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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
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Commission file number 001-12111
PEDIATRIX MEDICAL GROUP, INC.
(Exact name of registrant as specified in its charter)
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Florida
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65-0271219 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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1301 Concord Terrace, |
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33323 |
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Sunrise, Florida |
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(Zip Code) |
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(Address of principal executive offices) |
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(954) 384-0175
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Name of Each Exchange on Which Registered |
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Common Stock, par value $.01 per share
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act:
Preferred Share Purchase Rights
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (§229.405
of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Securities Exchange Act
Rule 12b-2). Yes þ No o
The aggregate market value of shares of Common Stock of the
registrant held by non-affiliates of the registrant on
June 30, 2004, the last business day of the
registrant’s most recently completed second fiscal quarter,
was approximately $1,698,751,000 based on a $69.85 closing price
per share as reported on the New York Stock Exchange composite
transactions list on such date.
The number of shares of Common Stock of the registrant
outstanding on March 7, 2005, was 22,782,260
DOCUMENTS INCORPORATED BY REFERENCE:
The registrant’s definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to
Regulation 14A, with respect to the 2005 annual meeting of
shareholders is incorporated by reference in Part III of
this Form 10-K to the extent stated herein. Except with
respect to information specifically incorporated by reference in
this Form 10-K, each document incorporated by reference
herein is deemed not to be filed as a part hereof.
PEDIATRIX MEDICAL GROUP, INC.
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2004
INDEX
FORWARD-LOOKING STATEMENTS
Certain information included or incorporated by reference in
this Annual Report may be deemed to be “forward-looking
statements” within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements may include,
but are not limited to, statements relating to our objectives,
plans and strategies, and all statements (other than statements
of historical facts) that address activities, events or
developments that we intend, expect, project, believe or
anticipate will or may occur in the future are forward looking
statements. These statements are often characterized by
terminology such as “believe”, “hope”,
“may”, “anticipate”, “should”,
“intend”, “plan”, “will”,
“expect”, “estimate”, “project”,
“positioned”, “strategy” and similar
expressions, and are based on assumptions and assessments made
by our management in light of their experience and their
perception of historical trends, current conditions, expected
future developments and other factors they believe to be
appropriate. Any forward-looking statements in this Annual
Report are made as of the date hereof, and we undertake no duty
to update or revise any such statements, whether as a result of
new information, future events or otherwise. Forward-looking
statements are not guarantees of future performance and are
subject to risks and uncertainties. Important factors that could
cause actual results, developments and business decisions to
differ materially from forward-looking statements are described
in this Annual Report, including the risks set forth under
“Risk Factors” in Item 1.
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PART I
As used in this Annual Report, unless the context otherwise
requires, the terms “Pediatrix”, the
“Company”, “we”, “us” and
“our” refer to Pediatrix Medical Group, Inc., a
Florida corporation, and its consolidated subsidiaries
(collectively, “PMG”), together with PMG’s
affiliated professional associations, corporations and
partnerships (“affiliated professional contractors”).
PMG has contracts with its affiliated professional contractors,
which are separate legal entities that provide physician
services in certain states and Puerto Rico.
OVERVIEW
Pediatrix is the nation’s largest health care services
company focused on physician services for newborn,
maternal-fetal and other pediatric subspecialty care. Our
national network is comprised of approximately 776 affiliated
physicians, including 603 neonatal physician specialists who
provide clinical care in 31 states and Puerto Rico,
primarily within hospital-based neonatal intensive care units
(called “NICUs”), to babies born prematurely or with
medical complications. Our affiliated neonatal physician
specialists staff and manage clinical activities at more than
220 hospitals, and our 86 affiliated maternal-fetal medicine
subspecialists provide care to expectant mothers experiencing
complicated pregnancies in many areas where our affiliated
neonatal physicians practice. Our network includes other
pediatric subspecialists, including 44 pediatric intensivists,
28 pediatric cardiologists and 15 pediatric hospitalists. In
addition, we believe that we are the nation’s largest
provider of hearing screens to newborns and the nation’s
largest private provider of metabolic screening services to
newborns.
Pediatrix Medical Group, Inc. was incorporated in Florida in
1979. Our principal executive offices are located at 1301
Concord Terrace, Sunrise, Florida 33323, and our telephone
number is (954) 384-0175.
Our Operations
The following discussion describes the components of our
services.
Physician Services. Our principal mission is the
provision of comprehensive clinical care to babies born
prematurely or with medical complications and to expectant
mothers experiencing complicated pregnancies.
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Neonatal Care. We provide clinical care to babies born
prematurely or with complications within specific units at
hospitals, primarily NICUs, through a team of experienced
neonatal physician specialists (called
“neonatologists”), neonatal nurse practitioners and
other pediatric clinicians. Neonatologists are board-certified
or board eligible pediatricians who have extensive education and
training for the care of babies born prematurely or with
complications that require complex medical treatment. Neonatal
nurse practitioners are registered nurses who have advanced
training and education in managing health care needs of
newborns, infants and their families. |
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Maternal-Fetal Care. Our operations also include
outpatient and inpatient clinical care to expectant mothers
experiencing complicated pregnancies and their unborn babies
through our affiliated maternal-fetal medicine subspecialists
and other clinicians, such as maternal-fetal nurses, certified
mid-wives, ultrasonographers and genetic counselors.
Maternal-fetal medicine subspecialists are board-certified
obstetricians who have extensive education and training for the
treatment of high-risk expectant mothers and their fetuses. Our
affiliated maternal-fetal medicine subspecialists practice in
certain metropolitan areas where we have affiliated
neonatologists to provide coordinated care for women with
complicated pregnancies and whose babies are often admitted to a
NICU upon delivery. |
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Other Pediatric Subspecialty Care. Our network also
includes other pediatric subspecialists, such as pediatric
intensivists, which are hospital-based physicians who have
additional education and training in caring for critically-ill
or injured children and adolescents, pediatric cardiologists,
which are pediatricians who have additional education and
training in congenital and acquired heart disorders, and
pediatric hospitalists, which are hospital-based pediatricians
who specialize in inpatient care and |
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management of acutely-ill children. Our affiliated physicians
also provide clinical services in other areas of hospitals,
particularly in the labor and delivery area, nursery and
pediatric department, where immediate accessibility to
specialized care may be critical. |
Newborn Screening Services. We also operate the
nation’s largest private laboratory providing newborn
metabolic screening. In addition, we are the nation’s
largest provider of hearing screens to newborns. Our newborn
screening program identifies more than 50 metabolic disorders
and various genetic and biochemical conditions, and potential
hearing loss for early treatment or management. All states
require screening for a select number of metabolic conditions
before newborns are discharged from the hospital. In addition,
38 states either require newborns to be screened for
potential hearing loss before being discharged from the hospital
or require that parents be offered the opportunity to submit
their newborns to hearing screens.
Clinical Research and Education. As part of our ongoing
commitment to improving patient care through evidence-based
medicine, we conduct clinical research, monitor clinical
outcomes and implement clinical quality initiatives with a view
to improving patient outcomes, shortening the length of hospital
stays and reducing long-term health system costs. We have
managed three neonatal clinical trials to completion. We also
make extensive continuing medical education resources available
to our physicians and neonatal nurse practitioners to give them
access to the most current treatment methodologies and best
demonstrated processes. We believe that referring physicians,
hospitals, third-party payors and patients all benefit from our
clinical research, education and quality initiatives.
Demand for our Physician Services
Hospital-Based Care. Hospitals generally must provide
cost-effective, quality care in order to enhance their
reputations within their communities and desirability to
patients, referring physicians and third-party payors. In an
effort to improve outcomes and manage costs, hospitals typically
employ or contract with physician subspecialists to provide
specialized care in many hospital-based units, including NICUs.
Hospitals traditionally staffed these units through affiliations
with small, local physician groups or independent practitioners.
However, management of these units in recent years has presented
significant operational challenges, including variable
admissions rates, increased operating costs, complex
reimbursement systems and other administrative burdens. As a
result, hospitals have contracted with physician organizations
that have the clinical quality initiatives, information and
reimbursement systems and management expertise required to
effectively and efficiently operate these units in the current
health care environment. Demand for hospital-based physician
services, including neonatology, is determined by a national
market in which qualified physicians with advanced training
compete for hospital contracts.
Neonatal Medicine. Of the approximately four million
births in the United States annually, we estimate that
approximately 10 to 12 percent require NICU admissions.
Although research continues to be conducted by numerous
institutions to identify potential causes of premature birth and
medical complications that often require NICU admissions, some
common contributing factors include the presence of hypertension
or diabetes in the mother, lack of prenatal care, complications
during pregnancy, drug and alcohol abuse and smoking or poor
nutritional habits during pregnancy. Babies admitted to NICUs
typically have an illness or condition that requires the care of
a neonatalogist. Babies that are born prematurely and have a low
birthweight often require neonatal intensive care services
because of increased risk for medical complications. We believe
obstetricians generally prefer to perform deliveries at
hospitals that provide a full complement of labor and delivery
services, which includes a NICU staffed by board-certified or
board-eligible neonatologists. Because obstetrics is a
significant source of hospital admissions, hospital
administrators have responded to these demands by establishing
NICUs and contracting with independent neonatology group
practices to staff and manage these units. As a result, NICUs
within the United States tend to be concentrated in hospitals
with a higher volume of births. There are approximately 3,800
board-certified neonatologists in the United States who practice
at approximately 1,500 hospital-based NICUs.
Maternal-Fetal Medicine. Expectant mothers with pregnancy
complications often seek or are referred by their obstetricians
to maternal-fetal medicine subspecialists. These subspecialists
provide care to women with conditions such as diabetes,
hypertension, sickle cell disease, multiple gestation, recurrent
miscarriage,
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family history of genetic diseases, suspected fetal birth
defects, and other complications during their pregnancies. We
believe that improved maternal-fetal care has a positive impact
on neonatal outcomes. Data on neonatal outcomes demonstrate
that, in general, the likelihood of mortality or an adverse
condition or outcome (referred to as “morbidity”) is
reduced the longer a baby remains in the womb. As a result, our
maternal-fetal medicine subspecialists focus on extending the
pregnancy to improve the viability of the fetus.
Other Pediatric Subspecialty Medicine. Other areas of
pediatric subspecialty medicine are closely associated with our
operations in maternal-fetal-newborn medicine. For example,
pediatric intensivists care for critically-ill or injured
children and adolescents in pediatric intensive care units
(called “PICUs”). There are approximately 1,000
board-certified pediatric intensivists in the United States who
practice at approximately 400 hospital-based PICUs. Pediatric
cardiology is another important subspecialty within pediatric
medicine and is linked closely with maternal-fetal and neonatal
intensive care. There are approximately 1,500 board-certified
pediatric cardiologists in the United States and we believe that
approximately one percent of all babies born in the United
States each year are born with congenital cardiovascular
malformations. Advances in diagnostic procedures have made it
possible to identify cardiovascular malformations relatively
early in a pregnancy, and pediatric cardiologists routinely work
closely with maternal-fetal medicine subspecialists and
neonatologists to improve patient outcomes.
Practice Administration. Administrative demands and cost
containment pressures from a number of sources, principally
commercial and government payors, make it increasingly difficult
for doctors and hospitals to effectively manage patient care,
remain current on the latest procedures and efficiently
administer non-clinical activities. As a result, we believe that
physicians and hospitals remain receptive to being affiliated
with larger organizations that reduce administrative burdens,
achieve economies of scale and provide value-added clinical
research, education and quality initiatives. By relieving many
of the burdens associated with the management of a subspecialty
group practice, we believe that our practice administration
services permit our affiliated physicians to focus on providing
quality patient care and thereby contribute to improving patient
outcomes, shortening the length of hospital stays and reducing
long-term health system costs. In addition, our national network
of affiliated physician practices, although modeled around a
traditional group practice structure, is managed by a
non-clinical professional management team with proven abilities
to achieve significant operating efficiencies in providing
administrative support systems, interacting with physicians,
hospitals and third-party payors, managing information systems
and technologies, and complying with laws and regulations.
Our Business Strategy
Our business objective is to enhance our position as a premier
health care services organization that is built around physician
services for newborn and maternal-fetal care. The key elements
of our strategy to achieve our objectives are:
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Focus on neonatal, maternal-fetal and other pediatric
subspecialty care. Through our focus on neonatology, we have
developed significant administrative expertise relating to
neonatal physician services. We have also facilitated the
development of a clinical approach to the practice of medicine
among our affiliated physicians that includes research,
education and quality initiatives intended to advance the
science of neonatology, improve the quality of care provided to
acutely-ill newborns and contribute to shortening the length of
their hospital stays and reducing long-term health system costs.
We are committed to developing similar expertise in
maternal-fetal medicine and other pediatric subspecialties. |
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Promote same unit growth. We seek opportunities for
increasing revenues in our hospital-based operations. For
example, our affiliated hospital-based physicians are well
situated to, and, in some cases, provide physician services in
other departments, such as newborn nurseries, or in situations
where immediate accessibility to specialized obstetric and
pediatric care may be critical. In addition, we market our
capabilities to obstetricians and family physicians to attract
referrals to our hospital-based units. We also market the
services of our affiliated physicians to other hospitals to
attract transport admissions. |
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Acquire physician practice groups and expand into additional
healthcare services. We continue to seek to expand our
operations by acquiring established neonatal and maternal-fetal
medicine practice groups and other complementary pediatric
subspecialty physician groups, such as pediatric intensivists,
pediatric cardiologists and pediatric hospitalists. During 2004,
we added 12 physician groups to our national network through
acquisitions consisting of eight neonatal groups, two pediatric
cardiology practices, one maternal-fetal practice and one
pediatric intensive care practice. We intend to explore other
strategic opportunities that are related to our physician and
newborn screening services and in other health care areas that
would allow us to benefit from our business expertise. |
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Expand our newborn screening services. We will continue
to seek contracts in the United States with hospitals, third
party payors and, in some cases, state agencies, and
internationally with distributors, to provide screening services
to newborns to detect the presence of hearing disorders and
metabolic conditions for early treatment or management. We
intend to focus on providing quality services and may seek other
opportunities to expand our screening capabilities. |
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Strengthen relationships with our partners. By managing
many of the operational challenges associated with a
subspecialty practice, encouraging clinical research, education
and quality initiatives, and promoting timely intervention by
qualified pediatric and maternal-fetal medicine subspecialists
in emergency situations, we believe that our business model is
focused on improving the quality of care delivered to
acutely-ill newborns, shortening the length of their hospital
stays and reducing long-term health system costs. We believe
that referring physicians, hospitals, third-party payors and
patients all benefit to the extent that we are successful in
implementing our business model. We will continue to seek
opportunities to strengthen relationships with our partners. |
OUR PHYSICIAN SERVICES
Neonatal Care
We provide neonatal care to babies born prematurely or with
complications within specific hospital units, primarily NICUs,
through our network of 603 affiliated neonatologists and other
related clinical professionals who staff and manage clinical
activities at more than 220 NICUs in 31 states and Puerto
Rico. We partner with our hospital clients in an effort to
enhance the quality of care delivered to premature and sick
babies. Some of the nation’s largest and most prestigious
hospitals, both not-for-profit and for-profit institutions,
retain us to staff and manage their NICUs. Our affiliated
neonatologists generally provide 24-hours-a-day,
seven-days-a-week coverage, supporting the local referring
physician community and being available for consultation in
other hospital departments. Our hospital partners benefit from
our experience in managing complex critical care units and
reducing the costs associated with directly employing physician
specialists. Our neonatal physicians interact with colleagues
across the country through an internal communications system to
draw upon their collective expertise in managing challenging
patient care issues. Our neonatal physicians also work
collaboratively with maternal-fetal medicine subspecialists to
coordinate care of mothers experiencing complicated pregnancies
and their fetuses. We also employ or contract with neonatal
nurse practitioners, who work with our affiliated physicians in
providing medical care.
Maternal-Fetal Care
We provide outpatient and inpatient maternal-fetal care to
expectant mothers with complicated pregnancies and their fetuses
through our network of 86 affiliated maternal-fetal medicine
subspecialists and other related clinical professionals. Our
affiliated neonatologists practice with maternal-fetal medicine
subspecialists to provide coordinated care for women with
complicated pregnancies whose babies are often admitted to the
NICU upon delivery. We believe continuity of treatment from
mother and developing fetus during the pregnancy to the newborn
upon delivery has improved the clinical outcomes of our patients.
Other Pediatric Subspecialty Care
Our network includes other pediatric subspecialists, such as
pediatric intensivists, pediatric cardiologists and pediatric
hospitalists. In addition, our affiliated physicians also seek
to provide support services in other
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areas of hospitals, particularly in the labor and delivery area,
nursery and pediatric department, where immediate accessibility
to specialized care may be critical. Our experience and
expertise in maternal-fetal-neonatal medicine has led to our
involvement in these other areas.
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Pediatric Intensive Care. Our 44 affiliated pediatric
intensivists provide clinical care for critically-ill or injured
children and adolescents. They staff and manage PICUs at more
than 17 hospitals. |
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Pediatric Cardiology Care. Our pediatric cardiology
practice consists of 28 affiliated pediatric cardiologists
practicing in the Phoenix-Tucson, Denver, Austin and South
Florida metropolitan areas who, together with related clinical
professionals, provide specialized cardiac care to fetal and
pediatric patients with congenital heart disorders through
scheduled office visits, hospital rounds and immediate
consultation in emergency situations. |
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Pediatric Hospitalists. Our 15 affiliated pediatric
hospitalists provide clinical care to acutely ill children in
more than 18 hospitals. |
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Other Newborn and Pediatric Care. Because our affiliated
physicians and advanced nurse practitioners generally provide
hospital-based coverage, they are situated to provide highly
specialized care to address medical needs that may arise during
a baby’s hospitalization. For example, as part of our
on-going efforts to support and partner with hospitals and the
local referring physician community, our affiliated
neonatologists, pediatric hospitalists and advanced nurse
practitioners provide in-hospital nursery care to newborns
through our newborn nursery program. This program is made
available for babies during their hospital stay, which in the
case of healthy babies typically comprises two days of
evaluation and observation, following which they are referred,
and their hospital records are provided, to their pediatricians
or family practitioners for follow-up care. |
OUR NEWBORN SCREENING SERVICES
We provide screening services to detect the presence of newborn
hearing disorders and metabolic conditions for early treatment
or management. Since we launched our newborn hearing screening
program in 1994, we believe that we have become the largest
provider of newborn hearing screening services in the United
States. We screened approximately 260,000 babies for potential
hearing loss at more than 100 hospitals across the nation in
2004. We also operate a technologically-advanced metabolic
screening laboratory. This laboratory provides a screening
program for newborns that we believe is among the most
comprehensive in the world. By analyzing small blood samples
drawn from newborns during the first few days after birth, we
can identify the presence of more than 50 metabolic disorders
and other genetic and biochemical conditions.
We have advocated expanded newborn screening for several years
and newborn screening is becoming an area of increasing interest
to health care providers, as well as state and federal agencies.
Many metabolic disorders can result in death if not diagnosed
and treated in a timely manner. Early detection and successful
intervention of many conditions can often improve the long-term
quality of life for patients and reduce the long-term health
care costs associated with the treatment of identified
conditions.
We contract or coordinate with hospitals and, in some cases,
state agencies to provide newborn screening services. All states
mandate the screening of a limited number of metabolic disorders
before newborns are discharged from the hospital so that a
course of treatment can begin as soon as possible. In addition,
hospitals, health care providers and parents may choose to have
expanded screening for more than 50 metabolic disorders and
other genetic and biochemical conditions. With respect to
hearing screens, 38 states either require newborns to be
screened for potential hearing loss before being discharged from
the hospital or require that parents be offered the opportunity
to submit their newborns to hearing screens.
OUR CLINICAL RESEARCH AND EDUCATION
As part of our patient focus and ongoing commitment to improving
patient care through evidenced-based medicine, we have engaged
in a number of clinical research, quality and education
initiatives intended to
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enhance the care provided to patients by our affiliated
physicians, thereby contributing to improved patient outcomes
and reduced long-term health system costs.
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Clinical Quality Initiatives. We monitor clinical
outcomes in an effort to identify specific factors in treating
babies born prematurely or with complications and to discover
new methods of patient care that result in better outcomes at a
reduced cost over the life of the patient. These efforts have
resulted in our implementation of four best demonstrated process
initiatives since 2000: Improving Weight Gain for Very Low
Birth Weight Infants in the First 28 Days; Improving Feeding of
Breast Milk at NICU Discharge; Reducing Red Blood Cell
Transfusions for 23-29 Week Infants; and Improving
Compliance with AAP Recommendation on Use of Hepatitis B Vaccine
in Premature Neonates. These initiatives are designed to
improve the growth of babies following premature birth, minimize
medical complications and shorten the length of their hospital
stays. |
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Clinical Trials. We have managed three neonatal clinical
trials to completion. Our clinical study entitled Glutamine
Supplementation In Safely Reducing Hospital-Acquired Sepsis in
Very Low Birth Weight Infants commenced in April 2000,
resulted in a paper published in the Journal of Pediatrics
in June 2003. Our clinical study entitled Epidemiology of
Respiratory Failure in Near-Term Neonates, which commenced
in February 2001, resulted in a paper accepted for publication
in October 2004 by the Journal of Perinatology. In 2004,
we completed a clinical trial, Comparing Infasurf and
Survanta in the Prevention and Treatment of Respiratory Distress
Syndrome in Low Birth Weight Infants, a study that we
commenced in March 2001 with a grant from Forest Laboratories.
We also have several multi-center clinical trials designed for
implementation during 2005. These include: Comparing the
Impact of One versus Two Courses of Antenatal Steroids on
Neonatal Outcomes, Removal versus Retention of Cerclage in
Preterm Premature Rupture of Membranes, and Progesterone to
Reduce Neonatal Morbidity due to Preterm Birth in Twin and
Triplet Pregnancies. We have several other multi-
institutional trials that are in the development stages. |
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Continuing Medical Education. We also make extensive
physician continuing medical education (called “CME”)
resources available to our affiliated physicians in an effort to
ensure that they have knowledge of current treatment
methodologies. We are accredited as a provider of CME Category I
credits for physicians and as a provider of continuing education
for nurses. We also maintain “Pediatrix
University — A University Without Walls™”
which is an interactive educational web-site. In addition, we
have a Professional Development Award program that offers a
stipend and research support for neonatal and maternal-fetal
fellows-in-training. |
We believe that these initiatives have been enhanced by our
integrated national presence together with our management
information systems, which are an integral component of our
clinical research and education activities. See “Our
Management Information Systems”.
OUR PRACTICE ADMINISTRATION
We provide multiple administrative services to support the
practice of medicine by our affiliated physicians and improve
operating efficiencies of our affiliated practice groups.
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Unit Management. We appoint a senior physician practicing
medicine in each NICU, PICU, maternal-fetal and cardiology
practice and other subspecialty unit that we manage to act as
our medical director for that unit. Each medical director is
responsible for the overall management of his or her unit,
including staffing and scheduling, quality of care, professional
discipline, utilization review, coordinating physician
recruitment, and monitoring our financial success within the
unit. Medical directors also serve as a liaison with hospital
administration and the community. Each medical director reports
to one of our Regional Presidents. All medical directors and
Regional Presidents are board-certified or board-eligible
physicians in their respective specialties. |
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Staffing and Scheduling. We assist with staffing and
scheduling physicians and advanced nurse practitioners within
the units that we manage. For example, each unit or practice is
staffed by at least one specialist on site or available on call.
All our affiliated physicians are board-certified or board- |
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eligible in neonatology, maternal-fetal medicine, pediatrics,
pediatric critical care or pediatric cardiology, as appropriate.
We are responsible for salaries and benefits for physicians
affiliated with us. In addition, we employ, compensate and
manage all non-medical personnel for our affiliated physician
groups. |
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Recruiting and Credentialing. We have significant
experience in locating, qualifying, recruiting and retaining
experienced neonatologists, maternal-fetal medicine
subspecialists, pediatricians and pediatric subspecialists. We
maintain an extensive database of maternal-fetal, neonatal and
other pediatric subspecialty physicians nationwide. Our medical
directors and Regional Presidents play a central role in the
recruiting and interviewing process before candidates are
introduced to hospital administrators. We check the credentials,
licensure and references of all candidates so that each of our
prospective affiliated physicians meet the hospital’s and
our requirements. In addition to our database of physicians, we
recruit nationally through trade advertising, referrals from our
affiliated physicians and attendance at conferences. |
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Billing, Collection and Reimbursement. We assume
responsibility for billing, collection and reimbursement with
respect to services rendered by our affiliated physicians, but
not charges for services provided by hospitals to the same
payors which are separately billed and collected by the
hospitals. We provide our affiliated physicians with a training
curriculum that emphasizes detailed documentation of and proper
coding protocol for all procedures performed and services
provided, and we provide comprehensive internal auditing
processes, all of which is designed to achieve appropriate
billing and collection of revenues for physician services. Our
billing and collection operations are conducted from our
corporate offices, as well as our regional business offices
located across the United States and in Puerto Rico. |
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Risk Management. We maintain a risk management program
focused on reducing risk and improving outcomes through
evidence-based medicine, including diligent patient evaluation,
documentation and access to research, education and best
demonstrated processes. We maintain professional liability
coverage for our national group of affiliated heath care
professionals. In addition, we provide regulatory expertise to
assist our affiliated practice groups in complying with
increasingly complex laws and regulations. |
We also provide management information systems, facilities
management, marketing support and other services to our
affiliated physicians and affiliated practice groups.
