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, 2000 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 Identification No.) incorporation or organization) 1301 Concord Terrace Sunrise, Florida 33323 (Address of principal executive offices) (Zip Code) (954) 384-0175 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- At August 10, 2000, the Registrant had 15,778,562 shares of $0.01 par value common stock outstanding.
PEDIATRIX MEDICAL GROUP, INC. INDEX <TABLE> <CAPTION> Page PART I - FINANCIAL INFORMATION - ------------------------------ <S> <C> ITEM 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2000 (Unaudited) and December 31, 1999.........................................................................................3 Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2000 and 1999 (Unaudited)............................................................................4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999 (Unaudited)............................................................................5 Notes to Condensed Consolidated Financial Statements............................................................6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................................9 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................12 PART II - OTHER INFORMATION....................................................................................13 - --------------------------- ITEM 1. Legal Proceedings................................................................................13 ITEM 2. Changes in Securities............................................................................14 ITEM 3. Defaults Upon Senior Securities..................................................................14 ITEM 4. Submission of Matters to a Vote of Security-Holders..............................................14 ITEM 5. Other Information................................................................................15 ITEM 6. Exhibits and Reports on Form 8-K.................................................................15 SIGNATURES.....................................................................................................16 - ---------- </TABLE> 2
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PEDIATRIX MEDICAL GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> June 30, 2000 December 31, (Unaudited) 1999 -------- -------- (in thousands) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents ....................................... $ 1,197 $ 825 Accounts receivable, net ........................................ 76,367 77,726 Prepaid expenses ................................................ 825 468 Income taxes receivable ......................................... 2,832 -- Other current assets ............................................ 821 962 -------- -------- Total current assets ........................................ 82,042 79,981 Property and equipment, net .......................................... 14,274 13,567 Other assets, net .................................................... 245,281 241,242 -------- -------- Total assets ................................................ $341,597 $334,790 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses ........................... $ 31,240 $ 29,099 Income taxes payable ............................................ -- 92 Line of credit................................................... 47,700 48,393 Current portion of note payable ................................. 200 200 Deferred income taxes ........................................... 17,888 18,549 -------- -------- Total current liabilities ................................... 97,028 96,333 Note payable ......................................................... 2,050 2,150 Deferred income taxes ................................................ 6,279 5,111 Deferred compensation ................................................ 3,339 2,309 -------- -------- Total liabilities ....................................... 108,696 105,903 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock ................................................. -- -- Common stock .................................................... 158 156 Additional paid-in capital ...................................... 134,441 133,516 Retained earnings ............................................... 98,302 95,215 -------- -------- Total stockholders' equity .................................. 232,901 228,887 -------- -------- Total liabilities and stockholders' equity .................. $341,597 $334,790 ======== ======== </TABLE> The accompanying notes are an integral part of these financial statements 3
PEDIATRIX MEDICAL GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (in thousands, except for per share data) <S> <C> <C> <C> <C> Net patient service revenue ......................... $ 55,178 $ 56,767 $ 114,587 $ 110,593 Operating expenses: Salaries and benefits ............................ 44,238 35,321 87,541 69,711 Supplies & other operating expenses .............. 6,677 5,076 12,398 9,602 Depreciation and amortization .................... 3,435 2,971 6,771 5,637 --------- --------- --------- --------- Total operating expenses ................... 54,350 43,368 106,710 84,950 --------- --------- --------- --------- Income from operations ..................... 828 13,399 7,877 25,643 Investment income ................................... 74 77 154 152 Interest expense .................................... (1,015) (457) (2,002) (692) --------- --------- --------- --------- (Loss) income before income taxes .............. (113) 13,019 6,029 25,103 Income tax provision ................................ 178 5,207 2,942 10,041 --------- --------- --------- --------- Net (loss)income ............................... $ (291) $ 7,812 $ 3,087 $ 15,062 ========= ========= ========= ========= Per share data: Net (loss) income per common and common equivalent share: Basic ...................................... $ (.02) $ .50 $ .20 $ .97 ========= ========= ========= ========= Diluted .................................... $ (.02) $ .50 $ .20 $ .95 ========= ========= ========= ========= Weighted average shares used in computing net (loss) income per common and common equivalent share: Basic ...................................... 15,778 15,500 15,702 15,466 ========= ========= ========= ========= Diluted .................................... 15,778 15,760 15,806 15,938 ========= ========= ========= ========= </TABLE> The accompanying notes are an integral part of these financial statements 4
