þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Florida | 65-0271219 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
2
3
March 31, | ||||||||
2007 (Unaudited) |
December 31, 2006 |
|||||||
(in thousands) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 71,632 | $ | 69,595 | ||||
Short-term investments |
17,185 | 65,660 | ||||||
Accounts receivable, net |
127,773 | 125,573 | ||||||
Prepaid expenses |
3,855 | 4,863 | ||||||
Deferred income taxes |
41,967 | 30,569 | ||||||
Other assets |
4,495 | 5,339 | ||||||
Total current assets |
266,907 | 301,599 | ||||||
Investments |
12,428 | 6,669 | ||||||
Property and equipment, net |
29,636 | 29,939 | ||||||
Goodwill |
780,811 | 770,289 | ||||||
Other assets, net |
28,586 | 26,674 | ||||||
Total assets |
$ | 1,118,368 | $ | 1,135,170 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 136,855 | $ | 206,552 | ||||
Current portion of long-term debt and capital lease obligations |
405 | 483 | ||||||
Income taxes payable |
4,669 | 14,280 | ||||||
Total current liabilities |
141,929 | 221,315 | ||||||
Line of credit |
| | ||||||
Long-term debt and capital lease obligations |
170 | 377 | ||||||
Deferred income taxes |
36,056 | 34,272 | ||||||
Other liabilities |
45,365 | 13,405 | ||||||
Total liabilities |
223,520 | 269,369 | ||||||
Commitments and contingencies |
||||||||
Shareholders equity: |
||||||||
Preferred stock; par value $.01 per share; 1,000 shares authorized; none issued |
| | ||||||
Common stock; par value $.01 per share; 100,000 shares authorized; 48,965 and
48,861 shares issued and outstanding, respectively |
490 | 489 | ||||||
Additional paid-in capital |
527,529 | 516,384 | ||||||
Retained earnings |
366,829 | 348,928 | ||||||
Total shareholders equity |
894,848 | 865,801 | ||||||
Total liabilities and shareholders equity |
$ | 1,118,368 | $ | 1,135,170 | ||||
4
Three Months Ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
(in thousands, except for | ||||||||
per share data) | ||||||||
Net patient service revenue |
$ | 214,456 | $ | 187,679 | ||||
Operating expenses: |
||||||||
Practice salaries and benefits |
130,945 | 112,569 | ||||||
Practice supplies and other operating expenses |
8,900 | 7,802 | ||||||
General and administrative expenses |
33,615 | 27,392 | ||||||
Depreciation and amortization |
2,473 | 2,348 | ||||||
Total operating expenses |
175,933 | 150,111 | ||||||
Income from operations |
38,523 | 37,568 | ||||||
Investment income |
1,864 | 450 | ||||||
Interest expense |
(221 | ) | (409 | ) | ||||
Income before income taxes |
40,166 | 37,609 | ||||||
Income tax provision |
14,584 | 14,182 | ||||||
Net income |
$ | 25,582 | $ | 23,427 | ||||
Per share data: |
||||||||
Net income per common and common equivalent share: |
||||||||
Basic |
$ | 0.53 | $ | 0.50 | ||||
Diluted |
$ | 0.51 | $ | 0.48 | ||||
Weighted average shares used in computing net
income per common and common equivalent share: |
||||||||
Basic |
48,366 | 47,268 | ||||||
Diluted |
49,910 | 48,906 | ||||||
5
Three Months Ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
(in thousands) | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 25,582 | $ | 23,427 | ||||
Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
Depreciation and amortization |
2,473 | 2,348 | ||||||
Stock-based compensation expense |
4,476 | 5,257 | ||||||
Recognition of tax benefit from uncertain tax position |
(1,181 | ) | | |||||
Deferred income taxes |
230 | 3,329 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(2,200 | ) | (4,034 | ) | ||||
Prepaid expenses and other assets |
1,852 | (1,910 | ) | |||||
Other assets |
274 | 370 | ||||||
Accounts payable and accrued expenses |
(60,764 | ) | (42,431 | ) | ||||
Income taxes payable |
(9,454 | ) | 3,804 | |||||
Other liabilities |
7,936 | | ||||||
Net cash used in operating activities |
(30,776 | ) | (9,840 | ) | ||||
Cash flows from investing activities: |
||||||||
Acquisition payments, net of cash acquired |
(11,958 | ) | (63,264 | ) | ||||
Purchases of investments |
(13,538 | ) | (5,434 | ) | ||||
Proceeds from sales or maturities of investments |
56,254 | 3,900 | ||||||
Purchases of property and equipment |
(1,469 | ) | (1,562 | ) | ||||
Net cash provided from (used in) investing activities |
29,289 | (66,360 | ) | |||||
Cash flows from financing activities: |
||||||||
Borrowings on line of credit |
| 109,000 | ||||||
Payments on line of credit |
| (68,000 | ) | |||||
Payments on long-term debt and capital lease obligations |
(285 | ) | (325 | ) | ||||
Excess tax benefit from exercises of stock options and vesting of restricted stock |
612 | 6,484 | ||||||
Proceeds from issuance of common stock |
3,197 | 22,356 | ||||||
Net cash provided from financing activities |