OUR MANAGEMENT INFORMATION SYSTEMS
We maintain several information systems to support our
day-to-day operations and ongoing clinical research and business
analysis. Our clinical information systems contain clinical
information from over five million daily progress records
relating to more than 250,000 discharged patients. These systems
are used to report and analyze clinical outcomes and identify
prospective clinical trials and quality initiatives. Studies
from these databases have resulted in 24 articles published in
peer-reviewed medical journals.
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BabyStepsTM.
BabySteps is our clinical information management system that
permits our affiliated physicians to record clinical progress
notes electronically and provides a decision-tree to assist them
in selecting appropriate billing codes. We developed this
software system to replace our existing Research Data System
(“RDS”). BabySteps is in the process of being
implemented throughout Pediatrix. |
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RDS. First installed in March 1996, RDS is a centralized
clinical database which is still being used at various locations
within Pediatrix pending the full implementation of BabySteps. |
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Pediatrix
UniversityTM.
Pediatrix University is an educational website that disseminates
clinical research, continuing quality improvement and education
materials for which physicians may obtain continuing medical
education credit. Pediatrix University also functions as a
“virtual doctors’ lounge”, enabling physicians
around the country to discuss difficult or unusual cases with
one another. |
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Our management information systems are also an integral
component of the billing and reimbursement process. We maintain
systems that provide for electronic data interchange with payors
accepting electronic submission, including electronic claims
submission, insurance benefits verification, and claims
processing and remittance advice and that enable us to track
numerous and diverse third-party payor relationships and payment
methods. Our information systems have been designed to meet our
requirements by providing for scalability and flexibility as
payor groups upgrade their payment and reimbursement systems. We
continually seek improvements in our systems to provide even
greater streamlining of information from the clinical systems
through the reimbursement process, thereby expediting the
overall process.
We maintain additional information systems designed to improve
operating efficiencies of our affiliated practice groups, reduce
physicians’ paperwork requirements and facilitate
interaction among our affiliated physicians and their colleagues
regarding patient care issues. Following the acquisition of a
physician practice group, we implement systematic procedures to
improve the acquired group’s operating and financial
performance. One of our first steps is to convert the
newly-acquired group to our broad-based management information
system. We also maintain a database management system to assist
our business development and recruiting departments to identify
potential practice group acquisitions and physician candidates.
RELATIONSHIPS WITH OUR PARTNERS
Our business model, which has been influenced by the direct
contact and daily interaction that our affiliated physicians
have with their patients, emphasizes a patient-focused clinical
approach that addresses the needs of our various
“partners”, including hospitals, third-party payors,
referring physicians, affiliated physicians and, most
importantly, our patients. Our relationships with all our
partners are important to our continued success.
Hospitals
Our relationships with our hospital partners are critical to our
operations. We have been retained by over 220 hospitals to staff
and manage clinical activities within specific hospital-based
units, primarily NICUs. Our hospital-based focus enhances our
relationships with hospitals and creates opportunities for our
affiliated physicians to provide patient care in other areas of
the hospital, including emergency rooms, nurseries and other
departments where access to specialized obstetric and pediatric
care may be critical. Because hospitals control access to their
NICUs through the awarding of contracts and hospital privileges,
we must maintain good relationships with our hospital partners.
Our affiliated physicians are an important component of
obstetric and pediatric services provided by hospitals. Our
hospital partners benefit from our expertise in managing
critical care units staffed with physician specialists,
including managing variable admission rates, operating costs,
complex reimbursement systems and other administrative burdens.
We also work with our hospital partners to enhance their
reputation and market our services to referring physicians, an
important source of hospital admissions, within the communities
served by those hospitals.
Under our contracts with hospitals, we have the responsibility
to manage, in many cases exclusively, the provision of physician
services to the NICUs and other hospital-based units. We
typically are responsible for billing patients and third-party
payors for services rendered by our affiliated physicians
separately from other related charges billed by the hospital to
the same payors. Some of our hospital contracts require a
hospital to pay to us administrative fees if the hospital does
not generate sufficient patient volume in order to guarantee
that we receive a specified minimum revenue level. We also
receive fees from hospitals for administrative services
performed by our affiliated physicians providing medical
director services at the hospital. Administrative fees accounted
for 6% of our net patient service revenue during 2004. Our
contracts with hospitals also generally require us to indemnify
them and their affiliates for losses resulting from the
negligence of our affiliated physicians. Our hospital contracts
have terms of typically one to three years which can be
terminated without cause by either party upon prior written
notice, and renew automatically for additional terms of one to
three years unless earlier terminated by any party. While we
have in most cases been able to renew these arrangements,
hospitals may cancel or not renew our arrangements, or reduce or
eliminate our administrative fees in the future.
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Third-Party Payors
Our relationships with government-sponsored plans (principally
Medicaid), managed care organizations and commercial payors are
vital to our business. We seek to maintain professional working
relationships with our third-party payors and streamline the
administrative process of billing and collection, and assist our
patients and their families in understanding their health
insurance coverage and any balance due for co-payment,
co-insurance deductible, or out-of-network benefit limitations.
In addition, through our quality initiatives and continuing
research and education efforts, we have sought to enhance
clinical care provided to patients, which we believe benefits
third-party payors by contributing to improved patient outcomes
and reduced long-term health system costs.
We receive compensation for professional services provided by
our affiliated physicians to patients based upon rates for
specific services provided, principally from third-party payors.
Our billed charges are substantially the same for all parties in
a particular geographic area, regardless of the party
responsible for paying the bill for our services. A significant
portion of our net patient service revenue is received from
government-sponsored plans, principally state Medicaid programs.
Medicaid programs can be either standard fee-for-service payment
programs or managed care programs in which states have
contracted with health insurance companies to run local or
state-wide health plans with features similar to Health
Maintenance Organizations. Our compensation rates under standard
Medicaid programs are established by state governments and are
not negotiated. Rates under Medicaid managed care programs are
negotiated but are similar to rates established under standard
Medicaid programs. Although Medicaid rates vary across the
individual states, these rates are generally much lower in
comparison to private sector health plan rates. In order to
participate in the Medicaid programs, we and our affiliated
practices must comply with stringent and often complex
enrollment and reimbursement requirements. Different states also
impose differing standards for their Medicaid programs. See
“Government Regulation — Government Reimbursement
Requirements” below.
We also receive compensation pursuant to contracts with
commercial payors that offer a wide variety of health insurance
products, such as Health Maintenance Organizations, Preferred
Provider Organizations, and Exclusive Provider Organizations,
that are subject to various state laws and regulations, as well
as self-insured organizations subject to federal ERISA
requirements. We seek to secure mutually agreeable contracts
with payors that enable our affiliated physicians to be listed
as in-network participants within the payors’ provider
networks. We generally contract with commercial payors through
our affiliated professional contractors, principally on a local
basis. Subject to applicable laws and regulations, the terms,
conditions and compensation rates of our contracts with
commercial third-party payors are negotiated and often vary
widely across markets and among payors. In some cases, we
contract with organizations that establish and maintain provider
networks and then rent or lease such networks to the actual
payor. Our contracts with commercial payors typically provide
for discounted fee-for-service arrangements and grant each party
the right to terminate the contracts without cause upon prior
written notice. In addition, these contracts generally give
commercial payors the right to audit our billings and related
reimbursement to us for professional services provided by our
affiliated physicians.
If we do not have a contractual relationship with a health
insurance payor, we generally bill the payor our full billed
charges. If payment is less than billed charges, we bill the
balance to the patient, subject to state billing practice
regulations. Although we maintain standard billing and
collections procedures with appropriate discounts for prompt
payment, we also provide discounts in certain hardship
situations where patients and their families do not have
financial resources necessary to pay the amount due for services
rendered. Any amounts written-off related to private pay
patients are based on the specific facts and circumstances
related to each individual patient account.
Referring Physicians
We consider referring physicians to be our partners, and our
affiliated physicians seek to establish and maintain
professional relationships with referring physicians in the
communities where they practice. Because patient volumes of our
NICUs are based in part on referrals from other physicians,
particularly obstetricians, it
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is important that we are responsive to the needs of referring
physicians in the communities in which we operate. We believe
that our community presence, through our hospital coverage and
outpatient clinics, assists referring obstetricians,
office-based pediatricians and family physicians with their
practices. Our affiliated physicians are able to provide
comprehensive maternal-fetal-newborn and pediatric subspecialty
care to patients using the latest advances in methodologies,
supporting the local referring physician community with
24-hours-a-day, seven-days-a-week on-site or on-call coverage.
Affiliated Physicians and Practice Groups
One of our most important assets is our relationships with our
affiliated physicians. Our affiliated physicians are organized
in traditional practice group structures. In accordance with
applicable state laws, our affiliated practice groups are
responsible for the provision of medical care to patients. Our
affiliated practice groups are separate legal entities organized
under state law as professional associations, corporations and
partnerships, which we sometimes refer to as “our
affiliated professional contractors.” Each of our
affiliated professional contractors is owned by a licensed
physician affiliated with PMG through employment or another
contractual relationship. Our national infrastructure enables
more effective and efficient sharing of new discoveries and
clinical outcomes data, including implementation of best
demonstrated processes, and affords access to sophisticated
information systems, and clinical research and education.
Our affiliated professional contractors employ or contract with
physicians to provide clinical services in certain states and
Puerto Rico. In most of our affiliated practice groups, each
physician has entered into an employment agreement with us or
one of our affiliated professional contractors providing for a
base salary and incentive bonus eligibility and having typically
a term of three to five years which usually can be terminated
without cause by any party upon prior written notice. We
typically are responsible for billing patients and third-party
payors for services rendered by our affiliated physicians
separately from other charges billed by hospitals to the same
payors. Each physician must hold a valid license to practice
medicine in the state in which he or she provides patient care
and must become a member of the medical staff, with appropriate
privileges, at each hospital at which he or she practices.
Substantially all the physicians employed by us or our
affiliated professional contractors have agreed not to compete
within a specified geographic area for a certain period after
termination of employment. Although we believe that the
non-competition covenants of our affiliated physicians are
reasonable in scope and duration and therefore enforceable under
applicable state laws, we cannot predict whether a court or
arbitration panel would enforce these covenants. Our hospital
contracts also typically require that we and the physicians
performing services maintain minimum levels of professional and
general liability insurance. We negotiate those policies and
contract and pay the premiums for such insurance on behalf of
the physicians.
Each of our affiliated professional contractors has entered into
a comprehensive management agreement with PMG that is long-term
in nature, and in most cases permanent, subject only to a right
of termination by PMG (except in the case of gross negligence,
fraud or illegal acts of PMG). Under the terms of these
management agreements, PMG is paid for its services based on the
performance of the applicable practice group, and PMG is
responsible for the provision of non-medical services and the
compensation and benefits of the practices’ non-physician
medical personnel. See “Governmental Regulation —
Fee Splitting; Corporate Practice of Medicine” and
Note 2 to our Consolidated Financial Statements included in
Item 8 of this Annual Report.
COMPETITION
Competition in our business is generally based upon a number of
factors, including reputation, experience and level of care, and
our affiliated physicians’ ability to provide
cost-effective, quality clinical care. The nature of competition
for our hospital-based practices, such as neonatology and
pediatric intensive care, differs significantly from competition
for our office-based practices. Our hospital-based practices
compete nationally with other pediatric health services
companies and physician groups for hospital contracts and
qualified physicians. In some instances, they also compete on a
more local basis for referrals from physicians and transports
from other hospitals. Our office-based practices, such as
maternal-fetal medicine and pediatric cardiology, compete for
patients with office-based practices in that specialty.
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Because our operations consist primarily of physician services
provided within hospital-based units, primarily NICUs, we
compete with others for contracts with hospitals to provide
neonatal services. We also compete with hospitals themselves to
provide such services. Hospitals may employ neonatologists
directly or contract with other physician groups to provide
services either on an exclusive or non-exclusive basis. A
hospital not otherwise competing with us may facilitate
competition by creating a new NICU, expanding the capacity of an
existing NICU or upgrading the level of its existing NICU and
then awarding the contract to operate the neonatal service to a
competing group or company. Because hospitals control access to
their NICUs through the awarding of contracts and hospital
privileges, we must maintain good relationships with our
hospital partners. Hospitals may terminate our contracts without
cause at any time upon prior written notice.
The health care industry is highly competitive. Companies in
other segments of the industry, some of which have financial and
other resources greater than ours, may become competitors in
providing neonatal, maternal-fetal and other pediatric
subspecialty care.
GOVERNMENT REGULATION
The health care industry is governed by a framework of federal
and state laws, rules and regulations that are extensive and
complex and for which the industry has the benefit of only
limited judicial and regulatory interpretation. If we or one of
our affiliated practice groups is found to have violated any of
these laws, rules and regulations, our business, financial
condition and results of operations could be materially
adversely affected. Moreover, health care continues to attract
much legislative interest and public attention. Changes in
health care legislation or government regulation may restrict
our existing operations, limit the expansion of our business or
impose additional compliance, requirements and costs, any of
which could have a material adverse effect on our business,
financial condition, results of operations and the trading price
of our common stock.
Licensing and Certificates of Need
Each state imposes licensing requirements on individual
physicians and clinical professionals, and on facilities
operated or utilized by health care companies like us. Many
states require regulatory approval, including certificates of
need, before establishing certain types of health care
facilities, offering certain services or expending amounts in
excess of statutory thresholds for health care equipment,
facilities or programs. We and our affiliated physicians are
required to meet applicable Medicaid provider requirements under
state laws and regulations.
Fee-Splitting; Corporate Practice of Medicine
Many states have laws that prohibit business corporations, such
as PMG, from practicing medicine, employing physicians to
practice medicine, exercising control over medical decisions by
physicians, or engaging in certain arrangements, such as
fee-splitting, with physicians. In these states, we maintain
long-term management contracts with our affiliated professional
contractors, which employ or contract with physicians to provide
physician services. In states where we are not permitted to
practice medicine, we perform only non-medical administrative
services, do not represent that we offer medical services and do
not exercise influence or control over the practice of medicine
by the physicians employed by our affiliated professional
contractors. In states where fee-splitting is prohibited, the
fees that we receive from our affiliated professional
contractors have been established on a basis that we believe
complies with the applicable states’ laws. Although the
relevant laws in these states have been subjected to limited
judicial and regulatory interpretation, we believe that we are
in compliance with applicable state laws in relation to the
corporate practice of medicine and fee-splitting. However,
regulatory authorities or other parties, including our
affiliated physicians, may assert that, despite these
arrangements, we are engaged in the corporate practice of
medicine or that our contractual arrangements with our
affiliated professional contractors constitute unlawful
fee-splitting, in which case we could be subject to civil or
criminal penalties, our contracts could be found legally invalid
and unenforceable
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(in whole or in part) or we could be required to restructure our
contractual arrangements with our affiliated professional
contractors.
Fraud and Abuse Provisions
Existing federal laws governing Medicaid and other federal
health care programs, as well as similar state laws, impose a
variety of fraud and abuse prohibitions on health care companies
like PMG. These laws are interpreted broadly and enforced
aggressively by multiple government agencies, including the
Office of Inspector General of the Department of Health and
Human Services (the “OIG”), the Department of Justice
and the various state authorities. The federal government’s
enforcement efforts have been increasing in recent years, in
part as a result of the establishment of an inter-agency fraud
and abuse control program that coordinates federal, state and
local law enforcement efforts nationwide and that is funded
through the collection of penalties and fines for violations of
the health care fraud and abuse laws.
The fraud and abuse laws include extensive federal and state
regulations applicable to our financial relationships with
hospitals, physicians and other health care entities. In
particular, federal anti-kickback laws and regulations prohibit
certain offers, payments or receipts of remuneration in return
for either referring Medicaid or other government-sponsored
health care program business, or purchasing, leasing, ordering,
or arranging for or recommending any service or item for which
payment may be made by a government-sponsored health care
program. In addition, federal physician self-referral
legislation, commonly known as the “Stark Law,”
prohibits a physician from ordering certain designated health
services reimbursable by Medicaid from an entity with which the
physician has a prohibited financial relationship. These laws
are broadly worded and, in the case of the anti-kickback law,
have been broadly interpreted by federal courts, and potentially
subject many business arrangements to government investigation
and prosecution, which can be costly and time consuming.
Violations of these laws are punishable by substantial
penalties, including monetary fines, civil penalties, criminal
sanctions (including imprisonment), exclusion from participation
in government-sponsored health care programs, and forfeiture of
amounts collected in violation of such laws, any of which could
have an adverse effect on our business and results of
operations. For example, if we or our affiliated professional
contractors were excluded from any government-sponsored
healthcare programs, not only would we not be permitted to make
claims for reimbursement under these programs but also we would
be unable to contract with other healthcare providers, such as
hospitals, to provide services to them. Many of the states in
which we operate also have similar anti-kickback and
self-referral laws which are applicable to our non-government
business and which also authorize substantial penalties for
violations.
There are a variety of other types of federal and state fraud
and abuse laws, including laws authorizing the imposition of
criminal, civil and administrative penalties for filing false or
fraudulent claims for reimbursement with government health care
programs. These laws include the civil False Claims Act
(“FCA”), which prohibits the filing of false claims in
federal health care programs, including Medicaid, the TRICARE
program for military dependents and retirees, and the Federal
Employees Health Benefits Program. Substantial civil fines can
be imposed for violating the FCA. Furthermore, to prove a
violation of the FCA requires only that the government show that
the individual or company that filed the false claim acted in
“reckless disregard” of the truth or falsity of the
claim, notwithstanding that there was no intent to defraud the
government program and no actual knowledge that the claim was
false (which are required to be shown to uphold a typical
criminal conviction). The FCA also includes
“whistleblower” provisions that permit private
citizens to sue a claimant on behalf of the government and
thereby share in any fines imposed under the law. In recent
years, many cases have been brought against health care
companies by such “whistleblowers,” which have
resulted in the imposition of substantial fines on the companies
involved. In addition, federal and state agencies that
administer health care programs have at their disposal statutes,
commonly known as the “civil money penalty laws”, that
authorize substantial administrative fines and exclusion from
government programs in any case where the individual or company
that filed the claim or caused the claim to be filed knew or
should have known that the claim was false. It often is not
necessary for the agency to show that the claimant had actual
knowledge that the claim was false in order to impose these
penalties. The civil and administrative penalty statutes are
being applied in an increasingly broader range of circumstances.
For example, government
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authorities often argue that claiming reimbursement for services
that fail to meet applicable quality standards may, under
certain circumstances, violate these statutes. Government
authorities also often take the position that claims for
services that were induced by kickbacks or other illicit
marketing schemes are fraudulent and, therefore, violate the
false claims statutes.
Although we intend to conduct our business in compliance with
all applicable federal and state fraud and abuse laws, many of
the laws and regulations applicable to us, including those
relating to billing and those relating to financial
relationships with physicians and hospitals, are broadly worded
and may be interpreted or applied by prosecutorial, regulatory
or judicial authorities in ways that we cannot predict.
Accordingly, we cannot assure you that our arrangements or
business practices will not be subject to government scrutiny or
be found to violate applicable fraud and abuse laws. Moreover,
the standards of business conduct expected of health care
companies under these laws and regulations have become more
stringent in recent years, even in instances where there has
been no change in statutory language. If there is a
determination by government authorities that we have not
complied with any of these laws and regulations, our business,
financial condition and results of operations could be
materially adversely affected. See “Government
Investigations.”
Government Reimbursement Requirements
In order to participate in various state Medicaid programs, we
and our affiliated practices must comply with stringent and
often complex enrollment and reimbursement requirements.
Different states also impose differing standards for their
Medicaid programs. Our compliance program requires that we and
our affiliated practices adhere to the laws and regulations
applicable to the government programs in which we participate,
and failure to comply with these laws and regulations could
negatively affect our business, financial condition and results
of operations. See “Government Regulation-Fraud and Abuse
Provisions”, “Government Regulation-Compliance
Plan”, “Government Investigations” and
“Other Legal Proceedings.”
In addition, Medicaid and other government health care programs
(such as the TRICARE program) are subject to statutory and
regulatory changes, administrative rulings, interpretations and
determinations, requirements for utilization review and new
governmental funding restrictions, all of which may materially
increase or decrease program payments as well as affect the cost
of providing services and the timing of payments to providers.
Moreover, because these programs generally provide for
reimbursements on a fee schedule basis rather than on a
charge-related basis, we generally cannot increase our revenues
by increasing the amount we charge for our services. To the
extent our costs increase, we may not be able to recover our
increased costs from these programs, and cost containment
measures and market changes in non-governmental insurance plans
have generally restricted our ability to recover, or shift to
non-governmental payors, these increased costs. In attempts to
limit federal and state spending, there have been, and we expect
that there will continue to be, a number of proposals to limit
or reduce Medicaid reimbursement for various services. For
example, the Balanced Budget Act of 1997 made it easier for
states to reduce their Medicaid reimbursement levels and some
states have enacted or are considering enacting measures that
are designed to reduce their Medicaid expenditures. The Balanced
Budget Act of 1997 also mandated that the Centers for Medicare
and Medicaid Services, or CMS, conduct competitive bidding
demonstrations for certain Medicare services. These competitive
bidding demonstrations could provide CMS, Congress and the
states with models for implementing competitive pricing in other
federal health care programs. If, for example, such a
competitive bidding system were implemented for Medicaid
services, it could result in lower reimbursement rates, exclude
certain services from coverage or impose limits on increases in
reimbursement rates. Our business may be significantly and
adversely affected by any such changes in reimbursement policies
and other legislative initiatives aimed at reducing health care
costs associated with Medicaid and other government healthcare
programs.
Our business also could be adversely affected by reductions in
or limitations of reimbursement amounts or rates under these
government programs, reductions in funding of these programs or
elimination of coverage for certain individuals or treatments
under these programs, which may be implemented as a result of:
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increasing budgetary and cost containment pressures on the
health care industry generally; |
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new federal or state legislation reducing state Medicaid funding
and reimbursements or increasing the proportion of state
discretionary funding; |
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new state legislation mandating state Medicaid managed care or
encouraging managed care organizations to provide benefits to
Medicaid enrollees, thereby reducing Medicaid reimbursement
payments to us; |
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state Medicaid waiver requests granted by the federal
government, increasing discretion with respect to, or reducing
coverage or funding for, certain individuals or treatments under
Medicaid, even in the absence of new federal legislation; |
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increasing state discretion in Medicaid expenditures which may
result in decreased reimbursement for, or other limitations on,
the services that we provide; or |
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other changes in reimbursement regulations, policies or
interpretations that place material limitations on reimbursement
amounts or coverage for services that we provide. |
Antitrust
The health care industry is highly regulated for antitrust
purposes and we believe that it will continue to be subject to
close regulatory scrutiny. In recent years, the Federal Trade
Commission (the “FTC”), the Department of Justice, and
state Attorney Generals have taken increasing steps to review
and, in some cases, take enforcement action against, business
conduct and acquisitions in the health care industry. We
continue to be the subject of an active and ongoing
investigation by the FTC relating to issues of competition in
connection with our 2001 acquisition of Magella Healthcare
Corporation (“Magella”) and our business practices
generally. See “Government Investigations”. Violations
of antitrust laws are punishable by substantial penalties,
including significant monetary fines, civil penalties, criminal
sanctions, and consent decrees and injunctions prohibiting
certain activities or requiring divestiture or discontinuance of
business operations. Any of these penalties could have a
material adverse effect on our business, financial condition and
results of operations.
Medical Records Privacy Legislation
Numerous federal and state laws and regulations govern the
collection, dissemination, use and confidentiality of patient
health information, including the federal Health Insurance
Portability and Accountability Act of 1996 and related rules
(“HIPAA”), violations of which are punishable by
monetary fines, civil penalties and criminal sanctions. As part
of our medical record keeping, third-party billing, research and
other services, we and our affiliated practices collect and
maintain patient health information.
