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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ___________
COMMISSION FILE NUMBER 0-26762
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PEDIATRIX MEDICAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA 65-0271219
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1301 CONCORD TERRACE, SUNRISE, FLORIDA 33323
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(Address of principal executive offices) (Zip Code)
(954) 384-0175
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, par value New York Stock Exchange
$.01 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Securities Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of shares of Common Stock of the registrant
held by non-affiliates of the registrant on June 28, 2002, was approximately
$527,064,000 based on a $25.00 closing price per share as reported on the New
York Stock Exchange composite transactions list on such date.
The number of shares of Common Stock of the registrant outstanding on
March 20, 2003, was 23,768,342.
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, with respect to the 2003 annual
meeting of shareholders, is incorporated by reference in Part III of this Form
10-K to the extent stated herein. Except with respect to information
specifically incorporated by reference in this Form 10-K, each document
incorporated by reference herein is deemed not to be filed as a part hereof.
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INDEX TO ITEMS
PART I ......................................................................................................3
Item 1. Business...................................................................................3
Item 2. Properties................................................................................20
Item 3. Legal Proceedings.........................................................................21
Item 4. Submission of Matters to a Vote of Security Holders.......................................21
PART II .....................................................................................................22
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................22
Item 6. Selected Financial Data...................................................................23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations...........................................................................25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................35
Item 8. Financial Statements and Supplementary Data...............................................36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...........................................................................58
PART III .....................................................................................................58
Item 10. Directors and Executive Officers of the Registrant........................................58
Item 11. Executive Compensation....................................................................58
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters...................................................................................58
Item 13. Certain Relationships and Related Transactions............................................59
Item 14. Controls and Procedures...................................................................59
PART IV .....................................................................................................60
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................60
Signatures .....................................................................................................64
Certifications .....................................................................................................65
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PART I
ITEM 1. BUSINESS
In this Annual Report on Form 10-K, the terms "Pediatrix", "PMG", "the
Company", "we", "us" and "our" refer to Pediatrix Medical Group, Inc., a Florida
corporation, together with its subsidiaries and its affiliated professional
associations, corporations and partnerships (the "PA Contractors"). The PA
Contractors are separate legal entities that contract with Pediatrix Medical
Group, Inc. to provide physician services in certain states and Puerto Rico.
BUSINESS OVERVIEW
Pediatrix is the nation's largest physician group focused on
maternal-fetal-newborn medicine. Pediatrix and its affiliated professional
companies employ 622 physicians, including more than 500 neonatologists who
staff and manage the clinical care at more than 200 hospital-based neonatal
intensive care units ("NICUs") across the country, caring for babies born
prematurely or with medical complications. In several of our markets, we also
employ maternal-fetal physician specialists, or perinatologists, who care for
expectant mothers with complicated pregnancies. In addition, we employ other
pediatric subspecialists, including pediatric intensivists who staff
hospital-based pediatric intensive care units, pediatric hospitalists and
pediatric cardiologists.
Our principal mission is the clinical care of premature newborns, babies
born with complications and patients with high-risk pregnancies. We staff and
manage the clinical activities within specific units in hospitals, primarily
NICUs, and we are an important component of the comprehensive labor and delivery
and pediatric services that the hospitals provide to their communities. We
employ physicians and advanced practitioners, who provide patient care, and we
also provide professional and administrative support that includes contracting
with third-party payors, billing and collections, risk management services,
physician recruiting and credentialing and clinical outcomes data management.
Our model for hospital-based coverage provides 24-hour physician
availability through either an on-site or on-call physician presence. We believe
that our 24-hour coverage has enhanced our hospital relationships, making it
possible for our physicians to provide patient care throughout the hospital,
including the emergency room, nursery and other areas of the obstetrics and
pediatrics departments where access to specialized care may be critical.
Our maternal-fetal medicine ("MFM") practices include a combination of
outpatient and inpatient care. We employ perinatal physicians and other clinical
professionals, as needed, including nurse mid-wives, ultrasonographers and
genetic counselors. We also employ and manage administrative support staff and
furnish the required medical equipment at our outpatient offices. All of our MFM
practices are based in markets where our physicians also practice neonatal
medicine. This allows us to improve patient care by using an integrated
continuum of care model that directs treatment to the mother and developing
fetus during the pregnancy, and to the baby upon delivery. As a result of these
collaborations, we have entered into contractual arrangements with hospitals and
third-party payors in certain markets that encompass the entire high risk
maternal-fetal-newborn experience.
We monitor clinical outcomes, employ best demonstrated processes, and
conduct clinical research to find new methods of care that result in better
outcomes at a reduced overall cost. We make extensive physician continuing
medical education resources available to our physicians to ensure that they have
knowledge of current treatment methodologies.
We focus on best demonstrated processes, data collection and reporting to
administrators and referring physicians. Our physicians work with the entire
medical staff in hospitals to promote each hospital's strategic goals.
Obstetrics is an important source of admissions for a hospital. We believe that
our physicians' ability to manage patient outcomes has a direct impact on a
hospital's reputation among referring physicians within its communities.
We generate value to our physicians by providing needed resources -
clinical and administrative - that allow them to focus on patient care. For
example, our Research Data System captures clinical information from daily
progress notes in a centralized database that is used for outcomes reporting,
retrospective clinical analysis, clinical quality initiatives and as a basis for
prospective clinical trials.
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In essence, our model removes many of the burdens that are associated with
the management of a physician group practice and allows physicians to
concentrate on patient care, adding value to patients, payors, hospital
administrators and referring physicians through better clinical care.
DEMAND FOR OUR SERVICES
The demand for our services - physicians caring for patients - is
determined in part by local market dynamics for health services and in part by
national market dynamics for physicians. We have built our leading presence in
neonatal and maternal-fetal medicine by advancing a comprehensive care model
that addresses the needs of our various constituents, including patients and
third-party payors, hospital administrators, referring physicians and our
employed physicians who practice as part of our national group. There are
approximately 4 million births in the U.S. annually, and we estimate that
between 10 to 15 percent of all births require neonatal intensive care unit
admissions. Babies admitted to NICUs are typically born prematurely, or have an
illness or condition that requires the care of a neonatal physician
subspecialist. Today, neonatal physicians generally practice in a traditional
group practice setting, contracting with hospitals within a community to provide
specified coverage in the NICU. Neonatologists are board-certified pediatricians
who obtain additional training in neonatal medicine. Premature and low
birthweight infants are at increased risk for medical complications and may
require neonatal intensive care services. Approximately 11 percent of babies
born in the U.S. are born "prematurely", before the 37th week of pregnancy.
Approximately 8 percent of all babies are born weighing less than 2,500 grams,
or five pounds, eight ounces, according to the U.S. Center for Health
Statistics.
There is no known cause for babies born prematurely. While research is
being conducted by numerous institutions to identify the potential cause of
premature birth, some common factors that may contribute to prematurity of birth
are lack of prenatal care, complications during pregnancy, smoking or poor
nutritional habits during pregnancy. Because most neonatal admissions are the
result of premature labor and delivery or other unanticipated complications,
they are not planned events.
Across the United States, NICUs are concentrated primarily among hospitals
with a higher volume of births. NICUs are important to hospitals since
obstetrics departments generate 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.
Pediatrix physicians work with our hospital partners to market
comprehensive labor and delivery services to referring physicians, principally
obstetricians, and also to general and family practice physicians within a
particular community and its surrounding areas.
These referring physicians feel most comfortable delivering babies at
hospitals that provide a full-service labor and delivery setting, which today
includes a NICU staffed by board-certified/board-eligible neonatal physicians.
Like most physician subspecialties, neonatal medicine was started at
academic centers. During the past three decades, neonatal physician services
have migrated from academic centers to community hospitals in reaction to demand
from obstetricians seeking additional resources to provide patient care in the
labor and delivery area.
Hospital administrators responded to the demands of community-based
obstetricians, an important source of hospital admissions, by building neonatal
intensive care units and entering into contracts with independent physician
group practices to staff and manage those units. Pediatrix is modeled around
that traditional group practice structure, but because of our size we have
non-clinical professional management that has proven abilities to achieve
significant operating efficiencies in interacting with the hospitals, managing
information systems and technologies and complying with government regulations.
In many of our markets, our neonatologists practice with physicians who are
MFM subspecialists, or perinatologists, to provide integrated care for women
with complicated pregnancies whose babies are often admitted to the NICU upon
delivery. Perinatologists are board-certified obstetricians who obtain
additional training in high-risk pregnancies to become eligible for perinatal
board certification. Since many maternal-fetal cases result in an admission to a
NICU, early involvement by the neonatologist helps to improve outcomes for both
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mother and child. In addition, we believe that improved perinatal care has a
positive impact on neonatal outcomes. Our data on neonatal outcomes demonstrates
that, in general, the longer the baby remains in the womb, the greater
likelihood of decreased mortality and morbidity. Perinatologists are focused on
extending the pregnancy to improve the viability of the fetus. We believe that
our integrated care model, which includes maternal-fetal medicine, has improved
the clinical outcomes of our patients and strengthened our relationships with
patients, hospitals and payors.
PHYSICIAN SERVICES OVERVIEW
Within the healthcare services sector, the physician services sector
remains largely fragmented. Today, administrative pressures on physicians make
it increasingly difficult for them to simultaneously manage patient care, stay
current on the latest procedures, and efficiently administer non-clinical
activities.
The healthcare services sector is also under considerable cost containment
pressures from a number of sources, principally third-party payors, including
commercial and government payors.
Hospitals have entered into contractual relationships with physician groups
and organizations to provide specialized care, including neonatal patient care
in hospital-based units. Management of these units presents significant
operational challenges for hospitals, including complex billing procedures,
variable admissions rates, and difficulties in recruiting and retaining
qualified physicians. Hospitals outsource with physician subspecialists in an
effort to improve outcomes, contain costs, improve utilization management and
reduce administrative burdens. Physician organizations assume responsibilities
to provide professional management of staff, including recruiting, staffing and
scheduling of physicians. Traditionally, hospitals have staffed these vital
units through affiliations with small, local physician groups or with
independent practitioners. Hospitals are increasingly seeking to contract with
physician groups that have the clinical quality initiatives, information and
reimbursement systems and management expertise that are required in the current
health care environment.
OUR STRATEGY
Physicians remain receptive to joining or affiliating with a larger
organization that provides value-added services and reduces administrative
burdens. We believe these trends continue to present opportunities for us. We
believe that hospitals will continue to outsource certain units, such as NICUs,
on a contract management basis.
Our objective is to enhance our position as the nation's leading provider
of neonatal and perinatal physician services by adding new practices and
increasing same-unit growth. A central aspect of our strategy is to attract
physicians to our national group by acquiring their practice and integrating it
into our existing practice structure. We also continue to market our services to
hospitals to obtain new contracts. The key elements of our strategy are as
follows:
FOCUS ON NEONATAL, PERINATAL AND PEDIATRIC PATIENT CARE. Since our
founding in 1979, we have focused primarily on neonatology and pediatric
subspecialties. As a result of this focus, we believe that we have
developed (i) significant expertise in the complexities of billing and
reimbursement for neonatal physician services, (ii) a competitive advantage
in recruiting and retaining neonatologists seeking to join a group practice
and (iii) a clinical approach that includes research, education and
clinical quality initiatives that help to advance the care provided to
patients. In 1998, we expanded our business into perinatology, or MFM. We
are continuing to focus our efforts in MFM and are dedicated to developing
the same level of expertise in MFM that we have developed in neonatology
over the course of more than two decades. We believe that our continued
focus will allow us to enhance our position as the nation's leading
provider of neonatal and maternal-fetal physician services.
INCREASE SAME UNIT GROWTH. We seek to provide our services to hospitals
where we can benefit from increased admissions, and we intend to increase
revenues at existing units by providing support to areas of the hospital
outside the NICU and pediatric intensive care unit ("PICU"), particularly in
the obstetrics and pediatrics departments where immediate accessibility to
specialized care may be critical. These services generate incremental
revenue for us, contribute to our overall profitability, enhance the
hospital's profitability, strengthen our 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.
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ACQUIRE NEONATAL AND PERINATAL PHYSICIAN GROUP PRACTICES. We intend to
further increase the number of locations at which we provide physician
services by acquiring established neonatal and MFM physician group
practices. We completed our first acquisition of a neonatal physician
group practice in July 1995 and since then we have completed numerous
acquisitions of established physician group practices. We intend to continue
actively pursuing acquisitions, attracting neonatal and perinatal physician
group practices to our comprehensive model for patient care. However, we may
not be able to identify future acquisition candidates or consummate any
future acquisitions. See "Risk Factors - Our failure to find suitable
acquisition candidates or successfully integrate any future or recent
acquisitions could harm our business and results of operations."
DEVELOP REGIONAL NETWORKS. We intend to develop regional and statewide
networks of NICUs and perinatal practices in geographic areas with high
concentrations of births. We operate combined regional networks of NICUs and
perinatal practices in the Austin, Dallas-Fort Worth, Denver-Colorado
Springs, Des Moines, Kansas City, Las Vegas, Phoenix-Tucson, San Antonio,
San Jose, Seattle-Tacoma and Southern California metropolitan areas. In
addition, we intend to continue to acquire and develop perinatal practices
in markets where we currently provide NICU services. We believe that the
development of regional and statewide networks has generated clinical
efficiencies, including best demonstrated processes, and operating
efficiencies that have a pronounced positive effect on quality of care,
length of stay and the overall cost of care.
ASSIST HOSPITALS TO CONTROL COSTS. Our 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. We
believe that our ability to assist hospitals to control costs will allow us
to continue to be successful in adding new units at which we provide
physician services.
ADDRESS CHALLENGES OF MANAGED CARE ENVIRONMENT. We intend to continue to
develop new methods of doing business with managed care and third party
payors that will allow us to strengthen our relationships with payors and
hospitals. We are prepared to enter into flexible arrangements with third
party payors. As the nation's leading provider of neonatal and perinatal
physician services, we believe that we are 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.
EXPAND INTO ADDITIONAL HEALTHCARE SERVICES. We intend to use our
expertise in maternal-fetal-newborn care, and managing hospital-based
physician subspecialists, to expand and diversify our services. For example,
we believe that our expertise running the "back-office" functions of
hospital-based physician subspecialties can be applied to other areas of the
hospital and other medical specialties. In addition, we believe there are
opportunities to expand beyond care of high-risk pregnancies and premature
and sick newborns. However, we may not be able to identify suitable
opportunities. See "Risk Factors - We may be unable to successfully
implement our strategy of diversifying our operations."
OUR PHYSICIAN SERVICES
We manage the physician services at NICUs and other hospital-based units.
Our services include the following:
UNIT MANAGEMENT. We staff each NICU, MFM practice and other subspecialty
area that we manage with a medical director who reports to one of our
Regional Presidents ("RP"). The RPs and all medical directors at these units
are board-certified or board-eligible physicians. In addition to providing
medical care and physician management in the unit, the medical director is
responsible for (i) overall management of the unit, including quality of
care, professional discipline, utilization review and coordinating 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 our financial success
within the unit.
RECRUITING, STAFFING AND SCHEDULING. We are responsible for recruiting,
staffing and scheduling of physicians and advanced registered nurse
practitioners ("ARNPs") within the NICUs and other practices and units that
we manage. Our recruiting department maintains an extensive recruiting
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database of neonatologists, perinatologists and pediatricians nationwide. We
pre-screen all candidates and check their credentials, licensure and
references. The RPs 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 that we manage are staffed by
at least one neonatologist or pediatrician on site or available on call.
These physicians are board-certified or board-eligible in neonatology,
perinatology, pediatrics, pediatric critical care or pediatric cardiology,
as appropriate. We also employ or contract with ARNPs, who assist our
physicians in operating the NICUs and other units. 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. We assume responsibility for salaries, benefits and physician
malpractice insurance for the physicians who are employed by or under
contract with us. See "Contractual Relationships."
SUPPORT TO OTHER HOSPITAL DEPARTMENTS. As part of our comprehensive care
model, physicians provide support services in other areas of hospitals,
particularly in the obstetrics, nursery and pediatrics departments, where
immediate accessibility to specialized care may be critical. We believe that
this support (i) improves our 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 that
contributes to our overall profitability, and (vi) increases the likelihood
of our renewing existing and adding new hospital contracts.
BILLING AND REIMBURSEMENT. We assume responsibility for all aspects of
billing, reimbursement and collections related to physician services. Third
party payors and/or patients receive a bill from us for physician services.
The hospital bills and collects separately for services it provides. To
address the increasingly complex and time-consuming process of obtaining
reimbursement for medical services, we have invested in both the technical
and human resources necessary to create an efficient billing and
reimbursement process, including specific claims forms and software systems.
We begin this process by providing our physicians with a thorough training
curriculum that emphasizes detailed documentation of and proper coding
protocol for all procedures performed and services provided to achieve
appropriate collection of revenues for physician services. Our billing and
collection operations are conducted from our corporate offices, as well as
our regional business offices located across the U.S. and in Puerto Rico.
See "Risk Factors - From time to time we are subject to billing
investigations by federal and state government authorities which could have
an adverse effect on our business and results of operations and the trading
price of our shares."
RISK MANAGEMENT SERVICES. The practice of medicine entails an inherent
risk of claims of professional liability. We maintain professional liability
insurance on a claims-made basis in accordance with standard industry
practice. We are able to negotiate with malpractice insurance carriers on
behalf of our national group of practitioners. In addition to the advantages
of group purchasing for this coverage, we are able to relieve our
practitioners of the burden of securing malpractice insurance in a market of
increasing insurance premiums. In addition to managing medical risk with
insurance, we take proactive steps to provide education and access to best
demonstrated processes to our practitioners.
MARKETING AND DEVELOPMENT ACTIVITIES
Since 1996, Pediatrix has grown largely through acquisition activities that
have successfully attracted seasoned neonatal and maternal-fetal specialists to
our model for clinical care. Our business development group maintains
relationships with many independent physician group practices within our
subspecialties. Our 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) on-site
visits conducted by business development personnel together with senior
management.
Physicians practicing as part of Pediatrix also market their practices
within their community and surrounding referral areas. Patient volume is based
on referrals from other physicians, particularly obstetricians. Consequently,
our physicians concentrate their marketing efforts on establishing and
maintaining professional relationships with physicians based in those
communities where they practice.
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MANAGEMENT INFORMATION SYSTEMS
We maintain several systems to support our day-to-day operations, business
development and ongoing clinical and business analysis, including (i) a clinical
information system designed to reduce physicians' paperwork requirements while
consolidating clinical information used to support our education, research and
quality assurance programs, (ii) a coding algorithm to help our physicians in
selecting the appropriate billing codes for services provided, (iii) a website
(Natal U(TM)) that disseminates clinical research and education materials to
physicians and patients, (iv) electronic interchange with payors using
electronic benefits verification, claims submission and remittance advice, and
(v) a database used by the business development and recruiting departments in
recruiting physicians and identifying potential physician group acquisition
candidates, which is updated through telemarketing activities, personal
contacts, professional journals and mail solicitation. Ongoing systems
development will provide even greater streamlining of information from the
clinical systems through the reimbursement process, thereby expediting the
overall process.
Our management information system is an integral component of the billing
and reimbursement process. Our system enables us 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. Our system was designed to meet our
requirements by providing maximum flexibility as payor groups upgrade their
payment and reimbursement systems. See "Risk Factors - If we do not maintain
effective and efficient information systems, our operations may be adversely
affected."