3,524 | 69,515 | ||||||
Net increase (decrease) in cash and cash equivalents |
2,037 | (6,685 | ) | |||||
Cash and cash equivalents at beginning of period |
69,595 | 11,192 | ||||||
Cash and cash equivalents at end of period |
$ | 71,632 | $ | 4,507 | ||||
6
1. | Basis of Presentation: | |
The accompanying unaudited condensed consolidated financial statements of Pediatrix Medical Group, Inc. and the notes thereto presented in this Form 10-Q have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) applicable to interim financial statements, and do not include all disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of interim periods. The financial statements include all the accounts of Pediatrix Medical Group, Inc. and its consolidated subsidiaries (collectively, PMG) together with the accounts of PMGs affiliated professional associations, corporations and partnerships (the affiliated professional contractors). PMG has contractual management arrangements with its affiliated professional contractors, which are separate legal entities that provide physician services in certain states and Puerto Rico. The terms Pediatrix and the Company refer collectively to Pediatrix Medical Group, Inc., its subsidiaries, and the affiliated professional contractors. | ||
The consolidated results of operations for the interim periods presented are not necessarily indicative of the results to be experienced for the entire fiscal year. In addition, the accompanying unaudited condensed consolidated financial statements and the notes thereto should be read in conjunction with the consolidated financial statements and the notes thereto included in the Companys most recent Annual Report on Form 10-K. | ||
2. | Summary of Significant Accounting Policies: | |
Stock Incentive Plans and Employee Stock Purchase Plans | ||
In accordance with Statement of Financial Accounting Standards No. 123(R) (FAS 123(R)), the Company measures the cost of employee services received in exchange for stock-based awards based on grant-date fair value. As prescribed under FAS 123(R), the Company estimates the grant-date fair value of stock option grants using a valuation model known as the Black-Scholes-Merton formula or the Black-Scholes Model and allocates the resulting compensation expense over the corresponding requisite service period associated with each grant. The Black-Scholes Model requires the use of several variables to estimate the grant-date fair value of stock options including expected term, expected volatility, expected dividends and risk-free interest rate. The Company performs significant analyses to calculate and select the appropriate variable assumptions used in the Black-Scholes Model. The Company also performs significant analyses to estimate forfeitures of stock-based awards as required by FAS 123(R). The Company is required to adjust its forfeiture estimates on at least an annual basis based on the number of share-based awards that ultimately vest. The selection of assumptions and estimated forfeiture rates is subject to significant judgment and future changes to these assumptions and estimates may have a material impact on the Consolidated Financial Statements. The Company recognizes compensation cost for stock-based compensation over the requisite service period using the graded vesting attribution method. | ||
The condensed consolidated statements of income for the three months ended March 31, 2007 and 2006 include stock-based compensation expense calculated in accordance with FAS 123(R) for the Companys stock incentive plans (the Stock Incentive Plans) and the Companys employee stock purchase plans (the Stock Purchase Plans). In addition, the Companys condensed consolidated statements of cash flows for the three months ended March 31, 2007 and 2006 include the excess tax benefits related to the exercise of stock options and the vesting of restricted stock as a cash inflow from financing activities. In accordance with Financial Accounting Standards Board (FASB) Staff Position No. FAS 123(R)-3, Transition Election to Accounting for the Tax Effects of Share-Based Payment Awards, the Company has elected to use the short-cut method to account for its historical pool of excess tax benefits related to stock-based awards. See Note 6 to the Condensed Consolidated Financial Statements for more information on the Companys Stock Incentive Plans and the Stock Purchase Plans. |
7
Accounting Pronouncements | ||
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (FAS 159), The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115. FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. FAS 159 is effective for fiscal years beginning after November 15, 2007. The Company has not yet completed an evaluation of the potential impact of FAS 159. | ||
