1 Filed Pursuant to Rule 424(A) Registration No. 333-07125 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION Dated July 3, 1996 5,000,000 SHARES PEDIATRIX LOGO COMMON STOCK --------------------- Of the 5,000,000 shares of Common Stock offered hereby (the "Shares"), 1,500,000 shares are being offered by Pediatrix Medical Group, Inc. (the "Company"), and 3,500,000 shares are being offered by certain shareholders of the Company (the "Selling Shareholders"). See "Principal and Selling Shareholders." --------------------- The Common Stock is included in the Nasdaq National Market under the symbol "PEDX." On July 2, 1996, the last reported sales price for the Common Stock on the Nasdaq National Market was $48.25 per share. See "Price Range of Common Stock and Dividends." --------------------- SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. (1) The Company and the Selling Shareholders have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $600,000. (3) Certain Selling Shareholders have granted the Underwriters a 30-day option to purchase up to an additional 750,000 shares to cover over-allotments, if any. If all such shares are purchased, the total price to public, underwriting discounts and commissions, proceeds to Company and proceeds to Selling Shareholders will be $ , $ , $ and $ , respectively. See "Underwriting." --------------------- The Shares are offered by the several Underwriters named herein when, as and if received and accepted by them, subject to their right to reject any order in whole or in part and subject to certain other conditions. It is expected that delivery of the Shares will be made in New York, New York, on or about , 1996. --------------------- DEAN WITTER REYNOLDS INC. ALEX. BROWN & SONS INCORPORATED DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION HAMBRECHT & QUIST SMITH BARNEY INC. , 1996
- -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- UNDERWRITING PROCEEDS PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS - -------------------------------------------------------------------------------------------------- PER SHARE $ $ $ $ TOTAL(3) $ $ $ $ - -------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------- 2 [MAP] The graphic is a map of the United States which designates the locations of the neonatal intensive care units, pediatric intensive care units and pediatrics clinics where the Company provides physician management services. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 3 NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. --------------------- TABLE OF CONTENTS --------------------- AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (together with all amendments, exhibits and schedules thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act") with respect to the Common Stock offered hereby. This Prospectus, which constitutes part of the Registration Statement, omits certain information contained in the Registration Statement and the exhibits and schedules thereto on file with the Commission pursuant to the Securities Act and the rules and regulations of the Commission thereunder. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete, and, in each instance, reference is made to the contract or document filed as an exhibit to the Registration Statement and incorporated by reference herein. The Company is subject to the information requirements of the Exchange Act and in accordance therewith files reports, proxy statements and other information with the Commission (collectively, "Exchange Act Filings"). The Registration Statement, including exhibits and schedules thereto, as well as the Company's Exchange Act Filings may be obtained from the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: Seven World Trade Center, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained from the public reference section of the Commission at its Washington address upon payment of the fees prescribed by the Commission, or may be examined without charge at the offices of the Commission, or accessed through the Commission's Internet address at http://www.sec.gov. 3
PAGE ---- Available Information................. 3 Prospectus Summary.................... 4 Risk Factors.......................... 8 The Company........................... 13 Recent Developments................... 13 Use of Proceeds....................... 15 Price Range of Common Stock and Dividends........................... 16 Capitalization........................ 16 Selected Consolidated Financial Data................................ 17 Unaudited Pro Forma Condensed Consolidated Information............ 19 PAGE ---- Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 23 Business.............................. 29 Management............................ 37 Principal and Selling Shareholders.... 43 Description of Capital Stock.......... 44 Shares Eligible for Future Sale....... 46 Underwriting.......................... 48 Legal Matters......................... 49 Experts............................... 49 Index to Consolidated Financial Statements.......................... 50 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors," and the Consolidated Financial Statements and notes thereto included elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. Unless the context otherwise requires, references in this Prospectus to the Company or Pediatrix include Pediatrix Medical Group, Inc., its predecessor and its subsidiaries and the professional associations and partnerships (the "PA Contractors") which are separate legal entities that contract with the Company to provide physician services in certain states and Puerto Rico, and references to PMG refer only to Pediatrix Medical Group, Inc. THE COMPANY Pediatrix is the nation's leading provider of physician management services to hospital-based neonatal intensive care units ("NICUs"). NICUs provide medical care to newborn infants with low birth weight and other medical complications, and are staffed with specialized pediatric physicians, known as neonatologists. Based upon its own market research, knowledge of the health care industry and experience in neonatology, the Company believes that it is the only provider of NICU physician management services that markets its services on a national basis. The Company also provides physician management services to hospital-based pediatric intensive care units ("PICUs"), units which provide medical care to critically ill children and are staffed with specially-trained pediatricians, and to pediatrics departments in hospitals. As of June 15, 1996, the Company provided services to 58 NICUs, eight PICUs and three pediatrics departments in 14 states and Puerto Rico and employed or contracted with 162 physicians. The Company staffs and manages NICUs and PICUs in hospitals, providing the physicians, professional management and administrative support, including physician billing and reimbursement expertise and services. The Company's policy is to provide 24-hour coverage at its NICUs and PICUs with on-site or on-call physicians. As a result of this policy, physicians are available to provide continuous pediatric support to other areas of the hospital on an as-needed basis, particularly in the obstetrics, nursery and pediatrics departments, where immediate accessibility to specialized care is critical. Pediatrix established its leading position in physician management services to NICUs by developing a comprehensive care model and management and systems infrastructure that address the needs of patients, hospitals, payor groups and physicians. Pediatrix addresses the needs of (i) patients by providing continuous, comprehensive, professional quality care, (ii) hospitals by recruiting, credentialing, and retaining neonatologists and hiring related staff to operate NICUs in a cost-effective manner thereby relieving hospitals of the financial and administrative burdens of operating the NICUs, (iii) payor groups by providing cost-effective care to patients, and (iv) physicians by providing administrative support, including billing and reimbursement expertise and services, to enable them to focus on providing care to patients, and by offering an opportunity for career advancement within Pediatrix. Of the approximately four million babies born in the United States in 1994, approximately 10% required neonatal treatment. Demand for neonatal services is primarily due to premature births, which are often characterized by low birth weight and other medical complications. A majority of high-risk mothers whose births require neonatal treatment are not identified until the time of delivery, thus heightening the need for continuous coverage by neonatologists. Across the United States, NICUs are concentrated primarily among hospitals located in metropolitan areas with a higher volume of births. NICUs are important to hospitals since obstetrics generates one of the highest volumes of admissions and obstetricians generally prefer to perform deliveries at hospitals with NICUs. Hospitals must maintain cost-effective care and service in these units to enhance the hospital's desirability to the community, physicians and managed care payors. 4 5 The Company's objective is to enhance its position as the nation's leading provider of physician management services to NICUs by adding new units and increasing same unit growth. The key elements of the Company's strategy are as follows: - Continue to focus exclusively on neonatology and pediatrics - Acquire well-established neonatal physician group practices - Develop regional networks to facilitate relationships with third party payors - Increase same unit growth - Assist hospitals by promoting cost-effective, quality care - Continue to develop new business models to meet the challenges of managed care Since its initial public offering in September 1995 (the "IPO"), the Company has completed six acquisitions (the "Recent Acquisitions") of neonatal physician group practices, which (i) added 24 NICUs, four PICUs and one pediatrics department, (ii) added 50 physicians, (iii) established the Company in three new markets, Denver, Phoenix and El Paso and (iv) expanded the Company's presence in Southern California. To support this growth and to facilitate the integration of acquisitions, the Company has enhanced its management infrastructure. See "Recent Developments." The Company's net patient service revenue has increased from $10.5 million in 1991 to $43.9 million for the year ended December 31, 1995 ($69.4 million for the year ended December 31, 1995 on a pro forma basis), representing a compound annual growth rate of 43.0% (60.4% on a pro forma basis). Over the same period, net income increased from $1.8 million in 1991 to $6.7 million for the year ended December 31, 1995, representing a compound annual growth rate of 38.1%. THE OFFERING - --------------- (1) Excludes (i) 2,430,954 shares of Common Stock reserved for issuance under the Company's amended and restated stock option plan (the "Stock Option Plan"), of which options for an aggregate of 1,941,029 shares of Common Stock were issued and outstanding as of June 15, 1996 and options for an aggregate of 444,127 shares of Common Stock were exercisable as of June 15, 1996, and (ii) 1,000,000 shares of Common Stock reserved for issuance under the Company's 1996 Qualified Employee Stock Purchase Plan and 1996 Non-Qualified Employee Stock Purchase Plan (collectively the "Stock Purchase Plans"), none of which had been issued as of June 15, 1996. See "Management -- Stock Option Plans." 5
Common Stock Offered by the Company................... 1,500,000 shares Common Stock Offered by the Selling Shareholders...... 3,500,000 shares Common Stock Outstanding After the Offering........... 14,576,170 shares(1) Use of Proceeds by the Company........................ Estimated net proceeds of $69.2 million to the Company will be used for possible future acquisitions, working capital requirements for new hospital contracts and general corporate purposes. See "Use of Proceeds." Nasdaq National Market Symbol......................... "PEDX" 6 SUMMARY CONSOLIDATED FINANCIAL DATA
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------------------------------------ -------------------------- 1995 1996 ------------------ ----------------- PRO PRO 1991 1992 1993 1994 ACTUAL FORMA(1) 1995 ACTUAL FORMA(2) ------- ------- ------- ------- ------- -------- ------ ------- -------- (IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA) CONSOLIDATED INCOME STATEMENT DATA: Net patient service revenue........ $10,497 $15,438 $23,570 $32,779 $43,860 $69,423 $8,886 $16,127 $21,342 Operating expenses: Salaries and benefits............ 6,291 9,585 14,852 20,723 29,545 47,204 6,270 10,796 14,216 Supplies and other operating expenses....................... 1,044 1,743 2,230 2,774 3,451 8,568 607 1,213 2,017 Depreciation and amortization.... 39 60 95 244 363 1,763 74 233 460 Nonrecurring expense(3).......... -- 15,400 -- -- -- -- -- -- -- ------- ------- ------- ------- ------- -------- ------ ------- -------- Total operating expenses... 7,374 26,788 17,177 23,741 33,359 57,535 6,951 12,242 16,693 ------- ------- ------- ------- ------- -------- ------ ------- -------- Income (loss) from operations...... 3,123 (11,350) 6,393 9,038 10,501 11,888 1,935 3,885 4,649 Investment income.................. 81 160 45 208 804 537 107 499 92 Interest expense................... -- (49) (105) (90) (117) (124) (28) (35) (35) Other income (expense), net........ -- 45 (17) -- -- 58 -- -- -- ------- ------- ------- ------- ------- -------- ------ ------- -------- Income (loss) before income taxes............................ 3,204 (11,194) 6,316 9,156 11,188 12,359 2,014 4,349 4,706 Income tax provision (benefit)..... 1,358 (3,536) 2,166 3,749 4,475 5,262 805 1,737 1,904 ------- ------- ------- ------- ------- -------- ------ ------- -------- Net income (loss)(4)............... $ 1,846 $(7,658) $ 4,150 $ 5,407 $ 6,713 $ 7,097 $1,209 $ 2,612 $ 2,802 ======= ======= ======= ======= ======= ========= ====== ======= ========= Net income per common and common equivalent share(5).............. $ .47 $ .55 $ .58 $ .10 $ .19 $ .20 ======= ======= ========= ====== ======= ========= Weighted average shares outstanding(5)................... 11,430 12,216 12,216 11,614 13,726 13,726 ======= ======= ========= ====== ======= ========= OTHER OPERATING DATA: Number of units at end of period: NICU............................. 6 13 18 22 37 23 47 PICU............................. 2 2 3 5 4 5 7 Other pediatric services......... -- -- 1 1 2 2 3 Number of physicians at end of period........................... 25 42 52 75 114 77 131 Number of births(6)................ 16,127 23,289 32,532 39,541 59,186 10,991 25,337 NICU admissions.................... 2,563 3,600 4,777 5,823 7,611 1,528 2,798 NICU patient days.................. N/A N/A 59,024 64,615 87,672 17,248 33,424 6
MARCH 31, 1996 ------------------------------------ PRO PRO FORMA ACTUAL FORMA(7) AS ADJUSTED(8) ------- --------- -------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents........................................................... $7,084 $7,084 $ 76,326 Working capital..................................................................... 39,717 21,267 90,509 Total assets........................................................................ 77,371 77,956 147,198 Total liabilities................................................................... 11,809 12,394 12,394 Long-term debt, including current maturities........................................ 799 799 799 Stockholders' equity................................................................ 65,562 65,562 134,804 7 (1) Gives effect to the Recent Acquisitions and the acquisition of Neonatal Pediatric Intensive Care Medical Group, Inc. ("NAPIC") as if such transactions had occurred as of January 1, 1995. See "Recent Developments" and "Unaudited Pro Forma Condensed Consolidated Information." (2) Gives effect to the Recent Acquisitions as if such transactions had occurred as of January 1, 1995. See "Recent Developments" and "Unaudited Pro Forma Condensed Consolidated Information." (3) Reflects nonrecurring payments aggregating $15.4 million to certain of the Company's physicians as bonuses for prior services and for covenants not to compete occuring at the time of the investment in the Company by Summit Ventures III, L.P. and Summit Investors II, L.P. (collectively "Summit") in 1992. (4) Immediately prior to the consummation of the IPO, the outstanding shares of redeemable cumulative convertible preferred stock (the "Convertible Preferred Stock") were converted into 4,571,063 shares of Common Stock and unpaid dividends on the Convertible Preferred Stock of approximately $3.7 million were forgiven pursuant to the terms of the Series A Preferred Stock Purchase Agreement, dated as of October 26, 1992. Upon conversion, such amounts were credited to the common stock and additional paid-in capital accounts. The net income (loss) amounts do not include accrued and unpaid dividends with respect to the Convertible Preferred Stock. (5) Such amounts represent net income per common share and common equivalent share, pro forma, to give effect to the conversion of the Convertible Preferred Stock, which was not determined to be a Common Stock equivalent, into Common Stock in connection with the IPO for 1994 and 1995. The net income per common share is computed based upon the weighted average number of shares of Common Stock and Common Stock equivalents, including the number of shares of Common Stock issuable upon conversion of the Convertible Preferred Stock, outstanding during the period. Common Stock issued by the Company during the 12 months immediately preceding the initial filing of the registration statement relating to the IPO, plus Common Stock equivalents relating to the grant of Common Stock options during the same period, have been included in the calculation of weighted average number of Common Stock equivalents outstanding for 1994 and 1995, using the treasury stock method and the IPO price of $20 per share. (6) Represents number of births at the hospitals with which the Company provided physician management services during the periods indicated. (7) Adjusted to give effect to the acquisitions consummated in the second quarter of 1996 (the "1996 Second Quarter Acquisitions") described in "Recent Developments" and "Unaudited Pro Forma Condensed Consolidated Information," as if all of these transactions occurred as of March 31, 1996. (8) Adjusted to give effect to (i) the sale of 1,500,000 shares of Common Stock offered hereby by the Company and the application of the estimated net proceeds therefrom, as described under "Use of Proceeds" and (ii) the 1996 Second Quarter Acquisitions as if all of these transactions occurred as of March 31, 1996. See "Recent Developments" and "Unaudited Pro Forma Condensed Consolidated Information." 7 8 RISK FACTORS Prospective investors should carefully consider the following risk factors, in addition to the other information contained in this Prospectus, in evaluating an investment in the Shares offered hereby. This Prospectus contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. Prospective investors are cautioned that such statements are only predictions and that actual events or results may differ materially. In evaluating such statements, prospective investors should specifically consider the various factors identified in this Prospectus, including the matters set forth below, which could cause actual results to differ materially from those indicated by such forward-looking statements. Health Care Regulatory Environment Could Increase Restrictions on the Company. The health care industry and physicians' medical practices are highly regulated. Neonatal and other health care services that the Company offers and proposes to offer are subject to extensive federal and state laws and regulations governing matters such as licensure and certification of facilities and personnel, conduct of operations, audit and retroactive reimbursement policies, adjustment of prior government billings and prohibitions on payments for the referral of business and self referrals. Failure to comply with these laws, or a determination that in the past the Company has failed to comply with these laws, could have a material adverse effect on the Company's financial condition and results of operations. There can be no assurance that the health care regulatory environment will not change so as to restrict the Company's existing operations or limit the expansion of its business. Changes in government regulation could also impose new requirements, involving compliance costs which cannot be recovered through price increases. See "Business -- Government Regulation." Reliance upon Government Programs; Possible Reduction in Reimbursement. Approximately 26%, 31% and 30% of the Company's net patient service revenue in 1994, 1995 and the three months ended March 31, 1996, respectively, was derived from payments made by government-sponsored health care programs (principally Medicaid). Increasing budgetary pressures may lead to reimbursement reductions or limits, reductions in these programs or elimination of coverage for certain individuals or treatments under these programs. Federal legislation could result in a reduction of Medicaid funding or an increase in state discretionary funding through block grants, or a combination thereof. State Medicaid waiver requests if granted by the federal government could increase discretion, or reduce coverage of or funding for certain individuals or treatments under the Medicaid program, in the absence of new federal legislation. Increased state discretion in Medicaid, coupled with the fact that Medicaid expenditures comprised a substantial and growing share of state budgets, could lead to significant reductions in reimbursement. In addition, these programs generally reimburse on a fee schedule basis, rather than a charge-related basis. Therefore, the Company generally cannot increase its revenues by increasing the amount it charges for services provided. To the extent the Company's costs increase, the Company may not be able to recover such cost increases from government reimbursement programs. In various states, Medicaid managed care is encouraged and may become mandated. In such systems health maintenance organizations ("HMOs") bargain for reimbursement with competing providers and contract with the state to provide benefits to Medicaid enrollees. Such systems are intended and expected to reduce Medicaid reimbursement of providers. Legislation enacted in states could result in reduced payments to the Company for Medicaid patients. Additionally, Proposition 187, which was adopted by referendum in California, but has been enjoined by a California court, may limit the access by illegal aliens to Medicaid funds in California. In the event similar legislation is passed in other states with large illegal alien populations, such as Arizona and Florida, the Company's ability to collect for medical services rendered to such patients could be adversely affected. Changes in government-sponsored health care programs which result in the Company being unable to recover cost increases through price increases or otherwise could have a material adverse effect on the Company's financial condition and results of operations. Because of cost containment measures and market changes in non-governmental insurance plans, the Company may not be able to shift cost increases to, or recover them from, non-governmental payors. In addition, funds received under government programs are subject to audit with respect to the proper billing for physician services and, accordingly, retroactive adjustments of revenue from these programs may occur. See "Business -- Government Regulation." 8 9 State Laws Regarding Prohibition of Corporate Practice of Medicine. Business corporations, such as PMG, are generally not permitted under state law to practice medicine, exercise control over the medical judgments or decisions of physicians or engage in certain practices, such as fee splitting, with physicians. In the states in which the Company operates, other than Florida, there exist potential judicial or governmental interpretations which may extend the scope of the corporate practice of medicine and/or medical practices acts principles. For such reasons, or for business reasons, PMG contracts with the PA Contractors (which are owned by a licensed physician in the state) in such states, which in turn employ or contract with physicians to provide necessary physician services to hospitals with which the Company provides physician management services. There can be no assurance that regulatory authorities or other parties will not assert that PMG is engaged in the corporate practice of medicine or that the percentage fee arrangements between PMG and the PA Contractors constitute fee splitting or the corporate practice of medicine. If such a claim were successfully asserted in any jurisdiction, PMG could be subject to civil and criminal penalties under such jurisdiction's laws and could be required to restructure its contractual arrangements. Such results or the inability to successfully restructure contractual arrangements could have a material adverse effect on the Company's financial condition and results of operations. In states where PMG is not permitted to practice medicine, PMG performs only non-medical administrative services, does not represent to the public or its clients that it offers medical services and does not exercise influence or control over the practice of medicine by the physicians employed by the PA Contractors. Accordingly, the Company believes it is not in violation of applicable state laws relating to the corporate practice of medicine. See "Business -- Contractual Relationships." Risk of Applicability of Anti-Kickback and Self-Referral Laws. Federal anti-kickback laws and regulations prohibit any knowing and willful offer, payment, solicitation or receipt of any form of remuneration, either directly or indirectly, in return for, or to induce (i) referral of an individual for a service for which payment may be made by Medicaid or another government-sponsored health care program or (ii) purchasing, leasing, ordering or arranging for, or recommending the purchase, lease or order of, any service or item for which payment may be made by a government-sponsored health care program. Violations of anti-kickback rules are punishable by monetary fines, civil and criminal penalties and exclusion from participation in Medicare and Medicaid programs. Effective January 1, 1995, federal physician self-referral laws became applicable to inpatient and outpatient hospital services. Subject to certain exceptions, these laws, such as "Stark I" and "Stark II," prohibit Medicare or Medicaid payments for services furnished by an entity pursuant to a referral by a physician who has a financial relationship with the entity through ownership, investment, or a compensation arrangement. Possible sanctions for violation of these laws include civil monetary penalties, exclusion from Medicare and Medicaid programs and forfeiture of amounts collected in violation of such prohibitions. Certain states in which the Company does business have similar anti-kickback, anti-fee splitting and self-referral laws, imposing substantial penalties for violations. The Company's relationships, including fee payments, among PA Contractors, hospital clients and physicians have not been examined by federal or state authorities under these laws and regulations. Although the Company believes it is in compliance with these laws and regulations, there can be no assurance that federal or state regulatory authorities will not challenge the Company's current or future activities under these laws. See "Business -- Strategy" and "Business -- Government Regulation." Uncertainty Relating to Federal and State Legislation. Federal and state governments have recently focused significant attention on health care reform. Some of the proposals under consideration, or others which may be introduced, could, if adopted, have a material adverse effect on the Company's financial condition and results of operations. It is not possible to predict which, if any, proposal that has been or will be considered will be adopted. The Company cannot predict what effect any future legislation will have on the Company. There can be no assurance that any future state or federal legislation or other changes in the administration or interpretation of governmental health care programs will not adversely affect the Company's financial condition and results of operations. See "Business -- Government Regulation." Risks Relating to Acquisition Strategy. The Company has expanded and intends to continue to expand its geographic and market penetration primarily through acquisitions of physician group practices. In implementing this acquisition strategy, the Company will compete with other potential acquirers, some of which may have greater financial or operational resources than the Company. Competition for acquisitions 9 10 may intensify due to the ongoing consolidation in the health care industry, which may increase the costs of capitalizing on such opportunities. While the Company has recently completed the Recent Acquisitions, there can be no assurance that future acquisition candidates will be identified or that any future acquisition will be consummated or, if consummated, that any acquisition, including the Recent Acquisitions, will be integrated successfully into the Company's operations or that the Company will be successful in achieving its objectives. The Recent Acquisitions also involve numerous short and long term risks, including diversion of management's attention, failure to retain key personnel, amortization of acquired intangible assets and the effects of contingent earn-out payments. At March 31, 1996, approximately $17.7 million, or approximately 22.9% of total assets, was goodwill relating to acquisitions. Subsequent to March 31, 1996, the Company made three acquisitions, resulting in additional aggregate goodwill of approximately $18.5 million. The Company may also incur one-time acquisition expenses in connection with acquisitions. Consummation of acquisitions could result in the incurrence or assumption by the Company of additional indebtedness and the issuance of additional equity. The issuance of shares of Common Stock for an acquisition may result in dilution to shareholders. Also, as the Company enters into new geographic markets, the Company will be required to comply with laws and regulations of states that differ from those in which the Company's operations are currently conducted. There can be no assurance that the Company will be able to effectively establish a presence in these new markets. While many of the expenses arising from the Company's efforts in these areas may have a negative effect on operating results until such time, if at all, as these expenses are offset by increased revenues, there can be no assurance that the Company will be able to implement its acquisition strategy, or that this strategy will ultimately be successful. See "Use of Proceeds," "Unaudited Pro Forma Condensed Consolidated Information," "Business -- Strategy," "Business -- Marketing," and "Business -- Government Regulation." Growth Strategy; Rapid Growth. Since the IPO, the Company has experienced rapid growth in its business and number of employees. Continued rapid growth may impair the Company's ability to efficiently provide its physician management services and to adequately manage its employees. While the Company is taking steps to manage rapid growth, future results of operations could be materially adversely affected if it is unable to do so effectively. Quarterly Fluctuations in Operating Results; Potential Volatility. The Company has historically experienced and expects to continue to experience quarterly fluctuations in net patient service revenue and associated net income due to unit specific volume and cost fluctuations. The Company has a high level of fixed operating costs, including physician costs, and, as a result, is highly dependent on the volume of births and capacity utilization of NICUs and PICUs to sustain profitability. Results of operations for any quarter are not necessarily indicative of results of operations for any future period or for the full year. As a result, there can be no assurance that results of operations will not fluctuate significantly from period to period. There has been significant volatility in the market price of securities of health care companies that often has been unrelated to the operating performance of such companies. The Company believes that certain factors, such as legislative and regulatory developments, quarterly fluctuations in the actual or anticipated results of operations of the Company, lower revenues or earnings in the financial results of the Company than those anticipated by securities analysts, the overall economy and the financial markets, could cause the price of the Common Stock to fluctuate substantially. Impact of Payor Discounts and Capitation Arrangements. The evolving managed care environment has created substantial cost containment pressures for the health care industry. The Company's business could be adversely affected by reductions in reimbursement amounts or rates, changes in services covered and similar measures which may be implemented by government sponsored health care programs or by other third party payors. The Company's contracts with payors and managed care organizations traditionally have been fee-for-service arrangements. At June 15, 1996, the Company had six shared-risk capitated arrangements with payors in Southern California, Arizona and Texas. These arrangements and any future arrangements may adversely affect the Company's financial condition and results of operations if the Company is unable to limit the risks associated with such arrangements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Contractual Relationships" and "Business -- Government Regulation." 10 11 Professional Liability and Insurance. The Company's business entails an inherent risk of claims of physician professional liability. The Company periodically becomes involved as a defendant in medical malpractice lawsuits, some of which are currently ongoing, and is subject to the attendant risk of substantial damage awards. See "Business -- Proceedings." The Company's contracts with hospitals generally require the Company to indemnify certain parties for losses resulting from the negligence of physicians who are managed by or affiliated with the Company. While the Company believes it has adequate professional liability insurance coverage, there can be no assurance that a pending or future claim or claims will not be successful or if successful will not exceed the limits of available insurance coverage or that such coverage will continue to be available at acceptable costs and on favorable terms. See "Business -- Professional Liability and Insurance." Collection and Reimbursement Risk. The Company assumes the financial risk related to collection, including the potential uncollectibility of accounts and delays attendant to reimbursement by third party payors, such as government programs, private insurance plans and managed care plans. Failure to manage adequately the collection risks and working capital demands could have a material adverse effect on the Company's financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Contractual Relationships" and "Business -- Government Regulation." Contract Administrative Fees; Cancellation or Non-renewal of Contracts. The Company's net patient service revenue is derived primarily from fee-for-service billings for patient care provided by its physicians and from administrative fees. Certain contracting hospitals that do not generate sufficient patient volume pay the Company administrative fees to assure the Company a minimum revenue level. If, at the time of renewal of the contracts with the hospitals currently paying administrative fees to the Company, such hospitals continue to generate insufficient patient volume but elect not to pay administrative fees to assure the Company a minimum revenue level, then the Company could either choose not to renew the contract or renew the contract with lower gross profit margins at such hospitals. Administrative fees include guaranteed payments to the Company, as well as fees paid to the Company by certain hospitals for administrative services performed by the Company's medical director at such hospital. Administrative fees accounted for 13%, 12% and 10% of the Company's net patient service revenue during 1994, 1995 and the three months ended March 31, 1996, respectively. The Company's contracts provide for approximately three-year terms and are generally terminable by the hospital upon 90 days' written notice. The Company has six contracts representing ten NICUs, five PICUs and one pediatrics department that have come up for renewal or are scheduled to be renewed in 1996. The administrative fees for these contracts aggregate approximately $3.2 million on an annual basis under their current terms. The Company has not been notified that these contracts will not be renewed and is currently providing services and receiving payment pursuant to the terms of such contracts. While the Company has in most cases been able to negotiate renewal of its contracts in the past, no assurance can be given that the Company's contracts with hospitals will not be canceled or will be renewed in the future or that the administrative fees will be continued. To the extent that the Company's contracts with hospitals are canceled or are not renewed or replaced with other contracts with at least as favorable terms, the Company's financial condition and results of operations could be adversely affected. See "Business -- Contractual Relationships." Competition. The health care industry is highly competitive and subject to continual changes in the method in which services are provided and the manner in which health care providers are selected and compensated. The Company believes that private and public reforms in the health care industry emphasizing cost containment and accountability will result in an increasing shift of NICU and related pediatric care from highly fragmented, individual or small practice neonatology providers to physician management companies. Companies in other health care industry segments, such as managers of other hospital-based specialties or currently expanding large physician group practices, some of which have financial and other resources greater than those of the Company, may become competitors in providing management of neonatal and pediatric intensive care services to hospitals. Increased competition could have a material adverse effect on the Company's financial condition and results of operations. See "Business -- Competition." Dependence on Qualified Neonatologists. The Company's business strategy is dependent upon its ability to recruit and retain qualified neonatologists. The Company has been able to compete with many types of health care providers, as well as teaching, research and governmental institutions, for the services of such 11 12 physicians. No assurance can be given that the Company will be able to continue to recruit and retain a sufficient number of qualified neonatologists who provide services in markets served by the Company on terms similar to its current arrangements. The inability to successfully recruit and retain physicians could adversely affect the Company's ability to service existing or new units at hospitals, or expand its business. Dependence on Key Personnel. The Company's success depends to a significant extent on the continued contributions of its key management, business development, sales and marketing personnel, including one of the Company's principal shareholders, President, Chief Executive Officer and co-founder, Dr. Roger Medel, for management of the Company and successful implementation of its growth strategy. The loss of Dr. Medel or other key personnel could have a material adverse effect on the Company's financial condition, results of operations and plans for future development. Dependence on PA Contractors. The Company has a management agreement with a PA Contractor in each state in which it operates except Florida. The agreements provide that the terms of the arrangements are permanent, subject only to termination by PMG and that the PA Contractor shall not terminate the agreement without PMG's prior written consent. Any disruption of the Company's relationships with the PA Contractors' relationships with contracting hospitals (including the determination that the PA Contractors' arrangements with PMG constitute the corporate practice of medicine) or any other event adverse to the PA Contractors could have a material adverse effect on the Company's financial condition and results of operations. See "Business -- Government Regulation" and "Business -- Contractual Relationships." Shares Eligible for Future Sale; Possible Adverse Effect on Market Price. Upon completion of this offering, the Company will have 14,576,170 shares of Common Stock outstanding, based upon the number of shares outstanding as of June 15, 1996. There are 7,269,270 shares of Common Stock (the "Restricted Shares"), which are deemed "restricted securities" under Rule 144 under the Securities Act and are eligible for future sale in the public market at prescribed times pursuant to Rule 144 or the exercise of registration rights. In addition, as of June 15, 1996, the Company had (i) 2,430,954 shares of Common Stock reserved for issuance under the Stock Option Plan, of which options for an aggregate of 1,941,029 shares of Common Stock were issued and outstanding as of June 15, 1996 and options for an aggregate of 444,127 shares of Common Stock were exercisable as of June 15, 1996, and (ii) 1,000,000 shares of Common Stock reserved for issuance under the Stock Purchase Plans, none of which had been issued as of June 15, 1996. See "Management -- Stock Option Plans." Shares issued under the Stock Option Plan and Stock Purchase Plans will be freely tradeable unless acquired by affiliates of the Company, as defined in Rule 144 of the Securities Act. Sales of such shares in the public market, or the perception that such sales may occur, could adversely affect the market price of the Common Stock or impair the Company's ability to raise additional capital in the future. See "Shares Eligible for Future Sale" and "Underwriting." Anti-Takeover Provisions; Possible Issuance of Preferred Stock. The Company's Articles of Incorporation and Bylaws contain provisions that could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire control of, the Company. These provisions establish certain advance notice procedures for nomination of candidates for election as directors and for shareholder proposals to be considered at shareholders' meetings and provide that only the Board of Directors may call special meetings of the shareholders. In addition, the Company's Articles of Incorporation authorize the Board of Directors to issue preferred stock ("Preferred Stock") without shareholder approval and upon such terms as the Board of Directors may determine. While no shares of Preferred Stock will be outstanding upon the consummation of this offering and the Company has no present plans to issue any shares of Preferred Stock, the rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of any holders of Preferred Stock that may be issued in the future. See "Description of Capital Stock." 