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 SEPTEMBER 30, 2001
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 October 31, 2001, the Registrant had 24,452,329 shares of $0.01 par value
common stock outstanding.
PEDIATRIX MEDICAL GROUP, INC.
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of September 30, 2001 (Unaudited)
and December 31, 2000........................................................................................3
Condensed Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 2001 and 2000 (Unaudited)......................................................................4
Condensed Consolidated Statement of Shareholders' Equity for the Nine Months Ended
September 30, 2001 (Unaudited)...............................................................................5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000 (Unaudited)......................................................................6
Notes to Condensed Consolidated Financial Statements...........................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................................15
PART II - OTHER INFORMATION...................................................................................16
ITEM 1. LEGAL PROCEEDINGS...............................................................................16
ITEM 2. CHANGES IN SECURITIES...........................................................................17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.............................................17
ITEM 5. OTHER INFORMATION...............................................................................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................18
SIGNATURES....................................................................................................19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEDIATRIX MEDICAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2001 (UNAUDITED) 2000
-------------------- -------------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents ..................... $ 3,536 $ 3,075
Accounts receivable, net....................... 69,278 69,133
Prepaid expenses............................... 966 831
Deferred income taxes.......................... 2,322 --
Other current assets........................... 1,899 836
----------------- ------------------
Total current assets....................... 78,001 73,875
Property and equipment, net......................... 14,230 9,629
Goodwill and other assets, net...................... 454,746 241,230
----------------- ------------------
Total assets............................... $ 546,977 $ 324,734
================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit................................. $ -- $ 23,500
Current portion of long-term debt and
capital lease obligations................ 553 --
Accounts payable and accrued expenses.......... 55,083 29,878
Income taxes payable........................... 4,162 3,266
Deferred income taxes.......................... -- 15,123
----------------- ------------------
Total current liabilities.................. 59,798 71,767
Line of credit...................................... 12,000 --
Long-term debt and capital lease obligations........ 2,715 --
Deferred income taxes............................... 10,125 7,197
Deferred compensation............................... 3,386 3,870
----------------- ------------------
Total liabilities.......................... 88,024 82,834
----------------- ------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock................................ -- --
Common stock................................... 244 159
Additional paid-in capital..................... 332,228 135,540
Retained earnings.............................. 126,481 106,201
----------------- ------------------
Total shareholders' equity................. 458,953 241,900
----------------- ------------------
Total liabilities and shareholders' equity. $ 546,977 $ 324,734
================= ==================
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
PEDIATRIX MEDICAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- -------------------------------------
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Net patient service revenue................... $ 102,784 $ 64,272 $ 249,841 $ 178,859
Operating expenses:
Salaries and benefits...................... 66,533 45,420 169,759 132,961
Supplies & other operating expenses........ 10,160 7,002 25,836 19,400
Depreciation and amortization.............. 6,344 3,478 15,025 10,249
--------------- --------------- --------------- ---------------
Total operating expenses............. 83,037 55,900 210,620 162,610
--------------- --------------- --------------- ---------------
Income from operations............... 19,747 8,372 39,221 16,249
Investment income............................. 100 58 246 212
Interest expense.............................. (795) (951) (2,108) (2,953)
--------------- --------------- --------------- ---------------
Income before income taxes............... 19,052 7,479 37,359 13,508
Income tax provision.......................... 8,733 3,650 17,079 6,592
--------------- --------------- --------------- ---------------
Net income............................... $ 10,319 $ 3,829 $ 20,280 $ 6,916
=============== =============== =============== ===============
Per share data:
Net income per common and
common equivalent share:
Basic............................... $ .43 $ .24 $ 1.02 $ .44
=============== =============== =============== ===============
Diluted............................. $ .40 $ .24 $ .96 $ .43