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (FAS 157), Fair Value Measures. FAS 157 creates a common definition for fair value for recognition or disclosure purposes under generally accepted accounting principles (GAAP). FAS 157 also establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. FAS 157 is effective for fiscal years beginning after November 15, 2007. The Company has not yet completed its evaluation of the potential impact of FAS 157. | ||
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN 48 effective January 1, 2007. See Note 7 to the Condensed Consolidated Financial Statements for more information on the Companys accounting for uncertain tax positions. | ||
Reclassifications | ||
Deferred compensation as presented in the consolidated balance sheet of the Companys Annual Report on Form 10-K for the year ended December 31, 2006 has been included in other liabilities to conform with the current quarter presentation. At March 31, 2007, other liabilities include deferred compensation of approximately $14.0 million. | ||
3. | Business Acquisitions: | |
The Company acquired two physician group practices during the three months ended March 31, 2007. In connection with these acquisitions, the Company recorded goodwill of approximately $10.0 million, other identifiable intangible assets consisting of physician and hospital agreements, of approximately $2.3 million, and liabilities of $847,000. The Company also recorded goodwill of $500,000 during the three months ended March 31, 2007 for the payment of contingent consideration related to a prior year acquisition based on volume and other performance measures. The Company may be required to pay similar contingent consideration under certain contract provisions relating to acquisitions completed during the three months ended March 31, 2007, as well as other acquisitions completed in prior years; however, the amount to be paid, if any, is not determinable at this point. | ||
The results of operations of the two practices acquired during the three months ended March 31, 2007 have been included in the Companys condensed consolidated financial statements from their respective dates of acquisition. The following unaudited pro forma information combines the consolidated results of operations of the Company and the physician group practice operations acquired during 2007 and 2006 as if the transactions had occurred at the beginning of the respective periods (in thousands, except for per share data); |
Three Months Ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
Net patient service revenue |
$ | 215,013 | $ | 196,712 | ||||
Net income |
25,724 | 25,682 | ||||||
Net income per share: |
||||||||
Basic |
0.53 | 0.54 | ||||||
Diluted |
0.52 | 0.53 |
8
The pro forma results do not necessarily represent results which would have occurred if the acquisitions had taken place at the beginning of the period, nor are they indicative of the results of future combined operations. | ||
4. | Investments: | |
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 and available-for-sale securities consisting of investment grade variable rate demand bonds. Investments with remaining maturities of less than one year are classified as short-term investments. | ||
The Company intends and has the ability to hold its held-to-maturity securities 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. | ||
Variable rate demand bonds are backed by municipal debt obligations with long-term contractual maturities and contain demand purchase option provisions allowing the Company to liquidate its investment in such securities over short-term intervals. Based on the provisions of these securities and the Companys intent to carry all such securities as short-term investments, the Company has classified its variable rate demand bonds as available-for-sale short-term investments. Under the provisions of FAS 115, available-for-sale investments are carried at fair value, with any unrealized gains and losses included in comprehensive income as a separate component of shareholders equity. | ||
The amortized cost associated with the Companys available-for-sale investments held at December 31, 2006 equaled fair value. Therefore, the Company had no unrealized gains and losses reported as a separate component of shareholders equity at December 31, 2006. The Company did not hold any available-for-sale investments at March 31, 2007. The Companys investments held at March 31, 2007 and December 31, 2006 are summarized as follows: |
March 31, 2007 | December 31, 2006 | |||||||||||||||
Short-Term | Long-Term | Short-Term | Long-Term | |||||||||||||