12 13 THE COMPANY Pediatrix is the nation's leading provider of physician management services to hospital-based NICUs. The Company also provides physician management services to hospital-based PICUs and pediatrics departments in hospitals. The Company staffs and manages NICUs and PICUs in hospitals, providing the physicians, professional management and administrative support, including physician billing and reimbursement expertise and services. As of June 15, 1996, the Company provided services to 58 NICUs, eight PICUs and three pediatrics departments in 14 states and Puerto Rico and employed or contracted with 162 physicians. The Company's predecessor was incorporated in 1980 by its co-founders, Drs. Medel and Melnick, as a professional association under the name Melnick & Medel, M.D.'s, P.A. In 1992, the Company changed its name to Pediatrix Medical Group, Inc. The Company's principal executive offices are located at 1455 Northpark Drive, Ft. Lauderdale, Florida 33326 and its telephone number is (954) 384-0175. RECENT DEVELOPMENTS The IPO provided net proceeds to the Company of approximately $39.7 million. Since the IPO in September 1995, the Company has enhanced its management infrastructure, thereby strengthening its ability to identify acquisition candidates, consummate transactions and integrate acquired physician group practices into the Company's operations. During the first half of 1996, the Company completed six acquisitions of neonatology physician group practices for an aggregate cash purchase price of approximately $29.5 million at the time of acquisition. The Company has developed regional networks in Denver, Phoenix and Southern California and intends to develop additional regional networks and state-wide networks. The Company believes these networks, augmented by ongoing marketing and acquisition efforts, will strengthen its position with third party payors, such as Medicaid and managed care organizations. RECENT ACQUISITIONS The Recent Acquisitions have (i) added 24 NICUs, four PICUs and one pediatrics department, (ii) added 50 physicians, (iii) established the Company in three new markets, Denver, Phoenix and El Paso, and (iv) expanded the Company's presence in Southern California. In the aggregate, the number of NICU patient days attributable to the Recent Acquisitions during 1995 was approximately 90,000. See "Unaudited Pro Forma Condensed Consolidated Information." Arizona. On January 16, 1996, the Company expanded its operations into metropolitan Phoenix by acquiring all of the outstanding capital stock of Neonatal Specialists, Ltd., an Arizona professional corporation ("NSL"), and certain assets of certain entities affiliated with NSL, for an aggregate cash purchase price of $6.0 million. NSL provided physician management services to five NICUs in the Phoenix area and employed six physicians. NSL's net patient service revenue for 1995 was approximately $4.1 million, and NICU patient days during 1995 were approximately 21,000. Colorado. The Company expanded its operations into metropolitan Denver by making three acquisitions during the first half of 1996. Through these acquisitions, the Company has established a regional network, which the Company believes will strengthen its position with third party payors, such as Medicaid and managed care organizations, in the Denver area. On January 29, 1996, the Company acquired certain assets of Pediatric and Newborn Consultants, P.C., a Colorado professional corporation ("PNC"), for an aggregate cash purchase price of $3.6 million. The shareholders of PNC are eligible to receive additional consideration of up to $1.3 million on or about April 4, 1997 if certain targets are achieved at the hospitals previously served by PNC during the period from February 1, 1996 to January 31, 1997. PNC provided physician management services to three NICUs, three PICUs and one pediatrics department in the Denver area and employed seven physicians. PNC's net patient 13 14 service revenue for 1995 was approximately $2.3 million, and NICU patient days during 1995 were approximately 5,000. On January 29, 1996, the Company acquired Colorado Neonatal Associates, P.C., a Colorado professional corporation ("CNA") through a merger, for an aggregate cash purchase price of $1.4 million. The prior shareholders of CNA are eligible to receive additional consideration of up to $667,000 on or about April 4, 1997 if certain targets are achieved at the hospitals previously served by CNA during the period from February 1, 1996 to January 31, 1997. CNA provided physician management services to two NICUs in the Denver area and employed two physicians. CNA's net patient service revenue for 1995 was approximately $1.3 million and NICU patient days during 1995 were approximately 5,000. On May 1, 1996, the Company acquired Rocky Mountain Neonatology, P.C., a Colorado professional corporation ("RMN") through a merger, for an aggregate cash purchase price of $7.2 million. RMN provided physician management services to two NICUs, including Denver's largest NICU, and one PICU and employed eight physicians. RMN's net patient service revenue for 1995 was approximately $3.1 million and NICU patient days during 1995 were approximately 15,000. Texas. On May 30, 1996, the Company expanded its presence into El Paso by acquiring certain assets of West Texas Neonatal Associates, a Texas general partnership ("WTNA"), for an aggregate cash purchase price of $5.3 million. WTNA provided physician management services to three NICUs and employed four physicians. WTNA's net patient service revenue for 1995 was approximately $2.3 million, and NICU patient days during 1995 were approximately 12,000. California. On June 6, 1996, the Company expanded its presence in Southern California by acquiring certain assets of Infant Care Specialists Medical Group, Inc. ("ICS"), relating to the operations of nine NICUs and the employment of 23 physicians. The aggregate cash payments were $6.0 million. Net patient service revenue of ICS for 1995 was approximately $10.4 million, and NICU patient days during 1995 were approximately 32,000. The acquisition of ICS complements the Company's acquisition in July 1995 of NAPIC, a neonatology physician group practice with operations in Southern California. ADDITIONS TO MANAGEMENT INFRASTRUCTURE To support its growth and facilitate the integration of acquisitions, the Company has enhanced its management infrastructure by adding the following new positions. See "Management." Chief Medical Officer. The Chief Medical Officer ("CMO") is responsible for overseeing all clinical operations of the Company. M. Douglas Cunningham, M.D., who has more than 25 years experience as a practicing neonatologist and professor of pediatrics and neonatotology, became CMO in June 1996. Dr. Cunningham's duties include developing and monitoring research and educational and peer review activities. In addition, Dr. Cunningham participates in sales discussions and acts as a liaison with hospital administrators in connection with the acquisition and hospital contracting process. Vice President, Business Development. The Vice President, Business Development is responsible for directing the Company's activities relating to the growth of its business. Kristen Bratberg joined the Company as Vice President, Business Development in November 1995. Mr. Bratberg was previously employed by Dean Witter Reynolds Inc. in the Corporate Finance Department specializing in the healthcare industry. Mr. Bratberg's duties include the implementation and execution of the Company's acquisition program, the development of regional and state-wide networks and marketing to hospital administrators for new hospital contracts. Vice President, Practice Integration. The Vice President, Practice Integration is responsible for the integration of physicians joining the Company. Brian D. Udell, M.D., who has been employed by the Company since 1983, was appointed to this position in November 1995. Dr. Udell's duties include familiarizing new physicians with scheduling and coverage at their units, collecting and analyzing clinical outcomes statistics, monitoring practice patterns and profiles and documenting patient records. 14 15 Chief Information Officer. The Chief Information Officer ("CIO") is responsible for determining and defining the Company's immediate and strategic information needs in coordination with other members of the Company's management and staff and developing the infrastructure, systems and processes to meet such needs in a cost-effective manner. The Company appointed Joseph M. Calabro as CIO in January 1996. Mr. Calabro's duties include coordinating with the Chief Operating Officer and Chief Financial Officer to upgrade and develop new management information systems. Director of Research and Medical Education. The Director of Research and Medical Education will be responsible for developing and directing a program of clinically-relevant research, establishing and monitoring programs for exchange of clinical information among physicians, including review of significant cases and development of accredited internal continuing medical education programs. The Company expects to fill this position in the third quarter of 1996. USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the 1,500,000 shares of Common Stock offered by the Company at the offering price set forth on the cover page of this Prospectus, after deducting underwriting discounts and commissions and estimated expenses of the offering payable by the Company, are approximately $69.2 million. The net proceeds to the Company from this offering will be used for possible future acquisitions, working capital requirements for new hospital contracts and general corporate purposes. The Company's growth strategy includes the acquisition of neonatal physician group practices that provide physician management services to NICUs. While the Company is actively pursuing acquisitions of neonatal physician group practices, and may at any time be in various stages of negotiating acquisitions, there can be no assurance that future acquisition candidates will be identified or that any future acquisition will be consummated. See "Risk Factors -- Risks Relating to Acquisition Strategy." Pending use of the net proceeds of this offering, the Company will invest such funds in short-term and medium-term, investment grade, interest-bearing obligations. The Company will not receive any of the proceeds from the sale of the Shares offered by the Selling Shareholders. See "Principal and Selling Shareholders." 15 16 PRICE RANGE OF COMMON STOCK AND DIVIDENDS The Common Stock commenced trading on the Nasdaq National Market under the symbol "PEDX" on September 20, 1995. The following table sets forth, for the periods indicated, the high and low sales prices for the Common Stock as reported on the Nasdaq National Market. On July 2, 1996, the last reported sale price for the Company's Common Stock on the Nasdaq National Market was $48.25 per share. As of July 2, 1996, there were 98 holders of record of Common Stock. This number does not include an indeterminate number of shareholders whose shares are held by brokers in "street name." The Company has not declared or paid any dividends since 1992, and does not currently intend to declare or pay in the future, any dividends on its Common Stock. The Company intends to retain all earnings for the operation and expansion of its business. The payment of any future dividends will be at the discretion of the Board of Directors and will depend upon, among other things, future earnings, results of operations, capital requirements, the general financial condition of the Company, general business conditions and contractual restrictions on payment of dividends, such as the Company's $30 million unsecured line of credit, as well as such other factors as the Board of Directors may deem relevant. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." CAPITALIZATION The following table sets forth the consolidated capitalization of the Company as of March 31, 1996, (i) on an actual basis, (ii) on a pro forma basis to give effect to the 1996 Second Quarter Acquisitions referenced in "Unaudited Pro Forma Condensed Consolidated Information" and (iii) as adjusted to give effect to the sale of the Shares being offered hereby and the application of the estimated net proceeds therefrom as described under "Use of Proceeds." This table should be read in conjunction with the Consolidated Financial Statements and related notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the other financial information appearing elsewhere in this Prospectus.
1995 HIGH LOW ---------------- ---- --- Third Quarter...................................................................... 22 1/4 18 7/8 Fourth Quarter..................................................................... 28 1/2 18 1/2 1996 ---------------- First Quarter...................................................................... 39 1/4 24 Second Quarter..................................................................... 64 3/4 35 1/4 Third Quarter (through July 2)..................................................... 49 1/2 48 1/4 - --------------- (1) Includes current portion of $64,000. (2) Excludes 2,445,915 shares of Common Stock reserved for issuance under the Stock Option Plan, of which options for an aggregate of 1,906,740 shares of Common Stock were issued and outstanding as of March 31, 1996 and options for an aggregate of 431,077 shares of Common Stock were exercisable as of March 31, 1996, and (ii) 1,000,000 shares of Common Stock reserved for issuance under the Stock Purchase Plans, none of which had been issued as of March 31, 1996. See "Management -- Stock Option Plans." Between March 31, 1996 and June 15, 1996, options for an aggregate of 50,000 shares of Common Stock were issued and as of June 15, 1996, options for an aggregate of 444,127 shares of Common Stock were exercisable. 16
MARCH 31, 1996 ------------------------------------- ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (IN THOUSANDS) Note payable(1):.................................................... $ 799 $ 799 $ 799 ------- --------- ----------- Stockholders' equity: Common Stock; $.01 par value; 50,000,000 shares authorized; 13,063,809 shares issued and outstanding; 13,063,809 shares issued and outstanding, pro forma, and 14,563,809 shares issued and outstanding, as adjusted(2)................................. 131 131 131 Additional paid-in capital.......................................... 55,809 55,809 125,051 Retained earnings................................................... 9,657 9,657 9,657 Unrealized loss on investments...................................... (35) (35) (35) ------- --------- ----------- Total stockholders' equity................................. 65,562 65,562 134,804 ------- --------- ----------- Total capitalization....................................... $66,361 $66,361 $ 135,603 ======== ========== =========== 17 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below as of and for each of the five years in the period ended December 31, 1995, have been derived from the Consolidated Financial Statements, which statements have been audited by Coopers & Lybrand L.L.P., independent accountants. The selected consolidated financial data of the Company as of and for the three month periods ended March 31, 1995 and 1996 have been derived from the unaudited consolidated financial statements of the Company which, in the Company's opinion, include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the information set forth therein. The results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results for the full year. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the Consolidated Financial Statements and the notes thereto included elsewhere in this Prospectus.
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ------------------------------------------------ -------------------- 1991 1992 1993 1994 1995 1995 1996 ------- -------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED INCOME STATEMENT DATA: Net patient service revenue........ $10,497 $15,438 $23,570 $32,779 $43,860 $8,886 $16,127 Operating expenses: Salaries and benefits............ 6,291 9,585 14,852 20,723 29,545 6,270 10,796 Supplies and other operating expenses....................... 1,044.. 1,743 2,230 2,774 3,451 607 1,213 Depreciation and amortization.... 39 60 95 244 363 74 233 Nonrecurring expense(1).......... -- 15,400 -- -- -- -- -- ------- -------- ------- ------- ------- ------- ------- Total operating expenses................ 7,374 26,788 17,177 23,741 33,359 6,951 12,242 ------- -------- ------- ------- ------- ------- ------- Income (loss) from operations...... 3,123 (11,350) 6,393 9,038 10,501 1,935 3,885 Investment income.................. 81 160 45 208 804 107 499 Interest expense................... -- (49) (105) (90) (117) (28) (35) Other income (expense), net........ -- 45 (17) -- -- -- -- ------- -------- ------- ------- ------- ------- ------- Income (loss) before income taxes............................ 3,204 (11,194) 6,316 9,156 11,188 2,014 4,349 Income tax provision (benefit)..... 1,358 (3,536) 2,166 3,749 4,475 805 1,737 ------- -------- ------- ------- ------- ------- ------- Net income (loss)(2)............... $ 1,846 $ (7,658) $ 4,150 $ 5,407 $ 6,713 $ 1,209 $ 2,612 ======== ========= ======== ======== ======== ======== ======== Net income per common share(3)..... $ .47 $ .55 $ .10 $ .19 ======== ======== ======== ======== Weighted average shares outstanding(3)................... 11,430 12,216 11,614 13,726 ======== ======== ======== ======== - --------------- (1) Reflects nonrecurring payments aggregating $15.4 million to certain of the Company's physicians as bonuses for prior services and for covenants not to compete occuring at the time of the investment in the Company by Summit in 1992. 17
DECEMBER 31, MARCH 31, ----------------------------------------------- -------------------- 1991 1992 1993 1994 1995 1995 1996 ------ ------- ------- ------- ------- ------- ------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents........... $1,576 $2,329 $2,469 $7,384 $18,499 $9,466 $7,084 Working capital..................... 3,426 6,651 8,052 13,772 53,448 14,768 39,717 Total assets........................ 6,243 11,721 14,239 20,295 69,881 21,706 77,371 Total liabilities................... 2,500 3,388 3,762 4,203 7,071 4,418 11,809 Long-term debt, including current maturities........................ -- 1,604 965 879 815 863 799 Convertible Preferred Stock(4)...... -- 13,212 14,401 15,697 -- 16,050 -- Stockholders' equity (deficit)(5)... 3,743 (4,879) (3,924) 395 62,810 1,238 65,562 18 (2) The net income (loss) amounts do not include accrued and unpaid dividends with respect to the Convertible Preferred Stock. See footnote 4 below. (3) Such amounts represent net income per common share and common equivalent share, pro forma, to give effect to the conversion of the Convertible Preferred Stock, which was not determined to be a Common Stock equivalent, into Common Stock in connection with the IPO for 1994 and 1995. The net income per common share is computed based upon the weighted average number of shares of Common Stock and Common Stock equivalents, including the number of shares of Common Stock issuable upon conversion of the Convertible Preferred Stock, outstanding during the period. Common Stock issued by the Company during the 12 months immediately preceding the initial filing of the registration statement relating to the IPO, plus Common Stock equivalents relating to the grant of Common Stock options during the same period, have been included in the calculation of weighted average number of Common Stock equivalents outstanding for 1994 and 1995, using the treasury stock method and the IPO price of $20 per share. (4) Immediately prior to the consummation of the IPO in September 1995, the Convertible Preferred Stock was converted into 4,571,063 shares of Common Stock and unpaid dividends of approximately $3.7 million were forgiven pursuant to the terms of the Series A Preferred Stock Purchase Agreement, dated as of October 26, 1992. Upon conversion, such amounts were credited to the common stock and additional paid-in capital accounts. (5) The deficit in total stockholders' equity is due to the net loss in 1992 as well as the accrual of unpaid cumulative dividends on the Convertible Preferred Stock. See Note 8 to the Consolidated Financial Statements. 18 19 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INFORMATION The following Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1996 is adjusted to give effect to (i) the 1996 Second Quarter Acquisitions and (ii) the consummation of this offering and the application of the estimated net proceeds to the Company therefrom, as if these transactions had occurred on March 31, 1996. The following Unaudited Pro Forma Condensed Consolidated Statements of Income for the year ended December 31, 1995 give effect to Recent Acquisitions and the acquisition of NAPIC, and for the three month period ended March 31, 1996 give effect to the Recent Acquisitions, as if such transactions had occurred on January 1, 1995. The Unaudited Pro Forma Condensed Consolidated Financial Statements should be read in conjunction with the December 31, 1995 and March 31, 1996 historical Consolidated Financial Statements of the Company and the related notes thereto. The Unaudited Pro Forma Condensed Consolidated Statements of Income have been prepared by the Company and are not necessarily indicative of the operating results that would have been achieved had the Recent Acquisitions and the acquisition of NAPIC actually occurred on January 1, 1995, nor do they purport to indicate the results of future operations. The Unaudited Pro Forma Condensed Consolidated Statements of Income combine the Company's Consolidated Statements of Operations with the historical operations of the Recent Acquisitions and the acquisition of NAPIC prior to the dates the Company made such acquisitions. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET MARCH 31, 1996 (IN THOUSANDS) See accompanying notes to pro forma condensed consolidated financial statements. 19
1996 PRO FORMA SECOND AFTER 1996 QUARTER SECOND ACQUISITION QUARTER OFFERING PRO FORMA COMPANY ADJUSTMENTS(A) ACQUISITIONS ADJUSTMENT AS ADJUSTED ------- -------------- ------------ ----------- ----------- ASSETS Current assets: Cash and cash equivalents................ $ 7,084 $ 7,084 $69,242(b) $ 76,326 Investments in marketable securities..... 26,552 $(18,450)(c) 8,102 8,102 Accounts receivable, net................. 15,484 585(c) 16,069 16,069 Other current assets..................... 1,671 1,671 1,671 ------- -------------- ------------ ----------- ----------- Total current assets............... 50,791 (17,865) 32,926 69,242 102,168 Property and equipment, net................ 5,242 5,242 5,242 Other assets............................... 21,338 18,450(c) 39,788 39,788 ------- -------------- ------------ ----------- ----------- Total assets....................... $77,371 $ 585 $ 77,956 $69,242 $ 147,198 ======== ============== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses.... $ 7,539 $ 585(c) $ 8,124 $ 8,124 Current portion of note payable.......... 64 64 64 Deferred income taxes.................... 3,471 3,471 3,471 ------- -------------- ------------ ----------- ----------- Total current liabilities.......... 11,074 585 11,659 11,659 Note payable............................... 735 735 735 ------- -------------- ------------ ----------- ----------- Total liabilities.................. 11,809 585 12,394 12,394 ------- -------------- ------------ ----------- ----------- Stockholders' equity: Common stock............................. 131 131 131 Additional paid-in capital............... 55,809 55,809 $69,242(b) 125,051 Retained earnings........................ 9,657 9,657 9,657 Unrealized loss on investments........... (35) (35) (35) ------- -------------- ------------ ----------- ----------- Total stockholders' equity......... 65,562 65,562 69,242 134,804 ------- -------------- ------------ ----------- ----------- Total liabilities and stockholders' equity........................... $77,371 $ 585 $ 77,956 $69,242 $ 147,198 ======== ============== =========== =========== =========== 20 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1995 ------------------------------------------------------------ RECENT PRO FORMA ACQUISITIONS ACQUISITION AFTER COMPANY AND NAPIC(A) ADJUSTMENTS ACQUISITIONS ------- --------------- ----------- ------------ Net patient service revenue............................... $43,860 $25,563 $ 69,423 ------- ------- ----------- ------------ Operating expenses: Salaries and benefits................................... 29,545 19,105 $(1,446)(d) 47,204 Supplies and other operating expenses................... 3,451 5,651 (534)(e) 8,568 Depreciation and amortization........................... 363 101 1,299(f) 1,763 ------- ------- ----------- ------------ Total operating expenses.......................... 33,359 24,857 (681) 57,535 ------- ------- ----------- ------------ Income from operations.................................... 10,501 706 681 11,888 Investment income......................................... 804 59 (326)(g) 537 Interest expense.......................................... (117) (7) (124) Other income, net......................................... -- 58 58 ------- ------- ----------- ------------ Income before income taxes........................ 11,188 816 355 12,359 Income tax provision (benefit)............................ 4,475 (476) 843(h) 5,262 420(i) ------- ------- ----------- ------------ Net income........................................ $ 6,713 $ 1,292 $ (908) $ 7,097 ======= ============= =========== =========== Earnings per share(j)..................................... $ 0.55 $ 0.58 Weighted average shares used in computing net income per common and common equivalent share...................... 12,216 12,216 See accompanying notes to pro forma condensed consolidated financial statements. 20
THREE MONTHS ENDED MARCH 31, 1996 ------------------------------------------------------------ PRO FORMA RECENT ACQUISITION AFTER COMPANY ACQUISITIONS(A) ADJUSTMENTS ACQUISITIONS ------- --------------- ----------- ------------ Net patient service revenue............................... $16,127 $ 5,215 $ 21,342 ------- ------- ----------- ------------ Operating expenses: Salaries and benefits................................... 10,796 3,609 $ (189)(d) 14,216 Supplies and other operating expenses................... 1,213 933 (129)(e) 2,017 Depreciation and amortization........................... 233 23 204(f) 460 ------- ------- ----------- ------------ Total operating expenses.......................... 12,242 4,565 (114) 16,693 ------- ------- ----------- ------------ Income from operations.................................... 3,885 650 114 4,649 Investment income......................................... 499 -- (407)(g) 92 Interest expense.......................................... (35) -- (35) Other income, net......................................... -- -- -- ------- ------- ----------- ------------ Income before income taxes........................ 4,349 650 (293) 4,706 Income tax provision...................................... 1,737 101 148(h) 1,904 (82)(i) ------- ------- ----------- ------------ Net income........................................ $ 2,612 $ 549 $ (359) $ 2,802 ======== ============= =========== =========== Earnings per share Primary............................................... $ 0.19 $ 0.20 Fully diluted......................................... $ 0.19 $ 0.20 Weighted average shares used in computing net income per common and common equivalent share Primary............................................... 13,697 13,697 Fully diluted......................................... 13,726 13,726 21 NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) A description of the adjustments included in the pro forma consolidated financial statements are as follows (in thousands, unless otherwise noted): (a) The following acquisitions have been accounted for using the purchase method of accounting. - --------------- (1) Total liabilities recorded by the Company consist of expenses incurred in connection with the acquisition and liabilities recorded for accounts receivable due to the prior shareholders of the entities acquired. The Company's liabilities for NAPIC and NSL include the purchase and payment of premiums for professional liability tail coverage. Liability tail coverage has been purchased and the premiums are being paid by the prior shareholders in all of the other Recent Acquisitions. (2) The prior shareholders of CNA and the shareholders of PNC are also eligible to receive additional cash consideration in an amount not to exceed $667,000 and $1.3 million, respectively, in April 1997 if certain targets are achieved at the hospitals previously served by such acquired entity during the period from February 1, 1996 to January 31, 1997. PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS (b) Reflects the estimated net proceeds of the offering of $69.2 million (assuming sale of 1.5 million shares at $48.25 per share (closing price at July 2, 1996), estimated offering expenses of $600,000 and 3.5% underwriters' discounts and commissions). (c) Reflects the purchase by the Company of the 1996 Second Quarter Acquisitions for consideration of $18.5 million in cash. Net assets acquired are as follows:
NAME OF PURCHASE TOTAL ASSETS TOTAL LIABILITIES GOODWILL ACQUISITION DATE OF ACQUISITION PRICE RECORDED RECORDED(1) RECORDED - ------------------ --------------------- -------- ------------ ----------------- -------- (IN MILLIONS) NAPIC............. July 27, 1995 $3.0 $4.6 $ 1.4 $3.8 NSL............... January 16, 1996 6.0 6.5 0.5 5.7 CNA(2)............ January 29, 1996 1.4 2.0 0.6 1.6 PNC(2)............ January 29, 1996 3.6 3.8 0.3 3.8 RMN............... May 1, 1996 7.2 7.7 0.6 7.2 WTNA.............. May 30, 1996 5.3 5.3 -- 5.3 ICS............... June 6, 1996 6.0 6.0 -- 6.0 PRO FORMA CONSOLIDATED STATEMENTS OF INCOME ADJUSTMENTS (d) Reflects the elimination of certain amounts of compensation, bonuses and other benefits paid principally to shareholders and other physicians that will not be paid in the future as a result of the following acquisitions and the employment agreements entered into as a result of these acquisitions. For the acquisition of WTNA, the adjustments represent amounts to be paid by the Company under employment agreements. 21
Accounts receivable........................................ $ 585 Other noncurrent assets.................................... 18,450 Current liabilities........................................ (585) ------- Total cash consideration......................... $18,450 ======= 22 Such amounts were previously not recorded by WTNA in the historical financial statements as compensation expense since WTNA was a Partnership and such amounts were treated as Partnership draws. (e) Reflects the reduction in the cost of malpractice insurance incurred by the Recent Acquisitions and NAPIC prior to the respective dates of their acquisition as a result of the Company's existing insurance arrangements.
DECEMBER 31, 1995 MARCH 31, 1996 ----------------- -------------- NAPIC................................... $ -- $ -- NSL..................................... 966 40 CNA..................................... 91 (27) PNC..................................... 599 50 RMN..................................... 573 322 WTNA.................................... (783) (196) ICS..................................... -- -- ------- ------- Total......................... $ 1,446 $ 189 ================== =============== (f) Reflects the amortization of goodwill, based on the allocation of the purchase prices paid in the Recent Acquisitions and the acquisition of NAPIC, which is being amortized on a straight-line basis over 25 years as follows:
DECEMBER 31, 1995 MARCH 31, 1996 ----------------- -------------- NAPIC................................... $ 156 $ -- NSL..................................... 45 2 CNA..................................... 10 1 PNC..................................... 17 1 RMN..................................... 36 10 WTNA.................................... 6 -- ICS..................................... 264 115 ------- ------- Total......................... $ 534 $ 129 ================== =============== (g) Reflects the elimination of that portion of investment income from interest on the investment of the net proceeds of the IPO assumed to be used by the Company for acquisitions and thus are no longer available by the Company for investment purposes assuming an average interest rate of 4.0% for 1995 and 5.0% for the first quarter ended March 31, 1996. (h) Reflects the incremental income taxes on the operations of the following entities that were either a Subchapter S corporation or a general partnership prior to the respective dates of their acquisition and assuming an effective income tax rate of 40% as follows:
DECEMBER 31, 1995 MARCH 31, 1996 ----------------- -------------- NAPIC................................... $ 114 $ -- NSL..................................... 229 14 CNA..................................... 65 1 PNC..................................... 153 4 RMN..................................... 288 72 WTNA.................................... 210 53 ICS..................................... 240 60 ------- ------- Total......................... $ 1,299 $ 204 ================== =============== (i) Reflects the income tax benefit of the pro forma adjustments at an assumed income tax rate of 40%. (j) Such amount represents pro forma net income per common share and common equivalent share as a result of the conversion of the Convertible Preferred Stock in connection with the IPO. See Note 2 to the Consolidated Financial Statements. 22
DECEMBER 31, 1995 MARCH 31, 1996 ----------------- -------------- NSL..................................... $ 162 $ 7 PNC..................................... 32 3 WTNA.................................... 649 138 ------ ------ Total......................... $ 843 $148 ================== =============== 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Pediatrix is the nation's leading provider of physician management services to hospital-based NICUs. The Company also provides physician management services to hospital-based PICUs and pediatrics departments in hospitals. Pediatrix was incorporated in 1980 by its co-founders, Drs. Roger Medel and Gregory Melnick. Since obtaining its first hospital contract in 1980, the Company has grown by increasing revenues at existing units ("same unit growth") and by adding new units. In July 1995, the Company completed its first acquisition of a neonatal physician group practice. Since its IPO in September 1995, the Company has enhanced its management infrastructure, thereby strengthening its ability to identify acquisition candidates, consummate transactions and integrate acquired physician group practices into the Company's operations. During the first half of 1996, the Company completed the Recent Acquisitions, which added 24 NICUs, four PICUs, one pediatrics department and 50 physicians. In the aggregate, the number of NICU patient days attributable to the Recent Aquisitions during 1995 was approximately 90,000. The Company has developed regional networks in Denver, Phoenix and Southern California and intends to develop additional regional and state-wide networks. The Company believes these networks, augmented by ongoing marketing and acquisition efforts, will strengthen its position with third party payors, such as Medicaid and managed care organizations. See "Business -- Strategy." The following chart identifies the number and geographic distribution of the hospitals as of June 15, 1996 where the Company provides services. See "Business -- Physician Management Services." - --------------- (a) The Company provides physician management services to pediatrics departments at these locations. 23
TYPE OF LOCATION OF HOSPITAL EFFECTIVE DATE FACILITY - --------------------- ----------------- ---------- FT. LAUDERDALE, FL July, 1980 NICU BOYNTON BEACH, FL January, 1983 NICU CORAL SPRINGS, FL February, 1987 NICU/PICU CHARLESTON, WV July, 1990 NICU FT. LAUDERDALE, FL July, 1991 PICU ALEXANDRIA, VA November, 1991 NICU PONCE, PR March, 1992 NICU LEESBURG, VA July, 1992 NICU FREDERICKSBURG, VA July, 1992 NICU VIRGINIA BEACH, VA September, 1992 NICU TRENTON, NJ October, 1992 NICU WICHITA, KS April, 1993 NICU HATO REY, PR August, 1993 NICU/PICU STRATFORD, NJ August, 1993 NICU TURNERSVILLE, NJ August, 1993 NICU BOCA RATON, FL September, 1993 NICU ELMIRA, NY October, 1993 NICU TRENTON, NJ December, 1993 PEDS(a) UTICA, NY March, 1994 NICU WICHITA, KS June, 1994 PICU BARRINGTON, IL July, 1994 NICU WATERTOWN, NY July, 1994 NICU HARRISBURG, PA September, 1994 NICU GRAND RAPIDS, MI October, 1994 NICU TRENTON, NJ January, 1995 NICU TRENTON, NJ January, 1995 PEDS(a) HOUSTON, TX June, 1995 NICU PONTIAC, MI July, 1995 NICU DAYTON, OH July, 1995 NICU KETTERING, OH July, 1995 NICU DAYTON, OH July, 1995 NICU HOBOKEN, NJ July, 1995 NICU TYPE OF LOCATION OF HOSPITAL EFFECTIVE DATE FACILITY - --------------------- ----------------- ---------- APPLE VALLEY, CA August, 1995 NICU FULLERTON, CA August, 1995 NICU NEWPORT BEACH, CA August, 1995 NICU OCEANSIDE, CA August, 1995 NICU SANTA ANA, CA August, 1995 NICU MESA, AZ January, 1996 NICU PHOENIX, AZ January, 1996 NICU PHOENIX, AZ January, 1996 NICU PHOENIX, AZ January, 1996 NICU GLENDALE, AZ January, 1996 NICU DENVER, CO January, 1996 NICU WESTMINSTER, CO January, 1996 NICU DENVER, CO January, 1996 NICU/PICU LITTLETON, CO January, 1996 NICU/PICU DENVER, CO January, 1996 PEDS(a) ENGLEWOOD, CO January, 1996 NICU/PICU SANTURCE, PR February, 1996 NICU DENVER, CO May, 1996 NICU/PICU AURORA, CO May, 1996 NICU EL PASO, TX May, 1996 NICU EL PASO, TX May, 1996 NICU EL PASO, TX May, 1996 NICU LAGUNA HILLS, CA June, 1996 NICU RIVERSIDE, CA June, 1996 NICU WEST COVINA, CA June, 1996 NICU WEST COVINA, CA June, 1996 NICU FOUNTAIN VALLEY, CA June, 1996 NICU ENCINO, CA June, 1996 NICU VENTURA, CA June, 1996 NICU SAN LUIS OBISPO, CA June, 1996 NICU SOUTH LAGUNA, CA June, 1996 NICU 24 The Company bills payors for services provided by physicians based upon rates for the specific services provided. The rates are substantially the same for all patients in a particular geographic area regardless of the party responsible for paying the bill. The Company determines its net patient service revenue based upon the difference between the gross fees for services and the ultimate collections from payors which differ from the 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 party payors and (iv) discounted and uncollectible accounts of private pay patients. The Company seeks to increase revenue at existing units in hospitals by providing support to areas of the hospital outside the NICU and PICU, particularly in the obstetrics, nursery and pediatrics departments, where immediate accessibility to specialized care is critical. The following table summarizes the fees for services by the point at which services originate, expressed as a percentage of total net patient service revenue, exclusive of administrative fees, for the periods indicated. - --------------- (1) Represents the net patient service revenue generated by physicians providing support to areas of hospitals outside the NICU and PICU and by physicians in pediatric subspecialty offices outside of hospitals. PAYOR MIX The Company's payor mix is comprised of government (principally Medicaid), managed care payors, other third party payors and private pay patients. The Company benefits when more patients are covered by Medicaid, despite Medicaid's lower reimbursement rates as compared with those of managed care payors, other third party payors and private payors, because typically these patients would not otherwise be able to pay for services due to lack of insurance coverage. In addition, the Company benefits from the fact that most of the medical services provided at the NICU or PICU are classified as emergency services, a category typically classified as a covered service by managed care payors. A significant increase in the managed care or capitated components of the Company's payor mix, however, could result in reduced reimbursement rates and, in the absence of increased patient volume, could have a material adverse effect on the Company's financial condition and results of operations. See "Risk Factors -- Reliance upon Government Programs; Possible Reduction in Reimbursement." The following is a summary of the Company's payor mix, expressed as a percentage of total net patient service revenue, exclusive of administrative fees, for the periods indicated.
