PEDIATRIX MEDICAL GROUP INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1997
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 02-26762
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PEDIATRIX MEDICAL GROUP, INC.
(Exchange 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.)

1455 NORTH PARK DRIVE, FT. LAUDERDALE, FLORIDA 33326
(Address of principal executive offices) (Zip Code)

(Registrant's telephone number, including area code) (954) 384-0175

Securities registered pursuant to Section 12(b) of the Act:

Name of each
Title of each class exchange on which registered
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COMMON STOCK NEW YORK STOCK EXCHANGE
$.01 PAR VALUE PER SHARE

Securities registered pursuant to Section 12(g) of the Act: NONE

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

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]

The aggregate market value of shares of Common Stock held by
non-affiliates of the registrant as of March 17, 1998, was approximately
$373,624,525 based on a $41.38 closing sales price for the Common Stock on the
New York Stock Exchange on such date. For purposes of this computation, all
executive officers, directors and 5% beneficial owners of the common stock of
the registrant have been deemed to be affiliates. Such determination should not
be deemed to be an admission that such directors, officers or 5% beneficial
owners are, in fact, affiliates of the registrant.

The number of shares of Common Stock, $.01 par value, of the registrant
outstanding as of March 17, 1998 were 15,175,087.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the following documents have been incorporated by reference
into the parts indicated: The registrant's definitive Proxy Statement to be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the fiscal year covered by this report - Part III.

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INDEX TO ITEMS

PART I............................................................................................................3
Item 1. Business.....................................................................................3
Item 2. Properties..................................................................................15
Item 3. Legal Proceedings...........................................................................15
Item 4. Submission of Matters to a Vote of Security Holders.........................................15

PART II..........................................................................................................15
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................15
Item 6. Selected Financial Data.....................................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................................18
Item 8. Financial Statements and Supplementary Data.................................................23
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..................................................................................43

PART III.........................................................................................................43
Item 10. Directors and Executive Officers of the Registrant..........................................43
Item 11. Executive Compensation......................................................................43
Item 12. Security Ownership of Certain Beneficial Owners and Management..............................43
Item 13. Certain Relationships and Related Transactions..............................................43

PART IV..........................................................................................................44
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................44

Schedules........................................................................................................45

Exhibits ........................................................................................................46

Signatures.......................................................................................................49

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PART I

ITEM 1. BUSINESS

Pediatrix Medical Group, Inc. ("PMG") includes its subsidiaries and the
professional associations and partnerships (the "PA Contractors") which are
separate legal entities that contract with PMG to provide physician services in
certain states and Puerto Rico. PMG, its subsidiaries and the PA Contractors are
collectively referred to herein as the "Company" or "Pediatrix."

GENERAL

Pediatrix is the nation's leading provider of physician management
services to hospital-based neonatal intensive care units ("NICUs"). NICUs
provide medical care to newborn infants with low birth weight and other medical
complications, and are staffed with specialized pediatric physicians, known as
neonatologists. The Company also provides physician management services to (i)
hospital-based pediatric intensive care units ("PICUs"), units which provide
medical care to critically ill children and are staffed with specially-trained
pediatricians, and (ii) pediatrics departments in hospitals. In addition to the
above hospital based services, the Company began providing inpatient and
outpatient perinatal services during 1997. Perinatology is a subspecialty of
obstetrical medicine that focuses on the diagnostics, management and care of
high-risk and/or complicated pregnancies. As of December 31, 1997, the Company
provided services to over 100 hospital based units and one perinatology practice
in 20 states and Puerto Rico and employed or contracted with approximately 260
physicians.

The Company staffs and manages NICUs and PICUs in hospitals, providing
the physicians, professional management and administrative support, including
physician billing and reimbursement expertise and services. The Company's policy
is to provide 24-hour coverage at its NICUs and PICUs with on-site or on-call
physicians. As a result of this policy, physicians are available to provide
continuous pediatric support to other areas of the hospital on an as-needed
basis, particularly in the obstetrics, nursery and pediatrics departments, where
immediate accessibility to specialized care is critical.

Pediatrix established its leading position in physician management
services to NICUs by developing a comprehensive care model and management and
systems infrastructure that address the needs of patients, hospitals, payor
groups and physicians. Pediatrix addresses the needs of (i) patients by
providing continuous, comprehensive, professional quality care, (ii) hospitals
by recruiting, credentialing, and retaining neonatologists and hiring related
staff to operate NICUs in a cost-effective manner thereby relieving hospitals of
the financial and administrative burdens of operating the NICUs, (iii) payor
groups by providing cost-effective care to patients and (iv) physicians by
providing administrative support, including physician billing and reimbursement
expertise and services, to enable them to focus on providing care to patients,
and by offering an opportunity for career advancement within Pediatrix.

RECENT DEVELOPMENTS

During 1997, the Company completed ten acquisitions, which added 28
NICUs. Additionally, three NICUs were added through the Company's internal
marketing activities. The Company has developed regional networks in Denver,
Phoenix, Southern California and Texas and intends to develop additional
regional and state-wide networks. The Company believes these networks, augmented
by ongoing marketing and acquisition efforts, will strengthen its position with
managed care organizations and other third party payors.

During the period of January 1 through March 25, 1998, the Company
completed the acquisition of five neonatal and three perinatal practices. In
addition, one NICU was added through internal marketing efforts.

INDUSTRY OVERVIEW

The evolving managed care environment has created substantial cost
containment pressures for all constituents of the healthcare industry. The
increasing use of fixed-payment systems that shift financial risk from payors to
providers has forced hospitals, in particular, to be more cost-effective in all
aspects of their operations. A

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trend among hospitals is to utilize third party contract management companies to
manage specialized functions in an effort to contain costs, improve utilization
management, and reduce administrative burdens. Physician management
organizations provide hospitals with professional management of staff, including
recruiting, staffing and scheduling of physicians.

Physicians are responding to cost containment pressures by joining
group practices through which they have greater leverage to negotiate and
contract with hospitals and managed care payors. Physician management
organizations provide a physician group practice an alternative to self
management that enables physicians to maintain their clinical autonomy while
creating greater negotiating power with payors and hospitals, and providing
administrative support to deal with the increasing complexity of billing and
reimbursement. Physician group practices are becoming larger and more prevalent.
The Company believes that as cost pressures continue to influence the medical
industry, the trend of physicians joining group practices will continue.
Although the Company continues to market its services to hospitals to obtain new
contracts, the Company has shifted its strategy to growth through acquisitions
as physicians become more receptive to being acquired.

The Company believes that hospitals will continue to outsource certain
units, such as NICUs, on a contract management basis. NICUs present significant
operational challenges for hospitals, including complex billing procedures,
highly variable admissions rates, and difficulties in recruiting and retaining
qualified physicians. These operational challenges generally make it difficult
for hospitals to operate these units profitably. Traditionally, hospitals have
staffed their NICUs internally, through affiliations with small, local physician
groups or with independent practitioners. These small practices typically lack
the necessary expertise and support services in billing and reimbursement,
recruiting and effective medical management to operate NICUs on a cost-effective
basis. Hospitals are increasingly seeking to contract with physician management
services organizations that have the capital resources, information and
reimbursement systems and practice management expertise that NICUs require to
accept and manage risk in the evolving managed care environment.

Of the approximately four million babies born in the United States
annually, approximately 10% to 15% require neonatal treatment. Demand for
neonatal services is primarily due to premature births, and to infants having
difficulty making the transition to extrauterine life. A majority of high-risk
mothers whose births require neonatal treatment are not identified until the
time of delivery, thus heightening the need for continuous coverage by
neonatologists. Across the United States, NICUs are concentrated primarily among
hospitals located in metropolitan areas with a higher volume of births. NICUs
are important to hospitals since obstetrics generates one of the highest volumes
of admissions and obstetricians generally prefer to perform deliveries at
hospitals with NICUs. Hospitals must maintain cost-effective care and service in
these units to enhance the hospital's desirability to the community, physicians
and managed care payors.

STRATEGY

The Company's objective is to enhance its position as the nation's
leading provider of physician management services to NICUs by adding new units
and increasing same unit growth. The key elements of the Company's strategy are
as follows:

FOCUS ON NEONATOLOGY, PERINATOLOGY AND PEDIATRICS. Since its
founding in 1979, the Company has focused primarily on neonatology and
pediatrics. As a result of this focus, the Company believes it has (i)
developed significant expertise in the complexities of billing and
reimbursement for neonatology physician services and (ii) a competitive
advantage in recruiting and retaining neonatologists seeking to join a
group practice. The Company believes its continued focus will allow it to
enhance its position as the nation's leading provider of physician
management services to NICUs. In 1997, the Company began providing
perinatal services in cooperation with one of its hospital customers. The
Company is continuing to pursue the integration of perinatology and, in the
future, will investigate obstetrics and other areas of pediatrics beyond
neonatology.

ACQUIRE NEONATAL AND PERINATAL PHYSICIAN GROUP PRACTICES. The
Company intends to further increase the number of locations at which it
provides physician management services by acquiring well-established
neonatal and perinatal physician group practices. The Company believes that
it will continue to benefit from

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physicians joining larger practice groups in an effort to increase
negotiating power with managed care organizations and eliminate
administrative burdens, while maintaining clinical autonomy. The Company
completed its first acquisition of a neonatology physician group practice
in California in July 1995 and since has completed acquisitions of an
additional 28 physician group practices. The Company is actively pursuing
acquisitions of other neonatal and perinatal physician group practices. No
assurance can be given that future acquisition candidates will be
identified or that any future acquisitions will be consummated. See "Recent
Developments" and "Factors to be Considered - Risks Relating to Acquisition
Strategy."

DEVELOP REGIONAL NETWORKS. The Company intends to develop regional
and state-wide networks of NICUs in geographic areas with high
concentrations of births. The Company operates regional networks in
Colorado, Arizona, Southern California and Texas. The Company believes that
the development of regional and state-wide networks will strengthen its
position with third party payors, such as Medicaid and managed care
organizations, since such networks will offer more choice to the patients
of third party payors.

INCREASE SAME UNIT GROWTH. The Company seeks to provide its
services to hospitals where the Company can benefit from increased
admissions and intends to increase revenues at existing units by providing
support to areas of the hospital outside the NICU, particularly in the
obstetrics, nursery and pediatrics departments, where immediate
accessibility to specialized care is critical. These services generate
incremental revenue to the Company, contribute to the Company's overall
profitability, enhance the hospital's profitability, strengthen the
Company's relationship with the hospital, and assist the hospital in
attracting more admissions by enhancing the hospital's reputation in the
community as a full-service critical care provider.

ASSIST HOSPITALS TO CONTROL COSTS. The Company intends to continue
assisting hospitals to control costs. The Company's comprehensive care
model, which promotes early intervention by neonatologists in emergency
situations, as well as the retention of qualified neonatologists, improves
the overall cost effectiveness of care. The Company believes that its
ability to assist hospitals to control costs will allow it to continue to
be successful in adding new units at which the Company provides physician
management services.

ADDRESS CHALLENGES OF MANAGED CARE ENVIRONMENT. The Company
intends to continue to develop new methods of doing business with managed
care and third party payors, which will allow it to develop relationships
among payors, hospitals and the Company. The Company is also prepared to
enter into flexible arrangements with third party payors, including
capitation arrangements. As the nation's leading provider of physician
management services to NICUs, the Company believes that it is
well-positioned to address the needs of managed care organizations and
other third party payors which seek to contract with cost-effective,
quality providers of medical services.

PHYSICIAN MANAGEMENT SERVICES

The Company provides physician management services to NICUs, providing
(i) a medical director to manage the unit, (ii) recruiting, staffing and
scheduling of physicians and certain other medical staff, (iii) neonatology and
pediatric support to other hospital departments, (iv) pediatric subspecialty
services and (v) billing and reimbursement expertise and services. These
physician management services include:

UNIT MANAGEMENT. The Company staffs each unit it manages with a
medical director who reports to a Regional Medical Officer ("RMO") of the
Company. The RMOs and all medical directors at these units are board
certified or board eligible in neonatology, pediatrics, pediatric critical
care or pediatric cardiology. In addition to providing medical care and
physician management in the unit, the medical director is responsible for
(i) the overall management of the unit, including quality of care,
professional discipline, utilization review, physician recruitment,
staffing and scheduling, (ii) serving as a liaison to the hospital
administration, (iii) maintaining professional and public relations in the
hospital and the community and (iv) monitoring the Company's financial
performance within the unit.

RECRUITING, STAFFING AND SCHEDULING. The Company is responsible for
recruiting, staffing and scheduling the neonatologists, pediatricians and
advanced registered nurse practitioners ("ARNPs") within the NICU. The
Company's recruiting department maintains an extensive database of
neonatologists and

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pediatricians nationwide from which to draw for recruiting purposes. All
candidates are pre-screened and their credentials, licensure and references
are checked and verified by the Company. The RMOs and the medical directors
play a key role in the recruiting and interviewing process before
candidates are introduced to hospital administrators. The units managed by
the Company are staffed with at least one neonatologist or pediatrician on
site or available on call. All of these physicians are board certified or
board eligible in neonatology, pediatrics, pediatric critical care or
pediatric cardiology. The Company also employs or contracts with ARNPs, who
assist medical directors and other physicians in operating the 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. With respect to the physicians
that are employed by or under contract with the Company, the Company
assumes responsibility for salaries, benefits, bonuses, group health
insurance and physician malpractice insurance. See "Business -- Contractual
Relationships."