(in thousands) | ||||||||||||||||
Variable Rate Demand Bonds |
$ | | $ | | $ | 51,850 | $ | | ||||||||
U.S. Treasury Securities |
4,889 | 500 | 5,867 | 500 | ||||||||||||
Federal Home Loan Securities |
2,992 | 4,097 | 3,497 | 1,494 | ||||||||||||
Municipal Debt Securities |
4,521 | 7,831 | 3,946 | 4,675 | ||||||||||||
Commercial Paper |
4,283 | | | | ||||||||||||
Federal Farm Credit Bank
Discount Note |
500 | | 500 | | ||||||||||||
$ | 17,185 | $ | 12,428 | $ | 65,660 | $ | 6,669 | |||||||||
5. | Accounts Payable and Accrued Expenses: | |
Accounts payable and accrued expenses consist of the following: |
March 31, | December 31, | |||||||
2007 | 2006 | |||||||
(in thousands) | ||||||||
Accounts payable |
$ | 3,100 | $ | 5,945 | ||||
Accrued salaries and bonuses |
34,444 | 103,434 | ||||||
Accrued payroll taxes and benefits |
11,503 | 13,414 | ||||||
Accrued professional liability risks |
61,578 | 55,773 | ||||||
Accrual for uncertain tax positions |
10,691 | 19,623 | ||||||
Other accrued expenses |
15,539 | 8,363 | ||||||
$ | 136,855 | $ | 206,552 | |||||
The decrease in accrued salaries and bonuses from $103.4 million at December 31, 2006 to $34.4 million at March 31, 2007 is primarily due to the decrease in the Companys liabilities for performance-based incentive compensation. |
9
The Companys annual payments due under its performance-based incentive compensation program are made during the first quarter of each year. | ||
6. | Stock Incentive Plans and Employee Stock Purchase Plans: | |
The Company has a stock option plan (the Option Plan) under which stock options are presently outstanding but no new additional grants may be made. The Company also has a 2004 Incentive Compensation Plan (the 2004 Incentive Plan) under which stock options, restricted stock, stock appreciation rights, deferred stock, other stock related and performance related awards may be made to key employees. To date, the Company has only awarded restricted stock and granted stock options under the 2004 Incentive Plan. Collectively, the Option Plan and the 2004 Incentive Plan are the Companys Stock Incentive Plans (the Stock Incentive Plans). The Company also has Stock Purchase Plans under which employees may purchase the Companys common stock at 85% of market value on designated dates. | ||
Under the 2004 Incentive Plan, options to purchase shares of common stock may be granted at a price not less than fair market value of the shares on the date of grant. The options must be exercised within 10 years from the date of grant and generally become exercisable on a pro rata basis over a three-year period from the date of grant. Restricted stock awards generally vest over periods of three years upon the fulfillment of specified service-based conditions and in certain instances performance-based conditions. The Company recognizes compensation expense related to its restricted stock awards ratably over the corresponding vesting periods. During the three months ended March 31, 2007, the Company granted 7,000 stock options to key employees under the 2004 Incentive Plan. At March 31, 2007, the Company had approximately 1.9 million shares available for future grants and awards under the 2004 Incentive Plan. During the three months ended March 31, 2007, approximately 18,000 shares were issued under the Stock Purchase Plans. At March 31, 2007, the Company had approximately 180,000 shares reserved under the Stock Purchase Plans. | ||
The Company recognized approximately $4.5 million and $5.3 million of stock-based compensation expense related to the Stock Incentive Plans and the Stock Purchase Plans during the three months ended March 31, 2007 and 2006, respectively. The after-tax impact of stock-based compensation expense on net income was approximately $2.7 million and $3.3 million for the three months ended March 31, 2007 and 2006, respectively. The excess tax benefit related to the exercise of stock options and the vesting of restricted stock for the three months ended March 31, 2007 and 2006 was approximately $769,000 and $7.5 million, respectively. | ||
In July 2007, the Audit Committee of the Board of Directors completed an independent comprehensive review of the Companys stock option granting practices and made certain findings with respect to these practices. Based on these findings, management concluded that incorrect measurement dates were used for certain stock option grants in prior periods. | ||