YEARS ENDED THREE MONTHS DECEMBER 31, ENDED ----------------- MARCH 31, 1994 1995 1996 ----- ----- ------------ NICU....................................................... 73.4% 74.7% 78.2% PICU and PEDS.............................................. 7.7 6.0 3.8 Other(1)................................................... 18.9 19.3 18.0 ----- ----- ------ 100.0% 100.0% 100.0% ===== ===== ========== 24
YEARS ENDED THREE MONTHS DECEMBER 31, ENDED --------------- MARCH 31, 1994 1995 1996 ---- ---- ------------ Government................................................... 26 % 31 % 30% Managed care................................................. 23 24 31 Other third party payors..................................... 44 39 34 Private pay.................................................. 7 6 5 ---- ---- --- 100 % 100 % 100% ==== ==== ========== 25 RESULTS OF OPERATIONS The following discussion provides an analysis of the Company's results of operations and should be read in conjunction with the Unaudited Pro Forma Condensed Consolidated Information and the Consolidated Financial Statements and related notes thereto appearing elsewhere in this Prospectus. The operating results for the periods presented were not significantly affected by inflation. The following table sets forth, for the periods indicated, certain information relating to the Company's operations expressed as a percentage of the Company's net patient service revenue (patient billings net of contractual adjustments and uncollectibles, and including administrative fees): Three Months Ended March 31, 1996 as Compared to Three Months Ended March 31, 1995 The Company reported net patient service revenue of $16.1 million for the three months ended March 31, 1996, as compared with $8.9 million for the same period in 1995, a growth rate of 81.5%. Of this $7.2 million increase, $6.3 million, or 87.5%, was attributable to new units, including units at which the Company provides services as a result of acquisitions. Same unit patient service revenue, exclusive of administrative fees, increased $559,000, or 7.2%, for the three months ended March 31, 1996, compared to the same period in 1995. Same units are those units at which the Company provided services for the entire period for which the percentage is calculated and the entire prior comparable period. The same unit growth resulted from volume increases as there were no general price increases during the periods. See "-- Quarterly Results." Salaries and benefits increased $4.5 million, or 72.2%, to $10.8 million for the three months ended March 31, 1996, as compared with $6.3 million for the same period in 1995. Of this $4.5 million increase, $3.4 million, or 75.6%, was attributable to hiring new physicians, primarily to support new unit growth, and the remaining $1.1 million was primarily attributable to increased support staff and resources added in the areas of nursing, management and billing and reimbursement. Supplies and other operating expenses increased $606,000, or 100%, to $1.2 million for the three months ended March 31, 1996, as compared with $607,000 for the same period in 1995, primarily as a result of new units. Depreciation and amortization expense increased by $159,000, or 214.9%, to $233,000 for the three months ended March 31, 1996, as compared with $74,000 for the same period in 1995, primarily as a result of amortization of goodwill in connection with acquisitions. Income from operations increased approximately $2.0 million, or 100.8%, to $3.9 million for the three months ended March 31, 1996, as compared with $1.9 million for the same period in 1995, representing an increase in the operating margin from 21.8% to 24.1%. The increase in operating margin was primarily due to increased volume, principally from acquisitions. The Company earned net interest income of approximately $499,000 for the three months ended March 31, 1996, as compared with $107,000 for the same period in 1995. The increase in net interest income 25
THREE MONTHS YEARS ENDED DECEMBER ENDED MARCH 31, 31, ----------------------- -------------- 1993 1994 1995 1995 1996 ----- ----- ----- ----- ----- Net patient service revenue.................. 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses: Salaries and benefits...................... 63.0 63.2 67.4 70.6 66.9 Supplies and other operating expenses...... 9.5 8.5 7.9 6.8 7.6 Depreciation and amortization.............. .4 .7 .8 .8 1.4 ----- ----- ----- ----- ----- Total operating expenses........... 72.9 72.4 76.1 78.2 75.9 ----- ----- ----- ----- ----- Income from operations..................... 27.1 27.6 23.9 21.8 24.1 Other income (expense), net.................. (.3) .3 1.6 .9 2.9 ----- ----- ----- ----- ----- Income before income taxes................. 26.8 27.9 25.5 22.7 27.0 Income tax provision......................... 9.2 11.4 10.2 9.1 10.8 ----- ----- ----- ----- ----- Net income................................. 17.6% 16.5% 15.3% 13.6% 16.2% ===== ===== ===== ===== ===== 26 resulted primarily from additional funds available for investment due to proceeds from the initial public offering and cash flow from operations. The effective income tax rate was approximately 40% for both of the three month periods ended March 31, 1996 and 1995. Net income increased 116.0% to $2.6 million for the three months ended March 31, 1996, as compared with $1.2 million for the same period in 1995. Net income as a percentage of net patient service revenue increased to 16.2% for the three months ended March 31, 1996, compared to 13.6% for the same period in 1995. Year Ended December 31, 1995 as Compared to Year Ended December 31, 1994 Net patient service revenue increased by $11.1 million, or 33.8%, to $43.9 million for the year ended December 31, 1995 compared to $32.8 million for the year ended December 31, 1994. Of this $11.1 million increase, $10.9 million, or 98.2%, was attributable to new contracts, including $2.7 million, or 24.3%, attributable to contracts acquired in connection with the acquisition of NAPIC in the third quarter of 1995. Same unit patient service revenue, exclusive of administrative fees, increased $689,000, or 2.6%. Same units are those units at which the Company provided services for the entire period for which the percentage is calculated and the entire prior comparable period. The same unit growth resulted from volume increases as there were no general price increases during the periods. Salaries and benefits increased by $8.8 million, or 42.6%, to $29.5 million for the year ended December 31, 1995, compared to $20.7 million for the year ended December 31, 1994. Of this $8.8 million increase, $6.5 million, or 73.9%, was attributable to hiring of new physicians, primarily to support new contract growth, and the remaining $2.3 million was primarily attributable to increased support staff and resources added in the areas of nursing, executive management and billing and reimbursement. Supplies and other operating expenses increased $677,000, or 24.4%, to $3.5 million for the year ended December 31, 1995, compared to $2.8 million for the year ended December 31, 1994, primarily as a result of increased contract activity. Depreciation and amortization expense increased by $119,000 or 48.8%, to $363,000 for the year ended December 31, 1995 compared to $244,000 in 1994, primarily as a result of additions of computer equipment and amortization of goodwill in connection with the acquisition of NAPIC. Income from operations increased $1.5 million, or 16.2%, to $10.5 million for the year ended December 31, 1995, compared to $9.0 million for the year ended December 31, 1994, representing a decrease in the operating income margin from 27.6% to 23.9%. The decrease in operating income margin was primarily due to increases in salaries and benefits to support new contract growth. The Company earned net interest income of $687,000 for the year ended December 31, 1995, compared to net interest income of $118,000 for the year ended December 31, 1994. This increase in net interest income primarily resulted from the investment of IPO net proceeds. The effective income tax rate was approximately 40.0% for the year ended December 31, 1995 compared with 40.9% for the year ended December 31, 1994. Net income increased by $1.3 million, or 24.1%, to $6.7 million for the year ended December 31, 1995, compared to $5.4 million for the year ended December 31, 1994. Net income as a percentage of net patient service revenue decreased to 15.3% for the year ended December 31, 1995, compared to 16.5% for the year ended December 31, 1994. Year Ended December 31, 1994 as Compared to Year Ended December 31, 1993 Net patient service revenue increased by $9.2 million, or 39.1%, to $32.8 million in 1994, compared to $23.6 million in 1993. Of this $9.2 million increase, $8.5 million, or 92%, was attributable to new contracts, and $716,000 was attributable to same units which grew 3.4%. Same units are those units that were under contract with the Company prior to 1993. Same unit growth resulted generally from volume increases with little or no impact from price increases. 26 27 Salaries and benefits increased by $5.9 million, or 39.5%, to $20.7 million in 1994, compared to $14.9 million in 1993. Of this $5.9 million increase, $4.6 million, or 78.0%, was attributable to hiring of new physicians, primarily to support new contract growth, and the remaining $1.3 million was primarily attributable to increased support staff and resources added in the areas of executive management and billing and reimbursement. Supplies and other operating expenses increased $544,000, or 24.4%, to $2.8 million in 1994, compared to $2.2 million in 1993, primarily as a result of increased advertising and contract activity. Depreciation expenses increased by $148,000 to $244,000 in 1994, primarily as a result of a full year's depreciation in 1994 of the Company's executive offices, which were occupied in July 1993. Income from operations increased by $2.6 million, or 41.4%, to $9.0 million in 1994, compared to $6.4 million in 1993, representing an increase in the operating income margin from 27.1% to 27.6%. The increase in operating income margin was primarily due to same unit growth. The Company earned net interest income of $118,000 in 1994, while it incurred net interest expense of $60,000 in 1993. This increase in net interest income primarily resulted from the reduction in 1993 of the debt incurred by the Company with respect to a stock repurchase and land and building acquisition and the accumulation of cash balances which amounted to $7.4 million as of December 31, 1994. The effective income tax rate was approximately 40.9% in 1994 compared to approximately 34.3% in 1993 with the increase resulting primarily from the effect of state income taxes. Net income increased by $1.3 million, or 30.3%, to $5.4 million in 1994, compared to $4.1 million in 1993. Net income as a percentage of net patient service revenue decreased to 16.5% in 1994, compared to 17.6% in 1993 due primarily to the higher effective tax rate in 1994. QUARTERLY RESULTS The following table presents certain unaudited quarterly financial data for each of the quarters in the years ended December 31, 1994 and 1995 and the quarter ended March 31 1996. This information has been prepared on the same basis as the Consolidated Financial Statements appearing elsewhere in this Prospectus and include, in the opinion of the Company, all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the quarterly results when read in conjunction with the Consolidated Financial Statements and the notes thereto. The Company has historically experienced and expects to continue to experience quarterly fluctuations in net patient service revenue and net income. As a result, the operating results for any quarter are not necessarily indicative of results for any future period or for the full year. See "Risk Factors -- Quarterly Fluctuations in Operating Results; Potential Volatility." 27
1994 CALENDAR QUARTERS 1995 CALENDAR QUARTERS 1996 CALENDAR --------------------------------- ----------------------------------- QUARTER FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST ------ ------ ------ ------ ------ ------ ------- ------- ------------- (IN THOUSANDS) Net patient service revenue.......... $7,190 $7,612 $9,032 $8,945 $8,886 $9,131 $12,478 $13,365 $16,127 Operating expenses: Salaries and benefits.............. 4,481 4,639 5,455 6,148 6,270 6,322 8,212 8,741 10,796 Supplies and other operating expenses......................... 496 711 689 878 607 831 967 1,046 1,213 Depreciation and amortization...... 49 59 65 71 74 66 99 124 233 ------ ------ ------ ------ ------ ------ ------- ------- ------------- Total operating expenses..... 5,026 5,409 6,209 7,097 6,951 7,219 9,278 9,911 12,242 ------ ------ ------ ------ ------ ------ ------- ------- ------------- Income from operations............... 2,164 2,203 2,823 1,848 1,935 1,912 3,200 3,454 3,885 Other income, net.................... 7 15 37 59 79 116 85 407 464 ------ ------ ------ ------ ------ ------ ------- ------- ------------- Income before income taxes........... 2,171 2,218 2,860 1,907 2,014 2,028 3,285 3,861 4,349 Income tax provision................. 889 908 1,171 781 805 812 1,314 1,544 1,737 ------ ------ ------ ------ ------ ------ ------- ------- ------------- Net income........................... $1,282 $1,310 $1,689 $1,126 $1,209 $1,216 $ 1,971 $ 2,317 $ 2,612 ====== ====== ====== ====== ====== ====== ======= ======= ============= 28 LIQUIDITY AND CAPITAL RESOURCES Prior to the IPO, the Company generated sufficient cash flow from operations to support its growth strategy, which primarily consisted of marketing directly to hospital administrators. The Company significantly increased its acquisition activities commencing with the fourth quarter of 1995. During the first quarter of 1996, the Company completed three acquisitions of neonatology physician group practices, utilizing approximately $11.0 million of net proceeds from the IPO. As of March 31, 1996, the Company had approximately $33.6 million of cash, cash equivalents and marketable securities. From April 1, 1996 through June 15, 1996, the Company completed three additional acquisitions utilizing approximately $18.5 million of net proceeds from the IPO. As of March 31, 1996, the Company had working capital of approximately $39.7 million, a decrease of $13.7 million from the working capital of $53.4 million available at December 31, 1995. The decrease is due principally to the acquisition of three physician group practices for aggregate consideration of approximately $11.0 million in cash as well as additions to property and equipment and other assets. On June 27, 1996, the Company entered into a $30.0 million unsecured revolving credit facility (the "Credit Facility") with The First National Bank of Boston ("Bank of Boston") and SunTrust Bank, which includes a $2.0 million amount reserved to cover deductibles under the Company's malpractice insurance policies. The Company intends to use amounts available under the Credit Facility primarily for acquisitions. The Credit Facility matures on June 30, 1999. At the Company's option, the Credit Facility bears interest at either LIBOR plus .875% or the prime rate announced by Bank of Boston. There is no balance currently outstanding under the Credit Facility. The Company is constructing a new building, which is scheduled to be completed in the third quarter of 1996 at an anticipated total cost of approximately $2.3 million. The Company has been funding the construction of the new building with available cash. The Company has an $800,000 mortgage loan with Bank of Boston which is secured by the corporate headquarters building. The Company has received a $3.0 million commitment from Bank of Boston for a mortgage loan on the new building and the corporate headquarters, which will replace the $800,000 mortgage loan. The Company's annual capital expenditures have typically been for computer hardware and software and for furniture, equipment and improvements at the corporate headquarters. During the three months ended March 31, 1996, capital expenditures amounted to approximately $800,000. For the remainder of 1996, the Company anticipates capital expenditures of approximately $3.3 million, including approximately $1.0 million for computer hardware and software, $1.5 million for the completion of the new building, and other expenditures, such as furnishing the new building and renovating the corporate headquarters. See "Business -- Properties." Capital expenditures during 1997 are not expected to exceed $2.0 million, principally for computer hardware and software. The Company anticipates that funds generated from operations, together with the net proceeds of this offering, cash and marketable securities on hand and funds available under the Credit Facility, will be sufficient to meet its working capital requirements and finance any required capital expenditures and acquisitions for both the short-term and long-term. 28 29 BUSINESS Pediatrix is the nation's leading provider of physician management services to hospital-based NICUs. NICUs provide medical care to newborn infants with low birth weight and other medical complications, and are staffed with specialized pediatric physicians, known as neonatologists. Based upon its own market research, knowledge of the health care industry and experience in neonatology, the Company believes that it is the only provider of NICU physician management services that markets its services on a national basis. The Company also provides physician management services to hospital-based PICUs, units which provide medical care to critically ill children and are staffed with specially-trained pediatricians, and pediatrics departments in hospitals. As of June 15, 1996, the Company provided services to 58 NICUs, eight PICUs and three pediatrics departments in 14 states and Puerto Rico and employed or contracted with 162 physicians. See "Recent Developments." The Company staffs and manages NICUs and PICUs in hospitals, providing the physicians, professional management and administrative support, including billing and reimbursement expertise and services. The Company's policy is to provide 24-hour coverage at its NICUs and PICUs with on-site or on-call physicians. As a result of this policy, physicians are available to provide continuous pediatric support to other areas of the hospital on an as-needed basis, particularly in the obstetrics, nursery and pediatrics departments, where immediate accessibility to specialized care is critical. Pediatrix established its leading position in physician management services to NICUs by developing a comprehensive care model and management and systems infrastructure that address the needs of patients, hospitals, payor groups and physicians. Pediatrix addresses the needs of (i) patients by providing continuous, comprehensive, professional quality care, (ii) hospitals by recruiting, credentialing, and retaining neonatologists and hiring related staff to operate NICUs in a cost-effective manner thereby relieving hospitals of the financial and administrative burdens of operating the NICUs, (iii) payor groups by providing cost-effective care to patients and (iv) physicians by providing administrative support, including physician billing and reimbursement expertise and services, to enable them to focus on providing care to patients, and by offering an opportunity for career advancement within Pediatrix. INDUSTRY OVERVIEW The evolving managed care environment has created substantial cost containment pressures for all constituents of the health care industry. The increasing use of fixed-payment systems that shift financial risk from payors to providers has forced hospitals, in particular, to be more cost-effective in all aspects of their operations. A trend among hospitals is to utilize third party contract management companies to manage specialized functions in an effort to contain costs, improve utilization management, and reduce administrative burdens. Physician management organizations provide hospitals with professional management of staff, including recruiting, staffing and scheduling of physicians. Physicians are responding to cost containment pressures by joining group practices through which they have greater leverage to negotiate and contract with hospitals and managed care payors. Physician management organizations provide a physician group practice an alternative to self management that enables physicians to maintain their clinical autonomy while creating greater negotiating power with payors and hospitals, and providing administrative support to deal with the increasing complexity of billing and reimbursement. Physician group practices are becoming larger and more prevalent. The Company believes that as cost pressures continue to influence the medical industry, the trend of physicians joining group practices will continue. Although the Company continues to market its services to hospitals to obtain new contracts, the Company has shifted its strategy to growth through acquisitions as physicians become more receptive to being acquired. The Company believes that hospitals will continue to outsource certain units, such as NICUs and PICUs, on a contract management basis. NICUs and PICUs present significant operational challenges for hospitals, including complex billing procedures, highly variable admissions rates, and difficulties in recruiting and retaining qualified physicians. These operational challenges generally make it difficult for hospitals to operate these units profitably. Traditionally, hospitals have staffed their NICUs internally, through affiliations with small, local physician groups or with independent practitioners. These small practices typically lack the necessary expertise and support services in billing and reimbursement, recruiting and effective medical 29 30 management to operate NICUs on a cost-effective basis. Hospitals are increasingly seeking to contract with physician management services organizations that have the capital resources, information and reimbursement systems and practice management expertise that NICUs require to accept and manage risk in the evolving managed care environment. Of the approximately four million babies born in the United States in 1994, approximately 10% required neonatal treatment. Demand for neonatal services is primarily due to premature births, which are often characterized by low birth weight and other medical complications. A majority of high-risk mothers whose births require neonatal treatment are not identified until the time of delivery, thus heightening the need for continuous coverage by neonatologists. Across the United States, NICUs are concentrated primarily among hospitals located in metropolitan areas with a higher volume of births. NICUs are important to hospitals since obstetrics generates one of the highest volumes of admissions and obstetricians generally prefer to perform deliveries at hospitals with NICUs. Hospitals must maintain cost-effective care and service in these units to enhance the hospital's desirability to the community, physicians and managed care payors. STRATEGY The Company's objective is to enhance its position as the nation's leading provider of physician management services to NICUs by adding new units and increasing same unit growth. The key elements of the Company's strategy are as follows: Focus on Neonatology and Pediatrics. Since its founding in 1980, the Company has focused exclusively on neonatology and pediatrics. As a result of this focus the Company believes it has (i) developed significant expertise in the complexities of billing and reimbursement for neonatology physician services and (ii) a competitive advantage in recruiting and retaining neonatologists seeking to join a group practice. The Company believes its continued focus will allow it to enhance its position as the nation's leading provider of physician management services to NICUs. Acquire Neonatal Physician Group Practices. The Company intends to further increase the number of units at which it provides physician management services by acquiring well-established neonatal physician group practices. The Company believes that it will continue to benefit from physicians joining larger practice groups in an effort to increase negotiating power with managed care organizations and eliminate administrative burdens, while maintaining clinical autonomy. The Company completed its first acquisition of a neonatology physician group practice in California in July 1995 and completed acquisitions of six neonatology physician group practices in the first half of 1996. The Company is actively pursuing acquisitions of other neonatal physician group practices. No assurance can be given that future acquisition candidates will be identified or that any future acquisitions will be consummated. See "Recent Developments." Develop Regional Networks. The Company intends to develop regional and state-wide networks of NICUs in geographic areas with high concentrations of births. The Company operates regional networks in Denver, Phoenix and Southern California. The Company believes that the development of regional and state-wide networks will strengthen its position with third party payors, such as Medicaid and managed care organizations, since such networks will offer more choice to the patients of third party payors. Increase Same Unit Growth. The Company seeks to provide its services to hospitals where the Company can benefit from increased admissions and intends to increase revenues at existing units by providing support to areas of the hospital outside the NICU and PICU, particularly in the obstetrics, nursery and pediatrics departments, where immediate accessibility to specialized care is critical. These services generate incremental revenue to the Company, contribute to the Company's overall profitability, enhance the hospital's profitability, strengthen the Company's relationship with the hospital, and assist the hospital in attracting more admissions by enhancing the hospital's reputation in the community as a full-service critical care provider. Assist Hospitals to Control Costs. The Company intends to continue assisting hospitals to control costs. The Company's comprehensive care model, which promotes early intervention by neonatologists in emergency situations, as well as the retention of qualified neonatologists, improves the overall cost-effectiveness of care. The Company believes that its ability to assist hospitals to control costs will allow it 30 31 to continue to be successful in adding new units at which the Company provides physician management services. Address Challenges of Managed Care Environment. The Company intends to continue to develop new methods of doing business with managed care and third party payors, which will allow it to develop relationships among payors, hospitals and the Company. The Company is also prepared to enter into flexible arrangements with third party payors, including capitation arrangements. As the nation's leading provider of physician management services to NICUs, the Company believes that it is well-positioned to address the needs of managed care organizations and other third party payors which seek to contract with cost-effective, quality providers of medical services. PHYSICIAN MANAGEMENT SERVICES The Company provides physician management services to NICUs and PICUs, providing (i) a medical director to manage the unit, (ii) recruiting, staffing and scheduling of physicians and certain other medical staff, (iii) neonatology and pediatric support to other hospital departments, (iv) pediatric subspecialty services and (v) billing and reimbursement expertise and services. These physician management services include: Unit Management. The Company staffs each NICU and PICU it manages with a medical director who reports to the CMO of the Company. The CMO and all medical directors at these units are board certified or board eligible in neonatology, pediatrics, pediatric critical care or pediatric cardiology. In addition to providing medical care and physician management in the unit, the medical director is responsible for (i) the overall management of the unit, including quality of care, professional discipline, utilization review, physician recruitment, staffing and scheduling, (ii) serving as a liaison to the hospital administration, (iii) maintaining professional and public relations in the hospital and the community and (iv) monitoring the Company's financial success within the unit. Recruiting, Staffing and Scheduling. The Company is responsible for recruiting, staffing and scheduling the neonatologists, pediatricians and advanced registered nurse practitioners ("ARNPs") within the NICU and PICU of the hospital. The Company's recruiting department maintains an extensive database of neonatologists and pediatricians nationwide from which to draw for recruiting purposes. All candidates are pre-screened and their credentials, licensure and references are checked and verified by the Company. The CMO and the medical directors play a key role in the recruiting and interviewing process before candidates are introduced to hospital administrators. The NICUs and PICUs managed by the Company are staffed with at least one neonatologist or pediatrician on-site or available on-call. All of these physicians are board certified or board eligible in neonatology, pediatrics, pediatric critical care or pediatric cardiology. The Company also employs or contracts with ARNPs, who assist medical directors and other physicians in operating the NICUs and PICUs. All ARNPs have either a certificate as a neonatal nurse practitioner or pediatric nurse practitioner or a masters degree in nursing, and have previous neonatal or pediatric experience. With respect to the physicians that are employed by or under contract with the Company, the Company assumes responsibility for salaries, benefits, bonuses, group health insurance and physician malpractice insurance. See "-- Contractual Relationships." Support to Other Hospital Departments. As part of the Company's comprehensive care model, physicians provide pediatric support services to other areas of hospitals, particularly in the obstetrics, nursery and pediatrics departments, where immediate accessibility to specialized care is critical. The Company believes this support (i) improves its relations with hospital staff and referring physicians, (ii) enhances the hospital's reputation in the community as a full-service critical care provider, (iii) increases admissions from referring obstetricians and pediatricians, (iv) integrates the physicians into a hospital's medical community, (v) generates incremental revenue which contributes to the Company's overall profitability and (vi) increases the likelihood of renewing and adding new hospital contracts. Pediatric Subspecialties. The Company has developed a pediatric subspecialty program to complement and enhance its comprehensive care model. The program consists of (i) a director of Pediatric Subspecialties to administer the program, (ii) four pediatric cardiologists in Florida and (iii) one pediatric nephrologist (kidney specialist) in Puerto Rico. These physicians provide out-patient services in 31 32 offices outside contracting hospitals. The pediatric cardiologists and the pediatric nephrologist also assist attending physicians at hospitals in Florida and Puerto Rico. The Company is exploring the possibility of expanding the existing program in pediatric cardiology in line with the Company's other strategic objectives in neonatology and pediatric intensive care. Expansion of the program will depend in part on the demand for such critical care services at hospitals and by payor groups. Billing and Reimbursement. The Company assumes responsibility for all aspects of the billing, reimbursement and collection process relating to physician services. Patients treated at the unit receive a bill from the Company for physician services, and the hospital bills and collects separately for all other services. To address the increasingly complex and time-consuming process for obtaining reimbursement for medical services, the Company has invested in both the technical and human resources necessary to create an efficient billing and reimbursement process, including specific claim forms and software systems. The Company begins this process by providing training to physicians that emphasizes a detailed review of and proper coding protocol for all procedures performed and services provided to achieve appropriate collection of revenues for physician services. Historically, the Company's billing and collection operations were conducted from its corporate headquarters in Fort Lauderdale, Florida. In June 1996, the Company opened a business office in Orange, California to support its operations in California. MARKETING Historically, most of the Company's growth was generated internally through marketing efforts and referrals. The Company significantly increased its acquisition activities during the fourth quarter of 1995 to capitalize on the opportunities created by the trend toward consolidation in the health care industry. The Company's marketing program to neonatal physician groups consists of (i) market research to identify established physician groups, (ii) telemarketing to identify and contact acquisition candidates, as well as hospitals with high demand for NICU services, including certain hospitals without on-site NICUs, and (iii) a national sales manager and two regional managers that conduct on-site visits along with senior management. The Company also advertises its services in hospital and health care trade journals, participates at hospital and physician trade conferences, and markets its services directly to hospital administrators and medical staff. In addition, the Company intends to focus on developing additional regional networks and state-wide networks to strengthen its position with third party payors, such as Medicaid and managed care organizations. MANAGEMENT INFORMATION SYSTEMS The Company maintains several systems to support day-to-day operations, business development and ongoing business analysis, including (i) a Company-wide electronic mail system to assist in intracompany communications and conferencing, including interaction among physicians regarding clinical matters on a real-time basis, (ii) electronic interchange with payors utilizing electronic invoicing and (iii) a database used by the business development and marketing departments in recruiting individual physicians and identifying potential neonatal physician group acquisition candidates, which is updated through telemarketing activities, personal contacts, professional journals and mail solicitation. The Company is in the process of acquiring and developing an electronic medical record system. The Company believes that the electronic medical record system, when implemented, will expedite the reimbursement process and serve as the source of data for a Company-wide clinical and financing repository in support of outcomes reporting, financial analysis and clinical studies. The Company's management information system is an integral component of the billing and reimbursement process. The Company's system enables it to track numerous and diverse third party payor relationships and payment methods and provides for electronic interchange in support of insurance benefits verification and claims submission with payors accepting electronic invoicing. The Company's system was designed to meet its requirements by providing maximum flexibility as payor groups upgrade their payment and reimbursement systems. See "Management's Discussion and Analysis and Financial Condition and Results of Operations -- Liquidity and Capital Resources." 