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, 1998 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) 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 6,1998, the Registrant had 15,242,831 shares of $0.01 par value common stock outstanding.
PEDIATRIX MEDICAL GROUP, INC. INDEX <TABLE> <CAPTION> <S> <C> PART I - FINANCIAL INFORMATION Page ---- ITEM 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 1998 (Unaudited) and December 31, 1997......................................................................................... 3 Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 1998 and 1997 (Unaudited)............................................................................ 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997 (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
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PEDIATRIX MEDICAL GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> June 30, 1998 December 31, (Unaudited) 1997 ------------------- ------------------- (in thousands) ASSETS Current assets: <S> <C> <C> Cash and cash equivalents ..................... $ 1,753 $ 18,562 Investments in marketable securities........... -- 27,132 Accounts receivable, net....................... 46,219 34,866 Prepaid expenses............................... 550 873 Other current assets........................... 1,016 586 ------------------- ------------------- Total current assets....................... 49,538 82,019 Property and equipment, net......................... 10,644 9,898 Other assets, net................................... 170,624 104,895 ------------------- ------------------ Total assets............................... $ 230,806 $ 196,812 =================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses.......... $ 17,083 $ 16,170 Income taxes payable........................... 1,103 1,348 Current portion of note payable................ 200 200 Deferred income taxes.......................... 15,252 10,393 ------------------- ------------------- Total current liabilities.................. 33,638 28,111 Line of credit...................................... 10,000 -- Note payable........................................ 2,450 2,550 Deferred income taxes............................... 947 2,442 ------------------- ------------------- Total liabilities.......................... 47,035 33,103 Minority interest................................... 4,153 -- Commitments and contingencies Stockholders' equity: Preferred stock................................ -- -- Common stock................................... 152 151 Additional paid-in capital..................... 125,162 122,391 Retained earnings.............................. 54,304 41,078 Unrealized gain on investments................. -- 89 ------------------- ------------------- Total stockholders' equity................. 179,618 163,709 ------------------- ------------------- Total liabilities and stockholders' equity. $ 230,806 $ 196,812 =================== =================== </TABLE> The accompanying notes are an integral part of these financial statements 3
<TABLE> <CAPTION> PEDIATRIX MEDICAL GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Six Months Ended June 30, June 30, ------------------------------------- ------------------------------------- 1998 1997 1998 1997 ---------------- --------------- --------------- ---------------- (in thousands, except for per share data) <S> <C> <C> <C> <C> Net patient service revenue.................. $ 46,144 $ 30,599 $ 83,952 $ 57,612 Operating expenses: Salaries and benefits..................... 28,584 19,774 52,144 37,383 Supplies & other operating expenses....... 3,393 2,358 6,088 4,460 Depreciation and amortization............. 2,125 1,008 3,813 1,791 ---------------- --------------- --------------- ---------------- Total operating expenses ........... 34,102 23,140 62,045 43,634 ---------------- --------------- --------------- ---------------- Income from operations ............. 12,042 7,459 21,907 13,978 Investment income............................ 45 563 491 1,298 Interest expense............................. (242) (75) (351) (149) ---------------- --------------- --------------- ---------------- Income before income taxes ......... 11,845 7,947 22,047 15,127 Income tax provision......................... 4,738 3,179 8,821 6,051 ---------------- --------------- --------------- ---------------- Net income.............................. $ 7,107 $ 4,768 $ 13,226 $ 9,076 ================ =============== =============== ================ Per share data: Net income per common and common equivalent share: Basic .............................. $ .47 $ .32 $ .87 $ .61 ================ =============== =============== ================ Diluted ............................ $ .45 $ .30 $ .83 $ .58 ================ =============== =============== ================ Weighted average shares used in computing net income per common and common equivalent share: Basic............................... 15,226 15,001 15,192 14,944 ================ =============== =============== ================ Diluted............................. 15,900 15,678 15,871 15,611 ================ =============== =============== ================ </TABLE> The accompanying notes are an integral part of these financial statements 4