SUPPORT TO OTHER HOSPITAL DEPARTMENTS. As part of the Company's
comprehensive care model, physicians provide pediatric support services to
other areas of hospitals, particularly in the obstetrics, nursery and
pediatrics departments, where immediate accessibility to specialized care
is critical. The Company believes this support (i) improves its relations
with hospital staff and referring physicians, (ii) enhances the hospital's
reputation in the community as a full-service critical care provider, (iii)
increases admissions from referring obstetricians and pediatricians, (iv)
integrates the physicians into a hospital's medical community, (v)
generates incremental revenue which contributes to the Company's overall
profitability and (vi) increases the likelihood of renewing and adding new
hospital contracts.

PEDIATRIC SUBSPECIALTIES. The Company has developed a pediatric
cardiology program consisting of several pediatric cardiologists to
complement and enhance its comprehensive care model. These physicians
provide out-patient services in offices outside contracting hospitals and
assist attending physicians at certain hospitals. The Company is exploring
the possibility of expanding the existing program in pediatric cardiology
in line with the Company's other strategic objectives in neonatology and
pediatric intensive care. Expansion of the program will depend in part on
the demand for such critical care services at hospitals and by payor
groups.

PERINATOLOGY. The Company has developed, in conjunction with a
hospital customer, a perinatal practice to manage the care of high-risk
and/or complicated pregnancies. The services provided include highly
technical invasive and non-invasive diagnostic procedures, sophisticated
medical consultations and hands-on patient management or co-management,
including deliveries. Since a significant portion of the pregnancies
managed by perinatologists result in admissions in the NICU, it is expected
that the addition of these services will result in better patient care. The
Company is continuing to pursue the development of perinatal programs in
other locations where it currently provides services to NICUs. See
"Business - Recent Developments."

BILLING AND REIMBURSEMENT. The Company assumes responsibility for
all aspects of the billing, reimbursement and collection process relating
to physician services. Patients and/or third party payors receive a bill
from the Company for physician services, and the hospital bills and
collects separately for all other services. To address the increasingly
complex and time-consuming processing for obtaining reimbursement for
medical services, the Company has invested in both the technical and human
resources necessary to create an efficient billing and reimbursement
process, including specific claim forms and software systems. The Company
begins this process by providing training to physicians that emphasizes a
detailed review of and proper coding protocol for all procedures performed
and services provided to achieve appropriate collection of revenues for
physician services. The Company's billing and collection operations are
conducted from its corporate headquarters in Ft. Lauderdale, Florida, as
well as regional business offices in Orange, California and Dallas, Texas.

MARKETING

Historically, most of the Company's growth was generated internally
through marketing efforts and referrals. Beginning in the latter part of 1995,
the Company significantly increased its acquisition activities to capitalize on
the opportunities created by the trend toward consolidation in the healthcare
industry. The Company's marketing program to physician groups consists of (i)
market research to identify established physician groups, (ii) telemarketing to
identify and contact acquisition candidates, as well as hospitals with high
demand for NICU

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services, and (iii) other sales and business development personnel that conduct
on-site visits along with senior management. The Company also advertises its
services in hospital and healthcare trade journals, participates at hospital and
physician trade conferences, and markets its services directly to hospital
administrators and medical staff. In addition, the Company intends to focus on
developing additional regional networks and state-wide networks to strengthen
its position with managed care organizations and other third party payors.

MANAGEMENT INFORMATION SYSTEMS

The Company maintains several systems to support day-to-day operations,
business development and ongoing clinical and business analysis, including (i) a
Company-wide electronic mail system to assist intracompany communications and
conferencing, (ii) an intranet site to facilitate clinical research and
interaction among physicians regarding clinical matters on a real-time basis,
(iii) electronic interchange with payors utilizing electronic benefits
verification and claims submission, (iv) a database used by the business
development and marketing departments in recruiting individual physicians and
identifying potential neonatal and perinatal physician group acquisition
candidates, which is updated through telemarketing activities, personal
contacts, professional journals and mail solicitation, (v) electronic imaging to
streamline accessibility to operational documents, and (vi) a clinical tracking
system used by the physicians to assist in the creation of their respective
paperwork and establish the basis for the consolidated clinical information
database used to support the Company's education, research and quality assurance
programs. Ongoing development will provide even greater streamlining of
information from the clinical systems through the reimbursement process,
allowing the overall process to be expedited further.

The Company's management information system is an integral component of
the billing and reimbursement process. The Company's system enables it to track
numerous and diverse third party payor relationships and payment methods and
provides for electronic interchange in support of insurance benefits
verification and claims processing to payors accepting electronic submission.
The Company's system was designed to meet its requirements by providing maximum
flexibility as payor groups upgrade their payment and reimbursement systems.

CONTRACTUAL RELATIONSHIPS

HOSPITAL RELATIONSHIPS. Many of the Company's contracts with hospitals
grant the Company the exclusive right and responsibility to manage the provision
of physician management services to the NICUs. The contracts typically have
terms of three to five years and renew automatically for additional terms of one
to five years unless otherwise terminated by either party. The contracts
typically provide that either party may terminate the agreement prior to the
expiration of the initial term in the event of material breach by the other
party and failure to cure after the notice and cure period has expired.

The Company bills for the physicians' services on a fee-for-service
basis separately from other charges billed by the hospital. Certain contracting
hospitals that do not generate sufficient patient volume agree to pay the
Company administrative fees to assure a minimum revenue level. Administrative
fees include guaranteed payments to the Company, as well as fees paid to the
Company by certain hospitals for administrative services performed by the
Company's medical directors at such hospitals. Administrative fees accounted for
12%, 8% and 5% of the Company's net patient service revenue during 1995, 1996
and 1997, respectively. The hospital contracts typically require that the
Company and the physicians performing services maintain minimum levels of
professional and general liability insurance. The Company contracts for and pays
the premiums for such insurance on behalf of the physicians. See "Business --
Professional Liability and Insurance."

PAYOR RELATIONSHIPS. While virtually all of the Company's contracts
with third party payors are discounted fee-for-service contracts, as of December
31, 1997, the Company had eight contracts that provide for capitated payments,
with payors located in California, Arizona, Texas and Florida. The Company is
prepared to enter into capitation arrangements with other third party payors. In
the event the Company enters into relationships with third party payors with
respect to regional and state-wide networks, such relationships may be on a
capitated basis. See "Factors to be Considered - Impact of Payor Discounts and
Capitation Arrangements."

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PA CONTRACTOR RELATIONSHIPS. PMG has entered into management agreements
("PA Management Agreements") with PA Contractors in all states in which it
operates, other than Florida. There is at least one PA Contractor in each state
in which the Company operates. Each PA Contractor is owned by a physician
licensed in the jurisdiction in which the PA Contractor operates, who is also an
officer of the PA Contractor. Under the PA Management Agreements, the PA
Contractors delegate to PMG the administrative, management and support functions
(but not any functions constituting the practice of medicine) that the PA
Contractors have agreed to provide to the hospital. In consideration of such
services, each PA Contractor pays PMG a percentage of the PA Contractor's gross
revenue (but in no event greater than the net profits of such PA Contractor), or
a flat fee. PMG has the discretion to determine whether the fee shall be paid on
a monthly, quarterly or annual basis. The management fee may be adjusted from
time to time to reflect industry standards and the range of services provided by
the PA Contractor. The agreements provide that the term of the arrangements are
permanent, subject only to termination by PMG, and that the PA Contractor shall
not terminate the agreement without PMG's prior written consent. Also, the
agreements provide that PMG or its assigns has the right, but not the
obligation, to purchase the stock of the PA Contractor. See Note 2 to the
Consolidated Financial Statements and "Factors to be Considered - State Laws
Regarding Prohibition of Corporate Practice of Medicine."

PHYSICIAN RELATIONSHIPS. The Company contracts with the PA Contractors
to provide the medical services required to fulfill its obligations to
hospitals. The physician employment agreements typically have terms of three to
five years and can be terminated by either party at any time upon 90 days prior
written notice. The physicians generally receive a base salary plus a
productivity bonus. The physician is required to hold a valid license to
practice medicine in the appropriate jurisdiction in which the physician
practices and to become a member of the medical staff, with appropriate
privileges at the hospital. The Company is responsible for billing patients and
third party payors for services rendered by the physician, and the Company has
the exclusive right to establish the schedule of fees to be charged for such
services. Substantially all of the physicians employed by PMG or the PA
Contractors have agreed not to compete with PMG or the PA Contractor within a
specified radius of any hospital for which the physician is rendering medical
services for a period of one to two years after termination of employment. The
Company contracts for and pays the premiums for professional liability insurance
on behalf of the physicians. See "Business -- Professional Liability and
Insurance."

ACQUISITIONS. The Company structures acquisitions of physician practice
groups as asset purchases, stock purchases and stock mergers. Generally, these
structures provide for: (i) the assignment to the Company of the contracts
between the physician practice group and the hospital at which the physician
practice group provides medical services; (ii) physician "tail insurance"
coverage under which the Company is an insured party to cover malpractice
liabilities that may arise after the date of the acquisition which relate to
events prior to the acquisition; and (iii) indemnification to the Company by the
previous owners of the acquired entity. Generally, in acquisitions structured as
asset purchases, the Company does not acquire the physician practice group's
receivables or liabilities, including professional liability claims, arising
from the physician practice group's activities prior to the date of the
acquisition. Generally, in acquisitions structured as stock purchases or stock
mergers, the physician practice group's receivables (net of any liabilities
accruing prior to the acquisition and permitted indemnification claims) are
assigned to the former owners of the physician practice group.

GOVERNMENT REGULATION

The Company's operations and relationships are subject to a variety of
governmental and regulatory requirements relating to the conduct of its
business. The Company is also subject to laws and regulations which relate to
business corporations in general. The Company believes that it exercises care in
an effort to structure its practices and arrangements with hospitals and
physicians to comply with relevant federal and state law and believes that such
arrangements and practices comply in all material respects with all applicable
statutes and regulations.

Approximately 23% and 22% of the Company's net patient service revenue
in 1996 and 1997, respectively, was derived from payments made by
government-sponsored healthcare programs (principally Medicaid). These programs
are subject to substantial regulation by the federal and state governments. Any
change in reimbursement regulations, policies, practices, interpretations or
statutes that places material limitations on reimbursement amounts or practices
could adversely affect the operations of the Company. Medicaid and other
government reimbursement programs are increasingly shifting to managed care,
which could result in reduced

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payments to the Company for Medicaid patients. In addition, funds received under
these programs are subject to audit with respect to the proper billing for
physician services and, accordingly, retroactive adjustments of revenue from
these programs may occur. See "Factors to be Considered -- Reliance upon
Government Programs; Possible Reduction in Reimbursement."

The Company is also subject to (i) certain provisions of the Social
Security Act, commonly referred to as the "Anti-kickback Statute," which
prohibits entities, such as the Company, from offering, paying, soliciting, or
receiving any form of remuneration in return for the referral of Medicare or
state health program patients or patient care opportunities, or in return for
the recommendation, arrangement, purchase, lease, or order of items or services
that are covered by Medicare or state health programs, (ii) prohibitions against
physician referrals, commonly known as "Stark II," which prohibit, subject to
certain exemptions, a physician or a member of his immediate family from
referring Medicare or Medicaid patients to an entity providing "designated
health services" (which include inpatient and outpatient hospital services) in
which the physician has an ownership or investment interest, or with which the
physician has entered into a compensation arrangement including the physician's
own group practice, (iii) state and federal civil and criminal statutes imposing
substantial penalties, including civil and criminal fines and imprisonment, on
healthcare providers which fraudulently or wrongfully bill governmental or other
third party payors for healthcare services and (iv) state laws similar to the
Anti-Kickback statute and Stark II which, in many cases, apply to privately paid
or insured services as well as services covered under governmentally sponsored
health care programs. Although the Company believes that it is not in violation
of these provisions, there can be no assurance that the Company's current or
future practices will not be found to be in violation of these provisions, and
any such finding could have a material adverse effect on the Company. See
"Factors to be Considered -- Risk of Applicability of Anti-Kickback and
Self-Referral Laws."

In addition, business corporations such as PMG are generally not
permitted under state law to practice medicine, exercise control over the
medical judgments or decisions of physicians, or engage in certain practices
such as fee-splitting with physicians. In states where PMG is not permitted to
practice medicine, the Company performs only nonmedical administrative services,
does not represent to the public or its clients that it offers medical services
and does not exercise influence or control over the practice of medicine by the
PA Contractors or the physicians employed by the PA Contractors. Accordingly,
the Company believes it is not in violation of applicable state laws relating to
the practice of medicine. In most states, PMG contracts with the PA Contractors
(which are owned by a licensed physician employed by the respective PA
Contractor), which in turn employ or contract with physicians to provide
necessary physician services. There can be no assurance that regulatory
authorities or other parties will not assert that PMG is engaged in the
corporate practice of medicine or that the percentage fee arrangements between
PMG and the PA Contractors constitute fee-splitting or the corporate practice of
medicine. If such a claim were successfully asserted in any jurisdiction, PMG
could be subject to civil and criminal penalties under such jurisdiction's laws
and could be required to restructure its contractual arrangements, which could
have a material adverse effect on the Company's financial condition and results
of operations. See "Factors to be Considered -- State Laws Regarding Prohibition
of Corporate Practice of Medicine."

In addition to current regulation, the public and state and federal
governments have recently focused significant attention on reforming the
healthcare system in the United States. Although the Company cannot predict
whether these or other reductions in the Medicare or Medicaid programs will be
adopted, the adoption of such proposals could have a material adverse effect on
the Company's business. Concern about such proposals has been reflected in
volatility of the stock prices of companies in healthcare and related
industries. See "Factors to be Considered -- Healthcare Regulatory Environment
Could Increase Restrictions on the Company."

