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 for 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 [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [   ]

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 August 2, 2004: 23,986,261

PEDIATRIX MEDICAL GROUP, INC.

INDEX

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

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.

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

4

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.

June 30, 2004

(Unaudited)

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 consolidated subsidiaries (collectively, “PMG”) together with the accounts of PMG’s affiliated professional associations, corporations and partnerships (the “affiliated professional contractors”). PMG has contractual management arrangements with its affiliated professional contractors which are separate legal entities that provide physician services in certain states and Puerto Rico. The terms “Pediatrix” and the “Company” refer collectively to Pediatrix Medical Group, Inc., its subsidiaries, and the affiliated professional 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 most recent Annual Report on Form 10-K.
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. To the extent the Company realizes an income tax benefit from the exercise of certain stock options, this benefit results in a decrease in current income taxes payable and an increase in additional paid-in capital.
		Had compensation expense been determined based on the fair value accounting provisions of Statement of Financial Accounting Standards No. 123 (“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. The weighted average assumptions used for grants in the three months ended June 30, 2004 are: dividend yield of 0%, expected volatility of 53%, and risk-free interest rates of 3.1% for options with expected lives of three years (officers of the Company) and 3.0% for options with expected lives of three and one-half years (all other employees of the Company except physicians). No options with expected lives of four years (physicians of the Company) were granted in the three months ended June 30, 2004. The weighted average assumptions used for grants in the three months ended June 30, 2003 are: dividend yield of 0%, expected volatility of 63%, and a risk-free interest rate of 2.8% for options with expected lives of five years (officers of the Company). No options with an expected life of three years (all other employees of the Company) and five years (physicians of the Company) were granted in the three months ended June 30, 2003. The weighted average assumptions for grants in the six months ended June 30, 2004 are: dividend yield of 0%, expected volatility of 53%, and risk-free interest rates of 2.9% for options with expected lives of three years (officers of the Company), 2.6% for options with expected lives of four years (physicians of the Company), and 2.2% for options with expected lives of three and one-half years (all other employees of the Company). The weighted average assumptions for grants in the six months ended June 30, 2003 are: dividend yield of 0%, expected volatility of 63%, and risk-free interest rates of 2.9% for options with expected lives of five years (officers of the Company), 3.0% for options with expected lives of five years (physicians of the Company), and 2.1% for options with expected lives of three years (all other employees of the Company).
3.		Business Acquisitions:
		The Company completed the acquisition of seven physician group practices during the six months ended June 30, 2004. Total consideration and related costs for these acquisitions were approximately $38.7 million. In connection with these transactions, the Company recorded goodwill of approximately $36.3 million and other identifiable intangible assets consisting of physician and hospital agreements of approximately $2.4 million. The goodwill of approximately $36.3 million related to these acquisitions represents the only change in the carrying amount of goodwill for the six month period ended June 30, 2004.
		The following unaudited pro forma information combines the consolidated results of operations of the Company and the Company’s 2003 and 2004 acquisitions, as if the transactions had occurred on January 1, 2003:

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.

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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:

5.		Shareholders’ Equity:
		The Company’s changes in shareholders’ equity for the six months ended June 30, 2004 are as follows (in thousands):

6.		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 applicable 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 applicable period. Potential common shares consist of the dilutive effect of convertible subordinated 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.
		During the three months ended December 31, 2003, all issued and outstanding subordinated convertible notes were converted into approximately 33,000 shares of common stock.

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

(Unaudited)

6.		Net Income Per Share, continued:
		The calculations of basic and diluted net income per share for the three and six months ended June 30, 2004 and 2003 are as follows:

		For the three months ended June 30, 2004 and 2003, the Company had approximately 7,000 and 1.5 million outstanding employee stock options, respectively, that have been excluded from the computation of diluted earnings per share since they are anti-dilutive. For the six months ended June 30, 2004 and 2003, the Company had approximately 12,000 and 1.5 million outstanding employee stock options, respectively, that have been excluded from the computation of diluted earnings per share since they are anti-dilutive.
7.		Common Stock Repurchase Program:
		During 2003, the Company repurchased approximately 3.0 million shares of its common stock for approximately $100 million under repurchase programs approved by its Board of Directors. During the three months ended June 30, 2004, the Company repurchased approximately 348,400 shares at a cost of approximately $23.2 million under a $50 million repurchase program approved by its Board of Directors in May 2004. No common stock was repurchased during the three months ended March 31, 2004. All repurchases were made in the open market, subject to market conditions and trading restrictions.