After considering the application of Section 409A of the Internal Revenue Code on stock options with revised measurement dates, in February 2007, the Companys Board of Directors approved the Companys election to participate in a compliance resolution program offered by the Internal Revenue Service for certain employees who exercised certain stock options in 2006. Under this program, the Company paid to the Internal Revenue Service taxes and related interest imposed on employees, other than executive officers, as a result of the revision of measurement dates. In connection with this program, the Company will reimburse these employees for any additional taxes resulting from the payment of the Section 409A taxes on their behalf. | ||
In February 2007, the Board of Directors adopted a program providing for increases in the exercise price of certain options that were subject to changes in measurement dates and authorizing the Company to make compensating payments for the difference to affected employees, other than executive officers, in 2008. In July 2007, the Board of Directors finalized the increase in the exercise price of these options and authorization of these compensating payments. | ||
The Company has recorded a liability of approximately $6.4 million at March 31, 2007 for amounts it expects to pay to the Internal Revenue Service on behalf of its employees and directly to employees under these programs. |
10
7. | Accounting for Uncertain Tax Positions: | |
Effective January 1, 2007, the Company adopted the provisions of FIN 48. As part of the implementation of FIN 48, the Company evaluated its open tax positions using the recognition and measurement criteria established by FIN 48 and, as a result, recorded a $7.7 million cumulative effect adjustment to the opening balance of retained earnings. In addition, the Company reclassified approximately $10.7 million from deferred taxes payable to its current liability for uncertain tax positions which represented taxes due in relation to tax positions taken on temporary differences. | ||
The Companys total liability for unrecognized tax benefits was $37.1 million as of January 1, 2007. The Company had approximately $20.3 million of unrecognized tax benefits that, if recognized, would favorably impact its effective tax rate at January 1, 2007. | ||
The Company anticipates that its liability for uncertain tax positions will be reduced over the next 12 months by approximately $2.6 million due to the expiration of statutes of limitation. Additionally, the Company anticipates that its liability for uncertain tax positions will be increased over the next 12 months for accrued interest and additional taxes of approximately $2.7 million and $1.4 million, respectively. Although the Company anticipates additional changes in its liability for uncertain tax positions related to certain temporary differences, an estimate of such changes cannot be made at this time. | ||
The Company is currently subject to U.S. Federal income tax examinations for the tax years 2003 through 2006 and Commonwealth of Puerto Rico income tax examinations for the tax years 2001 and 2003 through 2006. During the three months ended March 31, 2007, the Company reduced its liability for uncertain tax positions related to the deductibility of certain compensation payments by approximately $3.9 million as a result of the expiration of the statute of limitations on certain filed tax returns. Of this $3.9 million liability reduction, $2.7 million was recorded as an increase in additional paid-in capital with the remainder recorded as a tax benefit. | ||
The Company includes interest and penalties related to income tax liabilities in income tax expense. As of January 1, 2007, the Companys accrued interest and penalties totaled $5.1 million. | ||
At March 31, 2007, other liabilities and accounts payable and accrued expenses as presented in the Companys condensed consolidated balance sheet include $31.3 million and $10.7 million, respectively, related to the Companys total liability for unrecognized tax benefits of $42.0 million. | ||
8. | 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 applicable period. Potential common shares consist of the dilutive effect of outstanding options and non-vested restricted stock calculated using the treasury stock method. Under the treasury stock method, the Company calculates the assumed excess tax benefits related to the potential exercise or vesting of its stock-based awards using the sum of the average market price for the applicable period less the option price, if any, and the fair value of the stock-based award on the date of grant multiplied by the applicable tax rate. |
11
The calculations of basic and diluted net income per share for the three months ended March 31, 2007 and 2006 are as follows: |
Three Months Ended | ||||||||
March 31, | ||||||||
2007 | 2006 | |||||||
(in thousands, except for | ||||||||
per share data) | ||||||||
Basic: |
||||||||
Net income applicable to common stock |