CONTRACTUAL RELATIONSHIPS
HOSPITAL RELATIONSHIPS. Many of our contracts with hospitals grant us the
exclusive right and responsibility to manage the provision of physician services
to the NICUs and other hospital-based units. The contracts typically have terms
of one to three years and renew automatically for additional terms of one to
three years unless earlier terminated. The contracts typically provide that
either party may terminate the agreement upon 90 days' written notice. We
typically bill patients and third-party payors for physicians' services on a
fee-for-service basis separately from other charges billed by the hospital to
the same payors. Certain hospitals that do not generate sufficient patient
volume agree to pay us administrative fees to assure a minimum revenue level.
Administrative fees include guaranteed payments to us, as well as fees paid to
us by certain hospitals for administrative services performed by our medical
directors at such hospitals. Administrative fees accounted for 7%, 6% and 5% of
our net patient service revenue during 2000, 2001 and 2002, respectively. The
hospital contracts typically require that we and the physicians performing
services maintain minimum levels of professional and general liability
insurance. We negotiate those policies, contract and pay the premiums for such
insurance on behalf of the physicians. See "Professional Liability and
Insurance."
PAYOR RELATIONSHIPS. Substantially all of our contracts with third party
payors are discounted fee-for-service contracts. We have a minor number of small
capitated arrangements with certain payors. Under capitated arrangements, we are
paid a flat monthly fee based on the number of individuals covered by a
particular insurance plan. If we enter into relationships with third party
payors with respect to regional and statewide networks, such relationships may
be on a capitated basis.
PA CONTRACTOR RELATIONSHIPS. Pediatrix Medical Group, Inc. ("PMG") has
entered into management agreements ("PA Management Agreements") with
professional corporations or associations ("PA Contractors") in most of the
states in which it operates. Each PA Contractor is owned by a licensed physician
affiliated with PMG through employment or other contractual relationships. In
accordance with applicable state laws, under the PA Management Agreements, the
PA Contractors delegate to PMG only the administrative, management and support
functions that the PA Contractors have agreed to provide to the hospital. PMG
does not perform any functions that would constitute the practice of medicine.
In consideration of services provided, each PA Contractor pays PMG either a
percentage of the PA Contractor's gross revenue, but never greater than the net
profits of such PA Contractor, or a flat fee. PMG has the discretion to
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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 PA
Management Agreements are long-term in nature, and in most cases permanent,
subject only to termination by PMG, except in the case of gross negligence,
fraud or illegal acts of PMG. Also, the PA Management Agreements provide that
PMG has the right, but not the obligation to purchase, or to designate a person
or persons to purchase, the stock of the PA Contractor for a nominal amount.
Separately, in its sole discretion, PMG has the right to assign its interest in
the PA Management Agreements. See Note 2 to our Consolidated Financial
Statements and "Risk Factors - Regulatory authorities or other parties may
assert that our arrangements with our affiliated professional contractors
constitute fee-splitting or the corporate practice of medicine which could
result in civil or criminal penalties or invalidation of our contracts, which in
turn could have an adverse effect on our financial condition and results of
operations."
PHYSICIAN RELATIONSHIPS. Our 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. Each physician generally receives a base
salary and is eligible for an incentive bonus. Each physician is required to
hold a valid license to practice medicine in the appropriate state in which the
physician provides patient care and to become a member of the medical staff,
with appropriate privileges, at each hospital at which he or she practices. We
are responsible for billing patients and third party payors for services
rendered by the physician, and we have the exclusive right to establish the
schedule of fees to be charged for such services. Substantially all the
physicians employed by PMG or the PA Contractors have agreed not to compete with
PMG or the PA Contractor within a specified geographic area for a certain period
after termination of employment.
ACQUISITIONS. We structure acquisitions of physician practice groups as
asset purchases, stock purchases or mergers. Generally, these structures provide
for (i) the assignment to us or a PA Contractor of the contracts between the
physician practice group and the hospital at which the physician practice group
provides medical services, (ii) the procurement of "tail insurance" coverage
that covers malpractice claims filed after the date of acquisition that are
based on events that occurred prior to the acquisition, and (iii) the
indemnification to us by the previous owners of the practice group for breaches
of their representations and warranties contained in the purchase agreement.
Generally, in acquisitions structured as asset purchases, we do 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
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
Our operations and relationships are subject to extensive and complex
governmental and regulatory requirements relating to the practice of medicine
and billing for services rendered to patients. We are also subject to laws and
regulations that relate to business corporations in general. We exercise care in
an effort to structure our practices and arrangements with hospitals and
physicians to comply with applicable federal, state and local laws and
regulations and we believe that such practices and arrangements comply in all
material respects with all such existing applicable laws and regulations.
Approximately 23% of our net patient service revenue in 2002, exclusive of
administrative fees, was derived from payments made by government-sponsored
health care 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 our operations. In addition, funds received under these
programs are subject to audit with respect to the proper billing for physician
and ancillary services and, accordingly, retroactive adjustments of revenue from
these programs may occur. See "Risk Factors - Limitations of, reductions in or
retroactive adjustments to reimbursement amounts or rates by
government-sponsored health care programs could adversely affect our financial
condition and results of operations."
For more information about the various regulatory requirements to which we
are subject, see "Risk Factors - The health care industry is highly regulated
and our failure to comply with laws or regulations, or a determination that in
the past we have failed to comply with laws or regulations, could have an
adverse effect on our financial condition and results of operations", "Risk
9
Factors - If we are found to have violated anti-kickback or self-referral laws,
we could be subject to monetary fines, civil and criminal penalties and
exclusion from participation in government-sponsored health care programs, which
would have an adverse effect on our business and results of operations", "Risk
Factors - Regulatory authorities or other parties may assert that our
arrangements with our affiliated professional contractors constitute
fee-splitting or the corporate practice of medicine which could result in civil
or criminal penalties or invalidation of our contracts, which in turn could have
an adverse effect on our financial condition and results of operations", "Risk
Factors - Federal and state laws that protect the privacy of patient health
information may increase our costs and limit our ability to collect and use that
information", and "Risk Factors - Federal and state health care reform, or
changes in the interpretation of government-sponsored health care programs, may
have an adverse effect on our financial condition and results of operations."
GOVERNMENT INVESTIGATIONS
On June 6, 2002, we received a written request from the Federal Trade
Commission ("FTC") to submit information on a voluntary basis in connection with
an investigation of issues of competition related to our May 2001 acquisition of
Magella Healthcare Corporation ("Magella") and our business practices generally.
On February 5, 2003, we received additional information requests from the FTC in
the form of a Subpoena and Civil Investigative Demand. Pursuant to these
requests, the FTC has requested documents and information relating to the
acquisition and our business practices in certain markets. We are cooperating
fully with the FTC. We cannot predict the outcome of the investigation and
whether it, or any similar future investigation or claim by the FTC or other
parties, will have a material adverse effect on our business, financial
condition, results of operations or the trading price of our shares. See "Risk
Factors - The Federal Trade Commission or other parties may assert that our 2001
acquisition of Magella or our business practices violate antitrust laws, which
could have an adverse effect on us."
In April 2002, we entered into a settlement agreement with the Colorado
Department of Health Care Policy and Financing resolving the State of Colorado's
Medicaid investigation of the Company. We had received requests in April 1999,
and in one case a subpoena, from state and federal 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. The Arizona and Florida Medicaid investigations
were closed in 2000 after we entered into settlement agreements with those
states. The TRICARE investigation is active and ongoing. These previously
disclosed investigations 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 our
business. We cannot predict whether any such audits, inquiries or investigations
will have a material adverse effect on our business, financial condition,
results of operations or the trading price of our shares.
OTHER LEGAL PROCEEDINGS
On May 3, 2002, the United States District Court for the Southern District
of Florida entered an Order and Final Judgment approving the settlement of the
class action litigation filed against us and certain of our officers in February
1999 relating to alleged violations of securities laws. Under the terms of the
settlement, the plaintiffs' claim was dismissed with prejudice in exchange for a
cash payment of $12.0 million, which was covered by insurance policies.
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. Although these actions and proceedings are generally
expected to be covered by insurance, there can be no assurance that our medical
malpractice insurance coverage will be adequate to cover all potential
liabilities. 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 business, financial condition, results of operations or
the trading price of our shares. See "Item 3. Legal Proceedings."
PROFESSIONAL LIABILITY AND INSURANCE
The practice of medicine entails an inherent risk of claims of professional
liability. We maintain professional liability insurance and general liability
insurance on a claims-made basis in accordance with standard industry practice.
We believe that our coverage is appropriate based upon our claims experience and
the nature and risks of our 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. See "Item 3. Legal
Proceedings" and "Risk Factors - We may be subject to malpractice and other
lawsuits, some of which we may not be fully insured against."
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In order to maintain hospital privileges, the physicians who are employed
by or under contract with us are required to maintain professional liability
insurance coverage. We contract and pay the premiums for such insurance for the
physicians. Our current professional liability insurance policy expires May 1,
2003, and we are currently reviewing our coverage options, which may include a
higher self-insured retention. There can be no assurance that we can obtain
substantially similar coverage upon expiration or that such coverage will
continue to be available at acceptable costs and on favorable terms. Based upon
current conditions in the insurance markets, we expect that our professional
liability insurance premiums will increase over prior periods.
COMPETITION
The health care industry is highly competitive and has been subject to
continual changes in the method in which health care services are provided and
the manner in which health care providers are selected and compensated. We
believe that private and public reforms in the health care industry emphasizing
cost containment and accountability will serve as a catalyst for neonatal and
perinatal care to shift from highly fragmented, individual or small practice
providers to larger physician groups. Companies in other health care 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 ours, may become competitors in providing perinatal, neonatal and
pediatric intensive care physician services to patients. Competition in our
business is generally based upon reputation and experience, and our physicians'
ability to provide cost-effective, quality care. See "Risk Factors - Our
industry is already competitive and increased competition could adversely affect
our revenues."
SERVICE MARKS
We have 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. In addition, we have pending
applications to register the trademark "NatalU" and service mark "NatalU - A
University Without Walls".
EMPLOYEES AND PROFESSIONALS UNDER CONTRACT; GEOGRAPHIC COVERAGE
In addition to the 622 practicing physicians employed by or under contract
with us as of December 31, 2002, Pediatrix employed or contracted with 402 other
clinical professionals and 1,267 other full-time and part-time employees. None
of our employees are subject to a collective bargaining agreement.
We provide services in Alaska, Arizona, Arkansas, California, Colorado,
Florida, Georgia, Idaho, Indiana, Illinois, Iowa, Kansas, Kentucky, Maryland,
Missouri, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio,
Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Tennessee, Texas, Utah,
Virginia, Washington and West Virginia. During 2002, approximately 62% of our
net patient service revenue was generated by operations in our five largest
states. See "Risk Factors - We may be adversely affected by unfavorable
regulatory or other changes or conditions in geographic areas where our
operations are concentrated."
INFORMATION AVAILABLE ON OUR WEBSITE
Our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available
through our Internet website www.pediatrix.com, as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission ("SEC"). Our Internet website and the
information contained therein or connected thereto are not incorporated into
this Annual Report on Form 10-K.
11
RISK FACTORS
THE FEDERAL TRADE COMMISSION OR OTHER PARTIES MAY ASSERT THAT OUR 2001
ACQUISITION OF MAGELLA OR OUR BUSINESS PRACTICES VIOLATE ANTITRUST LAWS, WHICH
COULD HAVE AN ADVERSE EFFECT ON US.
The health care industry is highly regulated for antitrust purposes. We
believe that our industry will continue to be subject to increasing regulation
and enforcement action. In recent years, the Federal Trade Commission (the
"FTC"), the Department of Justice, and state Attorneys General have taken
increasing steps to review and, in some cases, take enforcement action against,
acquisitions and business conduct in the health care industry. On June 6, 2002,
we received a written request from the FTC to submit information on a voluntary
basis in connection with an investigation of issues of competition related to
our May 2001 acquisition of Magella and our business practices generally. On
February 5, 2003, we received additional information requests from the FTC in
the form of a Subpoena and Civil Investigative Demand. Pursuant to these
requests, the FTC has requested documents and information relating to the
acquisition and our business practices in certain markets. We intend to continue
to cooperate fully with the information requests but at this time cannot predict
the outcome of the investigation and whether it, or any similar future
investigation or claim by other parties, will have a material adverse effect on
our business, financial condition, results of operations or the trading price of
our shares.
FROM TIME TO TIME WE ARE SUBJECT TO BILLING INVESTIGATIONS BY FEDERAL AND STATE
GOVERNMENT AUTHORITIES WHICH COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS AND
RESULTS OF OPERATIONS AND THE TRADING PRICE OF OUR SHARES.
State and federal statutes impose substantial penalties, including civil and
criminal fines, exclusion from participation in government health care programs
and imprisonment, on entities or individuals (including any individual corporate
officers or physicians deemed responsible) that fraudulently or wrongfully bill
governmental or other third party payors for health care services. In addition,
federal laws allow a private person to bring a civil action in the name of the
United States government for false billing violations. In April 1999, we
received requests, and in one case a subpoena, from investigators in Arizona,
Colorado and Florida for information related to our billing practices for
services reimbursed by the Medicaid programs in these states and by the TRICARE
program for military dependents. Our disclosure of the investigations caused our
share price to substantially decrease.
The TRICARE investigation is active and ongoing, and this matter, along with
the Arizona, Colorado and Florida matters, has prompted inquiries by Medicaid
officials in other states. We cannot predict whether the TRICARE investigation
or any other inquiries will have a material adverse effect on our business,
financial condition or results of operations or on the trading prices of our
shares. We believe that additional billing audits, inquiries and investigations
by government agencies will continue to occur in the ordinary course of our
business and in the health care services industry in general from time to time.
WE MAY BE ADVERSELY AFFECTED BY UNFAVORABLE REGULATORY OR OTHER CHANGES OR
CONDITIONS IN GEOGRAPHIC AREAS WHERE OUR OPERATIONS ARE CONCENTRATED.
During 2000, 2001 and 2002, approximately 55%, 59% and 62%, respectively,
of our net patient service revenue was generated by operations in our five
largest states. Over those same periods, our operations in Texas accounted for
approximately 18%, 29% and 33% of our net patient service revenue. Adverse
changes or conditions affecting these markets, such as health care reforms,
changes in laws and regulations, reduced Medicaid reimbursements, reductions in
the supply of trained physicians and government investigations, may have an
adverse effect on our operations. We continue to seek to diversify the
geographic scope of our operations, primarily through acquisitions of physician
group practices. We may not be able to implement successfully or realize the
expected benefits of any of these initiatives. Our failure to so diversify our
operations geographically could have a material adverse effect on our business,
financial condition, results of operations or the trading price of our shares.
12
THE HEALTH CARE INDUSTRY IS HIGHLY REGULATED AND OUR FAILURE TO COMPLY WITH LAWS
OR REGULATIONS, OR A DETERMINATION THAT IN THE PAST WE HAVE FAILED TO COMPLY
WITH LAWS OR REGULATIONS, COULD HAVE AN ADVERSE EFFECT ON OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The health care industry and physicians' medical practices are highly
regulated. We believe that this industry will continue to be subject to
increasing regulation, the scope and effect of which we cannot predict.
Neonatal, perinatal and other health care services that we and our affiliated
professional contractors provide are subject to extensive and complex federal,
state and local laws and regulations governing various matters such as the
licensing and certification of our facilities and personnel, the conduct of our
operations, our billing and coding policies and practices, our policies and
practices with regard to patient privacy and confidentiality, and prohibitions
on payments for the referral of business and self-referrals. As a result of our
desire to assure compliance with the increasingly complex regulatory environment
for the health care industry, we maintain a company-wide compliance program.
Nevertheless, we may become the subject of additional regulatory or other
investigations or proceedings, and our interpretations of applicable laws and
regulations may be challenged. The defense of any such challenge could result in
substantial cost to us and a diversion of management's time and attention. Thus,
any such challenge could have a material adverse effect on our business,
regardless of whether it ultimately is successful. If we fail to comply with
these laws, or a determination is made that in the past we have failed to comply
with these laws, our financial condition and results of operations could be
adversely affected. In addition, changes in health care laws or regulations may
restrict our existing operations, limit the expansion of our business or impose
additional compliance requirements. These changes, if enacted, could reduce our
opportunities for continued growth and impose additional compliance costs on us
that we may not recover through price increases.
LIMITATIONS OF, REDUCTIONS IN OR RETROACTIVE ADJUSTMENTS TO REIMBURSEMENT
AMOUNTS OR RATES BY GOVERNMENT-SPONSORED HEALTH CARE PROGRAMS COULD ADVERSELY
AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Approximately 23% of our net patient service revenue in 2002, exclusive of
administrative fees, was derived from payments made by government-sponsored
health care programs, principally Medicaid. These government programs, as well
as private insurers, have taken and may continue to take steps to control the
cost, use and delivery of health care services. There can be no assurance that
payments from government or private payors will remain at levels comparable to
present levels. Our business could be adversely affected by reductions in or
limitations of reimbursement amounts or rates under these programs, reductions
in funding of these programs or elimination of coverage for certain individuals
or treatments under these programs, which may be implemented as a result of:
o increasing budgetary and cost containment pressures on the health care
industry generally;
o new federal or state legislation reducing state Medicaid funding and
reimbursements or increasing state discretionary funding;
o new state legislation encouraging or mandating state Medicaid managed
care;
o state Medicaid waiver requests granted by the federal government,
increasing discretion with respect to, or reducing coverage or funding
for, certain individuals or treatments under Medicaid, in the absence of
new federal legislation;
o increasing state discretion in Medicaid expenditures which may result in
decreased reimbursement for, or other limitations on, the services that
we provide; or
o other changes in reimbursement regulations, policies or interpretations
that place material limitations on reimbursement amounts or practices
for services that we provide.
In addition, these government-sponsored health care programs generally
provide for reimbursements on a fee schedule basis rather than on a
charge-related basis. Therefore, we generally cannot increase our revenues by
increasing the amount we charge for our services. To the extent our costs
increase, we may not be able to recover our increased costs from these
government programs. In states where Medicaid managed care is encouraged and may
13
become mandated, Medicaid reimbursement payments to us could be reduced as
managed care organizations bargain for reimbursement with competing providers
and contract with these states to provide benefits to Medicaid enrollees.
Moreover, cost containment measures and market changes in non-governmental
insurance plans have generally restricted our ability to recover, or shift to
non-governmental payors, these increased costs.
In attempts to limit federal spending, there have been, and we expect that
there will continue to be, a number of proposals to limit Medicare and Medicaid
reimbursement for various services. For example, the Balanced Budget Act of 1997
has made it easier for states to reduce their Medicaid reimbursement levels.
Some states have enacted or are considering enacting measures that are designed
to reduce their Medicaid expenditures. This Act also mandated that the Centers
for Medicare and Medicaid Services, or CMS (formerly known as Health Care
Financing Administration, or HCFA), conduct competitive bidding demonstrations
for certain Medicare services. These competitive bidding demonstrations could
provide CMS and Congress with a model for implementing competitive pricing in
other federal health care programs. If, for example, such a competitive bidding
system were implemented for Medicaid services, it could result in lower
reimbursement rates, exclude certain services from coverage or impose limits on
increases in reimbursement rates. Our business may be significantly and
adversely affected by any such changes in reimbursement policies and other
legislative initiatives aimed at reducing health care costs associated with
Medicare and Medicaid.