=============== =============== =============== ===============
Weighted average shares used in
computing net income per common
and common equivalent share:
Basic................................ 23,985 15,779 19,967 15,727
=============== =============== =============== ===============
Diluted.............................. 25,745 16,187 21,268 15,926
=============== =============== =============== ===============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
PEDIATRIX MEDICAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
COMMON STOCK
--------------------------
ADDITIONAL TOTAL
NUMBER OF PAID IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- ------------ ---------------- --------------- -----------------
(IN THOUSANDS)
Balance at December 31, 2000 15,878 $ 159 $ 135,540 $ 106,201 $ 241,900
Net income -- -- -- 20,280 20,280
Common stock issued in
connection with the Merger 7,293 73 152,417 -- 152,490
Fair value of stock options
assumed in the Merger -- -- 18,932 -- 18,932
Common stock issued under employee
stock option and stock purchase
plans 678 7 8,011 -- 8,018
Common stock issued for convertible
notes 537 5 11,867 -- 11,872
Tax benefit related to
employee stock options
and stock purchase plans -- -- 5,461 -- 5,461
--------- ------------ ---------------- --------------- -----------------
Balance at September 30, 2001 24,386 $ 244 $ 332,228 $ 126,481 $ 458,953
========= ============ ================ =============== =================
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
PEDIATRIX MEDICAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------------
2001 2000
----------------- -----------------
(IN THOUSANDS)
Cash flows from operating activities:
Net income...................................................... $ 20,280 $ 6,916
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 15,025 10,249
Deferred income taxes....................................... (5,823) 380
Changes in assets and liabilities, net of acquisitions:
Accounts receivable ................................... 12,249 3,843
Prepaid expenses and other current assets.............. (595) (400)
Other assets........................................... 637 (453)
Accounts payable and accrued expenses.................. 12,739 1,475
Income taxes........................................... 4,120 (754)
--------------- ---------------
Net cash provided from operating activities........ 58,632 21,256
--------------- ---------------
Cash flows used in investing activities:
Physician group acquisition payments............................ (22,274) (8,426)
Purchase of property and equipment.............................. (5,112) (2,942)
--------------- ---------------
Net cash used in investing activities.............. (27,386) (11,368)
--------------- ---------------
Cash flows from financing activities:
Payments on line of credit, net................................. (34,900) (9,593)
Payments to refinance line of credit............................ (1,404) --
Payments on long-term debt and capital lease obligations........ (2,499) (150)
Proceeds from issuance of common stock.......................... 8,018 927
--------------- ---------------
Net cash used in financing activities.............. (30,785) (8,816)
--------------- ---------------
Net increase in cash and cash equivalents............................ 461 1,072
Cash and cash equivalents at beginning of period..................... 3,075 825
--------------- ---------------
Cash and cash equivalents at end of period........................... $ 3,536 $ 1,897
=============== ===============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
6
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(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 accounting
principles generally accepted in the United States of America 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 4 necessary for a fair presentation
of the results of interim periods.
The results of operations for the three and nine months ended September
30, 2001 are not necessarily indicative of the results of operations to
be expected for the year ended December 31, 2001. 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/A (Amendment No. 1) filed with
the Securities and Exchange Commission on April 6, 2001.
2. ACCOUNTING PRONOUNCEMENTS:
In July 2001, the Financial Accounting Standards Board (the "Board")
issued Statements of Financial Accounting Standards No. 141 ("FAS
141"), "Business Combinations," and No. 142 ("FAS 142" or the
"Statement"), "Goodwill and Other Intangible Assets." FAS 141 (i)
requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001; (ii) establishes
specific criteria for the recognition of intangible assets separately
from goodwill; and (iii) requires unallocated negative goodwill to be
written off. FAS 142 (i) addresses financial accounting and reporting
for goodwill and other intangible assets; (ii) provides guidance on the
amortization of intangible assets other than goodwill; (iii) requires
that goodwill not be amortized; and (iv) requires an annual evaluation
of goodwill and certain intangible assets for impairment. FAS 141 is
effective for all business combinations initiated after June 30, 2001.
FAS 142 is effective for fiscal years beginning after December 15, 2001
with two exceptions: (i) goodwill and intangible assets acquired after
June 30, 2001 are immediately subject to the nonamortization and
amortization provisions of the Statement, and (ii) the provisions of
the Statement are not applicable to mutual enterprises and
not-for-profit organizations until further deliberation by the Board.