$ | 25,582 | $ | 23,427 | ||||
Weighted average number of common shares outstanding |
48,366 | 47,268 | ||||||
Basic net income per share |
$ | 0.53 | $ | 0.50 | ||||
Diluted: |
||||||||
Net income applicable to common stock |
$ | 25,582 | $ | 23,427 | ||||
Weighted average number of common shares outstanding |
48,366 | 47,268 | ||||||
Weighted average number of dilutive common stock equivalents |
1,544 | 1,638 | ||||||
Weighted average number of common and common equivalent shares outstanding |
49,910 | 48,906 | ||||||
Diluted net income per share |
$ | 0.51 | $ | 0.48 | ||||
For the three months ended March 31, 2007 and 2006, the Company had approximately 7,000 and 20,000 outstanding employee stock options, respectively, that were excluded from the computation of diluted earnings per share because they were anti-dilutive. | ||
9. | Contingencies: | |
The Audit Committee of the Companys Board of Directors conducted a comprehensive review of the Companys historical practices related to the granting of stock options with the assistance of independent legal counsel and forensic accounting experts. The Company voluntarily contacted the staff of the SEC regarding the Audit Committees review and subsequently the SEC notified the Company that it had commenced a formal investigation into the Companys stock option practices. The Company has also had discussions with the U.S. Attorneys office for the Southern District of Florida regarding the Audit Committees review. Based on these discussions, the Company believes that the U.S. Attorneys office may make a request for various documents and information related to the review and the Companys stock option granting practices. The Company intends to continue full cooperation with the U.S. Attorneys office and the SEC. The Company cannot predict the outcome of these matters. | ||
In September 2006, the Company announced that it had completed a final settlement agreement with the Department of Justice and the relator who initiated the qui tam complaint (Federal Settlement Agreement). In February 2007, the Company announced that it had completed separate state settlement agreements with each state Medicaid program involved in the settlement (the State Settlement Agreements). Under the terms of the Federal Settlement Agreement and State Settlement Agreements, the Company paid the federal government $25.1 million related to neonatal services provided from January 1996 through December 1999, of which $9.5 million was transferred to an escrow agent for distribution to each Medicaid-participating state that entered into a State Settlement Agreement with the Company. | ||
As part of the Federal Settlement Agreement, the Company entered into a five-year Corporate Integrity Agreement with the Office of Inspector General of the Department of Health and Human Services (the OIG). The Corporate Integrity Agreement acknowledges the existence of the Companys comprehensive Compliance Plan, which provides for policies and procedures aimed at ensuring the Companys adherence with federal healthcare program (FHC Program) requirements and requires the Company to maintain the Compliance Plan in full operation for the term of the Corporate Integrity Agreement. In addition, the Corporate Integrity Agreement requires, among other things, that the Company must comply with the following integrity obligations during the term of the Corporate Integrity Agreement: |
| maintaining a Compliance Officer and Compliance Committee to administer the Companys compliance with FHC Program requirements, the Companys Compliance Plan and the Corporate Integrity Agreement; | ||
| maintaining the Code of Conduct the Company previously developed, implemented, and distributed to its officers, directors, employees, contractors, subcontractors, agents, or other persons who provide patient care items or services (the Covered Persons); | ||
| maintaining the written policies and procedures the Company previously developed and implemented regarding the operation of the Compliance Plan and the Companys compliance with FHC Program requirements; |
12
| providing general compliance training to the Covered Persons as well as specific training to the Covered Persons who perform coding functions relating to claims for reimbursement from any FHC Program; | ||
| engaging an independent review organization to perform annual reviews of samples of claims from multiple hospital units to assist the Company in assessing and evaluating its coding, billing, and claims-submission practices; | ||
| maintaining the Disclosure Program the Company previously developed and implemented that includes a mechanism to enable individuals to disclose, to the Chief Compliance Officer or any person who is not in the disclosing individuals chain of command, issues or questions believed by the individual to be a potential violation of criminal, civil, or administrative laws; | ||