PROFESSIONAL LIABILITY AND INSURANCE

The Company's business entails an inherent risk of claims of physician
professional liability. The Company maintains professional liability insurance
and general liability insurance on a claims-made basis in accordance with
standard industry practice. The Company believes that its coverage is
appropriate based upon claims experience and the nature and risks of its
business. There can be no assurance that a pending or future claim or claims
will not be successful or if successful will not exceed the limits of available
insurance coverage or that such coverage will continue to be available at
acceptable costs and on favorable terms. See "Factors to be Considered --
Professional Liability and Insurance" and "Legal Proceedings."

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The physicians that are employed by or under contract with the Company
are required to obtain professional liability insurance coverage, and the
Company contracts for and pays the premiums with respect to such insurance for
the physicians. The current professional liability insurance policy expires May
1, 1998 and the Company expects to be able to renew such policy upon expiration.

COMPETITION

The healthcare industry is highly competitive and has been subject to
continual changes in the method in which healthcare services are provided and
the manner in which healthcare providers are selected and compensated. The
Company believes that private and public reforms in the healthcare industry
emphasizing cost containment and accountability will result in an increasing
shift of NICU and related pediatric care from highly fragmented, individual or
small practice neonatology providers to physician management companies.
Companies in other healthcare industry segments, such as managers of other
hospital-based specialties or large physician group practices, some of which
have financial and other resources greater than those of the Company, may become
competitors in providing management of neonatal and pediatric services to
hospitals. See "Factors to be Considered -- Competition."

SERVICE MARKS

The Company has registered the service mark "Pediatrix Medical Group"
and its design with the United States Patent and Trademark Office, and has
applied for registration of a baby design logo. The United States Patent and
Trademark Office has issued a Notice of Allowance and registration should follow
in due course.

EMPLOYEES AND PROFESSIONALS UNDER CONTRACT

In addition to the approximately 260 physicians employed or under
contract with the Company as of December 31, 1997, Pediatrix employed or
contracted with approximately 60 other clinical professionals and 310 other
full-time and part-time employees. The Company's employees are not subject to
any collective bargaining agreements.

FACTORS TO BE CONSIDERED

The parts of this Annual Report on Form 10-K titled "Item 1. Business,"
"Item 3. Legal Proceedings" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" contain certain forward-looking
statements which involve risks and uncertainties. In addition, officers of the
Company may from time to time make certain forward-looking statements which also
involve risks and uncertainties. Set forth below is a discussion of certain
factors that could cause the Company's actual results to differ materially from
the results projected in such forward-looking statements. In addition, to the
other information contained in this Annual Report on Form 10-K or incorporated
by reference herein, such factors should be considered when evaluating the
Company and its business.

HEALTHCARE REGULATORY ENVIRONMENT COULD INCREASE RESTRICTIONS ON THE
COMPANY. The healthcare industry and physicians' medical practices are highly
regulated. Neonatal and other healthcare services that the Company offers and
proposes to offer are subject to extensive federal and state laws and
regulations governing state matters such as licensure and certification of
facilities and personnel, conduct of operations, audit and retroactive
reimbursement policies, adjustment of prior government billings and prohibitions
on payments for the referral of business and self referrals. Failure to comply
with these laws, or a determination that in the past the Company has failed to
comply with these laws, could have a material adverse effect on the Company's
financial condition and results of operations. There can be no assurance that
the healthcare regulatory environment will not change so as to restrict the
Company's existing operations or limit the expansion of its business. Changes in
government regulation could also impose new requirements, involving compliance
costs which cannot be recovered through price increases. Finally, under the
Health Insurance Portability and Accountability Act of 1996, Congress expanded
the powers of and increased funding to the Office of Inspector General of the
Department of Health and Human Services to investigate violations of healthcare
laws. See "Business -- Government Regulations."

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RELIANCE UPON GOVERNMENT PROGRAMS; POSSIBLE REDUCTION IN REIMBURSEMENT.
A significant portion of the Company's net patient service revenue is derived
from payments made by government-sponsored healthcare programs (principally
Medicaid). Increasing budgetary pressures may lead to reimbursement reductions
or limits, reductions in these programs or elimination of coverage for certain
individuals or treatments under these programs. Federal legislation could result
in a reduction of Medicaid funding or an increase in state discretionary funding
through block grants, or a combination thereof. State Medicaid waiver requests
if granted by the federal government could increase discretion, or reduce
coverage of or funding for certain individuals or treatments under the Medicaid
program, in the absence of new federal legislation. Increased state discretion
in Medicaid, coupled with the fact that Medicaid expenditures compromised a
substantial and growing share of state budgets, could lead to significant
reductions in reimbursement. In addition, these programs generally reimburse on
a fee schedule basis, rather than a charge-related basis. Therefore, the Company
generally cannot increase its revenues by increasing the amount it charges for
services provided. To the extent the Company's costs increase, the Company may
not be able to recover such cost increases from government reimbursement
programs. In various states, Medicaid managed care is encouraged and may become
mandated. In such systems, health maintenance organizations ("HMO's") bargain
for reimbursement with competing providers and contract with the state to
provide benefits to Medicaid enrollees. Such systems are intended and expected
to reduce Medicaid reimbursement of providers. Legislation enacted in states
could result in reduced payments to the Company for Medicaid patients.
Additionally, Proposition 187, which was adopted by referendum in California,
but has been enjoined by a California court, may limit the access by illegal
aliens to Medicaid funds in California. In the event similar legislation is
passed in other states with large illegal alien populations, such as Arizona and
Florida, the Company's ability to collect for medical services rendered to such
patients could be adversely affected. Changes in government-sponsored healthcare
programs which result in the Company being unable to recover cost increases
through price increases or otherwise could have a material adverse effect on the
Company's financial condition and results of operations. Because of cost
containment measures and market changes in non-governmental insurance plans, the
Company may not be able to shift cost increases to, or recover them from,
non-governmental payors. Also, state and federal statutes impose substantial
penalties, including civil and criminal fines and imprisonment, on healthcare
providers that fraudulently or wrongfully bill governmental or other third party
payors for healthcare services. The federal law prohibiting false billings
allows a private person to bring a civil action in the name of the United States
government for violations of its provisions. The Company believes it is in
material compliance with such laws, but there can be no assurances that the
Company's activities will not be challenged or scrutinized by governmental
authorities. Noncompliance with such regulations may adversely affect the
operations of the Company and subject it to penalties and additional costs. In
addition, funds received under government programs are subject to audit with
respect to the proper billing for physician services and, accordingly,
retroactive adjustments of revenue from these programs may occur. See
"Business--Government Regulation."

STATE LAWS REGARDING PROHIBITION OF CORPORATE PRACTICE OF MEDICINE.
Business corporations, such as PMG, are generally not permitted under state law
to practice medicine, exercise control over the medical judgments or decisions
of physicians or engage in certain practices, such as fee-splitting with
physicians. In the states in which the Company operates, other than Florida,
there exist potential judicial or governmental interpretations which may extend
the scope of the corporate practice of medicine and/or medical practices acts
principles. For such reasons, or for business reasons, PMG contracts with the PA
Contractors (which are owned by a licensed physician in the state) in such
states, which in turn employ or contract with physicians to provide necessary
physician management services. There can be no assurance that the regulatory
authorities or other parties will not assert that PMG is engaged in the
corporate practice of medicine or that the percentage fee arrangements between
PMG and the PA Contractors constitute fee-splitting or the corporate practice of
medicine. For example, an order by the Florida Board of Medicine, which has been
stayed pending its appeal to the Florida courts, concludes that percentage-based
management arrangements violate applicable fee-splitting statutes. If such order
was upheld and adopted in other jurisdictions, or similar claim was successfully
asserted in any jurisdiction, PMG could be subject to civil and criminal
penalties under such jurisdiction's laws and could be required to restructure
its contractual arrangements. Such results or the inability to successfully
restructure contractual arrangements could have a material adverse effect on the
Company's financial condition and results of operations. In states where PMG is
not permitted to practice medicine, PMG performs only non-medical administrative
services, does not represent to the public or its clients that it offers medical
services and does not exercise influence or control over the practice of
medicine by the physicians employed by the PA Contractors. Accordingly, the
Company believes it is not in violation of applicable state laws in relation to
the corporate practice of medicine. See "Business-Contractual Relationships."

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RISK OF APPLICABILITY OF ANTI-KICKBACK AND SELF-REFERRAL LAWS. Federal
anti-kickback laws and regulations prohibit any knowing and willful offer,
payment, solicitation, or receipt of any form of remuneration, either directly
or indirectly, in return for, or to induce (i) referral of an individual for a
service for which payment may be made by Medicaid or another
government-sponsored healthcare program or (ii) purchasing, leasing, ordering or
arranging for, or recommending the purchase, lease or order of, any service or
item for which payment may be made by a government sponsored healthcare program.
Violations of anti-kickback rules are punishable by monetary fines, civil and
criminal penalties and exclusion from participation in Medicare and Medicaid
programs. Effective January 1, 1995, federal physician self-referral laws became
applicable to inpatient and outpatient hospital services. Subject to certain
exceptions, these laws, such as "Stark I" and "Stark II," prohibit Medicare or
Medicaid payments for services furnished by a physician who has a financial
relationship with the entity through ownership, investment, or compensation
agreement. Possible sanctions for violation of these laws include civil monetary
penalties, exclusion from Medicare and Medicaid programs and forfeiture of
amounts collected in violation of such prohibitions. Certain states in which the
Company does business have similar anti-kickback, anti-fee-splitting and
self-referral laws, imposing substantial penalties for violations. In many
cases, such state laws apply to privately insured or paid services as well as
services covered under governmentally sponsored plans. The Company's
relationships, including fee payments, among PA Contractors, hospital clients
and physicians have not been examined by federal or state authorities under
these laws and regulations. Although the Company believes it is in compliance
with these laws and regulations, there can be no assurance that federal or state
regulatory authorities will not challenge the Company's current or future
activities under these laws. See "Business-Strategy" and "Business-Government
Regulation."

RISKS RELATING TO ACQUISITION STRATEGY. The Company has expanded and
intends to continue to expand its geographic and market penetration primarily
through acquisitions of physician group practices. In implementing this
acquisition strategy, the Company will compete with other potential acquirers,
some of which may have greater financial or operational resources than the
Company. Competition for acquisitions may intensify due to the ongoing
consolidation in the healthcare industry, which may increase the costs of
capitalizing on such opportunities. While the Company has recently completed
several acquisitions, there can be no assurance that future acquisition
candidates will be identified or that any future acquisition will be consummated
or, if consummated, that any acquisition, including the recent acquisitions,
will be integrated successfully into the Company's operations or that the
Company will be successful in achieving its objectives. The recent acquisitions
also involve numerous short and long term risks, including diversion of
management's attention, failure to retain key personnel and amortization of
acquired intangible assets. The Company may also incur one-time acquisition
expenses in connection with acquisitions. Consummation of acquisitions could
result in the incurrence or assumption by the Company of additional indebtedness
and the issuance of additional equity. The issuance of shares of common stock
for an acquisition may result in dilution to shareholders. Also, as the Company
enters into new geographic markets, the Company will be required to comply with
laws and regulations of states that differ from those in which the Company's
operations are currently conducted. There can be no assurance that the Company
will be able to effectively establish a presence in these new markets. While
many of the expenses arising from the Company's efforts in these areas may have
a negative effect on operating results until such time, if at all, as these
expenses are offset by increased revenues, there can be no assurance that the
Company will be able to implement its acquisition strategy, or that this
strategy will be successful. See "Business-Strategy," "Business-Marketing" and
"Business-Government Regulation."

GROWTH STRATEGY; RAPID GROWTH. Since the Initial Public Offering
("IPO") the Company has experienced rapid growth in its business and number of
employees. Continued rapid growth may impair the Company's ability to
efficiently provide its physician management services and to adequately manage
its employees. While the Company is taking steps to manage rapid growth, future
results of operations could be materially adversely affected if it is unable to
do so effectively.

QUARTERLY FLUCTUATIONS IN OPERATING RESULTS; POTENTIAL VOLATILITY. The
Company has historically experienced and expects to continue to experience
quarterly fluctuations in net patient service revenue and associated net income
due to unit specific volume and cost fluctuations. The Company has a high level
of fixed operating costs, including physician costs, and, as a result, is highly
dependent on the volume of births and capacity utilization of NICUs and PICUs to
sustain profitability. Results of operations for any quarter are not necessarily

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indicative of results of operations for any future period or full year. As a
result, there can be no assurance that the results of operations will not
fluctuate significantly from period to period. There has been significant
volatility in the market price of securities of healthcare companies that often
has been unrelated to the operating performance of such companies. The Company
believes that certain factors, such as legislative and regulatory developments,
quarterly fluctuations in the actual or anticipated results of operations of the
Company, lower revenues or earnings in the financial results of the Company than
those anticipated by securities analysts, the overall economy and the financial
markets, could cause the price of Common Stock to fluctuate substantially.