<TABLE> <CAPTION> PEDIATRIX MEDICAL GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, ------------------------------------------- 1998 1997 ---------------- ----------------- (in thousands) Cash flows provided (used) by operating activities: <S> <C> <C> Net income $ 13,226 $ 9,076 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................. 3,813 1,791 Deferred income taxes......................................... 3,364 2,399 Changes in assets and liabilities: Accounts receivable...................................... (11,353) (6,332) Prepaid expenses and other current assets ............... (107) (680) Income taxes payable..................................... 629 2,146 Other assets............................................. 116 (84) Accounts payable and accrued expenses.................... (33) 439 ---------------- ----------------- Net cash provided by operating activities ........... 9,655 8,755 ---------------- ----------------- Cash flows provided (used) by investing activities: Physician group acquisition payments.............................. (63,891) (30,365) Purchase of investments........................................... (9,939) (7,074) Proceeds from sale of investments................................. 36,983 36,567 Purchase of property and equipment................................ (1,401) (1,114) ---------------- ----------------- Net cash used in investing activities................ (38,248) (1,986) ---------------- ----------------- Cash flows provided (used) by financing activities: Borrowings on line of credit...................................... 10,000 -- Payments on note payable.......................................... (100) (100) Proceeds from issuance of common stock............................ 1,884 2,265 ---------------- ----------------- Net cash provided by financing activities ........... 11,784 2,165 ---------------- ----------------- Net (decrease) increase in cash and cash equivalents .................. (16,809) 8,934 Cash and cash equivalents at beginning of period ...................... 18,562 18,435 ---------------- ----------------- Cash and cash equivalents at end of period.............................. $ 1,753 $ 27,369 ================ ================= </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, 1998 (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, 1998 are not necessarily indicative of the results of operations to be expected for the year ended December 31, 1998. 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, 1998. 2. Business Acquisitions: During the first six months of 1998, the Company completed the acquisition of 10 physician group practices. Total consideration for these acquisitions approximated $62 million in cash and 4,136,934 shares of stock in a subsidiary of the Company. 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 1997 and 1998 as if the acquisitions had occurred on January 1, 1997: <TABLE> <CAPTION> Six Months Ended June 30, ---------------------------------------- 1998 1997 ---------------- ---------------- (in thousands, except for per share data) <S> <C> <C> Net patient service revenue $ 88,698 $ 76,347 Net income 13,436 9,797 Net income per share: Basic .88 .66 Diluted .85 .63 </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
PEDIATRIX MEDICAL GROUP, INC. 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, 1998 1997 -------------------- -------------------- (in thousands) <S> <C> <C> Accounts payable............................ $ 2,624 $ 2,988 Accrued salaries and bonuses................ 5,195 5,340 Accrued payroll taxes and benefits.......... 3,308 3,013 Accrued professional liability coverage..... 4,298 3,747 Other accrued expenses...................... 1,658 1,082 -------------------- --------------------- $ 17,083 $ 16,170 ==================== ===================== </TABLE> 4. 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. 5. Accounting Pronouncements Recently Issued: During 1998, the Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income," which requires that all items recognized under accounting standards as components of comprehensive income be reported in the financial statements. The Company's comprehensive income was as follows: <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, ---------------------------- ----------------------------- 1998 1997 1998 1997 ------------ ------------ ------------- ------------ (in thousands) <S> <C> <C> <C> <C> Net income.......................................... $ 7,107 $ 4,768 $ 13,226 $ 9,076 Other comprehensive income (loss) net of tax: Unrealized holding losses arising during the period.................................. -- (1) -- (1) Reclassification adjustment for (gains) losses included in net income -- 39 (89) 30 ------------ ------------ ------------- ------------- Net (gains) losses recognized in other comprehensive income........................ -- 38 (89) 29 ------------ ------------ ------------- ------------- Comprehensive income................................ $ 7,107 $ 4,806 $ 13,137 $ 9,105 ============ ============ ============= ============ </TABLE> 7
PEDIATRIX MEDICAL GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) 6. 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. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Three Months Ended June 30, 1998 as Compared to Three Months Ended June 30, 1997 The Company reported net patient service revenue of $46.1 million for the three months ended June 30, 1998, as compared with $30.6 million for the same period in 1997, a growth rate of 50.8%. Of this $15.5 million increase, $14.4 million, or 92.9% 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 $1.5 million, or 5.6%, for the three months ended June 30, 1998. 