| not hiring or, if employed, removing from Pediatrixs business operations which are related to or compensated, in whole or part, by FHC Programs, persons (i) convicted of a criminal offense related to the provision of health care items or services or (ii) ineligible to participate in FHC Programs or Federal procurement or non-procurement programs; | ||
| notifying the OIG of (i) new investigations or legal proceedings by a governmental entity or its agents involving an allegation that Pediatrix has committed a crime or has engaged in fraudulent activities, (ii) matters that a reasonable person would consider a probable violation of criminal, civil or administrative laws applicable to any FHC Program for which penalties or exclusion may be imposed, and (iii) the purchase, sale, closure, establishment, or relocation of any facility furnishing items or services that are reimbursed under FHC Programs; | ||
| reporting and returning overpayments received from FHC Programs; | ||
| submitting reports to the OIG regarding the Companys compliance with the Corporate Integrity Agreement; and | ||
| maintaining for inspection, for a period of six years from the effective date, all documents and records relating to reimbursement from the FHC Programs and compliance with the Corporate Integrity Agreement. |
Failure to comply with the Companys duties under the Corporate Integrity Agreement could result in substantial monetary penalties and in the case of a material breach, could even exclude the Company from participating in FHC Programs. Management believes the Company was in compliance with the Corporate Integrity Agreement as of March 31, 2007. | ||
The Company expects that additional audits, inquiries and investigations from government authorities and agencies will continue to occur in the ordinary course of business. Such audits, inquiries and investigations and their ultimate resolutions, individually or in the aggregate, could have a material adverse effect on the Companys business, financial condition, results of operations, cash flows or the trading price of the Companys 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 Companys contracts with hospitals generally require it to indemnify them and their affiliates for losses resulting from the negligence of the Companys 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. 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, results of operations and the trading price of its common stock. | ||
The Company has received three letters from shareholders demanding that the Companys Board of Directors initiate legal proceedings against certain current and former officers and directors for, among other things, breaches of fiduciary duty in connection with the Companys historical stock option granting practices. These demands have been reviewed by a special committee (Special Committee) of the Companys Board of Directors in connection with the review of the Companys stock option practices. The Special Committee has considered the matter and has determined that it is not in the best interest of the Company to take further action with respect to the Companys current management or directors. The Special Committee is still considering whether any future action should be taken regarding any former management or directors. The Company cannot predict whether any derivative actions will result from the shareholder demands and, if so, their outcomes. | ||
13
Although the Company currently maintains liability insurance coverage intended to cover professional liability and certain other claims, 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 Companys insurance coverage, including coverage for professional liability and other claims, could have a material adverse effect on its business, financial condition, results of operations and cash flows. | ||
10. | Subsequent Events: | |
Since March 31, 2007, the Company has completed the acquisition of one physician group practice. Total consideration paid for this acquired practice was approximately $3.3 million in cash. | ||
In August 2007, the Board of Directors of the Company authorized a share repurchase program that allows the Company to repurchase up to $100 million of its common stock. The program allows the Company to make open market purchases of its shares from time to time subject to price, market and economic conditions and trading restrictions. |
14
15
16
17
18
19
| maintaining a Compliance Officer and Compliance Committee to administer our compliance with FHC Program requirements, our Compliance Plan and the Corporate Integrity Agreement; | ||