Effective July 1, 2001, the Company adopted the provisions of FAS 141
and the nonamortization provisions of FAS 142 pertaining to goodwill
recorded subsequent to June 30, 2001. The Company is currently
assessing the impact of the remaining provisions of FAS 142 effective
January 1, 2002. The adoption of FAS 141 and the nonamortization
provisions of FAS 142 did not have a material impact on the Company's
results of operations for the three months ended September 30, 2001.
In October 2001, the Board issued Statement of Financial Accounting
Standards No. 144 ("FAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets." FAS 144 supersedes Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of," and addresses (i) the
recognition and measurement of the impairment of long-lived assets to
be held and used and (ii) the measurement of long-lived assets to be
disposed of by sale. FAS 144 is effective for fiscal years beginning
after December 15, 2001. The Company is currently assessing the impact,
if any, of the adoption of this statement.
7
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
3. BUSINESS ACQUISITIONS:
On May 15, 2001, the Company completed a merger (the "Merger") with
Magella Healthcare Corporation ("Magella"). The total purchase price
for Magella was allocated as follows (in thousands):
(i) Fair value of Pediatrix common stock issued for the outstanding
common and nonvoting common stock of Magella (approximately
7.3 million shares)......................................... $ 152,490
(ii) Fair value of Magella options (approximately 1.4 million shares
of Pediatrix common stock to be issued upon exercise)....... 18,932
(iii) Estimated direct transaction costs............................... 2,154
---------------
Total purchase price............................................. $ 173,576
===============
In connection with the Merger, the Company recorded assets totaling
approximately $126.1 million, assumed liabilities of approximately
$59.2 million and recorded goodwill of approximately $106.7 million.
In addition to the Merger, the Company completed the acquisition of
five physician group practices during the nine months ended September
30, 2001. Total consideration for the acquisitions approximated $18.6
million in cash and $1.8 million in notes payable.
The Company has accounted for the Merger and the acquisitions using the
purchase method of accounting. Goodwill related to acquisitions
completed through June 30, 2001 is being amortized on a straight-line
basis over 25 years. In accordance with the provisions of FAS 142,
goodwill related to acquisitions completed subsequent to June 30, 2001
of approximately $4.1 million is not being amortized. The results of
operations of Magella and the acquired practices have been included in
the consolidated financial statements from the dates of acquisition.
The following unaudited pro forma information combines the consolidated
results of operations of the Company, Magella and the physician group
practices acquired during 2000 and 2001 as if the transactions had
occurred on January 1, 2000:
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------------------
2001 2000
---------------------- ---------------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Net patient service revenue $ 290,491 $ 243,994
Net income 26,209 14,502
Net income per share:
Basic 1.11 .63
Diluted 1.03 .60
8
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
3. BUSINESS ACQUISITIONS, CONTINUED:
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.
4. ALLOWANCE FOR CONTRACTUAL ADJUSTMENTS AND UNCOLLECTIBLE ACCOUNTS:
During the nine months ended September 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 during the nine months ended September 30, 2000.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
SEPTEMBER 30, DECEMBER 31,
2001 2000
-------------------- -----------------
(IN THOUSANDS)
Accounts payable............................ $ 12,385 $ 9,662
Accrued salaries and bonuses................ 15,935 6,960
Accrued payroll taxes and benefits.......... 7,125 4,315
Accrued professional liability coverage..... 11,811 5,888
Other accrued expenses...................... 7,827 3,053
------------------- ------------------
$ 55,083 $ 29,878
=================== ==================
6. LONG-TERM DEBT:
In connection with the Merger, the Company assumed certain convertible
subordinated notes ("Convertible Notes"). During the third quarter of
2001, approximately $11.9 million of Convertible Notes were converted
into approximately 537,000 shares of the Company's common stock at the
option of the holders. At September 30, 2001, the total outstanding
principal on the Convertible Notes is approximately $920,000. The
Convertible Notes are convertible into approximately 35,000 shares of
the Company's common stock at the option of the holder at $26.00, bear
interest at rates ranging from 5% to 6% and require varying periodic
interest payments. The Company has the right to force the holders of
the Convertible Notes to convert the notes to common stock when the
share price of the Company's common stock trades at a specified price
ranging from $32.50 to $39.00 over a 90 day trading period.