The Office of Inspector General of the Department of Health and
Human Services (DHHS) is required under the Administrative
Simplification Provisions of HIPAA to adopt standards to protect
the privacy and security of health-related information in an
effort to improve the efficiency and effectiveness of the
healthcare industry by enabling the efficient electronic
transmission of certain health information. DHHS released final
regulations in December 2000 containing privacy standards that
apply to medical records and other individually identifiable
health information used or disclosed by healthcare providers,
hospitals, health plans and healthcare clearinghouses in any
form, whether electronically, on paper, or orally. Compliance
with these privacy regulations was required by April 14,
2003. We have implemented privacy policies and procedures,
including training programs, designed to ensure compliance with
the privacy regulations. In addition, DHHS adopted final
regulations in February 2003 containing security standards
requiring healthcare providers to implement administrative,
physical and technical safeguards to protect the integrity,
confidentiality and availability of electronically received,
maintained or transmitted (including between us and our
affiliated practices), individually identifiable health-related
information. Compliance with these regulations is mandated by
April 21, 2005. We are substantially complete with our
compliance efforts and will continue to take appropriate
measures to comply with the security regulations.
Environmental Regulations
Our health care operations generate medical waste that must be
disposed of in compliance with federal, state and local
environmental laws, rules and regulations. Our outpatient
operations are subject to compliance
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with various other environmental laws, rules and regulations.
Such compliance does not, and we anticipate that such compliance
will not, materially affect our capital expenditures, financial
position or results of operations.
Compliance Plan
We have adopted a Compliance Plan that reflects our commitment
to complying with laws and regulations applicable to our
business and meeting our ethical obligations in conducting our
business. We believe our Compliance Plan provides a solid
framework to meet this commitment, including:
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a Chief Compliance Officer who reports to the Board of Directors
on a regular basis; |
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a Compliance Committee consisting of our senior executives; |
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our Code of Conduct, which is applicable to our
employees, independent contractors, officers and directors; |
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our Code of Professional Conduct — Finance,
which is applicable to our finance personnel, including our
chief executive officer, chief financial officer, chief
accounting officer and controller; |
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an organizational structure designed to integrate our compliance
objectives into our corporate, regional and practice
levels; and |
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education, monitoring and corrective action programs designed to
establish methods to promote the understanding of our Compliance
Plan and adherence to its requirements. |
The foundation of our Compliance Plan is our Code of
Conduct, which is intended to be a comprehensive statement
of the ethical and legal standards governing the daily
activities of our employees, affiliated professionals,
independent contractors, officers and directors. All our
personnel are required to abide by, and are given a thorough
introduction to, our Code of Conduct. In addition, all
employees and affiliated professionals are expected to report
incidents that they believe in good faith may be in violation of
our Code of Conduct. We maintain a toll-free hotline to
permit individuals to report compliance concerns on an anonymous
basis and obtain answers to questions about our Code of
Conduct. Our Compliance Plan, including our Code of
Conduct, is administered by our Chief Compliance Officer
with oversight by our Chief Executive Officer and Board of
Directors. We also have a Code of Professional
Conduct-Finance, which is applicable to our finance
personnel, including our Chief Executive Officer, Chief
Financial Officer (who is also our Chief Accounting Officer) and
Controller. A copy of our Code of Conduct and our Code of
Professional Conduct-Finance is available on our website,
www.pediatrix.com. Any amendments or waivers to our Code
of Professional Conduct — Finance will be disclosed on
our website within four business days following the date of the
amendment or waiver.
GOVERNMENT INVESTIGATIONS
In June 2002, we received a written request from the FTC to
submit information on a voluntary basis in connection with an
investigation of issues of competition related to our May 2001
acquisition of Magella and our business practices generally. In
February 2003, we received additional information requests from
the FTC in the form of a Subpoena and Civil Investigative
Demand. Pursuant to these requests, we produced documents and
information relating to the acquisition and our business
practices in certain markets. We have 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 we are cooperating fully with the
FTC.
Beginning in April 1999, we received requests from various
federal and state investigators for information relating to our
billing practices for services reimbursed by Medicaid and the
United States Department of Defense’s TRICARE program for
military dependents 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, we were advised by a United States
Attorney’s Office that it was conducting a civil
investigation with respect to our Medicaid billing practices
nationwide. This federal Medicaid investigation, the TRICARE
investigation, and related state inquiries are now being
coordinated together and
17
are active and ongoing. We are cooperating fully with federal
and state authorities with respect to these investigations and
inquiries.
In November 2003, our 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 certain maternal-fetal services provided by us in that
state. We are 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 our business, financial condition, results of
operations and the trading price of our common stock.
We also expect that additional audits, inquiries and
investigations from government authorities and agencies will
continue to occur in the ordinary course of our business. Such
audits, inquiries and investigations and their ultimate
resolutions, individually or in the aggregate, could have a
material adverse effect on our business, financial condition,
results of operations and the trading price of our common stock.
OTHER LEGAL PROCEEDINGS
In the ordinary course of our business, we become involved in
pending and threatened legal actions and proceedings, most of
which involve claims of medical malpractice related to medical
services provided by our affiliated physicians. Our contracts
with hospitals generally require us to indemnify them and their
affiliates for losses resulting from the negligence of our
affiliated physicians. We may also become subject to other
lawsuits which could involve large claims and significant
defense costs. We believe, based upon our review of pending
actions and proceedings, that the outcome of such legal actions
and proceedings will not have a material adverse effect on our
business, financial condition or results of operations. 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 our
business, financial condition, results of operations and the
trading price of our common stock.
Although we currently maintain liability insurance coverage
intended to cover professional liability and certain other
claims, this coverage generally must be renewed annually and may
not continue to be available to us in future years at acceptable
costs and on favorable terms. In addition, we cannot assure that
our insurance coverage will be adequate to cover liabilities
arising out of claims asserted against us in the future where
the outcomes of such claims are unfavorable to us. With respect
to professional liability insurance, we self-insure our
liabilities to pay deductibles through our wholly-owned captive
insurance subsidiary. Liabilities in excess of our insurance
coverage, including coverage for professional liability and
certain other claims, could have a material adverse effect on
our business, financial condition and results of operations. See
“Professional and General Liability Coverage.”
PROFESSIONAL AND GENERAL LIABILITY COVERAGE
We maintain professional and general liability insurance
policies with third-party insurers on a claims-made basis,
subject to deductibles, exclusions, and other restrictions, in
accordance with standard industry practice. We believe that our
insurance coverage is appropriate based upon our claims
experience and the nature and risks of our business. However, we
cannot assure that any pending or future claim will not be
successful or if successful will not exceed the limits of
available insurance coverage.
Our business entails an inherent risk of claims of medical
malpractice against our affiliated physicians and us. We
contract and pay premiums for third-party professional liability
insurance that indemnifies us and our affiliated heath care
professionals on a claims-made basis for losses incurred related
to medical malpractice litigation. Professional liability
coverage is required in order for our affiliated physicians to
maintain hospital privileges. We self-insure our liabilities to
pay deductibles under our professional liability insurance
coverage through a wholly-owned captive insurance subsidiary. We
record in our consolidated financial statements estimates for
our liabilities for self-insured deductibles and claims incurred
but not reported based on an actuarial valuation using
historical loss patterns. Liabilities for claims incurred but
not reported are not
18
discounted. Because many factors can affect historical and
future loss patterns, the determination of an appropriate
reserve involves complex, subjective judgment, and actual
results may vary significantly from estimates. If the
deductibles and other amounts that we are actually required to
pay materially exceed the estimates that have been reserved, our
financial condition and results of operations could be
materially adversely affected.
Our current professional liability insurance policy expires
May 1, 2005 and we are currently reviewing our coverage
options, which may include a higher self-insured retention.
There can be no assurance that we will obtain substantially
similar coverage upon expiration at acceptable costs and on
favorable terms. Based upon current conditions in the insurance
markets, we expect that our professional liability insurance
premiums will increase significantly over prior periods.
EMPLOYEES AND PROFESSIONALS UNDER CONTRACT
In addition to the approximately 776 practicing physicians
affiliated with us as of December 31, 2004, Pediatrix
employed or contracted with approximately 486 other clinical
professionals and 1,564 other full-time and part-time employees.
None of our employees is a member of a labor union or subject to
a collective bargaining agreement.
GEOGRAPHIC COVERAGE
We provide services in 31 states, including Alaska,
Arizona, Arkansas, California, Colorado, Florida, Georgia,
Idaho, Indiana, Illinois, Iowa, Kansas, Kentucky, Louisiana,
Maryland, Missouri, Nevada, New Jersey, New Mexico, New York,
North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina,
Tennessee, Texas, Utah, Virginia, Washington and West Virginia,
and Puerto Rico. During 2004, approximately 59% of our net
patient service revenue was generated by operations in our five
largest states. Our operations in Texas accounted for
approximately 28% of our net patient service revenue for the
same period. Although we continue to seek to diversify the
geographic scope of our operations, primarily through
acquisitions of physician group practices, we may not be able to
implement successfully or realize the expected benefits of any
of these initiatives. Adverse changes or conditions affecting
states in which our operations are concentrated, such as health
care reforms, changes in laws and regulations, reduced Medicaid
reimbursements or government investigations, may have a material
adverse effect on our business, financial condition and results
of operations.
SERVICE MARKS
We have registered the service marks “Pediatrix Medical
Group,” “Obstetrix Medical Group” and the baby
design logo, among others, with the United States Patent and
Trademark Office. In addition, we have pending applications to
register the following trademarks and service marks:
“BabySteps,” “Pediatrix University” and
“Pediatrix University — A University Without
Walls.”
INFORMATION AVAILABLE ON OUR WEBSITE
Our annual proxy statements, reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those statements and reports
filed or furnished pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 are available free of charge
through our Internet website, www.pediatrix.com, as soon
as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange
Commission (“SEC”). Our proxy statements and reports
may also be obtained directly from the SEC’s Internet
website at www.sec.gov or from the SEC’s Public
Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Information on the operation of the
Public Reference Room can be obtained by calling 1-800-SEC-0330.
Our Internet website and the information contained therein or
connected thereto are not incorporated into or deemed a part of
this Annual Report.
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RISK FACTORS
Any of the following risks could have a material adverse
effect on our business, financial condition or results of
operations and the trading price of our common stock.
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The Federal Trade Commission or other parties may assert
that our business practices violate antitrust laws. |
The health care industry is highly regulated for antitrust
purposes. In recent years, the FTC, the Department of Justice,
and state Attorney Generals have increasingly reviewed and, in
some cases, taken enforcement action against business conduct,
including acquisitions, in the health care industry. We continue
to be the subject of an active and ongoing investigation by the
FTC relating to issues of competition in connection with our
2001 acquisition of Magella and our business practices
generally. See “Government Regulation —
Antitrust” and “Government Investigations”. At
this time, we are unable to predict the timing or outcome of
this investigation and whether it will have a material adverse
effect on our business, financial condition, results of
operations and the trading price of our common stock.
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We are subject to billing investigations by federal and
state government authorities. |
State and federal statutes impose substantial penalties,
including civil and criminal fines, exclusion from participation
in government health care programs and imprisonment, on entities
or individuals (including any individual corporate officers or
physicians deemed responsible) that fraudulently or wrongfully
bill governmental or other third-party payors for health care
services. In addition, federal laws allow a private person to
bring a civil action in the name of the United States government
for false billing violations. See “Government
Regulation — Fraud and Abuse”. We continue to be
the subject of active and ongoing investigations by federal and
state authorities related to our billing practices for services
reimbursed by the Medicaid program nationwide and the TRICARE
program for military dependents and retirees. In November 2003,
our 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 us in that state. See “Government
Investigations”. We believe that additional audits,
inquiries and investigations from government agencies will
continue to occur from time to time in the ordinary course of
our business, which could result in substantial defense costs to
us and a diversion of management’s time and attention. We
cannot predict whether any such pending or future audits,
inquiries or investigations, or the public disclosure of such
matters, will have a material adverse effect on our business,
financial condition, results of operations and the trading price
of our common stock.
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The health care industry is highly regulated and
government authorities may determine that we have failed to
comply with applicable laws or regulations. |
The health care industry and physicians’ medical practices,
including the health care and other services that we and our
affiliated physicians provide, are subject to extensive and
complex federal, state and local laws and regulations,
compliance with which imposes substantial costs on us. In
addition, we believe that our business will continue to be
subject to increasing regulation, the scope and effect of which
we cannot predict. See “Government Regulation”. We are
currently and may in the future become the subject of regulatory
or other investigations or proceedings, and our interpretations
of applicable laws, rules and regulations may be challenged. For
example, regulatory authorities or other parties may assert that
our arrangements with our affiliated professional contractors
constitute fee-splitting or the corporate practice of medicine
and seek to invalidate these arrangements, which could have a
material adverse effect on our business, financial condition, or
results of operations and the trading price of our common stock.
See “Government Regulation — Fee Splitting;
Corporate Practice of Medicine”. Regulatory authorities or
other parties also could assert that our relationships,
including fee arrangements, among our affiliated professional
contractors, hospital clients and physicians violate the
anti-kickback or self-referral laws and regulations. See
“Government Regulation — Fraud and Abuse
Provisions” and “— Government Reimbursement
Requirements”. Such investigations, proceedings and
challenges could result in substantial defense costs to us and a
diversion of management’s time and attention. In addition,
violations of these laws are punishable by monetary fines, civil
and criminal
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penalties, exclusion from participation in government-sponsored
health care programs, and forfeiture of amounts collected in
violation of such laws and regulations, any of which could have
a material adverse effect on our business, financial condition,
or results of operations and the trading price of our common
stock.
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We are subject to changes in private employer healthcare
insurance and government sponsored programs. |
We believe that over the past several years there has been a
general decline in private employers that offer healthcare
insurance to their employees. This decline could continue or
accelerate and, as a consequence, the number of patients who are
uninsured or participate in government sponsored programs may
increase. Payments received from government sponsored programs
are substantially less than payments received from managed care
and other third party payors. A payor mix shift from managed
care and other third party payors to government payors results
in an increase in our estimated provision for contractual
adjustments and uncollectibles and a corresponding decrease in
our net patient service revenue. Further increases in the
government component of our payor mix at the expense of other
third-party payors could result in a significant reduction in
our average reimbursement rates. Moreover, changes in
eligibility requirements for government sponsored programs could
increase the number of patients who participate in such programs
or the number of uninsured patients. In addition, private
employers who offer healthcare insurance could change employee
coverage by increasing patient responsibility amounts. These
factors and events could have a material adverse effect on our
business, results of operations, financial condition and the
trading price of our common stock.
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Government programs or private insurers may limit, reduce
or make retroactive adjustments to reimbursement amounts or
rates. |
A significant portion of our net patient revenue is derived from
payments made by government-sponsored health care programs,
principally Medicaid. These government programs, as well as
private insurers, have taken and may continue to take steps,
including a movement toward managed care, to control the cost,
eligibility for, use and delivery of health care services as a
result of budgetary constraints, cost containment pressures and
other reasons, including those described above under
“Government Regulation — Government Reimbursement
Requirements”. As a result, payments from government
programs or private payors may decrease significantly. Our
business would be materially affected by limitations of or
reductions in reimbursement amounts or rates or elimination of
coverage for certain individuals or treatments. Moreover,
because government programs generally provide for reimbursements
on a fee schedule basis rather than on a charge-related basis,
we generally cannot increase our revenues from these programs by
increasing the amount we charge for our services. To the extent
our costs increase, we may not be able to recover our increased
costs from these programs and cost containment measures and
market changes in non-governmental insurance plans have
generally restricted our ability to recover, or shift to
non-governmental payors, these increased costs. In addition,
funds we receive from third-party payors are subject to audit
with respect to the proper billing for physician and ancillary
services and, accordingly, our revenue from these programs may
be adjusted retroactively. Any retroactive adjustments to our
reimbursement amounts could have a material effect on our
financial condition, results of operations, and the trading
price of our common stock.
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Our affiliated physicians may not appropriately record or
document services they provide. |
Our affiliated physicians are responsible for assigning
reimbursement codes and maintaining sufficient supporting
documentation for the services they provide. We use this
information to seek reimbursement for their services from
third-party payors. If these physicians do not appropriately
code or document their services, our business, financial
condition and results of operations could be adversely affected.
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We may not find suitable acquisition candidates or
successfully integrate our acquisitions and our acquisitions may
affect our payor-mix. |
We have expanded and intend to continue to seek to expand our
presence in new and existing markets by acquiring established
neonatal and maternal-fetal physician practice groups and other
complementary pediatric subspecialty physician groups, such as
pediatric intensivists, pediatric cardiologists and pediatric
21
hospitalists. We also intend to explore other strategic
opportunities that are clinically related to our physician and
newborn screening services and in areas within health care that
would allow us to benefit from our current business expertise.
However, our acquisition strategy involves numerous risks and
uncertainties, including:
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We may not be able to identify suitable acquisition candidates
or strategic opportunities or implement successfully or realize
the expected benefits of any suitable opportunities. In
addition, we compete for acquisitions with other potential
acquirers, some of which may have greater financial or
operational resources than we do. This competition may intensify
due to the ongoing consolidation in the health care industry,
which may increase our acquisition costs. |
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We may not be able to successfully integrate completed
acquisitions, including our recent acquisitions. Integrating
completed acquisitions into our existing operations involves
numerous short-term and long-term risks, including diversion of
our management’s attention, failure to retain key
personnel, long-term value of acquired intangible assets and
acquisition expenses. In addition, we may be required to comply
with laws and regulations that may differ from those of the
states in which our operations are currently conducted. |
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We cannot be certain that any acquired business will continue to
maintain its pre-acquisition revenues and growth rates or be
financially successful. In addition, we cannot be certain of the
extent of any unknown or contingent liabilities of any acquired
business, including liabilities for failure to comply with
applicable laws. We may incur material liabilities for past
activities of acquired businesses. |
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We could incur or assume indebtedness and issue equity in
connection with acquisitions. The issuance of shares of our
common stock for an acquisition may result in dilution to our
existing shareholders and, depending on the number of shares
that we issue, the resale of such shares could affect the
trading price of our common stock. |
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We may acquire businesses that derive a greater portion of their
revenue from government sponsored programs than what we
recognize on a consolidated basis. These acquisitions could
effect our overall payor mix in future periods. |
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Federal and state laws that protect the privacy of patient
health information may increase our costs and limit our ability
to collect and use that information. |
Numerous federal and state laws and regulations govern the
collection, dissemination, use and confidentiality of
patient-identifiable health information, including the federal
Health Insurance Portability and Accountability Act of 1996 and
related rules, or HIPAA. As part of our medical record keeping,
third-party billing, research and other services, we collect and
maintain patient health information. New patient health
information standards, whether implemented pursuant to HIPAA,
congressional action or otherwise, could have a significant
effect on the manner in which we handle health care-related data
and communicate with payors, and compliance with these standards
could impose significant costs on us or limit our ability to
offer services, thereby negatively impacting the business
opportunities available to us. If we do not comply with existing
or new laws and regulations related to patient health
information we could be subject to monetary fines, civil
penalties or criminal sanctions.
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There may be federal and state health care reform, or
changes in the interpretation of government-sponsored health
care programs. |
Federal and state governments continue to focus significant
attention on health care reform. In recent years, many
legislative proposals have been introduced or proposed in
Congress and some state legislatures that would effect major
changes in the health care system. Among the proposals which are
being or have been considered are cost controls on hospital
physicians and other providers, healthcare insurance reforms,
Medicaid reforms and the creation of a single government health
plan that would cover all citizens. We cannot predict which, if
any, proposal that has been or will be considered will be
adopted or what effect any future legislation will have on us.
Changes in healthcare laws or regulations could reduce our
revenue, impose additional costs on us, or affect our
opportunities for continued growth.
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We may not be able to successfully recruit and retain
qualified physicians to serve as affiliated physicians or
independent contractors. |
We are dependent upon our ability to recruit and retain a
sufficient number of qualified physicians to service existing
units at hospitals and our affiliated practices, and expand our
business. We compete with many types of health care providers,
including teaching, research and government institutions and
other practice groups, for the services of qualified physicians.
We may not be able to continue to recruit new physicians or
renew contracts with existing physicians on acceptable terms. If
we do not do so, our ability to service existing or new
hospitals units could be adversely affected.
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A significant number of our affiliated physicians could
leave our affiliated practices or our affiliated professional
contractors may be unable to enforce the non-competition
covenants of departed physicians. |
Our affiliated professional contractors usually enter into
employment agreements with our affiliated physicians which
typically can be terminated without cause by any party upon
prior written notice. In addition, substantially all of our
affiliated physicians have agreed not to compete within a
specified geographic area for a certain period after termination
of employment. Although we believe that the non-competition
covenants of our affiliated physicians are reasonable in scope
and duration and therefore enforceable under applicable state
law, if a substantial number of our affiliated physicians leave
our affiliated practices or our affiliated professional
contractors are unable to enforce the non-competition covenants
in the employment agreements, our business, financial condition
and results of operations could be materially adversely
affected. We cannot predict whether a court or arbitration panel
would enforce these covenants.
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We may be subject to medical malpractice and other
lawsuits not covered by insurance. |
Our business entails an inherent risk of claims of medical
malpractice against our affiliated physicians and us. We may
also be subject to other lawsuits which may involve large claims
and significant defense costs. Although we currently maintain
liability insurance coverage intended to cover professional
liability and other claims, there can be no assurance that our
insurance coverage will be adequate to cover liabilities arising
out of claims asserted against us where the outcomes of such
claims are unfavorable to us. In addition, this insurance
coverage generally must be renewed annually and may not continue
to be available to us in future years at acceptable costs and on
favorable terms. With respect to professional liability
insurance, we self-insure our liabilities to pay deductibles
through a wholly-owned captive insurance subsidiary. Liabilities
in excess of our insurance coverage, including coverage for
professional liability and other claims, could have a material
adverse effect on our business, financial condition, results of
operations and the trading price of our common stock. See
“Other Legal Proceedings” and “Professional and
General Liability Coverage.”
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We may write-off intangible assets, such as
goodwill. |
Our intangible assets, which consist primarily of goodwill, are
subject to annual impairment testing. Under current accounting
standards, goodwill is tested for impairment on an annual basis
and we may be subject to impairment losses as circumstances
after an acquisition change. If we record an impairment loss
related to our goodwill, it could have a material adverse effect
on our results of operations for the year in which the
impairment is recorded.
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We may not effectively manage our growth. |
We have experienced rapid growth in our business and number of
our employees and affiliated physicians in recent years.
Continued rapid growth may impair our ability to provide our
services efficiently and to manage our employees adequately.
While we are taking steps to manage our growth, our future
results of operations could be materially adversely affected if
we are unable to do so effectively.
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We may not be able to maintain effective and efficient
information systems. |
Our operations are dependent on uninterrupted performance of our
information systems. Failure to maintain reliable information
systems or disruptions in our information systems could cause
disruptions in our
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business operations, including errors and delays in billings and
collections, difficulty satisfying requirements under hospital
contracts, disputes with patients and payors, violations of
patient privacy and confidentiality requirements and other
regulatory requirements, increased administrative expenses and
other adverse consequences, any or all of which could have a
material adverse effect on our business, financial condition and
results of operations.
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Our quarterly results will likely fluctuate from period to
period. |
We have historically experienced and expect to continue to
experience quarterly fluctuations in net patient service revenue
and net income. For example, we typically experience negative
cash flow from operations in the first quarter of each year,
principally as a result of bonus payments to affiliated
physicians. In addition, a significant number of our employees
and associated professional contractors (primarily affiliated
physicians) exceed the level of taxable wages for social
security during the first and second quarters. As a result, we
incur a significantly higher payroll tax burden and our net
income is lower during those quarters. Moreover, a lower number
of calendar days are present in the first and second quarters of
the year as compared to the remainder of the year. Because we
provide services in the NICU on a 24 hour a day basis,
365 days a year, any reduction in service days will have a
corresponding reduction in net patient service revenue. We also
have significant fixed operating costs, including costs for our
affiliated physicians, and as a result, are highly dependent on
patient volume and capacity utilization of our affiliated
physicians to sustain profitability. Quarterly results may also
be impacted by the timing of acquisitions and any fluctuation in
patient volume. As a result, our results of operations for any
quarter are not indicative of results of operations for any
future period or full year.
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The value of our common stock may fluctuate. |
There has been significant volatility in the market price of our
common stock and securities of health care companies generally
that we believe in many cases has been unrelated to operating
performance. In addition, we believe that certain factors, such
as legislative and regulatory developments, including announced
regulatory investigations, quarterly fluctuations in our actual
or anticipated results of operations, lower revenues or earnings
than those anticipated by securities analysts, and general
economic and financial market conditions, could cause the price
of our common stock to fluctuate substantially.
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We may not be able to collect reimbursements for our
services from third-party payors in a timely manner. |
A significant portion of our net patient service revenue is
derived from reimbursements from various third-party payors,
including government-sponsored health care plans, private
insurance plans and managed care plans, for services provided by
our affiliated professional contractors. We are responsible for
submitting reimbursement requests to these payors and collecting
the reimbursements, and assume the financial risks relating to
uncollectible and delayed reimbursements. In the current health
care environment, we may continue to experience difficulties in
collecting reimbursements because third-party payors may seek to
reduce or delay reimbursements to which we are entitled for
services that our affiliated physicians have provided. If we are
not reimbursed fully and in a timely manner for such services,
our revenues, cash flows and financial condition could be
materially adversely affected.