In addition, funds we receive from third party payors, including government
programs, are subject to audit with respect to the proper billing for physician
and ancillary services and, accordingly, our revenue from these programs may be
adjusted retroactively.
IF OUR PHYSICIANS DO NOT APPROPRIATELY RECORD AND DOCUMENT THE SERVICES THAT
THEY PROVIDE, OUR REVENUES COULD BE ADVERSELY AFFECTED.
Physicians employed or under contract with our affiliated professional
contractors are responsible for assigning reimbursement codes and maintaining
sufficient supporting documentation in respect of the services that they
provide. We use this information to seek reimbursement for their services from
third party payors. If our physicians do not appropriately code or document
their services, our revenues could be adversely affected. For instance, in
response to billing investigations or other governmental inquiries, our
affiliated physicians could take an unduly conservative approach to coding for
their services. As a result, we could receive lower reimbursements from third
party payors which could have a material adverse effect on our revenues and
results of operations.
OUR FAILURE TO FIND SUITABLE ACQUISITION CANDIDATES OR SUCCESSFULLY INTEGRATE
ANY FUTURE OR RECENT ACQUISITIONS COULD HARM OUR BUSINESS AND RESULTS OF
OPERATIONS.
We have expanded and intend to continue to expand our geographic and market
penetration primarily through acquisitions of physician group practices.
However, we may not be able to implement our acquisition strategy, and our
strategy may not be successful. In implementing our acquisition strategy, we
compete with other potential acquirers, some of which may have greater financial
or operational resources than we do. Competition for acquisitions may intensify
due to the ongoing consolidation in the health care industry, which may increase
the costs of capitalizing on such opportunities. In addition, completion of
acquisitions could result in us incurring or assuming indebtedness and issuing
equity. The issuance of shares of our common stock for an acquisition may result
in dilution to our existing shareholders.
Although we conduct due diligence reviews of potential acquisition
candidates, including with respect to financial matters and compliance with
applicable laws, we cannot be certain that the acquired business will continue
to maintain its pre-acquisition revenues and growth rates following the
acquisition, nor can we be certain as to the absence or extent of any unknown or
contingent liabilities, including liabilities for failure to comply with
applicable laws. While we generally seek indemnification from the prior owners
of acquired businesses covering these matters (although we have no
indemnification in our Magella acquisition), we may incur material liabilities
for past activities of acquired businesses. Moreover, integrating acquisitions
into our existing operations involves numerous additional short and long-term
risks, including:
14
o diversion of our management's attention;
o failure to retain key personnel;
o long-term value of acquired intangible assets; and
o one-time acquisition expenses.
We cannot assure you that we will complete or integrate acquisitions in new
states; but if we do, we will be required to comply with the laws and
regulations of those states, which may differ from those of the states in which
our operations are currently conducted. Many of our acquisition-related expenses
may have a negative effect on our results of operations until, if ever, these
expenses are offset by increased revenues. We cannot assure you that we will
identify suitable acquisition candidates in the future or that we will complete
future acquisitions or, if completed, that any acquisition, including our recent
acquisitions, will be integrated successfully into our operations or that we
will be successful in achieving our objectives.
WE MAY BE UNABLE TO SUCCESSFULLY IMPLEMENT OUR STRATEGY OF DIVERSIFYING OUR
OPERATIONS.
We are beginning to explore potential strategic initiatives to diversify
our operations. Such initiatives would likely be either clinically related to
our current core business or in areas within healthcare that would allow us to
leverage our current business expertise. We may not be able to identify
appropriate diversification opportunities. If we are able to identify potential
diversification opportunities, we may not be able to implement successfully or
realize the expected benefits of such opportunities.
REGULATORY AUTHORITIES OR OTHER PARTIES MAY ASSERT THAT OUR ARRANGEMENTS WITH
OUR AFFILIATED PROFESSIONAL CONTRACTORS CONSTITUTE FEE-SPLITTING OR THE
CORPORATE PRACTICE OF MEDICINE WHICH COULD RESULT IN CIVIL OR CRIMINAL PENALTIES
OR INVALIDATION OF OUR CONTRACTS, WHICH IN TURN COULD HAVE AN ADVERSE EFFECT ON
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Many states have laws that prohibit business corporations, such as PMG, from
practicing medicine, exercising control over medical judgments or decisions of
physicians, or engaging in certain arrangements, such as fee-splitting, with
physicians. In these states, we maintain long-term management contracts with
professional associations and partnerships that are owned by licensed
physicians, and these affiliated professional contractors in turn employ or
contract with physicians to provide physician services. In states where we are
not permitted to practice medicine, we perform only non-medical administrative
services, do not represent that we offer medical services and do not exercise
influence or control over the practice of medicine by the physicians employed by
our affiliated professional contractors. In states where fee-splitting is
prohibited, the fees that we receive from our affiliated professional
contractors have been established on a basis that we believe complies with the
applicable states' laws. Although we believe that we are in compliance with
applicable state laws in relation to the corporate practice of medicine and
fee-splitting, we cannot assure you of this. Regulatory authorities or other
parties, including our affiliated physicians, may assert that, despite these
arrangements, we are engaged in the corporate practice of medicine or that our
contractual arrangements with our affiliated professional contractors constitute
fee-splitting or the corporate practice of medicine, in which case we could be
subject to civil and criminal penalties, our contracts could be found legally
invalid and unenforceable (in whole or in part) or we could be required to
restructure our contractual arrangements with our affiliated professional
contractors. We cannot assure you that this will not occur or, if it does, that
we would be able to restructure our contractual arrangements on terms that are
similar or at least as favorable to us. If we were unable to so restructure our
contractual arrangements, our financial condition and results of operations
could suffer.
IF WE ARE FOUND TO HAVE VIOLATED ANTI-KICKBACK OR SELF-REFERRAL LAWS, WE COULD
BE SUBJECT TO MONETARY FINES, CIVIL AND CRIMINAL PENALTIES AND EXCLUSION FROM
PARTICIPATION IN GOVERNMENT-SPONSORED HEALTH CARE PROGRAMS, WHICH WOULD HAVE AN
ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
Our business is subject to extensive federal and state regulation with
respect to financial relationships and "kickbacks" among health care providers,
physician self-referral arrangements and other fraud and abuse issues. Federal
15
anti-kickback laws and regulations prohibit certain offers, payments or receipts
of remuneration in return for (i) referring Medicaid or other
government-sponsored health care program patients or patient care opportunities
or (ii) purchasing, leasing, ordering or arranging for or recommending any
service or item for which payment may be made by a government-sponsored health
care program. In addition, federal physician self-referral legislation, known as
the Stark law, prohibits a physician from ordering certain services reimbursable
by Medicare or Medicaid from any entity with which the physician has a financial
relationship. These laws are broadly worded and, in the case of the
anti-kickback law, have been broadly interpreted by federal courts, and
potentially subject many business arrangements to government investigation and
prosecution, which can be costly and time consuming. Violations of these laws
are punishable by monetary fines, civil and criminal penalties, exclusion from
participation in government-sponsored health care programs and forfeiture of
amounts collected in violation of such laws, which could have an adverse effect
on our business and results of operations. Certain states in which we do
business also have similar anti-kickback and self-referral laws, imposing
substantial penalties for violations. The relationships, including fee
arrangements, among our affiliated professional contractors, hospital clients
and physicians have not been examined by federal or state authorities under
these anti-kickback and self-referral laws and regulations.
FEDERAL AND STATE LAWS THAT PROTECT THE PRIVACY OF PATIENT HEALTH INFORMATION
MAY INCREASE OUR COSTS AND LIMIT OUR ABILITY TO COLLECT AND USE THAT
INFORMATION.
Numerous federal and state laws and regulations govern the collection,
dissemination, use and confidentiality of patient-identifiable health
information, including the federal Health Insurance Portability and
Accountability Act of 1996 and related rules, or HIPAA. As part of our medical
record keeping, third party billing, research and other services, we collect and
maintain patient-identifiable health information. New health information
standards, whether implemented pursuant to HIPAA, congressional action or
otherwise, could have a significant effect on the manner in which we handle
health care related data and communicate with payors, and the cost of complying
with these standards could be significant. If we do not comply with existing or
new laws and regulations related to patient health information we could be
subject to criminal or civil sanctions.
FEDERAL AND STATE HEALTH CARE REFORM, OR CHANGES IN THE INTERPRETATION OF
GOVERNMENT-SPONSORED HEALTH CARE PROGRAMS, MAY HAVE AN ADVERSE EFFECT ON OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Federal and state governments have recently focused significant attention on
health care reform. In recent years, many legislative proposals have been
introduced or proposed in Congress and some state legislatures that would effect
major changes in the health care system. Among the proposals which are being or
have been considered are cost controls on hospitals, insurance reforms and the
creation of a single government health plan that would cover all citizens. Some
proposals under consideration, or others which may be introduced, could, if
adopted, have a material adverse effect on our financial condition and results
of operations. We cannot predict which, if any, proposal that has been or will
be considered will be adopted or what effect any future legislation will have on
us.
WE MAY NOT BE ABLE TO SUCCESSFULLY RECRUIT ADDITIONAL AND RETAIN EXISTING
QUALIFIED PHYSICIANS TO SERVE AS OUR INDEPENDENT CONTRACTORS OR EMPLOYEES.
Our business strategy is dependent upon our ability to recruit and retain
qualified neonatologists and perinatologists. We compete with many types of
health care providers, including teaching, research and government institutions,
for the services of qualified physicians. In addition, upon the expiration of
the employment contracts of our affiliated physicians, which typically have
terms of three to five years, we generally seek the renewal of such contracts.
We may not be able to continue to recruit and retain, through renewal of
existing contracts or otherwise, a sufficient number of qualified neonatologists
and perinatologists who provide services in markets served by us on terms
similar to our current arrangements. Our inability to recruit additional or
retain our current physicians on terms that are similar to our current
arrangements (or that are otherwise acceptable to us) could adversely affect our
ability to service existing or new units at hospitals or expand our business,
which could have a material adverse effect on our business, financial condition,
results of operations or the trading price of our shares.
WE MAY BE SUBJECT TO MALPRACTICE AND OTHER LAWSUITS, SOME OF WHICH WE MAY NOT BE
FULLY INSURED AGAINST.
Our business entails an inherent risk of claims of medical malpractice
against our physicians and us. We periodically become involved as a defendant in
medical malpractice lawsuits, some of which are currently ongoing, and are
subject to the attendant risk of substantial damage awards. A significant source
16
of potential liability is negligence or alleged negligence by physicians
employed or contracted by us or our affiliated professional contractors. To the
extent these physicians are our employees, or are regarded as our agents, we
could be held liable. In addition, our contracts with hospitals generally
require us to indemnify them and their affiliates for losses resulting from the
negligence of physicians who are associated with us. We maintain professional
liability insurance on a claims-made basis in accordance with standard industry
practice. We believe that our coverage is appropriate based upon our claims
experience and the nature and risks of our 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. Our current
professional liability insurance policy expires May 1, 2003, and we are
currently reviewing our coverage options, which may include a higher
self-insured retention. There can be no assurance that we can obtain
substantially similar coverage upon expiration or that such coverage will
continue to be available at acceptable costs and on favorable terms. Based upon
current insurance markets, we expect that our professional liability insurance
premiums will increase over prior periods.
From time to time we have been subject to other lawsuits. We recently
settled a class action lawsuit brought by a class of open market purchasers of
our common stock. The class action lawsuit alleged that we had violated federal
securities laws. We may be subject to lawsuits in the future which may involve
large claims and significant defense costs. Although we currently maintain
liability insurance intended to cover such claims, the coverage limits of such
insurance policies may prove to be inadequate or all such claims may not be
covered by the insurance. In addition, our commercial insurance policies must be
renewed annually. We cannot assure you that pending or future lawsuits will not
be successful or, if successful, will not exceed the limits of our available
insurance coverage or that this coverage will continue to be available at
acceptable costs and on favorable terms. Liabilities in excess of our insurance
coverage could have a material adverse effect on our financial condition and
results of operations. In addition, claims, regardless of their merit or
eventual outcome, also may have a material adverse effect on our business,
financial condition, results of operations or the trading price of our shares.
WE MAY WRITE-OFF INTANGIBLE ASSETS, SUCH AS GOODWILL.
Our intangible assets, which consist primarily of goodwill, are subject to
annual impairment testing. Under current accounting standards, goodwill is
tested for impairment at an operating segment level, known as a reporting unit,
on an annual basis using a two-step test. The first step compares the fair value
of a reporting unit with its carrying amount, including goodwill. If the
carrying amount of a reporting unit exceeds its fair value, a second step is
performed to determine the amount of any impairment loss. As circumstances after
an acquisition can change, our reporting units may be subject to impairment
losses. If we record an impairment loss related to our goodwill, it could have
an adverse effect on our results of operations for the year in which the
impairment is recorded.
FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD HARM OUR BUSINESS AND RESULTS OF
OPERATIONS.
We have experienced rapid growth in our business and number of employees in
recent years. Continued rapid growth may impair our ability to provide our
services efficiently and to manage our employees adequately. While we are taking
steps to manage our growth, our future results of operations could be materially
adversely affected if we are unable to do so effectively.
IF WE DO NOT MAINTAIN EFFECTIVE AND EFFICIENT INFORMATION SYSTEMS, OUR
OPERATIONS MAY BE ADVERSELY AFFECTED.
Our operations are dependent on the continued and uninterrupted performance
of our information systems. Failure to maintain reliable information systems or
disruptions in our information systems could cause disruptions in our business
operations, including: disruptions in billing and collections; loss of existing
patients; difficulty in satisfying requirements of contractual obligations with
hospitals; disputes with patients and payors; problems maintaining patient
privacy and confidentiality, patient records, research and other databases;
regulatory problems; decreased intra-company communications; increased
administrative expenses; or other adverse consequences, any or all of which
could have a material adverse effect on our operations.
17
OUR QUARTERLY RESULTS WILL LIKELY FLUCTUATE, WHICH COULD CAUSE THE VALUE OF OUR
COMMON STOCK TO DECLINE.
We have recently experienced and expect to continue to experience quarterly
fluctuations in our net patient service revenue and associated net income
primarily due to volume and cost fluctuations. We have significant fixed
operating costs, including physician costs, and, as a result, are highly
dependent on patient volume and capacity utilization of our affiliated
professional contractors to sustain profitability. Our results of operations for
any quarter are not necessarily indicative of results of operations for any
future period or full year. As a result, our results of operations may vary
significantly from period to period. In addition, there recently has been
significant volatility in the market price of securities of health care
companies that in many cases we believe has been unrelated to the operating
performance of these companies. We believe that certain factors, such as
legislative and regulatory developments, quarterly fluctuations in our actual or
anticipated results of operations, lower revenues or earnings than those
anticipated by securities analysts, and general economic and financial market
conditions, could cause the price of our common stock to fluctuate
substantially.
IF WE ARE UNABLE TO COLLECT REIMBURSEMENTS FROM THIRD PARTY PAYORS IN A TIMELY
MANNER FOR OUR SERVICES, OUR REVENUES COULD BE ADVERSELY AFFECTED.
A significant portion of our revenue is derived from reimbursements from
various third party payors, including government-sponsored health care plans,
private insurance plans and managed care plans, for services provided by our
affiliated professional contractors. In addition to being responsible for
submitting reimbursement requests to third party payors, we are also responsible
for the collection of reimbursements and assume the financial risks relating to
uncollectible and delayed reimbursements by third party payors. In the current
health care reimbursement environment, we may continue to experience
difficulties in collecting reimbursements to which we are entitled for services
that we have provided from third party payors, including Medicaid programs and
managed care payors. As part of their efforts to manage costs in an increasingly
competitive environment, third party payors may seek to reduce, by appeal or
otherwise, or delay reimbursements to which we are entitled for services that we
have provided. If we are not reimbursed in a timely manner for the services that
we provide, our revenues could be adversely affected.
IF OUR PHYSICIANS LOSE THE ABILITY TO PROVIDE SERVICES IN ANY HOSPITALS OR
ADMINISTRATIVE FEES PAID TO US BY HOSPITALS ARE REDUCED, OUR REVENUES COULD BE
ADVERSELY AFFECTED.
Our net patient service revenue is derived primarily from fee-for-service
billings for patient care provided by our physicians and from administrative
fees. Our arrangements with certain hospitals provide that if the hospital does
not generate sufficient patient volume it will pay us administrative fees in
order to guarantee that we receive a specified minimum revenue level. We also
receive administrative fees from hospitals for administrative services performed
by physicians providing medical director services at the hospital.
Administrative fees accounted for 7%, 6% and 5% of our net patient service
revenue during 2000, 2001 and 2002, respectively. Our contractual arrangements
with hospitals generally are for periods of one to three years and may be
terminated by us or the hospital upon 90 days written notice. While we have in
most cases been able to renew these arrangements, hospitals may cancel or not
renew our arrangements, or may not pay us administrative fees in the future. To
the extent that our arrangements with hospitals are canceled, or are not renewed
or replaced with other arrangements with at least as favorable terms, our
financial condition and results of operations could be adversely affected. In
addition, to the extent our physicians lose their privileges in hospitals or
hospitals enter into arrangements with other physicians, our revenues could be
adversely affected.
OUR INDUSTRY IS ALREADY COMPETITIVE AND INCREASED COMPETITION COULD ADVERSELY
AFFECT OUR REVENUES.
The health care industry is 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. We believe 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 health care industry segments, such as
managers of other hospital-based specialties or currently expanding large
18
physician group practices, some of which have greater financial and other
resources than we do, may become competitors in providing neonatal, perinatal
and pediatric intensive care physician services to hospitals. We may not be able
to continue to compete effectively in this industry, additional competitors may
enter our markets, and this increased competition may have an adverse effect on
our revenues.
WE ARE DEPENDENT UPON OUR KEY MANAGEMENT PERSONNEL FOR OUR FUTURE SUCCESS.
Our success depends to a significant extent on the continued contributions
of our key management, business development, sales and marketing personnel,
including our Chief Executive Officer and co-founder, Dr. Roger Medel, for our
management and implementation of our growth strategy. The loss of Dr. Medel or
other key personnel could have a material adverse effect on our financial
condition, results of operations and plans for future development.
THE SUBSTANTIAL NUMBER OF OUR SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR
FUTURE COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO FALL.
As of December 31, 2002, there were 25,313,371 shares of our common stock
outstanding, all of which are freely tradable without restriction, except that
45,769 shares, which are owned by certain of our officers, directors and
affiliates, may be sold publicly at any time subject to the volume and other
restrictions under Rule 144 of the Securities Act of 1933.
As of December 31, 2002, there were also:
o 5,363,664 shares of our common stock reserved for issuance under options
issued pursuant to our amended and restated stock option plan, of which
options for an aggregate of 4,240,869 shares of common stock were issued
and outstanding and options for an aggregate of 2,304,027 shares of
common stock were exercisable;
o 228,363 shares of our common stock reserved for issuance under presently
exercisable stock options issued by Magella, which options were
exercisable into shares of our common stock at the time of our
acquisition of Magella;
o 373,169 shares of our common stock reserved for issuance under our
employee stock purchase plans; and
o 30,449 shares of our common stock reserved for issuance under
convertible notes issued by Magella which were convertible into shares
of our common stock at the time of our acquisition of Magella.