PEDIATRIX MEDICAL GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, ----------------------------- 2000 1999 -------- -------- (in thousands) <S> <C> <C> Cash flows from operating activities: Net income .......................................................................... $ 3,087 $ 15,062 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................................................... 6,771 5,637 Deferred income taxes ........................................................... 507 3,687 Changes in assets and liabilities: Accounts receivable ........................................................ 1,359 (9,788) Prepaid expenses and other current assets .................................. (216) (1,037) Other assets ............................................................... (252) 170 Accounts payable and accrued expenses ...................................... 2,141 1,354 Income taxes ............................................................... (2,924) (5,551) -------- -------- Net cash provided from operating activities ............................ 10,473 9,534 -------- -------- Cash flows used in investing activities: Physician group acquisition payments ................................................ (8,088) (49,162) Purchase of property and equipment .................................................. (2,147) (1,707) -------- -------- Net cash used in investing activities .................................. (10,235) (50,869) -------- -------- Cash flows from financing activities: Borrowings on line of credit, net ................................................... (693) 34,043 Payments on note payable............................................................. (100) (100) Proceeds from issuance of common stock .............................................. 927 1,573 Proceeds from issuance of subsidiary stock .......................................... -- 5,757 -------- -------- Net cash provided from financing activities ............................ 134 41,273 -------- -------- Net increase (decrease) in cash and cash equivalents ..................................... 372 (62) Cash and cash equivalents at beginning of period ......................................... 825 650 -------- -------- Cash and cash equivalents at end of period ............................................... $ 1,197 $ 588 ======== ======== </TABLE> The accompanying notes are an integral part of these financial statements 5
PEDIATRIX MEDICAL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (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 of normal recurring adjustments and the adjustment to the contractual allowance which is further described in Note 3, necessary for a fair presentation of the results of interim periods. The results of operations for the three and six months ended June 30, 2000 are not necessarily indicative of the results of operations to be expected for the year ended December 31, 2000. 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 27, 2000. 2. Business Acquisitions: During the first six months of 2000, the Company completed the acquisition of three physician group practices. Total consideration for acquisitions approximated $8.1 million in cash. 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 1999 and 2000 as if the acquisitions had occurred on January 1, 1999: <TABLE> <CAPTION> Six Months Ended June 30, ---------------------------------------- 2000 1999 ---------------- ---------------- (in thousands, except for per share data) <S> <C> <C> Net patient service revenue $ 114,672 $ 128,065 Net income 3,086 16,019 Net income per share: Basic .20 1.04 Diluted .20 1.01 </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. 3. Allowance for Contractual Adjustments and Uncollectible Accounts: During the three months ended June 30, 2000, the Company recorded a change in its estimate of the allowance for contractual adjustments and uncollectible accounts. As a result of the change, the Company increased its reserve by $6.5 million. Such amount has been recorded as a reduction of revenue. 6
PEDIATRIX MEDICAL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) 4. Accounts Payable and Accrued Expenses: Accounts payable and accrued expenses consist of the following: <TABLE> <CAPTION> June 30, December 31, 2000 1999 -------------------- -------------------- (in thousands) <S> <C> <C> Accounts payable............................ $ 12,151 $ 9,664 Accrued salaries and bonuses................ 3,986 4,366 Accrued payroll taxes and benefits.......... 4,035 4,258 Accrued professional liability coverage..... 6,923 7,134 Other accrued expenses...................... 4,145 3,677 -------------------- --------------------- $ 31,240 $ 29,099 ==================== ===================== </TABLE> 5. Net Income Per Share: Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the 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. For the three months ended June 30, 2000, the calculation of diluted net income per share excludes the antidilutive effect of outstanding options on weighted average common shares. 