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Hospitals may terminate their agreements with us, our
physicians may lose the ability to provide services in hospitals
or administrative fees paid to us by hospitals may be
reduced. |
Our net patient service revenue is derived primarily from
fee-for-service billings for patient care provided within
hospital units by our affiliated physicians and from
administrative fees paid to us by hospitals. See
“Relationships with Our Partners —
Hospitals”. Our hospital partners may cancel or not renew
their contracts with us or they may reduce or eliminate our
administrative fees in the future. To the extent that our
arrangements with our hospital partners are canceled, or are not
renewed or replaced with other arrangements having at least as
favorable terms, our business, financial condition and results
of operations could be adversely affected. In addition, to the
extent our affiliated physicians lose their privileges in
hospitals or hospitals enter
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into arrangements with other physicians, our business, financial
condition and results of operations could be materially
adversely affected.
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Our industry is already competitive and could become more
competitive. |
The health care industry is highly competitive and subject to
continual changes in the methods by which services are provided
and the manner in which health care providers are selected and
compensated. Because our operations consist primarily of
physician services provided within hospital-based units,
primarily NICUs, we compete with other health care services
companies and physician groups for contracts with hospitals to
provide our services to patients. We also face competition from
hospitals themselves to provide our services. Companies in other
health care industry segments, some of which have greater
financial and other resources than ours, may become competitors
in providing neonatal, maternal-fetal and pediatric subspecialty
care. We may not be able to continue to compete effectively in
this industry, additional competitors may enter our markets, and
this increased competition may have a material adverse effect on
our business, financial condition and results of operations.
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Unfavorable changes or conditions could occur in the
states where our operations are concentrated. |
A majority of our net patient service revenue in 2004 was
generated by our operations in five states. In particular, Texas
accounted for approximately 28% of our net patient service
revenue in 2004. See “Geographic Coverage”. Adverse
changes or conditions affecting these particular states, such as
health care reforms, changes in laws and regulations, reduced
Medicaid reimbursements and government investigations, may have
a material adverse effect on our financial condition and results
of operations.
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We are dependent upon our key management personnel for our
future success. |
Our success depends to a significant extent on the continued
contributions of our key management personnel, including our
Chief Executive Officer, Roger J. Medel, M.D., for the
management of our business and implementation of our business
strategy. The loss of Dr. Medel or other key management
personnel could have a material adverse effect on our business,
financial condition, results of operations and the trading price
of our common stock.
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Our currently outstanding preferred stock purchase rights
could deter takeover attempts. |
We have adopted a preferred share purchase rights plan, under
which each outstanding share of our common stock includes a
preferred stock purchase right entitling the registered holder,
subject to the terms of our rights agreement, to purchase from
us a one-thousandth of a share of our series A junior
participating preferred stock at an initial exercise price of
$150. If a person or group of persons acquires, or announces a
tender offer or exchange offer which if consummated would result
in the acquisition or beneficial ownership of 15% or more of the
outstanding shares of our common stock, each right will entitle
its holder (other than the person or persons acquiring 15% or
more of our common stock) to purchase $300 worth of our common
stock for $150. Some provisions contained in our rights
agreement may have the effect of discouraging a third-party from
making an acquisition proposal for Pediatrix and may thereby
inhibit a change in control. For example, such provisions may
deter tender offers for our shares, which offers may be
attractive to shareholders, or deter purchases of large blocks
of common stock, thereby limiting the opportunity for
shareholders to receive a premium for their shares over the
then-prevailing market prices.
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Provisions of our articles and bylaws could deter takeover
attempts. |
Our amended and restated articles of incorporation authorize our
board of directors to issue up to 1,000,000 shares of
undesignated preferred stock and to determine the powers,
preferences and rights of these shares, without shareholder
approval. This preferred stock could be issued with voting,
liquidation, dividend and other rights superior to those of the
holders of common stock. The issuance of preferred stock under
some circumstances could have the effect of delaying, deferring
or preventing a change in control. In addition, provisions in
our amended and restated bylaws, including those relating to
calling shareholder meetings, taking
25
action by written consent and other matters, could render it
more difficult or discourage an attempt to obtain control of
Pediatrix through a proxy contest or consent solicitation. These
provisions could limit the price that some investors might be
willing to pay in the future for our shares of common stock.
Our corporate office building, which we own, is located in
Sunrise, Florida and contains approximately 80,000 square
feet of office space. During 2004, we leased space in other
facilities in various states for our business and medical
offices, storage space and temporary housing of medical staff
having an aggregate annual rent of approximately $7,738,000. See
Note 10 to our Consolidated Financial Statements included
in Item 8 of this Annual Report which is incorporated
herein by reference. We believe that our facilities and
equipment are in good condition in all material respects and
sufficient for our present needs.
|
|
| ITEM 3. |
LEGAL PROCEEDINGS |
The information required by this Item is included in and
incorporated herein by reference to Item 1 of this Annual
Report under “Government Investigations” and
“Other Legal Proceedings.”
|
|
| ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS |
No matter was submitted to a vote of security holders during the
three months ended December 31, 2004.
PART II
|
|
| ITEM 5. |
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES |
Price Range of Common Stock
Our common stock is traded on the New York Stock Exchange (the
“NYSE”) under the symbol “PDX”. The high and
low sales price for a share of our common stock for each quarter
during our last two fiscal years is set forth below, as reported
in the NYSE consolidated transaction reporting system:
| |
|
|
|
|
|
|
|
|
| |
|
High | |
|
Low | |
| |
|
| |
|
| |
|
2003
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
41.95 |
|
|
$ |
23.04 |
|
|
Second Quarter
|
|
|
42.90 |
|
|
|
24.60 |
|
|
Third Quarter
|
|
|
48.84 |
|
|
|
35.85 |
|
|
Fourth Quarter
|
|
|
57.25 |
|
|
|
45.94 |
|
|
2004
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
64.15 |
|
|
$ |
54.40 |
|
|
Second Quarter
|
|
|
71.62 |
|
|
|
60.50 |
|
|
Third Quarter
|
|
|
72.03 |
|
|
|
54.27 |
|
|
Fourth Quarter
|
|
|
65.60 |
|
|
|
51.90 |
|
As of March 7, 2005, we had approximately 68 holders of
record of our common stock, and the closing sales price on that
date for our common stock was $68.66 per share. We believe
that the number of beneficial owners of our common stock is
substantially greater than the number of record holders because
a significant number of shares of our common stock is held
through brokerage firms in “street name”.
Dividend Policy
We did not declare or pay any cash dividends on our common stock
in 2003 or 2004, nor do we currently intend to declare or pay
any cash dividends in the future, because we intend to retain
all earnings for the operation and expansion of our business.
The payment of any future dividends will be at the discretion of
our
26
Board of Directors and will depend upon, among other things,
future earnings, results of operations, capital requirements,
our general financial condition, general business conditions and
contractual restrictions on payment of dividends, if any, as
well as such other factors as our Board of Directors may deem
relevant. Our revolving line of credit restricts our ability to
declare and pay cash dividends. See Item 7 of this Annual
Report under “Liquidity and Capital Resources.”
Issuer Purchase of Equity Securities
During the three months ended December 31, 2004, we
repurchased approximately 1.7 million shares of our common
stock at a cost of approximately $92.7 million under a
repurchase program approved by our Board of Directors. All
repurchases were made in open market transactions, subject to
market conditions and trading restrictions.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Approximate Dollar | |
| |
|
|
|
|
|
Total Number of Shares | |
|
Value of Shares that | |
| |
|
|
|
|
|
Purchased as Part of | |
|
May Yet Be | |
| |
|
Total Number of | |
|
Average Price | |
|
the Repurchase | |
|
Purchased Under the | |
| Period |
|
Shares Purchased | |
|
Paid per Share | |
|
Program | |
|
Repurchase Program | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
|
|
|
|
(In thousands) | |
|
October 1, 2004 to October 31, 2004
|
|
|
1,629,900 |
|
|
$ |
54.65 |
|
|
|
1,629,900 |
|
|
$ |
3,639 |
|
|
November 1, 2004 to November 30, 2004
|
|
|
65,692 |
|
|
$ |
55.40 |
|
|
|
65,692 |
|
|
|
— |
(1) |
|
December 1, 2004 to December 31, 2004
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
1,695,592 |
|
|
|
|
|
|
|
1,695,592 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
During November 2004, we completed a $100 million common
stock repurchase program as authorized by our Board of Directors
in August 2004. See Note 14 to our Consolidated Financial
Statements included in Item 8 of this Annual Report. |
27
|
|
| ITEM 6. |
SELECTED FINANCIAL DATA |
The selected consolidated financial data set forth as of and for
each of the five years in the period ended December 31,
2004, have been derived from our audited Consolidated Financial
Statements. The following data should be read in conjunction
with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” and our
Consolidated Financial Statements and the related notes included
in Items 7 and 8, respectively, of this Annual Report.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share and other operating data) | |
|
Consolidated Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenue(1)(2)
|
|
$ |
243,075 |
|
|
$ |
354,595 |
|
|
$ |
465,481 |
|
|
$ |
551,197 |
|
|
$ |
619,629 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Practice salaries and benefits
|
|
|
148,476 |
|
|
|
197,581 |
|
|
|
263,165 |
|
|
|
310,778 |
|
|
|
350,354 |
|
| |
Practice supplies and other operating expenses
|
|
|
11,022 |
|
|
|
14,297 |
|
|
|
15,791 |
|
|
|
18,588 |
|
|
|
24,254 |
|
| |
General and administrative expenses
|
|
|
44,895 |
|
|
|
62,841 |
|
|
|
68,315 |
|
|
|
76,537 |
|
|
|
79,445 |
|
| |
Depreciation and amortization
|
|
|
13,810 |
|
|
|
21,437 |
|
|
|
6,135 |
|
|
|
8,405 |
|
|
|
9,353 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
218,203 |
|
|
|
296,156 |
|
|
|
353,406 |
|
|
|
414,308 |
|
|
|
463,406 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
24,872 |
|
|
|
58,439 |
|
|
|
112,075 |
|
|
|
136,889 |
|
|
|
156,223 |
|
|
Investment income
|
|
|
358 |
|
|
|
309 |
|
|
|
818 |
|
|
|
482 |
|
|
|
893 |
|
|
Interest expense
|
|
|
(3,771 |
) |
|
|
(2,538 |
) |
|
|
(1,156 |
) |
|
|
(1,372 |
) |
|
|
(1,295 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
21,459 |
|
|
|
56,210 |
|
|
|
111,737 |
|
|
|
135,999 |
|
|
|
155,821 |
|
|
Income tax provision
|
|
|
10,473 |
|
|
|
25,782 |
|
|
|
42,961 |
|
|
|
51,671 |
|
|
|
57,542 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
10,986 |
|
|
$ |
30,428 |
|
|
$ |
68,776 |
|
|
$ |
84,328 |
|
|
$ |
98,279 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
0.70 |
|
|
$ |
1.44 |
|
|
$ |
2.68 |
|
|
$ |
3.55 |
|
|
$ |
4.12 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
0.68 |
|
|
$ |
1.36 |
|
|
$ |
2.58 |
|
|
$ |
3.43 |
|
|
$ |
3.97 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
15,760 |
|
|
|
21,159 |
|
|
|
25,622 |
|
|
|
23,742 |
|
|
|
23,831 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
|
16,053 |
|
|
|
22,478 |
|
|
|
26,629 |
|
|
|
24,577 |
|
|
|
24,747 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of physicians at end of period
|
|
|
452 |
|
|
|
588 |
|
|
|
622 |
|
|
|
690 |
|
|
|
776 |
|
|
Number of births
|
|
|
381,602 |
|
|
|
450,205 |
|
|
|
501,832 |
|
|
|
522,612 |
|
|
|
567,794 |
|
|
NICU admissions
|
|
|
39,272 |
|
|
|
48,186 |
|
|
|
55,121 |
|
|
|
57,239 |
|
|
|
63,115 |
|
|
NICU patient days
|
|
|
637,957 |
|
|
|
804,293 |
|
|
|
983,733 |
|
|
|
1,087,753 |
|
|
|
1,195,936 |
|
28
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2000 | |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share and other operating data) | |
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
3,075 |
|
|
$ |
27,557 |
|
|
$ |
73,195 |
|
|
$ |
27,896 |
|
|
$ |
7,011 |
|
|
Working capital(3)
|
|
|
2,108 |
|
|
|
34,381 |
|
|
|
79,555 |
|
|
|
24,512 |
|
|
|
21,180 |
|
|
Total assets
|
|
|
324,734 |
|
|
|
573,099 |
|
|
|
648,679 |
|
|
|
717,594 |
|
|
|
788,889 |
|
|
Total liabilities
|
|
|
82,834 |
|
|
|
94,247 |
|
|
|
100,681 |
|
|
|
145,216 |
|
|
|
217,858 |
|
|
Borrowings under line of credit
|
|
|
23,500 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
54,000 |
|
|
Long-term debt and capital lease obligations, including current
maturities
|
|
|
— |
|
|
|
3,206 |
|
|
|
2,489 |
|
|
|
1,864 |
|
|
|
1,312 |
|
|
Shareholders’ equity
|
|
|
241,900 |
|
|
|
478,852 |
|
|
|
547,998 |
|
|
|
572,378 |
|
|
|
571,031 |
|
|
|
| (1) |
The Company adds new physician practices as a result of
acquisitions and the addition of new hospital contracts. In
addition, the Company acquired an independent laboratory
specializing in newborn metabolic screening in May 2003. The
increase in net patient service revenue related to acquisitions
(including our acquisition of Magella in May 2001) and the
addition of new hospital contracts was approximately
$13.9 million, $86.6 million, $69.8 million,
$30.1 million and $37.6 million for the years ended
December 31, 2000, 2001, 2002 2003, and 2004 respectively. |
| |
| (2) |
Net patient service revenue for the year ended December 31,
2000, included a charge of $6.5 million, which was recorded
during the three months ended June 30, 2000, to increase
the allowance for contractual adjustments and uncollectible
accounts. |
| |
| (3) |
At December 31, 2000, the balance outstanding on the
Company’s line of credit was classified as a current
liability. |
|
|
| ITEM 7. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
The following discussion highlights the principal factors that
have affected 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
our Consolidated Financial Statements and the related notes
included in Item 8 of this Annual Report. This discussion
contains forward-looking statements. Please see Item 1 of
this Annual Report, including the section entitled “Risk
Factors”, for a discussion of the uncertainties, risks and
assumptions associated with these forward-looking statements.
The operating results for the periods presented were not
significantly affected by inflation.
OVERVIEW
Pediatrix is the nation’s largest health care services
company focused on physician services for newborn,
maternal-fetal and other pediatric subspecialty care. Our
national network is comprised of approximately 776 affiliated
physicians, including 603 neonatal physician specialists who
provide clinical care in 31 states and Puerto Rico,
primarily within hospital-based NICUs, to babies born
prematurely or with medical complications. Our affiliated
neonatal physician specialists staff and manage clinical
activities at more than 220 hospitals, and our 86 affiliated
maternal-fetal medicine subspecialists provide care to expectant
mothers experiencing complicated pregnancies in many areas where
our affiliated neonatal physicians practice. Our network
includes other pediatric subspecialists, including 44 pediatric
intensivists, 28 pediatric cardiologists and 15 pediatric
hospitalists. In addition, we believe that we are the
nation’s largest provider of hearing screens to newborns
and the nation’s largest private provider of metabolic
screening services to newborns.
During 2004, we acquired 12 physician group practices,
consisting of eight neonatal practices, two pediatric cardiology
practices, one maternal-fetal practice and one pediatric
intensive care practice.
29
Geographic Coverage and Payor Mix
During 2002, 2003 and 2004, approximately 62%, 60% and 59%,
respectively, of our net patient service revenue was generated
by operations in our five largest states. Over those same
periods, our operations in Texas accounted for approximately
33%, 31% and 28% of our net patient service revenue. Although we
continue to seek to diversify the geographic scope of our
operations, primarily through acquisitions of physician group
practices, we may not be able to implement successfully or
realize the expected benefits of any of these initiatives.
Adverse changes or conditions affecting states in which our
operations are concentrated, such as health care reforms,
changes in laws and regulations, reduced Medicaid
reimbursements, or government investigations, may have a
material adverse effect on our business, financial condition and
results of operations.
We bill payors for professional services provided by our
affiliated physicians to our patients based upon rates for
specific services provided. Our billed charges are substantially
the same for all parties in a particular geographic area
regardless of the party responsible for paying the bill for our
services. We determine our net patient service revenue based
upon the difference between our gross fees for services and our
estimated ultimate collections from payors. Net patient service
revenue differs from gross fees due to (i) Medicaid
reimbursements at government-established rates,
(ii) managed care payments at contracted rates,
(iii) various reimbursement plans and negotiated
reimbursements from other third parties, and
(iv) discounted and uncollectible accounts of private pay
patients.
Our payor mix is comprised of government (principally Medicaid),
contracted managed care, other third parties and private pay
patients. We benefit from the fact that most of the medical
services provided in the NICU or PICU are classified as
emergency services, a category typically classified as a covered
service by managed care payors. In addition, we benefit when
patients are covered by Medicaid, despite Medicaid’s lower
reimbursement rates as compared with other payors, because
typically these patients would not otherwise be able to pay for
services due to lack of insurance coverage.
The following is a summary of our payor mix, expressed as a
percentage of net patient service revenue, exclusive of
administrative fees, for the periods indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Government
|
|
|
23 |
% |
|
|
25 |
% |
|
|
27 |
% |
|
Contracted managed care
|
|
|
55 |
% |
|
|
58 |
% |
|
|
60 |
% |
|
Other third parties
|
|
|
21 |
% |
|
|
16 |
% |
|
|
12 |
% |
|
Private pay patients
|
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
The payor mix shown above is not necessarily representative of
the amount of services provided to patients covered under these
plans. For example, services provided to patients covered under
government programs for the years ended December 31, 2002,
2003, and 2004 represented 46%, 48% and 52% of our total gross
patient service revenue but only 23%, 25% and 27% of our net
patient service revenue, respectively.
The increase in the government component of our payor mix during
2004 is the result of an increase in the number of patients
enrolled in government sponsored programs. Payments received
from government sponsored programs are substantially less than
payments received from managed care and other third party
payors. A payor mix shift from managed care and other third
party payors to government payors results in an increase in our
estimated provision for contractual adjustments and
uncollectibles and a corresponding decrease in our net patient
service revenue. Further increases in the government component
of our payor mix at the expense of other third-party payors
could result in a significant reduction in our average
reimbursement rates, and in the absence of increased patient
volume or improved reimbursement from contracted managed care or
other third parties, could have a material adverse effect on our
business, financial condition and results
30
of operations. See Item 1 — Risk
Factors — “Government programs or private
insurers may limit, reduce or make retroactive adjustments to
reimbursement amounts or rates.”
Quarterly Results
The table below presents certain unaudited quarterly financial
data for each of the quarters in the years ended
December 31, 2003 and 2004. This information has been
prepared on the same basis as our Consolidated Financial
Statements contained in Item 8 of this Annual Report and
includes, in our opinion, all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the
quarterly results when read in conjunction with our Consolidated
Financial Statements and the related notes. We have historically
experienced and expect to continue to experience quarterly
fluctuations in net patient service revenue and net income.
These fluctuations are primarily due to the following factors:
|
|
|
| |
• |
A significant number of our employees and our associated
professional contractors, primarily physicians, exceed the level
of taxable wages for social security during the first and second
quarters of the year. As a result, we incur a significantly
higher payroll tax burden and our net income is lower during
those quarters. |
| |
| |
• |
A lower number of calendar days are present in the first and
second quarters of the year as compared to the remainder of the
year. Because we provide services in NICUs on a 24 hour
basis, 365 days a year, any reduction in service days will
have a corresponding reduction in net patient service revenue. |
We have significant fixed operating costs, including physician
costs, and, as a result, are highly dependent on patient volume
and capacity utilization of our affiliated professional
contractors to sustain profitability. Additionally, quarterly
results may be impacted by the timing of acquisitions and
fluctuations in patient volume. As a result, the operating
results for any quarter are not necessarily indicative of
results for any future period or for the full year.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2003 Quarters | |
|
2004 Quarters | |
| |
|
| |
|
| |
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except for per share data) | |
|
Net patient service revenue
|
|
$ |
126,200 |
|
|
$ |
133,701 |
|
|
$ |
145,514 |
|
|
$ |
145,782 |
|
|
$ |
148,116 |
|
|
$ |
152,187 |
|
|
$ |
158,333 |
|
|
$ |
160,993 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Practice salaries and benefits
|
|
|
74,616 |
|
|
|
75,648 |
|
|
|
80,196 |
|
|
|
80,318 |
|
|
|
86,475 |
|
|
|
83,881 |
|
|
|
88,592 |
|
|
|
91,406 |
|
| |
Practice supplies and other operating expenses
|
|
|
4,065 |
|
|
|
4,718 |
|
|
|
4,778 |
|
|
|
5,027 |
|
|
|
5,351 |
|
|
|
5,960 |
|
|
|
5,895 |
|
|
|
7,048 |
|
| |
General and administrative expenses
|
|
|
18,301 |
|
|
|
19,006 |
|
|
|
19,843 |
|
|
|
19,387 |
|
|
|
19,847 |
|
|
|
19,606 |
|
|
|
20,002 |
|
|
|
19,990 |
|
| |
Depreciation and amortization
|
|
|
1,650 |
|
|
|
1,903 |
|
|
|
2,495 |
|
|
|
2,357 |
|
|
|
2,363 |
|
|
|
2,337 |
|
|
|
2,298 |
|
|
|
2,355 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
98,632 |
|
|
|
101,275 |
|
|
|
107,312 |
|
|
|
107,089 |
|
|
|
114,036 |
|
|
|
111,784 |
|
|
|
116,787 |
|
|
|
120,799 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
27,568 |
|
|
|
32,426 |
|
|
|
38,202 |
|
|
|
38,693 |
|
|
|
34,080 |
|
|
|
40,403 |
|
|
|
41,546 |
|
|
|
40,194 |
|
|
Other income (expense), net
|
|
|
(151 |
) |
|
|
(354 |
) |
|
|
(341 |
) |
|
|
(44 |
) |
|
|
(110 |
) |
|
|
(188 |
) |
|
|
(202 |
) |
|
|
98 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
27,417 |
|
|
|
32,072 |
|
|
|
37,861 |
|
|
|
38,649 |
|
|
|
33,970 |
|
|
|
40,215 |
|
|
|
41,344 |
|
|
|
40,292 |
|
|
Income tax provision
|
|
|
10,418 |
|
|
|
12,187 |
|
|
|
14,388 |
|
|
|
14,678 |
|
|
|
12,654 |
|
|
|
14,980 |
|
|
|
15,401 |
|
|
|
14,507 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
16,999 |
|
|
$ |
19,885 |
|
|
$ |
23,473 |
|
|
$ |
23,971 |
|
|
$ |
21,316 |
|
|
$ |
25,235 |
|
|
$ |
25,943 |
|
|
$ |
25,785 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income per common and common equivalent share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
$ |
.70 |
|
|
$ |
.84 |
|
|
$ |
1.01 |
|
|
$ |
1.02 |
|
|
$ |
0.89 |
|
|
$ |
1.03 |
|
|
$ |
1.08 |
|
|
$ |
1.13 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Diluted
|
|
$ |
.68 |
|
|
$ |
.82 |
|
|
$ |
.97 |
|
|
$ |
.97 |
|
|
$ |
0.85 |
|
|
$ |
0.99 |
|
|
$ |
1.04 |
|
|
$ |
1.10 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Application of Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires estimates and assumptions that affect the reporting of
assets, liabilities, revenues and expenses, and the disclosure
of contingent assets and liabilities. Note 2 to our
Consolidated Financial Statements provides a summary of our
significant accounting policies, which are all in accordance
with generally accepted accounting policies in the United
States. Certain of our accounting policies are critical to
understanding our Consolidated Financial Statements because
their application requires management to make assumptions about
future results and depends to a large extent on
management’s judgment, because past results have fluctuated
and are expected to continue to do so in the future.
We believe that the application of the accounting policies
described in the following paragraphs are highly dependent on
critical estimates and assumptions that are inherently uncertain
and highly susceptible to change. For all these policies, we
caution that future events rarely develop exactly as estimated,
and the best estimates routinely require adjustment. On an
ongoing basis, we evaluate our estimates and assumptions,
including those discussed below.
We recognize patient service revenue at the time services are
provided by our affiliated physicians. Almost all of our patient
service revenue is reimbursed by state Medicaid programs and
third party insurance payors. Payments for services rendered to
our patients are generally less than billed charges. We monitor
our revenue and receivables from these sources and record an
estimated contractual allowance to properly account for the
anticipated differences between billed and reimbursed amounts.