32 33 CONTRACTUAL RELATIONSHIPS Hospital Relationships. Most of the Company's contracts with hospitals grant the Company the exclusive right and responsibility to manage the provision of physician management services to the NICUs and PICUs. The contracts typically have terms of three to five years and renew automatically for additional terms of one to five years unless otherwise terminated by either party. The contracts typically provide that the hospital may terminate the agreement prior to the expiration of the initial term upon 30 days written notice in the event any physician (i) loses medical staff membership privileges, (ii) is convicted of a felony, (iii) is unable to perform duties due to disability or (iv) commits a grossly negligent act that jeopardizes the health or safety of a patient. The Company bills for the physicians' services on a fee-for-service basis separately from other charges billed by the hospital. Certain contracting hospitals that do not generate sufficient patient volume agree to pay the Company administrative fees to assure a minimum revenue level. Administrative fees include guaranteed payments to the Company, as well as fees paid to the Company by certain hospitals for administrative services performed by the Company's medical directors at such hospitals. Administrative fees accounted for 13%, 12% and 10% of the Company's net patient service revenue during 1994, 1995 and the three months ended March 31, 1996, respectively. The hospital contracts typically require that the Company and the physicians performing services maintain professional liability insurance and general liability insurance in minimum amounts of $1.0 million per claim per physician and $3.0 million in the aggregate per year per physician. The Company contracts for and pays the premiums for such insurance on behalf of the physicians. See "-- Professional Liability and Insurance." In addition to contracts with hospitals, staffing at certain hospitals is provided through the staff membership of the doctors at the hospital on an open basis in which no group of doctors at the NICU has an exclusive relationship with the hospital. At June 15, 1996, of the 58 NICUs to which the Company provided services, twelve were at open hospitals. Payor Relationships. While virtually all of the Company's contracts with third party payors are discounted fee for service contracts, as of June 15, 1996, the Company had six contracts that provide for capitated payments, including four contracts in California with an independent practice association ("IPA"), one contract in Arizona with an HMO and one contract in Texas with an IPA. The Company is prepared to enter into capitation arrangements with other third party payors. In the event the Company enters into relationships with third party payors with respect to regional and state-wide networks, such relationships may be on a capitated basis. PA Contractor Relationships. PMG has entered into management agreements ("PA Management Agreements") with PA Contractors in all states in which it operates, other than Florida. There is one PA Contractor in each state in which the Company operates. Each PA Contractor is owned by a physician licensed in the jurisdiction in which the PA Contractor operates, who is also an officer of the PA Contractor. Under the PA Management Agreements, the PA Contractors delegate to PMG the administrative, management and support functions (but not any functions constituting the practice of medicine) that the PA Contractors have agreed to provide to the hospital. In consideration of such services, each PA Contractor pays PMG a percentage of the PA Contractor's gross revenue (but in no event greater than the net profits of such PA Contractor), or a flat fee. PMG has the discretion to determine whether the fee shall be paid on a monthly, quarterly or annual basis. The management fee may be adjusted from time to time to reflect industry standards and the range of services provided by the PA Contractor. The agreements provide that the term of the arrangements are permanent, subject only to termination by PMG, and that the PA Contractor shall not terminate the agreement without PMG's prior written consent. Also, the agreements provide that PMG or its assigns has the right, but not the obligation, to purchase the stock of the PA Contractor. See "Risk Factors -- State Laws Regarding Prohibition of Corporate Practice of Medicine," "Risk Factors -- Dependence on PA Contractors" and Note 2 to the Consolidated Financial Statements. Physician Relationships. The Company contracts with the PA Contractors to provide the medical services required to fulfill its obligations to hospitals. The physician employment agreements typically have terms of three years and can be terminated by either party at any time upon 90 days prior written notice. The physicians generally receive a base salary plus a productivity bonus. The physician is required to hold a valid 33 34 license to practice medicine in the appropriate jurisdiction in which the physician practices and to become a member of the medical staff, with appropriate privileges at the hospital. The Company is responsible for billing patients and third party payors for services rendered by the physician, and the Company has the exclusive right to establish the schedule of fees to be charged for such services. Substantially all of the physicians employed by PMG or the PA Contractors have agreed not to compete with PMG or the PA Contractor within a five-mile radius of any hospital for which the physician is rendering medical services for a period of one to two years after termination of employment. The Company contracts for and pays the premiums for malpractice insurance on behalf of the physicians. See "-- Professional Liability and Insurance." Acquisitions. The Company structures acquisitions of physician practice groups as asset purchases, stock purchases and stock mergers. Generally, these structures provide for: (i) the assignment to the Company of the contracts between the physician practice groups and the hospital at which the physician practice group provides medical services; (ii) physician "tail insurance" coverage under which the Company is an insured party to cover malpractice liabilities that may arise after the date of the acquisition which relate to events prior to the acquisition; and (iii) indemnification to the Company by the previous owners of the acquired entity. Generally, in acquisitions structured as asset purchases, the Company does not acquire the physician practice group's receivables or liabilities, including malpractice claims, arising from the physician practice group's activities prior to the date of the acquisition. Generally, in acquisitions structured as stock purchases or stock mergers, the physician practice group's receivables (net of any liabilities accruing prior to the acquisition and permitted indemnification claims) are distributed as compensation to and collected by the former owners of the physician practice group. GOVERNMENT REGULATION The Company's operations and relationships are subject to a variety of governmental and regulatory requirements relating to the conduct of its business. The Company is also subject to laws and regulations which relate to business corporations in general. The Company believes that it exercises care in an effort to structure its practices and arrangements with hospitals and physicians to comply with relevant federal and state law and believes that such arrangements and practices comply in all material respects with all applicable statutes and regulations. Approximately 31% and 30% of the Company's net patient service revenue in 1995 and the three months ended March 31, 1996, respectively, was derived from payments made by government-sponsored health care programs (principally Medicaid). These programs are subject to substantial regulation by the federal and state governments. Any change in reimbursement regulations, policies, practices, interpretations or statutes that places material limitations on reimbursement amounts or practices could adversely affect the operations of the Company. Medicaid and other government reimbursement programs are increasingly shifting to managed care, which could result in reduced payments to the Company for Medicaid patients. In addition, funds received under these programs are subject to audit with respect to the proper billing for physician services and, accordingly, retroactive adjustments of revenue from these programs may occur. The Company is also subject to (i) certain provisions of the Social Security Act, commonly referred to as the "Anti-kickback Statute," which prohibits entities, such as the Company, from offering, paying, soliciting, or receiving any form of remuneration in return for the referral of Medicare or state health program patients or patient care opportunities, or in return for the recommendation, arrangement, purchase, lease, or order of items or services that are covered by Medicare or state health programs, (ii) prohibitions against physician referrals, commonly known as "Stark II," which prohibit, subject to certain exemptions, a physician or a member of his immediate family from referring Medicare or Medicaid patients to an entity providing "designated health services" (which include hospital inpatient and outpatient services) in which the physician has an ownership or investment interest, or with which the physician has entered into a compensation arrangement including the physician's own group practice, and (iii) state and federal civil and criminal statutes imposing substantial penalties, including civil and criminal fines and imprisonment, on health care providers which fraudulently or wrongfully bill governmental or other third party payors for health care services. Although the Company believes that it is not in violation of these provisions, there can be no 34 35 assurance that the Company's current or future practices will not be found to be in violation of these provisions, and any such finding could have a material adverse effect on the Company. In addition, business corporations such as PMG are generally not permitted under state law to practice medicine, exercise control over the medical judgments or decisions of physicians, or engage in certain practices such as fee-splitting with physicians. In states where PMG is not permitted to practice medicine, the Company performs only nonmedical administrative services, does not represent to the public or its clients that it offers medical services and does not exercise influence or control over the practice of medicine by the PA Contractors or the physicians employed by the PA Contractors. Accordingly, the Company believes it is not in violation of applicable state laws relating to the practice of medicine. In most states, PMG contracts with the PA Contractors (which are owned by a licensed physician employed by the respective PA Contractor), which in turn employ or contract with physicians to provide necessary physician services. There can be no assurance that regulatory authorities or other parties will not assert that PMG is engaged in the corporate practice of medicine or that the percentage fee arrangements between PMG and the PA Contractors constitute fee splitting or the corporate practice of medicine. If such a claim were successfully asserted in any jurisdiction, PMG could be subject to civil and criminal penalties under such jurisdiction's laws and could be required to restructure its contractual arrangements, which could have a material adverse effect on the Company's financial condition and results of operations. In addition to current regulation, the public and state and federal governments have recently focused significant attention on reforming the health care system in the United States. Although the Company cannot predict whether these or other reductions in the Medicare or Medicaid programs will be adopted, the adoption of such proposals could have a material adverse effect on the Company's business. Concern about such proposals has been reflected in volatility of the stock prices of companies in health care and related industries. PROFESSIONAL LIABILITY AND INSURANCE The Company's business entails an inherent risk of claims of physician professional liability. The Company maintains professional liability insurance and general liability insurance on a claims-made basis in the amounts of $1.0 million per incident per physician and ARNP ($2.0 million for certain physicians in California), and $3.0 million in the aggregate per annum for each physician and ARNP ($4.0 million for certain physicians in California); $2.0 million per incident and $4.0 million in the aggregate per annum for the Company; and $12.0 million in the aggregate per year for the Company and all physicians employed by or under contract with the Company. The Company believes that these amounts, which represent the required amounts of insurance coverage in the states in which the Company does business, are appropriate based upon claims experience and the nature and risks of its business. The Credit Facility includes a $2.0 million amount reserved to cover deductibles under the Company's insurance policies. There can be no assurance that a pending or future claim or claims will not be successful or if successful will not exceed the limits of available insurance coverage or that such coverage will continue to be available at acceptable costs and on favorable terms. See "-- Proceedings" and "Risk Factors -- Professional Liability and Insurance." The physicians that are employed by or contract with the Company are required to obtain professional liability insurance coverage, and the Company contracts for and pays the premiums with respect to such insurance for the physicians. This insurance would provide coverage to the Company, subject to policy limits, in the event the Company were held liable as a co-defendant in a lawsuit against a physician or a hospital arising out of the provision of medical services by the physician. The current policy expires April 30, 1997, and the Company expects to be able to renew such policy upon such expiration. COMPETITION The health care industry is highly competitive and has been subject to continual changes in the method in which health care services are provided and the manner in which health care providers are selected and compensated. The Company believes that private and public reforms in the health care industry emphasizing cost containment and accountability will result in an increasing shift of NICU and related pediatric care from highly fragmented, individual or small practice neonatology providers to physician management companies. Companies in other health care industry segments, such as managers of other hospital-based specialties or large physician group practices, some of which have financial and other resources greater than those of the 35 36 Company, may become competitors in providing management of neonatal and pediatric intensive care services to hospitals. The Company provides neonatal and pediatric management services in Arizona, California, Colorado, Florida, Illinois, Kansas, Michigan, New Jersey, New York, Ohio, Pennsylvania, Puerto Rico, Texas, Virginia and West Virginia. Competition in the Company's current markets and other geographic markets where the Company may expand is generally based upon the Company's reputation and experience, and the physician's ability to provide cost-effective, quality care. SERVICE MARKS The Company has registered the service mark "Pediatrix Medical Group" and its design with the United States Patent and Trademark Office, and has applied for registration of a baby design logo. EMPLOYEES AND PROFESSIONALS UNDER CONTRACT In addition to the 162 physicians employed or under contract with the Company as of June 15, 1996, Pediatrix employed or contracted with 31 other clinical professionals and 195 other full-time and part-time employees. None of the Company's employees are subject to a collective bargaining agreement. PROPERTIES The Company owns its executive offices located in Ft. Lauderdale, Florida (approximately 10,000 square feet) and currently leases space in other facilities in various states for its California business office, pediatric cardiology offices, storage space, and temporary housing of medical staff, with aggregate annual rents of approximately $360,000. In May 1995, the Company purchased approximately three acres of land adjacent to its current offices and is constructing an administrative building on such land. The building will be approximately 20,000 square feet, and is expected to be completed in the third quarter of 1996 at a cost of approximately $2.3 million. To facilitate its acquisition and business integration programs, the Company entered into a contract in March 1996 to purchase an aircraft for $9.8 million with delivery scheduled for 1996. The Company intends to transfer its rights under the purchase contract to a third party lessor and enter into a long-term operating lease for the aircraft. The Company may also enter into a financial sharing arrangement with respect to the operating lease with one or more third parties. PROCEEDINGS During the ordinary course of business, the Company has become a party to pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice and are generally covered by insurance. The Company intends to vigorously defend these suits. The Company believes, based upon the investigations conducted by the Company to date, that the outcome of such legal actions and proceedings, individually or in the aggregate, will not have a material adverse effect on the Company's financial condition, results of operations or liquidity, notwithstanding any possible insurance recovery. If liability results from the medical malpractice claims, there can be no assurance that the Company's medical malpractice insurance coverage will be adequate to cover liabilities arising out of such proceedings. See "Risk Factors -- Professional Liability and Insurance." On May 14, 1996, the Company received the Internal Revenue Service's (the "IRS") proposed adjustments to the Company's tax liability in connection with its examination of the Company's 1992, 1993, and 1994 federal income tax returns as discussed in Note 9 to the Consolidated Financial Statements. The IRS has challenged certain deductions that, if disallowed, would result in additional taxes of approximately $4.5 million, plus interest. The Company and its tax advisors are in the process of preparing a response to the IRS. The Company and its tax advisors believe that the tax returns are substantially correct as filed, and intend to vigorously contest the proposed adjustments. The Company and its tax advisors also believe that the amounts that have been provided for income taxes are adequate and that the ultimate resolution of the examination will not result in a material adverse effect on the Company's consolidated results of operations, financial position or cash flows. 36 37 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of the Company are as follows: - --------------- (1) Member of Compensation Committee. (2) Member of Audit Committee. Roger J. Medel, M.D. has held the position of President, Chief Executive Officer and director of Pediatrix since he founded the Company in 1980 with Dr. Gregory Melnick. Dr. Medel has been an instructor in pediatrics at the University of Miami and participates as a member of several medical and professional organizations. Dr. Medel also holds a Masters Degree in Business Administration from the University of Miami. Dr. Medel has served on the boards of directors of Sechrist Industries Inc., ARC Broward Inc. and Physician Healthcare Plans, Inc. Richard J. Stull, II joined the Company in November 1994 as Executive Vice President and was elected as a director in December 1994, and appointed as Chief Operating Officer in February 1995. From 1988 to November 1994, Mr. Stull served as the President and Chief Executive Officer of the North Broward Hospital District, a four hospital multi-facility health care delivery system, and the third largest public hospital system in the United States with gross revenues in excess of $1.0 billion and 6,000 employees. Mr. Stull has served on the boards of directors of the South Florida Hospital Association and the Florida Hospital Association, and is a member of the American Hospital Association's Regional Policy Board and Metropolitan Hospital Section. Mr. Stull has over 25 years of experience in the health care industry. M. Douglas Cunningham, M.D. joined the Company in June 1996 as Vice President and Chief Medical Officer. Dr. Cunningham has over 25 years experience as a practicing neonatologist and professor of pediatrics and neonatology. From 1988 until joining the Company, Dr. Cunningham served as the Senior Vice President, Medical Operations with Infant Care Management Services, Inc. ("ICMS"). Pediatrix recently acquired certain assets of ICMS' parent company, Infant Care Specialists Medical Group, Inc. Dr. Cunningham has also served as a professor at several medical schools, most recently as a Clinical Professor of Pediatrics at the University of California, Irvine, and has published numerous medical articles. 37
NAME AGE POSITION WITH THE COMPANY -------------------------------------- --- -------------------------------------- Roger J. Medel, M.D., M.B.A........... 49 President, Chief Executive Officer and Director Richard J. Stull, II.................. 52 Executive Vice President, Chief Operating Officer and Director M. Douglas Cunningham, M.D............ 56 Vice President and Chief Medical Officer Lawrence M. Mullen.................... 53 Vice President and Chief Financial Officer Cathy J. Lerman....................... 40 Vice President, General Counsel and Corporate Secretary Brian D. Udell, M.D................... 44 Vice President, Practice Integration Kristen Bratberg...................... 34 Vice President, Business Development E. Roe Stamps, IV..................... 50 Director Bruce R. Evans(1)..................... 37 Director Frederick V. Miller, M.D.............. 40 Director Michael B. Fernandez(1)(2)............ 43 Director Albert H. Nahmad(1)(2)................ 55 Director 38 Lawrence M. Mullen has held the position of Vice President and Chief Financial Officer of Pediatrix since May 1995. Mr. Mullen has over 30 years of experience in finance and accounting. Mr. Mullen was Senior Vice President and Chief Financial Officer of Medical Care America, Inc. from May 1993 until its acquisition by Columbia/HCA Healthcare Corporation in September 1994. Mr. Mullen served as a consultant to Columbia/HCA from November 1994 until joining Pediatrix. Prior to joining Medical Care America, Inc., Mr. Mullen was a partner of KPMG Peat Marwick LLP, where he was employed from 1964 to 1993. Cathy J. Lerman joined Pediatrix as Vice President and General Counsel in October 1994. From May 1990 to October 1994, Ms. Lerman served as corporate counsel to Post, Buckley, Schuh, and Jernigan, Inc., an international engineering firm with offices in 38 states and several foreign countries. Prior to that time, Ms. Lerman was in private practice specializing in commercial, insurance and malpractice litigation. She has served as officer and director of numerous local, state, and national bar associations and has published several legal articles. Brian D. Udell, M.D. has been employed by the Company since 1983. Dr. Udell served as a medical director from July 1983 to June 1994 and as the Medical Administrator from July 1994 to May 1995, at which time he was appointed Vice President, Business Development. In November 1996, upon the appointment of Mr. Bratberg as Vice President, Business Development, Dr. Udell was appointed Vice President, Practice Integration. Dr. Udell has published numerous medical articles and is a Fellow of the American Academy of Pediatrics and past-president of the Florida Society of Neonatologist -- Perinatologists. Kristen Bratberg joined the Company in November 1995 as Vice President, Business Development. Prior to joining the Company, Mr. Bratberg was employed by Dean Witter Reynolds Inc. in the Corporate Finance Department from May 1987 to November 1995, most recently as a Senior Vice President specializing in the healthcare industry. E. Roe Stamps, IV was elected a director of the Company in October 1992. Mr. Stamps co-founded Summit Partners in 1984 and is currently its Managing General Partner. Mr. Stamps is currently a director of Boca Research, Inc. Bruce R. Evans was elected a director of the Company in October 1992. Mr. Evans has been employed by Summit Partners since 1986, and is currently a General Partner. Mr. Evans is currently a member of the board of directors of A+ Network, Inc. Frederick V. Miller, M.D. was elected as a director in January 1995, and has been employed by the Company since 1991, most recently as a medical director. Prior to joining the Company, Dr. Miller served as a neonatal consultant and medical director for neonatal services with the US Army Medical Corps. Michael B. Fernandez was appointed as a director in October 1995. Mr. Fernandez has served since 1992 as Chairman of the Board and Chief Executive officer of Physicians Healthcare Plans, Inc., a Florida based health maintenance organization. Prior to that time, Mr. Fernandez served from 1990 to 1992 as Executive Vice President of Product Development and Marketing as well as Chief Executive Officer of certain indemnity subsidiaries of CAC-United Healthcare Plans of Florida, Inc. Albert H. Nahmad was appointed as a director in January 1996. Mr. Nahmad has served since 1973 as Chairman of the Board and President of Watsco, Inc. Mr. Nahmad is also a director of American Bankers Insurance Group, Inc. DIRECTOR COMPENSATION The Company pays each director who is neither an employee or affiliated with one of the Company's principal shareholders an annual director's fee of $7,500 payable quarterly, and a $500 fee for each committee meeting attended. In addition, each non-employee director that is not affiliated with one of the Company's principal shareholders (a "Non-Affiliated Director") receives options to purchase 5,000 shares of Common Stock on such director's initial appointment to the Board, which options become fully exercisable on the one-year anniversary date of the grant. The unexercised portion of any option granted to a Non-Affiliated Director becomes null and void three months after the date on which such Non-Employee Director ceases to be a director of the Company for any reason. The Company also reimburses all directors for out-of-pocket expenses incurred in connection with the rendering of services as a director. Dr. Miller also serves as a medical director 38 39 at a contracting hospital with the Company. He has two employment agreements, one as a medical director and one as a physician, which together provide for an annual salary of $250,000 plus a performance bonus. During 1993, 1994 and 1995, Dr. Miller received $259,629, $259,764 and $259,859, respectively, under such employment agreements. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION In 1992, the Company's Board of Directors established a Compensation Committee consisting of Messrs. Stamps and Evans and Dr. Medel. In September 1995, Dr. Medel resigned his position with the Compensation Committee. The Compensation Committee currently consists of Messrs. Nahmad, Fernandez and Evans. During the period that Dr. Medel served on the Compensation Committee, all compensation decisions affecting Dr. Medel were approved by the Company's directors, exclusive of Dr. Medel. Mr. Fernandez, a member of the Company's Compensation Committee, is also a director and executive officer of Physicians Healthcare Plans, Inc. Dr. Medel serves on the Board of Directors of Physicians Healthcare Plans, Inc. EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth certain summary information concerning compensation paid or accrued by the Company and its subsidiaries to or on behalf of the Company's Chief Executive Officer and each of the most highly compensated executive officers of the Company whose total annual salary and bonus, determined as of the end of the last fiscal year, exceeded $100,000 (the "Named Executive Officers"), for the fiscal years ended December 31, 1995 and 1994. - --------------- (1) The column for "Other Annual Compensation" has been omitted because there is no compensation required to be reported in such columns. The aggregate amount of perquisites and other personal benefits provided to each officer listed above is less than 10% of the total annual salary and bonus of such officer. (2) Includes bonuses paid in a subsequent year for services performed in the prior year. (3) Reflects matching contributions to the Company's 401(k) plan. (4) Mr. Stull joined the Company in November 1994. (5) Options to purchase 100,000 shares were canceled in December 1995 pursuant to the terms of Mr. Stull's employment agreement. (6) Mr. Mullen joined the Company in May 1995. (7) Ms. Lerman joined the Company in October 1994. 39
LONG-TERM COMPENSATION ANNUAL COMPENSATION(1) ------------------ -------------------------------- NO. OF SECURITIES ALL OTHER FISCAL UNDERLYING COMPENSA- NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(2) OPTIONS TION(3) - -------------------------------------- ------ --------- ----------- ------------------ ---------- Roger J. Medel, M.D., M.B.A. 1995 $ 400,000 $ 175,750 200,000 $6,000 President and Chief Executive 1994 400,000 311,139 320,000 6,000 Officer Richard J. Stull, II 1995 291,667 45,000 75,000 -- Executive Vice President, Chief 1994 62,498 -- 200,000(5) -- Operating Officer and Director(4) Lawrence M. Mullen 1995 110,936 25,500 100,000 3,400 Vice President and Chief Financial Officer(6) Cathy J. Lerman 1995 123,750 18,750 65,000 2,675 Vice President, General Counsel and 1994 18,808 -- 10,000 -- Corporate Secretary(7) Brian D. Udell, M.D. 1995 350,000 25,000 50,000 6,000 Vice President, Practice Integration 1994 350,000 50,000 -- 6,000 40 Option Grants Table. The following table sets forth certain information concerning grants of stock options made during fiscal 1995 to the Named Executive Officers. - --------------- (1) The dollar amounts set forth in these columns are the result of calculations at the five percent and ten percent rates set by the Securities and Exchange Commission, and therefore are not intended to forecast possible future appreciation, if any, of the market price of the Common Stock. (2) All options were granted at exercise prices equal to the fair market value of the Common Stock on the date of grant. Year-End Option Value Table. No Named Executive Officer exercised stock options during the year ended December 31, 1995. The following table sets forth certain information concerning the number of stock options held by the Named Executive Officers as of December 31, 1995, and the value (based on the fair market value of a share of stock at fiscal year-end) of in-the-money options outstanding as of such date.