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. Salaries and benefits increased $8.8 million, or 44.6% to $28.6 million for the three months ended June 30, 1998, as compared with $19.8 million for the same period in 1997. Of this $8.8 million increase, $6.5 million, or 73.7%, was attributable to hiring new physicians, primarily to support new unit growth, and the remaining $2.3 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 $1.0 million, or 43.9% to $3.4 million for the three months ended June 30, 1998, as compared with $2.4 million for the same period in 1997, primarily as a result of new units. Depreciation and amortization expense increased by $1.1 million, or 110.8% to $2.1 million for the three months ended June 30, 1998, as compared with $1.0 million for the same period in 1997, primarily as a result of amortization of goodwill in connection with acquisitions. Income from operations increased approximately $4.6 million, or 61.4%, to $12.0 million for the three months ended June 30, 1998, as compared with $7.5 million for the same period in 1997. The increase in income from operations was primarily due to increased volume, principally from acquisitions. The Company earned investment income of approximately $45,000 for the three months ended June 30, 1998, as compared with approximately $563,000 for the same period in 1997. The decrease in investment income resulted primarily from the use of funds in connection with acquisitions. The effective income tax rate was approximately 40.0% for the three month periods ended June 30, 1998 and 1997. Net income increased 49.1% to $7.1 million for the three months ended June 30, 1998, as compared with $4.8 million for the same period in 1997. Net income as a percentage of net patient service revenue decreased to 15.4% for the three months ended June 30, 1998, compared to 15.6% for the same period in 1997 primarily as a result of a decrease in investment income. Six Months Ended June 30, 1998 as Compared to Six Months Ended June 30, 1997 The Company reported net patient service revenue of $84.0 million for the six months ended June 30, 1998, as compared with $57.6 million for the same period in 1997, a growth rate of 45.7%. Of this $26.4 million increase, $24.8 million, or 93.9% was attributable to new units at which the Company provides services as a result of acquisitions. Same unit patient service revenue, exclusive of administrative fees, increased $2.3 million, or 5.2%, for the six months ended June 30, 1998. 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. Salaries and benefits increased $14.8 million, or 39.5% to $52.1 million for the six months ended June 30, 1998, as compared with $37.4 million for the same period in 1997. Of this $14.8 million increase, $10.9 million, or 73.6%, was attributable to hiring new physicians, primarily to support new unit 9
growth, and the remaining $3.9 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 36.5% to $6.1 million for the six months ended June 30, 1998, as compared with $4.5 million for the same period in 1997, primarily as a result of new units. Depreciation and amortization expense increased by $2.0 million, or 112.9% to $3.8 million for the six months ended June 30, 1998, as compared with $1.8 million for the same period in 1997, primarily as a result of amortization of goodwill in connection with acquisitions. Income from operations increased approximately $8.0 million, or 56.7%, to $22.0 million for the six months ended June 30, 1998, as compared with $14.0 million for the same period in 1997. The increase in income from operations was primarily due to increased volume, principally from acquisitions. The Company earned investment income of approximately $491,000 for the six months ended June 30, 1998, as compared with $1.3 million for the same period in 1997. The decrease in investment income resulted primarily from the use of funds in connection with acquisitions. The effective income tax rate was approximately 40.0% for the six month periods ended June 30, 1998 and 1997. Net income increased 45.7% to $13.2 million for the six months ended June 30, 1998, as compared with $9.1 million for the same period in 1997. Net income as a percentage of net patient service revenue was 15.8% for the six month periods ended June 30, 1998 and 1997. Liquidity and Capital Resources As of June 30, 1998, the Company had working capital of approximately $15.9 million, a decrease of $38.0 million from the working capital of $53.9 million available at December 31, 1997. The decrease is principally a result of funds utilized for acquisitions during the first six months of 1998, offset by cash generated from operations. The Company anticipates that funds generated from operations together with cash 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
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. During 1998, the Internal Revenue Service concluded its examination of the Company for the tax years ended December 31, 1992, 1993 and 1994. The resolution of the examination did not have a material effect on the Company's consolidated financial position or results of operations. 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 14, 1998. (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: <TABLE> <CAPTION> Against or Name For Withheld Abstained Broker Non-Vote - ------------------------------- ----------- -------- --------- --------------- <S> <C> <C> <C> <C> Roger J. Medel, M.D., M.B.A. 12,666,503 63,228 0 0 E. Roe Stamps, IV 12,712,313 17,418 0 0 Bruce R. Evans 12,712,343 17,388 0 0 Michael B. Fernandez 12,666,383 63,348 0 0 Albert H. Nahmad 12,712,283 17,448 0 0 M. Douglas Cunningham, M.D. 12,666,423 63,308 0 0 Cesar L. Alvarez 12,420,886 308,845 0 0 </TABLE> 11
Item 5. Other Information ----------------- Not applicable. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 10.33 Amendment No. 3 to Amended and Restated Credit Agreement, dated March 10, 1998 between Pediatrix, certain PA Contractors, BankBoston and SunTrust Bank 10.34 Amendment No. 4 to Amended and Restated Credit Agreement, dated June 24, 1998 between Pediatrix, certain PA Contractors, BankBoston and SunTrust Bank 10.35 Pediatrix Executive Non-Qualified Deferred Compensation Plan, dated October 13,1997 11.1 Statement Re: Computation of Per Share Earnings 27.1 Financial Data Schedule (b) Reports on Form 8-K None. 12
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, 1998 By: /s/ Roger J. Medel ------------------- Roger J. Medel, President and Chief Executive Officer (Principal Executive Officer) Date: August 12, 1998 By: /s/ Karl B. Wagner ------------------- Karl B. Wagner, Chief Financial Officer (Principal Financial and Accounting Officer) 13