Accordingly, patient service revenue is presented net of an
estimated provision for contractual adjustments and
uncollectibles. Management estimates allowances for contractual
adjustments and uncollectibles on accounts receivable based upon
historical experience and other factors, including days sales
outstanding (“DSO”) for accounts receivable,
evaluation of expected adjustments and delinquency rates, past
adjustments and collection experience in relation to amounts
billed, an aging of accounts receivable, current contract and
reimbursement terms, changes in payor mix and other relevant
information. Contractual adjustments result from the difference
between the physician rates for services performed and the
reimbursements by government-sponsored health care programs and
insurance companies for such services. The evaluation of these
historical and other factors involves complex, subjective
judgments. We believe that evaluating DSO is a key factor in
evaluating the condition of our accounts receivable and the
related allowances for contractual adjustments and
uncollectibles. As of December 31, 2004, our DSO was
61.6 days and we had approximately $298.4 million in
gross accounts receivable outstanding. Considering the
outstanding balance, a one percentage point change in our
estimated collection rate would result in an impact to net
patient service revenue of approximately $3.0 million. Our
net patient service revenue, net income and operating cash
flows, may be materially and adversely affected if actual
adjustments and uncollectibles exceed management’s
estimated provisions as a result of changes in these factors. In
addition, we are subject to audits of our billing by Medicaid
and other third party payors (see “Government
Investigations” below and Note 10 to our Consolidated
Financial Statements included in Item 8 of this Annual
Report).
|
|
|
Professional Liability Coverage |
We maintain professional liability insurance policies with
third-party insurers on a claims-made basis, subject to
deductibles, exclusions and other restrictions. We self-insure
our liabilities to pay deductibles under our professional
liability insurance coverage through a wholly-owned captive
insurance subsidiary. We record a liability for self-insured
deductibles and an estimate of liabilities for claims incurred
but not reported based on an actuarial valuation using
historical loss patterns. An inherent assumption in such
estimates is that historical loss patterns can be used to
predict future patterns with reasonable accuracy. Because many
factors can affect historical and future loss patterns, the
determination of an appropriate reserve involves complex,
subjective judgment, and actual results may vary significantly
from estimates. Insurance liabilities are necessarily based on
estimates including claim frequency and severity as well as
health care inflation. Liabilities for claims incurred but not
reported are not discounted.
32
We record acquired assets and liabilities at their respective
fair values, recording to goodwill the excess of cost over the
fair value of the net assets acquired, including identifiable
intangible assets. In accordance with the provisions of
Statement of Financial Accounting Standards, No. 142
(“FAS 142”), “Goodwill and Other Intangible
Assets,” no goodwill amortization was recorded for the
years ended December 31, 2003 and 2004. See Note 2 to
our Consolidated Financial Statements included in Item 8 of
this Annual Report.
We test goodwill for impairment at a reporting unit level on an
annual basis. We define a reporting unit as a specific region of
the United States based on our management structure. The testing
for impairment is completed using a two-step test. The first
step compares the fair value of a reporting unit with its
carrying amount, including goodwill. If the carrying amount of a
reporting unit exceeds its fair value, a second step is
performed to determine the amount of any impairment loss. We use
income and market-based valuation approaches to determine the
fair value of our reporting units. These approaches focus on
discounted cash flows and market multiples to derive the fair
value of a reporting unit. We also consider the economic outlook
for the healthcare services industry and various other factors
during the testing process, including hospital and physician
contract changes, local market developments, changes in
third-party payor payments, and other publicly-available
information.
Other significant accounting policies, not involving the same
level of measurement uncertainties as those discussed above, are
nevertheless important to an understanding of our Consolidated
Financial Statements. For example, our Consolidated Financial
Statements are presented on a consolidated basis with our
affiliated professional contractors because we or one of our
subsidiaries have entered into management agreements with our
affiliated professional contractors meeting the criteria set
forth in the Emerging Issues Task Force Issue 97-2 for a
“controlling financial interest”. Our management
agreements are further described in Note 2 to our
Consolidated Financial Statements included in Item 8 of
this Annual Report. The policies described in Note 2 often
require difficult judgments on complex matters that are often
subject to multiple sources of authoritative guidance and are
frequently reexamined by accounting standards setters and
regulators. See “Accounting Matters” within this Item
for matters that may impact our accounting policies in the
future.
|
|
|
Government Investigations |
In June 2002, we received a written request from the FTC to
submit information on a voluntary basis in connection with an
investigation of issues of competition related to our May 2001
acquisition of Magella and our business practices generally. In
February 2003, we received additional information requests from
the FTC in the form of a Subpoena and Civil Investigative
Demand. Pursuant to these requests, we produced documents and
information relating to the acquisition and our business
practices in certain markets. We have 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 we are cooperating fully with the
FTC.
Beginning in April 1999, we received requests from various
federal and state investigators for information relating to our
billing practices for services reimbursed by Medicaid and the
United States Department of Defense’s TRICARE program for
military dependents 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, we were advised by a United States
Attorney’s Office that it was conducting a civil
investigation with respect to our Medicaid billing practices
nationwide. This federal Medicaid investigation, the TRICARE
investigation, and related state inquiries are now being
coordinated together and are active and ongoing. We are
cooperating fully with federal and state authorities with
respect to these investigations and inquiries.
In November 2003, our 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 us in that state. We are
cooperating fully with appropriate officials in this
investigation.
33
Currently management remains unable to predict the timing or the
outcome of these investigations and inquiries and whether they
will have, individually or in the aggregate, a material adverse
effect on our business, financial condition, results of
operations and the trading price of our common stock.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated,
certain information related to our operations expressed as a
percentage of our net patient service revenue (patient billings
net of contractual adjustments and uncollectibles, and including
administrative fees):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Net patient service revenue
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Practice salaries and benefits
|
|
|
56.5 |
|
|
|
56.4 |
|
|
|
56.6 |
|
| |
Practice supplies and other operating expenses
|
|
|
3.4 |
|
|
|
3.4 |
|
|
|
3.9 |
|
| |
General and administrative expenses
|
|
|
14.7 |
|
|
|
13.9 |
|
|
|
12.8 |
|
| |
Depreciation and amortization
|
|
|
1.3 |
|
|
|
1.5 |
|
|
|
1.5 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses
|
|
|
75.9 |
|
|
|
75.2 |
|
|
|
74.8 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Income from operations
|
|
|
24.1 |
|
|
|
24.8 |
|
|
|
25.2 |
|
|
Other expense, net
|
|
|
(.1 |
) |
|
|
(.1 |
) |
|
|
(.1 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Income before income taxes
|
|
|
24.0 |
|
|
|
24.7 |
|
|
|
25.1 |
|
|
Income tax provision
|
|
|
9.2 |
|
|
|
9.4 |
|
|
|
9.2 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
|
14.8 |
% |
|
|
15.3 |
% |
|
|
15.9 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004 as Compared to Year
Ended December 31, 2003 |
Our net patient service revenue increased $68.4 million, or
12.4%, to $619.6 million for the year ended
December 31, 2004, as compared to $551.2 million in
2003. Of this $68.4 million increase, $37.6 million,
or 55.0%, was primarily attributable to revenue generated from
acquisitions completed during 2003 and 2004. Same unit net
patient service revenue increased $30.8 million, or 5.9%,
for the year ended December 31, 2004. The increase in same
unit net patient service revenue was primarily the result of:
(i) increased revenue of approximately $16.6 million
from a 4.4% increase in neonatal intensive care unit patient
days; (ii) increased revenue of approximately
$9.3 million from volume growth in maternal-fetal services
and other services including hearing screens and newborn nursery
services provided by existing practices; and
(iii) increased revenue of approximately $4.9 million
from improved pricing for our patient services due to modest
price increases and improved managed care contracting. The
increase in pricing was lower than anticipated due to an
increase in the percentage of our patients enrolled in
government sponsored programs during 2004. Payments received
from government sponsored programs are substantially less than
payments received from commercial insurance payors. This shift
in our payor mix resulted in an increase in our estimated
provision for contractual adjustments and uncollectibles and a
corresponding decrease in our same unit net patient service
revenue. 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 $39.6 million, or
12.7%, to $350.4 million for the year ended
December 31, 2004, as compared to $310.8 million in
2003. The increase was primarily attributable to: (i) costs
associated with new physicians and other staff of
$29.5 million to support acquisition related growth and
volume growth at existing units; and (ii) an increase in
incentive compensation of $8.0 million as a result of same
unit growth and operational improvements at the physician
practice level.
34
Practice supplies and other operating expenses increased
$5.7 million, or 30.5%, to $24.3 million for the year
ended December 31, 2004, as compared with
$18.6 million in 2003. The increase was primarily
attributable to: (i) laboratory and other supply costs of
approximately $1.8 million related to our acquisition of a
metabolic screening laboratory in May 2003 and our acquisitions
of office-based maternal-fetal and cardiology practices during
2003 and 2004; (ii) rent and other maintenance costs of
approximately $1.7 million related to practices acquired
during 2003 and 2004; and (iii) professional services and
other costs of approximately $1.1 million to support new
and existing physician practices.
General and administrative expenses include all salaries,
benefits, supplies and operating expenses not specifically
related to the day-to-day operations of our physician group
practices, including billing and collections functions. General
and administrative expenses increased $2.9 million, or
3.8%, to $79.4 million for the year ended December 31,
2004, as compared to $76.5 million in 2003. This
$2.9 million increase was primarily attributable to
salaries and benefits for personnel to support the continuing
growth of our operations. As a percentage of revenue, general
and administrative expenses declined by 107 basis points, to
12.8% for the year ended December 31, 2004, as compared to
13.9% in 2003. The decline in general and administrative
expenses as a percentage of revenue is due to the effective
management of such expenses as we grew our operations in 2004.
Depreciation and amortization expense increased by $948,000, or
11.3%, to $9.4 million for the year ended December 31,
2004, as compared to $8.4 million in 2003. Of the increase,
$495,000 was attributable to amortization of identifiable
intangible assets related to our acquisitions, $300,000 was
attributable to depreciation related to the purchase of our
corporate office building in 2003, and $153,000 was attributable
to depreciation related to the purchase of computer and office
equipment, software, furniture and other improvements at our
corporate and regional offices.
Income from operations increased $19.3 million, or 14.1%,
to $156.2 million for the year ended December 31,
2004, as compared with $136.9 million in 2003. Our
operating margin increased 38 basis points to 25.2% for the
year ended December 31, 2004, as compared to 24.8% in 2003.
The increase in operating margin is directly attributable to a
reduction in general and administrative expenses as a percentage
of revenue.
We recorded net interest expense of $402,000 for the year ended
December 31, 2004, as compared with net interest expense of
$890,000 in 2003. The decrease in net interest expense is
primarily due to the recognition of interest income in 2004 in
the amount of $360,000 related to a state income tax refund.
Interest expense for the year ended December 31, 2004
consisted primarily of interest charges, commitment fees and
amortized debt costs associated with our line of credit.
Our effective income tax rates were 36.9% and 38.0% for the
years ended December 31, 2004 and 2003, respectively. The
decline in our effective rate is due to: (i) changes in our
corporate structure and the resulting impact on our
apportionment of income for state income tax purposes, and
(ii) the recognition of a one-time state income tax refund
of approximately $502,000. The one-time state income tax refund
will not have any continuing impact on our effective tax rate.
Net income increased to $98.3 million for the year ended
December 31, 2004, as compared to $84.3 million in
2003.
Diluted net income per common and common equivalent share was
$3.97 on weighted average shares of 24.7 million for the
year ended December 31, 2004, as compared to $3.43 on the
weighted average shares of 24.6 million in 2003. The net
increase in weighted average shares outstanding was primarily
due to the exercise of employee stock options and the issuance
of shares under our employee stock purchase plan offset in part
by the impact of shares repurchased under share repurchase
programs approved by our Board of Directors since
January 1, 2003.
|
|
|
Year Ended December 31, 2003 as Compared to Year
Ended December 31, 2002 |
Our net patient service revenue increased $85.7 million, or
18.4%, to $551.2 million for the year ended
December 31, 2003, as compared to $465.5 million in
2002. Of this $85.7 million increase, $30.1 million,
or 35.1%, was primarily attributable to revenue generated from
acquisitions completed during 2002 and 2003 and
35
the addition of new hospital contracts. During 2003, we
increased the pace of acquisitions with the addition of seven
group practices and a metabolic screening laboratory. Same unit
patient service revenue increased $55.6 million, or 12.4%,
for the year ended December 31, 2003. The increase in same
unit net patient service revenue was primarily the result of:
(i) increased revenue of approximately $19.0 million
from changes in reimbursement for our services due to
modifications to billing codes implemented by the American
Medical Association in early 2003; (ii) increased revenue
of approximately $15.3 million from improved pricing for
our patient services due to modest price increases and improved
managed care contracting; (iii) increased revenue of
approximately $13.9 million from a 4.2% increase in
neonatal intensive care patient days; and (iv) increased
revenue of approximately $7.5 million from volume growth in
maternal-fetal services and other services including hearing
screens and newborn nursery services provided at existing
practices. Same units are those units at which we provided
services for the entire current period and the entire comparable
prior period.
Practice salaries and benefits increased $47.6 million, or
18.1%, to $310.8 million for the year ended
December 31, 2003, as compared to $263.2 million in
2002. The increase was primarily attributable to:
(i) increased costs of $20.8 million associated with
new physicians and other staff to support acquisition-related
growth and volume growth at existing units; (ii) an
increase in incentive compensation of $17.7 million as a
result of same unit growth and operational improvements at the
physician practice level; and (iii) an increase in
professional liability and group health insurance costs of
$3.1 million. We realized a significant growth in physician
incentive compensation as many of our affiliated physicians
participate in a performance-based incentive program. We believe
that this program has positively impacted our retention and
recruitment of physicians. During 2003, we recorded
approximately $54.0 million in physician incentive
compensation expense compared to approximately
$36.3 million in 2002.
Practice supplies and other operating expenses increased
$2.8 million, or 17.7%, to $18.6 million for the year
ended December 31, 2003, as compared to $15.8 million
in 2002. The increase was attributable to supply and other
operating costs related to acquired and new units at which we
provide services and our recent acquisition of a metabolic
screening laboratory.
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 $8.2 million, or
12.0%, to $76.5 million for the year ended
December 31, 2003, as compared to $68.3 million in
2002. This increase was primarily due to: (i) increased
salaries and benefits of $4.6 million as a result of our
continued growth, (ii) increased professional and
consulting fees of $1.5 million, (iii) increased legal
fees of $1.0 million due to government investigations, and
(iv) increased insurance costs of $500,000. General and
administrative expenses for the year ended December 31,
2002 include settlement costs of $1.3 million related to a
Colorado Medicaid investigation.
Depreciation and amortization expense increased by
$2.3 million, or 37.0%, to $8.4 million for the year
ended December 31, 2003, as compared to $6.1 million
in 2002. This increase is primarily attributable to:
(i) amortization expense of $1.4 million on
identifiable intangible assets related to our acquisitions;
(ii) an increase in depreciation of $786,000 related to the
purchase of computer hardware and software, furniture, equipment
and improvements at our corporate headquarters and regional
offices; and (iii) depreciation of $104,000 related to our
corporate office building, which we purchased in September 2003
for approximately $10.1 million.
Income from operations increased $24.8 million, or 22.1%,
to $136.9 million for the year ended December 31,
2003, as compared to $112.1 million in 2002. Our operating
margin increased 75 basis points to 24.8% for the year
ended December 31, 2003, as compared to 24.1% in 2002. The
increase in operating margin is directly attributable to a
reduction in general and administrative expenses as a percentage
of revenue.
We recorded net interest expense (investment income less
interest expense) of $890,000 for the year ended
December 31, 2003, as compared to net interest expense of
$338,000 in 2002. The increase in net interest expense is
primarily due to the use of cash on hand and borrowings under
our line of credit to fund acquisitions and repurchase shares of
our common stock under repurchase programs approved by our Board
of Directors. See “Liquidity and Capital Resources”.
36
Our effective income tax rates were 38.0% and 38.4% for the
years ended December 31, 2003 and 2002, respectively.
Net income increased to $84.3 million for the year ended
December 31, 2003, as compared to $68.8 million for
the same period in 2002.
Diluted net income per common and common equivalent share was
$3.43 on weighted average shares of 24.6 million for the
year ended December 31, 2003, as compared to $2.58 on
weighted average shares of 26.6 million for the same period
in 2002. The net decrease in weighted average shares outstanding
was due to the weighted average impact of approximately
4.7 million shares repurchased under repurchase programs
approved by our Board of Directors, offset in part by an
increase in outstanding shares due to stock option exercises and
shares issued under our employee stock purchase plans.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2004, we had approximately
$7.0 million of cash and cash equivalents on hand as
compared to $27.9 million at December 31, 2003.
Additionally, we had working capital of approximately
$21.2 million at December 31, 2004, a decrease of
$3.3 million from working capital of $24.5 million at
December 31, 2003.
We generated cash flow from operating activities of
$97.8 million, $118.0 million and $123.8 million
for the years ended December 31, 2002, 2003 and 2004,
respectively. The increase in cash flow from operating
activities in 2004 is due to improved year-over-year operating
results, changes in our working capital components and an
increase in deferred income taxes. Our significant working
capital component changes relate primarily to accounts
receivable, accounts payable and accrued expenses, and income
taxes payable.
During the year ended December 31, 2004, accounts
receivable increased by $13.6 million due to the continued
growth in our net patient service revenue. Our DSO for accounts
receivable at December 31, 2004 was 61.6 days, a
slight increase over 59.5 days at December 31, 2003.
During the same period, we realized increased cash flows from
operating activities of $16.6 million due to an increase in
accounts payable and accrued expenses. This increase is
primarily related to growth in our accrual for professional
liability risks of $7.9 million and an increase in accrued
salaries and bonuses of $6.7 million. Additionally, we
realized an increase in income taxes payable and deferred income
taxes which impacted our cash flows from operating activities by
$15.5 million. This increase is related to an increase in
income taxes payable of $9.7 million associated with the
timing of tax payments made in 2004 and an increase in deferred
income taxes of $5.8 million primarily due to the
amortization of goodwill that is deductible for tax purposes but
is not recognized as an expense for financial reporting purposes
under generally accepted accounting principles.
Our accounts receivable are principally due from government
payors, managed care payors and other third party insurance
payors. We track our collections from these sources, monitor the
age of our accounts receivable, and make all reasonable efforts
to collect outstanding accounts receivable through our systems,
processes and personnel at our corporate and regional billing
and collection offices. We use customary collection practices,
including the use of outside collection agencies for accounts
receivable due from private pay patients when appropriate.
Almost all of our accounts receivable adjustments consist of
contractual adjustments due to the difference between gross
amounts billed and the amounts allowed by our payors. Any
amounts written-off related to private pay patients are based on
the specific facts and circumstances related to each individual
patient account.
We maintain professional liability insurance policies with
third-party insurers, subject to deductibles, exclusions and
other restrictions. We self-insure our liabilities to pay
deductibles under our professional liability insurance coverage
through a wholly-owned captive insurance subsidiary. We record a
liability for self-insured deductibles and an estimate of
liabilities for claims incurred but not reported based on an
actuarial valuation using historical loss patterns. Our current
professional liability insurance policy expires May 1,
2005, and we are currently reviewing our coverage options, which
could include higher self-insured deductibles and an increase in
premium costs. We may not be able to obtain substantially
similar coverage for professional liability insurance upon
expiration or such coverage may not be available at acceptable
costs or on favorable terms.
37
The increase in our accrued salaries and bonuses of
$6.7 million is attributable to the growth in our physician
incentive compensation program due to same unit growth and
operational improvements at the physician practice level. A
large majority of our affiliated physicians participate in this
performance-based incentive compensation program and almost all
of the payments due under the program are made annually in the
first quarter. As a result, we typically experience negative
cash flow from operations in the first quarter of each year and
we are required to fund our operations during this period with
cash on hand or funds borrowed under our $150 million
revolving credit facility (our “Line of Credit”).
During 2004, we had net borrowings of $54.0 million under
our Line of Credit and realized proceeds from the exercise of
employee stock options and the issuance of common stock under
our employee stock purchase plans of $33.7 million.
Our Line of Credit matures in July 2009 and includes (i) a
$25 million subfacility for the issuance of letters of
credit and (ii) a $15 million subfacility for
swingline loans. At our option, the Line of Credit (other than
swingline loans) bears interest at (i) the base rate
(defined as the higher of the Federal Funds Rate plus .5% or the
Bank of America prime rate) or (ii) the Eurodollar rate
plus an applicable margin rate ranging from .75% to 1.75% based
on our consolidated leverage ratio. Swingline loans bear
interest at the base rate. The Line of Credit is collateralized
by substantially all of our assets. We are subject to certain
covenants and restrictions specified in the Line of Credit,
including covenants that require us to maintain a minimum level
of net worth and that restrict us from paying dividends and
making certain other distributions as specified therein. Failure
to comply with these covenants and restrictions would constitute
an event of default under our Line of Credit, notwithstanding
our ability to meet our debt service obligations. Our Line of
Credit includes various customary remedies for our lenders
following an event of default. At December 31, 2004, we
believe we were in compliance with the financial covenants and
other restrictions applicable to us under the Line of Credit. At
December 31, 2004, we had an outstanding principal balance
of $54.0 million under our Line of Credit and outstanding
letters of credit which reduced the amount available thereunder
by $7.0 million.
The exercise of employee stock options and the purchase of our
common stock by employees participating in our employee stock
purchase plans generated cash proceeds of $32.1 million,
$27.9 million and $33.7 million for the years ended
December 31, 2002, 2003 and 2004, respectively. Because
exercises and purchases under these plans are dependent on
several factors, including the market price of our common stock,
we cannot predict the timing and amount of any future proceeds.
During 2004, cash generated from our operating and financing
activities along with cash on hand were used to repurchase
shares of our common stock at an aggregate purchase price of
$150 million, fund the acquisition of 12 physician group
practices for $64.9 million, and fund capital expenditures
in the amount of $7.1 million. Our 12 physician group
practice acquisitions consisted of eight neonatal practices, two
pediatric cardiology practices, one maternal-fetal practice, and
one pediatric intensive care practice. Our capital expenditures
were for computer and office equipment, software, furniture and
other improvements at our corporate and regional offices.
During the year ended December 31, 2004, we repurchased
2.5 million shares of our common stock at an aggregate
purchase price of $150 million. During July 2004, we
completed a $50 million common stock repurchase program
which was authorized by our Board of Directors in May 2004. In
August 2004, our Board of Directors authorized the repurchase of
an additional $50 million of our common stock which was
subsequently increased by the Board of Directors to
$100 million in September 2004. This $100 million
repurchase program was completed in November 2004. All
repurchases were made in open market transactions, subject to
market conditions and trading restrictions. Our Board of
Director’s has not approved any new stock repurchase
programs for 2005. The approval of any new programs is subject
to several factors, including the amount of cash generated from
operations, the timing and extent of acquisitions, the amount
outstanding under our Line of Credit and the trading price of
our common stock.
We anticipate that funds generated from operations, together
with our current cash on hand and funds available under our Line
of Credit, will be sufficient to finance our working capital
requirements, fund anticipated acquisitions and capital
expenditures, and meet our contractual obligations for at least
the next
38
12 months. In addition to our contractual obligations
described below, we plan to invest $50 million to
$60 million in acquisitions during 2005.
CONTRACTUAL OBLIGATIONS
At December 31, 2004, we had certain obligations and
commitments under promissory notes, capital leases and operating
leases totaling approximately $26.0 million as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due | |
| |
|
| |
| |
|
|
|
2006 and | |
|
2008 and | |
|
2010 and | |
| Obligation |
|
Total | |
|
2005 | |
|
2007 | |
|
2009 | |
|
Later | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Promissory notes
|
|
$ |
700 |
|
|
$ |
350 |
|
|
$ |
350 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Capital leases
|
|
|
612 |
|
|
|
269 |
|
|
|
331 |
|
|
|
12 |
|
|
|
— |
|
|
Operating leases
|
|
|
24,702 |
|
|
|
7,431 |
|
|
|
11,104 |
|
|
|
4,244 |
|
|
|
1,923 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
26,014 |
|
|
$ |
8,050 |
|
|
$ |
11,785 |
|
|
$ |
4,256 |
|
|
$ |
1,923 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2004, we did not have any off-balance sheet
arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
ACCOUNTING MATTERS
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards No. 123R (“FAS 123R”) “Share
Based Payment.” This statement is a revision to
FAS 123 and supersedes Accounting Principles Board
(APB) Opinion No. 25, “Accounting for Stock
Issued to Employees,” and amends FAS No. 95,
“Statement of Cash Flows.” This statement requires
companies to expense the cost of employee services received in
exchange for an award of equity instruments, including stock
options. This statement also provides guidance on valuing and
expensing these awards, as well as disclosure requirements with
respect to these equity arrangements. This statement is
effective for the first interim reporting period that begins
after June 15, 2005.