IMPACT OF PAYOR DISCOUNTS AND CAPITATION ARRANGEMENTS. The evolving
managed care environment has created substantial cost containment pressures for
the healthcare industry. The Company's business could be adversely affected by
reductions in reimbursement amounts or rates, changes in services covered and
similar measures which may be implemented by government sponsored healthcare
programs or by other third party payors. The Company contracts with payors and
managed care organizations traditionally have been fee-for-service arrangements.
At December 31, 1997, the Company had eight shared-risk capitated arrangements
with payors in California, Arizona, Texas and Florida. These arrangements and
many future arrangements may adversely affect the Company's financial condition
and results of operations if the Company is unable to limit the risks associated
with such arrangements. See "Business-Contractual Relationships,"
"Business-Government Regulation" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

PROFESSIONAL LIABILITY AND INSURANCE. The Company's business entails an
inherent risk of claims of physician professional liability. The Company
periodically becomes involved as a defendant in medical malpractice lawsuits,
some of which are currently ongoing, and is subject to the attendant risk of
substantial damage awards. See "Legal Proceedings." The Company's contracts with
hospitals generally require the Company to indemnify certain parties for losses
resulting from the negligence of physicians who are managed by or affiliated
with the Company. While the Company believes it has adequate professional
liability insurance coverage, there can be no assurance that a pending or future
claim or claims will not be successful or if successful, will not exceed the
limits of available insurance coverage or that such coverage will continue to be
available at acceptable costs and on favorable terms. See "Business-Professional
Liability and Insurance."

COLLECTION AND REIMBURSEMENT RISK. The Company assumes the financial
risk related to collection, including the potential uncollectibility of accounts
and delays attendant to reimbursement by third party payors, such as government
programs, private insurance plans and managed care plans. Failure to manage
adequately the collection risks and working capital demands could have a
material adverse effect on the Company's financial condition and results of
operations. See "Business-Contractual Relationships" and "Business-Government
Regulation."

CANCELLATION OR NON-RENEWAL OF CONTRACTS. The Company's net patient
service revenue is derived primarily from fee-for-service billings for patient
care provided by its physicians and from administrative fees. Certain
contracting hospitals that do not generate sufficient patient volume pay the
Company administrative fees to assure the Company a minimum revenue level. If,
at the time of renewal of the contracts with the hospitals currently paying
administrative fees to the Company, such hospitals continue to generate
insufficient patient volume but elect not to pay administrative fees to assure
the Company a minimum revenue level, then the Company could either choose not to
renew the contract or renew the contract with lower gross profit margins at such
hospitals. The Company's contracts provide for terms of three to five years and
are generally terminable by the hospital upon 90 days written notice. While the
Company has in most cases been able to negotiate renewal of its contracts in the
past, no assurance can be given that the Company's contracts with hospitals will
not be canceled or will be renewed in the future or that the administrative fees
will be continued. To the extent that the Company's contracts with hospitals are
canceled or are not renewed or replaced with other contracts with at least as
favorable terms, the Company's financial position and results of operations
could be adversely affected. See "Business-Contractual Relationships."

COMPETITION. The healthcare industry is highly competitive and subject
to continual changes in the method in which services are provided and the manner
in which healthcare providers are selected and compensated. The Company believes
that private and public reforms in the healthcare industry emphasizing cost
containment and accountability will result in an increasing shift of NICU and
related pediatric care from highly fragmented,

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individual or small practice neonatology providers to physician practice
management companies. Companies in other healthcare industry segments, such as
managers of other hospital-based specialties or currently expanding large
physician group practices, some of which have financial and other resources
greater than those of the Company, may become competitors in providing
management of neonatal and pediatric services to hospitals. Increased
competition could have a material adverse effect on the Company's financial
condition and results of operations. See "Business-Competition."

DEPENDENCE ON QUALIFIED NEONATALOGISTS. The Company's business strategy
is dependent upon its ability to recruit and retain qualified neonatologists.
The Company has been able to compete with many types of healthcare providers, as
well as teaching, research, and government institutions, for the services of
such physicians. No assurance can be given that the Company will be able to
continue to recruit and retain a sufficient number of qualified neonatologists
who provide services in markets served by the Company on terms similar to its
current arrangements. The inability to successfully recruit and retain
physicians could adversely affect the Company's ability to service existing or
new units at hospitals, or expand its business.

DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant extent on the continued contributions of its key management,
business development, sales and marketing personnel, including one of the
Company's principal shareholders, President, Chief Executive Officer and
co-founder, Dr. Roger Medel, for management of the Company and successful
implementation of its growth strategy. The loss of Dr. Medel or other key
personnel could have a material adverse effect on the Company's financial
condition, results of operations and plans for future development.

DEPENDENCE ON PA CONTRACTORS. The Company has a management agreement
with a PA Contractor in each state in which it operates except Florida. The
agreements provide that the terms of the arrangements are permanent, subject
only to termination by PMG and that the PA Contractor shall not terminate the
agreement without PMG's prior written consent. Any disruption of the Company's
or the PA Contractors' relationships with contracting hospitals (including the
determination that the PA Contractors arrangements with PMG constitute the
corporate practice of medicine) or any other event adverse to the PA Contractors
could have a material adverse effect on the Company's financial condition and
results of operations. See "Business-Government Regulation" and
"Business-Contractual Relationships."

ANTI-TAKEOVER PROVISIONS; ISSUANCE OF PREFERRED STOCK. The Company's
Articles of Incorporation and Bylaws contain provisions that could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire control of, the Company.
These provisions establish certain advance notice procedures for nomination of
candidates for election as directors and for shareholder proposals to be
considered at shareholders' meetings and provide that only the Board of
Directors may call special meetings of the shareholders. In addition, the
Company's Articles of Incorporation authorize the Board of Directors to issue
preferred stock ("Preferred Stock") without shareholder approval and upon such
terms as the Board of Directors may determine. While no shares of Preferred
Stock are outstanding and the Company has no present plans to issue any shares
of Preferred Stock, the rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of any holders of Preferred
Stock that may be issued in the future.

YEAR 2000. The Company has conducted a comprehensive review of its
computer systems to identify the systems that could be affected by the
transition to the year 2000 and has developed an implementation plan to resolve
any related issues. The Year 2000 problem is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the Company's programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a major system failure or miscalculations. The Company presently believes
that, by modifying and upgrading its existing software the transition to the
year 2000 will not pose significant operational problems. The Company has not
had any discussion with its payors to determine the status of their systems.
However, if the Company or its vendors or payors do not make the modifications
and conversions required on a timely basis it could have a material adverse
effect on the Company's financial condition and results of operations.

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ITEM 2. PROPERTIES

The Company owns its executive offices located in Ft. Lauderdale,
Florida (approximately 30,000 square feet) including a new building that was
completed in the third quarter of 1996. The Company also leases space in other
facilities in various states for its business offices, pediatric cardiology
offices, storage space, and temporary housing of medical staff, with aggregate
annual rents of approximately $395,000. To facilitate its acquisition and
business integration programs, in September 1996, the Company entered into a
contract to lease an aircraft. See Note 10 to the Consolidated Financial
Statements.

ITEM 3. LEGAL PROCEEDINGS

During the ordinary course of business, the Company has become a party
to pending and threatened legal actions and proceedings, most of which involve
claims of medical malpractice and are generally covered by insurance. The
Company believes, based upon the investigations conducted by the Company to
date, that the outcome of such legal actions and proceedings, individually or in
the aggregate, will not have a material adverse effect on the Company's
financial condition, results of operations or liquidity, notwithstanding any
possible insurance recovery. If liability results from the medical malpractice
claims, there can be no assurance that the Company's medical malpractice
insurance coverage will be adequate to cover liabilities arising out of such
proceedings. See "Factors to be Considered--Professional Liability and
Insurance."

The Company is currently under examination by the Internal Revenue
Service (the "IRS") for the tax years ended December 31, 1992, 1993, and 1994.
The IRS has challenged certain deductions that, if ultimately disallowed, would
result in additional taxes of approximately $4.5 million, plus interest. The
Company and its tax advisors believe that the ultimate resolution of the
examination will not have a material effect on the Company's consolidated
financial position or results of operations and cash flows.

In 1997, the Company was notified by a hospital customer of a dispute
regarding the interpretation of the customer's contract with the Company. In
December 1997, this dispute was resolved amicably and the Company continues to
provide services to this hospital customer.

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, 1997.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's Common Stock commenced trading on the NASDAQ National
Market (the "NASDAQ") under the symbol "PEDX" on September 20, 1995. The
Company's stock began trading on the New York Stock Exchange (the "NYSE") under
the symbol "PDX" on September 11, 1996 and ceased trading on the NASDAQ on
September 10, 1996. The following table sets forth, for the periods indicated,
the high and low sales prices for the Common Stock as reported on the NASDAQ and
the NYSE.

HIGH LOW
---- ---

1996
----
First Quarter 40 3/4 22 1/2
Second Quarter 64 3/4 35 1/4
Third Quarter 53 31 1/4
Fourth Quarter 50 3/8 32

1997
----
First Quarter 44 1/2 30 1/2
Second Quarter 46 28 5/8
Third Quarter 50 7/16 39 7/8
Fourth Quarter 46 15/16 38 5/8

As of March 17, 1998 there were approximately 112 holders of record of
the 15,175,087 outstanding shares of Common Stock. The closing sales price for
the Common Stock on March 17, 1998 was $41.38.

The Company did not declare or pay in 1995, 1996 or 1997, nor does it
currently intend to declare or pay in the future, any dividends on its Common
Stock, but intends to retain all earnings for the operation and expansion

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of its business. The payment of any future dividends will be at the discretion
of the Board of Directors and will depend upon, among other things, future
earnings, results of operations, capital requirements, the general financial
condition of the Company, general business conditions and contractual
restrictions on payment of dividends, if any, as well as such other factors as
the Board of Directors may deem relevant. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

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ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share and other
operating data)

The selected consolidated financial data set forth as of and for each
of the five years in the period ended December 31, 1997, have been derived from
the Consolidated Financial Statements, which statements have been audited by
Coopers & Lybrand L.L.P., independent accountants. The following data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Consolidated Financial Statements
and the notes thereto included elsewhere herein.

------------------------------------------------------------
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
-------- --------- --------- --------- ---------

CONSOLIDATED INCOME STATEMENT DATA:
Net patient service revenue $ 23,570 $ 32,779 $ 43,860 $ 80,833 $ 128,850
Operating expenses:
Salaries and benefits 14,852 20,723 29,545 52,732 81,486
Supplies and other operating expenses 2,230 2,774 3,451 6,262 9,765
Depreciation and amortization 95 244 363 1,770 4,522
--------- --------- --------- --------- ---------
Total operating expenses 17,177 23,741 33,359 60,764 95,773
--------- --------- --------- --------- ---------
Income from operations 6,393 9,038 10,501 20,069 33,077
Investment income 45 208 804 2,096 2,102
Interest expense (105) (90) (117) (192) (324)
Other expense, net (17) -- -- -- --
--------- --------- --------- --------- ---------
Income before income taxes 6,316 9,156 11,188 21,973 34,855
Income tax provision 2,166 3,749 4,475 8,853 13,942
--------- --------- --------- --------- ---------
Net income (1) $ 4,150 $ 5,407 $ 6,713 $ 13,120 $ 20,913
========= ========= ========= ========= =========

PER SHARE DATA:
Net income per common share
Basic $ 0.66 $ 0.70 $ 0.95 $ 1.39
========= ========= ========= =========
Diluted $ 0.49 $ 0.57 $ 0.90 $ 1.33
========= ========= ========= =========
Weighted average shares outstanding
Basic 6,272 8,092 13,806 15,021
========= ========= ========= =========
Diluted 10,945 11,855 14,535 15,743
========= ========= ========= =========

OTHER OPERATING DATA:
Number of physicians at end of period 52 75 114 195 260
Number of births 32,532 39,541 59,186 132,796 200,616
NICU admissions 4,777 5,823 7,611 14,250 21,203
NICU patient days 59,024 64,615 87,672 185,702 325,199

CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 2,469 $ 7,384 $ 18,499 $ 18,435 $ 18,562
Working capital 8,052 13,772 53,448 81,187 53,908
Total assets 14,239 20,295 69,881 159,026 196,812
Total liabilities 3,762 4,203 7,071 22,705 33,103
Long-term debt, including
current maturities 965 879 815 2,950 2,750
Convertible preferred stock(2) 14,401 15,697 -- -- --
Stockholders' equity (deficit) (3,924) 395 62,810 136,321 163,709

- ----------------

(1) The net income amounts do not include accrued and unpaid dividends with
respect to the Convertible Preferred Stock. See footnote 2 below.

(2) Immediately prior to the consummation of the Company's IPO in September
1995, the Convertible Preferred Stock was converted into 4,571,063 shares
of Common Stock and unpaid dividends of approximately $3.7 million were
forgiven pursuant to the terms of the Series A Preferred Stock Purchase
Agreement, dated as of October 26, 1992. Upon conversion, such amounts were
credited to the common stock and additional paid-in capital accounts.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

Pediatrix is the nation's leading provider of physician management
services to hospital-based NICUs. The Company also provides physician management
services to hospital-based PICUs and pediatric departments in hospitals.
Pediatrix was founded in 1979 by Drs. Roger Medel and Gregory Melnick. Since
obtaining its first hospital contract in 1980, the Company has grown by
increasing revenues at existing units ("same unit growth") and by adding new
units.

In July 1995, the Company completed its first acquisition of a neonatal
physician group practice. Since its initial public offering in September 1995,
the Company has enhanced its management infrastructure, thereby strengthening
its ability to identify acquisition candidates, consummate transactions and
integrate acquired physician group practices into the Company's operations.
During 1997, the Company completed ten acquisitions, which added 28 NICUs.
Additionally, three NICUs were added through the Company's internal marketing
activities. The Company has developed networks in Colorado, Arizona, Southern
California and Texas and intends to develop additional regional and state-wide
networks. The Company believes these networks, augmented by ongoing marketing
and acquisition efforts, will strengthen its position with third party payors,
such as Medicaid and managed care organizations.