All shares of common stock issued upon the exercise of stock options or
under our employee stock purchase plans will be freely tradable, subject to the
volume trading limitations under Rule 144 of the Securities Act of 1933 in
respect of shares acquired by our affiliates. Our stock options entitle holders
to purchase shares of our common stock at prices which may be less than the
current market price per share of our common stock. Holders of these options
will usually exercise or convert them at a time when the market price of our
common stock is greater than their exercise price. Accordingly, the exercise of
these options and subsequent sale of our common stock could reduce the market
price for our common stock and result in dilution to our then shareholders.
IF WE ENTER INTO A SIGNIFICANT NUMBER OF SHARED-RISK CAPITATED ARRANGEMENTS WITH
CERTAIN PAYORS, SUCH ARRANGEMENTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The evolving managed care environment has created substantial cost
containment pressures for the health care industry. Our contracts with payors
and managed care organizations traditionally have been fee-for-service
arrangements. At December 31, 2002, we had relatively few "capitated" and "case
rate" arrangements with payors. Under capitated payment arrangements, we receive
a flat monthly fee based on the number of individuals covered by that particular
insurance plan regardless of the number of patients or types of treatment we
provide, and under a case rate payment arrangement, we receive a fixed dollar
amount per patient. If we enter into similar arrangements in the future, our
financial condition and results of operations may be adversely affected if we
are unable to manage our risks under these arrangements.
19
OUR CURRENTLY OUTSTANDING PREFERRED STOCK PURCHASE RIGHTS AND OUR ABILITY TO
ISSUE SHARES OF PREFERRED STOCK COULD DETER TAKEOVER ATTEMPTS.
We have adopted a preferred share purchase rights plan. Under this plan,
each outstanding share of Pediatrix common stock includes a preferred stock
purchase right that entitles the registered holder, subject to the terms of our
rights agreement, to purchase from Pediatrix a one-thousandth of a share of our
series A junior participating preferred stock at an exercise price of $150 per
right for each share of common stock held by the holder. In addition, if a
person or group of persons acquires beneficial ownership of 15% or more of the
outstanding shares of Pediatrix common stock, each right will permit its holder
to purchase $300 worth of Pediatrix common stock for $150. The rights are
attached to all certificates representing outstanding shares of Pediatrix common
stock, and no separate rights certificates have been distributed. Some
provisions contained in the rights agreement may have the effect of discouraging
a third party from making an acquisition proposal for Pediatrix and may thereby
inhibit a change in control. For example, such provisions may deter tender
offers for shares of common stock which offers may be attractive to
shareholders, or deter purchases of large blocks of common stock, thereby
limiting the opportunity for shareholders to receive a premium for their shares
of common stock or exchangeable shares over the then-prevailing market prices.
In addition, our amended and restated articles of incorporation authorize our
board of directors to issue up to 1,000,000 shares of undesignated preferred
stock and to determine the powers, preferences and rights of these shares,
without shareholder approval. This preferred stock could be issued with voting,
liquidation, dividend and other rights superior to those of the holders of
common stock. The issuance of preferred stock under some circumstances could
have the effect of delaying, deferring or preventing a change in control.
PROVISIONS OF OUR BYLAWS COULD DETER TAKEOVER ATTEMPTS WHICH MAY RESULT IN A
LOWER MARKET PRICE FOR OUR COMMON STOCK.
Provisions in our amended and restated bylaws, including those relating to
calling shareholder meetings, taking action by written consent and other
matters, could render it more difficult or discourage an attempt to obtain
control of Pediatrix through a proxy contest or consent solicitation. These
provisions could limit the price that some investors might be willing to pay in
the future for our shares of common stock.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE.
Certain information included or incorporated by reference in this Annual
Report on Form 10-K may be deemed to be "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements, other
than statements of historical facts, that address activities, events or
developments that Pediatrix intends, expects, projects, believes or anticipates
will or may occur in the future are forward-looking statements. Such statements
are 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 Pediatrix's 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.
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 or expressed
by such forward-looking statements. Forward-looking statements speak only as of
the date the statements were made. We assume no duty to update any
forward-looking statements. Some of the factors that may cause actual results,
developments and business decisions to differ materially from those contemplated
by such forward-looking statements include but may not be limited to the risk
factors discussed above.
ITEM 2. PROPERTIES
We lease our corporate office located in Sunrise, Florida (approximately
80,000 square feet). During 2002, we leased space in other facilities in various
states for our business and medical offices, storage space, and temporary
housing of medical staff, with aggregate annual rents of approximately
$6,097,000. See Note 9 to our Consolidated Financial Statements.
20
ITEM 3. LEGAL PROCEEDINGS
On June 6, 2002, we received a written request from the Federal Trade
Commission ("FTC") to submit information on a voluntary basis in connection with
an investigation of issues of competition related to our May 2001 acquisition of
Magella and our business practices generally. On February 5, 2003, we received
additional information requests from the FTC in the form of a Subpoena and Civil
Investigative Demand. Pursuant to these requests, the FTC has requested
documents and information relating to the acquisition and our business practices
in certain markets. We are cooperating fully with the FTC, but at this time
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 the trading price of our shares.
In April 2002, we entered into a settlement agreement with the Colorado
Department of Health Care Policy and Financing resolving the State of Colorado's
Medicaid investigation of the Company. We had received requests in April 1999,
and in one case a subpoena, from state and federal 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. The Arizona and Florida Medicaid investigations
were closed in 2000 after we entered into settlement agreements with those
states. The TRICARE investigation is active and ongoing and this matter, along
with the Florida, Arizona and Colorado matters, has 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 our business. We cannot predict whether any such audits,
inquiries or investigations will have a material adverse effect on our business,
financial condition, results of operations or the trading price of our shares.
On May 3, 2002, the United States District Court for the Southern District
of Florida entered an Order and Final Judgment approving the settlement of the
class action litigation filed against us and certain of our officers in February
1999 relating to alleged violations of securities laws. Under the terms of the
settlement, the plaintiffs' claim was dismissed with prejudice in exchange for a
cash payment of $12.0 million, which was covered by insurance policies.
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. Although these actions and proceedings are generally
expected to be covered by insurance, there can be no assurance that our medical
malpractice insurance coverage will be adequate to cover liabilities arising out
of medical malpractice claims where the outcomes of such claims are unfavorable
to us. 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 business, financial condition, results of operations or the
trading price of our shares.
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, 2002.
21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Pediatrix 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
----------- -----------
2001
First Quarter $ 25.82 $ 18.98
Second Quarter 33.20 21.30
Third Quarter 41.15 30.56
Fourth Quarter 43.17 24.00
2002
First Quarter $ 42.44 $ 33.00
Second Quarter 48.60 22.74
Third Quarter 34.75 21.70
Fourth Quarter 42.00 31.25
As of March 20, 2003, there were approximately 106 holders of record of the
23,768,342 outstanding shares of Pediatrix common stock. This share figure
reflects the repurchase of approximately 1.6 million shares of Pediatrix common
stock during the first quarter of 2003 under the Company's previously announced
share repurchase program. The closing sales price for Pediatrix common stock on
March 20, 2003 was $28.85 per share.
We did not declare or pay any cash dividends on our common stock in 2001 or
2002, nor do we currently intend to declare or pay any cash dividends in the
future, but instead we intend to retain all earnings for the operation and
expansion of our 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, our general
financial condition, 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."
22
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth as of and for each of the
five years in the period ended December 31, 2002, 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.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
CONSOLIDATED INCOME
STATEMENT DATA:
Net patient service revenue(1)(2) $ 185,422 $ 227,042 $ 243,075 $ 354,595 $ 465,481
--------- --------- --------- --------- ---------
Operating expenses:
Practice salaries and benefits 98,504 126,972 148,476 197,581 263,165
Practice supplies and other
operating expenses 5,679 9,341 11,022 14,297 15,791
General and administrative expenses 23,615 33,655 44,895 62,841 68,315
Depreciation and amortization 8,673 12,068 13,810 21,437 6,135
--------- --------- --------- --------- ---------
Total operating expenses 136,471 182,036 218,203 296,156 353,406
--------- --------- --------- --------- ---------
Income from operations 48,951 45,006 24,872 58,439 112,075
Investment income 564 296 358 309 818
Interest expense (1,013) (2,697) (3,771) (2,538) (1,156)
--------- --------- --------- --------- ---------
Income before income taxes 48,502 42,605 21,459 56,210 111,737
Income tax provision 19,403 17,567 10,473 25,782 42,961
--------- --------- --------- --------- ---------
Net income $ 29,099 $ 25,038 $ 10,986 $ 30,428 $ 68,776
========= ========= ========= ========= =========
PER SHARE DATA:
Net income per common share:
Basic $ 1.91 $ 1.61 $ 0.70 $ 1.44 $ 2.68
========= ========= ========= ========= =========
Diluted $ 1.82 $ 1.58 $ 0.68 $ 1.36 $ 2.58
========= ========= ========= ========= =========
Weighted average shares used in
computing net income per common share:
Basic 15,248 15,513 15,760 21,159 25,622
========= ========= ========= ========= =========
Diluted 15,987 15,860 16,053 22,478 26,629
========= ========= ========= ========= =========
23
ITEM 6. SELECTED FINANCIAL DATA, CONTINUED
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
OTHER OPERATING DATA:
Number of physicians at end of period 350 434 452 588 622
Number of births 268,923 337,480 381,602 450,205 501,832
NICU admissions 27,911 33,942 39,272 48,186 55,121
NICU patient days 450,225 548,064 637,957 804,293 983,733
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents $ 650 $ 825 $ 3,075 $ 27,557 $ 73,195
Working capital (deficit)(3) 14,915 (16,352) 2,108 34,381 79,555
Total assets 270,658 334,790 324,734 573,099 648,679
Total liabilities 63,265 105,903 82,834 94,247 100,681
Borrowings under line of credit 7,850 48,393 23,500 -- --
Long-term debt and capital lease
obligations, including current
maturities 2,550 2,350 -- 3,206 2,489
Shareholders' equity 201,051 228,887 241,900 478,852 547,998
(1) The Company adds new physician practices as a result of acquisitions and
internal marketing activities. The increase in net patient service revenue
related to acquisitions (including our acquisition of Magella) and internal
marketing activities was approximately $50.0 million, $49.5 million, $13.9
million, $86.6 million and $69.8 million for the years ended December 31,
1998, 1999, 2000, 2001 and 2002, respectively.
(2) Net patient service revenue for the year ended December 31, 2000, included
a charge of $6.5 million, which was recorded during the quarter ended June
30, 2000, to increase the allowance for contractual adjustments and
uncollectible accounts. This charge was attributable to management's
assessment of accounts receivable, which was revised to reflect the changes
occurring in the Company's collection rates.
(3) At December 31, 1999 and 2000, the balance outstanding on the Company's
line of credit was classified as a current liability.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion highlights the principal factors that have
affected 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
related notes thereto appearing elsewhere in this Annual Report on Form 10-K.
The operating results for the periods presented were not significantly affected
by inflation.
GENERAL
Pediatrix is the nation's leading provider of neonatal physician services
to hospital-based NICUs. In addition, we are the nation's leading provider of
perinatal physician services. We were founded in 1979 by Drs. Roger Medel and
Gregory Melnick. Since obtaining our first hospital contract in 1980, we have
grown by increasing revenues at existing units ("same unit growth") and by
adding new units. We also provide physician services to hospital-based PICUs and
pediatrics departments in hospitals.
On May 15, 2001, we acquired Magella Healthcare Corporation ("Magella") in
a merger transaction (the "Merger") for a total purchase price of $173.6
million, which we paid in shares of our common stock, plus assumed liabilities
of approximately $59.2 million. The Merger has been accounted for by Pediatrix
as an acquisition under the purchase method of accounting for business
combinations. This discussion and the Consolidated Financial Statements included
elsewhere in this report reflect our operations and financial results, which
from May 15, 2001, includes the business and operations of Magella.
On June 6, 2002, we received a written request from the FTC to submit
information on a voluntary basis in connection with an investigation of issues
of competition related to the Merger and our business practices generally. On
February 5, 2003, we received additional information requests from the FTC in
the form of a Subpoena and Civil Investigative Demand. Pursuant to these
requests, the FTC has requested documents and information relating to the Merger
and our business practices in certain markets.
We completed six acquisitions and added three NICUs through our internal
marketing activities during 2002. We have developed integrated regional
networks, including both neonatology and perinatology, in the Austin,
Dallas-Fort Worth, Denver-Colorado Springs, Des Moines, Kansas City, Las Vegas,
Phoenix-Tucson, San Antonio, San Jose, Seattle-Tacoma and Southern California
metropolitan areas and intend to develop additional regional and statewide
networks.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires estimates
and assumptions that affect the reporting of assets, liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities. Note 2 to our
Consolidated Financial Statements provides a summary of our significant
accounting policies, which are all in accordance with generally accepted
accounting policies in the United States of America. Certain of our accounting
policies are critical to understanding our financial statements because their
application places significant demands on management's judgment, with financial
reporting results relying on estimates of matters that are inherently uncertain.
We believe that the critical accounting policies described in the following
paragraphs affect the most significant estimates and assumptions used in the
preparation of our Consolidated Financial Statements. For all these policies, we
caution that future events rarely develop exactly as estimated, and the best
estimates routinely require adjustment. On an ongoing basis, we evaluate our
estimates and assumptions, including those discussed below.
Revenue Recoginition
We recognize patient service revenue at the time services are provided by
our affiliated physicians. Patient service revenue is presented net of an
estimated provision for contractual adjustments and uncollectibles. Management
estimates allowances for contractual adjustments and uncollectibles on accounts
receivable based on historical and other factors, including an evaluation of
expected adjustments and delinquency rates, past adjustment and collection
experience in relation to amounts billed, current economic conditions and other
relevant information. Contractual adjustments result from the difference between
25
the physician rates for services performed and reimbursements by
government-sponsored health care programs and insurance companies for such
services. The evaluation of these factors involves complex, subjective
judgments. Changes in these factors may significantly impact our Consolidated
Financial Statements.
Professional Liability Coverage
We maintain professional liability coverage, which indemnifies us and our
health care professionals on a claims-made basis with a portion of self
insurance deductible. We record a liability for self-insured deductibles and an
estimate of liabilities for claims incurred but not reported based on an
actuarial valuation which is based on historical loss patterns. An inherent
assumption in such estimates is that historical loss patterns can be used to
predict future patterns with reasonable accuracy. Because many factors can
affect past and future loss patterns, the effect of changes in such factors on
our estimates must be carefully evaluated. The evaluation of these factors
involves complex, subjective judgments. Insurance liabilities are necessarily
based on estimates including claim frequency and severity as well as health care
inflation, and actual results may vary significantly from such estimates.
Liabilities for claims incurred but not reported are not discounted.
Goodwill
We record acquired assets and liabilities at their respective fair values
under the purchase method of accounting, recording to goodwill the excess of
cost over the fair value of the net assets acquired, including identifiable
intangible assets. Goodwill related to acquisitions completed prior to July 1,
2001 was amortized through the year ended December 31, 2001 on a straight-line
basis over 25 years. In accordance with the provisions of Statement of Financial
Accounting Standards, No. 142 ("FAS 142"), "Goodwill and Other Intangible
Assets," no goodwill amortization was recorded for the year ended December 31,
2002. See Note 2 to our Consolidated Financial Statements.
Under current accounting standards, goodwill is tested for impairment at an
operating segment level, known as a reporting unit, on at least an annual basis
using a two-step test. The first step compares the fair value of a reporting
unit with its carrying amount, including goodwill. If the carrying amount of a
reporting unit exceeds its fair value, a second step is performed to determine
the amount of any impairment loss. We use income and market-based valuation
approaches to determine the fair value of our reporting units. These approaches
focus on discounted cash flows and market multiples to derive the fair value of
a reporting unit. We also consider the economic outlook for the healthcare
services industry and various other factors during the testing process,
including hospital and physician contract changes, local market developments,
changes in third-party payments, and other publicly-available information.
Other Matters
Other significant accounting policies, not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of our Consolidated Financial Statements. For example, our
Consolidated Financial Statements are presented on a consolidated basis with our
affiliated professional associations, corporations and partnerships (the "PA
Contractors") because we or one of our subsidiaries have entered into management
agreements with our PA Contractors meeting the criteria set forth in the
Emerging Issues Task Force Issue 97-2 for a "controlling financial interest".
Our management agreements are further described in Note 2 to our Consolidated
Financial Statements. Such policies often require difficult judgments on complex
matters that are often subject to multiple sources of authoritative guidance and
such matters are among topics currently under reexamination by accounting
standards setters and regulators. Although no specific conclusions reached by
these standard setters appear likely to cause a material change in our
accounting policies, outcomes cannot be predicted with confidence.
GEOGRAPHIC COVERAGE AND PAYOR MIX
During 2000, 2001 and 2002, approximately 55%, 59% and 62%, respectively,
of our net patient service revenue was generated by operations in our five
largest states. Over those same periods, our operations in Texas accounted for
approximately 18%, 29% and 33% of our net patient service revenue. Adverse
changes or conditions affecting these markets, such as health care reforms,
26
changes in laws and regulations, reduced Medicaid reimbursements, reductions in
the supply of trained physicians and government investigations, may have an
adverse effect on our operations. We continue to seek to diversify the
geographic scope of our operations, primarily through acquisitions of physician
group practices.
We bill 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. We determine our net patient service revenue based upon the
difference between our gross fees for services and our ultimate collections from
payors. Net patient service revenue differs from 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.
Our payor mix is comprised of government (principally Medicaid), contracted
managed care, other third parties and private pay patients. We benefit 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. In addition, we benefit when 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. However, a significant
increase in the government, managed care or capitated components of our payor
mix at the expense of other third party payors, as we have experienced in the
last few years, could result in reduced reimbursement rates and, in the absence
of increased patient volume, could have a material adverse effect on our
financial condition and results of operations. The following is a summary of our
payor mix, expressed as a percentage of net patient service revenue, exclusive
of administrative fees, for the periods indicated.
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 2001 2002
------------- ------------ -----------
Government 21% 23% 23%
Contracted managed care 48% 49% 55%
Other third parties 30% 27% 21%
Private pay patients 1% 1% 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 46% of our total gross patient service revenue but only 23% of our
net patient service revenue during 2002.
27
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
information related to our operations expressed as a percentage of our net
patient service revenue (patient billings net of contractual adjustments and
uncollectibles, and including administrative fees):
-----------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------
2000 2001 2002
------ ------ ------
Net patient service revenue 100% 100% 100%
------ ------ ------
Operating expenses:
Practice salaries and benefits 61.1 55.7 56.5
Practice supplies and other operating
expenses 4.5 4.1 3.4
General and administrative expenses 18.5 17.7 14.7
Depreciation and amortization 5.7 6.0 1.3
------ ------ ------
Total operating expenses 89.8 83.5 75.9
------ ------ ------
Income from operations 10.2 16.5 24.1
Other expense, net (1.4) (0.6) (.1)
------ ------ ------
Income before income taxes 8.8 15.9 24.0
Income tax provision 4.3 7.3 9.2
------ ------ ------
Net income 4.5% 8.6% 14.8%
====== ====== ======
YEAR ENDED DECEMBER 31, 2002 AS COMPARED TO YEAR ENDED DECEMBER 31, 2001
Our net patient service revenue increased $110.9 million, or 31.3%, to
$465.5 million for the year ended December 31, 2002, as compared with $354.6
million for the same period in 2001. Of this $110.9 million increase, $69.8
million, or 62.9%, 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 $41.1 million, or 15.6%, for the year
ended December 31, 2002. The increase in same unit net patient service revenue
was primarily the result of: (i) price increases implemented on June 1, 2001;
(ii) improved collection rates; (iii) an increase in patient days of 5.5%; (iv)
improved managed care contracting; and (v) increased revenue from new services
provided in existing practices. 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 $65.6 million, or 33.2%, to $263.2
million for the year ended December 31, 2002, as compared with $197.6 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 unit 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 $1.5 million, or
10.5%, to $15.8 million for the year ended December 31, 2002, as compared with
$14.3 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 $5.5 million, or 8.7%,
to $68.3 million for the year ended December 31, 2002, as compared to $62.8
million for the same period in 2001. This $5.5 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.
