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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File Number 0-26762

PEDIATRIX MEDICAL GROUP, INC.

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   o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

     Shares of Common Stock outstanding as of May 8, 2003: 23,571,731.

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PEDIATRIX MEDICAL GROUP, INC.

INDEX

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PART I — FINANCIAL INFORMATION

PEDIATRIX MEDICAL GROUP, INC.

The accompanying notes are an integral part of
these condensed consolidated financial statements.

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PEDIATRIX MEDICAL GROUP, INC.

(Unaudited)

The accompanying notes are an integral part of
these condensed consolidated financial statements.

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PEDIATRIX MEDICAL GROUP, INC.

(Unaudited)

The accompanying notes are an integral part of
these condensed consolidated financial statements.

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PEDIATRIX MEDICAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.		Basis of Presentation:
		The accompanying unaudited condensed consolidated financial statements of Pediatrix Medical Group, Inc. and the notes thereto presented in this Quarterly Report have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission applicable to interim financial statements, and 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 only of normal recurring adjustments, necessary for a fair presentation of the results of interim periods. The financial statements include all the accounts of Pediatrix Medical Group, Inc., and its subsidiaries combined with the accounts of the professional associations, corporations and partnerships (the “PA Contractors”) with which Pediatrix Medical Group, Inc. or one of its subsidiaries currently has specific management arrangements. The terms “Pediatrix” and the “Company” refer collectively to Pediatrix Medical Group, Inc., its subsidiaries, and the PA Contractors.
		The consolidated results of operations for the interim periods presented are not necessarily indicative of the results to be experienced for the entire fiscal year. The accompanying unaudited condensed consolidated financial statements and the notes thereto should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission.
2.		Summary of Significant Accounting Policies:
		Stock Options
		The Company accounts for stock-based compensation to employees using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation expense for stock options issued to employees is reflected in the condensed consolidated statements of income, because the market value of the Company’s stock equals the exercise price on the day options are granted.
		Had compensation expense been determined based on the fair value accounting provisions of FAS 123, “Accounting for Stock-Based Compensation,” the Company’s net income and net income per share would have been reduced to the pro forma amounts below:

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PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

2.		Summary of Significant Accounting Policies, Continued:
		The fair value of each option or share to be issued is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in the three months ended March 31, 2003 and 2002: dividend yield of 0% for all years; expected volatility of 60% and 65%, respectively, and risk-free interest rates of 3.0% and 4.4%, respectively, for options with expected lives of five years (officers and physicians of the Company) and 2.1% and 3.8%, respectively, for options with expected lives of three years (all other employees of the Company).
		Accounting Pronouncements
		In November 2002, FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34,” was issued. This statement elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective for interim and annual periods ending after December 15, 2002. The adoption of FIN 45 did not have a material impact on the Company’s financial position or results of operations for the three months ended March 31, 2003.
		In January 2003, FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51,” was issued. FIN 46 addresses consolidation by business enterprises of variable interest entities. The provisions of FIN 46 apply immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company has lease arrangements with two entities that may be considered variable interest entities under FIN 46. The Company is currently evaluating whether these two entities will be subject to consolidation under the provisions of FIN 46. As of March 31, 2003, property and equipment related to these entities was approximately $16.0 million with associated liabilities of the same amount.
3.		Business Acquisitions:
		The Company completed the acquisition of one physician group practice during the three months ended March 31, 2003. Total consideration for the acquired practice was approximately $2.6 million in cash. The Company has accounted for this acquisition using the purchase method of accounting. The results of operations of the acquired practice have been included in the Company’s consolidated financial statements from the date of acquisition.
		The following unaudited pro forma information combines the consolidated results of operations of the Company and the physician group practices acquired during 2002 and 2003 as if the transactions had occurred on January 1, 2002:

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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.		Accounts Payable and Accrued Expenses:
		Accounts payable and accrued expenses consist of the following:

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 convertible notes calculated using the if-converted method and outstanding options calculated using the treasury stock method. The calculation of diluted net income per share excludes the after-tax impact of interest expense related to convertible subordinated notes.
6.		Common Stock Repurchase Program:
		In November 2002, the Company’s Board of Directors approved a common stock repurchase program (the “Repurchase Program”). Under this Repurchase Program, the Company was authorized to repurchase up to $50 million of its common stock in the open market, subject to market conditions and trading restrictions. During the three months ended March 31, 2003, the Company repurchased approximately 1.6 million shares at a cost of approximately $50 million under the Repurchase Program. In April 2003, the Company’s Board of Directors authorized the repurchase of an additional $50 million of common stock.

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PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