The Company bills payors for services provided by physicians based upon
rates for the specific services provided. The rates are substantially the same
for all patients in a particular geographic area regardless of the party
responsible for paying the bill. The Company determines its net patient service
revenue based upon the difference between the gross fees for services and the
ultimate collections from payors which differ from the gross fees due to (i)
Medicaid reimbursements at government-established rates, (ii) managed care
payments at contracted rates, (iii) various reimbursement plans and negotiated
reimbursements from other third parties and (iv) discounted and uncollectible
accounts of private pay patients.

The Company seeks to increase revenue at existing units in hospitals by
providing support to areas of the hospital outside the NICU and PICU,
particularly in the obstetrics, nursery and pediatric departments, where
immediate accessibility to specialized care is critical. The following table
indicates the point at which services originate, expressed as a percentage of
net patient service revenue, exclusive of administrative fees, for the periods
indicated.

YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
----------- ----------- -----------
NICU 74.7% 81.4% 85.4%
PICU and PEDS 6.0 3.4 2.2
Other(1) 19.3 15.2 12.4
--------- --------- --------
100.0% 100.0% 100.0%
========= ========= ========
- -----------------

(1) Represents principally the percentage of net patient service revenue
generated by physicians providing support to areas of hospitals outside
the NICU and PICU.

PAYOR MIX

The Company's payor mix is comprised of government (principally
Medicaid), managed care, other third parties and private pay patients. The
Company benefits when more patients are covered by Medicaid, despite Medicaid's
lower reimbursement rates as compared with other payors, because typically these
patients would not otherwise be able to pay for services due to lack of
insurance coverage. In addition, the Company benefits from the fact that most of
the medical services provided at the NICU or PICU are classified as emergency
services, a category typically classified as a covered service by managed care
payors. A significant increase in the managed

18

19

care or capitated components of the Company's payor mix, however, could result
in reduced reimbursement rates and, in the absence of increased patient volume,
could have a material adverse effect on the Company's financial condition and
results of operations. The following is a summary of the Company's payor mix,
expressed as a percentage of net patient service revenue, exclusive of
administrative fees, for the periods indicated (the amounts reported for 1995
and 1996 have been restated to reflect revised classifications in certain payor
relationships).

YEARS ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
----------------- ------------ ------------
Government 24% 23% 22%
Managed Care 24 34 31
Other third parties 50 42 44
Private pay 2 1 3
----------- --------- --------
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 44% of the Company's total gross patient service revenue during
1997.

RESULTS OF OPERATIONS

The following discussion provides an analysis of the Company's results
of operations and should be read in conjunction with the Consolidated Financial
Statements and related notes thereto appearing elsewhere in this Annual Report.
The operating results for the periods presented were not significantly affected
by inflation.

The following table sets forth, for the periods indicated, certain
information related to the Company's operations expressed as a percentage of the
Company's net patient service revenue (patient billings net of contractual
adjustments and uncollectibles, and including administrative fees):

YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1995 1996 1997
----------------- ----------------- -----------------

Net patient service revenue 100.0% 100.0% 100.0%
Operating expenses:
Salaries and benefits 67.4 65.2 63.2
Supplies and other operating expenses 7.9 7.8 7.6
Depreciation and amortization .8 2.2 3.5
----------- ---------- ----------
Total operating expenses 76.1 75.2 74.3
----------- ---------- ----------
Income from operations 23.9 24.8 25.7
Other income, net 1.6 2.4 1.3
----------- ---------- ----------
Income before income taxes 25.5 27.2 27.0
Income tax provision 10.2 11.0 10.8
----------- ---------- ----------
Net income 15.3% 16.2% 16.2%
=========== ========== ==========

YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996

The Company reported net patient service revenue of $128.9 million for
the year ended December 31, 1997, as compared with $80.8 million in 1996, a
growth rate of 59.4%. Of this $48.1 million increase, approximately $47.5
million, or 98.8%, was attributable to new units, including units at which the
Company provides services as a result of acquisitions. Same unit patient service
revenue increased approximately $603,000, or 1.2%, for the year ended December
31, 1997, compared to the year ended December 31, 1996. Same units are those
units at which the Company provided services for the entire period for which the
percentage is calculated and the entire prior comparable period. The same unit
growth resulted primarily from volume increases.

19

20

Salaries and benefits increased $28.8 million, or 54.5%, to $81.5
million for the year ended December 31, 1997, as compared with $52.7 million for
the same period in 1996. Of this increase, $21.4 million, or 74.3%, was
attributable to hiring new physicians, primarily to support new unit growth, and
the remaining $7.4 million was primarily attributable to increased support staff
and resources added in the areas of nursing, management and billing and
reimbursement. Supplies and other operating expenses increased $3.5 million, or
55.9%, to $9.8 million for the year ended December 31, 1997, as compared with
$6.3 million for the year ended December 31, 1996, primarily as a result of new
units. Depreciation and amortization expense increased by $2.7 million, or
155.5%, to $4.5 million for the year ended December 31, 1997, as compared with
$1.8 million for the year ended December 31, 1996, primarily as a result of
amortization of goodwill in connection with acquisitions.

Income from operations increased $13.0 million, or 64.8%, to $33.1
million for the year ended December 31, 1997, as compared with $20.1 million for
the year ended December 31, 1996, representing an increase in the operating
margin from 24.8% to 25.7%. The increase in operating margin was primarily due
to increased volume, principally from acquisitions, without comparable increases
in corporate overhead.

The Company earned net interest income of approximately $1.8 million
for the year ended December 31, 1997, as compared with $1.9 million for the year
ended December 31, 1996.

The effective income tax rate was approximately 40.0% for the year
ended December 31, 1997 as compared with 40.3% for the year ended December 31,
1996.

Net income increased 59.4% to $20.9 million for the year ended December
31, 1997, as compared with $13.1 million for the year ended December 31, 1996.
Net income as a percentage of net patient service revenue remained consistent at
16.2% for the years ended December 31, 1996 and 1997.

YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995

The Company reported net patient service revenue of $80.8 million for
the year ended December 31, 1996, as compared with $43.9 million in 1995, a
growth rate of 84.3%. Of this $36.9 million increase, $34.7 million, or 94.0%,
was attributable to new units, including units at which the Company provides
services as a result of acquisitions. Same unit patient service revenue
increased $2.2 million, or 6.2%, for the year ended December 31, 1996, compared
to the year ended December 31, 1995. The same unit growth resulted from volume
increases as there were no general price increases during the periods.

Salaries and benefits increased $23.2 million, or 78.5%, to $52.7
million for the year ended December 31, 1996, as compared with $29.5 million for
the same period in 1995. Of this $23.2 million increase, $18.0 million, or
77.6%, was attributable to hiring new physicians, primarily to support new unit
growth, and the remaining $5.2 million was primarily attributable to increased
support staff and resources added in the areas of nursing, management and
billing and reimbursement. Supplies and other operating expenses increased $2.8
million, or 81.5%, to $6.3 million for the year ended December 31, 1996, as
compared with $3.5 million for the year ended December 31, 1995, primarily as a
result of new units. Depreciation and amortization expense increased by $1.4
million, or 387.6%, to $1.8 million for the year ended December 31, 1996, as
compared with $363,000 for the year ended December 31, 1995, primarily as a
result of amortization of goodwill in connection with acquisitions.

Income from operations increased approximately $9.6 million, or 91.1%,
to $20.1 million for the year ended December 31, 1996, as compared with $10.5
million for the year ended December 31, 1995, representing an increase in the
operating margin from 23.9% to 24.8%. The increase in operating margin was
primarily due to increased volume, principally from acquisitions, without
comparable increases in corporate overhead.

The Company earned net interest income of approximately $1.9 million
for the year ended December 31, 1996, as compared with $687,000 for the year
ended December 31, 1995. The increase in net interest income resulted primarily
from additional funds available for investment due to proceeds from the initial
and secondary public stock offerings, as well as cash flow from operations.

20

21

The effective income tax rate was approximately 40.3% for the year
ended December 31, 1996 compared with 40.0% for the year ended December 31,
1995.

Net income increased 95.4% to $13.1 million for the year ended December
31, 1996, as compared with $6.7 million for the year ended December 31, 1995.
Net income as a percentage of net patient service revenue increased to 16.2% for
the year ended December 31, 1996, compared to 15.3% for the year ended December
31, 1995.

QUARTERLY RESULTS

The following table presents certain unaudited quarterly financial data
for each of the quarters in the years ended December 31, 1996 and 1997. This
information has been prepared on the same basis as the Consolidated Financial
Statements appearing elsewhere in this Annual Report and include, in the opinion
of the Company, all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the quarterly results when read in
conjunction with the Consolidated Financial Statements and the notes thereto.
The Company has historically experienced and expects to continue to experience
quarterly fluctuations in net patient service revenue and net income. As a
result, the operating results for any quarter are not necessarily indicative of
results for any future period or for the full year.

1996 CALENDAR QUARTERS 1997 CALENDAR QUARTERS
------------------------------------------- -------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
---------- --------- --------- --------- --------- ---------- ---------- ---------
(In thousands, except for per share data)

Net patient service revenue $16,127 $17,808 $22,404 $24,494 $27,013 $30,599 $34,444 $36,794
Operating expenses:
Salaries and benefits 10,796 11,541 14,526 15,869 17,609 19,774 21,874 22,229
Supplies and other
operating expenses 1,213 1,269 1,740 2,040 2,102 2,358 2,467 2,838
Depreciation and
amortization 233 335 543 659 783 1,008 1,278 1,453
--------- -------- -------- -------- -------- --------- --------- --------
Total operating expenses 12,242 13,145 16,809 18,568 20,494 23,140 25,619 26,520
--------- -------- -------- -------- -------- --------- --------- --------
Income from operations 3,885 4,663 5,595 5,926 6,519 7,459 8,825 10,274
Other income, net 464 396 455 589 661 488 346 283
--------- -------- -------- -------- -------- --------- --------- --------
Income before income taxes 4,349 5,059 6,050 6,515 7,180 7,947 9,171 10,557
Income tax provision 1,737 2,024 2,485 2,607 2,872 3,179 3,668 4,223
--------- -------- -------- -------- -------- --------- --------- --------
Net income $2,612 $3,035 $3,565 $3,908 $4,308 $4,768 $5,503 $6,334
========= ======== ======== ======== ======== ========= ========= ========
Per share data:
Net income per common and
common equivalent share:
Basic $.20 $.23 $.25 $.26 $.29 $.32 $.37 $.42
========= ======== ======== ======== ======== ========= ========= ========
Diluted $.19 $.22 $.24 $.25 $.28 $.30 $.35 $.40
========= ======== ======== ======== ======== ========= ========= ========

LIQUIDITY AND CAPITAL RESOURCES

During 1997, the Company completed the acquisition of ten physician
group practices, utilizing approximately $59.0 million in cash. These
acquisitions were funded principally by the net proceeds from the Company's
initial public stock offering in September 1995, and a secondary public stock
offering in August 1996. As of December 31, 1997, the Company had approximately
$45.7 million of cash, cash equivalents and marketable securities on hand.

As of December 31, 1997, the Company had working capital of
approximately $53.9 million, a decrease of $27.3 million from the working
capital of $81.2 million available at December 31, 1996. The net decrease is
principally the result of expenditures related to the acquisition of physician
group practices and additions to property and equipment offset by funds
generated from operations.

On June 27, 1996, the Company entered into an unsecured revolving
credit facility (the "Credit Facility") with BankBoston and SunTrust Bank.
During 1997, the Company increased the amount available under the Credit
Facility to $75.0 million, which includes a $2.0 million amount reserved to
cover deductibles under the Company's professional liability insurance policies.
The Company intends to use the amount available under the Credit Facility
primarily for acquisitions. The Credit Facility matures on September 30, 2000.
At the Company's option, the

21
22

Credit Facility bears interest at either LIBOR plus .875%, or the prime rate
announced by BankBoston. There is no balance currently outstanding under the
Credit Facility.

The Company's annual capital expenditures have typically been for
computer hardware and software and for furniture, equipment and improvements at
the corporate headquarters. During the year ended December 31, 1997, capital
expenditures amounted to approximately $2.2 million.

The Company anticipates that funds generated from operations, together
with cash and marketable securities on hand, and funds available under the
Credit Facility will be sufficient to meet its working capital requirements and
finance required capital expenditures and acquisitions for at least the next
twelve months.

STATUS OF YEAR 2000 COMPLIANCE

The Company has completed a review of its computer systems to identify
any software that could be affected by the transition to the year 2000.
Currently, all the Company's systems are year 2000 compliant or are upgradeable
to commercially available versions that are compliant. In addition, all of the
vendors that the Company uses for the transmission of electronic claims
information are expected to complete the transition to year 2000 compliant
systems by the end of September 1998. The Company has not had any discussions
with its payors to determine the status of their systems. However, if a
substantial number of payors do not make the modifications and conversions
required on a timely basis it could have a material adverse effect on the
Company's financial condition and results of operations.

CHANGE IN ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," which must be implemented by the Company in 1998. This statement
establishes standards for the reporting and display of comprehensive income and
its components. The Company expects that the implementation of SFAS No. 130 will
not have a material impact on its consolidated financial statements.

22
23

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 Accountants.....................................................................24

Consolidated Balance Sheets as of December 31, 1996 and 1997..........................................25

Consolidated Statements of Income for the Years Ended December 31, 1995, 1996 and 1997................26

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1995,
1996 and 1997................................................................................27

Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996
and 1997.....................................................................................28

Notes to Consolidated Financial Statements............................................................29

23

24

REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors of
Pediatrix Medical Group, Inc.
Ft. Lauderdale, Florida

We have audited the consolidated financial statements and the financial
statement schedule of Pediatrix Medical Group, Inc. listed in Item 14(a) of this
Form 10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pediatrix Medical
Group, Inc. as of December 31, 1996 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included herein.