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

(Unaudited)

8.		Incentive Compensation Plan
		On May 20, 2004, the Company’s shareholders approved the 2004 Incentive Compensation Plan (“2004 Plan”). The terms of the 2004 Plan provide for grants of stock options, stock appreciation rights or SARs, restricted stock, deferred stock, other stock-related awards and performance awards that may be settled in cash, stock or other property. Under the 2004 Plan, the total number of shares of the Company’s common stock that may be subject to the granting of awards is 2,000,000 shares, subject to the terms and conditions set forth in the 2004 Plan.
9.		Contingencies:
		In June 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 May 2001 acquisition of Magella Healthcare Corporation and the Company’s business practices generally. In February 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 Company produced documents and information relating to the acquisition and its business practices in certain markets. The Company has also provided on a voluntary basis additional information and testimony on issues related to the investigation. At this time, the investigation remains active and ongoing and the Company is cooperating fully with the FTC.
		Beginning in April 1999, the Company received requests from various federal and state investigators for information relating to its billing practices for services reimbursed by Medicaid, and the United States Department of Defense’s TRICARE program for military dependants and retirees. Since then, a number of the individual state investigations were resolved through agreements to refund certain overpayments and reimburse certain costs to the states. In June 2003, the Company was advised by a United States Attorney’s Office that it was conducting a civil investigation with respect to the Company’s Medicaid billing practices nationwide. This federal Medicaid investigation, the TRICARE investigation, and related state inquiries are now being coordinated and are active and ongoing. The Company is cooperating fully with federal and state authorities with respect to these investigations and inquiries.
		In November 2003, the Company’s maternal-fetal practice in Las Vegas, Nevada was served with a search warrant by the State of Nevada. The warrant requested information concerning Medicaid billings for maternal-fetal care provided by the Company in that state. The Company does not know the basis for the warrant or the nature of the issues relating to this investigation. The Company is cooperating fully with appropriate officials in the investigation.
		Currently, management cannot predict the timing or outcome of any of these pending investigations and inquiries and whether they will have, individually or in the aggregate, a material adverse effect on its business, financial condition or results of operations and the trading price of its common stock.
		The Company also expects that additional audits, inquiries and investigations from government authorities and agencies will continue to occur in the ordinary course of its business. Such audits, inquiries and investigations and their ultimate resolutions, individually or in the aggregate, could have a material adverse effect on its business, financial condition or results of operations and the trading price of its common stock.
		In the ordinary course of its business, the Company has become involved as a defendant in pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice related to medical services provided by its affiliated physicians. The Company’s contracts with hospitals also generally require it to indemnify them and their affiliates for losses resulting from the negligence of the Company’s affiliated physicians. The Company is also subject to other lawsuits which may involve large claims and significant defense costs. The Company believes, based upon its review of pending actions and proceedings, that the outcome of such legal actions and proceedings will not have a material adverse effect on its business, financial condition or results of operations and the trading price of its common stock. The outcome of such actions and proceedings, however, cannot be predicted with certainty and an unfavorable resolution of one or more of them could have a material adverse effect on the Company’s business, financial condition or results of operations and the trading price of its common stock.

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

(Unaudited)

9.		Contingencies, continued:
		Although the Company currently maintains liability insurance coverage intended to cover medical malpractice and certain other claims, this coverage generally must be renewed annually and may not continue to be available to the Company in future years at acceptable costs and on favorable terms. In addition, its insurance coverage may not be adequate to cover liabilities arising out of claims asserted against it in the future where the outcomes of such claims are unfavorable to the Company. Liabilities in excess of the Company’s insurance coverage could have a material adverse effect on its business, financial condition and results of operations.
10.		Subsequent Events:
		In July 2004, the Company obtained a new revolving line of credit and simultaneously terminated its old line of credit. The new line of credit is a $150 million revolving credit facility which includes (1) a $25 million subfacility for the issuance of letters of credit and (2) a $15 million subfacility for swingline loans. The new line of credit m