As permitted by FAS 123, we currently account for
share-based payments to employees using APB Opinion
No. 25’s intrinsic value method and, as such, we
generally recognize no compensation costs for employee stock
options. The adoption of FAS 123R will have a significant
impact on our results of operations, although it will have no
impact on our overall financial position. We will adopt the
provisions of FAS 123R effective July 1, 2005. Due to
the timing of the release of FAS 123R, we have not yet
determined the impact that the adoption of FAS 123R will
have on our future results of operations.
|
|
| ITEM 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK |
Our Line of Credit and an aircraft operating lease agreement are
subject to market risk and interest rate changes. The line of
credit bears interest at our option (other than swingline loans)
at (i) the base rate (defined as the higher of the Federal
Funds Rate plus .5% or the Bank of America prime rate) or
(ii) the Eurodollar rate plus an applicable margin rate
ranging from .75% to 1.75% based on our consolidated leverage
ratio. Swingline loans bear interest at the base rate. The
aircraft operating lease bears interest at a LIBOR-based
variable rate. The outstanding principal balance under our line
of credit was $54.0 million at December 31, 2004. The
outstanding balance related to the aircraft operating lease
totaled approximately $5.0 million at December 31,
2004. Considering the total outstanding balances under these
instruments at December 31, 2004 of approximately
$59.0 million, a 1% change in interest rates would result
in an impact to income before income taxes of approximately
$590,000 per year.
39
|
|
| ITEM 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The following Consolidated Financial Statements and Financial
Statement Schedule of Pediatrix Medical Group, Inc. and its
subsidiaries are included in this Annual Report on the pages set
forth below:
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
| |
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|
|
|
| |
|
Page | |
| |
|
| |
|
Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
41 |
|
|
|
|
|
43 |
|
|
|
|
|
44 |
|
|
|
|
|
45 |
|
|
|
|
|
46 |
|
|
|
|
|
47 |
|
|
Financial Statement Schedule
|
|
|
|
|
|
Schedule II — Valuation and Qualifying Accounts
for the Years Ended December 31, 2002, 2003, and 2004
|
|
|
65 |
|
40
Report of Independent Registered Certified Public
Accounting Firm
To the Board of Directors and Shareholders of
Pediatrix Medical Group, Inc.:
We have completed an integrated audit of Pediatrix Medical
Group, Inc.’s 2004 consolidated financial statements and of
its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002
consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are
presented below.
Consolidated financial statements and financial statement
schedule
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Pediatrix Medical Group, Inc. (the
“Company”) and its subsidiaries at December 31,
2004 and 2003, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and financial statement schedule are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in
Management’s Annual Report on Internal Control over
Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial
reporting as of December 31, 2004 based on criteria
established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”), is
fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained,
in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on
criteria established in Internal Control —
Integrated Framework issued by the COSO. The Company’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management’s
assessment and on the effectiveness of the Company’s
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial
41
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Tampa, Florida
March 9, 2005
42
PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
ASSETS |
|
Current assets:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
27,896 |
|
|
$ |
7,011 |
|
| |
Short-term investments
|
|
|
— |
|
|
|
9,961 |
|
| |
Accounts receivable, net
|
|
|
94,213 |
|
|
|
107,860 |
|
| |
Prepaid expenses
|
|
|
3,152 |
|
|
|
4,766 |
|
| |
Deferred income taxes
|
|
|
19,354 |
|
|
|
20,166 |
|
| |
Other assets
|
|
|
942 |
|
|
|
2,470 |
|
| |
|
|
|
|
|
|
| |
|
Total current assets
|
|
|
145,557 |
|
|
|
152,234 |
|
|
Property and equipment, net
|
|
|
27,194 |
|
|
|
26,621 |
|
|
Goodwill
|
|
|
527,422 |
|
|
|
588,874 |
|
|
Other assets, net
|
|
|
17,421 |
|
|
|
21,160 |
|
| |
|
|
|
|
|
|
| |
|
Total assets
|
|
$ |
717,594 |
|
|
$ |
788,889 |
|
| |
|
|
|
|
|
|
| |
|
LIABILITIES & SHAREHOLDERS’ EQUITY |
|
Current liabilities:
|
|
|
|
|
|
|
|
|
| |
Accounts payable and accrued expenses
|
|
$ |
111,974 |
|
|
$ |
128,991 |
|
| |
Current portion of long-term debt and capital lease obligations
|
|
|
686 |
|
|
|
619 |
|
| |
Income taxes payable
|
|
|
8,385 |
|
|
|
1,444 |
|
| |
|
|
|
|
|
|
| |
|
Total current liabilities
|
|
|
121,045 |
|
|
|
131,054 |
|
| |
|
|
|
|
|
|
|
Line of credit
|
|
|
— |
|
|
|
54,000 |
|
|
Long-term debt and capital lease obligations
|
|
|
1,178 |
|
|
|
693 |
|
|
Deferred income taxes
|
|
|
17,429 |
|
|
|
24,052 |
|
|
Deferred compensation
|
|
|
5,564 |
|
|
|
8,059 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities
|
|
|
145,216 |
|
|
|
217,858 |
|
| |
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
|
|
| |
Preferred stock; $.01 par value; 1,000 shares
authorized; none issued
|
|
|
— |
|
|
|
— |
|
| |
Common stock; $.01 par value; 50,000 shares
authorized; 23,760 and 22,526 shares issued and
outstanding, respectively
|
|
|
237 |
|
|
|
225 |
|
| |
Additional paid-in capital
|
|
|
362,420 |
|
|
|
370,847 |
|
| |
Retained earnings
|
|
|
209,721 |
|
|
|
199,959 |
|
| |
|
|
|
|
|
|
| |
|
Total shareholders’ equity
|
|
|
572,378 |
|
|
|
571,031 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities and shareholders’ equity
|
|
$ |
717,594 |
|
|
$ |
788,889 |
|
| |
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
43
PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except for per share | |
| |
|
data) | |
|
Net patient service revenue
|
|
$ |
465,481 |
|
|
$ |
551,197 |
|
|
$ |
619,629 |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Practice salaries and benefits
|
|
|
263,165 |
|
|
|
310,778 |
|
|
|
350,354 |
|
| |
Practice supplies and other operating expenses
|
|
|
15,791 |
|
|
|
18,588 |
|
|
|
24,254 |
|
| |
General and administrative expenses
|
|
|
68,315 |
|
|
|
76,537 |
|
|
|
79,445 |
|
| |
Depreciation and amortization
|
|
|
6,135 |
|
|
|
8,405 |
|
|
|
9,353 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total operating expenses
|
|
|
353,406 |
|
|
|
414,308 |
|
|
|
463,406 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Income from operations
|
|
|
112,075 |
|
|
|
136,889 |
|
|
|
156,223 |
|
|
Investment income
|
|
|
818 |
|
|
|
482 |
|
|
|
893 |
|
|
Interest expense
|
|
|
(1,156 |
) |
|
|
(1,372 |
) |
|
|
(1,295 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Income before income taxes
|
|
|
111,737 |
|
|
|
135,999 |
|
|
|
155,821 |
|
|
Income tax provision
|
|
|
42,961 |
|
|
|
51,671 |
|
|
|
57,542 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net income
|
|
$ |
68,776 |
|
|
$ |
84,328 |
|
|
$ |
98,279 |
|
| |
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income per common and common equivalent share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
$ |
2.68 |
|
|
$ |
3.55 |
|
|
$ |
4.12 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Diluted
|
|
$ |
2.58 |
|
|
$ |
3.43 |
|
|
$ |
3.97 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Weighted average shares used in computing net income per common
and common equivalent share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
|
25,622 |
|
|
|
23,742 |
|
|
|
23,831 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Diluted
|
|
|
26,629 |
|
|
|
24,577 |
|
|
|
24,747 |
|
| |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
44
PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Common Stock | |
|
|
|
|
|
|
| |
|
| |
|
Additional | |
|
|
|
Total | |
| |
|
Number of | |
|
|
|
Paid in | |
|
Retained | |
|
Shareholders’ | |
| |
|
Shares | |
|
Amount | |
|
Capital | |
|
Earnings | |
|
Equity | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Balance at December 31, 2001
|
|
|
24,961 |
|
|
$ |
250 |
|
|
$ |
341,973 |
|
|
$ |
136,629 |
|
|
$ |
478,852 |
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
68,776 |
|
|
|
68,776 |
|
|
Common stock issued under employee stock option and stock
purchase plans
|
|
|
2,044 |
|
|
|
20 |
|
|
|
32,091 |
|
|
|
— |
|
|
|
32,111 |
|
|
Common stock issued for convertible notes
|
|
|
— |
|
|
|
— |
|
|
|
128 |
|
|
|
— |
|
|
|
128 |
|
|
Repurchased common stock
|
|
|
(1,691 |
) |
|
|
(17 |
) |
|
|
(24,578 |
) |
|
|
(25,403 |
) |
|
|
(49,998 |
) |
|
Tax benefit related to employee stock option and stock purchase
plans
|
|
|
— |
|
|
|
— |
|
|
|
18,129 |
|
|
|
— |
|
|
|
18,129 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
25,314 |
|
|
|
253 |
|
|
|
367,743 |
|
|
|
180,002 |
|
|
|
547,998 |
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
84,328 |
|
|
|
84,328 |
|
|
Common stock issued under employee stock option and stock
purchase plans
|
|
|
1,387 |
|
|
|
14 |
|
|
|
27,922 |
|
|
|
— |
|
|
|
27,936 |
|
|
Common stock issued for convertible notes
|
|
|
33 |
|
|
|
— |
|
|
|
791 |
|
|
|
— |
|
|
|
791 |
|
|
Repurchased common stock
|
|
|
(2,974 |
) |
|
|
(30 |
) |
|
|
(45,363 |
) |
|
|
(54,609 |
) |
|
|
(100,002 |
) |
|
Tax benefit related to employee stock option and stock purchase
plans
|
|
|
— |
|
|
|
— |
|
|
|
11,327 |
|
|
|
— |
|
|
|
11,327 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
23,760 |
|
|
|
237 |
|
|
|
362,420 |
|
|
|
209,721 |
|
|
|
572,378 |
|
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
98,279 |
|
|
|
98,279 |
|
|
Common stock issued under employee stock option and stock
purchase plans
|
|
|
1,313 |
|
|
|
13 |
|
|
|
33,681 |
|
|
|
— |
|
|
|
33,694 |
|
|
Repurchased common stock
|
|
|
(2,547 |
) |
|
|
(25 |
) |
|
|
(41,932 |
) |
|
|
(108,041 |
) |
|
|
(149,998 |
) |
|
Tax benefit related to employee stock option and stock purchase
plans
|
|
|
— |
|
|
|
— |
|
|
|
16,678 |
|
|
|
— |
|
|
|
16,678 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
22,526 |
|
|
$ |
225 |
|
|
$ |
370,847 |
|
|
$ |
199,959 |
|
|
$ |
571,031 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
45
PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
68,776 |
|
|
$ |
84,328 |
|
|
$ |
98,279 |
|
| |
Adjustments to reconcile net income to net cash provided from
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation and amortization
|
|
|
6,135 |
|
|
|
8,405 |
|
|
|
9,353 |
|
| |
|
Deferred income taxes
|
|
|
1,497 |
|
|
|
(9,700 |
) |
|
|
5,811 |
|
| |
|
Gain on sale of assets
|
|
|
— |
|
|
|
— |
|
|
|
(197 |
) |
| |
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Accounts receivable
|
|
|
(11,505 |
) |
|
|
(17,368 |
) |
|
|
(13,647 |
) |
| |
|
|
Prepaid expenses and other assets
|
|
|
(3,254 |
) |
|
|
3,516 |
|
|
|
(3,142 |
) |
| |
|
|
Other assets
|
|
|
565 |
|
|
|
(1,129 |
) |
|
|
921 |
|
| |
|
|
Accounts payable and accrued expenses
|
|
|
15,504 |
|
|
|
35,165 |
|
|
|
16,637 |
|
| |
|
|
Income taxes payable
|
|
|
20,124 |
|
|
|
14,817 |
|
|
|
9,738 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net cash provided from operating activities
|
|
|
97,842 |
|
|
|
118,034 |
|
|
|
123,753 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Acquisition payments, net of cash acquired
|
|
|
(25,735 |
) |
|
|
(75,243 |
) |
|
|
(64,853 |
) |
| |
Purchase of short-term investments
|
|
|
— |
|
|
|
— |
|
|
|
(12,461 |
) |
| |
Maturities of short-term investments
|
|
|
— |
|
|
|
— |
|
|
|
2,500 |
|
| |
Purchase of property and equipment
|
|
|
(7,993 |
) |
|
|
(15,274 |
) |
|
|
(7,057 |
) |
| |
Proceeds from sale of assets
|
|
|
— |
|
|
|
— |
|
|
|
1,100 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net cash used in investing activities
|
|
|
(33,728 |
) |
|
|
(90,517 |
) |
|
|
(80,771 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Borrowings on line of credit, net
|
|
|
— |
|
|
|
— |
|
|
|
54,000 |
|
| |
Payments for syndication of line of credit
|
|
|
— |
|
|
|
— |
|
|
|
(890 |
) |
| |
Payments on long-term debt and capital lease obligations
|
|
|
(589 |
) |
|
|
(750 |
) |
|
|
(673 |
) |
| |
Proceeds from issuance of common stock
|
|
|
32,111 |
|
|
|
27,936 |
|
|
|
33,694 |
|
| |
Repurchases of common stock
|
|
|
(49,998 |
) |
|
|
(100,002 |
) |
|
|
(149,998 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net cash used in financing activities
|
|
|
(18,476 |
) |
|
|
(72,816 |
) |
|
|
(63,867 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
45,638 |
|
|
|
(45,299 |
) |
|
|
(20,885 |
) |
|
Cash and cash equivalents at beginning of year
|
|
|
27,557 |
|
|
|
73,195 |
|
|
|
27,896 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
73,195 |
|
|
$ |
27,896 |
|
|
$ |
7,011 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Interest
|
|
$ |
1,164 |
|
|
$ |
1,280 |
|
|
$ |
1,345 |
|
| |
|
|
|
|
Income taxes
|
|
$ |
20,216 |
|
|
$ |
46,555 |
|
|
$ |
40,512 |
|
| |
|
|
Non-cash financing activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Common stock issued for convertible notes
|
|
$ |
128 |
|
|
$ |
791 |
|
|
$ |
— |
|
The accompanying notes are an integral part of these
Consolidated Financial Statements.
46
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The principal business activity of Pediatrix Medical Group, Inc.
and its subsidiaries (“Pediatrix” or the
“Company”) is to provide neonatal, maternal-fetal and
other pediatric subspecialty physician services in
31 states and Puerto Rico. The Company has contracts with
affiliated professional associations, corporations and
partnerships (“affiliated professional contractors”),
which are separate legal entities that provide physician
services in certain states and Puerto Rico. The Company and its
affiliated professional contractors enter into contracts with
hospitals to provide physician services, which include
(i) fee-for-service contracts, whereby hospitals agree, in
exchange for the Company’s services, to authorize the
Company and its health care professionals to bill and collect
the charges for medical services rendered by the Company’s
affiliated health care professionals, and
(ii) administrative fee contracts, whereby the Company is
assured a minimum revenue level.
|
|
| 2. |
Summary of Significant Accounting Policies: |
Principles of Presentation
The financial statements include all the accounts of the Company
combined with the accounts of the affiliated professional
contractors with which the Company currently has specific
management arrangements. The financial statements of the
Company’s affiliated professional contractors are
consolidated with the Company because the Company has
established a controlling financial interest in the operations
of the affiliated professional contractors, as defined in
Emerging Issues Task Force Issue 97-2, through contractual
management arrangements. The Company’s agreements with
affiliated professional contractors provide that the term of the
arrangements are permanent, subject only to termination by the
Company, except in the case of gross negligence, fraud or
bankruptcy of the Company. The Company has the right to receive
income, both as ongoing fees and as proceeds from the sale of
its interest in the Company’s affiliated professional
contractors, in an amount that fluctuates based on the
performance of the affiliated professional contractors and the
change in the fair value thereof. The Company has exclusive
responsibility for the provision of all non-medical services
required for the day-to-day operation and management of the
Company’s affiliated professional contractors and
establishes the guidelines for the employment and compensation
of the physicians. In addition, the agreements provide that the
Company has the right, but not the obligation, to purchase, or
to designate a person(s) to purchase, the stock of the
Company’s affiliated professional contractors for a nominal
amount. Separately, in its sole discretion, the Company has the
right to assign its interest in the agreements. All significant
intercompany and interaffiliate accounts and transactions have
been eliminated.
Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting
Standards No. 123R (“FAS 123R”) “Share
Based Payment.” This statement is a revision to
FAS 123 and supersedes Accounting Principles Board
(APB) Opinion No. 25, “Accounting for Stock
Issued to Employees,” and amends FAS No. 95,
“Statement of Cash Flows.” This statement requires
companies to expense the cost of employee services received in
exchange for an award of equity instruments, including stock
options. This statement also provides guidance on valuing and
expensing these awards, as well as disclosure requirements with
respect to these equity arrangements. This statement is
effective for the first interim reporting period that begins
after June 15, 2005.
As permitted by FAS 123, the Company currently accounts for
share-based payments to employees using APB Opinion
No. 25’s intrinsic value method and, as such, the
Company generally recognizes no compensation costs for employee
stock options. The adoption of FAS 123R will have a
significant impact on the Company’s results of operations,
although it will have no impact on the Company’s overall
financial position. The Company will adopt the provisions of
FAS 123R effective July 1, 2005. Due to the timing of
the
47
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
release of FAS 123R, the Company has not yet determined the
impact that the adoption of FAS 123R will have on its
future results of operations.
Accounting Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting periods. Significant estimates include the
estimated allowance for contractual adjustments and
uncollectibles on accounts receivable, and the estimated
liabilities for self-insured deductibles and claims incurred but
not reported related to the Company’s professional
liability risks. Actual results could differ from those
estimates.
Segment Reporting
The Company operates in a regional operating structure. The
results of our regional operations are aggregated into a single
reportable segment for purposes of presenting financial
information as outlined in Statement of Financial Accounting
Standards No. 131 (“FAS 131”),
“Disclosures about Segments of an Enterprise and Related
Information.”
Revenue Recognition
Patient service revenue is recognized at the time services are
provided by the Company’s affiliated physicians. Almost all
of the Company’s patient service revenue is reimbursed by
state Medicaid programs and third party insurance payors.
Payments for services rendered to the Company’s patients
are generally less than billed charges. The Company monitors its
revenue and receivables from these sources and records an
estimated contractual allowance to properly account for the
anticipated differences between billed and reimbursed amounts.
Accordingly, patient service revenue is presented net of an
estimated provision for contractual adjustments and
uncollectibles. The Company estimates allowances for contractual
adjustments and uncollectibles on accounts receivable based upon
historical experience and other factors, including days sales
outstanding (“DSO”) for accounts receivable,
evaluation of expected adjustments and delinquency rates, past
adjustments and collection experience in relation to amounts
billed, an aging of accounts receivable, current contract and
reimbursement terms, changes in payor mix and other relevant
information. Contractual adjustments result from the difference
between the physician rates for services performed and the
reimbursements by government-sponsored health care programs and
insurance companies for such services.
Accounts receivable are primarily amounts due under
fee-for-service contracts from third-party payors, such as
insurance companies, self-insured employers and patients and
government-sponsored health care programs geographically
dispersed throughout the United States and its territories.
Concentration of credit risk relating to accounts receivable is
limited by number, diversity and geographic dispersion of the
business units managed by the Company, as well as by the large
number of patients and payors, including the various
governmental agencies in the states in which the Company
provides services. Receivables from government agencies made up
approximately 29% and 25% of net accounts receivable at
December 31, 2003 and 2004, respectively.
Cash Equivalents
Cash equivalents are defined as all highly liquid financial
instruments with maturities of 90 days or less from the
date of purchase. The Company’s cash equivalents consist
principally of demand deposits, amounts on deposit in money
market accounts, mutual funds, and funds invested in overnight
repurchase agreements. The Company holds a majority of its cash
equivalents with one financial institution.
48
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Short-Term Investments
Short-term investments consist of held-to-maturity securities
issued primarily by the U.S. Treasury, other
U.S. Government corporations and agencies and states of the
United States. At December 31, 2004, all of the
Company’s short-term investments had remaining maturities
of less than one year. The Company has the positive intent and
ability to hold its short-term investments to maturity, and
therefore carries such investments at amortized cost in
accordance with the provisions of Financial Accounting Standards
No. 115 (“FAS 115”), “Accounting for
Certain Investments in Debt and Equity Securities.”
Property and Equipment
Property and equipment are stated at original purchase cost.
Depreciation of property and equipment is computed on the
straight-line method over the estimated useful lives. Estimated
useful lives are generally 20 years for buildings; three to
seven years for medical equipment, computer equipment, software
and furniture; and the lease term for leasehold improvements and
capital leases. Upon sale or retirement of property and
equipment, the cost and related accumulated depreciation are
eliminated from the respective accounts and the resulting gain
or loss is included in earnings.
Goodwill and Other Intangible Assets
The Company records acquired assets and liabilities at their
respective fair values under the purchase method of accounting.
Goodwill represents the excess of cost over the fair value of
the net assets acquired. Intangible assets with finite lives,
principally physician and hospital agreements, are recognized
apart from goodwill at the time of acquisition based on the
contractual-legal and separability criteria established in
Statement of Financial Accounting Standards No. 141
(“FAS 141”), “Business Combinations.”
As outlined in Statement of Financial Accounting Standards
No. 142 (“FAS 142”), “Goodwill and
Other Intangible Assets,” goodwill is tested for impairment
at a reporting unit level on an annual basis. The Company
defines a reporting unit as a specific region of the United
States based upon its management structure. The testing for
impairment is completed using a two step test. The first step
compares the fair value of a reporting unit with its carrying
amount, including goodwill. If the carrying amount of a
reporting unit exceeds its fair value, a second step is
performed to determine the amount of any impairment loss. During
2004, the Company completed its annual impairment test in the
third quarter of 2004 and determined that goodwill was not
impaired. Intangible assets with finite lives are amortized over
a period of 4 to 20 years.
Long-Lived Assets
The Company evaluates long-lived assets, including intangible
assets subject to amortization, at least annually and records an
impairment whenever events or changes in circumstances indicate
that the carrying value of the assets may not be fully
recoverable. The recoverability of such assets is measured by a
comparison of the carrying value of the assets to the future
undiscounted cash flows before interest charges to be generated
by the assets. If long-lived assets are impaired, the impairment
to be recognized is measured as the excess of the carrying value
over the fair value. Long-lived assets to be disposed of are
reported at the lower of the carrying value or fair value less
disposal costs. The Company does not believe there are any
indicators that would require an adjustment to such assets or
their estimated periods of recovery at December 31, 2004
pursuant to the current accounting standards.
Common Stock Repurchases
Effective with the beginning of the third quarter of 2002, the
Company began repurchasing shares of its common stock. As
required by state law, the Company treats repurchased shares of
its common stock as
49
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
authorized but unissued shares. The reacquisition cost of
repurchased shares is recorded as a reduction in the respective
components of shareholders equity.
Professional Liability Coverage
The Company maintains professional liability insurance policies
with third-party insurers, subject to deductibles, exclusions
and other restrictions. The Company self-insures its liabilities
to pay deductibles under its professional liability insurance
coverage through a wholly-owned captive insurance subsidiary.
The Company records an estimated liability for self-insured
deductibles and an estimated liability for claims incurred but
not reported based on an actuarial valuation using historical
loss patterns. Liabilities for claims incurred but not reported
are not discounted.
Income Taxes
The Company records deferred income taxes using the liability
method, whereby deferred tax assets and liabilities are
determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are
expected to reverse.
Stock Incentives
The Company accounts for stock-based compensation to employees
using the intrinsic value method as prescribed by APB 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 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:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except per share data) | |
|
Net income, as reported
|
|
$ |
68,776 |
|
|
$ |
84,328 |
|
|
$ |
98,279 |
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value accounting rules, net of related tax
effect
|
|
|
(10,451 |
) |
|
|
(10,999 |
) |
|
|
(9,759 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
58,325 |
|
|
$ |
73,329 |
|
|
$ |
88,520 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
$ |
2.68 |
|
|
$ |
3.55 |
|
|
$ |
4.12 |
|
| |
|
Diluted
|
|
$ |
2.58 |
|
|
$ |
3.43 |
|
|
$ |
3.97 |
|
| |
Pro forma:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basic
|
|
$ |
2.28 |
|
|
$ |
3.09 |
|
|
$ |
3.58 |
|
| |
|
Diluted
|
|
$ |
2.25 |
|
|
$ |
3.05 |
|
|
$ |
3.51 |
|
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 2002, 2003
50
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
and 2004: dividend yield of 0% for all years and expected
volatility of 58%, 56% and 43%, respectively; risk- free
interest rates of 3.6% in 2002 and 2.9% in 2003 for options with
expected lives of five years (officers and physicians of the
Company); a risk-free interest rate in 2004 of 2.6% for options
with expected lives of four years (physicians of the Company)
and 2.9% for options with expected lives of three years
(officers of the Company); a risk-free interest rate of 3.1% in
2002 and 2.2% in 2003 for options with expected lives of three
years (all other employees of the Company); and a risk-free
interest rate in 2004 of 2.3% for options with expected lives of
three and one-half years (all other employees of the Company).