6. Contingencies: In February 1999, the first of several federal securities law class actions was commenced against the Company and three of its principal officers in United States District Court for the Southern District of Florida ("District Court"). The Plaintiffs are shareholders purporting to represent a class of all open market purchasers of the Company's common stock between April 28, 1998, and various dates through and including April 1, 1999. They claim that during that period the Company violated the antifraud provisions of the federal securities laws by issuing false and misleading statements concerning its accounting practices and financial results, focusing in particular on the capitalization of certain payments made to employees in connection with acquisitions and revenue recognition in light of recent inquiries initiated by state investigators into the Company's billing practices. The Plaintiffs seek damages in an undetermined amount based on the alleged decline in the value of the common stock after the Company disclosed the capitalization issue with respect to the capitalization of certain payments and the inquiries by state investigators. On June 24, 1999, the Judge of the District Court entered an Order of Consolidation consolidating into one case the several federal securities law class action lawsuits. On August 20, 1999, the Judge entered two Orders in the case. The first Order granted the motion made by the three public pension funds to be appointed as lead Plaintiffs and to have their counsel appointed as lead Plaintiffs' counsel. The second Order set the administrative mechanism for handling the consolidated cases, including the time limitations for the filing of a Consolidated Amended Class Action Complaint. On October 7, 1999, the Company filed a Motion to Dismiss the Consolidated Amended Class Action Complaint. 7
PEDIATRIX MEDICAL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, Continued (Unaudited) 6. Contingencies, Continued: On January 19, 2000, the Judge granted defendants' Motion to Dismiss based on deficiencies in the allegations which rendered the pleading insufficient as a matter of law. The Judge provided that the Plaintiffs could file an Amended Complaint on or before February 3, 2000. The Plaintiffs filed a Second Amended Complaint on February 3, 2000. On March 10, 2000, the Company filed a Motion to Dismiss the Second Amended Consolidated Class Action Complaint. The Plaintiffs answering memorandum was filed on April 3, 2000, and the Company's reply memorandum was filed on April 19, 2000. On June 6, 2000, the Judge entered an Order holding that the allegations in the Plaintiff's Second Amended Complaint satisfied the requirements to maintain a cause of action and thus denied the Company's Motion to Dismiss. On July 5, 2000, the Company was served with Plaintiff's First Request for Production of Documents. The Company is preparing its written response to be filed on a timely basis. The Company continues to believe that the claims are without merit and intends to defend them vigorously. In April 1999, the Company received requests, and in one case a subpoena, from investigators in Arizona, Colorado and Florida for information related to its billing practices. On May 25, 2000, a Settlement Agreement was entered into between the Company and the Office of the Attorney General for the State of Florida ("OAG"). The Company paid the OAG $40,000 to settle any possible overpayments by the Florida Medicaid program from January 7, 1997 to the present time. The Agreement settles all aspects of the billing inquiry in the State of Florida. The Agreement states that the OAG investigation, together with an independent audit performed by Ernst & Young, LLP, revealed that no fraud was committed and the possible overpayment was due to lack of clarity in the relevant billing codes. The Company continues to cooperate with the inquiries in Arizona and Colorado. Although the Company believes that its billing practices are proper, as confirmed by the results of the billing inquiry by the State of Florida, the investigations in Arizona and Colorado are ongoing and the Company is unable to predict at this time whether they will have a material adverse effect on the Company's business, financial condition or results of operations. In August 2000, the Company was served with a subpoena requesting a limited number of medical records for patients treated by its physicians at a single hospital. The services provided in that state represent an insignificant percentage of the Company's national group practice. The Company intends to fully comply with the request. 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. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Results of Operations Three Months Ended June 30, 2000 as Compared to Three Months Ended June 30, 1999 The Company reported net patient service revenue of $55.2 million for the three months ended June 30, 2000, as compared with $56.8 million for the same period in 1999. Net patient service revenue for the three months ended June 30, 2000 includes a charge of $6.5 million to increase the allowance for contractual adjustments and uncollectible accounts as of June 30, 2000. This charge is attributable to management's continuous assessment of accounts receivable which was revised to reflect the changes occurring in the Company's collection rates. This decline in collection rates is the result of: (i) an increased utilization of non-critical care codes on which the Company realizes a lower collection rate as a percentage of billed charges; (ii) continued difficulties in the health care reimbursement environment; (iii) a significant decline in reimbursement from non-contracted payors; (iv) continued delays in settlement of receivables under appeal; and (v) disruption within our collection offices due to the government investigations and