INDIVIDUAL OPTION GRANTS IN 1995 FISCAL YEAR --------------------------------------------------------------------------- POTENTIAL REALIZABLE % OF TOTAL VALUE AT ASSUMED ANNUAL OPTIONS RATES OF STOCK PRICE GRANTED TO APPRECIATION FOR OPTION NUMBER OF EMPLOYEES EXERCISE TERM(1) OPTIONS IN FISCAL PRICE PER EXPIRATION ------------------------ NAME GRANTED 1995 SHARE(2) DATE 5% 10% - ------------------------------ --------- ----------- --------- ---------- ---------- ---------- Roger J. Medel, M.D........... 200,000 23.8% $ 19.25 10/29/05 $2,421,244 $6,135,908 Richard J. Stull, III......... 75,000 8.9 19.25 10/29/05 907,967 2,300,966 Lawrence M. Mullen............ 50,000 5.9 12.50 05/01/05 393,059 996,089 Lawrence M. Mullen............ 50,000 5.9 19.25 10/29/05 605,311 1,533,977 Cathy J. Lerman............... 40,000 4.8 12.50 01/18/05 314,447 796,871 Cathy J. Lerman............... 25,000 3.0 19.25 10/29/05 302,656 766,989 Brian D. Udell, M.D........... 50,000 5.9 20.00 12/04/05 628,895 1,593,742 - --------------- (1) The closing sale price for the Company's Common Stock as reported on the Nasdaq National Market System on December 29, 1995 was $27.50. Value is calculated by multiplying (a) the difference between $27.50 and the option exercise price by (b) the number of shares of Common Stock underlying the option. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AGREEMENTS Effective February 1, 1995, the Company entered into an employment agreement with Ms. Lerman, and amended and restated employment agreements with each of Dr. Medel, Mr. Stull and Dr. Udell. In May 1995, the Company entered into an employment agreement with Mr. Mullen. In November 1995, the Company entered into an employment agreement with Mr. Bratberg, and in June 1996, the Company entered into an employment agreement with Dr. Cunningham (as amended to date, collectively, the "Employment Agreements"). All Employment Agreements are for a three-year term, except that Dr. Medel's agreement is for a five-year term. Dr. Medel's agreement provides for his employment as President and Chief Executive Officer at a base salary of $400,000 per year, plus (i) an incentive bonus equal to 5% of the Company's Pre-Tax Consolidated Net Income (as defined) in excess of specified targets ($9.0 million for 1995 and for each subsequent year during the employment term, such target is equal to the highest Pre-Tax Consolidated Net Income achieved during the employment term), and (ii) a performance bonus of $100,000 if certain performance objectives are achieved by Dr. Medel during the year. Pursuant to the Employment Agreements, 40
NUMBER OF VALUE OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT DECEMBER 31, 1995 AT DECEMBER 31, 1995(1) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------------------------------ ----------- ------------- ----------- ------------- Roger J. Medel, M.D............................. 139,999 430,001 $ 3,055,312 $ 6,527,688 Richard J. Stull, II............................ 33,333 141,667 749,993 2,118,757 Lawrence M. Mullen.............................. -- 100,000 -- 1,162,500 Cathy J. Lerman................................. 3,333 71,667 74,993 956,257 Brian D. Udell, M.D............................. -- 50,000 -- 375,000 41 Messrs. Stull and Mullen, Dr. Udell, Ms. Lerman, Mr. Bratberg and Dr. Cunningham receive base salaries of $300,000, $170,000, $350,000, $125,000, $100,000 and $275,000, respectively. The Employment Agreements for Messrs. Stull, Mullen and Bratberg, Dr. Udell, Ms. Lerman and Dr. Cunningham also provide that such executives are eligible to receive performance bonuses, with Mr. Bratberg's agreement providing that such performance bonus shall be $100,000 per year payable in 12 equal installments. Mr. Bratberg's Employment Agreement also provides for payment of an incentive bonus of 5% of the initial fiscal year's "gross profits" (as defined) of businesses acquired during the term of his agreement, half of which is payable in the month immediately succeeding each such acquisition based upon projected "gross profits" and the remainder of which is payable at the end of the initial fiscal year of each such acquisition upon closure of the accounting period. The Employment Agreements also provide for payments to the executives upon termination after a Change in Control (as defined) in amount equal to 200% of average compensation for Dr. Medel, and 100% of the average compensation for each of Dr. Udell, Messrs. Stull, Mullen and Bratberg, Ms. Lerman and Dr. Cunningham for the five taxable years prior to such termination. The executive officers each hold options to purchase Common Stock granted under the Company's Stock Option Plan. The Employment Agreements provide that, to the extent not already exercisable, such options will become exercisable if the executive's employment is terminated within a 12-month period after a Change in Control. The Employment Agreements further provide that each executive shall not compete with the Company during the employment term and for a period of one year thereafter following the termination of the agreement for any reason. STOCK OPTION PLANS Stock Option Plan. Under the Company's Stock Option Plan (the "Stock Option Plan"), 2,500,000 shares of Common Stock were reserved for issuance upon exercise of stock options. The Stock Option Plan is designed as a means to retain and motivate key employees and directors. The Compensation Committee of the Board of Directors administers and interprets the Stock Option Plan and is authorized to grant options thereunder to all eligible employees and directors of the Company, except that no incentive stock options (as defined in Section 422 of the Internal Revenue Code) may be granted to a director who is not also an employee of the Company or a subsidiary. The Stock Option Plan provides for the granting of both incentive stock options and nonqualified stock options. Options are granted under the Stock Option Plan on such terms and at such prices as determined by the Compensation Committee, except that the per share exercise price of incentive stock options cannot be less than the fair market value of the Common Stock on the date of grant. Each option is exercisable after the period or periods specified in the option agreement, but no option may be exercisable after the expiration of ten years from the date of grant. Options granted to an individual who owns (or is deemed to own) at least 10% of the total combined voting power of all classes of stock of the Company must have an exercise price of at least 110% of the fair market value of the Common Stock on the date of grant and a term of no more than five years. Options granted under the Stock Option Plan are not transferable other than by will or by the laws of descent and distribution. The Stock Option Plan also authorizes the Company to make or guarantee loans to optionees to enable them to exercise their options. Such loans must (i) provide for recourse to the optionee, (ii) bear interest at a rate no less than the prime rate of interest, and (iii) be secured by the shares of Common Stock purchased. The Board of Directors has the authority to amend or terminate the Stock Option Plan, provided that no such action may impair the rights of the holder of any outstanding option without the written consent of such holder, and provided further that certain amendments of the Stock Option Plan are subject to shareholder approval. Unless terminated sooner, the Stock Option Plan will continue in effect until all options granted thereunder have expired or been exercised, provided that no options may be granted after 10 years from the date the Board of Directors adopted the Stock Option Plan. As of June 15, 1996, the Company has outstanding options to purchase an aggregate of 1,941,029 shares of Common Stock under the Plan at a weighted average exercise price of $15.70 per share. 41 42 Employee Stock Purchase Plans. The Company has adopted two Stock Purchase Plans, one which covers the employees of the Company and one which covers the employees of the PA Contractors. The Company has reserved an aggregate of 1,000,000 shares under the Stock Purchase Plans. The purpose of the Stock Purchase Plans is to encourage stock ownership in the Company, thereby enhancing employee interest in the continued success and progress of the Company. The Stock Purchase Plans permit participants to purchase stock of the Company at a favorable price and possibly with favorable tax consequences to the participants. The Stock Purchase Plans are administered by the Compensation Committee appointed by the Board consisting of persons who are "disinterested" persons under Rule 16b-3 under the Exchange Act. The Stock Purchase Plans give broad powers to the Committee to administer and interpret the Qualified Stock Purchase Plan. Purchase periods for the Stock Purchase Plans are each of the six-month periods ending on the last day of March and September, commencing September 30, 1996. Before the commencement date of each purchase period, each participant must elect to have compensation withheld during the purchase period of either (i) a minimum of 1% and a maximum of 15% of his or her compensation, or (ii) a specific dollar amount of not less than $25 or more than $10,625. The percentage or amount designated may not be increased or decreased during a purchase period, but a participant can discontinue payroll deductions for the remainder of a purchase period and withdraw his or her funds entirely. As of the first day of the purchase period, a participant is granted an option to purchase that number of shares determined by dividing the total amount to be withheld by the purchase price described below. Based on the amount of salary withheld at the end of the purchase period, shares will be purchased for the account of each participant within five business days of the termination date of such purchase period (the "Purchase Date"). In no event, however, may a participant receive an option for shares which would cause the participant to own 5% or more of the Common Stock of the Company. The purchase price to be paid by the participants will be the lower of the amount determined under Paragraphs A and B below: A. 85% of the average of the high and low sales price of the Company's Common Stock as reported on Nasdaq National Market as of the commencement date of the purchase period; or B. 85% of the average of the high and low sales price of the Company's Common Stock as reported on Nasdaq National Market as of the Purchase Date. As required by tax law, no participant may receive an option under the Stock Purchase Plans for shares which have a fair market value in excess of $25,000 determined at the time such option is granted. Any funds not used to purchase shares will remain credited to the participant's bookkeeping account and applied to the purchase of shares of Common Stock in the next succeeding purchase period. No interest is paid by the Company on funds withheld, and such funds are used by the Company for general operating purposes. As of June 15, 1996, no shares of Common Stock had been issued under the Stock Purchase Plans. 401(K) PLAN As of January 1, 1993, the Company instituted a 401(k) plan (the "401(k) Plan"). All full-time employees of the Company who are at least 21 years old are eligible to participate in the 401(k) Plan on the first day of the quarter following the employee's date of hire. The Company contributes an amount equal to the participant's contribution, up to 4% of the participant's salary. The 401(k) Plan also allows the Company to make other discretionary contributions, including profit sharing contributions, which will be administered by the Compensation Committee. The Company's matching contributions on behalf of an eligible employee generally become fully vested if such employee reaches normal retirement age, dies or becomes disabled while an employee. Such matching contributions vest on a pro rata basis over a three-year period from the date of contribution. An employee generally will be entitled to payment of such employee's total account balance under the 401(k) Plan upon such employee's retirement, death or permanent disability. In the event employment is terminated for any other reason, an employee will be entitled to payment of such employee's vested account balance. See Note 11 of Notes to Consolidated Financial Statements. 42 43 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth information with respect to the beneficial ownership of the Company's outstanding Common Stock as of June 15, 1996 and as adjusted to reflect the sale of the Common Stock offered hereby by (i) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii) each director or executive officer of the Company who beneficially owns any shares, (iii) each Selling Shareholder, and (iv) all directors and executive officers of the Company as a group. Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of Common Stock owned by them, except to the extent such power may be shared with a spouse. - --------------- * Less than one percent. (1) Unless otherwise indicated, the address of each of the beneficial owners identified is 1455 Northpark Drive, Ft. Lauderdale, Florida 33326. (2) Based on 13,076,170 shares of Common Stock outstanding at June 15, 1996 and 14,576,170 as adjusted after the offering. Pursuant to the rules of the Commission, certain shares of Common Stock which a person has the right to acquire within 60 days of the date hereof pursuant to the exercise of stock options are deemed to be outstanding for the purpose of computing the percentage ownership of such person but are not deemed outstanding for the purpose of computing the percentage ownership of any other person. (3) Includes 3,030,223 shares of Common Stock held by Summit Ventures III, L.P. ("Ventures"), 26,549 shares of Common Stock held by Summit Investors II, L.P. ("Investors"), and 22,353 shares of Common Stock held by HKL Associates ("HKL", and together with Ventures and Investors, "Summit Partners"). Mr. Evans and Mr. Stamps are directors of the Company, general partners of an affiliate of Ventures and are general partners of Investors and HKL. Messrs. Stamps and Evans may, by virtue of their relationships with Ventures, Investors and HKL, be deemed to beneficially own the securities held by Ventures, Investors and HKL, and to share voting and investment power with respect to such securities. Messrs. Stamps and Evans both disclaim beneficial ownership of the securities, except to the extent of their respective investment interests in Ventures, Investors and HKL. The address of Summit Partners and Messrs. Stamps and Evans is 600 Atlantic Avenue, Suite 2800, Boston, Massachusetts 02210. Does not reflect the sale of 500,000 shares pursuant to the exercise of the Underwriters' over- allotment option. See "Underwriting." 43
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO THE OWNED AFTER THE OFFERING(2) NUMBER OF OFFERING(2) ------------------------ SHARES --------------------- NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT(3) OFFERED NUMBER PERCENT - ----------------------------------------- --------- ---------- --------- --------- ------- Summit Partners(3)....................... 3,079,125 23.6% 1,500,000 1,579,125 10.8% Roger J. Medel, M.D.(4).................. 1,197,575 9.0 500,000 697,575 4.7 Richard J. Stull, II(5).................. 31,583 * -- 31,583 * Lawrence M. Mullen(6).................... 19,167 * -- 19,167 * Cathy J. Lerman(7)....................... 14,167 * -- 14,167 * Brian D. Udell, M.D.(8).................. 630,455 4.8 300,000 330,455 2.3 E. Roe Stamps, IV(3)..................... 3,079,125 23.6 1,500,000 1,579,125 10.8 Bruce R. Evans(3)........................ 3,079,125 23.6 1,500,000 1,579,125 10.8 Frederick V. Miller, M.D.(9)............. 38,266 * -- 38,266 * K. Steven Haskins, M.D.(10).............. 630,455 4.8 300,000 330,455 2.3 Stefan R. Maxwell, M.D.(10).............. 630,455 4.8 300,000 330,455 2.3 Gregory Melnick, M.D.(10)(11)............ 624,000 4.8 300,000 324,000 2.2 Carlos A. Perez, M.D.(10)(12)............ 391,413 3.0 300,000 91,413 * All directors and executive officers as a group (12 persons)(13)................. 5,010,338 37.5 2,300,000 2,710,338 18.3 44 (4) Includes (i) 50,000 shares beneficially owned by Dr. Medel's wife, as to which Dr. Medel disclaims beneficial ownership; (ii) 240 shares owned by Dr. Medel's minor children, as to which Dr. Medel disclaims beneficial ownership, (iii) 950,908 shares held of record by Medel Family Investments, Ltd., a Florida limited partnership, and its general partner, which are controlled by Dr. Medel and his wife, and (iv) 196,667 shares subject to presently exercisable options. Excludes 573,333 shares subject to unexercisable options. Does not reflect the sale of 250,000 shares pursuant to the exercise of the Underwriters' over-allotment option. See "Underwriting." (5) Includes (i) 1,250 shares directly owned, and (ii) 30,333 shares subject to presently exercisable options. Excludes 141,667 shares subject to unexercisable options. (6) Includes (i) 2,500 shares directly owned, and (ii) 16,667 shares subject to presently exercisable options. Excludes 83,333 shares subject to unexercisable options. (7) All shares are subject to presently exercisable options. Excludes 58,333 shares subject to unexercisable options. (8) All shares are held in trusts for the benefit of Dr. Udell and his wife. Dr. Udell disclaims beneficial ownership with respect to the shares held in trust for his wife. Excludes 50,000 shares subject to unexercisable options. (9) Includes (i) 26,600 shares directly owned, and (ii) 11,666 shares subject to presently exercisable stock options. Excludes 23,334 shares subject to unexercisable options. (10) Each of Drs. Haskins, Maxwell, Melnick, Perez and Turnier (the wife of Dr. Medel) are employed by the Company as medical directors. Prior to April 1, 1996, Drs. Haskins, Maxwell, Melnick, Perez and Turnier received annual salaries of $315,000, $300,000, $300,000, $300,000 and $300,000, respectively, pursuant to employment agreements. Effective April 1, 1996, commensurate with an anticipated reduction in responsibilities, the annual compensation to be paid to each such person was reduced to $50,000 per year. (11) Includes 290,000 shares beneficially owned by Dr. Melnick's wife, as to which Dr. Melnick disclaims beneficial ownership. (12) Includes 46,667 shares subject to presently exercisable stock options. Excludes 93,333 shares subject to unexercisable options. (13) Includes 269,500 shares subject to presently exercisable stock options. Excludes 1,065,000 shares subject to unexercisable options. DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 50,000,000 shares of authorized Common Stock and 1,000,000 shares of authorized Preferred Stock, $.01 par value. Copies of the Articles of Incorporation and Bylaws have been filed as exhibits with the Commission and are incorporated by reference herein. COMMON STOCK Holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of shareholders, including the election of directors. Since the Common Stock does not have cumulative voting rights, the holders of a majority of the outstanding shares voting for election of directors can elect all members of the Board of Directors. A majority vote is also sufficient for other actions that require the vote or concurrence of shareholders. See "Principal and Selling Shareholders." Dividends may be paid to holders of Common Stock when and if declared by the Board of Directors out of funds legally available therefor. See "Price Range of Common Stock and Dividends." Holders of Common Stock will be entitled to share ratably in the assets of the Company legally available for distribution to shareholders in the event of liquidation or dissolution. The holders of Common Stock have no preemptive or conversion rights. The shares of Common Stock offered hereby will be, when issued and paid for, fully paid and not liable for further call or assessment. PREFERRED STOCK Although the Company has no present plans to issue shares of Preferred Stock, Preferred Stock may be issued from time to time in one or more classes or series with such designations, powers, preferences, rights, qualifications, limitations and restrictions as may be fixed by the Company's Board of Directors. The Board of 44 45 Directors, without obtaining shareholder approval, could issue the Preferred Stock with voting and/or conversion rights and thereby dilute the voting power and equity of the holders of Common Stock and adversely affect the market price of such stock. See "Risk Factors--Anti-Takeover Provisions; Possible Issuance of Preferred Stock." CERTAIN FLORIDA LEGISLATION The Company is subject to (i) the Florida Control Share Act, which generally provides that shares acquired in excess of certain specified thresholds will not possess any voting rights unless such voting rights are approved by a majority vote of the corporation's disinterested shareholders, and (ii) the Florida Fair Price Act, which generally requires supermajority approval by disinterested directors or shareholders of certain specified transactions between a corporation and holders of more than 10% of the outstanding shares of the corporation (or their affiliates). CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK The authorized but unissued shares of Common Stock and Preferred Stock are available for future issuance without shareholder approval. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved Common Stock and Preferred Stock may enable the Board of Directors to issue shares to persons friendly to current management which could render more difficult or discourage an attempt to obtain control of the Company by means of a proxy contest, tender offer, merger or otherwise, and thereby protect the continuity of the Company's management. See "Risk Factors -- Anti-Takeover Provisions; Possible Issuance of Preferred Stock." ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS Certain provisions of the Articles of Incorporation and Bylaws of the Company summarized in the following paragraphs may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by shareholders. Special Meeting of Shareholders. The Articles of Incorporation provide that special meetings of shareholders of the Company may be called only by the Board of Directors or upon the written demand of the holders of not less than fifty percent of all votes entitled to be cast on any issue proposed to be considered at a special meeting. This provision will make it more difficult for shareholders to take actions opposed by the Board of Directors. Advance Notice Requirements for Shareholder Proposals and Director Nominations. The Articles of Incorporation provide that shareholders seeking to bring business before an annual meeting of shareholders, or to nominate candidates for election as directors at an annual meeting of shareholders, must provide timely notice thereof in writing. To be timely, a shareholder's notice must be delivered to or mailed and received at the executive offices of the Company not less than 120 days nor more than 180 days prior to the first anniversary of the date of the Company's notice of annual meeting provided with respect to the previous year's annual meeting. The Articles of Incorporation also specify certain requirements for a shareholder's notice to be in proper written form. These provisions may preclude some shareholders from bringing matters before the shareholders at an annual meeting or from making nominations for directors at an annual meeting. TRANSFER AGENT The transfer agent and registrar of the Common Stock is Boston Equiserve, Boston, Massachusetts. 45 46 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have 14,576,170 shares of Common Stock outstanding, based upon the number of shares outstanding as of June 15, 1996. Of these shares, the 5,000,000 shares sold in this offering (5,750,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradeable without restriction or further registration under the Securities Act, except for any shares purchased by "affiliates" of the Company, as that term is defined under the Securities Act ("Affiliates"). SALES OF RESTRICTED SHARES There are 7,269,270 Restricted Shares which are deemed "restricted securities" under Rule 144 under the Securities Act and may not be sold unless they are registered under the Securities Act or unless an exemption, such as the exemption provided by Rule 144, is available. Of this amount, 6,970,734 shares are subject to the Lock-up Agreements described below. Of the 298,536 shares that are not subject to the Lock-up Agreements, all are eligible for sale in the public market in accordance with Rule 144, including 200,981 shares subject to immediate resale under the provisions of Rule 144(k). Certain securityholders have the right to have their Restricted Shares registered by the Company under the Securities Act as described below. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including an Affiliate, who has beneficially owned Restricted Shares for at least two years, is entitled to sell, within any three-month period, a number of such shares that does not exceed the greater of (i) one percent of the then outstanding shares of Common Stock (approximately 145,762 shares after this offering) or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks preceding the date on which notice of such sale is filed with the Commission. In addition, under Rule 144(k), a person who is not an Affiliate and has not been an Affiliate for at least three months prior to the sale and who has beneficially owned the Restricted Shares for at least three years may resell such shares without compliance with the foregoing requirements. In meeting the two and three year holding periods described above, a holder of Restricted Shares can include the holding periods of a prior owner who was not an Affiliate. On July 27, 1995, the Securities and Exchange Commission proposed to reduce the Rule 144(d) holding period for resales of restricted securities from two years to one year and to reduce the Rule 144(k) holding period from three years to two years. If the proposed changes are adopted, the reduced holding periods will apply to all securities eligible for resale under Rule 144. OPTIONS As of June 15, 1996, options to purchase a total of 1,941,029 shares of Common Stock were outstanding, of which options for an aggregate of 444,127 shares of Common Stock were exercisable. Of the exercisable options, 299,500 shares are subject to Lock-up Agreements. The Company has filed one or more registration statements on Form S-8 under the Securities Act to register all shares of Common Stock subject to then outstanding stock options and Common Stock issuable pursuant to the Company's Stock Option Plan and Employee Stock Purchase Plans. The shares registered pursuant to these registration statements will, once exercisable, be eligible for sale in the public markets, subject to the Lock-up Agreements, to the extent applicable. See "Management." LOCK-UP AGREEMENTS Holders of 6,970,734 shares of Common Stock outstanding immediately prior to this offering and holders of options to purchase an aggregate of 1,447,000 shares of Common Stock have agreed, pursuant to the Lock-up Agreements, that they will not, without the prior written consent of Dean Witter Reynolds Inc., offer, sell, contract to sell or otherwise dispose of any shares of Common Stock beneficially owned by them or exercise any registration rights in respect of such Common Stock for a period of 90 days after the date of this Prospectus (the "Lock-up Period"). 46 47 REGISTRATION RIGHTS The Selling Shareholders (collectively, the "Rights Holders") will be entitled, subject to the Lock-up Agreements, to require the Company to register under the Securities Act a total of approximately 6,919,015 shares of outstanding Common Stock (the "Registrable Shares") (approximately 3,419,015 shares after giving effect to the sale of shares in this offering). The Registration Rights Agreement provides that under certain circumstances and subject to certain limitations the Rights Holders may require the Company to file a registration statement under the Securities Act with respect to the Registrable Shares and the Company must use all commercially reasonable efforts to effect such registration. In addition, in the event the Company proposes to register any of its securities, either for its own account or for the account of a security holder, the Rights Holders may be entitled to include the Registrable Shares in such registration, subject to certain limitations on the number of shares to be included in the registration by the underwriter of such offering. 47 48 UNDERWRITING The Underwriters named below, for whom Dean Witter Reynolds Inc. and Alex. Brown & Sons Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC and Smith Barney Inc. are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement (a copy of which has been filed as an exhibit to the Registration Statement), to purchase from the Company and the Selling Shareholders the number of shares of Common Stock set forth opposite their respective names in the table below: The Underwriting Agreement provides that the obligations of the several Underwriters thereunder are subject to approval of certain legal matters by counsel and to various other conditions. The nature of the Underwriters' obligation is such that they must purchase all of the shares (other than those subject to the over-allotment option) if any are purchased. The Underwriters have advised the Company that they propose to offer the shares of Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers (who may include the Underwriters) at such public offering price less a concession not to exceed $ per share. Such dealers may reallow a concession not to exceed $ per share to other dealers. After the public offering, the public offering price may be reduced and concessions and reallowances to dealers may be changed by the underwriters. The Representatives have informed the Company that the Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. The Representatives intend to make a market in the Common Stock after completion of this offering. Certain Selling Shareholders have granted to the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to an additional 750,000 shares of Common Stock at the public offering price, less underwriting discounts and commissions to cover over-allotments, if any. After commencement of this offering, the Underwriters may confirm sales subject to the over-allotment option. The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. The Company, the officers and directors of the Company and the Selling Shareholders have agreed that they will not, during the period commencing on the date hereof and ending 90 days after the date of this prospectus (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock (whether such shares or any such securities are now owned by the undersigned or are hereafter acquired), or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. 48
NUMBER OF NAME SHARES -------------------------------------------------------------------------- --------- Dean Witter Reynolds Inc. ................................................ Alex. Brown & Sons Incorporated........................................... Donaldson, Lufkin & Jenrette Securities Corporation....................... Hambrecht & Quist LLC..................................................... Smith Barney Inc. ........................................................ --------- Total........................................................... 5,000,000 ======== 49 In connection with this offering, the Underwriters and other selling group members may engage in passive market making transactions in the Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act. Passive market making consists of displaying bids on the Nasdaq National Market limited by the prices of independent market makers and effecting purchases limited by such prices and in response to order flow. Net purchases by a passive market maker on each day are limited to a specified percentage of the passive market maker's average daily trading volume in the Common Stock during a specified prior period and must be discontinued when such limit is reached. Passive market making may stabilize the market price of the Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company and certain of the Selling Shareholders by Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A., Miami, Florida. Certain legal matters relating to the offering will be passed upon for the Underwriters by Latham & Watkins, Washington, D.C. EXPERTS The consolidated balance sheets of the Company at December 31, 1994 and 1995 and the consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995, the balance sheet of Neonatal and Pediatric Intensive Care Medical Group, Inc. as of December 31, 1994 and the statements of operations, stockholders' equity and cash flows for the year ended December 31, 1994, and the balance sheet of Rocky Mountain Neonatology, P.C. as of December 31, 1995 and the statements of operations, stockholders' equity and cash flows for the year ended December 31, 1995, which are included in this Prospectus and Registration Statement, have been included herein in reliance on the report of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. The balance sheet of Neonatal Specialists, Ltd. as of December 31, 1995 and the statements of income and retained earnings, and cash flows for the year then ended, which are included in this Prospectus and Registration Statement, have been included herein in reliance on the report of Johnson & Moser, Ltd., independent accountants, given on the authority of that firm as experts in accounting and auditing. The balance sheet of Pediatric and Newborn Consultants, PC as of December 31, 1995 and the statements of earnings and retained earnings, and cash flows for the year then ended, which are included in this Prospectus and Registration Statement, have been included herein in reliance on the report of Deon E. Fitch, C.P.A., independent accountant, given on the authority of that individual as an expert in accounting and auditing. The balance sheet of West Texas Neonatal Associates, a Partnership, as of December 31, 1995 and the related statements of income and partners' equity, and cash flows for the year then ended, which are included in this Prospectus and Registration Statement, have been included herein in reliance on the report of Linda G. Medlock P.C., independent accountant, given on the authority of that firm as an expert in accounting and auditing. The consolidated balance sheet of Infant Care Specialists Medical Group, Inc. and subsidiary as of December 31, 1995 and the consolidated statements of income and retained earnings and cash flows for the year then ended, which are included in this Prospectus and Registration Statement, have been included herein in reliance on the report of Harlan & Boettger, independent accountants, given on the authority of that firm as experts in accounting and auditing. 49 50 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS THE REGISTRANT -- PEDIATRIX MEDICAL GROUP, INC. 50
PAGE ---- Report of Independent Accountants..................................................... F-2 Consolidated Balance Sheets as of December 31, 1994 and 1995, and March 31, 1996 (unaudited)......................................................................... F-3 Consolidated Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995, and the Three Months Ended March 31, 1995 and 1996 (unaudited)................ F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1993, 1994 and 1995, and the Three Months Ended March 31, 1996 (unaudited)................ F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995, and the Three Months Ended March 31, 1995 and 1996 (unaudited)................ F-6 Notes to Consolidated Financial Statements............................................ F-7 BUSINESSES ACQUIRED -- NEONATAL AND PEDIATRIC INTENSIVE CARE MEDICAL GROUP, INC. Report of Independent Accountants..................................................... F-19 Balance Sheets at December 31, 1994 and June 30, 1995 (unaudited)..................... F-20 Statements of Operations for the Year Ended December 31, 1994 and the Six Months Ended June 30, 1995 (unaudited)........................................................... F-21 Statements of Stockholders' Equity for the Year Ended December 31, 1994 and the Six Months Ended June 30, 1995 (unaudited).............................................. F-22 Statements of Cash Flows for the Year Ended December 31, 1994 and the Six Months Ended June 30, 1995 (unaudited)........................................................... F-23 Notes to Financial Statements......................................................... F-24 NEONATAL SPECIALISTS, LTD. Independent Auditors' Report.......................................................... F-31 Balance Sheet at December 31, 1995.................................................... F-32 Statement of Income and Retained Earnings for the Year Ended December 31, 1995........ F-33 Statement of Cash Flows for the Year Ended December 31, 1995.......................... F-34 Notes to Financial Statements......................................................... F-35 PEDIATRIC AND NEWBORN CONSULTANTS, PC Independent Auditor's Report.......................................................... F-38 Balance Sheet at December 31, 1995.................................................... F-39 Statement of Earnings and Retained Earnings for the Year Ended December 31, 1995...... F-40 Statement of Cash Flows for the Year Ended December 31, 1995.......................... F-41 Notes to Financial Statements......................................................... F-42 ROCKY MOUNTAIN NEONATOLOGY, P.C. Report of Independent Accountants..................................................... F-45 Balance Sheets at December 31, 1995 and March 31, 1996 (unaudited).................... F-46 Statements of Operations for the Year Ended December 31, 1995 and the Three Months Ended March 31, 1996 (unaudited).................................................... F-47 Statements of Stockholders' Equity for the Year Ended December 31, 1995 and the Three Months Ended March 31, 1996 (unaudited)............................................. F-48 Statements of Cash Flows for the Year Ended December 31, 1995 and the Three Months Ended March 31, 1996 (unaudited).................................................... F-49 Notes to Financial Statements......................................................... F-50 51 51
PAGE ---- WEST TEXAS NEONATAL ASSOCIATES Independent Auditors' Report.......................................................... F-55 Balance Sheets at December 31, 1995 and March 31, 1996 (unaudited).................... F-56 Statements of Income and Partners' Equity for the Year Ended December 31, 1995 and the Three Months Ended March 31, 1996 (unaudited)....................................... F-57 Statements of Cash Flows for the Year Ended December 31, 1995 and the Three Months Ended March 31, 1996 (unaudited).................................................... F-58 Notes to Financial Statements......................................................... F-59 INFANT CARE SPECIALISTS MEDICAL GROUP, INC. AND SUBSIDIARY Independent Auditors' Report.......................................................... F-61 Consolidated Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (unaudited)......................................................................... F-62 Consolidated Statements of Operations and Retained Earnings for the Years Ended December 31, 1994 and 1995 and the Three Months Ended March 31, 1996 (unaudited).... F-63 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and the Three Months Ended March 31, 1996 (unaudited)............................... F-64 Notes to Consolidated Financial Statements............................................ F-65 52 PEDIATRIX MEDICAL GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS F-1 53 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors Pediatrix Medical Group, Inc. Fort Lauderdale, Florida We have audited the accompanying consolidated balance sheets of Pediatrix Medical Group, Inc. as of December 31, 1994 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pediatrix Medical Group, Inc. as of December 31, 1994 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Fort Lauderdale, Florida January 29, 1996 F-2 54 PEDIATRIX MEDICAL GROUP, INC. CONSOLIDATED BALANCE SHEETS The accompanying notes are an integral part of these financial statements. F-3
DECEMBER 31, ----------------- MARCH 31, 1994 1995 1996 ------- ------- ----------- (IN THOUSANDS) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents..................................... $ 7,384 $18,499 $ 7,084 Investments in marketable securities.......................... -- 27,718 26,552 Accounts receivable, net...................................... 8,965 12,096 15,484 Prepaid expenses.............................................. 293 628 692 Other assets.................................................. 339 497 596 Income taxes receivable....................................... 179 330 383 ------- ------- ----------- Total current assets.................................. 17,160 59,768 50,791 Property and equipment, net..................................... 3,011 4,549 5,242 Other assets, net............................................... 124 5,564 21,338 ------- ------- ----------- Total assets.......................................... $20,295 $69,881 $77,371 ======= ======= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses......................... $ 2,784 $ 4,347 $ 7,539 Current portion of note payable............................... 64 64 64 Deferred income taxes......................................... 540 1,909 3,471 ------- ------- ----------- Total current liabilities............................. 3,388 6,320 11,074 Note payable.................................................... 815 751 735 ------- ------- ----------- Total liabilities..................................... 4,203 7,071 11,809 ------- ------- ----------- Preferred stock; voting, redeemable, cumulative, convertible, $.01 par value; 4,575,000 shares authorized, 4,571,063 shares issued and outstanding at December 31, 1994, and none issued and outstanding at December 31, 1995 and March 31, 1996; stated at redemption value of $13,000,103 plus accrued and unpaid dividends of $2,696,678 at December 31, 1994........... 15,697 -- -- Contingencies (Note 10) Stockholders' equity: Preferred stock; $.01 par value, 1,000,000 shares authorized, none issued and outstanding at December 31, 1995 and March 31, 1996................................................... -- -- -- Common stock; $.01 par value, 15,000,000 shares authorized at December 31, 1994 and 50,000,000 shares authorized at December 31, 1995 and March 31, 1996, 6,265,983 and 13,051,055 and 13,063,809 shares issued and outstanding at December 31, 1994 and 1995 and March 31, 1996, respectively............................................... 63 131 131 Additional paid-in capital.................................... -- 55,620 55,809 Retained earnings............................................. 332 7,045 9,657 Unrealized gain (loss) on investments......................... -- 14 (35) ------- ------- ----------- Total stockholders' equity............................ 395 62,810 65,562 ------- ------- ----------- Total liabilities and stockholders' equity............ $20,295 $69,881 $77,371 ======= ======= ========= 55 PEDIATRIX MEDICAL GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS The accompanying notes are an integral part of these financial statements. F-4