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.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term
investments, accounts receivable and accounts payable and
accrued expenses approximate fair value due to the short
maturities of these items. The carrying value of long-term debt
and capital lease obligations approximates fair value.
Reclassifications
Certain reclassifications have been made to the prior
years’ financial statements to conform with the current
year presentation.
|
|
| 3. |
Short-Term Investments: |
Short-term investments consist of the following held-to-maturity
securities at December 31, 2004:
| |
|
|
|
|
|
U.S. Treasury Securities
|
|
$ |
6,963 |
|
|
Municipal Debt Securities
|
|
|
2,000 |
|
|
Federal Home Loan Bank Discount Note
|
|
|
998 |
|
| |
|
|
|
| |
|
$ |
9,961 |
|
| |
|
|
|
At December 31, 2004, $3.5 million of the
Company’s short-term investments were held as collateral on
a letter of credit.
|
|
| 4. |
Accounts Receivable and Net Patient Service Revenue: |
Accounts receivable consists of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Gross accounts receivable
|
|
$ |
294,022 |
|
|
$ |
298,357 |
|
|
Allowance for contractual adjustments and uncollectibles
|
|
|
(199,809 |
) |
|
|
(190,497 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
94,213 |
|
|
$ |
107,860 |
|
| |
|
|
|
|
|
|
51
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Net patient service revenue consists of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Gross patient service revenue
|
|
$ |
1,072,476 |
|
|
$ |
1,367,336 |
|
|
$ |
1,584,155 |
|
|
Contractual adjustments and uncollectibles
|
|
|
(631,238 |
) |
|
|
(845,578 |
) |
|
|
(1,001,902 |
) |
|
Hospital contract administrative fees
|
|
|
24,243 |
|
|
|
29,439 |
|
|
|
37,376 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
465,481 |
|
|
$ |
551,197 |
|
|
$ |
619,629 |
|
| |
|
|
|
|
|
|
|
|
|
During 2003, the Company realized an increase in contractual
adjustments and uncollectibles as a percentage of gross revenue
due to (i) changes in billing codes introduced by the
American Medical Association in early 2003 which resulted in
reduced collection rates for the specific codes impacted, and
(ii) the impact of modest price increases implemented on
January 1, 2003 partially offset by a decrease in
contractual adjustments and uncollectibles as a percentage of
gross revenue as a result of improved managed care contracting
processes. As a result of the modest price increases,
contractual adjustments and uncollectibles increased as a
percentage of gross patient service revenue in 2003. This
increase is primarily due to government-sponsored health care
programs, like Medicaid, that generally provide for
reimbursements on a fee schedule basis rather than on a gross
charge basis. Since the Company bills government-sponsored
health care programs, like other payors, on a gross charge
basis, the Company increased the provision for contractual
adjustments and uncollectibles by the amount of any price
increase, resulting in a higher contractual adjustment
percentage.
During 2004, contractual adjustments and uncollectibles
continued to increase as a percentage of gross patient service
revenue due to (i) an increase in the government component
of our payor mix, and (ii) the impact of modest price
increases offset in part by improved managed care contracting
processes (see discussion above). Since government-sponsored
health care programs typically pay claims at a lower percentage
of the Company’s gross charges than other third party
payors, an increase in the government component of the
Company’s payor mix reduces its average reimbursement rate
and results in a higher contractual adjustment percentage.
|
|
| 5. |
Property and Equipment: |
Property and equipment consists of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Building
|
|
$ |
8,056 |
|
|
$ |
8,056 |
|
|
Land
|
|
|
2,032 |
|
|
|
2,032 |
|
|
Equipment and furniture
|
|
|
41,583 |
|
|
|
47,492 |
|
| |
|
|
|
|
|
|
| |
|
|
51,671 |
|
|
|
57,580 |
|
|
Accumulated depreciation
|
|
|
(24,477 |
) |
|
|
(30,959 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
27,194 |
|
|
$ |
26,621 |
|
| |
|
|
|
|
|
|
At December 31, 2003 and 2004, property and equipment
includes medical and other equipment held under capital leases
of approximately $2.3 million and $994,000, respectively,
and related accumulated depreciation of approximately
$1.2 million and $490,000, respectively. The Company
recorded depreciation expense of approximately
$6.0 million, $6.8 million and $7.4 million for
the years ended December 31, 2002, 2003 and 2004,
respectively.
52
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
| 6. |
Goodwill and Other Assets: |
Other assets consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Other intangible assets
|
|
$ |
7,761 |
|
|
$ |
8,940 |
|
|
Other assets
|
|
|
9,660 |
|
|
|
12,220 |
|
| |
|
|
|
|
|
|
| |
|
$ |
17,421 |
|
|
$ |
21,160 |
|
| |
|
|
|
|
|
|
At December 31, 2003, other intangible assets consisted of
amortizable hospital, state and other contracts; physician and
hospital agreements; and patents and other agreements with gross
carrying amounts of approximately $9.4 million, less
accumulated amortization of approximately $1.6 million. At
December 31, 2004, other intangible assets consisted of
amortizable hospital, state and other contracts; physician and
hospital agreements; and patents and other agreements with gross
carrying amounts of approximately $12.5 million, less
accumulated amortization of approximately $3.6 million.
Amortization expense related to other intangible assets for the
years ended December 31, 2003 and 2004 was approximately
$1.5 million and $2.0 million, respectively.
Amortization expense on other intangible assets for the years
2005 through 2009 is expected to be approximately
$2.2 million, $1.9 million, $1.4 million,
$609,000 and $336,000, respectively. The remaining weighted
average amortization period of other intangible assets is
17.4 years.
During 2003, the Company completed the acquisition of an
independent laboratory specializing in newborn metabolic
screening and seven physician group practices. Total
consideration and related costs for the acquisitions, net of
cash acquired, was approximately $75.2 million in cash. In
connection with the acquisitions, the Company recorded goodwill
of approximately $64.4 million, other intangible assets of
approximately $8.2 million, fixed and other assets of
approximately $3.8 million and liabilities of approximately
$1.2 million. The goodwill of approximately
$64.4 million related to these acquisitions represents the
only change in the carrying amount of goodwill for the year
ended December 31, 2003. The other intangible assets of
approximately $8.2 million consist of hospital, state and
other contracts; physician and hospital agreements; and patents
and other agreements with gross carrying amounts of
$4.5 million, $2.0 million and $1.7 million,
respectively.
During 2004, the Company completed the acquisition of twelve
physician group practices. Total consideration and related costs
for these acquisitions were approximately $64.9 million. In
connection with these transactions, the Company recorded
goodwill of approximately $61.5 million and other
identifiable intangible assets consisting of physician and
hospital agreements of approximately $3.4 million. Goodwill
recorded for these acquisitions represents the only change in
the carrying amount of goodwill for the year ended
December 31, 2004. The weighted average amortization period
of these other intangible assets is 18.5 years.
The results of operations of the independent laboratory acquired
in 2003 and the practices acquired in 2003 and 2004 have been
included in the Company’s consolidated financial statements
from the dates of acquisition.
53
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following unaudited pro forma information combines the
consolidated results of operations of the Company and the
acquisitions completed during 2003 and 2004 as if the
transactions had occurred on January 1, 2003:
| |
|
|
|
|
|
|
|
|
|
| |
|
Years Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(In thousands, except | |
| |
|
per share data) | |
|
Net patient service revenue
|
|
$ |
598,317 |
|
|
$ |
636,492 |
|
|
Net income
|
|
|
86,943 |
|
|
|
99,583 |
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
3.66 |
|
|
$ |
4.18 |
|
| |
Diluted
|
|
$ |
3.54 |
|
|
$ |
4.02 |
|
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.
|
|
| 7. |
Accounts Payable and Accrued Expenses: |
Accounts payable and accrued expenses consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Accounts payable
|
|
$ |
10,528 |
|
|
$ |
13,353 |
|
|
Accrued salaries and bonuses
|
|
|
55,336 |
|
|
|
62,004 |
|
|
Accrued payroll taxes and benefits
|
|
|
11,452 |
|
|
|
10,542 |
|
|
Accrued professional liability risks
|
|
|
24,040 |
|
|
|
31,983 |
|
|
Other accrued expenses
|
|
|
10,618 |
|
|
|
11,109 |
|
| |
|
|
|
|
|
|
| |
|
$ |
111,974 |
|
|
$ |
128,991 |
|
| |
|
|
|
|
|
|
|
|
| 8. |
Line of Credit, Long-Term Debt and Capital Lease
Obligations: |
In July 2004, the Company obtained a new revolving line of
credit and simultaneously terminated its prior line of credit.
The new line of credit is a $150 million revolving credit
facility which includes (i) a $25 million subfacility
for the issuance of letters of credit and (ii) a
$15 million subfacility for swingline loans. The new line
of credit matures in July 2009. At the Company’s option the
new line of credit (other than swingline loans) bears interest
at (i) the base rate (defined as the higher of the Federal
Funds Rate plus .5% or the Bank of America prime rate) or
(ii) the Eurodollar rate plus an applicable margin rate
ranging from .75% to 1.75% based on the Company’s
consolidated leverage ratio. Swingline loans bear interest at
the base rate. The new line of credit is collateralized by
substantially all of the Company’s assets. The Company is
subject to certain covenants and restrictions specified in the
new line of credit, including covenants that require the Company
to maintain a minimum level of net worth and that restrict the
Company from paying dividends and making certain other
distributions as specified therein. Failure to comply with these
covenants and restrictions would constitute an event of default
under the new line of credit, notwithstanding the Company’s
ability to meet its debt service obligations. The new line of
credit includes various customary remedies for lenders following
an event of default. At December 31, 2004, the Company
believes that it was in compliance with such financial covenants
and restrictions. The Company’s outstanding principal
balance under the line of credit at December 31, 2004 was
$54.0 million. The Company has outstanding letters of
credit associated with
54
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
its professional liability insurance program which reduced the
amount available under the new line of credit by
$7.0 million at December 31, 2004. The weighted
average interest rate on these outstanding balances of
$61 million was 3.9% at December 31, 2004. At
December 31, 2004, the Company had an unused balance on the
Line of Credit of $89 million.
At December 31, 2004, the Company also had an outstanding
letter of credit in the amount of $3.5 million associated
with its professional liability insurance program. The Company
holds $3.5 million of short-term investments under a
security agreement as collateral on this letter of credit.
Prior to July 2004, the Company had a revolving line of credit
in the amount of $100 million. At the Company’s
option, the line of credit bore interest at either the prime
rate or the Eurodollar rate plus an applicable margin rate
ranging from 2% to 2.75%. The line of credit was collateralized
by substantially all of the Company’s current and future
assets. Although the Company had no balance outstanding under
the line of credit at December 31, 2003, it had outstanding
letters of credit which reduced the amount available under the
line of credit by $6.5 million at December 31, 2003.
During 2001, the Company issued a $1.8 million promissory
note in connection with an acquisition. The promissory note
accrues interest at 5.5%, requires principal payments in five
equal installments of $350,000, and matures on September 7,
2006.
In connection with the acquisition of Magella Healthcare
Corporation (“Magella”), the Company assumed certain
convertible subordinated notes issued by Magella which, as a
result of the acquisition, became exercisable into the
Company’s common stock (the “Convertible Notes”).
During 2003, approximately $791,000 of the Convertible Notes
were converted into approximately 33,000 shares of the
Company’s common stock. As of December 31, 2003, there
were no Convertible Notes outstanding.
Long-term debt, including capital lease obligations, consists of
the following:
| |
|
|
|
|
|
| |
|
December 31, | |
| |
|
2004 | |
| |
|
| |
| |
|
(In thousands) | |
|
Promissory note in connection with acquisition
|
|
$ |
700 |
|
|
Capital lease obligations
|
|
|
612 |
|
| |
|
|
|
| |
Total
|
|
|
1,312 |
|
|
Current portion
|
|
|
(619 |
) |
| |
|
|
|
|
Long-term debt and capital lease obligations
|
|
$ |
693 |
|
| |
|
|
|
The amounts due under the terms of the Company’s long-term
debt, including capital lease obligations, at December 31,
2004 are as follows: 2005 — $619,000; 2006 —
$601,000; 2007 — $80,000; and 2008 — $12,000.
55
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The components of the income tax provision (benefit) are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
$ |
35,924 |
|
|
$ |
55,902 |
|
|
$ |
51,790 |
|
| |
Deferred
|
|
|
3,192 |
|
|
|
(8,786 |
) |
|
|
5,383 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
39,116 |
|
|
|
47,116 |
|
|
|
57,173 |
|
| |
|
|
|
|
|
|
|
|
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
|
3,593 |
|
|
|
5,469 |
|
|
|
(58 |
) |
| |
Deferred
|
|
|
252 |
|
|
|
(914 |
) |
|
|
427 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
3,845 |
|
|
|
4,555 |
|
|
|
369 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
42,961 |
|
|
$ |
51,671 |
|
|
$ |
57,542 |
|
| |
|
|
|
|
|
|
|
|
|
The Company files its tax return on a consolidated basis with
its subsidiaries. The remaining affiliated professional
contractors file tax returns on an individual basis.
The effective tax rate on income was 38.4%, 38.0% and 36.9% for
the years ended December 31, 2002, 2003 and 2004,
respectively. The decrease in the tax rate for the year ended
December 31, 2004 is due to: (i) changes in the
Company’s corporate structure and the resulting impact on
the apportionment of income for state income tax purposes, and
(ii) the recognition of a one-time state income tax refund
of approximately $502,000 recorded during the year ended
December 31, 2004. The one-time state income tax refund is
related to the settlement of a dispute with one state associated
with previously paid state income taxes. This settlement will
not have any continuing impact on the Company’s effective
tax rate.
The differences between the effective rate and the United States
federal income tax statutory rate are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Tax at statutory rate
|
|
$ |
39,108 |
|
|
$ |
47,600 |
|
|
$ |
54,537 |
|
|
State income tax, net of federal benefit
|
|
|
2,499 |
|
|
|
2,960 |
|
|
|
567 |
|
|
Amortization
|
|
|
237 |
|
|
|
— |
|
|
|
— |
|
|
Non-deductible expenses
|
|
|
131 |
|
|
|
163 |
|
|
|
423 |
|
|
Other, net
|
|
|
986 |
|
|
|
948 |
|
|
|
2,015 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$ |
42,961 |
|
|
$ |
51,671 |
|
|
$ |
57,542 |
|
| |
|
|
|
|
|
|
|
|
|
56
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The significant components of deferred income tax assets and
liabilities are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2003 | |
|
December 31, 2004 | |
| |
|
| |
|
| |
| |
|
|
|
Non- | |
|
|
|
Non- | |
| |
|
Total | |
|
Current | |
|
Current | |
|
Total | |
|
Current | |
|
Current | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Allowance for uncollectible accounts
|
|
$ |
9,675 |
|
|
$ |
9,675 |
|
|
$ |
— |
|
|
$ |
12,611 |
|
|
$ |
12,611 |
|
|
$ |
— |
|
|
Net operating loss carryforward
|
|
|
1,776 |
|
|
|
1,776 |
|
|
|
— |
|
|
|
222 |
|
|
|
222 |
|
|
|
— |
|
|
Amortization
|
|
|
886 |
|
|
|
— |
|
|
|
886 |
|
|
|
670 |
|
|
|
— |
|
|
|
670 |
|
|
Reserves and accruals
|
|
|
19,284 |
|
|
|
19,284 |
|
|
|
— |
|
|
|
19,466 |
|
|
|
16,229 |
|
|
|
3,237 |
|
|
Other
|
|
|
1,304 |
|
|
|
42 |
|
|
|
1,262 |
|
|
|
133 |
|
|
|
133 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total deferred tax assets
|
|
|
32,925 |
|
|
|
30,777 |
|
|
|
2,148 |
|
|
|
33,102 |
|
|
|
29,195 |
|
|
|
3,907 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual to cash adjustment
|
|
|
(11,410 |
) |
|
|
(11,410 |
) |
|
|
— |
|
|
|
(8,989 |
) |
|
|
(8,989 |
) |
|
|
— |
|
|
Property and equipment
|
|
|
(2,965 |
) |
|
|
— |
|
|
|
(2,965 |
) |
|
|
(3,500 |
) |
|
|
— |
|
|
|
(3,500 |
) |
|
Amortization
|
|
|
(16,612 |
) |
|
|
— |
|
|
|
(16,612 |
) |
|
|
(24,272 |
) |
|
|
— |
|
|
|
(24,272 |
) |
|
Other
|
|
|
(13 |
) |
|
|
(13 |
) |
|
|
— |
|
|
|
(227 |
) |
|
|
(40 |
) |
|
|
(187 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total deferred tax liabilities
|
|
|
(31,000 |
) |
|
|
(11,423 |
) |
|
|
(19,577 |
) |
|
|
(36,988 |
) |
|
|
(9,029 |
) |
|
|
(27,959 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net deferred tax asset (liability)
|
|
$ |
1,925 |
|
|
$ |
19,354 |
|
|
$ |
(17,429 |
) |
|
$ |
(3,886 |
) |
|
$ |
20,166 |
|
|
$ |
(24,052 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax benefit related to the exercise of stock options
and the purchase of shares under the Company’s
non-qualified employee stock purchase plan reduces taxes
currently payable and is credited to additional paid-in capital.
Such amounts totaled approximately $18,129,000, $11,327,000 and
$16,678,000 for the years ended December 31, 2002, 2003 and
2004, respectively.
The Company has net operating loss carryforwards for federal and
state tax purposes totaling approximately $8,697,000, $4,958,000
and $635,000 at December 31, 2002, 2003 and 2004,
respectively, expiring at various times commencing in 2022. The
decline of approximately $4,323,000 in 2004 is primarily related
to the use of net operating loss carryforwards as a result of a
significant increase in earnings by certain of the
Company’s affiliates.
The Company and the affiliated professional contractors are
subject to federal and state audits through the normal course of
operations. Management regularly evaluates its tax risks as
required by generally accepted accounting principles and,
accordingly, has recorded provisions for unasserted contingent
claims.
|
|
| 10. |
Commitments and Contingencies: |
In June 2002, the Company received a written request from the
Federal Trade Commission (the “FTC”) to submit
information on a voluntary basis in connection with an
investigation of issues of competition related to its May 2001
acquisition of Magella and its 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 dependents and retirees. Since then, a
number of
57
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 its Medicaid billing
practices nationwide. This federal Medicaid investigation, the
TRICARE investigation, and related state inquiries are now being
coordinated together 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 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 becomes
involved 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
generally require it to indemnify them and their affiliates for
losses resulting from the negligence of the Company’s
affiliated physicians. The Company may also become subject to
other lawsuits which could 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 its business, financial
condition or results of operations and the trading price of its
common stock.
Although the Company currently maintains liability insurance
coverage intended to cover professional liability 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,
the Company cannot assure that its insurance coverage will be
adequate to cover liabilities arising out of claims asserted
against it in the future where the outcomes of such claims are
unfavorable. With respect to professional liability insurance,
the Company self-insures its liabilities to pay deductibles
through a wholly-owned captive insurance subsidiary. Liabilities
in excess of the Company’s insurance coverage, including
coverage for professional liability and other claims, could have
a material adverse effect on its business, financial condition
and results of operations.
The Company leases an aircraft and space for its regional
offices and medical offices, storage space and temporary housing
of medical staff. The aircraft lease bears interest at a
LIBOR-based variable rate. Rent expense for the years ended
December 31, 2002, 2003 and 2004 was approximately
$6,898,000, $7,437,000 and $8,516,000, respectively.
58
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Future minimum lease payments under non-cancelable operating
leases as of December 31, 2004 are as follows (in
thousands):
| |
|
|
|
|
|
2005
|
|
$ |
7,431 |
|
|
2006
|
|
|
7,502 |
|
|
2007
|
|
|
3,602 |
|
|
2008
|
|
|
2,610 |
|
|
2009
|
|
|
1,634 |
|
|
Thereafter
|
|
|
1,923 |
|
| |
|
|
|
| |
|
$ |
24,702 |
|
| |
|
|
|
The Company maintains two qualified contributory savings plans
as allowed under Section 401(k) of the Internal Revenue
Code and Section 1165(e) of the Puerto Rico Income Tax Act
of 1954 (the “Plans”). The Plans permit participant
contributions and allow elective Company contributions based on
each participant’s contribution. Participants may defer a
percentage of their annual compensation subject to the limits
defined in the Plans. The Company recorded an expense of
$5,728,000, $6,192,000 and $7,257,000 for the years ended
December 31, 2002, 2003 and 2004, respectively, related to
the Plans.
|
|
| 12. |
Net Income Per Common and Common Equivalent Share: |
The calculation of basic and diluted net income per share for
the years ended December 31, 2002, 2003 and 2004 are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands, except for | |
| |
|
per share data) | |
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income applicable to common stock
|
|
$ |
68,776 |
|
|
$ |
84,328 |
|
|
$ |
98,279 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Weighted average number of common shares outstanding
|
|
|
25,622 |
|
|
|
23,742 |
|
|
|
23,831 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Basic net income per share
|
|
$ |
2.68 |
|
|
$ |
3.55 |
|
|
$ |
4.12 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
68,776 |
|
|
$ |
84,328 |
|
|
$ |
98,279 |
|
| |
Interest expense on convertible subordinated debt, net of tax
|
|
|
28 |
|
|
|
25 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Net income applicable to common stock
|
|
$ |
68,804 |
|
|
$ |
84,353 |
|
|
$ |
98,279 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Weighted average number of common shares outstanding
|
|
|
25,622 |
|
|
|
23,742 |
|
|
|
23,831 |
|
| |
Weighted average number of dilutive common stock equivalents
|
|
|
975 |
|
|
|
807 |
|
|
|
916 |
|
| |
Dilutive effect of convertible subordinated debt
|
|
|
32 |
|
|
|
28 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
Weighted average number of common and common equivalent shares
outstanding
|
|
|
26,629 |
|
|
|
24,577 |
|
|
|
24,747 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Diluted net income per share
|
|
$ |
2.58 |
|
|
$ |
3.43 |
|
|
$ |
3.97 |
|
| |
|
|
|
|
|
|
|
|
|
59
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
At December 31, 2002, 2003 and 2004, the Company had
approximately 959,000, 359,000, and 62,000 outstanding employee
stock options, respectively, that have been excluded from the
computation of diluted earnings per share because they are
anti-dilutive.
|
|
| 13. |
Stock Incentive Plans and Employee Stock Purchase Plans: |
In May 2004, the Company’s shareholders approved the 2004
Incentive Compensation Plan (“2004 Incentive Plan”).
The terms of the 2004 Incentive 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 Incentive 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 Incentive Plan. During 2004,
awards under the 2004 Incentive Plan consisted of stock option
grants of 281,250 shares. At December 31, 2004, the
Company had 1,718,750 shares available for future awards
under the 2004 Incentive Plan.
In 1993, the Company’s Board of Directors authorized a
stock option plan (the “Option Plan”). Under the
Option Plan, options to purchase shares of common stock may be
granted at a price not less than the fair market value of the
shares on the date of grant. The options must be exercised
within 10 years from the date of grant. The stock options
generally become exercisable on a pro rata basis over a
three-year period from the date of grant. At December 31,
2004, the Company had 82,893 shares available for future
grants under the Option Plan.
In connection with the acquisition of Magella, the Company
assumed stock options issued by Magella. The options assumed at
the time of the transaction were exercisable to purchase
approximately 1.4 million shares of Pediatrix common stock.
Such options are included in the disclosures below.
