1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-26762 PEDIATRIX MEDICAL GROUP, INC. (Exact name of registrant as specified in its charter) FLORIDA 65-0271219 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1455 NORTH PARK DRIVE FT. LAUDERDALE, FLORIDA 33326 (Address of principal executive offices) (Zip Code) (954) 384-0175 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- At August 1, 1997, the Registrant had 15,062,983 shares of $0.01 par value common stock outstanding. Page 1 of 13
2 PEDIATRIX MEDICAL GROUP, INC. INDEX <TABLE> <CAPTION> PAGE ---- <S> <C> PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of June 30, 1997 (Unaudited) and December 31, 1996......................................................................................... 3 Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 1997 and 1996 (Unaudited)............................................................................ 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996 (Unaudited)............................................................................ 5 Notes to Condensed Consolidated Financial Statements............................................................ 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................................... 9 PART II - OTHER INFORMATION..................................................................................... 11 SIGNATURES...................................................................................................... 13 </TABLE> 2
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PEDIATRIX MEDICAL GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> JUNE 30, 1997 DECEMBER 31, (UNAUDITED) 1996 ------------- ------------ (in thousands) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 27,369 $ 18,435 Investments in marketable securities 27,755 57,218 Accounts receivable, net 29,728 23,396 Prepaid expenses 1,822 1,283 Other current assets 509 375 Income taxes receivable -- 202 --------- --------- Total current assets 87,183 100,909 Property and equipment, net 9,347 8,676 Other assets, net 77,235 49,441 ========= ========= Total assets $ 173,765 $ 159,026 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 12,549 $ 13,423 Income taxes payable 62 -- Current portion of note payable 200 200 Deferred income taxes 7,417 6,099 --------- --------- Total current liabilities 20,228 19,722 Note payable 2,650 2,750 Deferred income taxes 1,314 233 --------- --------- Total liabilities 24,192 22,705 --------- --------- Commitments and contingencies Stockholders' equity: Preferred stock -- -- Common stock 151 149 Additional paid-in capital 120,182 116,037 Retained earnings 29,241 20,165 Unrealized loss on investments (1) (30) --------- --------- Total stockholders' equity 149,573 136,321 --------- --------- Total liabilities and stockholders' equity $ 173,765 $ 159,026 ========= ========= </TABLE> The accompanying notes are an integral part of these financial statements 3
4 PEDIATRIX MEDICAL GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ----------------------- 1997 1996 1997 1996 -------- -------- -------- -------- (in thousands, except for per share data) <S> <C> <C> <C> <C> Net patient service revenue $ 30,599 $ 17,808 $ 57,612 $ 33,935 Operating expenses: Salaries and benefits 19,774 11,541 37,383 22,337 Supplies & other operating expenses 2,358 1,269 4,460 2,482 Depreciation and amortization 1,008 335 1,791 568 -------- -------- -------- -------- Total operating expenses 23,140 13,145 43,634 25,387 -------- -------- -------- -------- Income from operations 7,459 4,663 13,978 8,548 Investment income 563 423 1,298 922 Interest expense (75) (27) (149) (62) -------- -------- -------- -------- Income before income taxes 7,947 5,059 15,127 9,408 Income tax provision 3,179 2,024 6,051 3,761 -------- -------- -------- -------- Net income $ 4,768 $ 3,035 $ 9,076 $ 5,647 ======== ======== ======== ======== Per share data: Net income per common and common equivalent share: Primary $ .30 $ .22 $ .58 $ .41 ======== ======== ======== ======== Fully diluted $ .30 $ .22 $ .58 $ .41 ======== ======== ======== ======== Weighted average shares used in computing net income per common and common equivalent share: Primary 15,678 13,873 15,611 13,785 ======== ======== ======== ======== Fully diluted 15,837 13,873 15,691 13,799 ======== ======== ======== ======== </TABLE> The accompanying notes are an integral part of these financial statements 4
5 PEDIATRIX MEDICAL GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, ----------------------- 1997 1996 -------- -------- (in thousands) <S> <C> <C> Cash flows provided (used) by operating activities: Net income $ 9,076 $ 5,647 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,791 568 Deferred income taxes 2,399 2,329 Changes in assets and liabilities: Accounts receivable (6,332) (4,821) Prepaid expenses and other current assets (680) (1,194) Income taxes receivable/payable 2,146 950 Other assets (84) (1,766) Accounts payable and accrued expenses 439 2,247 -------- -------- Net cash provided by operating activities 8,755 3,960 -------- -------- Cash flows provided (used) by investing activities: Physician group acquisition payments (30,365) (30,220) Purchase of investments (7,074) (6,421) Proceeds from sale of investments 36,567 26,818 Purchase of property and equipment (1,114) (2,629) -------- -------- Net cash used in investing activities (1,986) (12,452) -------- -------- Cash flows provided (used) by financing activities: Payments on note payable (100) (32) Proceeds from issuance of common stock 2,265 147 Payments made to retire common stock -- (45) -------- -------- Net cash provided by financing activities 2,165 70 -------- -------- Net increase (decrease) in cash and cash equivalents 8,934 (8,422) Cash and cash equivalents at beginning of period 18,435 18,499 -------- -------- Cash and cash equivalents at end of period $ 27,369 $ 10,077 ======== ======== </TABLE> The accompanying notes are an integral part of these financial statements 5