the transition to a regional collection structure. Excluding the $6.5 million charge, net patient service revenue increased by $4.9 million for the three months ended June 30, 2000 as compared to the same period in 1999. Of this $4.9 million net increase, $5.6 million, or 114.3%, was attributable to new units, including units at which the Company provides services as a result of acquisitions. Same unit patient service revenue decreased approximately $656,000, or 1.3%, for the three months ended June 30, 2000. The decline in same unit patient service revenue is the result of a lower acuity level of patient service billed and a lower expected collection rate in the three months ended June 30, 2000 as compared to the same period in 1999. Same units are those units at which the Company provided services for the entire current period and the entire comparable period. Salaries and benefits increased $8.9 million, or 25.2%, to $44.2 million for the three months ended June 30, 2000, as compared with $35.3 million for the same period in 1999. Of this $8.9 million increase, $5.4 million, or 60.7%, was attributable to hiring new physicians, primarily to support new unit growth, and the remaining $3.5 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 $1.6 million, or 31.5%, to $6.7 million for the three months ended June 30, 2000, as compared with $5.1 million for the same period in 1999. The increase was primarily the result of additional rent expense related to the Company's corporate and regional offices, increased legal fees related to government investigations, and the addition of new outpatient offices. Outpatient services require a higher level of office supplies than do inpatient services. Depreciation and amortization expense increased by approximately $464,000, or 15.6%, to $3.4 million for the three months ended June 30, 2000, as compared with $3.0 million for the same period in 1999, primarily as a result of amortization of goodwill in connection with acquisitions. Income from operations decreased approximately $12.6 million, or 93.8%, to approximately $828,000 for the three months ended June 30, 2000, as compared with $13.4 million for the same period in 1999. Excluding the $6.5 million charge to revenue, income from operations declined $6.1 million. The Company recorded net interest expense of approximately $941,000 for the three months ended June 30, 2000, as compared with net interest expense of approximately $380,000 for the same period in 1999. The increase in interest expense in 2000 is primarily the result of funds used for the acquisition of physician practices and the use of the Company's line of credit for such purposes. During the three months ended June 30, 2000, the Company recorded a tax provision of $178,000 in order to reflect a significant increase in the estimated effective tax rate for 2000 during the second quarter. The increase in the tax rate is primarily due to the change in the Company's estimated annual income before taxes as a result of the charge. Excluding the charge, the effective tax rate for the three months ended June 30, 2000 would have been 46% as compared to 40% for the same period in 1999. The increase was the result of a growth in non-deductible amounts associated with goodwill as a percentage of pretax income. 9
The Company reported a net loss of approximately $291,000 for the three months ended June 30, 2000. Excluding the impact of the $6.5 million charge, net income decreased by $4.4 million, or 56.4%, to $3.4 million for the three months ended June 30, 2000, as compared to $7.8 million for the same period in 1999. The diluted net loss per common and common equivalent share was two cents for the three months ended June 30, 2000. Excluding the impact of the $6.5 million charge, diluted net income per common and common equivalent share decreased to 22 cents for the three months ended June 30, 2000, as compared to 50 cents for the same period in 1999. Six Months Ended June 30, 2000 as Compared to Six Months Ended June 30, 1999 The Company reported net patient service revenue of $114.6 million for the six months ended June 30, 2000, as compared with $110.6 million for the same period in 1999. Net patient service revenue for the six months ended June 30, 2000 includes a charge of $6.5 million to increase the allowance for contractual adjustments and uncollectible accounts as of June 30, 2000. Excluding the $6.5 million charge, net patient service revenue increased by $10.5 million for the six months ended June 30, 2000. Of this $10.5 million net increase, $15.3 million, or 145.7%, was attributable to new units, including units at which the Company provides services as a result of acquisitions. Same unit patient service revenue decreased approximately $4.8 million, or 4.6%, for the six months ended June 30, 2000. The decline in same unit patient service revenue is the result of a lower acuity level of patient service billed and a lower expected collection rate in the six months ended June 30, 2000 as compared to the same period in 1999. Same units are those units at which the Company provided services for the entire current period and the entire comparable period. Salaries and benefits increased $17.8 million, or 25.6%, to $87.5 million for the six months ended June 30, 2000, as compared with $69.7 million for the same period in 1999. Of this $17.8 million increase, $10.4 million, or 58.4%, 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 $2.8 million, or 29.1%, to $12.4 million for the six months ended June 30, 2000, as compared with $9.6 million for the same period in 1999. The increase was primarily the result of additional rent expense related to the Company's corporate and regional offices, increased legal fees related to government investigations, and the addition of new outpatient offices. Outpatient services require a higher