Pertinent information covering stock option transactions related
to the 2004 Incentive Plan and the Option Plan is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted | |
|
|
| |
|
|
|
|
|
Average | |
|
|
| |
|
Number of | |
|
Option Price | |
|
Exercise | |
|
Expiration | |
| |
|
Shares | |
|
per Share | |
|
Price | |
|
Date | |
| |
|
| |
|
| |
|
| |
|
| |
|
Outstanding at December 31, 2001
|
|
|
5,693,791 |
|
|
$ |
5.00-$61.00 |
|
|
$ |
22.07 |
|
|
|
2004-2011 |
|
| |
Granted
|
|
|
807,000 |
|
|
$ |
25.00-$41.60 |
|
|
$ |
33.22 |
|
|
|
|
|
| |
Canceled
|
|
|
(52,693 |
) |
|
$ |
7.06-$39.13 |
|
|
$ |
31.19 |
|
|
|
|
|
| |
Exercised
|
|
|
(1,978,866 |
) |
|
$ |
5.00-$36.25 |
|
|
$ |
15.21 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2002
|
|
|
4,469,232 |
|
|
$ |
5.00-$61.00 |
|
|
$ |
27.03 |
|
|
|
2004-2012 |
|
| |
Granted
|
|
|
1,002,000 |
|
|
$ |
25.30-$57.01 |
|
|
$ |
29.56 |
|
|
|
|
|
| |
Canceled
|
|
|
(574,103 |
) |
|
$ |
7.06-$61.00 |
|
|
$ |
33.05 |
|
|
|
|
|
| |
Exercised
|
|
|
(1,291,659 |
) |
|
$ |
5.00-$41.60 |
|
|
$ |
20.02 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2003
|
|
|
3,605,470 |
|
|
$ |
5.00-$61.00 |
|
|
$ |
29.29 |
|
|
|
2004-2013 |
|
| |
Granted
|
|
|
920,150 |
|
|
$ |
58.14-$69.71 |
|
|
$ |
61.00 |
|
|
|
|
|
| |
Canceled
|
|
|
(16,973 |
) |
|
$ |
5.00-$60.00 |
|
|
$ |
29.18 |
|
|
|
|
|
| |
Exercised
|
|
|
(1,249,707 |
) |
|
$ |
5.00-$57.01 |
|
|
$ |
24.89 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
3,258,940 |
|
|
$ |
6.75-$69.71 |
|
|
$ |
39.92 |
|
|
|
2004-2014 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
December 31, 2002
|
|
|
2,532,390 |
|
|
$ |
5.00-$61.00 |
|
|
$ |
26.39 |
|
|
|
|
|
| |
December 31, 2003
|
|
|
2,037,218 |
|
|
$ |
5.00-$61.00 |
|
|
$ |
28.69 |
|
|
|
|
|
| |
December 31, 2004
|
|
|
1,727,738 |
|
|
$ |
6.75-$61.97 |
|
|
$ |
34.35 |
|
|
|
|
|
60
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The weighted average grant date fair value for options granted
in 2002, 2003 and 2004 was $33.22, $29.56 and $61.00,
respectively. The weighted average grant date fair value for
options assumed in connection with the acquisition of Magella in
2001 was $14.03.
Significant option groups outstanding at December 31, 2004
and related price and life information is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding | |
|
|
| |
|
| |
|
Options Exercisable | |
| |
|
|
|
Weighted | |
|
| |
| |
|
|
|
Weighted | |
|
Average | |
|
|
|
Weighted | |
| |
|
Outstanding | |
|
Average | |
|
Remaining | |
|
Exercisable | |
|
Average | |
| |
|
as of | |
|
Exercise | |
|
Contractual | |
|
as of | |
|
Exercise | |
| Range of Exercise Prices |
|
12/31/2004 | |
|
Price | |
|
Life | |
|
12/31/2004 | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$ 6.75 - $12.20
|
|
|
68,664 |
|
|
$ |
7.00 |
|
|
|
5.1 |
|
|
|
68,664 |
|
|
$ |
7.00 |
|
|
$12.21 - $18.30
|
|
|
74,783 |
|
|
$ |
14.83 |
|
|
|
4.3 |
|
|
|
74,783 |
|
|
$ |
14.83 |
|
|
$18.31 - $24.40
|
|
|
130,902 |
|
|
$ |
20.38 |
|
|
|
4.5 |
|
|
|
130,902 |
|
|
$ |
20.38 |
|
|
$24.41 - $30.50
|
|
|
716,978 |
|
|
$ |
27.23 |
|
|
|
7.7 |
|
|
|
209,172 |
|
|
$ |
27.18 |
|
|
$30.51 - $36.60
|
|
|
686,466 |
|
|
$ |
33.42 |
|
|
|
6.7 |
|
|
|
524,800 |
|
|
$ |
33.58 |
|
|
$36.61 - $42.70
|
|
|
539,165 |
|
|
$ |
38.99 |
|
|
|
2.8 |
|
|
|
512,334 |
|
|
$ |
38.93 |
|
|
$42.71 - $54.90
|
|
|
90,666 |
|
|
$ |
47.94 |
|
|
|
5.6 |
|
|
|
63,335 |
|
|
$ |
46.47 |
|
|
$54.91 - $61.00
|
|
|
548,066 |
|
|
$ |
59.45 |
|
|
|
8.9 |
|
|
|
25,000 |
|
|
$ |
61.00 |
|
|
$61.01 - $69.71
|
|
|
403,250 |
|
|
$ |
63.04 |
|
|
|
9.4 |
|
|
|
118,748 |
|
|
$ |
61.97 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
3,258,940 |
|
|
$ |
39.92 |
|
|
|
6.8 |
|
|
|
1,727,738 |
|
|
$ |
34.35 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the Company’s employee stock purchase plans (the
“Stock Purchase Plans”), employees may purchase the
Company’s common stock at 85% of the average high and low
sales price of the stock as reported as of commencement of the
purchase period or as of the purchase date, whichever is lower.
Under the Stock Purchase Plans, 64,397, 95,498 and
63,135 shares were issued during the years ended
December 31, 2002, 2003 and 2004, respectively. At
December 31, 2004, the Company has an additional
214,536 shares reserved under the Stock Purchase Plans.
|
|
| 14. |
Common Stock Repurchase Programs: |
During 2003, the Company completed two share repurchase programs
buying approximately 3.0 million shares of its common stock
for an aggregate amount of approximately $100 million under
repurchase programs approved by its Board of Directors.
During July 2004, the Company completed a $50 million
common stock repurchase program which was authorized by its
Board of Directors and announced in May 2004. During November
2004, the Company completed a $100 million repurchase
program which was authorized by its Board of Directors and
announced in September 2004. Collectively, the Company
repurchased approximately 2.5 million shares of its common
stock for an aggregate amount of $150 million during 2004.
All repurchases were made in open market transactions subject to
market conditions and trading restrictions.
|
|
| 15. |
Preferred Share Purchase Rights Plan: |
In 1999, the Board of Directors of the Company adopted a
Preferred Share Purchase Rights Plan (the “Rights
Plan”) under which each outstanding share of the
Company’s common stock includes one preferred share
purchase right (“Right”) entitling the registered
holder, subject to the terms of the Rights Plan, to purchase
from the Company a one-thousandth of a share of the
Company’s series A junior participating preferred
stock. Each Right entitles the shareholder to purchase from the
Company one one-thousandth of a
61
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
share of the Company’s Series A Junior Participating
Preferred Stock (the “Preferred Shares”) (or in
certain circumstances, cash, property or other securities). Each
Right has an initial exercise price of $150.00 for one
one-thousandth of a Preferred Share (subject to adjustment). The
Rights will be exercisable only if a person or group acquires
15% or more of the Company’s common stock or announces a
tender or exchange offer, the consummation of which would result
in ownership by a person or group of 15% or more of the common
stock. Upon such occurrence, each Right will entitle it’s
registered holder (other than such person or group of affiliated
or associated persons) to purchase, at the Right’s
then-current exercise price, a number of the Company’s
common shares having a market value of twice such price. The
final expiration date of the Rights is the close of business on
March 31, 2009 (the “Final Expiration Date”).
The Board of Directors of the Company may, at its option, as
approved by a Majority Director Vote (as defined in the Rights
Plan), at any time prior to the earlier of (i) the time
that any person or entity becomes an Acquiring Person (as
defined in the Rights Plan), and (ii) the Final Expiration
Date, redeem all but not less than all of the then outstanding
Rights at a redemption price of $.005 per Right, as such
amount may be appropriately adjusted to reflect any stock split,
stock dividend or similar transaction. The redemption of the
Rights may be made effective at such time, on such basis and
with such conditions as the Board of Directors of the Company,
in its sole discretion, may establish (as approved by a Majority
Director Vote).
In 2005, the Company completed the acquisition of five physician
group practices. Total consideration and related costs for these
acquisitions were approximately $36.6 million in cash.
62
|
|
| ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
|
| ITEM 9A. |
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures and Changes
in Internal Control Over Financial Reporting
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of the end of the period
covered by this Annual Report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are
effective as of December 31, 2004.
There have been no changes in our internal control over
financial reporting that occurred during the fourth quarter of
2004 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal Control Over
Financial Reporting
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in Rule 13a-15(f) or 15d-15(f) promulgated under
the Securities Exchange Act of 1934. The Company’s internal
control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of
December 31, 2004. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in
“Internal Control — Integrated Framework.”
Based on our assessment we concluded that, as of
December 31, 2004, the Company’s internal control over
financial reporting was effective based on those criteria.
The Company’s independent registered certified public
accounting firm has audited our assessment of the effectiveness
of our internal control over financial reporting as of
December 31, 2004 as stated in their report which appears
on page 41 of this Annual Report on Form 10-K.
|
|
| ITEM 9B. |
OTHER INFORMATION |
On March 10, 2005, Pediatrix entered into Amendment
No. 2 to the Credit Agreement dated as of July 30,
2004, by and among Pediatrix and certain of its subsidiaries and
affiliates, as borrowers, Bank of America, N.A., as
administrative agent, and the lenders named therein. The
amendment increases the amount by which Pediatrix can request
increases in the aggregate commitments amount under the Credit
Agreement from $50,000,000 to $80,000,000 and creates
preexisting authority for Pediatrix to make equity repurchases
provided certain conditions are met. The amendment is attached
as Exhibit 10.10 hereto and is hereby incorporated by
reference in its entirety.
63
PART III
|
|
| ITEM 10. |
DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT |
The information required by this Item is incorporated by
reference to the applicable information in the definitive proxy
statement for our 2005 annual meeting of shareholders, which is
to be filed with the SEC within 120 days after our fiscal
year end.
|
|
| ITEM 11. |
EXECUTIVE COMPENSATION |
The information required by this Item is incorporated by
reference to the applicable information in the definitive proxy
statement for our 2005 annual meeting of shareholders, which is
to be filed with the SEC within 120 days after our fiscal
year end.
|
|
| ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Equity Compensation Plan Information
The following table provides information as of December 31,
2004, with respect to shares of our common stock that may be
issued under existing equity compensation plans, including our
2004 Incentive Compensation Plan (“2004 Incentive
Plan”), our Amended and Restated Stock Option Plan (the
“Option Plan”), 1996 Qualified and Non-Qualified
Employee Stock Purchase Plans, as amended and restated (the
“Stock Purchase Plans”), and shares of our common
stock reserved for issuance under presently exercisable stock
options issued by Magella at the time of its acquisition by the
Company (the “Magella Plan”).
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of Securities to be | |
|
Weighted-Average | |
|
Number of Securities Remaining | |
| |
|
Issued upon Exercise of | |
|
Exercise Price of | |
|
Available for Future Issuance Under | |
| |
|
Outstanding Options, | |
|
Outstanding Options, | |
|
Equity Compensation Plans (Excluding | |
| Plan Category |
|
Warrants and Rights | |
|
Warrants and Rights | |
|
Securities Reflected in Column(a)) | |
| |
|
| |
|
| |
|
| |
| |
|
(a) | |
|
(b) | |
|
(c) | |
|
Equity compensation plans approved by security holders
|
|
|
3,258,940 |
(1) |
|
$ |
39.92 |
|
|
|
2,016,179 |
(2) |
|
Equity compensation plans not approved by security holders
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,258,940 |
|
|
$ |
39.92 |
|
|
|
2,016,179 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Represents 281,250 shares issuable under the 2004 Incentive
Plan, 2,918,479 shares issuable under the Option Plan and
59,211 shares issuable under the Magella Plan. |
| |
| (2) |
Under the 2004 Incentive Plan, the Option Plan and the Stock
Purchase Plans, 1,718,750, 82,893 and 214,536 shares,
respectively, remain available for future issuance. |
The other information required by this Item is incorporated by
reference to the applicable information in the definitive proxy
statement for our 2005 annual meeting of shareholders, which is
to be filed with the SEC within 120 days after our fiscal
year end.
|
|
| ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS |
The information required by this Item is incorporated by
reference to the applicable information in the definitive proxy
statement for our 2005 annual meeting of shareholders, which is
to be filed with the SEC within 120 days after our fiscal
year end.
64
|
|
| ITEM 14. |
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item is incorporated by
reference to the applicable information in the definitive proxy
statement for our 2005 annual meeting of shareholders, which is
to be filed with the SEC within 120 days after our fiscal
year end.
PART IV
|
|
| ITEM 15. |
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a)(1) Financial Statements
The information required by this Item is included in Item 8
of Part II of this Annual Report.
(a)(2) Financial Statement Schedule
The following financial statement schedule for the years ended
December 31, 2002, 2003 and 2004, is included in this
Annual Report as set forth below.
Pediatrix Medical Group, Inc.
Schedule II: Valuation and Qualifying Accounts
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(In thousands) | |
|
Allowance for contractual adjustments and uncollectibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$ |
129,314 |
|
|
$ |
135,427 |
|
|
$ |
199,809 |
|
|
Amount charged against operating revenue
|
|
|
631,238 |
|
|
|
845,578 |
|
|
|
1,001,902 |
|
|
Accounts receivable contractual adjustments and write-offs (net
of recoveries)
|
|
|
(625,125 |
) |
|
|
(781,196 |
) |
|
|
(1,011,214 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$ |
135,427 |
|
|
$ |
199,809 |
|
|
$ |
190,497 |
|
| |
|
|
|
|
|
|
|
|
|
All other schedules for which provision is made in the
applicable accounting regulations of the SEC are not required
under the related instructions or are not applicable and
therefore have been omitted.
(a)(3) Exhibits
See Item 15(b) of this Annual Report.
(b) Exhibits
| |
|
|
|
|
| |
2.1 |
|
|
Agreement and Plan of Merger dated as of February 14, 2001,
among Pediatrix Medical Group, Inc., Infant Acquisition Corp.
and Magella Healthcare Corporation (incorporated by reference to
Exhibit 2.1 to Pediatrix’s Current Report on
Form 8-K dated February 15, 2001). |
| |
| |
3.1 |
|
|
Amended and Restated Articles of Incorporation of Pediatrix
(incorporated by reference to Exhibit 3.1 to
Pediatrix’s Registration Statement on Form S-1
(Registration No. 33-95086)). |
| |
| |
3.2 |
|
|
Amended and Restated Bylaws of Pediatrix (incorporated by
reference to Exhibit 3.2 to Pediatrix’s Quarterly
Report on Form 10-Q for the period ended June 30,
2000). |
| |
| |
3.3 |
|
|
Articles of Designation of Series A Junior Participating
Preferred Stock of Pediatrix (incorporated by reference to
Exhibit 3.1 to Pediatrix’s Current Report on
Form 8-K dated March 31, 1999). |
| |
| |
4.1 |
|
|
Rights Agreement, dated as of March 31, 1999, between
Pediatrix and BankBoston, N.A., as rights agent including the
form of Articles of Designations of Series A Junior
Participating Preferred Stock and the form of Rights Certificate
(incorporated by reference to Exhibit 4.1 to
Pediatrix’s Current Report on Form 8-K dated
March 31, 1999). |
65
| |
|
|
|
|
| |
| |
10.1 |
|
|
Amended and Restated Stock Option Plan of Pediatrix dated as of
June 4, 2003 (incorporated by reference to
Exhibit 10.5 to Pediatrix’s Quarterly Report on
Form 10-Q for the period ended June 30, 2003).* |
| |
| |
10.2 |
|
|
Amended and Restated Thrift and Profit Sharing Plan of Pediatrix
(incorporated by reference to Exhibit 4.5 to
Pediatrix’s Registration Statement on Form S-8
(Registration No. 333-101222)).* |
| |
| |
10.3 |
|
|
1996 Qualified Employee Stock Purchase Plan of Pediatrix, as
amended and restated (incorporated by reference to
Exhibit 4.5 to Pediatrix’s Registration Statement on
Form S-8 (Registration No. 333-07061)).* |
| |
| |
10.4 |
|
|
1996 Non-Qualified Employee Stock Purchase Plan of Pediatrix, as
amended and restated (incorporated by reference to
Exhibit 4.5 to Pediatrix’s Registration Statement on
Form S-8 (Registration No. 333-101225)).* |
| |
| |
10.5 |
|
|
Executive Non-Qualified Deferred Compensation Plan of Pedaitrix,
dated October 13, 1997 (incorporated by reference to
Exhibit 10.35 to Pediatrix’s Quarterly Report on
Form 10-Q for the period ended June 30, 1998).* |
| |
| |
10.6 |
|
|
Form of Indemnification Agreement between Pediatrix and each of
its directors and executive officers. (incorporated by reference
to Exhibit 10.6 to Pediatrix’s Annual Report on
Form 10-K for the year ended December 31, 2003).* |
| |
| |
10.7 |
|
|
Form of Amended and Restated Exclusive Management and
Administrative Services Agreement between Pediatrix and each of
its affiliated professional contractors. (incorporated by
reference to Exhibit 10.7 to Pediatrix’s Annual Report
on Form 10-K for the year ended December 31, 2003).* |
| |
| |
10.8 |
|
|
Credit Agreement, dated as of July 30, 2004, among
Pediatrix Medical Group, Inc. and certain subsidiaries and
affiliates, Bank of America, N.A., HSBC Bank USA, National
Association, SunTrust Bank, U.S. Bank National Association,
Wachovia Bank, N.A., KeyBank National Association, UBS
Loan Financer LLC and the International Bank of Miami, N.A.
(incorporated by reference to Exhibit 99.2 to
Pediatrix’s Current Report on Form 8-K dated
July 30, 2004). |
| |
| |
10.9 |
|
|
Security Agreement, dated as of July 30, 2004, between
Pediatrix Medical Group, Inc. and certain material subsidiaries,
and Bank of America, N.A., as Administrative Agent (incorporated
by reference to Exhibit 99.3 to Pediatrix’s Current
Report on Form 8-K dated July 30, 2004). |
| |
| |
10.10+ |
|
|
Amendment No. 2 dated March 10, 2005 to Credit
Agreement dated as of July 30, 2004, among Pediatrix
Medical Group, Inc. and certain subsidiaries and affiliates,
Bank of America, N.A., HSBC Bank USA, National Association,
SunTrust Bank, U.S. Bank National Association, Wachovia
Bank, N.A., KeyBank National Association, UBS Loan Financer
LLC and the International Bank of Miami, N.A. |
| |
| |
10.11 |
|
|
Employment Agreement dated November 11, 2004 between
Pediatrix Medical Group, Inc. and Roger J. Medel, M.D.
(incorporated by reference to Exhibit 10.1 to
Pediatrix’s Current Report on Form 8-K dated
November 11, 2004).* |
| |
| |
10.12 |
|
|
Employment Agreement dated November 11, 2004 between
Pediatrix Medical Group, Inc. and Joseph M. Calabro
(incorporated by reference to Exhibit 10.2 to
Pediatrix’s Current Report on Form 8-K dated
November 11, 2004).* |
| |
| |
10.13 |
|
|
Employment Agreement dated November 11, 2004 between
Pediatrix Medical Group, Inc. and Karl B. Wagner (incorporated
by reference to Exhibit 10.3 to Pediatrix’s Current
Report on Form 8-K dated November 11, 2004).* |
| |
| |
10.14 |
|
|
Employment Agreement dated November 11, 2004 between
Pediatrix Medical Group, Inc. and Thomas W. Hawkins
(incorporated by reference to Exhibit 10.4 to
Pediatrix’s Current Report on Form 8-K dated
November 11, 2004).* |
| |
| |
10.15 |
|
|
Pediatrix Medical Group of Puerto Rico Thrift and Profit Sharing
Plan (incorporated by reference to Exhibit 4.3 to
Pediatrix’s Registration Statement on Form S-8 dated
December 9, 2004).* |
| |
| |
10.16 |
|
|
Pediatrix Medical Group, Inc. 2004 Incentive Compensation Plan
(incorporated by reference to Exhibit A of Pediatrix’s
Proxy Statement on Schedule 14A dated as of April 9,
2004).* |
| |
| |
10.17 |
|
|
Pediatrix Medical Group, Inc. Form of Stock Option Agreement for
Stock Options Awarded Under the Stock Option Plan (incorporated
by reference to Exhibit 10.3 to Pediatrix’s Current
Report on Form 8-K dated February 23, 2005).* |
66
| |
|
|
|
|
| |
| |
10.18 |
|
|
Pediatrix Medical Group, Inc. Form of Incentive Stock Option
Agreement for Incentive Stock Options Awarded Under the 2004
Incentive Compensation Plan (incorporated by reference to
Exhibit 10.4 to Pediatrix’s Current Report on
Form 8-K dated February 23, 2005).* |
| |
| |
10.19 |
|
|
Pediatrix Medical Group, Inc. Form of Non-Qualified Stock Option
Agreement for Non-Qualified Stock Options Awarded Under the 2004
Incentive Compensation Plan (incorporated by reference to
Exhibit 10.5 to Pediatrix’s Current Report on
Form 8-K dated February 23, 2005).* |
| |
| |
10.20 |
|
|
Pediatrix Medical Group, Inc. Form of Restricted Stock Agreement
for Restricted Stock Awarded Under the 2004 Incentive
Compensation Plan (incorporated by reference to
Exhibit 10.5 to Pediatrix’s Current Report on
Form 8-K dated February 23, 2005).* |
| |
| |
10.21 |
|
|
Stockholders’ Agreement dated as of February 14, 2001,
among Pediatrix, Infant Acquisition Corp., John K. Carlyle,
Cordillera Interest, Ltd., Steven K. Boyd, Ian M.
Ratner, M.D., Welsh, Carson, Anderson & Stowe VII,
L.P., WCAS Healthcare Partners, L.P., the persons listed on
Schedule A thereto, Leonard Hilliard, M.D., The
Hilliard Family Partnership, Ltd. and Gregg C. Lund, D.O.
(incorporated by reference to Exhibit 10.40 to
Pediatrix’s Current Report on Form 8-K dated
February 15, 2001). |
| |
| |
10.22 |
|
|
Standstill and Registration Rights Agreement dated as of
May 15, 2001, among Pediatrix, Welsh, Carson,
Anderson & Stowe VII, L.P., WCAS Healthcare Partners,
L.P., the persons listed on Schedule A thereto, John K.
Carlyle, Cordillera Interest, Ltd., Steven K. Boyd, Ian M.
Ratner, M.D., Roger J. Medel, M.D., Kristen Bratberg,
Joseph Calabro, Karl B. Wagner and Brian T. Gillon (incorporated
by reference to Exhibit 10.1 to Pediatrix’s Current
Report on Form 8-K dated May 25, 2001). |
| |
| |
21+ |
|
|
Subsidiaries of the registrant. |
| |
| |
23.1+ |
|
|
Consent of PricewaterhouseCoopers LLP. |
| |
| |
31.1+ |
|
|
Certification of Chief Executive Officer pursuant to Securities
Exchange Act Rule 13a-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| |
31.2+ |
|
|
Certification of Chief Financial Officer pursuant to Securities
Exchange Act Rule 13a-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| |
32+ |
|
|
Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |
|
|
| * |
Management contracts or compensation plans, contracts or
arrangements. |
| |
| + |
Filed herewith. |
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. |
|
|
|
| |
By: |
/s/ Roger J. Medel, M.D. |
|
|
| |
|
| |
Roger J. Medel, M.D. |
| |
Chief Executive Officer |
Date: March 10, 2005
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities and on the dates
indicated.
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
/s/ Roger J. Medel, M.D.
Roger
J. Medel, M.D. |
|
Chief Executive Officer
(principal executive officer) |
|
March 10, 2005 |
| |
/s/ Karl B. Wagner
Karl
B. Wagner |
|
Chief Financial Officer
(principal financial officer
and principal accounting officer) |
|
March 10, 2005 |
| |
/s/ Cesar L. Alvarez
Cesar
L. Alvarez |
|
Director and Chairman of the Board |
|
March 10, 2005 |
| |
/s/ Waldemar A. Carlo, M.D.
Waldemar
A. Carlo, M.D. |
|
Director |
|
March 10, 2005 |
| |
/s/ Michael B. Fernandez
Michael
B. Fernandez |
|
Director |
|
March 10, 2005 |
| |
/s/ Roger K. Freeman, M.D.
Roger
K. Freeman, M.D. |
|
Director |
|
March 10, 2005 |
| |
/s/ Paul G. Gabos
Paul
G. Gabos |
|
Director |
|
March 10, 2005 |
| |
/s/ Lawrence M. Mullen
Lawrence
M. Mullen |
|
Director |
|
March 10, 2005 |
| |
/s/ Enrique J. Sosa
Enrique
J. Sosa |
|
Director |
|
March 10, 2005 |
68