6 PEDIATRIX MEDICAL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) 1. BASIS OF PRESENTATION: The accompanying unaudited condensed consolidated financial statements of Pediatrix Medical Group, Inc. (the "Company" or "Pediatrix") presented herein do not include all disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of management, these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of interim periods. The results of operations for the three and six months ended June 30, 1997 are not necessarily indicative of the results of operations to be expected for the year ended December 31, 1997. The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 31, 1997. 2. BUSINESS ACQUISITIONS: During the first six months of 1997, the Company completed the acquisition of six physician group practices in Dallas, Texas; Albuquerque, New Mexico; Tacoma, Washington; South Bend, Indiana; Pasadena, California and Columbia, South Carolina. Additionally, 3 neonatal intensive care units (NICUs) were added through the Company's internal marketing activities. Total cash paid for these units approximated $27 million, adding a total of 14 NICUs. The Company has accounted for the acquisitions 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 practices have been included in the consolidated financial statements from the dates of acquisition. The following unaudited pro forma information combines the consolidated results of operations of the Company and the physician group practices acquired during 1996 and 1997 as if the acquisitions had occurred on January 1, 1996: <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, ----------------------------------- 1997 1996 --------------- -------------- (in thousands, except per share data) <S> <C> <C> Net patient service revenue $59,760 $50,057 Net income 9,170 6,624 Net income per share: Primary .59 .48 Fully diluted .58 .48 </TABLE> The pro forma results do not necessarily represent results which would have occurred if the acquisitions had taken place at the beginning of the period, nor are they indicative of the results of future combined operations. 6
7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consists of the following: <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1997 1996 ------- ------------ (in thousands) <S> <C> <C> Accounts payable ............................ $ 2,656 $ 2,489 Accrued salaries and bonuses ................ 3,694 3,508 Accrued payroll taxes and benefits .......... 2,102 2,009 Accrued professional liability coverage ..... 2,870 2,413 Other accrued expenses ...................... 1,227 3,004 ------- ------- $12,549 $13,423 ======= ======= </TABLE> 4. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE: Primary and fully diluted net income per share is calculated by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of the dilutive effect of outstanding options calculated using the treasury stock method. 5. 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. The Company believes that the outcome of such legal actions and proceedings will not have a material adverse effect on the Company's financial condition, results of operations or liquidity, notwithstanding any possible insurance recovery. 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 disallowed, would result in additional taxes of approximately $4.5 million, plus interest. The Company has reviewed the IRS matters under consideration and believes that the tax returns are substantially correct as filed. The Company intends to vigorously contest the proposed adjustments and believes it has adequately provided for any liability that may result from this examination. The Company and its tax advisors believe that the ultimate resolution of the examination will not have a material effect on the Company's consolidated financial position, results of operations or cash flows. The Company has been notified by a hospital customer of a dispute regarding the interpretation of the customer's contract with the Company. The customer believes that the Company should refund approximately $7.5 million of payments made to the Company over the last five years. The Company disagrees with the customer's interpretation of the contract and believes that the matter will be resolved amicably. In the unlikely event that the Company cannot resolve this matter amicably, the Company intends to vigorously litigate the matter and assert all its legal defenses. The Company believes that the ultimate resolution of the matter will not have a material effect on the Company's consolidated financial position, results of operations or cash flows. 7
8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 6. CHANGES TO ACCOUNTING PRONOUNCEMENTS: In February, 1997 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". This statement is designed to improve the earnings per share ("EPS") information provided in financial statements by simplifying the existing computational guidelines, revising the disclosure requirements, and increasing the comparability of EPS data on an international basis. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997. Under the provisions of SFAS 128, basic EPS would have been $.32 and $.23 for the three months ended June 30, 1997 and 1996, respectively, and $.61 and $.43 for the six months ended June 30, 1997 and 1996, respectively. Diluted EPS would have been the same as the reported amounts. 7. SUBSEQUENT EVENTS: Subsequent to June 30, 1997, the Company completed the acquisition of two physician group practices. Total cash paid for these acquisitions approximated $20 million. The acquisitions will be accounted for using the purchase method of accounting. 8