Earnings before interest expense, investment income, income tax provision,
and depreciation and amortization ("EBITDA") increased by $38.3 million, or
48.0%, to $118.2 million for the year ended December 31, 2002, as compared with
$79.9 million for the same period in 2001. EBITDA margin increased by 2.9
percentage points to 25.4%, as compared with 22.5% for the same period in 2001.
The EBITDA margin improvement was primarily due to the decline in general and
administrative expenses as a percentage of net patient service revenue.
28
EBITDA and EBITDA margin are non-GAAP measures of profitability and
operating efficiency widely used by investors to evaluate and compare operating
performance among different companies excluding the impact of certain non-cash
charges (depreciation and amortization). Depending on capital investments,
depreciation and amortization can vary significantly among different companies
and industries. We believe that EBITDA and EBITDA margin provide investors with
valuable measures to compare our operating performance with the operating
performance of other companies. EBITDA and EBITDA margin for the years ended
December 31, 2002 and 2001 can be reconciled to income from operations and
operating margin as shown below. Margins are expressed as a percentage of net
patient service revenue (amounts in thousands):
2002 2001
------------------------------- ----------------------------
AMOUNT $ MARGIN % AMOUNT $ MARGIN %
------------- ------------- ----------- ------------
Income from operations $112,075 24.1% $ 58,439 16.5%
Add: Depreciation and amortization 6,135 1.3% 21,437 6.0%
-------- ---- -------- ----
EBITDA $118,210 25.4% $ 79,876 22.5%
======== ==== ======== ====
Depreciation and amortization expense decreased by $15.3 million, or 71.4%,
to $6.1 million for the year ended December 31, 2002, as compared with $21.4
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 of the
Consolidated Financial Statements. Excluding the impact of goodwill amortization
for the year ended December 31, 2001, depreciation and amortization increased
$1.3 million, primarily due to fixed assets acquired in the Merger.
Income from operations increased $53.7 million, or 91.8%, to $112.1 million
for the year ended December 31, 2002, as compared with $58.4 million for the
same period in 2001. Our operating margin increased 7.6 percentage points to
24.1% for the year ended December 31, 2002, as compared to 16.5% for the same
period in 2001. Excluding the impact of goodwill amortization for the year ended
December 31, 2001, income from operations increased $37.1 million and operating
margin increased by 2.9 percentage points.
We recorded net interest expense of $338,000 for the year ended December
31, 2002, as compared with net interest expense of $2.2 million for the same
period in 2001. The decrease in interest expense in 2002 was primarily the
result of having no outstanding balance under our line of credit during the year
ended December 31, 2002. Interest expense for the year ended December 31, 2002
consisted primarily of commitment fees and amortized deferred debt costs
associated with our line of credit.
Our effective income tax rates were 38.4% and 45.9% for the years ended
December 31, 2002 and 2001, respectively. The decrease in the tax rate for the
year ended December 31, 2002 was primarily due to the elimination of
non-deductible goodwill amortization as required under the provisions of FAS
142. See Note 2 of the Consolidated Financial Statements.
Net income increased to $68.8 million for the year ended December 31, 2002,
as compared to $30.4 million for the same period in 2001. Excluding the impact
of goodwill amortization expense for the year ended December 31, 2001, net
income increased by $24.4 million.
Diluted net income per common and common equivalent share was $2.58 on
weighted average shares of 26.6 million for the year ended December 31, 2002, as
compared to $1.36 on the weighted average shares of 22.5 million for same period
in 2001. Excluding the impact of goodwill amortization expense, diluted net
income per common and common equivalent share would have been $1.98 for the year
ended December 31, 2001. The significant net increase in weighted average shares
outstanding was 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 plans, offset by a decrease in shares
due to the weighted average impact of approximately 1.7 million shares purchased
in 2002 under the Company's common stock repurchase program.
YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO YEAR ENDED DECEMBER 31, 2000
Our net patient service revenue increased $111.5 million, or 45.9%, to
$354.6 million for the year ended December 31, 2001, as compared with $243.1
million for the same period in 2000. Net patient service revenue for the year
ended December 31, 2000 included a charge of $6.5 million, which was recorded
during the quarter ended June 30, 2000, to increase the allowance for
contractual adjustments and uncollectible accounts. Of this $111.5 million
29
increase, approximately $86.5 million, or 77.6%, 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 $25.0 million, or 10.6%, for the year ended December 31, 2001. The
increase in same unit net patient service revenue was primarily the result of:
(i) improved collection performance due to process changes implemented in the
last 18 months including the regionalization of billing and collection
functions; (ii) improved managed care contracting; (iii) price increases
implemented after the completion of the Merger; (iv) higher acuity level of
patient services billed; and (v) volume increases. Same units are those units at
which we provided services for all of 2001 and 2000.
Practice salaries and benefits increased $49.1 million, or 33.1%, to $197.6
million for the year ended December 31, 2001, as compared with $148.5 million
for the same period in 2000. The increase was attributable to new physicians and
other clinical staff as a result of the Merger and to support new unit growth
and volume growth at existing units.
Practice supplies and other operating expenses increased $3.3 million, or
29.7%, to $14.3 million for the year ended December 31, 2001, as compared with
$11.0 million for the same period in 2000. Of this $3.3 million increase,
approximately $1.6 million was attributable to increased costs related to the
Merger. The remaining approximately $1.7 million was primarily attributable to:
(i) increases in rent for medical equipment and medical office space; and (ii)
an increase in medical supplies related to the growth in our national hearing
screen program.
General and administrative expenses include all salaries and benefits and
supplies and other operating expenses not specifically related to the day-to-day
operations of our physician group practices. General and administrative expenses
increased $17.9 million, or 40.0%, to $62.8 million for the year ended December
31, 2001, as compared to $44.9 million for the same period in 2000. Of this
$17.9 million increase, approximately $8.2 million, or 45.8%, was attributable
to increased costs for services provided to the practices acquired in the
Merger. Approximately $9.7 million, or 54.2%, was primarily due to an increase
in costs for: (i) salaries and benefits for billing and collections personnel as
we continued our regionalization of billing and collection functions; (ii) legal
fees related to government investigations and our class action lawsuit; (iii)
rent and other operating expenses related to the expansion of our regional
billing and collection offices; and (iv) information services for the
development and support of clinical and operational systems.
EBITDA increased by $41.2 million, or 106.5%, to $79.9 million for the year
ended December 31, 2001, as compared with $38.7 million for the same period in
2000. EBITDA margin increased by 6.6 percentage points to 22.5%, as compared
with 15.9% for the same period in 2000. The EBITDA margin improvement was
primarily due to the decline in practice salaries and benefits as a percentage
of net patient service revenue.
EBITDA and EBITDA margin are non-GAAP measures of profitability and
operating efficiency widely used by investors to evaluate and compare operating
performance among different companies excluding the impact of non-cash charges
(depreciation and amortization). Depending on capital investments, depreciation
and amortization can vary significantly among different companies and
industries. We believe that EBITDA and EBITDA margin provide investors with
valuable measures to compare our operating performance with the operating
performance of other companies. EBITDA and EBITDA margin for the years ended
December 31, 2001 and 2000 can be reconciled to income from operations and
operating margin as shown below. Margins are expressed as a percentage of net
patient service revenue (amounts in thousands):
2001 2000
------------------------------- ----------------------------
AMOUNT $ MARGIN % AMOUNT $ MARGIN %
------------- ------------- ----------- ------------
Income from operations $58,439 16.5% $24,872 10.2%
Add: Depreciation and amortization 21,437 6.0% 13,810 5.7%
------- ---- ------- ----
EBITDA $79,876 22.5% $38,682 15.9%
======= ==== ======= ====
Depreciation and amortization expense increased by approximately $7.6
million, or 55.2%, to $21.4 million for the year ended December 31, 2001, as
compared with $13.8 million for the same period in 2000, primarily as a result
of depreciation on fixed asset additions and amortization of goodwill in
connection with the Merger and other acquisitions.
30
Income from operations increased approximately $33.5 million, or 135.0%, to
approximately $58.4 million for the year ended December 31, 2001, as compared
with $24.9 million for the same period in 2000. Our operating margin increased
6.3 percentage points to 16.5% for the year ended December 31, 2001, as compared
to 10.2% for the same period in 2000.
We recorded net interest expense of approximately $2.2 million for the year
ended December 31, 2001, as compared with net interest expense of approximately
$3.4 million for the same period in 2000. The decrease in interest expense in
2001 was primarily the result of a net reduction in the average balance
outstanding under our line of credit.
Our effective income tax rate was approximately 45.9% and 48.8% for the
years ended December 31, 2001 and 2000, respectively. The decrease in the tax
rate for the year ended December 31, 2001 was primarily due to the reduction of
non-deductible amounts associated with goodwill as a percentage of our pretax
income.
Net income increased to approximately $30.4 million for the year ended
December 31, 2001, as compared to $11.0 million for the same period in 2000.
Diluted net income per common and common equivalent share was $1.36 on
weighted average shares of 22.5 million for the year ended December 31, 2001, as
compared to $0.68 on the weighted average shares of 16.1 million for the year
ended December 31, 2000. The significant increase in the weighted average shares
outstanding is due to: (i) the shares issued in the Merger which were
outstanding from May 15, 2001; (ii) the dilutive effect of convertible notes and
stock options assumed in the Merger; and (iii) an increase in our stock price.
QUARTERLY RESULTS
The following table presents certain unaudited quarterly financial data for
each of the quarters in the years ended December 31, 2001 and 2002. This
information has been prepared on the same basis as the Consolidated Financial
Statements appearing elsewhere in this Annual Report on Form 10-K and includes,
in our opinion, 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. We
have historically experienced and expect to continue to experience quarterly
fluctuations in net patient service revenue and net income. These fluctuations
are primarily due to the following factors:
o A significant number of employees, including physicians, at Pediatrix
exceed the level of taxable wages for social security during the first
and second quarter of the year. As a result, we incur a significantly
higher payroll tax burden during those quarters.
o A lower number of calendar days are present in the first and second
quarters of the year as compared to the remainder of the year. Since we
provide services in the NICU on a 24 hour basis, 365 days a year, any
reduction in service days will have a corresponding reduction in net
patient service revenue.
31
Additionally, the quarterly results may be impacted by the timing of
acquisitions and any fluctuation in patient volume. As a result, the operating
results for any quarter are not necessarily indicative of results for any future
period or for the full year.
2001 CALENDAR QUARTERS 2002 CALENDAR QUARTERS
------------------------------------------------ ------------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Net patient service
revenue $ 63,920 $ 83,137 $ 102,784 $ 104,754 $ 107,282 $ 116,223 $ 122,502 $ 119,474
--------- --------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Practice salaries and
benefits 38,249 46,424 55,899 57,010 62,534 65,183 68,232 67,216
Practice supplies and
other operating
expenses 2,897 3,564 3,898 3,937 3,489 3,954 3,997 4,351
General and
administrative
expenses 12,191 15,577 16,896 18,177 17,572 17,740 17,483 15,520
Depreciation and
amortization 3,578 5,103 6,344 6,412 1,465 1,463 1,520 1,687
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses 56,915 70,668 83,037 85,536 85,060 88,340 91,232 88,774
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations 7,005 12,469 19,747 19,218 22,222 27,883 31,270 30,700
Other expense, net (452) (715) (695) (367) (130) (65) (67) (76)
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income
taxes 6,553 11,754 19,052 18,851 22,092 27,818 31,203 30,624
Income tax provision 2,949 5,397 8,733 8,703 8,616 10,851 11,857 11,637
--------- --------- --------- --------- --------- --------- --------- ---------
Net income $ 3,604 $ 6,357 $ 10,319 $ 10,148 $ 13,476 $ 16,967 $ 19,346 $ 18,987
========= ========= ========= ========= ========= ========= ========= =========
Per share data:
Net income per
common and common
equivalent share:
Basic $ .23 $ .32 $ .43 $ .41 $ .53 $ .64 $ .75 $ .75
========= ========= ========= ========= ========= ========= ========= =========
Diluted $ .22 $ .30 $ .40 $ .39 $ .51 $ .62 $ .73 $ .73
========= ========= ========= ========= ========= ========= ========= =========
The significant increase in net patient service revenue beginning in the
second quarter of 2001 is primarily related to the Merger which was completed on
May 15, 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, we had approximately $73.2 million of cash and
cash equivalents on hand as compared to $27.6 million at December 31, 2001.
Additionally, we had working capital of approximately $79.6 million at December
31, 2002, an increase of $45.2 million from working capital of $34.4 million at
December 31, 2001.
We generated cash flow from operating activities of $36.1 million, $90.3
million and $97.8 million for the years ended December 31, 2000, 2001 and 2002,
respectively. In 2001, we realized a significant increase in cash provided from
operating activities as compared to 2000. This increase was due to a reduction
in days' revenue outstanding combined with the impact of the Merger on cash
provided from operating activities. We continued to realize an increase in cash
provided from operating activities in 2002 as compared to 2001 due to improved
year over year operating results.
In July 2002, our Board of Directors approved a common stock repurchase
program (the "Repurchase Program"). Under this Repurchase Program, we were
authorized to repurchase up to $50 million of our common stock in the open
market, subject to market conditions and trading restrictions. In November 2002,
our Board of Directors authorized the repurchase of an additional $50 million of
common stock. In 2002, we repurchased approximately 1.7 million shares at a cost
of approximately $50 million. Subsequent to December 31, 2002 and through March
20, 2003, the Company purchased an additional 1.6 million shares of its common
stock at a cost of approximately $50 million.
We generated proceeds from the exercise of stock options and the issuance
of common stock under our stock purchase plans of approximately $1.6 million,
$15.8 million and $32.1 million for the years ended December 31, 2000, 2001 and
2002, respectively.
During 2002, we completed the acquisition of six physician practices, using
approximately $25.4 million in cash. These acquisitions were funded principally
by cash generated from operations.
32
The Company currently has a line of credit in the amount of $100 million
which matures August 14, 2004 (the "Line of Credit"). 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 Line of Credit is
collateralized by substantially all of our assets. We are subject to certain
covenants and 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 December 31, 2002, we are in compliance with such
financial covenants. We had no outstanding balance under our Line of Credit at
December 31, 2001 and 2002.
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 an actuarial valuation.
Our current professional liability insurance policy expires May 1, 2003, and we
are currently reviewing our coverage options, which may include a higher
self-insured retention and an increase in premium costs. There can be no
assurance that we will be able to obtain substantially similar coverage for
professional liability insurance upon expiration or that such coverage will be
available at acceptable costs or on favorable terms.
The health care services industry is highly regulated. We believe that
billing audits, inquiries and investigations by government agencies will
continue to occur in the ordinary course of our business and in the health care
services industry in general. In response to such billing audits, inquiries and
investigations, our affiliated physicians could take an unduly conservative
approach to coding for their services by, for example, increasing the use of
non-critical care codes, for which our reimbursement is lower than critical care
codes, as they may have in the past. If they were to do this, we could receive
lower reimbursements from third party payors which could have a material adverse
effect on our liquidity and capital resources.
Our annual capital expenditures have typically been for computer hardware
and software and for furniture, equipment and improvements at the corporate
headquarters and our regional offices. During the year ended December 31, 2002,
capital expenditures amounted to approximately $8.0 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, finance our required capital expenditures and
meet our contractual obligations for at least the next 12 months.
CONTRACTUAL OBLIGATIONS
At December 31, 2002, we had certain obligations and commitments under
promissory notes, capital leases and operating leases totaling approximately
$29.7 million as follows:
PAYMENTS DUE (IN THOUSANDS)
-------------------------------------------------------------
LESS THAN ONE TO THREE TO MORE THAN
OBLIGATION ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS
- --------------------------- ------------ ------------ ------------ ------------
Promissory notes $ 350 $ 1,075 $ 767 $ --
Capital leases 154 130 13 --
Operating leases 14,099 7,746 4,856 557
------- ------- ------- -------
$14,603 $ 8,951 $ 5,636 $ 557
======= ======= ======= =======
We have lease arrangements with two entities that may be considered
variable interest entities under Financial Accounting Standards Board
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities -
an interpretation of ARB No. 51," which was issued in January 2003. We are
currently evaluating whether these two entites will be subject to consolidation
under the provisions of FIN 46. As of December 31, 2002, property and equipment
related to these entities was approximately $16.2 million with associated
liabilities of the same amount.
33
ACCOUNTING MATTERS
In June 2001, the Financial Accounting Standards Board (the "Board") issued
Statements of Financial Accounting Standards No. 141 ("FAS 141"), "Business
Combinations," and No. 142 ("FAS 142"), "Goodwill and Other Intangible Assets."
FAS 141 (i) requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001; (ii) establishes specific
criteria for the initial recognition and measurement of intangible assets
separately from goodwill; and (iii) requires unallocated negative goodwill be
written off immediately. FAS 142 supersedes APB 17, "Intangible Assets," and is
effective for fiscal years beginning after December 15, 2001. FAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
initial recognition. FAS 142 (i) prohibits the amortization of goodwill and
indefinite-lived intangible assets, (ii) requires that goodwill and
indefinite-lived intangible assets be tested annually for impairment, (iii)
requires that reporting units be identified for the purpose of assessing
potential future impairments of goodwill, and (iv) removes the forty-year
limitation on the amortization period of intangible assets that have finite
lives.
Effective July 1, 2001, we adopted the provisions of FAS 141 and the
nonamortization provisions of FAS 142 pertaining to goodwill recorded in
connection with acquisitions consummated subsequent to June 30, 2001.
Effective January 1, 2002, the remaining provisions of FAS 142 were fully
adopted, which require the nonamortization of all goodwill and that goodwill be
tested annually for impairment using a two-step process. We completed our
testing for 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 years
ended December 31, 2000, 2001 and 2002, pro forma net income and net income per
share is as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------------------
2000 2001 2002
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income, as reported $ 10,986 $ 30,428 $ 68,776
Add: Goodwill amortization, net of tax 8,618 13,974 --
---------- ---------- ----------
Pro forma net income $ 19,604 $ 44,402 $ 68,776
========== ========== ==========
Net income per share:
As reported:
Basic $ 0.70 $ 1.44 $ 2.68
Diluted $ 0.68 $ 1.36 $ 2.58
Pro forma:
Basic $ 1.24 $ 2.10 $ 2.68
Diluted $ 1.22 $ 1.98 $ 2.58
Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 144 ("FAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." FAS 144 supersedes Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," and addresses (i) the recognition and measurement of the
impairment of long-lived assets to be held and used, and (ii) the measurement of
long-lived assets to be disposed of by sale. The adoption of FAS 144 did not
have a material impact on our financial position or results of operations.