9
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
7. 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 the Convertible Notes calculated using the
if-converted method and outstanding options calculated using the
treasury stock method. For the three and nine months ended September
30, 2001, the calculation of diluted net income per share excludes the
after-tax impact of interest expense related to the Convertible Notes.
8. CONTINGENCIES:
In February 1999, several federal securities law class actions were
commenced against the Company and three of its principal officers in
United States District Court for the Southern District of Florida. The
plaintiffs purport to represent a class of all open market purchasers
of the Company's common stock between March 31, 1997, and various dates
through and including April 2, 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 billing practices and results of operations. The plaintiffs seek
damages in an undetermined amount based on the alleged decline in the
value of the common stock after the Company, in early April 1999,
disclosed the initiation of inquiries by state investigators into its
billing practices. The plaintiff class has been certified. No trial
date has been set, but the court has set a pre-trial conference for
November 19, 2001. Under the local rules, all pre-trial activities,
including discovery and motions for summary judgment, must be completed
before that date, and trial may be set for anytime thereafter. Also
pursuant to the local rules, the parties have agreed to engage in a
mediation, but to date those efforts have been unsuccessful. Although
the Company continues to believe that the claims are without merit and
intends to defend them vigorously, if the Company is unsuccessful in
defending the class action lawsuits that have been brought against it,
damages awarded could exceed the limits of the Company's insurance
coverage and have a material adverse effect on the Company's financial
condition, results of operations and liquidity.
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 for services reimbursed by
the Medicaid programs in these states and the Tricare program for
military dependents. On May 25, 2000, the Company entered into a
settlement agreement with the Office of the Attorney General for the
State of Florida, pursuant to which the Company paid the State of
Florida $40,000 to settle any claims regarding the receipt of
overpayments from the Florida Medicaid program from January 7, 1997
through the effective date of the settlement agreement. On August 28,
2000, the Company entered into a settlement agreement with the State of
Arizona's Medicaid Agency, pursuant to which the Company paid the State
of Arizona $220,000 in settlement of potential claims regarding
payments received by the Company and its affiliated physicians and
physician practices from the Arizona Medicaid program for neonatal,
newborn and pediatric services provided over a ten-year period, from
January 1, 1990 through the effective date of the settlement agreement.
Additionally, the Company reimbursed the State of Arizona for costs
related to its investigation.
The Florida and Arizona settlement agreements both stated that the
investigations conducted by those states revealed a potential
overpayment, but no intentional fraud, and that any overpayment was due
to a lack of clarity in the relevant billing codes. Although the
Company believes that the resolution of the Florida and Arizona
investigations on these terms supports the propriety of our billing
practices, the investigation in Colorado is ongoing and these matters
have prompted inquiries by Medicaid officials in other states. The
Company cannot predict whether the Colorado investigation or any other
inquiries will have a material adverse effect on the Company's
business, financial condition and results of operations.
10
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
8. CONTINGENCIES, CONTINUED:
The Company further believes that billing audits, inquiries and
investigations from government agencies will continue to occur in the
ordinary course of its business and in the healthcare services industry
in general and from time to time, the Company may be subject to
additional billing audits and inquiries by government and other payors.
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
are not expected to have a material impact on the Company's financial
position, results of operations or liquidity, notwithstanding any
possible lack of insurance recovery.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
On May 15, 2001, we completed the merger with Magella, and accordingly,
Magella's results of operations have been included in our consolidated financial
statements commencing on the effective date.
THREE MONTHS ENDED SEPTEMBER 30, 2001 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
We reported net patient service revenue of $102.8 million for the three
months ended September 30, 2001, as compared with $64.3 million for the same
period in 2000, a growth rate of 59.9%. Of this $38.5 million increase, $34
million, or 88.3%, was attributable to new units, including units at which we
provide services as a result of acquisitions. Same unit net patient service
revenue increased approximately $4.5 million, or 7%, for the three months ended
September 30, 2001. The increase in same unit net patient service revenue is
primarily the result of pricing increases and volume increases in the three
months ended September 30, 2001 as compared to the three months ended September
30, 2000. Pricing increases are due to a higher acuity level of patient services
billed and increased reimbursement from third party payors. Same units are those
units at which we provided services for the entire current period and the entire
comparable period.