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, --------------------------- ----------------- 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT FOR (UNAUDITED) PER SHARE DATA) Net patient service revenue...................... $23,570 $32,779 $43,860 $ 8,886 $16,127 ------- ------- ------- ------- ------- Operating expenses: Salaries and benefits.......................... 14,852 20,723 29,545 6,270 10,796 Supplies and other operating expenses.......... 2,230 2,774 3,451 607 1,213 Depreciation and amortization.................. 95 244 363 74 233 ------- ------- ------- ------- ------- Total operating expenses............... 17,177 23,741 33,359 6,951 12,242 ------- ------- ------- ------- ------- Income from operations........................... 6,393 9,038 10,501 1,935 3,885 Investment income................................ 45 208 804 107 499 Interest expense................................. (105) (90) (117) (28) (35) Other expense, net............................... (17) -- -- -- -- ------- ------- ------- ------- ------- Income before income taxes..................... 6,316 9,156 11,188 2,014 4,349 Income tax provision............................. 2,166 3,749 4,475 805 1,737 ------- ------- ------- ------- ------- Net income............................. $ 4,150 $ 5,407 $ 6,713 $ 1,209 $ 2,612 ======= ======= ======= ======= ======= Per share data (1995 pro forma unaudited): Net income per common and common equivalent share.......................................... $ .55 $ .10 $ .19 ======= ======= ======= Weighed average shares used in computing net income per common and common equivalent share.......................................... 12,216 11,614 13,726 ======= ======= ======= 56 PEDIATRIX MEDICAL GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY The accompanying notes are an integral part of these financial statements. F-5
COMMON STOCK RETAINED ------------------ ADDITIONAL EARNINGS NUMBER OF PAID-IN (ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT) --------- ------ ---------- ------------ (IN THOUSANDS) Balance at December 31, 1992.......................... 6,857 $ 69 $ -- $ (4,662) Net income............................................ -- -- -- 4,150 Common stock issued................................... 204 2 291 -- Common stock retired.................................. (837) (8) (24) (2,553) Accrued and unpaid preferred stock dividends for the year ended December 31, 1993........................ -- -- (267) (921) --------- ------ ---------- ------------ Balance at December 31, 1993.......................... 6,224 63 -- (3,986) Net income............................................ -- -- -- 5,407 Common stock issued................................... 118 1 588 -- Common stock retired.................................. (76) (1) (154) (227) Accrued and unpaid preferred stock dividends for the year ended December 31, 1994........................ -- -- (434) (862) --------- ------ ---------- ------------ Balance at December 31, 1994.......................... 6,266 63 -- 332 Net income............................................ -- -- -- 6,713 Accrued and unpaid preferred stock dividends through conversion date, September 25, 1995................. -- -- (1,040) -- Common stock issued................................... 2,240 22 39,848 -- Conversion of preferred stock......................... 4,571 46 16,691 -- Tax benefit related to employee stock options......... -- -- 252 -- Common stock retired.................................. (26) -- (131) -- --------- ------ ---------- ------------ Balance at December 31, 1995.......................... 13,051 131 55,620 7,045 Net income (unaudited)................................ -- -- -- 2,612 Common stock issued (unaudited)....................... 14 2 72 -- Common stock retired (unaudited)...................... (2) (2) (44) -- Tax benefit related to employee stock options (unaudited)......................................... -- -- 161 -- --------- ------ ---------- ------------ Balance at March 31, 1996 (unaudited)................. 13,063 $131 $ 55,809 $ 9,657 ======== ====== ======= ========== 57 PEDIATRIX MEDICAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS The accompanying notes are an integral part of these financial statements. F-6
THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------- ----------------- 1993 1994 1995 1995 1996 ------- ------- -------- ------ -------- (IN THOUSANDS) (UNAUDITED) Cash flows from (used in) operating activities: Net income................................... $ 4,150 $ 5,407 $ 6,713 $1,209 $ 2,612 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............. 95 244 363 74 233 Deferred income taxes..................... 1,339 517 1,456 (121) 1,562 Other..................................... 17 -- (2) -- -- Changes in assets and liabilities: Accounts receivable..................... (2,692) (1,290) (3,131) 607 (3,388) Prepaid expenses and other assets....... (66) (449) (493) 194 (162) Income taxes receivable................. 1,362 428 101 -- 108 Other assets............................ (3) (7) 62 (103) (1,882) Accounts payable and accrued expenses... 479 521 871 412 752 ------- ------- -------- ------ -------- Net cash provided (used) by operating activities......................... 4,681 5,371 5,940 2,272 (165) ------- ------- -------- ------ -------- Cash flows used in investing activities: Physician group acquisition payments......... -- -- (4,938) -- (11,584) Purchase of investments...................... -- -- (34,382) -- (6,621) Proceeds from sale of investments............ -- -- 6,681 -- 7,738 Purchase of property and equipment........... (1,897) (578) (1,861) (161) (794) ------- ------- -------- ------ -------- Net cash used by investing activities..... (1,897) (578) (34,500) (161) (11,261) ------- ------- -------- ------ -------- Cash flows (used in) from financing activities: Borrowings on notes payable.................. 2,359 -- -- -- -- Payments on notes payable.................... (2,997) (87) (64) (16) (16) Proceeds from issuance of common stock....... 579 590 39,871 -- 72 Payments made to retire common stock......... (2,585) (381) (132) (13) (45) ------- ------- -------- ------ -------- Net cash (used in) provided by financing activities............... (2,644) 122 39,675 (29) 11 ------- ------- -------- ------ -------- Net increase (decrease) in cash and cash equivalents.................................. 140 4,915 11,115 2,082 (11,415) Cash and cash equivalents at beginning of year/period.................................. 2,329 2,469 7,384 7,384 18,499 ------- ------- -------- ------ -------- Cash and cash equivalents at end of year/period.................................. $ 2,469 $ 7,384 $ 18,499 $9,466 $ 7,084 ======= ======= ======== ====== ======== Supplemental disclosure of cash flow information: Cash paid for: Interest.................................. $ 125 $ 130 $ 117 $ 28 $ 35 Income taxes.............................. $ 85 $ 2,354 $ 2,943 $ -- $ 66 Non-cash investing and financing activities: Accrued and unpaid preferred stock dividends............................... $ 1,189 $ 1,269 $ 1,040 $ 353 $ -- 58 PEDIATRIX MEDICAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL: The principal business activity of Pediatrix Medical Group, Inc. ("Pediatrix" or the "Company") is to provide physician management services to hospital-based neonatal and pediatric intensive care units in twelve states and Puerto Rico. Contractual arrangements with hospitals are a) fee-for-service contracts whereby hospitals agree, in exchange for the Company's services, to authorize the Company and its healthcare professionals to bill and collect the professional component of the charges for medical services rendered by the Company's healthcare professionals; and b) administrative fees whereby the Company is assured a minimum revenue level. In September 1995, the Company completed its initial public offering whereby it issued 2,200,000 shares of common stock, resulting in cash proceeds to the Company of approximately $39.7 million. In addition, in connection with the initial public offering, the Company authorized 50,000,000 shares of common stock and 1,000,000 shares of preferred stock. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Presentation The financial statements (the "consolidated financial statements") include the accounts of Pediatrix consolidated with the accounts of the Pediatrix Medical Group of Florida, Inc. (the "Subsidiary") and combined with the accounts of the professional associations (the "PA Contractors") with which the Company currently has specific management billing arrangements. All significant intercompany and interaffiliate accounts and transactions have been eliminated. The financial statements of the PA Contractors are consolidated with Pediatrix because Pediatrix, as opposed to affiliates of Pediatrix, has unilateral control over the assets and operations of the PA Contractors. Notwithstanding the lack of technical majority ownership, consolidation of the PA Contractors is necessary to present fairly the financial position and results of operations of Pediatrix because of the existence of a parent-subsidiary relationship by means other than record ownership of the PA Contractors' voting common stock. Control of the assets and operations of the PA Contractors by Pediatrix is permanent and other than temporary because the PA Contractors' agreements with Pediatrix provide that the term of the arrangements are permanent, subject only to termination by Pediatrix and that the PA Contractors shall not terminate the agreements without the prior written consent of Pediatrix. Also, the agreements provide that Pediatrix or its assigns has the right, but not the obligation, to purchase the stock of the PA Contractors. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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. Actual results could differ from those estimates. Accounts Receivable and Revenues 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. These receivables are presented net of an estimated allowance for contractual adjustments and uncollectibles which is charged to operations based on the Company's evaluation of expected collections resulting from an analysis of current and past due accounts, past collection experience in relation to amounts billed and other relevant information. Contractual adjustments result from the difference between the physician rates for services performed and F-7 59 PEDIATRIX MEDICAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) reimbursements by government-sponsored healthcare programs and insurance companies for such services. Bad debts are included in contractual allowances and uncollectibles because they are not considered material. Concentration of credit risk relating to accounts receivable is limited by number, diversity and geographic dispersion of the neonatology 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 35% and 41% of accounts receivable at December 31, 1994 and 1995, 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 maintains its cash and cash equivalents which consist principally of demand deposits, short-term government securities and amounts on deposit in money market accounts with principally four financial institutions. Investments The Company determines the appropriate classification of its investments in debt securities at the time of purchase and reevaluates such determination at each balance sheet date. Investments are classified as available for sale and are carried at fair value, with unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. Fair value is determined by the most recently traded price of the security at the balance sheet date. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and interest income and declines in value judged to be other than temporary are included in investment income. Realized gains and losses are included in earnings using the specific identification method for determining the cost of securities sold. Investments are stated at fair market value which approximates amortized cost and consist principally of tax exempt municipal obligations (fair value of $19.4 million at December 31, 1995) as well as U.S. government and government agency securities (fair value of $8.3 million at December 31, 1995). The Company's investments in marketable securities represent cash available for current operations and are accordingly classified as current assets. Property and Equipment Property and equipment is recorded at cost. Depreciation of property and equipment is computed on the straight-line method over the estimated useful lives which range from five to forty years. 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. Other Assets Other assets include the excess of cost over the fair value of net assets acquired which is being amortized on a straight-line basis over twenty-five years. In addition, other assets include payments to physicians for non- competition and other agreements which are being amortized over their terms which range from one to five years. At each balance sheet date following the acquisition of a business, the Company reviews the carrying value of the goodwill to determine if facts and circumstances suggest that it may be impaired or that the amortization period may need to be changed. The Company considers external factors relating to each acquired business, including hospital and physician contract changes, local market developments, changes in F-8 60 PEDIATRIX MEDICAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) third party payments, national health care trends, and other publicly available information. If these external factors indicate the goodwill will not be recoverable, as determined based upon undiscounted cash flows before interest charges of the business acquired over the remaining amortization period, the carrying value of the goodwill will be reduced. The Company does not believe there currently are any indicators that would require an adjustment to the carrying value of the goodwill or its estimated periods of recovery at December 31, 1995. Professional Liability Coverage The Company maintains professional liability coverage which indemnifies the Company and its employee physicians and independent contractor physicians on a claims made basis with a portion of self insurance retention. The Company records an estimate of its liabilities for claims incurred but not reported based on an actuarial valuation. Such liabilities are not discounted. Income Taxes The Company utilizes the liability method of accounting for deferred income taxes. Under this method, 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 Options The Company follows the practice of recording amounts received upon the exercise of options by crediting common stock and additional paid-in capital. No charge has been reflected in the consolidated statements of operations as a result of the grant or exercise of stock options, as the fair market value of the Company's stock equals the exercise price on the date the options are granted. To the extent that the Company realizes an income tax benefit from the exercise or early disposition of certain stock options, this benefit results in a decrease in current income taxes payable and an increase in additional paid-in capital. Change in Accounting Standards Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" must be implemented by the Company in 1996. This statement requires that long-lived assets and certain intangibles to be held and used by the Company be reviewed for impairment. This pronouncement is not expected to have a material impact on the financial statements of the Company. SFAS No. 123, "Accounting for Stock-Based Compensation" must also be implemented by the Company in 1996. This pronouncement establishes financial accounting and reporting standards for stock-based employee compensation plans. It encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options and other equity instruments to employees based on new fair value accounting rules. Companies that choose not to adopt the new fair value accounting rules will be required to disclose proforma net income and earnings per share under the new method. The Company anticipates adopting the disclosure provisions of SFAS No. 123, although the impact of such disclosure has not been determined. Interim Financial Statements The financial statements at March 31, 1996, and for the three months ended March 31, 1996 and 1995 are unaudited and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results of interim periods. The results of operations for the F-9 61 PEDIATRIX MEDICAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) three months ended March 31, 1996 are not necessarily indicative of the results to be expected for the full year or any other interim period. Net Income Per Common and Common Equivalent Share (Unaudited) As a result of the conversion of the preferred stock, which was not determined to be a common stock equivalent, into common stock in connection with the initial public offering, the Company has presented pro forma net income per common and common equivalent share for the years ended December 31, 1994 and 1995 and for the three months ended March 31, 1995. The calculation of the proforma shares is comparable to primary and fully dilutive common and common equivalent shares subsequent to the initial public offering. Pro forma net income per common and common equivalent share is computed based upon the weighted average number of shares of common stock and common stock equivalents, including the number of shares of common stock issuable upon conversion of preferred stock, outstanding during the period. Pursuant to the requirements of the Securities and Exchange Commission (SEC), common stock issued by the Company during the 12 months immediately preceding the initial filing of the registration statement with the SEC, plus common stock equivalents relating to the grant of common stock options during the same period, have been included in the calculation of pro forma weighted average number of common and common stock equivalents outstanding for the years ended December 31, 1994 and 1995, and for the three months ended March 31, 1995, using the treasury stock method and the initial public offering price of $20 per share. 3. ACCOUNTS RECEIVABLE AND NET PATIENT SERVICE REVENUE: Accounts receivable consist of the following: Net patient service revenue consists of the following:
DECEMBER 31, --------------------- 1994 1995 -------- -------- (IN THOUSANDS) Gross accounts receivable...................................... $ 22,211 $ 25,184 Less allowance for contractual adjustments and uncollectibles............................................... (13,246) (13,088) -------- -------- $ 8,965 $ 12,096 ======== ======== F-10
YEARS ENDED DECEMBER 31, ---------------------------------- 1993 1994 1995 -------- -------- -------- (IN THOUSANDS) Gross patient service revenue...................... $ 45,829 $ 59,405 $ 79,360 Less contractual adjustments and uncollectibles.... (25,475) (30,885) (40,843) Hospital contract administrative fees.............. 3,216 4,259 5,343 -------- -------- -------- $ 23,570 $ 32,779 $ 43,860 ======== ======== ======== 62 PEDIATRIX MEDICAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. PROPERTY AND EQUIPMENT: Property and equipment consist of the following: 5. OTHER ASSETS: Other assets consist of the following:
DECEMBER 31, ------------------- 1994 1995 ------ ------ (IN THOUSANDS) Land............................................................. $ 389 $1,308 Building......................................................... 1,608 1,644 Equipment and furniture.......................................... 1,445 2,104 ------ ------ 3,442 5,056 Less accumulated depreciation.................................... (431) (748) Construction in progress......................................... -- 241 ------ ------ $3,011 $4,549 ====== ====== On July 27, 1995, the Company completed the acquisition of the stock of Neonatal and Pediatric Intensive Care Medical Group, Inc. ("NAPIC"), a California professional corporation, in exchange for approximately $3.2 million in cash. In connection with the transaction, the Company has recorded assets of $4.6 million including $3.8 million of goodwill and liabilities of $1.4 million. The Company has accounted for the transaction using the purchase method of accounting for financial reporting purposes and the excess of the cost over fair value of net assets acquired is being amortized on a straight-line basis over 25 years. NAPIC's results of operations have been included in the consolidated financial statements from the date of acquisition. The following unaudited pro forma information combines the consolidated results of operations of the Company and NAPIC as if the acquisition had occurred on January 1, 1994:
DECEMBER 31, ----------------- 1994 1995 ---- ------ (IN THOUSANDS) Excess of cost over net assets acquired........................... $ -- $3,870 Physician agreements.............................................. -- 1,692 Other............................................................. 124 106 ---- ------ 124 5,668 Less accumulated amortization..................................... -- (104) ---- ------ $124 $5,564 ==== ====== The pro forma results do not necessarily represent results which would have occurred if the acquisition had taken place at the beginning of the period, nor are they indicative of the results of future combined operations. F-11
YEARS ENDED DECEMBER 31, ------------------- 1994 1995 ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net patient service revenue.................................... $36,527 $45,999 Net income..................................................... 5,381 6,639 Net income per share........................................... 0.47 .54 63 PEDIATRIX MEDICAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following: 7. NOTE PAYABLE: Note payable consists of the following:
DECEMBER 31, --------------- 1994 1995 ------ ------ (IN THOUSANDS) Accounts payable................................................... $ 918 $ 786 Accrued salaries and bonuses....................................... 599 779 Accrued payroll taxes and benefits................................. 461 726 Accrued professional liability coverage............................ 500 1,268 Other accrued expenses............................................. 306 788 ------ ------ $2,784 $4,347 ====== ====== The Company is required to maintain minimum levels of net income and net worth under the terms of the mortgage agreement. The mortgage is collateralized by the Company's headquarters carried at $1,545,000 at December 31, 1995. The Company has a revolving line of credit in the amount of $7,000,000 and another $2,000,000 line of credit to cover deductibles under its professional liability insurance policies. Both facilities bear interest at prime plus .5%. The Company did not have an outstanding balance under either line of credit at December 31, 1994 or 1995. The revolving line of credit is collateralized by all tangible personal and intangible property of the Company. The agreement provides for the Company to maintain certain covenants including a requirement that the Company maintain minimum levels of net income and net worth, as defined. 8. PREFERRED STOCK: On October 26, 1992, the Company issued 4,571,063 shares of 9% voting, redeemable, cumulative convertible Preferred Stock for $13,000,103. Pursuant to the terms of the Preferred Stock Purchase Agreement (the "Agreement"), each share of Preferred Stock was convertible into one share of common stock, subject to adjustments in certain events. The Agreement indicated that upon conversion of the Preferred Stock, all accumulated and unpaid dividends, whether or not declared, since the date of issue up to and including the date of conversion would be forgiven. On September 25, 1995, in connection with the initial public offering, the Company's Preferred Stock was converted into common stock of the Company and the unpaid dividends of $3,736,589 were forgiven and the redemption value of the Preferred Stock was credited to common stock and additional paid-in capital accounts. F-12
DECEMBER 31, ------------- 1994 1995 ---- ---- (IN THOUSANDS) Mortgage payable to bank, interest at prime plus .5% (9.5% at December 31, 1995) quarterly payments of principal of $16,032 plus interest through maturity date of October 4, 1998 at which time the unpaid principal balance of $638,488 is due................................ $879 $815 Less current portion................................................ 64 64 ---- ---- $815 $751 ==== ==== 64 PEDIATRIX MEDICAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES: The components of the income tax provision are as follows: The Company files its tax return on a consolidated basis with the Subsidiary. The remaining PA Contractors file tax returns on an individual basis. The effective tax rate on income was 34%, 41% and 40% for the years ended December 31, 1993, 1994 and 1995, respectively. The differences between the effective rate and the U.S. federal income tax statutory rate of 35% are as follows:
DECEMBER 31, ------------------------ 1993 1994 1995 ------ ------ ------ (IN THOUSANDS) Federal: Current.................................................... $ 527 $2,460 $2,573 Deferred................................................... 1,269 722 1,184 ------ ------ ------ 1,796 3,182 3,757 ------ ------ ------ State: Current.................................................... -- 322 454 Deferred................................................... 370 245 264 ------ ------ ------ 370 567 718 ------ ------ ------ Total.............................................. $2,166 $3,749 $4,475 ====== ====== ====== The significant components of deferred income tax assets and liabilities are as follows:
DECEMBER 31, ------------------------ 1993 1994 1995 ------ ------ ------ (IN THOUSANDS) Tax at statutory rate........................................ $2,211 $3,205 $3,916 Statutory federal surtax exemption........................... (63) (91) (112) State income tax, net of federal benefit..................... 60 333 451 Change in valuation allowance................................ (300) (450) -- Other, net................................................... 258 752 220 ------ ------ ------ Income tax provision......................................... $2,166 $3,749 $4,475 ====== ====== ====== F-13
DECEMBER 31, ----------------------------------------------- 1994 1995 ---------------------- ---------------------- DEFERRED INCOME TAX DEFERRED INCOME TAX ---------------------- ---------------------- ASSETS LIABILITIES ASSETS LIABILITIES ------ ----------- ------ ----------- (IN THOUSANDS) Allowances for uncollectible accounts receivable and other expenses recognized on a cash basis by certain PA Contractors...................... $738 $(1,314) $389 $(2,711) Property and equipment........................... 1 (47) -- (139) Net operating loss carryforward.................. 151 -- 552 -- ------ ----------- ------ ----------- Total.................................. 890 (1,361) 941 (2,850) Current deferred income taxes.................... -- (540) -- (1,909) ------ ----------- ------ ----------- Total noncurrent deferred income taxes................................ $890 $ (821) $941 $ (941) ===== ======= ===== ======= Net noncurrent deferred income taxes............. $ 69 ===== 65 PEDIATRIX MEDICAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The net noncurrent deferred income tax asset for the year ended December 31, 1994, is included in other assets. The income tax benefits related to the exercise of stock options reduces taxes currently payable and is credited to additional paid-in capital. Such amounts totaled $252,180 for the year ended December 31, 1995. The Company has net operating loss carryforwards for federal and state tax purposes of approximately $369,000 and $1,377,000 at December 31, 1994 and December 31, 1995, respectively, expiring at various times commencing in 1997. As of December 31, 1995, U.S. Federal Income Tax Returns for 1992 and 1993 were in the process of examination by the Internal Revenue Service, which the Company believes will propose certain adjustments for additional taxes and interest. The Company believes that the tax returns are substantially correct as filed and intends to vigorously contest any proposed adjustments. The Company believes that the amounts that have been provided are adequate and that the ultimate resolution of the examination will result in no material impact on the Company's consolidated results of operations, financial position or cash flows. 10. CONTINGENCIES: During the ordinary course of business, the Company has become a party to pending and threatened legal actions and proceedings, most of which involve claims of medical malpractice and are generally covered by insurance. These lawsuits are not expected to result in judgments which would exceed professional liability insurance coverage, and therefore, will not have a material impact on the Company's consolidated results of operations, financial position or liquidity, notwithstanding any possible insurance recovery. 11. RETIREMENT PLAN: The Company has a qualified contributory savings plan (the "Plan") as allowed under Section 401(k) of the Internal Revenue Code. The Plan permits participant contributions and allows elective company contributions based on each participant's contribution. Participants may elect to defer up to 15% of their annual compensation by contributing amounts to the Plan. The Company approved contributions of $375,339, $473,249 and $559,125 to the Plan during the years ended December 31, 1993, 1994 and 1995, respectively. F-14 66 PEDIATRIX MEDICAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. HISTORICAL NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE: Net income per common and common equivalent share on a historical basis, both primary and fully diluted, are as follows: Primary net income per common and common equivalent share is computed by dividing net income available to common shareholders by the weighted average number of common and common equivalent shares outstanding during the period. The voting, redeemable, cumulative convertible preferred stock issued in October 1992 was determined not to be a common stock equivalent. In computing primary net income per share, preferred stock dividends reduce income available to common shareholders. Fully diluted net income per share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period and includes 4,571,063 shares of common stock assumed to be issued upon conversion of all shares of the preferred stock described in Note 8 for December 31, 1993 and 1994. Pursuant to the requirements of the SEC, common stock issued by the Company plus common stock equivalents relating to the grant of common stock options, during the twelve months immediately preceding the initial filing of the registration statement with the SEC, have been included in the calculation of the weighted average number of common and common equivalent shares outstanding on a primary and fully diluted basis for the years ended December 31, 1993, 1994 and 1995, using the treasury stock method and the initial public offering price of $20 per share. 13. STOCK OPTION PLAN: In 1993, the Company's Board of Directors authorized a stock option plan. Under the plan, options to purchase shares of common stock may be granted to certain employees at a price not less than the fair market value of the shares on the date of grant. The options must be exercised within ten years from the date of grant. The stock options become exercisable on a prorata basis over a three year period from the date of grant. As of January 18, 1995, 1,500,000 options were authorized by the Company's Board of Directors and the previously issued options were confirmed. The additional authorization of options resulted in 268,300 options available for grant as of that date. F-15
YEARS ENDED DECEMBER 31, ------------------------ 1993 1994 1995 ------ ------ ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Income applicable to common stock: Net income................................................ $4,150 $5,407 $6,713 Less: preferred stock dividends........................... 1,189 1,296 1,040 ------ ------ ------ Income applicable to common stock........................... $2,961 $4,111 $5,673 ------ ------ ------ Net income per share: Primary................................................... $ 0.43 $ 0.60 $ 0.65 ------ ------ ------ Fully diluted............................................. $ 0.36 $ 0.47 $ 0.55 ------ ------ ------ Weighted average number of common and common equivalent shares outstanding: Primary................................................... 6,833 6,853 8,773 ------ ------ ------ Fully diluted............................................. 11,415 11,430 12,216 ------ ------ ------ 67 PEDIATRIX MEDICAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pertinent information covering the stock option plan is as follows: 14. SUBSEQUENT EVENTS: Subsequent to year end, the Company completed acquisitions of three neonatology and pediatric physician group practices for a total of approximately $11 million cash. The agreements provide for additional payments of up to $2 million in 1997 based upon achievement of certain operating targets. The acquisitions will be accounted for using the purchase method of accounting. 15. SUBSEQUENT EVENTS (UNAUDITED): During the second quarter of 1996, the Company completed acquisitions of three neonatology and pediatric physician group practices: - On May 1, 1996, the Company, through its PA Contractors, acquired the stock of Rocky Mountain Neonatology, P.C., a Colorado professional corporation, in exchange for approximately $7.2 million in cash. - On May 30, 1996, the Company, through its PA Contractors, acquired certain assets of West Texas Neonatal Associates, a Texas general partnership, in exchange for approximately $5.25 million in cash. - On June 6, 1996, the Company, through its PA Contractors, acquired certain assets of Infant Care Specialists Medical Group, Inc., a California professional corporation, in exchange for approximately $6 million in cash. The Company has accounted for the transactions using the purchase method of accounting and the excess of cost over fair value of net assets acquired is being amortized on a straight-line basis over 25 years. The results of operations of the acquired companies have been included in the consolidated financial statements from the dates of acquisition. The following unaudited pro forma consolidated results of operations give effect to the acquisitions completed in 1996 as if they had occurred as of January 1, 1995 and do not purport to be indicative of what would have occurred had the acquisitions actually been made as of such date or of results which may occur in the future. Adjustments made in arriving at these results include the reduction of certain amounts of compensation, bonuses and other benefits paid principally to shareholders and other physicians, the reduction F-16
NUMBER OF OPTION PRICE EXPIRATION SHARES PER SHARE DATE --------- ------------- ---------- Outstanding at December 31, 1993................. 200,000 $ 2.84-$ 3.12 2003 Granted........................................ 1,035,450 $ 5.00-$10.00 Canceled....................................... (3,750) $ 5.00 --------- ------------- Outstanding at December 31, 1994................. 1,231,700 $ 2.84-$10.00 2003-2004 Granted........................................ 841,500 $10.00-$21.50 Canceled....................................... (324,583) $ 3.12-$12.50 Exercised...................................... (39,709) $ 3.12-$10.00 --------- ------------- Outstanding at December 31, 1995................. 1,708,908 $ 2.84-$21.50 2003-2005 ======== ============ Exercisable at December 31, 1995................. 306,872 $ 2.84-$10.00 ======== ============ 68 PEDIATRIX MEDICAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) in the cost of malpractice insurance, the amortization of goodwill, the elimination of investment income assumed to be used for the acquisitions and the application of the Company's effective tax rate on the combined earnings. On May 14, 1996, the Company received the Internal Revenue Service's (IRS) proposed adjustments to the Company's tax liability in connection with its examination of the Company's 1992, 1993, and 1994 federal income tax returns as discussed in Note 9 to the Consolidated Financial Statements. The IRS has challenged certain deductions that, if disallowed, would result in additional taxes of approximately $4.5 million, plus interest. The Company and its tax advisors are in the process of preparing a response to the IRS. The Company and its tax advisors believe that the tax returns are substantially correct as filed and intend to vigorously contest the proposed adjustments. The Company and its tax advisors also believe that the amounts that have been provided for income taxes are adequate and that the ultimate resolution of the examination will not result in a material adverse effect on the Company's consolidated results of operations, financial position or cash flows. F-17
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1995 MARCH 31, 1996 ----------------- ------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Net patient service revenue................. $69,423 $ 21,342 Net income.................................. 7,097 2,802 Net income per share........................ .58 .20 69 NEONATAL AND PEDIATRIC INTENSIVE CARE MEDICAL GROUP, INC. FINANCIAL STATEMENTS F-18 70 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors Neonatal and Pediatric Intensive Care Medical Group, Inc. We have audited the accompanying balance sheet of Neonatal and Pediatric Intensive Care Medical Group, Inc. as of December 31, 1994 and the related statements of operations, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Neonatal and Pediatric Intensive Care Medical Group, Inc. as of December 31, 1994, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Los Angeles, California July 21, 1995 F-19 71 NEONATAL AND PEDIATRIC INTENSIVE CARE MEDICAL GROUP, INC. BALANCE SHEETS See accompanying notes. F-20
DECEMBER 31, 1994 JUNE 30, 1995 ----------------- ------------- (UNAUDITED) ASSETS: Current assets: Cash and cash equivalents.................................... $ 194,916 $ 194,831 Accounts receivable, net of allowance for uncollectibles of $129,046 at December 31, 1994 and $153,435 at June 30, 1995...................................................... 788,809 698,275 Income tax receivable........................................ 10,982 10,982 Equity securities available for sale......................... 22,582 83,607 Prepaid expenses and other assets............................ 33,230 37,059 ----------------- ------------- Total current assets................................. 1,050,519 1,024,754 Equipment, net of accumulated depreciation of $14,093 at December 31, 1994 and $14,263 at June 30, 1995............... 1,555 1,385 Deferred tax asset............................................. 63,487 81,207 Other assets................................................... 58,804 72,808 ----------------- ------------- Total assets......................................... $ 1,174,365 $ 1,180,154 ============= ========== LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable and accrued expenses........................ $ 246,886 $ 319,835 Deferred revenue............................................. 122,500 17,500 Deferred tax liability....................................... 222,324 236,829 ----------------- ------------- Total current liabilities............................ 591,710 574,164 Professional claims liability.................................. 234,456 320,098 ----------------- ------------- Total liabilities.................................... 826,166 894,262 ----------------- ------------- Commitments and contingencies Stockholders' equity: Common stock; no par value, 100,000 shares authorized, 60,000 shares issued and outstanding............................. 135,000 135,000 Unrealized valuation adjustment, net of tax effect........... 835 12,041 Retained earnings............................................ 212,364 138,851 ----------------- ------------- Total stockholders' equity........................... 348,199 285,892 ----------------- ------------- Total liabilities and stockholders' equity........... $ 1,174,365 $ 1,180,154 ============= ========== 72 NEONATAL AND PEDIATRIC INTENSIVE CARE MEDICAL GROUP, INC. STATEMENTS OF OPERATIONS See accompanying notes. F-21
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, 1994 JUNE 30, 1995 ----------------- ------------- (UNAUDITED) Operating revenues: Net patient service revenue.................................. $ 3,748,454 $ 2,139,730 ----------------- ------------- Operating expenses: Stockholders' compensation and benefits...................... 1,935,454 1,011,851 Salaries and benefits........................................ 1,280,441 860,133 Supplies and other operating expenses........................ 568,523 356,334 Depreciation................................................. 2,651 170 ----------------- ------------- Total operating expenses............................. 3,787,069 2,228,488 ----------------- ------------- Loss from operations................................. (38,615) (88,758) Other income................................................... 15,462 4,376 ----------------- ------------- Loss before income taxes............................. (23,153) (84,382) Income tax provision (benefit)................................. 3,572 (10,869) ----------------- ------------- Net loss............................................. $ (26,725) $ (73,513) ============= ========== 73 NEONATAL AND PEDIATRIC INTENSIVE CARE MEDICAL GROUP, INC. STATEMENTS OF STOCKHOLDERS' EQUITY See accompanying notes. F-22
COMMON STOCK -------------------- UNREALIZED NUMBER OF RETAINED VALUATION SHARES AMOUNT EARNINGS ADJUSTMENT TOTAL --------- -------- --------- ---------- --------- Balance at December 31, 1993.............. 60,000 $135,000 $ 239,089 $ 6,820 $ 380,909 Unrealized valuation adjustment, net of tax effect of ($4,168).................. -- -- -- (5,985) (5,985) Net loss.................................. -- -- (26,725) -- (26,725) --------- -------- --------- ---------- --------- Balance at December 31, 1994.............. 60,000 135,000 212,364 835 348,199 Unrealized valuation adjustment, net of tax effect of $11,206 (unaudited)....... -- -- -- 11,206 11,206 Net loss (unaudited)...................... -- -- (73,513) -- (73,513) --------- -------- --------- ---------- --------- Balance at June 30, 1995 (unaudited)...... 60,000 $135,000 $ 138,851 $ 12,041 $ 285,892 ======== ======== ========= ======== ========= 74 NEONATAL AND PEDIATRIC INTENSIVE CARE MEDICAL GROUP, INC. STATEMENTS OF CASH FLOWS See accompanying notes. F-23