In 2002, we adopted Statement of Financial Accounting Standards No. 145
("FAS 145"), "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This Statement eliminates the FAS
No. 4 requirement that gains and losses from extinguishments of debt be
classified as an extraordinary item, and requires that such gains and losses be
evaluated for extraordinary classification under the criteria of APB Opinion No.
30, "Reporting Results of Operations." This statement also amends FAS No. 13 to
require that certain lease modifications that have economic effects that are
similar to sale-leaseback transactions be accounted for in the same manner as
34
sale-leaseback transactions. FAS 145 also makes various other technical
corrections to existing pronouncements. The adoption of FAS 145 did not have a
material effect on our financial position or results of operations.
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees Including Indirect Guarantees of
Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and 107
and rescission of FASB Interpretation No. 34," was issued. This statement
elaborates on the disclosures to be made by a guarantor about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of the interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002 and the disclosure requirements are effective for financial
statements ending after December 15, 2002. We are currently assessing the
impact, if any, of the adoption of the initial recognition and initial
measurement provisions.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("FAS 148"), "Accounting for Stock-Based Compensation -
Transition and Disclosure." This Statement amends Statement of Financial
Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
compensation. It also amends the disclosure provisions of FAS 123 to require
prominent disclosure about the effects on reported net income of an entity's
accounting policy decisions with respect to stock-based employee compensation.
Finally, FAS 148 amends APB Opinion No. 28, "Interim Financial Reporting," to
require disclosure about those effects in interim financial information. As of
December 31, 2002, we have adopted the disclosure provisions of FAS 148, but
have not voluntarily changed to the fair value based method of accounting for
stock based compensation.
In January 2003, FIN 46, "Consolidation of Variable Interest Entities - an
interpretation of ARB No. 51," was issued. FIN 46 addresses consolidation by
business enterprises of variable interest entities. The provisions of FIN 46
apply immediately to variable interest entities created after January 31, 2003,
and to variable interest entities in which an enterprise obtains an interest
after that date. It applies in the first fiscal year or interim period beginning
after June 15, 2003, to variable interest entities in which an enterprise holds
a variable interest that it acquired before February 1, 2003. We have lease
arrangements with two entities that may be considered variable interest entities
under FIN 46. We are currently evaluating whether these two entities will be
subject to consolidation under the provisions of FIN 46. As of December 31,
2002, property and equipment related to these entities was approximately $16.2
million with associated liabilities of the same amount. See "Contractual
Obligations."
ITEM 7A. 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
December 31, 2002. The outstanding balances related to the operating leases
totaled approximately $16.2 million at December 31, 2002. Considering the total
outstanding balances under these instruments at December 31, 2002 of
approximately $16.2 million, a 1% change in interest rates would result in an
impact to pre-tax earnings of approximately $162,000 per year.
35
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:
PAGE
----
Report of Independent Certified Public Accountants ...... 37
Consolidated Balance Sheets at December 31, 2001 and 2002 38
Consolidated Statements of Income for the Years Ended
December 31, 2000, 2001 and 2002 .............. 39
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 2000, 2001 and 2002 .. 40
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 2001 and 2002 .............. 41
Notes to Consolidated Financial Statements .............. 42
36
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Pediatrix Medical Group, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 8 on page 36 present fairly, in all material respects, the
financial position of Pediatrix Medical Group, Inc. and subsidiaries (the
"Company") at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule appearing under Item 15(a)(2) on page 60 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 and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, 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 our opinion.
As described in Note 2 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," effective January 1, 2002.
PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
February 5, 2003
37
PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
------------------------
2001 2002
-------- ---------
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 27,557 $ 73,195
Accounts receivable, net .................................... 63,851 75,356
Prepaid expenses ............................................ 3,110 6,083
Deferred income taxes ....................................... 5,515 5,515
Other assets ................................................ 12,925 1,206
-------- ---------
Total current assets ...................................... 112,958 161,355
Property and equipment, net .................................... 14,836 16,820
Goodwill ....................................................... 438,694 463,032
Other assets, net............................................... 6,611 7,472
-------- ---------
Total assets .............................................. $573,099 $ 648,679
======== =========
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ....................... $ 73,203 $ 76,400
Current portion of long-term debt and capital
lease obligations ......................................... 531 504
Income taxes payable ........................................ 4,843 4,896
-------- ---------
Total current liabilities ................................. 78,577 81,800
Long-term debt and capital lease obligations ................... 2,675 1,985
Deferred income taxes .......................................... 9,846 13,290
Deferred compensation .......................................... 3,149 3,606
-------- ---------
Total liabilities ......................................... 94,247 100,681
-------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock; $.01 par value, 1,000,000
shares authorized, none issued and
outstanding at December 31, 2001 and 2002 ................. -- --
Common stock; $.01 par value, 50,000,000
shares authorized at December 31, 2001 and 2002, 24,961,103
and 27,004,938 shares issued at December 31, 2001 and 2002,
respectively .............................................. 250 270
Additional paid-in capital .................................. 341,973 392,321
Treasury stock, at cost, 1,691,567 shares ................... -- (49,998)
Retained earnings ........................................... 136,629 205,405
-------- ---------
Total shareholders' equity ................................ 478,852 547,998
-------- ---------
Total liabilities and shareholders' equity ................ $573,099 $ 648,679
======== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
38
PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------------------
2000 2001 2002
--------- --------- ---------
Net patient service revenue ...................... $ 243,075 $ 354,595 $ 465,481
--------- --------- ---------
Operating expenses:
Practice salaries and benefits ................ 148,476 197,581 263,165
Practice supplies and other operating expenses 11,022 14,297 15,791
General and administrative expenses ........... 44,895 62,841 68,315
Depreciation and amortization ................. 13,810 21,437 6,135
--------- --------- ---------
Total operating expenses .................... 218,203 296,156 353,406
--------- --------- ---------
Income from operations ...................... 24,872 58,439 112,075
Investment income ................................ 358 309 818
Interest expense ................................. (3,771) (2,538) (1,156)
--------- --------- ---------
Income before income taxes .................. 21,459 56,210 111,737
Income tax provision ............................. 10,473 25,782 42,961
--------- --------- ---------
Net income .................................. $ 10,986 $ 30,428 $ 68,776
========= ========= =========
Per share data:
Net income per common and
common equivalent share:
Basic ....................................... $ .70 $ 1.44 $ 2.68
========= ========= =========
Diluted ..................................... $ .68 $ 1.36 $ 2.58
========= ========= =========
Weighted average shares used
in computing net income per common and common
equivalent share:
Basic ....................................... 15,760 21,159 25,622
========= ========= =========
Diluted ..................................... 16,053 22,478 26,629
========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
39
PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK
-----------------------
ADDITIONAL TOTAL
NUMBER OF PAID IN TREASURY RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL STOCK EARNINGS EQUITY
--------- ------- ---------- -------- -------- -------------
Balance at December 31, 1999 15,625 $156 $133,516 $ -- $ 95,215 $ 228,887
Net income ................. -- -- -- -- 10,986 10,986
Common stock issued under
Employee stock option and
stock purchase plans ..... 253 3 1,582 -- -- 1,585
Tax benefit related to
employee stock options and
stock purchase plans ..... -- -- 442 -- -- 442
------ ---- -------- -------- -------- ---------
Balance at December 31, 2000 15,878 159 135,540 -- 106,201 241,900
Net income ................. -- -- -- -- 30,428 30,428
Common stock issued in
connection with the Merger 7,293 73 152,417 -- -- 152,490
Fair value of stock options
assumed in the Merger .... -- -- 18,932 -- -- 18,932
Common stock issued under
employee stock option and
stock purchase plans ..... 1,253 13 15,820 -- -- 15,833
Common stock issued for
convertible notes ........ 537 5 11,867 -- -- 11,872
Tax benefit related to
employee stock options and
stock purchase plans ..... -- -- 7,397 -- -- 7,397
------ ---- -------- -------- -------- ---------
Balance at December 31, 2001 24,961 250 341,973 -- 136,629 478,852
Net income ................. -- -- -- -- 68,776 68,776
Common stock issued under
employee stock option and
stock purchase plans ..... 2,044 20 32,091 -- -- 32,111
Common stock issued for
convertible notes ........ -- -- 128 -- -- 128
Treasury stock ............. -- -- -- (49,998) -- (49,998)
Tax benefit related to
employee stock options and
stock purchase plans ..... -- -- 18,129 -- -- 18,129
------ ---- -------- -------- -------- ---------
Balance at December 31, 2002 27,005 $270 $392,321 $(49,998) $205,405 $ 547,998
====== ==== ======== ======== ======== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
40
PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------------------
2000 2001 2002
-------- -------- --------
Cash flows from operating activities:
Net income .................................................. $ 10,986 $ 30,428 $ 68,776
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization ............................. 13,810 21,437 6,135
Deferred income taxes ..................................... (1,340) (14,725) 1,497
Loss on sale of assets .................................... 15 -- --
Changes in assets and liabilities:
Accounts receivable ..................................... 8,593 17,676 (11,505)
Prepaid expenses and other assets ....................... (237) (1,765) (3,254)
Other assets ............................................ (73) 5,436 565
Accounts payable and accrued expenses ................... 779 22,992 15,504
Income taxes payable .................................... 3,616 8,857 20,124
-------- -------- --------
Net cash provided from operating activities ........... 36,149 90,336 97,842
-------- -------- --------
Cash flows from investing activities:
Physician group acquisition payments ........................ (9,033) (23,734) (25,735)
Purchase of property and equipment .......................... (4,346) (7,088) (7,993)
Proceeds from sale of assets ................................ 5,138 -- --
-------- -------- --------
Net cash used in investing activities ................. (8,241) (30,822) (33,728)
-------- -------- --------
Cash flows from financing activities:
Payments on line of credit, net ............................. (24,893) (46,900) --
Payments to refinance line of credit ........................ -- (1,404) --
Payments on long-term debt, capital lease obligations
and note payable .......................................... (2,350) (2,561) (589)
Proceeds from issuance of common stock ...................... 1,585 15,833 32,111
Purchase of treasury stock .................................. -- -- (49,998)
-------- -------- --------
Net cash used in financing activities ................. (25,658) (35,032) (18,476)
-------- -------- --------
Net increase in cash and cash equivalents ...................... 2,250 24,482 45,638
Cash and cash equivalents at beginning of year ................. 825 3,075 27,557
-------- -------- --------
Cash and cash equivalents at end of year ....................... $ 3,075 $ 27,557 $ 73,195
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest .......................................... $ 3,892 $ 2,642 $ 1,164
Income taxes ...................................... $ 8,135 $ 23,426 $ 20,216
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
41
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 30 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 health care
professionals to bill and collect the charges for medical services
rendered by the Company's health care professionals; and b)
administrative fees whereby the Company is assured a minimum revenue
level.
On May 15, 2001, the Company acquired Magella Healthcare Corporation
("Magella") pursuant to a merger transaction (the "Merger"). The total
purchase price was approximately $173.6 million, which the Company paid
for in shares of its common stock, plus assumed liabilities of
approximately $59.2 million. The Company also completed six
acquisitions and added three neonatal intensive care units ("NICUs")
through internal marketing activities during 2002. The Company has
accounted for the Merger and the acquisitions using the purchase method
of accounting. The results of operations of Magella and the acquired
practices have been included in the Consolidated Financial Statements
from the dates of acquisition. See also Note 5.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF PRESENTATION
The financial statements include all the accounts of the Company and
its subsidiaries combined with the accounts of the professional
associations (the "PA Contractors") with which the Company currently
has specific management arrangements. The financial statements of the
PA Contractors are consolidated with the Company because the Company
has established a controlling financial interest in the operations of
the PA Contractors, as defined in Emerging Issues Task Force Issue
97-2, through contractual management arrangements. The PA Contractors'
agreements with the Company provide that the term of the arrangements
are permanent, subject only to termination by the Company, except in
the case of gross negligence, fraud or bankruptcy of the Company. The
Company has the right to receive income, both as ongoing fees and as
proceeds from the sale of its interest in the PA Contractors, in an
amount that fluctuates based on the performance of the PA Contractors
and the change in the fair value thereof. The Company has exclusive
responsibility for the provision of all non-medical services required
for the day-to-day operation and management of the PA Contractors and
establishes the guidelines for the employment and compensation of the
physicians. In addition, the agreements provide that the Company has
the right, but not the obligation, to purchase, or to designate a
person(s) to purchase, the stock of the PA Contractors for a nominal
amount. Separately, in its sole discretion, the Company has the right
to assign its interest in the agreements. All significant intercompany
and interaffiliate accounts and transactions have been eliminated.
ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "Board")
issued Statements of Financial Accounting Standards No. 141 ("FAS
141"), "Business Combinations," and No. 142 ("FAS 142"), "Goodwill and
Other Intangible Assets." FAS 141 (i) requires that the purchase method
of accounting be used for all business combinations initiated after
June 30, 2001; (ii) establishes specific criteria for the initial
recognition and measurement of intangible assets separately from
goodwill; and (iii) requires unallocated negative goodwill be written
off immediately. FAS 142 supersedes APB 17, "Intangible Assets," and is
effective for fiscal years beginning after December 15, 2001. FAS 142
primarily addresses the accounting for goodwill and intangible assets
subsequent to their initial recognition. FAS 142 (i) prohibits the
amortization of goodwill and indefinite-lived intangible assets, (ii)
requires that goodwill and indefinite-lived intangible assets be tested
at least annually for impairment, (iii) requires that reporting units
be identified for the purpose of assessing potential future impairments
of goodwill, and (iv) removes the forty-year limitation on the
amortization period of intangible assets that have finite lives.
42
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
Effective July 1, 2001, the Company adopted the provisions of FAS 141
and the nonamortization provisions of FAS 142 pertaining to goodwill
recorded in connection with acquisitions consummated subsequent to June
30, 2001.
Effective January 1, 2002, the remaining provisions of FAS 142 were
fully adopted, which require the nonamortization of all goodwill and
that goodwill be tested annually for impairment using a two-step
process. The Company completed its testing for 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 years
ended December 31, 2000, 2001 and 2002, pro forma net income and net
income per share is as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------------
2000 2001 2002
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income, as reported .............. $ 10,986 $ 30,428 $ 68,776
Add: Goodwill amortization, net of tax 8,618 13,974 --
---------- ---------- ----------
Pro forma net income ................. $ 19,604 $ 44,402 $ 68,776
========== ========== ==========
Net income per share:
As reported:
Basic ......................... $ 0.70 $ 1.44 $ 2.68
Diluted ....................... $ 0.68 $ 1.36 $ 2.58
Pro forma:
Basic ......................... $ 1.24 $ 2.10 $ 2.68
Diluted ....................... $ 1.22 $ 1.98 $ 2.58
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144 ("FAS 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." FAS 144 supersedes
Financial Accounting Standards No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and
addresses (i) the recognition and measurement of the impairment of
long-lived assets to be held and used, and (ii) the measurement of
long-lived assets to be disposed of by sale. The adoption of FAS 144
did not have a material impact on the Company's financial position or
results of operations.
In 2002, the Company adopted Statement of Financial Accounting
Standards No. 145 ("FAS 145"), "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
This statement eliminates the FAS No. 4 requirement that gains and
losses from extinguishments of debt be classified as an extraordinary
item, and requires that such gains and losses be evaluated for
extraordinary classification under the criteria of APB Opinion No. 30,
"Reporting Results of Operations." This statement also amends FAS No.
13 to require that certain lease modifications that have economic
effects that are similar to sale-leaseback transactions be accounted
for in the same manner as sale-leaseback transactions. FAS 145 also
makes various other technical corrections to existing pronouncements.
The adoption of FAS 145 did not have a material effect on the Company's
financial position or results of operations.
In November 2002, FASB Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No.
34," was issued. This statement elaborates on the disclosures to be
made by a guarantor about its obligations under certain guarantees that
it has issued.
43
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition
and initial measurement provisions of the interpretation are applicable
on a prospective basis to guarantees issued or modified after December
31, 2002 and the disclosure requirements are effective for financial
statements ending after December 15, 2002. The Company is currently
assessing the impact, if any, of the adoption of the initial
recognition and initial measurement provisions.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("FAS 148"), "Accounting for Stock-Based Compensation
- Transition and Disclosure." This Statement amends Statement of
Financial Accounting Standards No. 123 ("FAS 123"), "Accounting for
Stock-Based Compensation," to provide alternative methods of transition
for an entity that voluntarily changes to the fair value based method
of accounting for stock-based compensation. It also amends the
disclosure provisions of FAS 123 to require prominent disclosure about
the effects on reported net income of an entity's accounting policy
decisions with respect to stock-based employee compensation. Finally,
FAS 148 amends APB Opinion No. 28, "Interim Financial Reporting," to
require disclosure about those effects in interim financial
information. As of December 31, 2002, the Company has adopted the
disclosure provisions of FAS 148, but has not changed to the fair value
based method of accounting for stock based compensation.
In January 2003, FASB Interpretation No. 46 ("FIN 46"), "Consolidation
of Variable Interest Entities - an interpretation of ARB No. 51," was
issued. FIN 46 addresses consolidation by business enterprises of
variable interest entities. The provisions of FIN 46 apply immediately
to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest
after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which
an enterprise holds a variable interest that it acquired before
February 1, 2003. The Company has lease arrangements with two entities
that may be considered variable interest entities under FIN 46. The
Company is currently evaluating whether these two entities will be
subject to consolidation under the provisions of FIN 46. As of December
31, 2002, property and equipment related to these entities was
approximately $16.2 million with associated liabilities of the same
amount.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. Significant
estimates include the estimated allowance for contractual adjustments
and uncollectibles on accounts receivable, and the estimated
liabilities for claims incurred but not reported related to the
Company's professional liability insurance. Actual results could differ
from those estimates.
SEGMENT REPORTING
The Company operates in a single operating segment for purposes of
presenting financial information and evaluating performance. As such,
the accompanying Consolidated Financial Statements present financial
information in a format that is consistent with the financial
information used by management for internal use.
REVENUE RECOGNITION
Patient service revenue is recognized at the time services are provided
by the Company's employed physicians. Patient service revenue is
presented net of an estimated provision for contractual adjustments
44
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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 health
care programs and insurance companies for such services.
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. 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 22% and 19%
of net accounts receivable at December 31, 2001 and 2002, 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's cash equivalents consist principally of demand deposits,
amounts on deposit in money market accounts, mutual funds, and funds
invested in overnight repurchase agreements. The Company holds a
majority of its cash equivalents with one financial institution.
PROPERTY AND EQUIPMENT
Property and equipment are stated at original purchase cost.
Depreciation of property and equipment is computed on the straight-line
method over the estimated useful lives. Estimated useful lives are
generally 40 years for buildings; three to seven years for medical
equipment, computer equipment, software and furniture; and the lease
period for leasehold improvements and capital leases. 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.
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company fully adopted the provisions of
FAS 142. In accordance with FAS 142, the Company records acquired
assets and liabilities at their respective fair values under the
purchase method of accounting. Goodwill represents the excess of cost
over the fair value of the net assets acquired. Intangible assets with
finite lives, physician and hospital agreements, are recognized apart
from goodwill at the time of acquisition based on the contractual-legal
and separability criteria established in FAS 141.