COOPERS & LYBRAND L.L.P.

Ft. Lauderdale, Florida
January 26, 1998, except
as to information presented
in Note 14, for which the
date is March 23, 1998

24
25

PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

DECEMBER 31,
-----------------------------------------------
ASSETS 1996 1997
--------------------- ---------------------

Current assets:
Cash and cash equivalents $18,435 $18,562
Investments in marketable securities 57,218 27,132
Accounts receivable, net 23,396 34,866
Prepaid expenses 1,283 873
Other assets 375 586
Income taxes receivable 202 --
--------------------- ---------------------

Total current assets 100,909 82,019

Property and equipment, net 8,676 9,898
Other assets, net 49,441 104,895
--------------------- ---------------------

Total assets $159,026 $196,812
===================== =====================

LIABILITIES & STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued expenses $13,423 $16,170
Income taxes payable -- 1,348
Current portion of note payable 200 200
Deferred income taxes 6,099 10,393
--------------------- ---------------------

Total current liabilities 19,722 28,111

Note payable 2,750 2,550
Deferred income taxes 233 2,442
--------------------- ---------------------

Total liabilities 22,705 33,103
--------------------- ---------------------

Commitments and contingencies

Stockholders' equity:
Preferred stock; $.01 par value, 1,000,000
shares authorized, none issued and
outstanding at December 31, 1996 and 1997 -- --
Common stock; $.01 par value, 50,000,000
shares authorized at December 31, 1996
and 1997, 14,864,694 and 15,141,418
shares issued and outstanding at
December 31, 1996 and 1997, respectively 149 151
Additional paid-in capital 116,037 122,391
Retained earnings 20,165 41,078
Unrealized gain (loss) on investments (30) 89
--------------------- ---------------------

Total stockholders' equity 136,321 163,709
--------------------- ---------------------

Total liabilities and stockholders' equity $159,026 $196,812
===================== =====================

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

25
26

PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

YEARS ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
------------ ------------ ------------

Net patient service revenue $43,860 $80,833 $128,850
------------ ------------ ------------
Operating expenses:
Salaries and benefits 29,545 52,732 81,486
Supplies and other operating expenses 3,451 6,262 9,765
Depreciation and amortization 363 1,770 4,522
------------ ------------ ------------

Total operating expenses 33,359 60,764 95,773
------------ ------------ ------------

Income from operations 10,501 20,069 33,077

Investment income 804 2,096 2,102
Interest expense (117) (192) (324)
------------ ------------ ------------

Income before income taxes 11,188 21,973 34,855

Income tax provision 4,475 8,853 13,942
------------ ------------ ------------

Net income $6,713 $13,120 $20,913
============ ============ ============

Per share data:
Net income per common and
common equivalent share:
Basic $.70 $.95 $1.39
============ ============ ============
Diluted $.57 $.90 $1.33
============ ============ ============

Weighted average shares used
in computing net income per common
and common equivalent share:
Basic 8,092 13,806 15,021
============ ============ ============
Diluted 11,855 14,535 15,743
============ ============ ============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

26

27

PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)

COMMON STOCK
----------------------- ADDITIONAL
NUMBER OF PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------------ ---------- --------- -------------

Balance at December 31, 1994 6,266 $ 63 $ -- $ 332

Net income -- -- -- 6,713
Accrued and unpaid preferred
stock dividends through
conversion date,
September 25, 1995 -- -- (1,040) --
Conversion of preferred stock 4,571 46 16,691 --
Common stock issued 2,240 22 39,848 --
Common stock retired (26) -- (131) --
Tax benefit related to
employee stock options -- -- 252 --
--------- --------- --------- ---------

Balance at December 31, 1995 13,051 131 55,620 7,045

Net income -- -- -- 13,120
Common stock issued 1,815 18 59,757 --
Common stock retired (1) -- (45) --
Tax benefit related to
employee stock options -- -- 705 --
--------- --------- --------- ---------

Balance at December 31, 1996 14,865 149 116,037 20,165

Net income -- -- -- 20,913
Common stock issued 276 2 3,480 --
Tax benefit related to
employee stock options
and stock purchase plans -- -- 2,874 --
--------- --------- --------- ---------

Balance at December 31, 1997 15,141 $ 151 $ 122,391 $ 41,078
========= ========= ========= =========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

27

28

PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
----------- ---------- ----------

Cash flows from operating activities:
Net income $ 6,713 $ 13,120 $ 20,913
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization 363 1,770 4,522
Deferred income taxes 1,456 4,423 6,503
Other (2) -- --
Changes in assets and liabilities:
Accounts receivable (3,131) (11,300) (11,470)
Prepaid expenses and other assets (493) (533) 199
Income taxes receivable/payable 101 833 4,424
Other assets 62 7 (232)
Accounts payable and accrued expenses 871 6,470 4,140
-------- -------- --------

Net cash provided from operating activities 5,940 14,790 28,999
-------- -------- --------

Cash flows used in investing activities:
Physician group acquisition payments (4,938) (42,487) (60,158)
Purchase of investments (34,382) (57,394) (14,003)
Proceeds from sale of investments 6,681 27,850 44,207
Purchase of property and equipment (1,861) (4,688) (2,200)
-------- -------- --------

Net cash used in investing activities (34,500) (76,719) (32,154)
-------- -------- --------

Cash flows from financing activities:
Borrowings on notes payable -- 3,000 --
Payments on notes payable (64) (865) (200)
Proceeds from issuance of common stock 39,870 59,775 3,482
Payments made to retire common stock (131) (45) --
-------- -------- --------

Net cash provided from financing activities 39,675 61,865 3,282
-------- -------- --------

Net increase (decrease) in cash and cash
equivalents 11,115 (64) 127
Cash and cash equivalents at beginning of year 7,384 18,499 18,435
-------- -------- --------

Cash and cash equivalents at end of year $ 18,499 $ 18,435 $ 18,562
======== ======== ========

Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 117 $ 164 $ 310
Income taxes $ 2,943 $ 2,950 $ 2,651
Non-cash investing and financing activities:
Accrued and unpaid preferred stock
dividends $ 1,040 $-- $--

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

28
29

PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL:

The principal business activity of Pediatrix Medical Group, Inc.
("Pediatrix" or the "Company") is to provide physician management
services to hospital-based neonatal units in 20 states and Puerto Rico.
Contractual arrangements with hospitals include a) fee-for-service
contracts whereby hospitals agree, in exchange for the Company's
services, to authorize the Company and its healthcare professionals to
bill and collect the professional component of the charges for medical
services rendered by the Company's healthcare professionals; and b)
administrative fees whereby the Company is assured a minimum revenue
level.

In September 1995, the Company completed its initial public offering
whereby it issued 2,200,000 shares of common stock, resulting in net
cash proceeds to the Company of approximately $39.7 million. In
addition, in connection with the initial public offering, the Company
authorized 50,000,000 shares of common stock and 1,000,000 shares of
preferred stock.

In August 1996, the Company completed a secondary public offering
whereby it issued 1,755,000 shares of common stock, resulting in net
cash proceeds to the Company of approximately $59.1 million.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF PRESENTATION

The financial statements (the "consolidated financial statements")
include all the accounts of Pediatrix and its wholly owned subsidiaries
combined with the accounts of the professional associations (the "PA
Contractors") with which the Company currently has specific management
billing arrangements. All significant intercompany and interaffiliate
accounts and transactions have been eliminated. The financial
statements of the PA Contractors are consolidated with Pediatrix
because Pediatrix, as opposed to affiliates of Pediatrix, has
unilateral control over the assets and operations of the PA
Contractors. Notwithstanding the lack of technical majority ownership,
consolidation of the PA Contractors is necessary to present fairly the
financial position and results of operations of Pediatrix because of
the existence of a parent-subsidiary relationship by means other than
record ownership of the PA Contractors' voting common stock. Control of
the assets and operations of the PA Contractors by Pediatrix is
permanent and other than temporary because the PA Contractor's
agreements with Pediatrix provide that the term of the arrangements are
permanent, subject only to termination by Pediatrix and that the PA
Contractors shall not terminate the agreements without the prior
written consent of Pediatrix. Also, the agreements provide that
Pediatrix or its assigns has the right, but not the obligation, to
purchase the stock of the PA Contractors.

In November 1997, the Emerging Issues Task Force of the FASB (the
"EITF") reached a consensus relating to the conditions under which a
physician practice management company would consolidate the accounts of
an affiliated physician practice. The Company believes that its
accounting policies conform to the EITF consensus.

29
30

PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

ACCOUNTS RECEIVABLE AND REVENUES

Accounts receivable are primarily amounts due under fee-for-service
contracts from third party payors, such as insurance companies,
self-insured employers and patients and government-sponsored healthcare
programs geographically dispersed throughout the United States and its
territories. These receivables are presented net of an estimated
allowance for contractual adjustments and uncollectibles which is
charged to operations based on the Company's evaluation of expected
collections resulting from an analysis of current and past due
accounts, past collection experience in relation to amounts billed and
other relevant information. Contractual adjustments result from the
difference between the physician rates for services performed and
reimbursements by government-sponsored healthcare programs and
insurance companies for such services. Bad debts are included in
contractual allowances and uncollectibles because they are not
considered material.

Concentration of credit risk relating to accounts receivable is limited
by number, diversity and geographic dispersion of the neonatology units
managed by the Company, as well as by the large number of patients and
payors, including the various governmental agencies in the states in
which the Company provides services. Receivables from government
agencies made up approximately 41% and 37% of accounts receivable at
December 31, 1996 and 1997, respectively.

CASH EQUIVALENTS

Cash equivalents are defined as all highly liquid financial instruments
with maturities of 90 days or less from the date of purchase. The
Company maintains its cash and cash equivalents which consist
principally of demand deposits, short-term government securities and
amounts on deposit in money market accounts with principally three
financial institutions.

INVESTMENTS

The Company determines the appropriate classification of its
investments in debt securities at the time of purchase and re-evaluates
such determination at each balance sheet date. Investments are
classified as available for sale and are carried at fair value, with
unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. Fair value is determined by the most
recently traded price of the security at the balance sheet date.

30
31

PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

INVESTMENTS, CONTINUED

The cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization and interest
income and declines in value judged to be other than temporary are
included in investment income. Realized gains and losses are included
in earnings using the specific identification method for determining
the cost of securities sold.

Investments are stated at fair market value which approximates
amortized cost and consist principally of tax exempt municipal
obligations (fair value of $48.6 million and $26.6 million at December
31, 1996 and 1997, respectively), U.S. government and government agency
securities (fair value of $6.8 million and $511,000 at December 31,
1996 and 1997, respectively) and commercial paper (fair value of $1.5
million at December 31, 1996). The Company's investments in marketable
securities represent amounts available for current operations and are
accordingly classified as current assets.

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost. Depreciation of property
and equipment is computed on the straight-line method over the
estimated useful lives which range from five to forty years. Upon sale
or retirement of property and equipment, the cost and related
accumulated depreciation are eliminated from the respective accounts
and the resulting gain or loss is included in earnings.

OTHER ASSETS

Other assets consists principally of the excess of cost over the fair
value of net assets acquired which is being amortized on a
straight-line basis over twenty-five years.

In 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This
statement requires companies to review certain assets for impairment
whenever events or changes in circumstances indicate that the carrying
value of these assets may not be recoverable, in which case the asset
generally would be written down to fair value. The adoption of SFAS No.
121 did not affect the Company's financial position, results of
operations or liquidity.

At each balance sheet date following the acquisition of a business, the
Company reviews the carrying value of the goodwill to determine if
facts and circumstances suggest that it may be impaired or that the
amortization period may need to be changed. The Company considers
external factors relating to each acquired business, including hospital
and physician contract changes, local market developments, changes in
third party payments, national healthcare trends, and other publicly
available information. If these external factors indicate the goodwill
will not be recoverable, as determined based upon undiscounted cash
flows before interest charges of the business acquired over the
remaining amortization period, the carrying value of the goodwill will
be reduced. The Company does not believe there currently are any
indicators that would require an adjustment to the carrying value of
the goodwill or its estimated periods of recovery at December 31, 1997.

31

32

PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

PROFESSIONAL LIABILITY COVERAGE

The Company maintains professional liability coverage which indemnifies
the Company and its healthcare professionals on a claims made basis
with a portion of self insurance retention. The Company records an
estimate of its liabilities for claims incurred but not reported based
on an actuarial valuation. Such liabilities are not discounted.

INCOME TAXES

The Company utilizes the liability method of accounting for deferred
income taxes. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.

STOCK OPTIONS

SFAS No. 123, "Accounting for Stock-Based Compensation," encourages,
but does not require, companies to recognize compensation expense for
grants of stock, stock options and other equity instruments to
employees based on new fair value accounting rules. The Company has
chosen the SFAS No. 123 alternative to disclose pro forma net income
and earnings per share under the new method but not to apply the fair
value accounting rules in the statements of income. No charge has been
reflected in the consolidated statements of income as a result of the
grant of stock options, as the market value of the Company's stock
equals the exercise price on the date the options are granted. To the
extent that the Company realizes an income tax benefit from the
exercise or early disposition of certain stock options, this benefit
results in a decrease in current income taxes payable and an increase
in additional paid-in capital.

NET INCOME PER SHARE

During 1997, the Company adopted SFAS No. 128, "Earnings Per Share,"
which requires the presentation of both basic and diluted earnings per
share. Net income per share information for all periods has been
restated to conform with the requirements of the standard.

Basic net income per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted net income per share is calculated by dividing net income by
the weighted average number of common and potential common shares
outstanding during the period. Potential common shares consist of the
dilutive effect of outstanding options calculated using the treasury
stock method.