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, 1994 JUNE 30, 1995 ----------------- ------------- (UNAUDITED) Cash flows from operating activities: Net loss..................................................... $ (26,725) $ (73,513) Adjustments to reconcile net loss to net cash and cash equivalents provided by (used in) operating activities: Depreciation.............................................. 2,651 170 Provision for uncollectible accounts...................... 129,046 24,389 Provision for deferred taxes.............................. 3,767 7,992 Changes in assets and liabilities: Accounts receivable..................................... (306,184) 66,145 Prepaid expenses and other assets....................... (29,347) (17,835) Accounts payable and accrued expenses................... 25,268 72,950 Deferred revenues....................................... 40,833 (105,000) Professional claims liability........................... 37,550 85,642 ----------------- ------------- Net cash provided by (used in) operating activities......................................... (123,141) 60,940 Cash flows from investing activities: Purchase of equity securities................................ (183,079) (149,399) Sale of equity securities.................................... 212,822 88,374 Purchase of property and equipment........................... (4,856) -- ----------------- ------------- Net cash provided by (used in) investing activities......................................... 24,887 (61,025) ----------------- ------------- Net decrease in cash and cash equivalents............ (98,254) (85) Cash and cash equivalents at beginning of year................. 293,170 194,916 ----------------- ------------- Cash and cash equivalents at end of year....................... $ 194,916 194,831 ============= ========== Supplemental disclosure of cash flow information: Cash paid for taxes.......................................... $ 10,641 $ 800 ============= ========== 75 NEONATAL AND PEDIATRIC INTENSIVE CARE MEDICAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS 1. GENERAL: The principal business activity of Neonatal and Pediatric Intensive Medical Care Group, Inc. ("the Company") is to provide physician services to hospital-based neonatal and pediatric intensive care units. Contractual arrangements with hospitals are: (a) fee-for-service contracts whereby hospitals agree, in exchange for the Company's services, to authorize the Company and its healthcare professionals to bill and collect the professional component of the charges for medical services rendered by the Company's healthcare professionals; and (b) administrative fees whereby the Company is assured a minimum revenue level for the services provided. In addition, the Company has a revenue sharing agreement with another medical group which also provides services at certain hospitals where the Company provides services. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Accounts Receivable and Revenues Accounts receivable are primarily amounts due under discounted fee-for-service contracts with hospitals, medical groups and third-party payors, such as insurance companies, self-insured employers, patients and government-sponsored health care programs in the State of California. These receivables are presented net of contractual adjustments and an estimated allowance for uncollectibles which is charged to operations based on an evaluation of expected collections resulting from an analysis of current and past due accounts, past collection experience in relation to amounts billed and other relevant information. Contractual adjustments result from the difference between the physician rates for services performed, including withholding provisions, and reimbursement by government-sponsored healthcare programs and insurance companies for such services. Bad debts are included in contractual allowances and uncollectibles because they are not considered material. Concentration of credit risk relating to accounts receivable is limited by the number and diversity of the neonatology units managed by the Company, as well as by the large number of patients and payors. Approximately one-third of the Company's net patient service revenue is derived from Medi-Cal, the California Medicaid program. Receivables from Medi-Cal made up approximately 13% of accounts receivable at December 31, 1994. Deferred Revenues The Company receives certain fees from hospitals for its services which are paid in advance. The payments are recognized as earned on a straight-line basis over the remaining contract period. Cash and Cash Equivalents Cash and cash equivalents are defined as all highly liquid financial instruments with maturities of 90 days or less from the date of purchase. The Company maintains its cash and cash equivalents which consist primarily of demand deposits, amounts on deposit in a money market account with principally one financial institution and short-term government securities which subjects it to concentrations of credit risk. At times such balances may exceed the Federal Deposit Insurance Corporation limits. Property and Equipment Property and equipment is recorded at cost. Depreciation of property and equipment is computed on the double-declining-balance method over the estimated useful lives of five years. 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 reflected in operations. F-24 76 NEONATAL AND PEDIATRIC INTENSIVE CARE MEDICAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Professional Liability Coverage The Company maintains professional liability coverage which indemnifies the Company and its stockholder and employee physicians and independent contractor physicians on a claims-made basis. The Company records an estimate of its liabilities for claims incurred but not reported. Such liabilities are not discounted. Income Taxes The Company computes its income taxes utilizing Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes,"which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted rates in effect for the year in which the differences are expected to reverse. Investments The Company accounts for its investments in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities ("SFAS NO. 115"). This Statement classifies investments into one of three categories: held-to-maturity, available-for-sale, or trading. Debt securities that an enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value with unrealized gains and losses included in earnings. Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity. The Company classifies its investments as available-for-sale. The basis on which cost is determined is the specific identification method which the Company uses when computing realized gains and losses. Gains of $10,623 and losses of $5,861 were realized on the sale of investments in securities for the year ended December 31, 1994. Gains and losses for the six months ended June 30, 1995 were $841 and $395, respectively. Gross unrealized gains and losses were $1,996 and $580, at December 31, 1994 and $20,310 and $650 at June 30, 1995, respectively. Charity Care The Company provides care to patients who meet certain criteria under its charity care policy without charge. Because the Company does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. F-25 77 NEONATAL AND PEDIATRIC INTENSIVE CARE MEDICAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. INCOME TAXES: The following table presents the current and deferred income tax provision (benefit) for federal and state income taxes: The provision for income taxes differs from the amount obtained by applying the federal statutory income tax rate to income before provision for income taxes as follows:
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, 1994 JUNE 30, 1995 ----------------- ------------- (UNAUDITED) Current: Federal.............................................. $ (10,982) $ -- State................................................ 800 800 ----------------- ------------- (10,182) 800 ----------------- ------------- Deferred: Federal.............................................. 11,920 (10,390) State................................................ 1,834 (1,279) ----------------- ------------- 13,754 (11,669) ----------------- ------------- $ 3,572 $ (10,869) ============= ========== F-26
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, 1994 JUNE 30, 1995 ----------------- ------------- (UNAUDITED) Federal statutory rate................................ 35.0% 35.0% State income tax, net of federal benefit.............. (7.4) .4 Change in valuation allowance......................... (21.9) (20.3) Officer's life insurance.............................. (16.3) (2.2) Meals and entertainment............................... (6.0) (.2) Other, net............................................ 1.2 .2 ------ ------ (15.4)% 12.9% ============== ========== 78 NEONATAL AND PEDIATRIC INTENSIVE CARE MEDICAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The deferred tax asset/(liability) is comprised of the following: The change in the valuation allowance increased by $5,070 in the year ended December 31, 1994 and $21,166 for the six months ended June 30, 1995. At December 31, 1994 the Company had a state net operating loss carryforward (NOL) of approximately $6,000 which will expire in 1999. At June 30, 1995 the Company had federal and state net operating losses of approximately $47,000 and $40,000, respectively, which will expire in 2010 and 2000, respectively. The acquisition of the Company referred to in Note 8 will constitute a change in control under both Section 382 of the Internal Revenue Code and related state law. As a result, the amount of NOL carryovers that may be utilized in a tax year subsequent to the acquisition is limited to the "long-term tax exempt rate" (presently 5.88% for ownership changes during August 1995) times the value of the Company. The value of the Company is subject to specific rules under section 382 of the Internal Revenue Code and related state tax law. The sources of deferred taxes and the tax effect of each are as follows:
DECEMBER 31, 1994 JUNE 30, 1995 ----------------- ------------- Deferred tax asset (long-term): Professional claims liability..................... $ 103,864 $ 141,803 Other............................................. (14,518) (13,571) ----------------- ------------- 89,346 128,232 Less: valuation adjustment........................ (25,859) (47,025) ----------------- ------------- $ 63,487 $ 81,207 ================== ============= Deferred tax liability (short-term): Allowance for uncollectibles...................... $ 57,167 $ 67,972 Deferred revenue.................................. 54,268 7,753 Accrual to cash adjustments....................... (333,458) (303,798) Other............................................. (301) (8,756) ----------------- ------------- $(222,324) $(236,829) ================== ============= F-27
SIX MONTHS YEAR ENDED ENDED DECEMBER 31, 1994 JUNE 30, 1995 ----------------- ------------- (UNAUDITED) Allowance for uncollectibles...................... $ 57,167 $ 10,804 Accrual to cash adjustments....................... (71,659) 29,660 Deferred revenue.................................. 18,089 (46,515) Professional claims liability..................... 16,634 37,939 Other............................................. (29,243) (17,714) Net operating loss................................ 1,507 18,661 ----------------- ------------- (7,505) 32,835 Valuation allowance............................... (6,249) (21,166) ----------------- ------------- (13,754) 11,669 ----------------- ------------- Unrealized valuation adjustment (reflected in the statement of stockholders' equity).............. 4,168 (11,206) ----------------- ------------- $ (9,586) $ 463 ================== ============= 79 NEONATAL AND PEDIATRIC INTENSIVE CARE MEDICAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following: 5. RELATED-PARTY TRANSACTIONS: For the year ended December 31, 1994, the Company paid approximately $84,000 ($52,000 for the six months ended June 30, 1995) in billing fees to a company for the billing and collection of revenue (the "Billing Company") in which certain shareholders of the Company have a controlling ownership. In addition, the Company rents certain employees to the Billing Company at its cost. The reimbursement for these services is presented net in the accompanying statement of operations and amounted to approximately $81,000 in 1994 and $48,000 for the six months ended June 30, 1995. 6. RETIREMENT PLANS: The Company has two qualified defined contribution employee benefit plans (the "Plans") as allowed under Section 401 of the Internal Revenue Code, which include a 401(k)/profit-sharing plan ("401(k) Plan") and a money purchase plan ("Money Purchase Plan") which covers substantially all employees. Employees who have completed 12 months of service and are at least 21 years old are eligible to participate and will become participants in the Plans following eligibility effective on certain dates which are based on each of the Plans' years. The 401(k) Plan permits participant contributions and a discretionary amount determined by the Company which are fully vested upon contribution. In addition, the Company may elect to contribute from the profits of the Company up to 15% of its annual compensation expense (as defined in the Plan) which is allocated to each participant based on a relationship of his/her compensation to total compensation, with graduated vesting over 6 years of service. Under the provisions of the Money Purchase Plan, the Company shall contribute to the Plan on behalf of each eligible participant an amount equal to approximately 6.13% of the participant's compensation (as defined in the Plan) for such Plan year which is subject to certain limitations. These amounts are allocated to each participant based on a relationship of his/her compensation to total compensation with graduated vesting over 7 years of service. The Company approved contributions of $229,000 to the Plans which were expensed for the year ended December 31, 1994. 7. COMMITMENTS: The Company has employment agreements with certain employee physicians that expire in various months ranging from June to September 1995. As of December 31, 1994 the terms of the agreements commit the Company to pay approximately $374,000 ($43,000 at June 30, 1995) in compensation for the remainder of the agreements' terms. In addition, the agreements provide the Company with the right to automatically extend the agreements, unless the employee gives appropriate notice as defined in each agreement. F-28
DECEMBER 31, 1994 JUNE 30, 1995 ----------------- -------------- (UNAUDITED) Accrued retirement..................................... $ 229,000 $229,000 Accrued vacation....................................... 14,141 15,386 Accounts payable....................................... 3,745 75,449 ----------------- -------------- $ 246,886 $319,835 ============== =========== 80 NEONATAL AND PEDIATRIC INTENSIVE CARE MEDICAL GROUP, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 8. SUBSEQUENT EVENT: On June 13, 1995, the Company announced it had reached an agreement in principle to be acquired by Pediatrix Medical Group of California, P.C., a separate legal entity that contracts with Pediatrix Medical Group, Inc., in a stock transaction in exchange for cash. Consummation of the sale is conditioned upon satisfactory resolution of the following items: the satisfactory completion of due diligence by Pediatrix, the successful negotiation of arrangements with the hospitals now serviced by the Company and the successful negotiation of any other professional relationships necessary to effectuate a continuum of the Company's professional services presently rendered. F-29 81 NEONATAL SPECIALISTS, LTD. FINANCIAL STATEMENTS F-30 82 INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Directors Neonatal Specialists, Ltd. Phoenix, Arizona We have audited the accompanying balance sheet of Neonatal Specialists, Ltd. as of December 31, 1995, and the related statements of income and retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of Neonatal Specialists, Ltd.'s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements present fairly, in all material respects, the financial position of Neonatal Specialists, Ltd. as of December 31, 1995, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. Johnson & Moser, Ltd. Scottsdale, Arizona February 22, 1996 F-31 83 NEONATAL SPECIALISTS, LTD. BALANCE SHEET DECEMBER 31, 1995 ASSETS: See accompanying notes to financial statements. F-32
Current assets: Cash.......................................................................... $ 3,456 Accounts Receivable -- Net (Note 1)........................................... 851,180 Stockholder's Advances (Note 2)............................................... 2,646 Other Receivables (Note 2).................................................... 88,169 Deposits...................................................................... 1,090 -------- Total current assets.................................................. $946,541 ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts Payable.............................................................. $ 22,313 Other Payables (Note 2)....................................................... 146,835 Interest Payable.............................................................. 1,086 Payroll Taxes Payable......................................................... 2,199 Profit Sharing Plan Payable (Note 4).......................................... 53,236 Treasury Stock Payable (Note 3)............................................... 20,947 Deferred Compensation (Note 3)................................................ 133,365 -------- Total current liabilities............................................. 379,981 Stockholders' equity: Common Stock, $10 Par Value, 255 Shares Issued................................ 2,550 Retained Earnings............................................................. 604,010 -------- 606,560 Treasury Stock, 102 Shares, at Cost (Note 3).................................. (40,000) -------- Total stockholders' equity............................................ 566,560 -------- Total liabilities and stockholders' equity............................ $946,541 ======== 84 NEONATAL SPECIALISTS, LTD. STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1995 See accompanying notes to financial statements. F-33
Medical revenues, net of patient refunds....................................... $4,086,713 Operating expenses............................................................. 3,716,612 ---------- Total operating income............................................... 370,101 ---------- Other income (expenses): Other Income................................................................. 36,777 Interest Income.............................................................. 5,438 Interest Expense............................................................. (7,521) ---------- Net Income -- Other.......................................................... 34,694 ---------- Net income..................................................................... 404,795 Retained earnings at beginning of year......................................... 199,215 ---------- Retained earnings at end of year............................................... $ 604,010 ========= 85 NEONATAL SPECIALISTS, INC. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1995 Cash flows from operating activities: See accompanying notes to financial statements. F-34
Net Income................................................................... $ 404,795 Adjustments to reconcile net income to net cash used by operating activities: (Increase) Decrease in Assets: Accounts Receivable -- Net.............................................. 54,503 Other Receivables....................................................... (88,169) Stockholder's Advances.................................................. (2,646) Deposits................................................................ 1,070 Increase (Decrease) in Liabilities: Accounts Payable........................................................ 1,676 Other Payables.......................................................... 146,836 Interest Payable........................................................ (204) Payroll Taxes Payable................................................... (167,216) Income Taxes Payable.................................................... (2,155) Profit Sharing Plan Payable............................................. 22,690 Treasury Stock Payable.................................................. (17,403) Deferred Compensation................................................... (40,535) --------- Net cash provided by operating activities............................ 313,242 Cash flows from financing activities: Distributions to Stockholders............................................. (430,452) --------- Net decrease in cash and equivalents........................................... (117,210) Cash and equivalents at beginning of year...................................... 120,666 --------- Cash and equivalents at end of year............................................ $ 3,456 ========= 86 NEONATAL SPECIALISTS, LTD. NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies is presented to assist in understanding the Neonatal Specialists, Ltd.'s ("Company") financial statements. The financial statements and notes are representations of the Company's management, who is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Business Activities The Company is a professional corporation. The stockholders are physicians specializing in the field of neonatology. The area of service is mainly in Phoenix, Arizona. The Company receives patients from a wider geographical area serviced by transport/air ambulance services. Services are provided within hospital settings, based on contracts between the Company and the various hospitals. The Company has fee agreements with the State of Arizona and insurance providers. Accounts Receivable Accounts receivable are primarily amounts due under discounted fee-for-service contracts with hospitals and third-party payors, such as insurance companies and government-sponsored health care programs in the State of Arizona. These receivables are presented net of contractual adjustments and an estimated allowance for uncollectibles of $244,000 which is charged to operations based on an evaluation of expected collections resulting from an analysis of current and past due accounts, past collection experience in relation to amounts billed and other relevant information. Contractual adjustments result from the difference between the physician rates for services performed, including withholding provisions, and reimbursement by government- sponsored healthcare programs and insurance companies for such services. S Corporation -- Income Tax Status The Company elected the C Corporation status in 1991. In 1995, this election was changed to an S Corporation. In lieu of corporation income taxes, the shareholders of an S corporation are taxed on their proportionate share of the Company's taxable income. As a result, provision or liability for federal and state income taxes has not been included in the financial statements. Cash Equivalents For purposes of the statement of cash flows, the Company considers all short-term debt securities purchased with a maturity of three months or less to be cash equivalents. NOTE 2 -- RELATED PARTY TRANSACTIONS The Company has entered into contractual agreements with two related parties. CMJ Leasing, L.P. leases fixed assets to the Company. Med-Support, L.P. leases employees to the Company. For the year ended December 31, 1995, total expenses charged to the Company by CMJ Leasing, L.P. and Med-Support, L.P. were $36,000 and $1,613,160, respectively. At year-end, the Company was owed $87,169 by CMJ Leasing, L.P., but owed Med-Support, L.P. $145,835. As of December 31, 1995, one stockholder had been advanced $2,646 on a non-interest bearing basis. F-35 87 NEONATAL SPECIALISTS, LTD. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 -- TREASURY STOCK AND DEFERRED COMPENSATION PAYABLES Deferred compensation and payments for the Company's treasury stock are paid to former stockholders. In 1994, the Company entered into a contract to buy back stock from former stockholders. Part of the agreement included deferred compensation to the former stockholders. NOTE 4 -- RETIREMENT PLANS The Company covers substantially all of its employees under two qualified defined contribution employee benefit plans (the "Plans") as allowed under Section 401 of the Internal Revenue Code. The Plans include a profit sharing plan ("Profit Sharing Plan") and a money purchase plan ("Money Purchase Plan"). Employees who have completed 12 months of service and are at least 21 years old are eligible to participate and will become participants in the Plans following eligibility effective on certain dates which are based on each of the Plan's years. The participants of the Plans with less than five years of service are subject to a vesting schedule, with less than one year of service having 0% vested and for 1-5 years, 20% vested per year beginning with the completion of the first year. Vesting of 100% occurs when the participants reach normal retirement age or upon death or disability prior to the completion of the 5 years of service. The Plans cover all "Leased Employees" as determined in accordance with Section 414(n)(6) of the Internal Revenue Code. Under the provisions of the Profit Sharing Plan, the Company may elect to contribute from the profits of the Company a percentage of annual compensation expense, as defined. The amount allocated to each participant is based on the percentage of his/her compensation to the total compensation of the Company. The Money Purchase Plan directs the Company to contribute to the Plan on behalf of each eligible participant an amount equal to 5% of the participant's annual compensation, as defined, subject to certain limitations. The amount allocated to each participant is based on the percentage of his/her compensation to the total compensation of the Company. NOTE 5 -- CONTINGENT LIABILITY The Company has an automobile lease for an employee of Med-Support, L.P. The balance due as of December 31, 1995, was $5,338, and is due to be paid off by December 31, 1996. The Company's stockholders are liable for the remainder of the payments. NOTE 6 -- CASH FLOW INFORMATION Supplemental cash flow information relative to cash payments for the year ended December 31, 1995 is as follows: NOTE 7 -- SUBSEQUENT EVENTS Sale of Business On January 16, 1996, the Company's stockholders sold all outstanding shares of the Company to an affiliate of Florida-based Pediatrix Medical Group, Inc. a publicly held company traded on NASDAQ, for an amount in excess of book value. As part of the sales agreement, the treasury stock and deferred compensation debts were paid in full by the Company's stockholders. F-36
Interest.................................... $6,435 Income Taxes................................ $2,155 88 PEDIATRIC AND NEWBORN CONSULTANTS, PC FINANCIAL STATEMENTS F-37 89 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Pediatric and Newborn Consultants, PC I have audited the accompanying balance sheet of Pediatric and Newborn Consultants, PC as of December 31, 1995 and the related statements of earnings and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the Pediatric and Newborn Consultants, PC's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe my audit provides a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pediatric and Newborn Consultants, PC as of December 31, 1995 and the results of its activities and its cash flows for the year then ended in conformity with generally accepted accounting principles. DEON E. FITCH, CPA Englewood, Colorado March 15, 1996 F-38 90 PEDIATRIC AND NEWBORN CONSULTANTS, PC BALANCE SHEET The accompanying notes are an integral part of these financial statements. F-39
DECEMBER 31, 1995 ----------------- ASSETS Current assets Cash....................................................................... $ 10,596 Accounts receivable, net................................................... 426,402 Stockholder loans.......................................................... 8,289 ----------------- 445,287 ----------------- Property and equipment Equipment and furnishings.................................................. 18,893 Less accumulated depreciation.............................................. (18,795) ----------------- 98 ----------------- Other assets Deferred sales commissions................................................. 20,175 Unamortized organization costs............................................. 800 Security deposit........................................................... 400 ----------------- 21,375 ----------------- Total assets....................................................... $ 466,760 ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and withheld taxes........................................ $ 9,958 Accrued retirement plan contributions...................................... 35,875 Deferred compensation...................................................... 12,490 ----------------- 58,323 ----------------- Stockholders' equity Common stock, no par value, 10,000 shares authorized, 5,000 shares issued and outstanding......................................................... 5,098 Retained earnings.......................................................... 403,339 ----------------- 408,437 ----------------- Total liabilities and stockholders' equity......................... $ 466,760 ============= 91 PEDIATRIC AND NEWBORN CONSULTANTS, PC STATEMENT OF EARNINGS AND RETAINED EARNINGS The accompanying notes are an integral part of these financial statements. F-40
YEAR ENDED DECEMBER 31, 1995 ----------------- Revenue Hospital contracts......................................................... $ 676,412 Patient fees, net.......................................................... 1,646,635 ----------------- Total revenue...................................................... 2,323,047 ----------------- Expense Salaries and wages Physicians.............................................................. 1,463,005 Staff physicians........................................................ 230,221 Physician assistants and administrative................................. 95,560 Payroll taxes and employee benefits........................................ 79,998 Retirement benefits........................................................ 131,989 Contract office services................................................... 17,576 Amortization............................................................... 200 Professional development................................................... 3,375 Practice development....................................................... 30,902 Contract medical coverage.................................................. 16,500 Office..................................................................... 15,708 Hospital dues and licenses................................................. 5,050 Malpractice insurance...................................................... 39,596 Billing services........................................................... 80,084 Professional fees.......................................................... 11,838 Vehicle.................................................................... 19,663 Charitable contributions................................................... 1,875 ----------------- Total expense...................................................... 2,243,140 ----------------- Net earnings................................................................. 79,907 Retained earnings, beginning................................................. -- Transfer of accounts receivable and accounts payable on incorporation, accrual basis.............................................................. 323,432 ----------------- Retained earnings, ending.................................................... $ 403,339 ============= 92 PEDIATRIC AND NEWBORN CONSULTANTS, PC STATEMENT OF CASH FLOWS The accompanying notes are an integral part of these statements. F-41
YEAR ENDED DECEMBER 31, 1995 ----------------- Cash flows from operating activities......................................... $ 2,237,294 Cash received from fees and services....................................... (2,201,834) ----------------- Cash paid to employees and other Net cash provided from operating activities........................ 35,460 ----------------- Cash flows from (used in) investing activities Stockholder loans.......................................................... (8,289) Deferred sales commissions................................................. (20,175) Organization costs......................................................... (1,000) Security deposit........................................................... (400) ----------------- Net cash used in investing activities.............................. (29,864) ----------------- Cash flows from financing activities Proceeds from issuance of common stock..................................... 5,000 ----------------- Net cash from financing activities................................. 5,000 ----------------- Net increase in cash......................................................... 10,596 Cash, beginning of year...................................................... -- ----------------- Cash, end of year............................................................ $ 10,596 ============= Reconciliation of net earnings to net cash provided by operating activities: Net earnings............................................................... $ 79,907 Adjustments Amortization............................................................ 200 Increase in receivables................................................. (85,753) Increase in payables.................................................... 41,106 ----------------- Net cash provided from operating activities............................. $ 35,460 ============= Supplemental schedule of non-cash transactions Non-cash transfers of assets and liabilities on incorporation: Net property transfer in exchange for common stock......................... $ 98 ============= Transfer of accounts receivable, retained earnings, beginning.............. $ 340,649 Transfer of accounts payable, retained earnings, beginning................. (17,217) ----------------- Net transfer of accounts receivable and payables on incorporation.......... $ 323,432 ============= 93 PEDIATRIC AND NEWBORN CONSULTANTS, PC NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 1. NATURE OF ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES Nature of Activities Pediatric and Newborn Consultants, PC, a Colorado professional service corporation and hereafter referred to as PNC, was formed to provide neonatal and pediatric services through the practice of medicine in Colorado. PNC commenced operations in January, 1995 as a continuation of Pediatric and Newborn Consultants, a general partnership. PNC uses the modified-cash method of accounting for reporting the results of its activities for financial statement and income tax purposes. Under this method, revenues are reported when received, expenses when paid and retirement plan contributions when incurred. The accompanying special purpose financial statements have been prepared on the accrual basis. Accounts Receivable, Contractual Adjustments Accounts receivable is composed of outstanding patient fees and services, net of estimated uncollectible accounts and contractual adjustments based on collection experience. Property Fully depreciated property of $18,893 is still in use as of December 31, 1995. Statement of Cash Flows For the purposes of the statement of cash flows, PNC considers all highly liquid debt instruments purchased with a maturity of three months or less and certificates of deposits to be cash. Income Taxes PNC and its shareholders have elected to be classified as an S corporation for federal and state income tax purposes and accordingly all items subject to taxation generally pass-through the corporation and are taxed in conjunction with the shareholder's individual income tax returns. Deferred Compensation In April, 1995, in accordance with the terms and conditions of an employment agreement, PNC agreed to pay a terminating physician/shareholder a portion of the outstanding accounts receivable as of April 30, 1995 as collected. In February, 1996, PNC negotiated a final settlement for the compensation obligation. Retirement Plans PNC maintains a money-purchase pension plan and a profit-sharing plan for some of its eligible employees with one year of full-time service. Contributions to the money purchase pension plan are based on compensation, integrated with social security and subject to a vesting schedule on termination of employment. Contributions to the profit-sharing plan are at the discretion of the board of directors, based on compensation and subject to a vesting schedule on termination of employment. F-42
DECEMBER 31, 1995 DECEMBER 31, 1994 ----------------- ----------------- Accounts receivable.......................................... $ 802,538 $ 720,379 Estimated uncollectible accounts............................. (146,535) (196,304) Contractual adjustments...................................... (229,601) (183,426) ----------------- ----------------- Accounts receivable, net..................................... $ 426,402 $ 340,649 ============= ============= 94 PEDIATRIC AND NEWBORN CONSULTANTS, PC NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) During 1995, PNC allocated the following amounts to its retirement plans. In conjunction with the sale of its professional practice, PNC has agreed to terminate its retirement plans on or before December 31, 1996 and provide full vesting for all plan participants. Incorporation and Issuance of Common Stock On January 3, 1995, the partners of Pediatric and Newborn Consultants, a general partnership, transferred their interests in the partnership's assets including outstanding accounts receivable, accounts payable, work in progress and cash in the amount of $5,000 to Pediatric and Newborn Consultants, PC in exchange for 5,000 shares of no par value, common stock of Pediatric and Newborn Consultants, PC. 2. COMMITMENTS AND CONTINGENCIES Revenue and Support PNC derives substantially all of its revenue including interrelated patient fees, use of office and clinic facilities and administrative services from various short-term, renewable contracts with some of the hospitals in the metro-Denver area. Should a significant reduction in the level of this revenue and support occur, PNC programs and activities may be affected. The value of the use of the office and clinic facilities and administrative services applicable to these contracts has not been reflected in the accompanying financial statements. Office Facility In December, 1995, PNC secured an office facility for a one year term beginning January 1, 1996. Under the lease, rent in the amount of $400 per month plus a prorata share of the monthly maintenance is payable during the term. 3. SUBSEQUENT EVENTS Sale of Professional Practice In December, 1995, PNC and its shareholders negotiated a letter of intent to sell, assign and transfer all of its assets, hospital contracts, business rights/goodwill and restrictive covenants, excluding cash and outstanding accounts receivable and payable to Pediatrix Medical Group of Colorado, P.C., a separate legal entity that contracts with Pediatrix Medical Group, Inc. Final negotiations for the sale and assignment, which includes contingent, additional sales consideration based on productivity and activities during the one-year, post-closing period, were completed on January 29, 1996. Subsequent to the sale, PNC became a nonprofessional service corporation. Deferred Sales Commissions Agreement In conjunction with the sale of the professional practice, PNC contracted with Nord Capital Group, Inc. to assist in the negotiations. In addition to the sales commissions applicable to the completed portions of the sales agreement, PNC agreed to assign an undivided six percent interest in its contingent, additional sales consideration arrangement applicable to the one-year, post-closing period. F-43
MONEY PURCHASE PARTICIPANTS PENSION PROFIT-SHARING TOTAL - --------------------------------------------------------- -------------- -------------- -------- Physician/shareholders................................... $ 40,835 $ 49,165 $ 90,000 Staff.................................................... 16,455 25,534 41,989 -------------- -------------- -------- Totals......................................... $ 57,290 $ 74,699 $131,989 ============ ========== ======== 95 ROCKY MOUNTAIN NEONATOLOGY, P.C. FINANCIAL STATEMENTS F-44 96 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors Rocky Mountain Neonatology, P.C. We have audited the accompanying balance sheet of Rocky Mountain Neonatology, P.C. as of December 31, 1995 and the related statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rocky Mountain Neonatology, P.C. as of December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. COOPERS & LYBRAND L.L.P. Fort Lauderdale, Florida June 17, 1996 F-45 97 ROCKY MOUNTAIN NEONATOLOGY, P.C. BALANCE SHEETS The accompanying notes are an integral part of these financial statements. F-46
DECEMBER 31, MARCH 31, 1995 1996 ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents.......................................... $157,095 $ 477,879 Accounts receivable, net........................................... 634,267 675,926 Prepaid expenses................................................... 77,607 62,566 ------------ ------------ Total current assets....................................... 868,969 1,216,371 Furniture and equipment, net of accumulated depreciation of $2,737 at December 31, 1995 and $2,949 at March 31, 1996............... 1,878 1,666 ------------ ------------ Total assets............................................... $870,847 $1,218,037 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses.............................. $ 18,679 $ 20,188 Salaries payable................................................... -- 371,640 Patient overpayments............................................... 83,276 89,521 Hospital salary reimbursement payable.............................. 83,329 25,000 Professional claims liability...................................... 72,842 72,842 Deferred tax liability............................................. 233,131 243,059 ------------ ------------ Total current liabilities.................................. 491,257 822,250 ------------ ------------ Commitments (Note 6) Stockholders' equity: Common stock; $1 par value, 50,000 shares authorized, 6,000 shares issued and outstanding.......................................... 6,000 6,000 Retained earnings.................................................. 373,590 389,787 ------------ ------------ Total stockholders' equity...................................... 379,590 395,787 ------------ ------------ Total liabilities and stockholders' equity...................... $870,847 $1,218,037 ========== ========= 98 ROCKY MOUNTAIN NEONATOLOGY, P.C. STATEMENTS OF OPERATIONS The accompanying notes are an integral part of these financial statements. F-47
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, 1995 1996 ------------ ------------- (UNAUDITED) Net patient service revenue......................................... $3,105,845 $ 954,900 ------------ ------------- Operating expenses: Stockholders' compensation and benefits........................... 1,973,395 671,640 Salaries and benefits............................................. 344,494 111,193 Supplies and other operating expenses............................. 428,779 106,175 Insurance expense................................................. 70,411 18,641 Hospital salary reimbursement..................................... 83,329 25,000 Depreciation...................................................... 1,236 212 ------------ ------------- Total operating expenses.................................. 2,901,644 932,861 ------------ ------------- Income from operations.............................................. 204,201 22,039 Other income........................................................ 7,721 4,086 ------------ ------------- Income before income taxes................................ 211,922 26,125 Income tax provision................................................ 80,530 9,928 ------------ ------------- Net income................................................ $ 131,392 $ 16,197 ========== =========== 99 ROCKY MOUNTAIN NEONATOLOGY, P.C. STATEMENTS OF STOCKHOLDERS' EQUITY The accompanying notes are an integral part of these financial statements. F-48