Goodwill is tested for impairment at an operating segment level, known
as a reporting unit, on an annual basis using a two-step test. The
first step compares the fair value of a reporting unit with its
carrying amount, including goodwill. If the carrying amount of a
reporting unit exceeds its fair value, a second step is performed to
determine the amount of any impairment loss. The Company completed its
initial impairment analysis of goodwill as of January 1, 2002 and its
annual impairment test in the third quarter of 2002 and determined that
goodwill was not impaired. Goodwill related to acquisitions completed
prior to July 1, 2001 was amortized through the year ended December 31,
2001 on a straight-line basis over 25 years. No goodwill amortization
was recorded for the year ended December 31, 2002. Intangible assets
with finite lives are amortized over a period of 5 to 20 years.
45
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
LONG-LIVED ASSETS
The Company evaluates long-lived assets, including intangible assets
subject to amortization, at least annually and records an impairment
whenever events or changes in circumstances indicate that the carrying
value of the assets may not be fully recoverable. The recoverability of
such assets is measured by a comparison of the carrying value of the
assets to the future undiscounted cash flows before interest charges to
be generated by the assets. If long-lived assets are impaired, the
impairment to be recognized is measured as the excess of the carrying
value over the fair value. Long-lived assets to be disposed of are
reported at the lower of the carrying value or fair value less disposal
costs. The Company does not believe there are any indicators that would
require an adjustment to such assets or their estimated periods of
recovery at December 31, 2002 pursuant to the current accounting
standards.
TREASURY STOCK
Effective with the beginning of the third quarter of 2002, the Company
began repurchasing and holding shares of its common stock as treasury
stock. The Company records its common stock repurchases at
reacquisition cost using the cost method of accounting for treasury
stock. Treasury stock is reported as a reduction in shareholders'
equity.
PROFESSIONAL LIABILITY COVERAGE
The Company maintains professional liability coverage, which
indemnifies the Company and its health care professionals on a
claims-made basis with a portion of self insurance deductible. 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 records deferred income taxes using the liability method,
whereby 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
The Company accounts for stock-based compensation to employees using
the intrinsic value method as prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, no compensation expense for stock options
issued to employees is reflected in the consolidated statements of
income, because the market value of the Company's stock equals the
exercise price on the day options are granted. To the extent 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.
Had compensation expense been determined based on the fair value
accounting provisions of FAS 123, "Accounting for Stock-Based
Compensation," the Company's net income and net income per share would
have been reduced to the pro forma amounts below:
46
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
YEARS ENDED DECEMBER 31,
--------------------------------------------
2000 2001 2002
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income, as reported ............. $ 10,986 $ 30,428 $ 68,776
Deduct: Total stock-based employee
compensation expense determined
under fair value accounting rules,
net of related tax effect ........ (6,970) (9,338) (10,451)
---------- ---------- ----------
Pro forma net income ................ $ 4,016 $ 21,090 $ 58,325
========== ========== ==========
Net income per share:
As reported:
Basic ........................ $ 0.70 $ 1.44 $ 2.68
Diluted ...................... $ 0.68 $ 1.36 $ 2.58
Pro forma:
Basic ........................ $ 0.25 $ 1.00 $ 2.28
Diluted ...................... $ 0.25 $ 0.98 $ 2.25
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 2000, 2001
and 2002: dividend yield of 0% for all years; expected volatility of
82%, 71% and 58%, respectively, and risk-free interest rates of 6.4%,
4.6% and 3.6%, respectively, for options with expected lives of five
years (officers and physicians of the Company) and 6.3%, 3.9% and 3.1%,
respectively, for options with expected lives of three years (all other
employees of the Company).
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 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 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.
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 value of long-term
debt and capital lease obligations approximates fair value.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform with the current year presentation.
47
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. ACCOUNTS RECEIVABLE AND NET PATIENT SERVICE REVENUE:
Accounts receivable consists of the following:
DECEMBER 31,
-------------------------
2001 2002
--------- ---------
(IN THOUSANDS)
Gross accounts receivable ........... $ 193,165 $ 210,783
Allowance for contractual adjustments
and uncollectibles ............. (129,314) (135,427)
--------- ---------
$ 63,851 $ 75,356
========= =========
Net patient service revenue consists of the following:
YEARS ENDED DECEMBER 31,
--------------------------------------------
2000 2001 2002
--------- --------- -----------
(IN THOUSANDS)
Gross patient service revenue .. $ 545,758 $ 835,137 $ 1,071,475
Contractual adjustments
and uncollectibles ........... (320,584) (500,284) (630,237)
Hospital contract administrative
fees ......................... 17,901 19,742 24,243
--------- --------- -----------
$ 243,075 $ 354,595 $ 465,481
========= ========= ===========
During the second quarter of 2000, the Company recorded a charge of
$6.5 million to increase the allowance for contractual adjustments and
uncollectible accounts. This charge was attributable to management's
assessment of accounts receivable, which was revised to reflect the
changes occurring in the Company's collection rates that became known
by the Company as a result of trends noted during the second quarter of
2000 and an increase in average aged accounts receivable. This decline
in collection rates was the result of (i) an increased utilization of
non-critical care codes on which the Company realizes a lower
collection rate as a percentage of billed charges, (ii) a significant
decline in the reimbursement from non-contracted payors, (iii)
continued difficulties in the health care reimbursement environment,
primarily with managed care payors, and (iv) disruption within our
collection offices due to the billing inquiries and the transition to a
regional collection structure.
During the second quarter of 2001, the Company increased prices for its
patient services. As a result of the price increase, contractual
adjustments and uncollectibles increased as a percentage of gross
patient service revenue from 2000 to 2001. This increase is primarily
due to government-sponsored health care programs, like Medicaid, that
generally provide for reimbursements on a fee schedule basis rather
than on a gross charge basis. Since the Company bills
government-sponsored health care programs, like other payors, on a
gross charge basis, the Company must increase the provision for
contractual adjustments and uncollectibles by the amount of any price
increase, resulting in a higher contractual adjustment percentage.
During 2002, the Company realized a decrease in contractual adjustments
and uncollectibles as a percentage of gross revenue due to (i) the
realization of improved reimbursement from non-contracted payors
related to the 2001 price increase, (ii) improved contracting with
managed care payors, and (iii) improved collections as a result of the
Company's regional collection structure.
48
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
DECEMBER 31,
-----------------------
2001 2002
-------- --------
(IN THOUSANDS)
Building ............... $ 33 $ 33
Equipment and furniture 27,013 34,442
-------- --------
27,046 34,475
Accumulated depreciation (12,210) (17,655)
-------- --------
$ 14,836 $ 16,820
======== ========
At December 31, 2002, property and equipment includes medical equipment
held under capital leases of approximately $1.3 million and related
accumulated depreciation of approximately $1.0 million. The Company
recorded depreciation expense of approximately $3,131,000, $4,857,000
and $6,009,000 for the years ended December 31, 2000, 2001 and 2002,
respectively.
5. GOODWILL AND OTHER ASSETS:
Other assets consists of the following:
DECEMBER 31,
----------------------
2001 2002
-------- --------
(IN THOUSANDS)
Other intangible assets $ -- $ 996
Other assets .......... 6,611 6,476
-------- --------
$ 6,611 $ 7,472
======== ========
At December 31, 2002, other intangible assets consist of amortizable
physician and hospital agreements with a gross carrying amount of
approximately $1.1 million, less accumulated amortization of
approximately $120,000. Amortization expense related to these
agreements for the year ended December 31, 2002 was approximately
$120,000. Amortization expense on these agreements for the years 2003
through 2006 is expected to be approximately $161,000, $145,000,
$105,000, $94,000 and $78,000, respectively. The remaining weighted
average amortization period of other intangible assets is 19 years.
On May 15, 2001, the Company acquired Magella pursuant to a merger
transaction. The total purchase price for Magella was allocated as
follows (in thousands):
(i) Fair value of approximately 7.3 million shares of Pediatrix
common stock issued for all outstanding common and
nonvoting common stock of Magella.................................. $ 152,490
(ii) Fair value of Magella options exercisable into approximately
1.4 million shares of Pediatrix common stock as a result of
the Merger......................................................... 18,932
(iii) Estimated direct transaction costs................................. 2,154
--------------
Total purchase price............................................... $ 173,576
==============
In connection with the Merger, the Company recorded assets totaling
approximately $232.8 million, including approximately $206.5 million in
goodwill, and assumed liabilities of approximately $59.2 million.
49
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. GOODWILL AND OTHER ASSETS, CONTINUED:
In addition to the Merger, the Company completed the acquisition of six
physician group practices during 2001. Total consideration and related
costs for the acquisitions approximated $19.8 million in cash and $1.8
million in notes payable. In connection with these transactions, the
Company recorded goodwill in the amount of approximately $21.6 million.
During 2002, the Company completed the acquisition of six physician
practices. Total consideration and related costs for these acquisitions
approximated $25.4 million. In connection with these transactions, the
Company recorded goodwill of approximately $24.3 million and other
intangible assets consisting of physician and hospital agreements of
approximately $1.1 million. The goodwill of approximately $24.3 million
related to these acquisitions represents the only change in the
carrying amount of goodwill for the year ended December 31, 2002.
The Company has accounted for the Merger and the other acquisitions
completed during 2001 and 2002 using the purchase method of accounting.
The results of operations of Magella and the acquired practices 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, Magella and the physician group
practices acquired during 2001 and 2002 as if the transactions had
occurred on January 1, 2001:
YEARS ENDED DECEMBER 31,
----------------------------------
2001 2002
----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net patient service revenue $ 407,599 $ 469,783
Net income ................ 36,145 68,787
Net income per share:
Basic ................... $ 1.52 $ 2.68
Diluted ................. $ 1.41 $ 2.58
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.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
DECEMBER 31,
----------------------------
2001 2002
------- -------
(IN THOUSANDS)
Accounts payable ....................... $12,625 $10,131
Accrued salaries and bonuses ........... 21,811 35,377
Accrued payroll taxes and benefits ..... 7,374 10,364
Accrued professional liability
coverage ............................. 11,504 14,607
Accrued securities litigation settlement
(Note 9) ............................. 12,000 --
Other accrued expenses ................. 7,889 5,921
------- -------
$73,203 $76,400
======= =======
50
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES, CONTINUED:
In connection with the accrued liability for the settlement of the
class action securities litigation at December 31, 2001, as noted
above, the Company recorded a receivable from the Company's insurance
carrier in the amount of $12 million. Such amount is included in other
current assets at December 31, 2001.
7. LINE OF CREDIT, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
During 2001, the Company refinanced its $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 the Company's 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 the Company's assets.
The Company is subject to certain covenants and restrictions under the
Line of Credit, including covenants that require the Company 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 December 31, 2002, the Company was in compliance with such
financial covenants. The Company had no outstanding balance under the
Line of Credit at December 31, 2001 and 2002.
During 2001, the Company issued a $1.8 million promissory note in
connection with an acquisition. The promissory note accrues interest at
5.5%, requires principle payments in five equal installments of
$350,000, and matures on September 7, 2006.
In connection with the Merger, the Company assumed certain convertible
subordinated notes issued by Magella which, as a result of the Merger
became exercisable into our common stock ("Convertible Notes"). During
2001 and 2002, approximately $11.9 million and $128,000 of Convertible
Notes were converted into approximately 537,000 and 5,000 shares,
respectively, of the Company's common stock at the option of the
holders. At December 31, 2002, the total outstanding principal on the
Convertible Notes is approximately $792,000. The remaining outstanding
Convertible Notes are convertible into approximately 30,000 shares of
the Company's common stock at the option of the holder at a price of
$26.00 per share, bear interest at rates ranging from 5% to 6%, require
varying periodic interest payments and are due at various dates ranging
from January 2005 through January 2006. The Company has the right to
force the holders of the Convertible Notes to convert the notes into
Pediatrix common stock when the share price of the Company's common
stock trades at a specified price ranging from $32.50 to $39.00 over a
90 day trading period.
Long-term debt, including capital lease obligations, consists of the
following:
DECEMBER 31,
2002
--------------------
(IN THOUSANDS)
Convertible Notes ................ $ 792
Promissory note in connection with
acquisition..................... 1,400
Capital lease obligations ........ 297
-------
Total .......................... 2,489
Current portion .................. (504)
-------
Long-term debt and capital lease
obligations .................... $ 1,985
=======
The amounts due under the terms of the Company's long-term debt,
including capital lease obligations, at December 31, 2002 are as
follows: 2003 - $504,000; 2004 - $443,000; 2005 - $762,000; and 2006 -
$780,000.
51
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. INCOME TAXES:
The components of the income tax provision (benefit) are as follows:
DECEMBER 31,
---------------------------------------------
2000 2001 2002
-------- -------- -------
(IN THOUSANDS)
Federal:
Current $ 11,463 $ 29,970 $35,924
Deferred (1,265) (4,709) 3,192
-------- -------- -------
10,198 25,261 39,116
-------- -------- -------
State:
Current 350 1,083 3,593
Deferred (75) (562) 252
-------- -------- -------
275 521 3,845
-------- -------- -------
Total $ 10,473 $ 25,782 $42,961
======== ======== =======
The Company files its tax return on a consolidated basis with its
subsidiaries. The remaining PA Contractors file tax returns on an
individual basis.
The effective tax rate on income was 48.8%, 45.9% and 38.4% for the
years ended December 31, 2000, 2001 and 2002, respectively. The
decrease in the tax rate for the year ended December 31, 2002 was
primarily due to the elimination of non-deductible goodwill
amortization as required under current accounting standards. The
differences between the effective rate and the U.S. federal income tax
statutory rate are as follows:
DECEMBER 31,
---------------------------------------
2000 2001 2002
------- ------- -------
(IN THOUSANDS)
Tax at statutory rate $ 7,511 $19,674 $39,108
State income tax, net
of federal benefit 179 865 2,499
Amortization ........ 2,347 3,939 237
Other, net .......... 436 1,304 1,117
------- ------- -------
Income tax provision $10,473 $25,782 $42,961
======= ======= =======
52
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:
DECEMBER 31, 2001 DECEMBER 31, 2002
--------------------------------- -----------------------------
NON- NON-
TOTAL CURRENT CURRENT TOTAL CURRENT CURRENT
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Allowance for uncollectible
accounts $ 5,275 $ 5,275 $ -- $ 5,708 $ 5,708 $ --
Net operating loss carryforward 2,727 2,727 -- 3,321 3,321 --
Amortization 1,417 -- 1,417 1,170 -- 1,170
Operating reserves and accruals 10,167 10,167 -- 10,273 10,273 --
Other 1,986 1,249 737 2,394 368 2,026
-------- -------- -------- -------- -------- --------
Total deferred tax assets 21,572 19,418 2,154 22,866 19,670 3,196
Accrual to cash adjustment (13,903) (13,903) -- (14,123) (14,123) --
Property and equipment (3,912) -- (3,912) (3,775) -- (3,775)
Amortization (8,088) -- (8,088) (12,712) -- (12,712)
Other -- -- -- (31) (32) 1
-------- -------- -------- --------- --------- --------
Total deferred tax liabilities (25,903) (13,903) (12,000) (30,641) (14,155) (16,486)
-------- -------- -------- --------- --------- ---------
Net deferred tax liability $ (4,331) $ 5,515 $ (9,846) $ (7,775) $ 5,515 $(13,290)
========== ======== ========== ========= ======== =========
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
$442,000, $7,397,000 and $18,129,000 for the years ended December 31,
2000, 2001, and 2002, respectively.
The Company has net operating loss carryforwards for federal and state
tax purposes totaling approximately $6,668,000, $7,175,000 and
$8,697,000 at December 31, 2000, 2001 and 2002, respectively, expiring
at various times commencing in 2009.
9. COMMITMENTS AND CONTINGENCIES:
On June 6, 2002, the Company received a written request from the
Federal Trade Commission ("FTC") to submit information on a voluntary
basis in connection with an investigation of issues of competition
related to the 2001 acquisition of Magella and our business practices
generally. On February 5, 2003, the Company received additional
information requests from the FTC in the form of a Subpoena and Civil
Investigative Demand. Pursuant to these requests, the FTC has requested
documents and information relating to the acquisition and the Company's
business practices in certain markets. The Company is cooperating fully
with the FTC, 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 the
trading price of the Company's shares.
In April 2002, the Company entered into a settlement agreement with the
Colorado Department of Health Care Policy and Financing resolving the
State of Colorado's Medicaid investigation of the Company. The Company
had received requests in April 1999, and in one case a subpoena, from
state and federal 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. The Arizona and Florida Medicaid investigations
were closed in 2000 after the Company entered into settlement
agreements with those states. The TRICARE investigation is active and
ongoing, and this matter, along with the Florida, Arizona and Colorado
matters, has 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. The Company cannot predict whether any
such audits, inquiries or investigations will have a material adverse
effect on the
53
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. COMMITMENTS AND CONTINGENCIES, CONTINUED:
Company's business, financial condition, results of operations or the
trading price of the Company's shares.
On May 3, 2002, the United States District Court for the Southern
District of Florida entered an Order and Final Judgment approving the
settlement of the class action litigation filed against the Company and
certain of its officers in February 1999 relating to alleged violations
of securities laws. Under the terms of the settlement, the plaintiffs'
claim was dismissed with prejudice in exchange for a cash payment of
$12.0 million, which was covered by insurance policies.
During the ordinary course of its business, the Company has become a
party to pending and threatened legal actions and proceedings, most of
which involve claims of medical malpractice. Although these actions and
proceedings are generally expected to be covered by insurance, there
can be no assurance that the Company's medical malpractice insurance
coverage will be adequate to cover liabilities arising out of medical
malpractice claims where the outcomes of such claims are unfavorable to
the Company. 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 business, financial
condition, results of operations or the trading price of the Company's
shares.
The Company maintains a lease agreement for its corporate office in
Sunrise, Florida. The Company is required to maintain certain financial
covenants pursuant to the corporate office lease agreement, including a
requirement that the Company maintain a minimum level of net worth. At
December 31, 2002, the Company was in compliance with such financial
covenants. In addition, the Company leases space for its regional
offices and medical offices, storage space, temporary housing of
medical staff, and an aircraft. The corporate office lease and the
aircraft lease both bear interest at LIBOR-based variable rates. Rent
expense for the years ended December 31, 2000, 2001 and 2002 was
approximately $4,386,000, $6,149,000 and $6,898,000, respectively.
Future minimum lease payments under noncancelable operating leases as
of December 31, 2002 are as follows (in thousands):
2003 $ 14,099
2004 4,405
2005 3,341
2006 4,037
2007 819
Thereafter 557
---------
$ 27,258
=========
10. RETIREMENT PLAN:
During 2001, the Company maintained two qualified contributory savings
plans as allowed under Section 401(k) of the Internal Revenue Code. The
Company's primary plan (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 maintained a second plan as a result of the Merger (the
"Magella Plan"). This second plan permitted participant contributions
and allowed discretionary Company contributions based on each
participant's contribution.
Effective January 1, 2002, the Magella Plan was merged into the Plan.
The Company recorded an expense of $1,807,000, $3,765,000 and
$5,728,000 for the years ended December 31, 2000, 2001, and 2002,
respectively, related to the savings plans.