Salaries and benefits increased $21.1 million, or 46.5%, to $66.5
million for the three months ended September 30, 2001 as compared with $45.4
million for the same period in 2000. Of this $21.1 million increase, $19.7
million, or 93.4%, was attributable to physicians, clinical staff and support
staff added as a result of the Magella merger and physicians and clinical staff
related to other acquisitions. The remaining $1.4 million was primarily
attributable to an increase in resources for: (i) billing and collections as a
result of our continued regionalization of collection activities; and (ii)
information services for the development and support of clinical and operational
systems. Supplies and other operating expenses increased $3.2 million, or 45.1%,
to $10.2 million for the three months ended September 30, 2001, as compared with
$7 million for the same period in 2000. This $3.2 million increase was primarily
attributable to increased costs related to the Magella merger. Depreciation and
amortization expense increased by approximately $2.9 million, or 82.4%, to $6.3
million for the three months ended September 30, 2001, as compared with $3.5
million for the same period in 2000, primarily as a result of amortization of
goodwill in connection with the Magella merger and other acquisitions.
Income from operations increased approximately $11.3 million to
approximately $19.7 million for the three months ended September 30, 2001, as
compared with approximately $8.4 million for the same period in 2000. Our
operating margin increased 6.2% to 19.2% for the three months ended September
30, 2001, as compared to 13% for the same period in 2000.
We recorded net interest expense of approximately $695,000 for the
three months ended September 30, 2001, as compared with net interest expense of
approximately $893,000 for the same period in 2000. The decrease in interest
expense in 2001 is primarily due to a net reduction in the average balance
outstanding under our line of credit.
Our effective income tax rate was approximately 45.8% and 48.8% for the
three months ended September 30, 2001 and September 30, 2000, respectively. The
decrease is due to the reduction of non-deductible amounts associated with
goodwill as a percentage of our estimated annual pretax income.
Net income increased to approximately $10.3 million for the three
months ended September 30, 2001, as compared to $3.8 million for the same period
in 2000.
Diluted net income per common and common equivalent share was 40 cents
on weighted average shares of 25.7 million for the three months ended September
30, 2001, as compared to 24 cents on weighted average shares of 16.2 million for
the same period in 2000. The significant increase in the weighted average shares
outstanding is due to: (i) the shares issued in the Magella transaction which
were outstanding from May 15, 2001; (ii) the dilutive effect of convertible
notes and stock options assumed in the Magella transaction; and (iii) an
increase in our stock price.
12
NINE MONTHS ENDED SEPTEMBER 30, 2001 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2000
We reported net patient service revenue of $249.8 million for the nine
months ended September 30, 2001, as compared with $178.9 million for the same
period in 2000. Net patient service revenue for the nine months ended September
30, 2000 includes a charge of $6.5 million, which was recorded during the
quarter ended June 30, 2000, to increase the allowance for contractual
adjustments and uncollectible accounts. Excluding the $6.5 million charge, net
patient service revenue increased by $64.4 million for the nine months ended
September 30, 2001. Of this $64.4 million increase, $53.7 million, or 83.4%, was
attributable to new units at which we provide services as a result of
acquisitions. Same unit net patient service revenue increased approximately
$10.7 million, or 5.9%, for the nine months ended September 30, 2001. The
increase in same unit net patient service revenue is primarily the result of
pricing increases and volume increases in the nine months ended September 30,
2001 as compared to the nine months ended September 30, 2000. Pricing increases
are due to a higher acuity level of patient services billed and increased
reimbursement from third party payors. Same units are those units at which we
provided services for the entire current period and the entire comparable
period.