| maintaining the Code of Conduct we previously developed, implemented, and distributed to our officers, directors, employees, contractors, subcontractors, agents, or other persons who provide patient care items or services (the Covered Persons); | ||
| maintaining the written policies and procedures we previously developed and implemented regarding the operation of the Compliance Plan and our compliance with FHC Program requirements; | ||
| providing general compliance training to the Covered Persons as well as specific training to the Covered Persons who perform coding functions relating to claims for reimbursement from any FHC Program; | ||
| engaging an independent review organization to perform annual reviews of samples of claims from multiple hospital units to assist us in assessing and evaluating our coding, billing, and claims-submission practices; | ||
| maintaining the Disclosure Program we previously developed and implemented that includes a mechanism to enable individuals to disclose, to the Chief Compliance Officer or any person who is not in the disclosing individuals chain of command, issues or questions believed by the individual to be a potential violation of criminal, civil, or administrative laws; | ||
| not hiring or, if employed, removing from Pediatrixs business operations which are related to or compensated, in whole or part, by FHC Programs, persons (i) convicted of a criminal offense related to the provision of health care items or services or (ii) ineligible to participate in FHC Programs or Federal procurement or non-procurement programs; | ||
| notifying the OIG of (i) new investigations or legal proceedings by a governmental entity or its agents involving an allegation that Pediatrix has committed a crime or has engaged in fraudulent activities, (ii) matters that a reasonable person would consider a probable violation of criminal, civil or administrative laws applicable to any FHC Program for which penalties or exclusion may be imposed, and (iii) the purchase, sale, closure, establishment, or relocation of any facility furnishing items or services that are reimbursed under FHC Programs; | ||
| reporting and returning overpayments received from FHC Programs; | ||
| submitting reports to the OIG regarding our compliance with the Corporate Integrity Agreement; and | ||
| maintaining for inspection, for a period of six years from the effective date, all documents and records relating to reimbursement from the FHC Programs and compliance with the Corporate Integrity Agreement. |
20
21
PEDIATRIX MEDICAL GROUP, INC. |
||||
Date: August 6, 2007 | By: | /s/ Roger J. Medel, M.D. | ||
Roger J. Medel, M.D., Chief Executive Officer | ||||
(principal executive officer) | ||||
Date: August 6, 2007 | By: | /s/ Karl B. Wagner | ||
Karl B. Wagner, Chief Financial Officer | ||||
(principal financial officer) |
22
Exhibit | ||||
No. | Description | |||
3.1 | Composite Articles of Incorporation of Pediatrix
(incorporated by reference to Exhibit 3.1 to Pediatrixs
Quarterly Report on Form 10-Q for the period ended March 31,
2006). |
|||
3.2 | Amended and Restated Bylaws of Pediatrix (incorporated by
reference to Exhibit 3.2 to Pediatrixs 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 Pediatrixs 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
Pediatrixs Current Report on Form 8-K dated March 31, 1999). |
|||
4.2 | Certificate of Adjustment to the Rights Agreement between
Pediatrix and Computershare Trust Company N.A. (as successor
to BankBoston, N.A.) as rights agent (incorporated by
reference to Exhibit 4.2 to Pediatrixs Current Report on
Form 8-K dated April 27, 2006). |
|||
10.1 | Consent to Extension Agreement dated March 15, 2007
(incorporated by reference to Exhibit 10.1 to Pediatrixs
Current Report on Form 8-K dated March 15, 2007). |
|||
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. |
+ | Filed herewith. |
23
1. | I have reviewed this quarterly report on Form 10-Q of Pediatrix Medical Group, Inc.; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; | ||
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
By: | /s/ Roger J. Medel, M.D. | |||
Roger J. Medel, M.D. | ||||
Chief Executive Officer |
1. | I have reviewed this quarterly report on Form 10-Q of Pediatrix Medical Group, Inc.; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; | ||
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
By: | /s/ Karl B. Wagner | |||
Karl B. Wagner | ||||
Chief Financial Officer |
By: | /s/ Roger J. Medel, M.D. | |||
Roger J. Medel, M.D. | ||||
Chief Executive Officer | ||||
By: | /s/ Karl B. Wagner | |||
Karl B. Wagner | ||||
Chief Financial Officer | ||||