32
33

PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, accounts receivable,
investments in marketable securities, and accounts payable and accrued
expenses approximate fair value due to the short maturities of these
items.

The carrying amount of the note payable approximates fair value because
the interest rates on this instrument change with market interest
rates.

CHANGE IN ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," which must be implemented by the
Company in 1998. This statement establishes standards for the reporting
and display of comprehensive income and its components. The Company
expects that the implementation of SFAS No. 130 will not have a
material impact on its consolidated financial statements.

3. ACCOUNTS RECEIVABLE AND NET PATIENT SERVICE REVENUE

Accounts receivable consists of the following:

DECEMBER 31,
---------------------------------------
1996 1997
----------------- -----------------
(IN THOUSANDS)

Gross accounts receivable $53,991 $80,237
Less allowance for contractual adjustments
and uncollectibles (30,595) (45,371)
----------------- -----------------

$23,396 $34,866
================= =================

Net patient service revenue consists of the following:

YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
(IN THOUSANDS)

Gross patient service revenue $79,360 $156,594 $260,112
Less contractual adjustments
and uncollectibles (40,843) (82,759) (137,385)
Hospital contract administrative
fees 5,343 6,998 6,123
-------------- -------------- --------------
$43,860 $80,833 $128,850
============== ============== ==============

33
34

PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

4. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

DECEMBER 31,
-------------------------------------
1996 1997
------------- -------------
(IN THOUSANDS)

Land and land improvements $1,374 $1,493
Building 4,000 4,290
Equipment and furniture 4,312 6,351
------------- -------------

9,686 12,134
Less accumulated depreciation (1,275) (2,236)
Construction in progress 265 --
------------- -------------
$8,676 $9,898
============= =============

5. OTHER ASSETS:

Other assets consists of the following:

DECEMBER 31,
-------------------------------------
1996 1997
------------- -------------
(IN THOUSANDS)

Excess of cost over net assets
acquired $48,963 $107,972
Physician agreements 1,692 1,692
Other 572 1,023
------------- -------------

51,227 110,687
Less accumulated amortization (1,786) (5,792)
------------- -------------
$49,441 $104,895
============= =============

During 1996, the Company completed the acquisition of ten physician
group practices. Total consideration and related costs for these
acquisitions approximated $43.7 million. In connection with these
transactions, the Company recorded assets totaling $43.7 million,
including $43.0 million of goodwill, and liabilities of $3.4 million.
In 1997, the Company paid an aggregate of $1.3 million to the prior
shareholders of two physician group practices acquired in 1996. The
payments were earned based upon the achievement of certain targets as
outlined in the acquisition agreements.

During 1997, the Company completed the acquisition of ten physician
group practices. Total consideration and related costs for these
acquisitions approximated $59.0 million. In connection with these
transactions, the Company recorded assets totaling approximately $59.0
million, principally goodwill, and liabilities of $1.9 million.

34

35

PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

5. OTHER ASSETS, CONTINUED:

The Company has accounted for the transactions using the purchase
method of accounting and the excess of cost over fair value of net
assets acquired is being amortized on a straight-line basis over 25
years. The results of operations of the acquired companies have been
included in the consolidated financial statements from the dates of
acquisition.

The following unaudited pro forma information combines the consolidated
results of operations of the Company and the companies acquired during
1996 and 1997 as if the acquisitions had occurred on January 1, 1996:

YEARS ENDED DECEMBER 31,
------------------------------------
1996 1997
------------ --------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)

Net patient service revenue $113,303 $136,519
Net income 14,603 21,143
Net income per share:
Basic $1.06 $1.41
Diluted $1.00 $1.34

The pro forma results do not necessarily represent results which would
have occurred if the acquisition had taken place at the beginning of
the period, nor are they indicative of the results of future combined
operations.

6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

Accounts payable and accrued expenses consists of the following:

DECEMBER 31,
-------------------------------------
1996 1997
------------- --------------
(IN THOUSANDS)

Accounts payable $2,489 $2,988
Accrued salaries and bonuses 3,508 5,340
Accrued payroll taxes and benefits 2,009 3,013
Accrued professional liability
coverage 2,413 3,747
Other accrued expenses 3,004 1,082
------------- --------------
$13,423 $16,170
============= ==============

35
36

PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

7. NOTE PAYABLE:

Note payable consists of the following:

DECEMBER 31,
-------------------------------------
1996 1997
------------- --------------
(IN THOUSANDS)

Mortgage payable to bank $2,950 $2,750

Less current portion (200) (200)
------------- --------------
$2,750 $2,550
============= ==============

During 1996, the Company negotiated a new mortgage loan agreement,
increasing the principal balance to $3.0 million and adjusting the
terms of the original mortgage. The new loan agreement requires
quarterly payments totaling $200,400 per year plus interest through the
maturity date of the loan, June 30, 2003, at which time the unpaid
principal balance of $1,647,300 is due, bears interest at prime (8.5%
at December 31, 1997), and is collateralized by the Company's two
buildings.

In June 1996, the Company entered into an unsecured revolving credit
facility. During 1997, the amounts available under the credit facility
were increased to $75 million, which includes a $2 million amount
reserved to cover deductibles under the Company's professional
liability insurance policies. The credit facility matures on September
30, 2000. At the Company's option, the credit facility bears interest
at either LIBOR plus .875% or prime. The Company had no outstanding
balance at December 31, 1996 or 1997.

The Company is required to maintain certain financial covenants
including a requirement that the Company maintain a minimum level of
net worth, as defined under the terms of the mortgage and credit
facility agreement.

8. PREFERRED STOCK:

In October 1992, the Company issued 4,571,063 shares of 9% voting,
redeemable, cumulative convertible Preferred Stock for $13,000,103. In
connection with the Company's initial public offering, the Preferred
Stock was converted into common stock of the Company and the unpaid
dividends of $3,736,589 were forgiven. As a result, the redemption
value of the Preferred Stock was credited to common stock and
additional paid-in capital accounts.

36
37

PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

9. INCOME TAXES:

The components of the income tax provision are as follows:

DECEMBER 31,
---------------------------------------------------------------
1995 1996 1997
-------------- ------------- -------------
(IN THOUSANDS)

Federal:
Current $2,573 $3,072 $6,004
Deferred 1,184 3,667 5,913
-------------- ------------- -------------
3,757 6,739 11,917
-------------- ------------- -------------

State:
Current 454 1,358 1,054
Deferred 264 756 971
-------------- ------------- -------------
718 2,114 2,025
-------------- ------------- -------------

Total $4,475 $8,853 $13,942
============== ============= =============

The Company files its tax return on a consolidated basis with its
subsidiaries. The PA Contractors file tax returns on an individual
basis.

The effective tax rate on income was 40% for the years ended December
31, 1995, 1996 and 1997. The differences between the effective rate and
the U.S. federal income tax statutory rate are as follows:

DECEMBER 31,
---------------------------------------------------------------
1995 1996 1997
-------------- ------------- -------------
(IN THOUSANDS)

Tax at statutory rate $3,804 $7,472 $12,199
State income tax, net
of federal benefit 451 1,374 1,316
Permanent differences 16 (391) 43
Other, net 204 398 384
-------------- ------------- -------------

Income tax provision $4,475 $8,853 $13,942
============== ============= =============

37
38

PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

9. INCOME TAXES, CONTINUED:

The significant components of deferred income tax assets and
liabilities are as follows:

DECEMBER 31, 1996 DECEMBER 31, 1997
--------------------------------- ----------------------------------
NON NON
TOTAL CURRENT CURRENT TOTAL CURRENT CURRENT
--------- --------- --------- --------- ---------- ----------
(IN THOUSANDS)

Allowance for uncollectible
accounts $ 150 $ 150 $ -- $ 766 $ 766 $ --
Net operating loss
carryforward 1,112 1,112 -- 398 398 --
Other -- -- -- 304 304 --
-------- -------- -------- -------- -------- --------

Total deferred
tax assets 1,262 1,262 -- 1,468 1,468 --
-------- -------- -------- -------- -------- --------

Accrual to cash adjustment (7,416) (7,355) (61) (8,878) (8,878) --
Property and equipment -- -- -- (1,251) -- (1,251)
Receivable discounts -- -- -- (2,966) (2,966) --
Other (178) (6) (172) (1,208) (17) (1,191)
-------- -------- -------- -------- -------- --------
Total deferred tax
liabilities (7,594) (7,361) (233) (14,303) (11,861) (2,442)
-------- -------- -------- -------- -------- --------

Net deferred tax
liability $ (6,332) $ (6,099) $ (233) $(12,835) $(10,393) $ (2,442)
======== ======== ======== ======== ======== ========

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 $252,180, $704,630 and
$2,873,649 for the years ended December 31, 1995, 1996 and 1997,
respectively.

The Company's PA Contractors have net operating loss carryforwards for
federal and state tax purposes of approximately $1,377,000, $2,762,000
and $978,000 at December 31, 1995, 1996 and 1997, respectively,
expiring at various times commencing in 1999.

The Company is currently under examination by the Internal Revenue
Service for the tax years ended December 31, 1992, 1993 and 1994. The
IRS has challenged certain deductions that, if ultimately disallowed,
would result in additional taxes of approximately $4.5 million, plus
interest. The Company and its tax advisors believe that the ultimate
resolution of the examination will not have a material effect on the
Company's consolidated financial position or results of operations and
cash flows.

10. COMMITMENTS AND CONTINGENCIES:

During the ordinary course of business, the Company has become a party
to pending and threatened legal actions and proceedings, most of which
involve claims of medical malpractice and are generally covered by
insurance. These lawsuits are not expected to result in judgments which
would exceed professional liability insurance coverage, and therefore,
will not have a material impact on the Company's consolidated results
of operations, financial position or liquidity, notwithstanding any
possible insurance recovery.

38

39

PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

10. COMMITMENTS AND CONTINGENCIES, CONTINUED:

Rent expense for the years ended December 31, 1995, 1996 and 1997 was
$189,408, $1,118,594 and $1,721,964, respectively. At December 31,
1997, the future minimum lease payments are as follows:

(IN THOUSANDS)
--------------

1998 $1,565
1999 1,472
2000 1,367
2001 1,315
2002 1,177
Thereafter 5,495
-----------
$12,391
===========

11. RETIREMENT PLAN:

The Company has a qualified contributory savings plan (the "Plan") as
allowed under Section 401(k) of the Internal Revenue Code. The Plan
permits participant contributions and allows elective Company
contributions based on each participant's contribution. Participants
may defer up to 15% of their annual compensation by contributing
amounts to the Plan. The Company approved contributions of $559,125,
$1,107,092 and $1,731,829 to the Plan during the years ended December
31, 1995, 1996 and 1997, respectively.

39

40

PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

12. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE:

The calculation of basic and diluted net income per share for the years
ended December 31, 1995, 1996 and 1997 are as follows:

YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
-------------- ---------- -------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

Basic net income per share:

Net income $ 6,713 $ 13,120 $ 20,913

Preferred stock dividends (1,040) -- --
-------- -------- --------

Income applicable to common shareholders $ 5,673 $ 13,120 $ 20,913
======== ======== ========

Weighted average common shares outstanding 8,092 13,806 15,021
======== ======== ========

Basic net income per share $ 0.70 $ 0.95 $ 1.39
======== ======== ========

Diluted net income per share:

Weighted average common shares outstanding 8,092 13,806 15,021

Preferred stock 3,354 -- --

Stock options 409 729 722
-------- -------- --------

Weighted average common and potential
common shares outstanding 11,855 14,535 15,743
======== ======== ========

Net income $ 6,713 $ 13,120 $ 20,913
======== ======== ========

Diluted net income per share $ 0.57 $ 0.90 $ 1.33
======== ======== ========

13. STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE PLANS:

In 1993, the Company's Board of Directors authorized a stock option
plan. Under the plan, options to purchase shares of common stock may be
granted to certain employees at a price not less than the fair market
value of the shares on the date of grant. The options must be exercised
within ten years from the date of grant. The stock options become
exercisable on a pro rata basis over a three year period from the date
of grant. In 1997, the Company's shareholders approved an amendment to
increase the number of shares authorized to be issued under the plan
from 2,500,000 to 3,250,000. At December 31, 1997, 220,164 shares were
available for future grants.