Salaries and benefits increased $36.8 million, or 27.7%, to $169.8
million for the nine months ended September 30, 2001, as compared with $133
million for the same period in 2000. Of this $36.8 million increase, $31.9
million, or 86.7%, was attributable to physicians, clinical staff and support
staff added as a result of the Magella merger and physicians and clinical staff
related to other acquisitions. The remaining $4.9 million is primarily
attributable to an increase in resources for: (i) billing and collections as a
result of our continued regionalization of collection activities; and (ii)
information services for the development and support of clinical and operational
systems. Supplies and other operating expenses increased $6.4 million, or 33.2%,
to $25.8 million for the nine months ended September 30, 2001, as compared with
$19.4 million for the same period in 2000. Of this $6.4 million increase,
approximately $3.4 million was attributable to increased costs related to the
Magella merger. The remaining $3 million was primarily attributable to: (i)
additional rent expense and other costs related to the continued expansion of
our regional collection offices; and (ii) an increase in medical supplies
related to the growth in our national hearing screen program. Depreciation and
amortization expense increased by approximately $4.8 million, or 46.6%, to $15
million for the nine months ended September 30, 2001, as compared with $10.2
million for the same period in 2000, primarily as a result of amortization of
goodwill related to the Magella merger and other acquisitions.
Income from operations increased approximately $23 million, or 141.4%,
to approximately $39.2 million for the nine months ended September 30, 2001, as
compared with $16.2 million for the same period in 2000. Our operating margin
increased 6.6% to 15.7% for the nine months ended September 30, 2001, as
compared to 9.1% for the same period in 2000. Excluding the $6.5 million charge
to revenue in the 2000 period, income from operations increased $16.5 million
and operating margin increased 3%.
We recorded net interest expense of approximately $1.9 million for the
nine months ended September 30, 2001, as compared with net interest expense of
approximately $2.7 million for the same period in 2000. The decrease in interest
expense in 2001 is primarily the result of a net reduction in the average
balance outstanding under our line of credit.
Our effective income tax rate was approximately 45.7% and 48.8% for the
nine months ended September 30, 2001 and September 30, 2000, respectively. The
decrease in the tax rate for the nine months ended September 30, 2001 is
primarily due to the reduction of non-deductible amounts associated with
goodwill as a percentage of our estimated annual pretax income.
Net income increased to approximately $20.3 million for the nine months
ended September 30, 2001, as compared to $6.9 million for the same period in
2000.
Diluted net income per common and common equivalent share was 96 cents
on weighted average shares of 21.3 million for the nine months ended September
30, 2001, as compared to 43 cents on weighted average shares of 15.9 million for
the same period in 2000. The significant increase in the weighted average shares
outstanding is due to: (i) the shares issued in the Magella transaction which
were outstanding from May 15, 2001; (ii) the dilutive effect of convertible
notes and stock options assumed in the Magella transaction; and (iii) an
increase in our stock price.
13
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, we had working capital of approximately $18.2
million, an increase of $16.1 million from working capital of $2.1 million at
December 31, 2000. The increase in working capital is primarily due to the
classification of our line of credit as long-term at September 30, 2001.
During the third quarter of 2001, we refinanced our $75 million line of
credit, which matured on September 30, 2001, with an amended and restated credit
agreement in the amount of $100 million. At our option, the credit agreement
(the "Line of Credit") bears interest at prime or Eurodollar rate plus an
applicable margin rate ranging from 2% to 2.75%. The Line of Credit is
collateralized by substantially all of our assets and matures on August 14,
2004. We are required to maintain certain financial covenants and at September
30, 2001 we are in compliance with such financial covenants. We had $12 million
outstanding under the Line of Credit at September 30, 2001 as compared to $23.5
million at December 31, 2000. The decrease is primarily due to the increase in
cash provided from operations.
Our capital expenditures have typically been for computer hardware and
software and for medical equipment at our outpatient offices. During the nine
months ended September 30, 2001, capital expenditures amounted to approximately
$5.1 million.
We anticipate that funds generated from operations, together with cash
on hand, and funds available under our Line of Credit will be sufficient to meet
our working capital requirements and finance required capital expenditures for
at least the next 12 months.