54
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, 2000, 2001 and 2002 are as follows:
YEARS ENDED DECEMBER 31,
---------------------------------------
2000 2001 2002
------------- ------------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Basic:
Net income applicable to common stock $ 10,986 $ 30,428 $ 68,776
========= ========= =========
Weighted average number of common shares outstanding 15,760 21,159 25,622
========= ========= =========
Basic net income per share $ .70 $ 1.44 $ 2.68
========= ========= =========
Diluted:
Net income $ 10,986 $ 30,428 $ 68,776
Interest expense on convertible subordinated debt, net of tax -- 115 28
--------- --------- ---------
Net income applicable to common stock $ 10,986 $ 30,543 $ 68,804
========= ========= =========
Weighted average number of common shares outstanding 15,760 21,159 25,622
Weighted average number of dilutive common stock
equivalents 293 1,165 975
Dilutive effect of convertible subordinated debt -- 154 32
--------- --------- ---------
Weighted average number of common and common
equivalent shares outstanding 16,053 22,478 26,629
========= ========= =========
Diluted net income per share $ .68 $ 1.36 $ 2.58
========= ========= =========
12. STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE PLANS:
In 1993, the Company's Board of Directors authorized a stock option
plan (the "Option Plan"). Under the Option 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 10 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 2001, the shareholders
approved an amendment to increase the number of shares authorized to be
issued under the Option Plan from 5,500,000 to 8,000,000. At December
31, 2002, 1,122,795 shares were available for future grants.
In connection with the Merger, the Company assumed stock options issued
by Magella which options at the time of the Merger were exercisable to
purchase approximately 1.4 million shares of Pediatrix common stock.
Such options are included in the disclosures below.
55
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE PLANS, CONTINUED:
Pertinent information covering the Option Plan is as follows:
WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE EXERCISE EXPIRATION
SHARES PER SHARE PRICE DATE
-------------- ------------ ------- -------------
Outstanding at December 31, 1999 3,930,443 $5.00-$61.00 $ 24.57 2004-2009
Granted 1,048,334 $6.75-$17.75 $ 9.45
Canceled (395,512) $7.88-$61.00 $ 38.11
Exercised (27,834) $5.00-$12.50 $ 8.06
-------------- ------------ -------
Outstanding at December 31, 2000 4,555,431 $5.00-$61.00 $ 20.28 2004-2010
Assumed in the Merger 1,375,894 $13.00-$24.05 $ 14.03
Granted 1,373,000 $21.38-$36.30 $ 29.67
Canceled (464,704) $7.06-$61.00 $ 25.94
Exercised (1,145,830) $5.00-$36.13 $ 12.52
-------------- ------------ -------
Outstanding at December 31, 2001 5,693,791 $5.00-$61.00 $ 22.07 2004-2011
Granted 807,000 $25.00-$41.60 $ 33.22
Canceled (52,693) $7.06-$39.13 $ 31.19
Exercised (1,978,866) $5.00-$36.25 $ 15.21
--------------- ------------ -------
Outstanding at December 31, 2002 4,469,232 $5.00-$61.00 $ 27.03 2004-2012
============== ============ =======
Exercisable at:
December 31, 2000 2,666,022 $5.00-$61.00 $ 23.87
December 31, 2001 3,502,787 $5.00-$61.00 $ 21.48
December 31, 2002 2,532,390 $5.00-$61.00 $ 26.39
The weighted average grant date fair value for options granted in 2000,
2001 and 2002 was $9.45, $29.67 and $33.22, respectively. The weighted
average grant date fair value for options assumed in the Merger in 2001
was $14.03.
Significant option groups outstanding at December 31, 2002 and related
price and life information is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ----------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
OUTSTANDING AVERAGE REMAINING EXERCISABLE AVERAGE
RANGE OF EXERCISE AS OF EXERCISE CONTRACTUAL AS OF EXERCISE
PRICES 12/31/2002 PRICE LIFE 12/31/2002 PRICE
-------------------------- ------------ ------------ ------------ ------------ ---------
$ 5.00 39,134 $5.00 1.1 39,134 $ 5.00
$ 6.10 - $12.20 575,714 $7.77 5.5 394,314 $ 8.05
$12.21 - $18.30 381,782 $14.15 5.7 280,308 $13.84
$18.31 - $24.40 741,886 $20.20 5.9 448,900 $19.63
$24.41 - $30.50 281,333 $28.02 6.8 174,668 $28.54
$30.51 - $36.60 1,741,216 $33.44 8.5 586,399 $34.22
$36.61 - $42.70 583,167 $39.12 5.0 483,667 $39.03
$42.71 - $48.80 50,000 $45.13 5.8 50,000 $45.13
$61.00 75,000 $61.00 6.1 75,000 $61.00
-------- ------ --- -------- ------
4,469,232 $27.03 6.7 2,532,390 $26.39
========= ====== === ========= ======
56
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 (the "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 the Stock Purchase Plans, 224,716, 107,423 and 64,397 shares were
issued during the years ended December 31, 2000, 2001 and 2002,
respectively. At December 31, 2002, the Company has an additional
373,169 shares reserved under the Stock Purchase Plans.
13. COMMON STOCK REPURCHASE PROGRAM:
In July 2002, the Company's Board of Directors approved a common stock
repurchase program (the "Repurchase Program"). Under this Repurchase
Program, the Company was authorized to repurchase up to $50 million of
its common stock in the open market, subject to market conditions and
trading restrictions. In November 2002, the Company's Board of
Directors authorized the repurchase of an additional $50 million of
common stock. As of December 31, 2002, the Company had repurchased
approximately 1.7 million shares at a cost of approximately $50
million. The Company expects to complete the additional $50 million
repurchase during the first quarter of 2003.
14. PREFERRED SHARE PURCHASE RIGHTS PLAN:
The Board of Directors of the Company has 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 of 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 (as defined in the Rights Plan), at any
time prior to the earlier of (i) the time that any person or entity
becomes an Acquiring Person (as defined in the Rights Plan), and (ii)
the Final Expiration Date, redeem all but not 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).
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Pursuant to instruction G(3) of the General Instructions to Form 10-K, the
information required herein is incorporated by reference to the Company's
definitive proxy statement with respect to the Company's 2003 annual meeting of
shareholders, to be filed with the Securities and Exchange Commission within 120
days after fiscal year end.
RECENT EVENTS
On March 27, 2003, the Company announced that its President and Chief
Executive Officer, Kristen Bratberg, had resigned for personal reasons and that
Roger J. Medel, M.D., Chairman of the Board and founder of Pediatrix, had agreed
to a new three-year contract to reassume the role of Chief Executive Officer, a
position he had held until December 31, 2002.
ITEM 11. EXECUTIVE COMPENSATION
Pursuant to instruction G(3) of the General Instructions to Form 10-K, the
information required herein is incorporated by reference to the Company's
definitive proxy statement with respect to the Company's 2003 annual meeting of
shareholders, to be filed with the Securities and Exchange Commission within 120
days after fiscal year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
In addition to the Equity Compensation Plan Information set forth below,
pursuant to instruction G(3) of the General Instructions to Form 10-K, the
information required herein is incorporated by reference to the Company's
definitive proxy statement with respect to the Company's 2003 annual meeting of
shareholders, to be filed with the Securities and Exchange Commission within 120
days after fiscal year end.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2002, with
respect to shares of Pediatrix common stock that may be issued under existing
equity compensation plans, including Pediatrix's Amended and Restated Stock
Option Plan (the "Option Plan"), Pediatrix's 1996 Qualified and Non-Qualified
Employee Stock Purchase Plans, as amended and restated, (the "Stock Purchase
Plans"), and shares of our common stock reserved for issuance under presently
exercisable stock options issued by Magella at the time of the Merger (the
"Magella Plan").
------------------------- ----------------------- --------------------------------
NUMBER OF SECURITIES TO NUMBER OF SECURITIES REMAINING
BE ISSUED UPON EXERCISE WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
OF OUTSTANDING EXERCISE PRICE OF UNDER EQUITY COMPENSATION
OPTIONS,WARRANTS AND OUTSTANDING OPTIONS, PLANS (EXCLUDING SECURITIES
PLAN CATEGORY RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
------------- ------------------------- ----------------------- --------------------------------
(A) (B) (C)
Equity compensation plans approved
by security holders 4,469,232 (1) $ 27.03 1,495,964 (2)
Equity compensation plans not
approved by security holders N/A N/A N/A
------------------------- ----------------------- --------------------------------
Total 4,469,232 $ 27.03 1,495,964
========================= ======================= ================================
(1) Represents 4,240,869 shares issuable under the Option Plan and 228,363
shares issuable under the Magella Plan.
(2) Under the Option Plan and the Stock Purchase Plans, 1,122,795 and 373,169
shares, respectively, remain available for future issuance.
58
s
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to instruction G(3) of the General Instructions to Form 10-K, the
information required herein is incorporated by reference to the Company's
definitive proxy statement with respect to the Company's 2003 annual meeting of
shareholders, to be filed with the Securities and Exchange Commission within 120
days after fiscal year end.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this Annual Report on Form 10-K,
Pediatrix carried out an evaluation, under the supervision and with the
participation of Pediatrix's management, including the Chief Executive Officer
and Chief Financial Officer, of the effectiveness of Pediatrix's disclosure
controls and procedures as defined in Rule 13a-14 under the Securities Exchange
Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that Pediatrix's current disclosure controls
and procedures are adequate and effective. There have been no significant
changes in Pediatrix's internal controls or in other factors that could
significantly affect internal controls subsequent to the date of the evaluation
by the Chief Executive Officer and Chief Financial Officer. The design of any
system of controls and procedures is based in part upon certain assumptions
about the likelihood of future events. There can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
59
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
An index to financial statements included in this Annual Report on Form 10-K
appears on page 36.
(A)(2) FINANCIAL STATEMENT SCHEDULE
The following financial statement schedule for the years ended December 31,
2000, 2001 and 2002, is included in this Annual Report on Form 10-K as set forth
below.
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
2000 2001 2002
------------ ------------ --------
(IN THOUSANDS)
Allowance for contractual adjustments and uncollectibles:
Balance at beginning of year $ 102,479 $ 101,949 $ 129,314
Portion charged against operating revenue 320,584 500,284 630,237
Accounts receivable written-off (net of recoveries) (321,114) (472,919) (624,124)
------------ ------------ -------------
Balance at end of year $ 101,949 $ 129,314 $ 135,427
============ ============ ============
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.
60
(A)(3) EXHIBITS
2.1 Agreement and Plan of Merger dated as of February 14, 2001,
among Pediatrix Medical Group, Inc., a Florida corporation,
Infant Acquisition Corp., a Delaware corporation, and Magella
Healthcare Corporation, a Delaware corporation (incorporated
by reference to Exhibit 2.1 to Pediatrix's Current Report on
Form 8-K dated February 15, 2001).
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).
4.1 Rights Agreement, dated as of March 31, 1999, between
Pediatrix and BankBoston, N.A., as rights agent including the
form of Articles of Designations of Series A Junior
Participating Preferred Stock and the form of Rights
Certificate (incorporated by reference to Exhibit 4.1 to
Pediatrix's Current Report on Form 8-K dated March 31, 1999).
10.1 Pediatrix's Amended and Restated Stock Option Plan
(incorporated by reference to Exhibit 10.1 to Pediatrix's
Annual Report on Form 10-K for the year ended December 31,
2001).*
10.2 Amended and Restated Pediatrix Thrift and Profit Sharing Plan
(incorporated by reference to Exhibit 4.5 to Pediatrix's
Registration Statement on Form S-8 (Registration No.
333-101222)).*
10.3 1996 Qualified Employee Stock Purchase Plan, as amended and
restated (incorporated by reference to Exhibit 4.5 to
Pediatrix's Registration Statement on Form S-8 (Registration
No. 333-07061)).*
10.4 1996 Non-Qualified Employee Stock Purchase Plan, as amended
and restated (incorporated by reference to Exhibit 4.5 to
Pediatrix's Registration Statement on Form S-8 (Registration
No. 333-101225)).*
10.5 Pediatrix Executive Non-Qualified Deferred Compensation Plan,
dated October 13, 1997 (incorporated by reference to Exhibit
10.35 to Pediatrix's Quarterly Report on Form 10-Q for the
period ended June 30, 1998).*
10.6 Form of Indemnification Agreement between Pediatrix and each
of its directors and certain executive officers (incorporated
by reference to Exhibit 10.2 to Pediatrix's Registration
Statement on Form S-1 (Registration No. 33-95086)).*
10.7 Form of Non-competition and Nondisclosure Agreement
(incorporated by reference to Exhibit 10.24 to Pediatrix's
Registration Statement on (Form S-1 Registration No.
33-95086)).*
10.8 Form of Exclusive Management and Administrative Services
Agreement between Pediatrix and each of the PA Contractors
(incorporated by reference to Exhibit 10.25 to Pediatrix's
Registration Statement on Form S-1 (Registration No.
33-95086)).*
61
10.9 Employment Agreement, dated as of January 1, 2001, as amended,
between Pediatrix and Roger J. Medel, M.D. (incorporated by
reference to Exhibit 10.19 to Pediatrix's Quarterly Report on
Form 10-Q for the period ended March 31, 2001).*
10.10 Amended and Restated Employment Agreement, dated May 8, 2000,
between Kristen Bratberg and Pediatrix (incorporated by
reference to Exhibit 10.39 to Pediatrix's Quarterly Report on
Form 10-Q for the period ended September 30, 2000).*
10.11 Amended and Restated Employment Agreement dated December 1,
2000, between M. Douglas Cunningham, M.D. and Pediatrix
(incorporated by reference to Exhibit 10.13 to Pediatrix's
Annual Report on Form 10-K for the year ended December 31,
2000).
10.12 Employment Agreement, dated January 1, 1999, between Karl B.
Wagner and Pediatrix (incorporated by reference to Exhibit
10.38 to Pediatrix's Quarterly Report on Form 10-Q for the
year ended September 30, 1999).*
10.12.1+ First Amendment to Employment Agreement dated January 1, 2003
between Karl B. Wagner and Pediatrix.*
10.13+ Amended and Restated Employment Agreement dated January 1,
2003 between Brian T. Gillon and Pediatrix.*
10.14 Amended and Restated Credit Agreement, dated as of August 14,
2001, among Pediatrix, certain professional contractors, Fleet
National Bank, Firstar Bank N.A., UBS AG, The International
Bank of Miami, N.A., and Fleet Securities, Inc. (incorporated
by reference to Exhibit 10.21 to Pediatrix's Quarterly Report
on Form 10-Q for the period ended September 30, 2001).
10.15 Amendment No. 1 to Amended and Restated Credit Agreement,
dated as of August 29, 2001, among Pediatrix, certain
professional contractors, Fleet National Bank, Firstar Bank
N.A., UBS AG, The International Bank of Miami, N.A. and HSBC
Bank (incorporated by reference to Exhibit 10.23 to
Pediatrix's Quarterly Report on Form 10-Q for the period ended
September 30, 2001).
10.16 Security Agreement dated November 1, 2000, between Pediatrix
Medical Group, Inc. and Fleet National Bank, as Agent
(incorporated by reference to Exhibit 10.17 to Pediatrix's
Annual Report on Form 10-K for the year ended December 31,
2000).
10.17 Amendment No. 1 to Security Agreement, dated as of August 14,
2001, among Pediatrix, certain professional contractors, and
Fleet National Bank, as Agent (incorporated by reference to
Exhibit 10.22 to Pediatrix's Quarterly Report on Form 10-Q for
the period ended September 30, 2001).
10.18 Stockholders' Agreement dated as of February 14, 2001, among
Pediatrix, Infant Acquisition Corp., John K. Carlyle,
Cordillera Interest, Ltd., Steven K. Boyd, Ian M. Ratner,
M.D., Welsh, Carson, Anderson & Stowe VII, L.P., WCAS
Healthcare Partners, L.P., the persons listed on Schedule A
thereto, Leonard Hilliard, M.D., The Hilliard Family
Partnership, Ltd. and Gregg C. Lund, D.O. (incorporated by
reference to Exhibit 10.40 to Pediatrix's Current Report on
Form 8-K dated February 15, 2001).
62
10.19 Standstill and Registration Rights Agreement dated as of May
15, 2001, among Pediatrix, Welsh, Carson, Anderson & Stowe
VII, L.P., WCAS Healthcare Partners, L.P., the persons listed
on Schedule A thereto, John K. Carlyle, Cordillera Interest,
Ltd., Steven K. Boyd, Ian M. Ratner, M.D., Roger J. Medel,
M.D., Kristen Bratberg, Joseph Calabro, Karl B. Wagner and
Brian T. Gillon (incorporated by reference to Exhibit 10.1 to
Pediatrix's Current Report on Form 8-K dated May 25, 2001).
10.20 Stipulation and Agreement of Settlement dated February 7,
2001, among Sands Point Partners, L.P., et. al., on behalf of
themselves and all other similarly situation, and Pediatrix,
Roger J. Medel, M.D., Karl B. Wagner and Lawrence M. Mullen
(incorporated by reference to Exhibit 10.20 to Pediatrix's
Annual Report on Form 10-K for the year ended December 31,
2001).
10.21 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 (incorporated by
reference to Exhibit 10.1 to Pediatrix's Quarterly Report on
Form 10-Q for the period ended June 30, 2002).
10.22+ Amendment No. 3 to Amended and Restated Credit Agreement,
dated as of November 22, 2002, among Pediatrix, certain
professional contractors, Fleet National Bank, U.S. Bank
National Association, and HSBC Bank USA.
10.23+ Separation Agreement dated March 26, 2003, between Kristen
Bratberg and Pediatrix.
21.1+ Subsidiaries of Pediatrix.
23.1+ Consent of PricewaterhouseCoopers LLP.
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.
- ------------
* Management contract or compensation plan or arrangement.
+ Filed herewith.
(B) REPORTS ON FORM 8-K
None.
63
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 31, 2003 By: /s/ Roger J. Medel, M.D.
------------------------------------------
Roger J. Medel, M.D., M.B.A.
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROGER J. MEDEL, M.D. Chairman of the Board March 31, 2003
- ----------------------------------------- and Chief Executive Officer
Roger J. Medel, M.D., M.B.A. (principal executive officer)
/s/ KARL B. WAGNER Chief Financial Officer March 31, 2003
- ----------------------------------------- (principal financial officer
Karl B. Wagner and principal accounting officer)
/s/ CESAR L. ALVAREZ Director March 31, 2003
- -----------------------------------------
Cesar L. Alvarez
/s/ WALDEMAR A. CARLO, M.D. Director March 31, 2003
- -----------------------------------------
Waldemar A. Carlo, M.D.
/s/ JOHN K. CARLYLE Director March 31, 2003
- -----------------------------------------
John K. Carlyle
/s/ KEVIN C. CLARK Director March 31, 2003
- -----------------------------------------
Kevin C. Clark
/s/ MICHAEL B. FERNANDEZ Director March 31, 2003
- -----------------------------------------
Michael B. Fernandez
/s/ ROGER K.FREEMAN, M.D. Director March 31, 2003
- -----------------------------------------
Roger K. Freeman, M.D.
/s/ PAUL G. GABOS Director March 31, 2003
- -----------------------------------------
Paul G. Gabos
64
CERTIFICATIONS
I, Roger J. Medel, M.D., certify that:
1. I have reviewed this annual report on Form 10-K of Pediatrix Medical
Group, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003 By: /s/ Roger J. Medel, M.D.
-----------------------------------
Roger J. Medel, M.D., M.B.A.
Chairman of the Board and Chief
Executive Officer (principal
executive officer)
65
CERTIFICATIONS
I, Karl B. Wagner, certify that:
1. I have reviewed this annual report on Form 10-K of Pediatrix Medical
Group, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
d. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
e. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003 By: /s/ KARL B. WAGNER
------------------------------
Karl B. Wagner
Chief Financial Officer
(principal financial officer)
66