40

41

PEDIATRIX MEDICAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

13. STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE PLANS, CONTINUED:

Pertinent information covering the stock option plan is as follows:

WEIGHTED
AVERAGE
NUMBER OF OPTION PRICE EXERCISE EXPIRATION
SHARES PER SHARE PRICE DATE
-------------- --------------- -------------- --------------

Outstanding at December 31, 1994 1,231,700 $2.84-$10.00 $5.82 2003-2004
Granted 841,500 $10.00-$21.50 $17.95
Canceled (324,583) $3.12-$12.50 $5.33
Exercised (39,709) $3.12-$10.00 $3.46
-------------- -------------------------------

Outstanding at December 31, 1995 1,708,908 $2.84-$21.50 $12.03 2003-2005
Granted 600,400 $12.50-$36.75 $35.27
Canceled (34,660) $3.12-$36.00 $16.46
Exercised (47,187) $5.00-$20.50 $5.64
-------------- --------------- --------------

Outstanding at December 31, 1996 2,227,461 $2.84-$36.75 $18.27 2003-2006
Granted 783,500 $29.00-$41.38 $33.38
Canceled (68,021) $5.00-$36.00 $21.55
Exercised (229,710) $5.00-$36.00 $9.69
-------------- --------------- --------------

Outstanding at December 31, 1997 2,713,230 $2.84-$41.38 $23.28 2003-2007
============== =============== ==============

Exercisable at:

December 31, 1995 306,872 $2.84-$10.00 $6.15
December 31, 1996 828,631 $2.84-$21.50 $10.20
December 31, 1997 1,315,850 $2.84-$36.75 $14.74

Significant option groups outstanding at December 31, 1997 and related
price and life information follows:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ---------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF EXERCISE CONTRACTUAL EXERCISE
EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
----------------------- -------------- ------------ ------------- ------------- ------------

$2.84 50,000 $2.84 5.5 50,000 $2.84
$5.00 278,770 $5.00 6.1 278,770 $5.00
$7.50 200,000 $7.50 6.8 200,000 $7.50
$10.00-$12.50 266,667 $10.80 7.0 226,249 $10.60
$19.25-$21.50 567,243 $19.59 7.2 369,074 $19.59
$24.00-$32.88 644,000 $29.71 9.2 51,788 $31.71
$36.00-$41.38 706,550 $38.22 8.7 139,969 $36.36
-------------- ------------ ------------- ------------- ------------

2,713,230 $23.28 7.9 1,315,850 $14.74
============== ============ ============= ============= ============

Under the Company's stock purchase plans, employees may purchase the
Company's common stock at 85% of the average high and low sales price
of the stock as reported as of commencement of the purchase period or
as of the purchase date, whichever is lower. Under these plans, 12,786
and 47,302 shares were issued during 1996 and 1997, respectively. At
December 31, 1997, the Company has an additional 939,912 shares
reserved under the stock purchase plans.

41
42

PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

13. STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE PLANS, CONTINUED:

The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation expense has been recognized for stock
options granted under the stock option plan or stock issued under the
employee stock purchase plans. Had compensation expense been determined
based on the fair value consistent with the provisions of SFAS No. 123,
the Company's net income and net income per share would have been
reduced to the pro forma amounts below:

YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1995 1996 1997
----------------- ----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income $6,381 $11,002 $16,272
Net income per share:
Basic $.66 $ .80 $1.08
Diluted $.55 $ .77 $1.05

The fair value of each option or share to be issued is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants in 1995, 1996
and 1997, respectively: dividend yield of 0% for all years; expected
volatility of 42%, 42% and 41%; and risk-free interest rates of 6.1%,
6.3% and 6.6% for options with expected lives of five years (certain
management and physicians of the Company) and 6.1%, 6.1% and 6.6% for
options with expected lives of three years (all other employees of the
Company).

The pro forma effect on net income is not representative of the pro
forma effect on net income in future periods because it does not take
into consideration pro forma compensation expense related to grants
made in prior periods.

14. SUBSEQUENT EVENTS:

Subsequent to December 31, 1997, the Company completed the acquisitions
of eight physician group practices. Total consideration for these
acquisitions approximated $48.6 million in cash and 2,951,327 shares of
stock in a subsidiary of the Company. The acquisitions will be
accounted for using the purchase method of accounting.

42
43

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

The Company has had no changes in or disagreements with its independent
certified public accountants on accounting and financial disclosure.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information with respect to directors and executive officers of
the Company is incorporated by reference to the registrant's Proxy Statement to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
not later than 120 days after the end of the fiscal year covered by this report.

ITEM 11. EXECUTIVE COMPENSATION

The information required in response to this item is incorporated by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required in response to this item is incorporated by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required in response to this item is incorporated by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.

43
44

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(A) DOCUMENTS FILED AS PART OF THIS REPORT:

(1) FINANCIAL STATEMENTS.

An index to financial statements included in this
annual report on Form 10-K appears on page 23.

(2) FINANCIAL STATEMENT SCHEDULES.

The following financial statement schedules for the years ended December 31,
1995, 1996 and 1997 are included in this Annual Report on Form 10-K on the pages
set forth below.

ITEM PAGE

Financial Statement Schedules

Report of Independent Accountants............................. 24

Schedule II: Valuation and Qualifying Accounts............... 45

Any required information not included in the above described schedules is
included in the consolidated financial statements and notes thereto incorporated
herein by reference.

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are not applicable and therefore have been omitted.

44
45

PEDIATRIX MEDICAL GROUP, INC.
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

1995 1996 1997
----------------- ----------------- ------------------

Allowance for contractual
adjustments and uncollectibles:
Balance at beginning of year $13,246,580 $13,087,899 $30,594,906
Portion charged against
operating revenue 40,843,431 82,759,087 137,385,310
Accounts receivable written-
off (net of recoveries) (41,002,112) (65,252,080) (122,608,986)
---------------- ---------------- -----------------

Balance at end of year $13,087,899 $30,594,906 $45,371,230
================ ================ =================

45

46

(3) EXHIBITS

3.1 Pediatrix's Amended and Restated Articles of Incorporation (3.1)(1)
3.2 Pediatrix's Amended and Restated Bylaws (3.2)(12)
4.1 Registration Rights Agreement, dated as of September 13, 1995 between Pediatrix and certain
shareholders (4.1)(1)
10.1 Pediatrix's Amended and Restated Stock Option Plan (10.1)(10)
10.2 Form of Indemnification Agreement between Pediatrix and each of its directors and certain
executive officers (10.2)(1)
10.3 Employment Agreement, dated as of January 1, 1995, as amended, between Pediatrix and Roger
J. Medel, M.D. (10.3)(1)
10.4 Employment Agreement, dated as of February 1, 1995, as amended, between Pediatrix and
Richard J. Stull, II (10.4)(1)
10.5 Employment Agreement, dated as of May 1, 1995, as amended, between Pediatrix and Larry M.
Mullen (10.5)(1)
10.6 Employment Agreement, dated as of February 1, 1995, as amended, between Pediatrix and Brian
D. Udell, M.D., as amended (10.7)(1)
10.7 Employment Agreement, dated November 6, 1995, between Kristen Bratberg and Pediatrix
(10.9)(4)
10.8 Employment Agreement, dated June 1, 1996, between Pediatrix and M. Douglas Cunningham, M.D.
(10.21)(3)
10.9 Mortgage, Security Agreement and Assignment of Leases and Rents,
dated as of September 30, 1993, made by Pediatrix in favor of The
First National Bank of Boston (10.22)(1)
10.10 The Company's Profit Sharing Plan (10.23)(1)
10.11 Form of Non-competition and Nondisclosure Agreement (10.24)(1)
10.12 Form of Exclusive Management and Administrative Services Agreement between Pediatrix and
each of the PA Contractors (10.25)(1)
10.13 Agreement for Purchase and Sale of Stock, dated July 27, 1995, between Pediatrix Medical
Group of California and Neonatal and Pediatric Intensive Care Medical Group, Inc. and the
individual physicians set forth in Exhibit A therein (10.26)(1)
10.14 Stock Purchase Agreement, effective January 16, 1996, between Jack C. Christensen, M.D.,
Cristina Carballo-Perelman, M.D., Michael C. McQueen, M.D., Neonatal Specialists, Ltd. and
Brian Udell, M.D. (2.1)(4)
10.15 Asset Purchase Agreement, effective January 16, 1996, between Med-Support, L.P. and
Neonatal Specialists, Ltd.(2.2)(4)
10.16 Asset Purchase Agreement, effective January 16, 1996, between CMJ Leasing, L.P. and
Neonatal Specialists, Ltd. (2.3)(4)
10.17 Asset Purchase Agreement, dated January 29, 1996, among Pediatrix
Medical Group of Colorado, P.C., Pediatrix and Newborn
Consultants, P.C., and the shareholders of PNC (2.1)(5)
10.18 Agreement and Plan of Merger, dated January 29, 1996, among Pediatrix Medical Group of
Colorado, P.C., Colorado Neonatal Associates, P.C. and the shareholders of CNA (2.1)(5)
10.19 Amendment No. 4 to Credit Agreement dated as of December 30, 1995, between Pediatrix,
certain PA Contractors and The First National Bank of Boston (10.24)(2)
10.20 1996 Qualified Employee Stock Purchase Plan (10.25)(2)
10.21 1996 Non-Qualified Employee Stock Purchase Plan (10.26)(2)
10.22 Agreement and Plan of Merger, dated May 1, 1996, among Pediatrix Acquisition Corp., Rocky
Mountain Neonatology, P.C. and the shareholders of RMN (2.1)(7)

46

47

10.23 Asset Purchase Agreement, dated as of May 30, 1996, by and among
Pediatrix Medical Group of Texas, P.A., West Texas Neonatal
Associates and the individual physicians set forth in Exhibit A
therein (2.1)(8)
10.24 Agreement for Purchase and Sale of Assets, dated as of June 5, 1996, by and among Pediatrix
Medical Group of California, P.C., Infant Care Specialists Medical Group, Inc. and the
individual physicians set forth in Exhibit A therein (2.1)(9)
10.25 Airplane Purchase Agreement, dated March 22, 1996, between Pediatrix and Learjet Inc.
(10.22)(3)
10.26 First Amended and Restated Credit Agreement, dated as of June 27, 1996, between Pediatrix,
certain PA Contractors, The First National Bank of Boston and Sun Trust Bank (10.25)(3)
10.27 Modification of Mortgage, dated as of June 27, 1996, between PMG and The First National
Bank of Boston (10.26)(3)
10.28 Amendment No. 2 to the employment agreement between Pediatrix and Roger J. Medel, M.D.
(10.34)(10)
10.29 Amendment No. 1 to the employment agreement between Pediatrix and Kristen Bratberg
(10.35)(10)
10.30 Amendment No. 2 to First Amended and Restated Credit Agreement, dated October 21, 1997,
between Pediatrix, certain PA Contractors, BankBoston and SunTrust Bank (10.36)(11)
10.31 Regional Vice President of Medical Operations appointment, dated as of June 1, 1997,
between Pediatrix and M. Douglas Cunningham, M.D. (12)
10.32 Employment Agreement, dated as of April 7, 1997, between Pediatrix and Bruce A. Jordan (12)
21.1 Subsidiaries of Pediatrix (12)
23.1 Consent of Coopers & Lybrand L.L.P. (12)
27.1 Financial Data Schedule for current period and restated Financial Data Schedules for other
periods. (12)

- ----------------------

(1) Incorporated by reference to the exhibit shown in parentheses and
filed with the Pediatrix Form S-1 (File No. 33-95086).

(2) Incorporated by reference to the exhibit shown in parentheses and
filed with the Pediatrix Form 10-Q for the quarterly period ended
March 31, 1996.

(3) Incorporated by reference to the exhibit shown in parentheses and
filed with the Pediatrix Form S-1 (File No. 333-07125).

(4) Incorporated by reference to the exhibit shown in parentheses and
filed with the Pediatrix Form 8-K, dated January 31, 1996.

(5) Incorporated by reference to the exhibit shown in parentheses and
filed with the Pediatrix Form 8-K, dated February 8, 1996.

(6) Incorporated by reference to the exhibit shown in parentheses and
filed with the Pediatrix Annual Report on Form 10-K for the year
ended December 31, 1995.

(7) Incorporated by reference to the exhibit shown in parentheses and
filed with the Pediatrix Form 8-K, dated May 9, 1996.

(8) Incorporated by reference to the exhibit shown in parentheses and
filed with the Pediatrix Form 8-K, dated May 30, 1996.

(9) Incorporated by reference to the exhibit shown in parentheses and
filed with the Pediatrix Form 8-K, dated June 5, 1996.

(10) Incorporated by reference to the exhibit shown in parentheses and
filed with the Pediatrix Form 10-Q for the quarterly period ended
June 30, 1997.

(11) Incorporated by reference to the exhibit shown in parentheses and
filed with the Pediatrix Form 10-Q for the quarterly period ended
September 30, 1997.

(12) Filed herewith.

47

48
(B) REPORTS ON FORM 8-K

No reports on Form 8-K were filed by the Registrant during the
last quarter of the period covered by this Report.

(C) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K

The index to exhibits that are listed in Item 14(a)(3) of this
report and not incorporated by reference follows the "Signatures" section hereof
and is incorporated herein by reference.

(D) FINANCIAL STATEMENT SCHEDULES REQUIRED BY REGULATION S-X

The financial statement schedules required by Regulation S-X which
are excluded from the Registrant's Annual Report to Shareholders for the Year
ended December 31, 1997, by Rule 14a-3(b)(1) are included above. See Item
14(a)(2) for index.

48
49

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 30, 1998 By: /s/ Roger J. Medel, M.D., M.B.A.
---------------------------------------
ROGER J. MEDEL, M.D., M.B.A., President

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

President, Chief Executive
/s/ ROGER J. MEDEL, M.D., M.B.A. Officer and Director (principal March 30, 1998
- ------------------------------------------------ executive officer)
Roger J. Medel, M.D., M.B.A.

Vice President and Chief Financial
/s/ LAWRENCE M. MULLEN Officer (principal financial officer March 30, 1998
- ------------------------------------------------ and principal accounting officer)
Lawrence M. Mullen

/s/ E. ROE STAMPS, IV Director March 30, 1998
- ------------------------------------------------
E. Roe Stamps, IV

/s/ BRUCE R. EVANS Director March 30, 1998
- ------------------------------------------------
Bruce R. Evans

/s/ M. DOUGLAS CUNNINGHAM, M.D. Director March 30, 1998
- ------------------------------------------------
M. Douglas Cunningham, M.D.

/s/ MICHAEL FERNANDEZ Director March 30, 1998
- ------------------------------------------------
Michael Fernandez

/s/ ALBERT H. NAHMAD Director March 30, 1998
- ------------------------------------------------
Albert H. Nahmad

/S/ CESAR L. ALVAREZ Director March 30, 1998
- ------------------------------------------------
CESAR L. ALVAREZ

49