ACCOUNTING MATTERS
In July 2001, the Financial Accounting Standards Board (the "Board")
issued Statements of Financial Accounting Standards No. 141 ("FAS 141"),
"Business Combinations," and No. 142 ("FAS 142" or the "Statement") "Goodwill
and Other Intangible Assets." FAS 141 (i) requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001;
(ii) establishes specific criteria for the recognition of intangible assets
separately from goodwill; and (iii) requires unallocated negative goodwill to be
written off. FAS 142 (i) addresses financial accounting and reporting for
goodwill and other intangible assets; (ii) provides guidance on the amortization
of intangible assets other than goodwill; (iii) requires that goodwill not be
amortized; and (iv) requires an annual evaluation of goodwill and certain
intangible assets for impairment. FAS 141 is effective for all business
combinations initiated after June 30, 2001. FAS 142 is effective for fiscal
years beginning after December 15, 2001 with two exceptions: (i) goodwill and
intangible assets acquired after June 30, 2001 are immediately subject to the
nonamortization and amortization provisions of the Statement, and (ii) the
provisions of the Statement are not applicable to mutual enterprises and
not-for-profit organizations until further deliberation by the Board.
Effective July 1, 2001, the Company adopted the provisions of FAS 141
and the nonamortization provisions of FAS 142 pertaining to goodwill recorded
subsequent to June 30, 2001. The Company is currently assessing the impact of
the remaining provisions of FAS 142 effective January 1, 2002. The adoption of
FAS 141 and the nonamortization provisions of FAS 142 did not have a material
impact on the Company's results of operations for the three months ended
September 30, 2001.
In October 2001, the Board issued Statement of Financial Accounting
Standards No. 144 ("FAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." FAS 144 supersedes Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," and addresses (i) the recognition and measurement of the
impairment of long-lived assets to be held and used and (ii) the measurement of
long-lived assets to be disposed of by sale. FAS 144 is effective for fiscal
years beginning after December 15, 2001. The Company is currently assessing the
impact, if any, of the adoption of this statement.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our Line of Credit and certain operating lease agreements are subject
to market risk from interest rate changes. The total amount available under our
Line of Credit is $100 million. At our option, the Line of Credit bears interest
at prime or Eurodollar rate plus an applicable margin rate ranging from 2% to
2.75%. The leases bear interest at LIBOR-based variable rates. The outstanding
principal balance on the Line of Credit is $12 million at September 30, 2001.
The outstanding balances related to the operating leases totaled approximately
$16.9 million at September 30, 2001. Considering the total outstanding balances
under these instruments at September 30, 2001 of approximately $28.9 million, a
1% change in interest rates would result in an impact to pretax earnings of
approximately $289,000 per year.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1999, several federal securities law class actions
were commenced against us and three of our principal officers in
United States District Court for the Southern District of Florida. The
plaintiffs purport to represent a class of all open market purchasers
of our common stock between March 31, 1997, and various dates through
and including April 2, 1999. They claim that during that period, we
violated the antifraud provisions of the federal securities laws by
issuing false and misleading statements concerning our billing
practices and results of operations. The plaintiffs seek damages in an
undetermined amount based on the alleged decline in the value of the
common stock after we, in early April 1999, disclosed the initiation
of inquiries by state investigators into our billing practices. The
plaintiff class has been certified. No trial date has been set, but
the court has set a pre-trial conference for November 19, 2001. Under
the local rules, all pre-trial activities, including discovery and
motions for summary judgment, must be completed before that date, and
trial may be set for anytime thereafter. Also pursuant to the local
rules, the parties have agreed to engage in a mediation, but to date
those efforts have been unsuccessful. Although we continue to believe
that the claims are without merit and intend to defend them
vigorously, if we are unsuccessful in defending the class action
lawsuits that have been brought against us, damages awarded could
exceed the limits of our insurance coverage and have a material
adverse effect on our financial condition, results of operations, and
liquidity.
In April 1999, we received requests, and in one case a
subpoena, from investigators in Arizona, Colorado and Florida for
information related to our billing practices for services reimbursed
by the Medicaid programs in these states and the Tricare program for
military dependents. On May 25, 2000, we entered into a settlement
agreement with the Office of the Attorney General for the State of
Florida, pursuant to which we paid the State of Florida $40,000 to
settle any claims regarding the receipt of overpayments from the
Florida Medicaid program from January 7, 1997 through the effective
date of the settlement agreement. On August 28, 2000, we entered into
a settlement agreement with the State of Arizona's Medicaid Agency,
pursuant to which we paid the State of Arizona $220,000 in settlement
of potential claims regarding payments received by Pediatrix and its
affiliated physicians and physician practices from the Arizona
Medicaid program for neonatal, newborn and pediatric services provided
over a ten-year period, from January 1, 1990 through the effective
date of the settlement agreement. Additionally, we reimbursed the
State of Arizona for costs related to its investigation.