level of office supplies than do inpatient services. Depreciation and amortization expense increased by approximately $1.2 million, or 20.1%, to $6.8 million for the six months ended June 30, 2000, as compared with $5.6 million for the same period in 1999, primarily as a result of amortization of goodwill in connection with acquisitions. Income from operations decreased approximately $17.7 million, or 69.3%, to approximately $7.9 million for the six months ended June 30, 2000 as compared with $25.6 million for the same period in 1999. Excluding the $6.5 million charge to revenue, income from operations declined $11.2 million. The Company recorded net interest expense of approximately $1.8 million for the six months ended June 30, 2000, as compared with net interest expense of approximately $540,000 for the same period in 1999. The increase in interest expense in 2000 is primarily the result of funds used for the acquisition of physician practices and the use of the Company's line of credit for such purposes. During the six months ended June 30, 2000, the Company recorded a tax provision of approximately $2.9 million in order to reflect a significant increase in the estimated effective tax rate for 2000. The increase in the tax rate is primarily due to the change in the Company's estimated annual income before taxes as a result of the charge. Excluding the charge, the effective tax rate for the six months ended June 30, 2000 would have been 45.5% as compared to 40% for the same period in 1999. The Company reported net income of approximately $3.1 million for the six months ended June 30, 2000. Excluding the impact of the $6.5 million charge, net income decreased by $8.3 million, or 55.0%, to $6.8 million for the six months ended June 30, 2000, as compared to $15.1 million for the same period in 1999. Diluted net income per common and common equivalent share was 20 cents for the six months ended June 30, 2000. Excluding the impact of the $6.5 million charge, diluted net income per common and common equivalent share decreased to 43 cents for the six months ended June 30, 2000, as compared to 95 cents for the same period in 1999. 10
Liquidity and Capital Resources As of June 30, 2000, the Company had a working capital deficit of approximately $15 million, a decrease of $1.4 million from the working capital deficit of $16.4 million at December 31, 1999. The working capital deficit is due to the classification of the Company's line of credit as current at June 30, 2000 and December 31, 1999. Excluding the amount due under the line of credit, working capital increased by approximately $673,000. As of June 30, 2000, the Company had $27.3 million available under its $75 million line of credit which matures on September 30, 2000. The Company is currently evaluating options to obtain financing beyond the current maturity of its line of credit. However, there can be no assurance that the Company will be able to obtain financing in amounts and on terms substantially similar to its existing credit facility on or prior to September 30, 2000. Provided the Company is able to secure financing in amounts similar to those currently available under its line of credit, it anticipates that funds generated from operations, together with cash on hand, and funds available under such financing will be sufficient to meet its working capital requirements and finance required capital expenditures for at least the next twelve months. 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- The Company's unsecured revolving credit facility, mortgage note payable and certain operating lease agreements are subject to market risk and interest rate changes. The total amount available under the credit facility is $75 million. At the Company's option, the credit facility bears interest at either LIBOR plus .875% or prime. The mortgage note payable bears interest at prime and the leases bear interest at LIBOR based variable rates. The outstanding principal balances on the credit facility and note payable were approximately $47.7 million and $2.3 million, respectively, at June 30, 2000. The outstanding balances related to the operating leases totaled approximately $17 million at June 30, 2000. Considering the total outstanding balances under these instruments at June 30, 2000 of approximately $67 million, a 1% change in interest rates would result in an impact to pre-tax earnings of approximately $670,000 per year. 12
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. 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. In February 1999, the first of several federal securities law class actions was commenced against the Company and three of its principal officers in United States District Court for the Southern District of Florida ("District Court"). The Plaintiffs are shareholders purporting to represent a class of all open market purchasers of the Company's common stock between April 28, 1998, and various dates through and including April 1, 1999. They claim that during that period the Company violated the antifraud provisions of the federal securities laws by issuing false and misleading statements concerning its accounting practices and financial results, focusing in particular on the capitalization of certain payments made to employees in connection with acquisitions and revenue recognition in light of recent inquiries initiated by state investigators into the Company's billing practices. The Plaintiffs seek damages in an undetermined amount based on the alleged decline in the value of the common stock after the Company disclosed the capitalization issue with respect to the capitalization of certain payments and the inquiries by state investigators. On June 24, 1999, the Judge of the District Court entered an Order of Consolidation consolidating into one case the several federal securities law class action