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1997 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 1996 The Company reported net patient service revenue of $30.6 million for the three months ended June 30, 1997, as compared with $17.8 million for the same period in 1996, a growth rate of 71.8%. Of this $12.8 million increase, $12.4 million, or 96.9% was attributable to new units, including units at which the Company provides services as a result of acquisitions. Same unit patient service revenue, exclusive of administrative fees, increased $574,000, or 4.3%, for the three months ended June 30, 1997. Same units are those units at which the Company provided services for the entire period for which the percentage is calculated and the entire comparable period. The same unit growth resulted from volume increases as there were no general price increases. Salaries and benefits increased $8.2 million, or 71.3% to $19.8 million for the three months ended June 30, 1997, as compared with $11.6 million for the same period in 1996. Of this $8.2 million increase, $6.2 million, or 75.3%, was attributable to hiring new physicians, primarily to support new unit growth, and the remaining $2.0 million was primarily attributable to increased support staff and resources added in the areas of nursing, executive management and billing and reimbursement. Supplies and other operating expenses increased $1.1 million, or 85.8% to $2.4 million for the three months ended June 30, 1997, as compared with $1.3 million for the same period in 1996, primarily as a result of new units. Depreciation and amortization expense increased by $673,000, or 200.9% to $1.0 million for the three months ended June 30, 1997, as compared with $335,000 for the same period in 1996, primarily as a result of amortization of goodwill in connection with acquisitions. Income from operations increased approximately $2.8 million, or 60.0%, to $7.5 million for the three months ended June 30, 1997, as compared with $4.7 million for the same period in 1996. The increase in income from operations was primarily due to increased volume, principally from acquisitions. The Company earned investment income of approximately $563,000 for the three months ended June 30, 1997, as compared with $423,000 for the same period in 1996. The increase in investment income resulted primarily from additional funds available for investment due to proceeds from the secondary public offering completed in the third quarter of 1996 as well as cash flow from operations. The effective income tax rate was approximately 40% for the three month periods ended June 30, 1997 and 1996. Net income increased 57.1% to $4.8 million for the three months ended June 30, 1997, as compared with $3.0 million for the same period in 1996. Net income as a percentage of net patient service revenue decreased to 15.6% for the three months ended June 30, 1997, compared to 17.0% for the same period in 1996, primarily as a result of amortization of goodwill in connection with acquisitions. SIX MONTHS ENDED JUNE 30, 1997 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 1996 The Company reported net patient service revenue of $57.6 million for the six months ended June 30, 1997, as compared with $33.9 million for the same period in 1996, a growth rate of 69.8%. This $23.7 million increase was primarily attributable to new units. Same unit patient service revenue, exclusive of administrative fees, increased $262,000, or 1.1%, for the six months ended June 30, 1997. Same units are those units at which the Company provided services for the entire period for which the percentage is calculated and the entire comparable period. 9
10 Salaries and benefits increased $15.1 million, or 67.4% to $37.4 million for the six months ended June 30, 1997, as compared with $22.3 million for the same period in 1996. Of this $15.1 million increase, $11.3 million, or 74.8%, was attributable to hiring new physicians, primarily to support new unit growth, and the remaining $3.8 million was primarily attributable to increased support staff and resources added in the areas of nursing, executive management and billing and reimbursement. Supplies and other operating expenses increased $2.0 million, or 79.7% to $4.5 million for the six months ended June 30, 1997, as compared with $2.5 million for the same period in 1996, primarily as a result of new units. Depreciation and amortization expense increased by $1.2 million, or 215.3% to $1.8 million for the six months ended June 30, 1997, as compared with $568,000 for the same period in 1996, primarily as a result of amortization of goodwill in connection with acquisitions. Income from operations increased approximately $5.5 million, or 63.5%, to $14.0 million for the six months ended June 30, 1997, as compared with $8.5 million for the same period in 1996. The increase in income from operations was primarily due to increased volume, principally from acquisitions. The Company earned investment income of approximately $1.3 million for the six months ended June 30, 1997, as compared with $922,000 for the same period in 1996. The increase in investment income resulted primarily from additional funds available for investment due to proceeds from the secondary public offering completed in the third quarter of 1996 as well as cash flow from operations. The effective income tax rate was approximately 40% for the six month periods ended June 30, 1997 and 1996. Net income increased 60.7% to $9.1 million for the six months ended June 30, 1997, as compared with $5.6 million for the same period in 1996. Net income as a percentage of net patient service revenue decreased to 15.8% for the six months ended June 30, 1997, compared to 16.6% for the same period in 1996, primarily as a result of amortization of goodwill in connection with acquisitions. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1997, the Company had working capital of approximately $67.0 million, a decrease of $14.2 million from the working capital of $81.2 million available at December 31, 1996. The decrease is principally a result of funds utilized for acquisitions during the first six months of 1997, offset by cash generated from operations. During the six months ended June 30, 1997, capital expenditures amounted to approximately $1.1 million principally for computer hardware and software and furniture and fixtures. For the remainder of 1997, the Company anticipates capital expenditures of approximately $1.0 million, principally for computer hardware and software. The Company anticipates that funds generated from operations together with cash and marketable securities on hand and funds available under its credit facility, will be sufficient to meet its working capital requirements and finance any required capital expenditures for at least the next twelve months. 10
11 PART II - OTHER INFORMATION ITEM 1. 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 that the outcome of such legal actions and proceedings will not have a material adverse effect on the Company's financial condition, results of operations or liquidity, notwithstanding any possible insurance recovery. 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 disallowed, would result in additional taxes of approximately $4.5 million, plus interest. The Company has reviewed the IRS matters under consideration and believes that the tax returns are substantially correct as filed. The Company intends to vigorously contest the proposed adjustments and believes it has adequately provided for any liability that may result from this examination. The Company and its tax advisors believe that the ultimate resolution of the examination will not have a material effect on the Company's consolidated financial position, results of operations or cash flows. The Company has been notified by a hospital customer of a dispute regarding the interpretation of the customer's contract with the Company. The customer believes that the Company should refund approximately $7.5 million of payments made to the Company over the last five years. The Company disagrees with the customer's interpretation of the contract and believes that the matter will be resolved amicably. In the unlikely event that the Company cannot resolve this matter amicably, the Company intends to vigorously litigate the matter and assert all its legal defenses. The Company believes that the ultimate resolution of the matter will not have a material effect on the Company's consolidated financial position, results of operations or cash flows. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS (a) The Company's Annual Meeting of Shareholders was held on May 8, 1997. (b) Not required. (c) The matters voted on at the Annual Meeting of Shareholders and the tabulation of votes on such matters are as follows: 11
12 1. Election of Directors. <TABLE> <CAPTION> AGAINST OR BROKER NAME FOR WITHHELD ABSTAINED NON-VOTE ---- --- ---------- --------- -------- <S> <C> <C> <C> <C> Roger J. Medel, M.D. 11,556,689 44,343 0 0 E. Roe Stamps, IV 11,591,089 9,943 0 0 Bruce R. Evans 11,591,089 9,943 0 0 Michael B. Fernandez 11,556,689 44,343 0 0 Albert H. Nahmad 11,591,089 9,943 0 0 M. Douglas Cunningham, M.D. 11,556,339 44,693 0 0 Cesar L. Alvarez 11,322,292 278,740 0 0 </TABLE> 2. Proposal to approve the amendment of the Company's Amended and Restated Stock Option Plan. <TABLE> <CAPTION> FOR AGAINST OR WITHHELD ABSTAINED BROKER NON-VOTE --- ------------------- --------- --------------- <S> <C> <C> <C> 9,303,148 1,338,196 7,594 952,094 </TABLE> 3. Proposal to approve the adoption of the incentive plans for the President and Chief Executive Officer and Vice President of Business Development. <TABLE> <CAPTION> FOR AGAINST OR WITHHELD ABSTAINED BROKER NON-VOTE --- ------------------- --------- --------------- <S> <C> <C> <C> 10,507,554 72,041 69,343 952,094 </TABLE> (d) Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. 10.1 Pediatrix's Amended and Restated Stock Option Plan 10.34 Amendment No. 2 to the Employment Agreement between Pediatrix and Roger J. Medel, M.D. 10.35 Amendment No. 1 to the Employment Agreement between Pediatrix and Kristen Bratberg 11.1 Statement Re: Computation of Per Share Earnings 27.1 Financial Data Schedule (b) Reports on Form 8-K None. 12
13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PEDIATRIX MEDICAL GROUP, INC. Date: August 12, 1997 By: /s/ ROGER J. MEDEL -------------------------------------- Roger J. Medel, President and Chief Executive Officer (Principal Executive Officer) Date: August 12, 1997 By: /s/ LAWRENCE M. MULLEN -------------------------------------- Lawrence M. Mullen, Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 13