The Florida and Arizona settlement agreements both stated that
the investigations conducted by those states revealed a potential
overpayment, but no intentional fraud, and that any overpayment was
due to a lack of clarity in the relevant billing codes. Although we
believe that the resolution of the Florida and Arizona investigations
on these terms supports the propriety of our billing practices, the
investigation in Colorado is ongoing and these matters have prompted
inquiries by Medicaid officials in other states. We cannot predict
whether the Colorado investigation or any other inquiries will have a
material adverse effect on our business, financial condition and
results of operations.
We further believe that billing audits, inquiries and
investigations from government agencies will continue to occur in the
ordinary course of business and in the healthcare services industry in
general and from time to time, we may be subject to additional billing
audits and inquiries by government and other payors.
During the ordinary course of business, we have become a party
to pending and threatened legal actions and proceedings, most of which
involve claims of medical malpractice and are generally covered by
insurance. These lawsuits are not expected to result in judgments
which would exceed professional liability insurance coverage, and
therefore are not expected to have a material impact on our financial
position, results of operations or liquidity, notwithstanding any
possible lack of insurance recovery.
16
PEDIATRIX MEDICAL GROUP, INC.
PART II - OTHER INFORMATION - (CONTINUED)
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
Not applicable.
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 our actual
results, performance or achievements 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.
Our shareholders should also be aware that while we do, at
various times, communicate with securities analysts, it is against our
policies to disclose to such analysts any material non-public
information or other confidential information. Accordingly, our
shareholders should not assume that we agree with all statements or
reports issued by such analysts. To the extent statements or reports
issued by analysts contain projections, forecasts or opinions by such
analysts about us, such reports and statements are not our
responsibility.
For additional information identifying certain other important
factors which may affect our operations and could cause actual results
to vary materially from those anticipated in the forward looking
statements, see our Securities and Exchange Commission filings,
including but not limited to, the discussion included in the Business
section of our Form 10-K/A (Amendment No. 1) under the heading "Risk
Factors" and in our Proxy Statement/Prospectus contained in the
Registration Statement on Form S-4, as amended, in the section
entitled "Risk Factors."
17
PEDIATRIX MEDICAL GROUP, INC.
PART II - OTHER INFORMATION - (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.21 Amended and Restated Credit Agreement, dated as of
August 14, 2001, among Pediatrix, certain
professional contractors, Fleet Bank and Firstar Bank
N.A.
10.22 Amendment No. 1 to Security Agreement dated August
14, 2001, between Pediatrix Medical Group, Inc. and
Fleet National Bank, as Agent.
10.23 Amendment No. 1 to Amended and Restated Credit
Agreement, dated as of August 29, 2001, among
Pediatrix, certain professional contractors, Fleet
Bank, Firstar Bank N.A. and HSBC Bank USA.
11.1 Statement Re: Computation of Per Share Earnings
(b) Reports on Form 8-K
Form 8-K/A, filed July 27, 2001, amending Form 8-K, filed May
25, 2001, reporting Item 2 (Acquisition or Disposition of
Assets) related to the completion of the Company's merger with
Magella Healthcare Corporation ("Magella") effective May 15,
2001; reporting Item 7(a) (Financial Statements of Businesses
Acquired) related to the audited consolidated financial
statements of Magella as of December 31, 1999 and 2000, and
for each of the three years in the period ended December 31,
2000; and reporting Item 7(b) (Pro Forma Financial
Information) related to pro forma financial information
incorporated by reference to the Company's Registration
Statement on Form S-4.
18
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: November 9, 2001 By: /s/ Roger J. Medel, M.D.
-----------------------------------------------
Roger J. Medel, M.D., Chief Executive Officer
(Principal Executive Officer)
Date: November 9, 2001 By: /s/ Karl B. Wagner
-----------------------------------------------
Karl B. Wagner, Chief Financial Officer
(Principal Financial and Accounting Officer)
19