7.		Contingencies:
		On June 6, 2002, the Company received a written request from the Federal Trade Commission (“FTC”) to submit information on a voluntary basis in connection with an investigation of issues of competition related to the 2001 acquisition of Magella Healthcare Corporation and its business practices generally. On February 5, 2003, the Company received additional information requests from the FTC in the form of a Subpoena and Civil Investigative Demand. Pursuant to these requests, the FTC has requested documents and information relating to the acquisition and the Company’s business practices in certain markets. The Company is cooperating fully with the FTC, but at this time cannot predict the outcome of the investigation and whether it will have a material adverse effect on the Company’s business, financial condition, results of operations or the trading price of the Company’s shares.
		In April 1999, the Company received requests from federal investigators for information related to its billing practices for services reimbursed by the TRICARE program for military dependents. The TRICARE investigation is active and ongoing. The Company believes that additional audits, inquiries and investigations from government agencies will continue to occur in the ordinary course of its business. The Company cannot predict whether any such audits, inquiries or investigations will have a material adverse effect on the Company’s business, financial condition, results of operations or the trading price of the Company’s shares.
		During the ordinary course of its business, the Company has become a party to pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice. Although these actions and proceedings are generally expected to be covered by insurance, there can be no assurance that the Company’s medical malpractice insurance coverage will be adequate to cover liabilities arising out of medical malpractice claims where the outcomes of such claims are unfavorable to the Company. The Company believes, based upon its review of these pending matters, that the outcome of such legal actions and proceedings will not have a material adverse effect on its business, financial condition, results of operations or the trading price of the Company’s shares.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     The following discussion highlights the principal factors affecting our financial condition and results of operations, as well as our liquidity and capital resources for the periods described. This discussion should be read in conjunction with the consolidated financial statements and the accompanying notes presented in this Quarterly Report. As used herein, “us”, “we” and “our” refer to Pediatrix Medical Group, Inc. and its subsidiaries and the professional associations, corporations and partnerships (the “PA Contractors”) with which Pediatrix Medical Group, Inc. or one of its subsidiaries has specific management arrangements.

     The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements as of March 31, 2003, and for the three months ended March 31, 2003 and 2002, and the notes thereto, presented in this Quarterly Report, and Management’s Discussion and Analysis of Financial Condition and Results of Operations (including the discussion of our critical accounting policies) and our consolidated financial statements and the notes thereto contained in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission. The consolidated results of operations for the interim periods reported are not necessarily indicative of the results to be experienced for the entire fiscal year.

     The matters discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical facts are forward-looking and are based on estimates, forecasts and assumptions involving risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. See “Caution Concerning Forward-Looking Statements” below.

Results of Operations

Three Months Ended March 31, 2003 as Compared to Three Months Ended March 31, 2002

     Our net patient service revenue increased $18.9 million, or 17.6%, to $126.2 million for the three months ended March 31, 2003, as compared with $107.3 million for the same period in 2002. Of this $18.9 million increase, $3.9 million, or 20.6%, was attributable to new units at which we provide services as a result of acquisitions. Same unit patient service revenue increased $15.0 million, or 14.2%, for the three months ended March 31, 2003. The increase in same unit net patient service revenue was primarily the result of: (i) an increase in neonatal intensive care unit patient days of 5.6%; (ii) increased revenue from volume growth in perinatal services and other services including hearing screens and newborn nursery provided in existing practices; (iii) improved managed care contracting; and (iv) price increases implemented on January 1, 2003. Same units are those units at which we provided services for the entire current period and the entire comparable period.

     Practice salaries and benefits increased $12.1 million, or 19.3%, to $74.6 million for the three months ended March 31, 2003, as compared with $62.5 million for the same period in 2002. The increase was attributable to: (i) costs associated with new physicians and other clinical staff to support new unit growth and volume growth at existing units; (ii) an increase in incentive compensation as a result of same unit growth and operational improvements at the physician practice level; (iii) an increase in professional liability and group insurance costs; and (iv) an increase in payroll taxes related to increased incentive compensation payouts.

     Practice supplies and other operating expenses increased $600,000, or 16.5%, to $4.1 million for the three months ended March 31, 2003, as compared with $3.5 million for the same period in 2002. The increase was primarily attributable to new units at which we provide services as a result of acquisitions.

     General and administrative expenses include all salaries, benefits, supplies and other operating expenses not specifically related to the day-to-day operations of our physician group practices, including billing and collection functions. General and administrative expenses increased $700,000, or 4.1%, to $18.3 million for the three months ended March 31, 2003, as compared to $17.6 million for the same period in 2002. This $700,000 increase was primarily due to salaries and benefits as a result of the continued growth of the Company and increased group insurance costs. General and administrative expenses for the three months ended March 31, 2002 include settlement costs of $1.3 million related to a Colorado Medicaid investigation.

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     Depreciation and amortization expense increased by $200,000, or 12.6%, to $1.7 million for the three months ended March 31, 2003, as compared with $1.5 million for the same period in 2002.

     Income from operations increased $5.3 million, or 24.1%, to $27.6 million for the three months ended March 31, 2003, as compared with $22.2 million for the same period in 2002. Our operating margin increased 1.1 percentage points to 21.8% for the three months ended March 31, 2003, as compared to 20.7% for the same period in 2002.

     Earnings before interest expense, investment income, income tax provision, and depreciation and amortization (“EBITDA”) increased by $5.5 million, or 23.4%, to $29.2 million for the three months ended March 31, 2003, as compared with $23.7 million for the same period in 2002. EBITDA margin increased by 1.1 percentage points to 23.2%, as compared with 22.1% for the same period in 2002.

     EBITDA and EBITDA margin are non-GAAP measures of profitability and operating efficiency widely used by investors to evaluate and compare operating performance among different companies excluding the impact of certain non-cash charges (depreciation and amortization). Depending on capital investments, depreciation and amortization can vary significantly among different companies and industries. We believe that EBITDA and EBITDA margin provide investors with valuable measures to compare our operating performance with the operating performance of other companies. EBITDA and EBITDA margin for the three months ended March 31, 2003 and 2002 can be reconciled to their most comparable GAAP measures, income from operations and operating margin, as shown below. Margins are expressed as a percentage of net patient service revenue (amounts in thousands):