lawsuits. On August 20, 1999, the Judge entered two Orders in the case. The first Order granted the motion made by the three public pension funds to be appointed as lead Plaintiffs and to have their counsel appointed as lead Plaintiffs' counsel. The second Order set the administrative mechanism for handling the consolidated cases, including the time limitations for the filing of a Consolidated Amended Class Action Complaint. On October 7, 1999, the Company filed a Motion to Dismiss the Consolidated Amended Class Action Complaint. On January 19, 2000, the Judge granted defendants' Motion to Dismiss based on deficiencies in the allegations which rendered the pleading insufficient as a matter of law. The Judge provided that the Plaintiffs could file an Amended Complaint on or before February 3, 2000. The Plaintiffs filed a Second Amended Complaint on February 3, 2000. On March 10, 2000, the Company filed a Motion to Dismiss the Second Amended Consolidated Class Action Complaint. The Plaintiffs answering memorandum was filed on April 3, 2000, and the Company's reply memorandum was filed on April 19, 2000. On June 6, 2000, the Judge entered an Order holding that the allegations in the Plaintiff's Second Amended Complaint satisfied the requirements to maintain a cause of action and thus denied the Company's Motion to Dismiss. On July 5, 2000, the Company was served with Plaintiff's First Request for Production of Documents. The Company is preparing its written response to be filed on a timely basis. The Company continues to believe that the claims are without merit and intends to defend them vigorously. In April 1999, the Company received requests, and in one case a subpoena, from investigators in Arizona, Colorado and Florida for information related to its billing practices. On May 25, 2000, a Settlement Agreement was entered into between the Company and the Office of the Attorney General for the State of Florida ("OAG"). The Company paid the OAG $40,000 to settle any possible overpayments by the Florida Medicaid program from January 7, 1997 to the present time. The Agreement settles all aspects of the billing inquiry in the State of Florida. The Agreement states that the OAG investigation, together with an independent audit performed by Ernst & Young, LLP, revealed that no fraud was committed and the possible overpayment was due to lack of clarity in the relevant billing codes. The Company continues to cooperate with the 13
inquiries in Arizona and Colorado. Although the Company believes that its billing practices are proper, as confirmed by the results of the billing inquiry by the State of Florida, the investigations in Arizona and Colorado are ongoing and the Company is unable to predict at this time whether they will have a material adverse effect on the Company's business, financial condition or results of operations. In August 2000, the Company was served with a subpoena requesting a limited number of medical records for patients treated by its physicians at a single hospital. The services provided in that state represent an insignificant percentage of the Company's national group practice. The Company intends to fully comply with the request. 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, 2000. (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: 1. Election of Directors Against or Broker Non- Name For Withheld Abstained Vote - -------------------------------------------------------------------------------- Roger J. Medel, M.D., M.B.A. 13,673,090 494,455 0 0 Michael B. Fernandez 13,673,961 493,584 0 0 M. Douglas Cunningham, M.D. 13,663,095 504,451 0 0 Cesar L. Alvarez 13,671,627 495,918 0 0 Waldemar A. Carlo, M.D. 13,996,148 171,398 0 0 G. Eric Knox, M.D. 13,995,351 172,195 0 0 14
ITEM 5. Other Information ----------------- This quarterly report contains statements which, to the extent they are not historical fact, constitute "forward looking statements" under the securities laws. All forward looking statements involve risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to differ materially from those expressed or implied by or in such forward looking statements. The forward looking statements in this document are intended to be subject to the safe harbor protection provided under the securities laws. The Company's shareholders should also be aware that while the Company does, at various times, communicate with securities analysts, it is against the Company's policies to disclose to such analysts any material non-public information or other confidential information. Accordingly, our shareholders should not assume that the Company agrees with all statements or reports issued by such analysts. To the extent statements or reports issued by analysts contain certain projections, forecasts or opinions about our Company, such reports and statements are not the responsibility of the Company. For additional information identifying certain other important factors which may affect the Company's operations and could cause actual results to vary materially from those anticipated in the forward looking statements, see the Company's Securities and Exchange Commission filings, including but not limited to, the discussion included in the Business section of the Company's Form 10-K under the heading "Factors to be Considered". ITEM 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 3.2 Pediatrix's Amended and Restated Bylaws 11.1 Statement Re: Computation of Per Share Earnings 27.1 Financial Data Schedule (b) Reports on Form 8-K None. 15
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 11, 2000 By: /s/ Roger J. Medel, M.D. ------------------------- Roger J. Medel, M.D., Chief Executive Officer (Principal Executive Officer) Date: August 11, 2000 By: /s/ Karl B. Wagner ------------------- Karl B. Wagner, Chief Financial Officer (Principal Financial and Accounting Officer) 16