COMMON STOCK ------------------ NUMBER RETAINED OF SHARES AMOUNT EARNINGS TOTAL --------- ------ -------- -------- Balance, December 31, 1994............................... 6,000 $6,000 $242,198 $248,198 Net income............................................... -- -- 131,392 131,392 --------- ------ -------- -------- Balance, December 31, 1995............................... 6,000 6,000 373,590 379,590 Net income (unaudited)................................... -- -- 16,197 16,197 --------- ------ -------- -------- Balance, March 31, 1996 (unaudited)...................... 6,000 $6,000 $389,787 $395,787 ======= ====== ======== ======== 100 ROCKY MOUNTAIN NEONATOLOGY, P.C. STATEMENTS OF CASH FLOWS The accompanying notes are an integral part of these financial statements. F-49
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, 1995 1996 ------------ ------------ (UNAUDITED) Cash flows from operating activities: Net income......................................................... $ 131,392 $ 16,197 Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: Provision for deferred taxes.................................... 80,530 9,928 Depreciation.................................................... 1,236 212 Changes in assets and liabilities: Accounts receivable........................................... (102,337) (41,659) Prepaid expenses and other assets............................. (37,463) 15,041 Accounts payable and accrued expenses......................... 1,722 1,509 Salaries payable.............................................. -- 371,640 Patient overpayments.......................................... 12,592 6,245 Hospital salary reimbursement payable......................... 68,536 (58,329) ------------ ------------ Net cash provided by operating activities.................. 156,208 320,784 ------------ ------------ Net increase in cash and cash equivalents............................ 156,208 320,784 Cash and cash equivalents, beginning of year/period.................. 887 157,095 ------------ ------------ Cash and cash equivalents, end of year/period........................ $ 157,095 $477,879 ========== ========== 101 ROCKY MOUNTAIN NEONATOLOGY, P.C. NOTES TO FINANCIAL STATEMENTS 1. GENERAL: The principal business activity of Rocky Mountain Neonatology, P.C. (the "Company") is to provide physician services to hospital-based neonatal and pediatric intensive care units to two hospitals in the Denver, Colorado area. Contractual arrangements with hospitals are: (a) fee-for-service contracts whereby hospitals agree, in exchange for the Company's services, to authorize the Company and its healthcare professionals to bill and collect the professional component of the charges for medical services rendered by the Company's healthcare professionals; and (b) administrative fees for providing medical director services for neonatal and/or pediatric departments in the hospitals where the Company provides physician services. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Accounting Estimates: The preparation of financial statements in conformity with generally accepted accounting principles 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. Actual results could differ from those estimates. Accounts Receivable and Revenues: Accounts receivable are primarily amounts due under discounted fee-for-service contracts with medical groups and third-party payors, such as insurance companies, self-insured employers, patients and government-sponsored health care programs in the State of Colorado. These receivables are presented net of contractual adjustments and an estimated allowance for uncollectibles which is charged to operations based on an evaluation of expected collections resulting from an analysis of current and past due accounts, past collection experience in relation to amounts billed and other relevant information. Contractual adjustments result from the difference between the physician rates for services performed, including withholding provisions, and reimbursement by government-sponsored healthcare programs and insurance companies for such services. Bad debts are included in contractual allowances and uncollectibles because they are not considered material. Concentration of credit risk relating to accounts receivable is limited by the large number of patients and payors that the Company manages. Approximately 29% of the Company's net patient service revenue is derived from Medicaid. Cash and Cash Equivalents: Cash and cash equivalents are defined as all highly liquid financial instruments with maturities of 90 days or less from the date of purchase. The Company maintains its cash and cash equivalents which consist primarily of demand deposits and amounts on deposit in a money market account with principally one financial institution. Furniture and Equipment: Furniture and equipment is recorded at cost. Depreciation of furniture and equipment is computed on the straight line method over the estimated useful lives of five years. Upon sale or retirement of furniture and equipment, the cost and related accumulated depreciation are eliminated from the respective accounts and the resulting gain or loss is reflected in operations. F-50 102 ROCKY MOUNTAIN NEONATOLOGY, P.C. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Professional Liability Coverage: The Company maintains professional liability coverage which indemnifies the Company and its stockholders and employee physicians on a claims made basis. The Company records an estimate of its liabilities for claims incurred but not reported. Such liabilities are not discounted. Income Taxes: The Company computes its income taxes utilizing Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted rates in effect for the year in which the differences are expected to reverse. Charity Care: The Company provides care to patients who meet certain criteria under its charity care policy without charge. Because the Company does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. Interim Financial Statements: The financial statements at March 31, 1996 and for the three months ended March 31, 1996, are unaudited and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments necessary for a fair statement of the results of interim periods. The results of the three months ended March 31, 1996 are not necessarily indicative of the results to be expected for the full year or any other interim period. 3. ACCOUNTS RECEIVABLE AND NET PATIENT SERVICE REVENUE: Accounts receivable consist of the following: Net patient service revenue consists of the following:
DECEMBER 31, 1995 ------------ Gross accounts receivable.................................. $ 973,779 Less: allowance for contractual adjustments and uncollectibles........................................... (389,512 ) Administrative fees........................................ 50,000 ------------ $ 634,267 ============ Administrative fees are received by the Company for providing medical director services under annual agreements with the hospitals where the Company provides physician services. These agreements are automatically renewable, unless otherwise terminated. F-51
DECEMBER 31, 1995 ------------ Gross patient service revenue.............................. $ 4,190,338 Less contractual adjustments and uncollectibles............ (1,467,160 ) Administrative fees........................................ 382,667 ------------ $ 3,105,845 ============ 103 ROCKY MOUNTAIN NEONATOLOGY, P.C. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. RETIREMENT PLANS: The Company has two qualified defined contribution employee benefit plans (the "Plans") as allowed under Section 401 of the Internal Revenue Code, which include a 401(k)/profit sharing plan ("401(k) Plan") and a money purchase plan ("Money Purchase Plan") which covers substantially all employees. Employees who have completed 24 months of service and are at least 21 years old are eligible to participate and will become participants in the Plans following eligibility effective on certain dates which are based on each of the Plan's years. The 401(k) Plan permits participant contributions and a discretionary amount determined by the Company which are fully vested upon contribution. In addition, the Company may elect to contribute from the profits of the Company a percentage of annual compensation expense, as defined, which is allocated to each participant based on a relationship of his/her compensation to total compensation, with immediate vesting upon contribution. Under the provisions of the Money Purchase Plan, the Company shall contribute to the Plan on behalf of each eligible participant an amount equal to 5% of the participant's annual compensation, as defined, subject to certain limitations. These amounts are allocated to each participant based on a relationship of his/her compensation to total compensation, with immediate vesting upon contribution. The Company approved contributions of $180,000 to the Plans which were expensed for the year ended December 31, 1995. 5. INCOME TAXES: The components of the income tax provision is as follows: The provision for income taxes differs from the amount obtained by applying the federal statutory income tax rate to income before provision for income taxes as follows:
DECEMBER 31, 1995 ------------ Deferred: Federal.................................................... $ 74,173 State...................................................... 6,357 ------------ $ 80,530 ========== F-52
YEAR ENDED DECEMBER 31, 1995 ------------ Federal statutory rate....................................... 35.0% State income tax, net of federal benefit..................... 3.0 ----- Effective rate............................................... 38.0% ========== 104 ROCKY MOUNTAIN NEONATOLOGY, P.C. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The significant components of the deferred income tax assets and liabilities at December 31, 1995 are as follows: 6. COMMITMENTS: The Company has an employment agreement with an employee physician that expires on June 30, 1997. As of December 31, 1995, the terms of the agreement commit the Company to pay approximately $293,000 to the employee physician in compensation for the remainder of the agreement's term. The Company is a lessee of office space under an operating lease that expires on April 24, 1997. Future minimum payments under the lease are $29,550 and $10,047 for fiscal years 1996 and 1997, respectively. Total rent expense under this lease was $30,230 for the year ended December 31, 1995. 7. SUBSEQUENT EVENT: Effective May 1, 1996, the capital stock of the Company was acquired by Pediatrix Acquisition Corp., a separate legal entity which contracts with Pediatrix Medical Group, Inc., in exchange for an aggregate cash purchase price of $7.2 million. F-53
Accounts receivable........................................... $(241,022) Prepaid expenses.............................................. (29,491) Patient overpayments.......................................... 31,644 Hospital salary reimbursement payable......................... 31,665 Professional claims liability................................. 27,680 Accrual to cash adjustments................................... (59,418) Other......................................................... 5,811 --------- Net current deferred tax liability.................. $(233,131) ========= 105 WEST TEXAS NEONATAL ASSOCIATES FINANCIAL STATEMENTS F-54 106 INDEPENDENT AUDITORS' REPORT The Partners West Texas Neonatal Associates We have audited the accompanying balance sheet of West Texas Neonatal Associates (a Partnership) as of December 31, 1995 and the related statements of income and partners' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of West Texas Neonatal Associates as of December 31, 1995 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. LINDA G. MEDLOCK P.C. June 10, 1996 El Paso, Texas F-55 107 WEST TEXAS NEONATAL ASSOCIATES BALANCE SHEETS Notes to financial statements are an integral part of these financial statements. F-56
DECEMBER 31, MARCH 31, 1995 1996 ------------ ----------- (UNAUDITED) ASSETS Current assets: Checking -- Texas commerce.......................................... $ -- $ 156,596 Accounts receivable -- trade........................................ 558,343 496,604 Accounts receivable -- Internal Revenue Service..................... 2,200 -- ------------ ----------- Total current assets........................................ 560,543 653,200 ------------ ----------- Property and equipment: Furniture and fixtures.............................................. 3,550 3,550 Less: accumulated depreciation................................... (3,550) (3,550) ------------ ----------- Net property and equipment....................................... -- -- ------------ ----------- Total assets................................................ $560,543 $ 653,200 ========== ========= LIABILITIES AND PARTNERS' EQUITY Current liabilities: Bank overdraft...................................................... $ 24,541 $ -- Accounts payable -- CMBS............................................ 13,757 22,110 Payroll taxes payable............................................... 374 357 Accounts payable -- Jose Arellano, M.D. P.A......................... -- 6,339 ------------ ----------- Total current liabilities................................... 38,672 28,806 ------------ ----------- Partners' equity: Capital -- Ayo...................................................... 255,286 305,179 Capital -- Caviglia................................................. 266,585 319,215 ------------ ----------- Total partners' equity...................................... 521,871 624,394 ------------ ----------- Total liabilities and partners' equity...................... $560,543 $ 653,200 ========== ========= 108 WEST TEXAS NEONATAL ASSOCIATES STATEMENTS OF INCOME AND PARTNERS' EQUITY Notes to financial statements are an integral part of these statements. F-57
YEAR ENDED THREE MONTHS DECEMBER 31, ENDED MARCH 31, 1995 1996 ------------ --------------- (UNAUDITED) Medical fee income............................................... $ 2,269,543 $ 561,088 ------------ --------------- Operating expenses: Billing service................................................ 160,519 46,878 Patient refunds................................................ 4,924 354 Business promotion............................................. -- 236 Contract labor................................................. 5,050 825 Insurance -- malpractice....................................... 21,549 -- Insurance -- employee health................................... 17,955 5,032 Insurance -- general........................................... -- 1,326 Legal and accounting........................................... 2,600 1,100 Medical books.................................................. -- 700 Miscellaneous.................................................. 2,505 -- Office supplies................................................ 188 -- Office maintenance............................................. 2,566 -- Penalties...................................................... 4 -- Professional fees -- other..................................... 99,349 57,258 Salaries and wages............................................. 306,761 94,250 Seminars....................................................... 450 -- Taxes -- payroll............................................... 21,433 7,567 Telephone...................................................... 1,316 320 Travel......................................................... 529 -- ------------ --------------- Total operating expenses............................... 647,698 215,846 ------------ --------------- Operating income....................................... 1,621,845 345,242 Other income (expense): Interest income................................................ 7 18 ------------ --------------- Net income............................................. 1,621,852 345,260 Partners' equity at beginning of year/period..................... 419,787 521,871 Partners draw.................................................... (1,519,768) (242,737) ------------ --------------- Partners' equity at end of year/period........................... $ 521,871 $ 624,394 ========== ============ 109 WEST TEXAS NEONATAL ASSOCIATES STATEMENTS OF CASH FLOWS Notes to financial statements are an integral part of these financial statements. F-58
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, 1995 1996 ------------ -------------- (UNAUDITED) Cash flows from operating activities: Cash received from patients...................................... $2,155,044 $ 622,828 Cash collected from other sources................................ 7 18 Cash paid to billing service, patients and employees............. (467,129) (133,129) Cash paid for general and administrative expenses................ (176,075) (65,843) ------------ -------------- Net cash provided by operating activities................ 1,511,847 423,874 ------------ -------------- Cash flows from financing activities: Cash paid to partner -- Ayo...................................... (764,769) (122,737) Cash paid to partner -- Caviglia................................. (755,000) (120,000) ------------ -------------- Net cash used by financing activities.............................. (1,519,769) (242,737) ------------ -------------- Net (decrease) increase in cash and cash equivalents............... (7,922) 181,137 Cash and cash equivalents at beginning of year/period.............. (16,619) (24,541) ------------ -------------- Cash and cash equivalents at end of year/period.................... $ (24,541) $ 156,596 ========== =========== Reconciliation of net income to net cash provided by operating activities: Net income....................................................... $1,621,852 $ 345,260 ------------ -------------- Adjustments to reconcile net income to net cash provided by operating activities: (Increase) decrease in accounts receivable -- trade........... (114,499) 61,740 (Increase) decrease accounts receivable -- IRS................ (1,508) -- (Increase) decrease accounts payable.......................... 6,002 16,874 ------------ -------------- Total adjustments............................................. (110,005) 78,614 ------------ -------------- Net cash provided by operating activities..................... $1,511,847 $ 423,874 ========== =========== 110 WEST TEXAS NEONATAL ASSOCIATES NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES: The Company's accounting policies conform to generally accepted accounting principles based on the accrual method of accounting. Nature of Operations The Company, a partnership, is engaged in the business of providing medical services at its location in El Paso, Texas. Property and Equipment Property and equipment are carried at cost. Management has elected to calculate depreciation using the accelerated cost recovery system (ACRS) and the modified accelerated cost recovery system (MACRS). These are not acceptable methods for financial statements under generally accepted accounting principles. Generally accepted accounting principles require depreciating cost over an asset's estimated useful life using an acceptable method. The effect of this departure from generally accepted accounting principles on financial position, results of operations, and cash flows has not been determined. Bad Debts Bad debts are accounted for using the direct write-off method. Expense is recognized only when a specific account is determined to be uncollectible. The effects of using this method approximate those of the allowance method. 2. INCOME TAXES: The Partnership is not a taxpaying entity for federal or state income tax purposes, and thus no income tax expense has been recorded in the statements. Income from the Partnership is taxed to the partners in their individual returns. 3. ECONOMIC DEPENDENCY: The Company operates in El Paso, Texas, and has contracts with Sierra Medical Center and Providence Hospital (which are owned by the Tenet Corporation). All services are provided through these two hospitals. 4. CONCENTRATION OF CREDIT RISK: The Company grants credit without collateral to its patients, most of whom are local residents and are insured under third-party payor agreements. The major source of income consists of fees from medicaid and private insurance. 5. SUBSEQUENT EVENT: The Company has signed a contract to sell its assets to Pediatrix Medical Group of Texas, P.A. effective May 30, 1996. The two partners will remain as employees and continue to provide neonatal services. F-59 111 INFANT CARE SPECIALISTS MEDICAL GROUP, INC. & SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS F-60 112 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Infant Care Specialists Medical Group, Inc. & Subsidiary: We have audited the accompanying consolidated balance sheet of Infant Care Specialists Medical Group, Inc. (a California corporation) and Subsidiary as of December 31, 1995, and the related consolidated statements of operations and retained earnings and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of Infant Care Specialists Medical Group, Inc. and Subsidiary as of December 31, 1994 were audited by other auditors, whose report dated September 20, 1995 expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Infant Care Specialists Medical Group, Inc. and Subsidiary as of December 31, 1995, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The general and administrative expense detail for the year ended December 31, 1995 presented in Exhibit I is presented for the purpose of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. The general and administrative expense detail for the year ended December 31, 1994 presented in Exhibit I was subjected to the auditing procedures applied in the December 31, 1994 audit of the basic financial statements by other auditors, whose report on such information stated that it was fairly stated in all material respects in relation to the December 31, 1994 basic financial statements taken as a whole. San Diego, California May 7, 1996 F-61 113 INFANT CARE SPECIALISTS MEDICAL GROUP, INC. & SUBSIDIARY CONSOLIDATED BALANCE SHEETS The accompanying notes are an integral part of these financial statements. F-62
AS OF DECEMBER 31, MARCH 31, ----------------------- ---------- 1994 1995 1996 ---------- ---------- ---------- (UNAUDITED) ASSETS Current Assets Cash..................................................... $ 364,121 $ 128,085 $ 114,164 Accounts receivable, net of allowance for mandatory adjustments of $5,247,098, $3,358,706 and $4,765,882 for 1994, 1995 and March 31, 1996 (Note A)............ 5,150,777 3,542,341 3,496,407 Prepaid expenses and other current assets................ 106,790 15,239 -- ---------- ---------- ---------- Total current assets............................. 5,621,688 3,685,665 3,610,571 Property and equipment, net (Note B)....................... 338,695 305,867 282,845 Investment in partnership (Note C)......................... 302,570 327,804 327,804 Deferred income tax assets................................. 70,050 73,655 37,979 Deposits................................................... 8,584 8,583 8,583 ---------- ---------- ---------- $6,341,587 $4,401,574 $4,267,782 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Line of credit -- current (Note H)....................... $ 9,350 $ 10,200 $ 10,200 Capital lease obligations -- current portion............. 11,268 12,960 12,964 Accounts payable and accrued expenses.................... 174,244 190,982 158,259 Accrued pension contribution payable (Note D)............ 748,653 370,186 370,186 Note payable -- other (Note G)........................... 433,185 377,846 200,656 Note payable -- affiliate (Note E)....................... 267,050 245,000 245,000 Income taxes payable..................................... 11,265 109,823 41,423 Deferred income taxes (Notes A and F).................... 2,027,875 1,371,169 1,424,809 ---------- ---------- ---------- Total Current Liabilities........................ 3,682,890 2,688,166 2,463,497 Commitments (Note I) Line of credit, less current portion (Note H)............ 41,650 31,450 28,900 Capital lease obligations, less current portion.......... 55,051 42,340 39,252 Minority interest in subsidiary.......................... 8,785 (7,211) (532) ---------- ---------- ---------- Total Liabilities 3,788,376 2,754,745 2,531,117 Stockholders' Equity Common stock, $1 par value; 200,000 shares authorized; 900 shares issued and outstanding..................... 900 900 900 Preferred stock, $1 par value; 200,000 shares authorized; 1,300, 1,800 and 1,900 shares issued and outstanding, respectively.......................................... 1,300 1,800 1,900 Additional paid-in-capital............................... 1,310 1,310 1,310 Retained earnings........................................ 2,549,701 1,642,819 1,732,555 ---------- ---------- ---------- Total Stockholders' Equity....................... 2,553,211 1,646,829 1,736,665 ---------- ---------- ---------- $6,341,587 $4,401,574 $4,267,782 ========= ========= ========= 114 INFANT CARE SPECIALISTS MEDICAL GROUP, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS The accompanying notes are an integral part of these financial statements. F-63
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ----------------------------- ----------- 1994 1995 1996 ----------- ----------- ----------- (UNAUDITED) Income Professional fees............................... $ 9,933,406 $10,363,733 $ 2,939,229 Management fees................................. 692,216 -- 238,231 Interest income (expense)....................... 15,560 50,699 (2,957) Other income (expense).......................... 8,128 (3,181) -- Minority interest in net income of subsidiary... (7,021) 15,996 (6,679) ----------- ----------- ----------- Total income............................ 10,642,289 10,427,247 3,167,824 Operating expenses Payroll and payroll taxes....................... 4,977,124 7,373,320 2,115,199 Liability insurance............................. 260,552 353,074 137,533 Disability insurance............................ 256,411 165,827 68,450 General and administrative...................... 1,221,433 1,203,395 302,826 Management fees................................. -- 194,056 -- Billing service fee............................. 460,684 124,482 7,222 Depreciation and amortization................... 45,423 93,116 23,022 Profit sharing plan contributions (Note D)...... 748,653 483,411 94,407 Physician moonlighting.......................... 427,257 417,922 54,599 Independent contracting......................... 88,746 33,070 18,275 Transcription fees.............................. 133,808 134,962 51,829 University expenses............................. 3,163,062 1,303,005 113,810 ----------- ----------- ----------- Total operating expenses................ 11,783,153 11,879,640 2,987,172 ----------- ----------- ----------- (Loss) income before income taxes................. (1,140,864) (1,452,393) 180,652 (Benefit) provision for income taxes (Notes A and F).............................................. (384,055) (545,511) 90,916 ----------- ----------- ----------- Net (loss) income................................. (756,809) (906,882) 89,736 Retained earnings, beginning of year.............. 3,306,510 2,549,701 1,642,819 ----------- ----------- ----------- Retained earnings, end of year.................... $ 2,549,701 $ 1,642,819 $ 1,732,555 ========== ========== ========== 115 INFANT CARE SPECIALISTS MEDICAL GROUP, INC. & SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS The accompanying notes are an integral part of these financial statements. F-64
THREE MONTHS YEARS ENDED ENDED DECEMBER 31, MARCH 31, ----------------------- ---------- 1994 1995 1996 ---------- ---------- ---------- (UNAUDITED) Cash flows from operating activities: Net (loss) income........................................ $ (756,809) $ (906,882) $ 89,736 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization......................... 45,423 93,113 23,022 Expenses accrued under notes payable.................. 491,859 -- -- Loss (gain) on investment in partnership.............. 1,230 (25,234) -- Minority interest in net income of subsidiary......... 7,021 (15,994) 6,679 Change in assets and liabilities: Accounts receivable................................. 122,671 1,608,436 45,934 Employee receivable................................. (300) 2,064 -- Management fees receivable.......................... 489,166 -- -- Prepaid expenses.................................... 102,235 81,987 15,239 Deposits............................................ (8,584) -- -- Income taxes receivable............................. (2,500) 7,500 -- Tax benefit......................................... -- (3,605) 35,676 Accounts payable and accrued expenses............... 99,331 16,737 (32,721) Accrued pension plans............................... 123,516 (378,467) -- Income taxes payable................................ 11,265 98,558 (68,400) Note payable, other................................. -- -- (177,192) Deferred income taxes............................... (396,920) (656,706) 53,640 ---------- ---------- ---------- Net cash provided by (used in) operating activities........ 328,604 (78,493) (8,387) ---------- ---------- ---------- Cash flows from investing activities: Purchases of fixed assets................................ (197,295) (60,285) -- Payments on related party debt........................... -- (22,050) -- ---------- ---------- ---------- Net cash used in investing activities...................... (197,295) (82,335) -- ---------- ---------- ---------- Cash flows from financing activities: Proceeds (payments) on line of credit.................... 51,000 (9,350) (2,550) Principal payments on capital leases..................... (4,855) (11,019) (3,084) Decrease in notes payable................................ -- (55,339) -- Principal payments in notes payable -- other............. (36,625) -- -- Proceeds from issuance of preferred stock................ 200 500 100 ---------- ---------- ---------- Net cash provided by (used in) financing activities........ 9,720 (75,208) (5,534) ---------- ---------- ---------- Net increase (decrease) in cash............................ 141,029 (236,036) (13,921) Cash, beginning of year.................................... 223,092 364,121 128,085 Cash, end of year.......................................... $ 364,121 $ 128,085 $ 114,164 ========= ========= ========= 116 INFANT CARE SPECIALISTS MEDICAL GROUP, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization Infant Care Specialists Medical Group, Inc. (the Company) was incorporated under the laws of the State of California on November 15, 1988. The Company provides neonatal medical services through its affiliation agreements with the UC Irvine Medical Center, Division of Neonatal Medicine and with fourteen other Southern California hospitals. Basis of Accounting The Company's policy is to prepare its financial statements on an accrual basis of accounting. Accordingly, the accompanying financial statements are intended to present the financial position, results of operations and cash flows in conformity with generally accepted accounting principles. These financial statements include the accounts of the Company and its 82.36% owned subsidiary, Infant Care Management Services, Inc. (ICMS), a company established to provide management and administrative services to medical practice groups in Southern California. All significant intercompany accounts and transactions have been eliminated in consolidation. University Affiliation All of the physician shareholders and employees of the Company were also employees of the Division of Neonatal/Perinatal Medicine in the Department of Pediatrics of the University of California, Irvine. It has been the practice of the Company to fund the salaries and benefits of the physicians and staff who have paid positions with the University as well as research and teaching expenses. In order to cover these expenses, the Company deposits professional fees with the Regents of the University of California. These funds are used only to support physician salaries, administration salaries, research salaries and miscellaneous research supplies. Cash For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less and money market funds to be cash equivalents. Accounts Receivable Accounts receivable are stated at net realizable value. An allowance for mandatory adjustments has been reflected in the financial statements to reduce accounts receivable for managed care contracts and Medical charges which the Company has agreed to accept at a discounted fee. The total mandatory adjustments at 1995 and 1994 are $3,358,706 and $5,247,098, respectively. Property and Equipment Property and equipment are stated at cost. Depreciation is provided by the straight-line method over their estimated useful lives as follows: F-65
Leasehold improvements............. 5 years (term of lease) Furniture and fixtures............. 7 years Equipment.......................... 5 - 7 years Software........................... 3 years 117 INFANT CARE SPECIALISTS MEDICAL GROUP, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Upon retirement or disposal of depreciated assets, the cost and related depreciation are removed and the resulting gain or loss is reflected in income. Major renewals and betterments are capitalized while maintenance costs and repairs are expensed in the year incurred. Income Taxes Deferred tax liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be settled. The effect on deferred tax liabilities of a change in tax rates is recognized in income in the period in which the change is enacted. Temporary differences related principally to differences between the accrual method of accounting used for financial statement purposes and the cash method of accounting used for tax purposes. Management Fees The Company maintains a management agreement with Infant Care Management Services, Inc. (ICMS). ICMS manages the operations of the Company and receives its net income from the Company in the form of a management fee. Concentration of Credit Risk Substantially all of the Company's accounts receivables are concentrated within the medical industry, primarily health insurance companies and government insurance providers. Reclassifications Certain amounts included in the financial statements for 1994 have been reclassified to conform to the current year presentation. B. PROPERTY AND EQUIPMENT: Property and equipment as of December 31, 1994 and 1995 are summarized as follows: C. INVESTMENT IN PARTNERSHIP: During 1993, the Company acquired a 98% interest in LBW Medical Group, Limited Partnership ("LBW") in exchange for cash of $58,800 and a note payable of $245,000. The Partnership, together with other joint venture partners, plans to invest in and assist in the development and operation of transitional care facilities for infants who are presently being treated in hospital neonatal intensive care units. The Partnership is currently in the development stage of operations and did not generate any revenues during 1995 or 1994 F-66
1994 1995 --------- --------- Furniture and fixtures......................................... $ 76,250 $ 83,274 Equipment...................................................... 281,433 319,782 Software....................................................... 39,738 53,211 Leasehold improvements......................................... 44,860 46,298 --------- --------- 422,281 502,565 Less: accumulated depreciation................................. (103,586) (196,698) --------- --------- $ 338,695 $ 305,867 ========= ========= 118 INFANT CARE SPECIALISTS MEDICAL GROUP, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) related to operations. However, the investment earned interest income in 1995 in the amount of $29,392 and incurred expenses of $4,158 (see Note E). D. ACCRUED PENSION AND PROFIT SHARING EXPENSE: The Company maintains both a defined contribution profit sharing plan and a money purchase pension plan covering substantially all employees subject to minimum age and service requirements. Contributions to the profit sharing plan are at the discretion of the Board of Directors. Contributions to the money purchase plan are based upon 5% of eligible compensation. Total pension and profit sharing expense was $483,411 and $748,653 for the years ended December 31, 1995 and 1994, respectively. It is the policy of the Company to fund accrued pension and profit sharing contributions prior to the filing of the corporate income tax returns. E. NOTE PAYABLE TO AFFILIATE: The Company has a note payable of $245,000 to LBW, in which the Company has a 98% interest. The note bears interest at 6% per annum and is due on demand. F. INCOME TAXES: As discussed in Note A, the Company adopted SFAS 109, "Accounting for Income Taxes" in 1993 and applied the provisions of this statement retroactively to January 1, 1992. SFAS 109 requires the use of the balance sheet method of accounting for income taxes. Under this method, a deferred tax asset or liability represents the tax effect of temporary differences between financial statement and tax bases of assets and liabilities and is measured using the latest enacted tax rates. The provision for income taxes (benefit) for the years ended December 31, 1994 and 1995 are as follows: G. NOTES PAYABLE: Notes payable at December 31, 1994 and 1995 is comprised of the following:
1994 1995 --------- --------- Current provision............................................ $ 12,865 $ 114,800 Deferred benefit............................................. (396,920) (660,311) --------- --------- Net benefit............................................. $(384,055) $(545,511) ========= ========= F-67
Non-interest bearing note due to the University of California, Irvine as reimbursement for expenses of Division of Neonatal Medicine paid by the University (see Note A).......................................... $ 433,185 $ 377,847 ========= ========= 119 INFANT CARE SPECIALISTS MEDICAL GROUP, INC. & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) H. LINE OF CREDIT: The Company maintains a line of credit facility with City National Bank (the "Bank") which is secured by various fixed assets, with interest at the "prime rate" as announced by the Bank plus 1.25% (8.75% at December 31, 1995). Principal is currently payable at $850 per month plus interest through December 1, 2000. The following is a schedule of future maturities of the line of credit as of December 31, 1995: I. COMMITMENTS: On July 15, 1994, the Company entered into a noncancelable building lease for its operating facility which runs through July 30, 1999. The agreement calls for an annual base rent of $88,402 with an increase of 6% in the fourth and fifth year. Net future minimum rental payments required under this lease as of December 31, 1995 are as follows:
YEAR ENDING DECEMBER 31, ------------------------------------------------------------------ 1996............................................................ $ 10,200 1997............................................................ 10,200 1998............................................................ 10,200 1999............................................................ 10,200 2000............................................................ 850 -------- 41,650 Less: current portion............................................. (10,200) -------- $ 31,450 ======== Total rent expense charged to operations for the year ended December 31, 1995 and 1994 was $73,669 and $50,183, respectively. J. SUBSEQUENT EVENT: In June of 1996, Pediatrix Medical Group of California, P.C., which is a separate legal entity that contracts with Pediatrix Medical Group, Inc., acquired the operating assets of the Company including its existing contracts with various hospitals and tendered employment contracts to most of its employees. With the funds received, the Company has paid severance fees to all of its employees based upon a formula established by its Board of Directors for years of service with the Company. The Company's future operations include the collection of its remaining accounts receivables, paying its outstanding expenses and liquidation. F-68
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------ 1996............................................................ $ 88,402 1997............................................................ 88,402 1998............................................................ 93,707 1999............................................................ 99,329 -------- $369,840 ======== 120 ADDITIONAL INFORMATION F-69 121 EXHIBIT I INFANT CARE SPECIALISTS MEDICAL GROUP, INC. & SUBSIDIARY DETAIL OF GENERAL AND ADMINISTRATIVE EXPENSES F-70
YEARS ENDED DECEMBER 31, MARCH 31, ----------------------- --------- 1994 1995 1996 ---------- ---------- --------- (UNAUDITED) General and Administrative Expenses Auto expense............................................. $ 87,086 $ 76,708 $ 10,822 Practice development..................................... 135,972 9,997 964 Dues and subscriptions................................... 98,074 87,520 23,401 Outside services......................................... 33,382 72,918 25,774 Legal and accounting..................................... 174,152 174,052 96,336 Education and conferences................................ 156,956 84,701 15,293 Computer maintenance..................................... 24,855 22,921 3,764 Telephone................................................ 59,521 86,571 25,970 Housing and relocation................................... 15,111 11,787 -- Supplies................................................. 54,567 91,355 9,200 Miscellaneous............................................ 2,453 20,114 6,888 Drugs.................................................... 35,458 27,578 9,260 Printing................................................. 12,100 60,438 -- Meals and entertainment.................................. 37,007 43,913 15,333 Postage.................................................. 14,672 70,622 6,063 Interest................................................. 28,004 19,642 -- Other insurance.......................................... 113,110 50,834 17,624 Repairs and maintenance.................................. 837 1,294 -- Recruiting............................................... 6,325 10,162 -- Pension administration................................... 10,650 4,878 -- Gifts.................................................... 6,875 5,849 -- Rent -- building......................................... 50,183 73,669 34,184 Rent -- equipment........................................ -- 65,987 -- Licenses and fees........................................ 2,745 9,572 932 Managed care fees........................................ 47,535 -- -- Bank service charges..................................... 14,163 20,313 1,018 ---------- ---------- --------- Total General and Administrative Expenses........ $1,221,433 $1,203,395 $302,826 ========= ========= ========= 122 Pediatrix Logo 5,000,000 SHARES COMMON STOCK PROSPECTUS DEAN WITTER REYNOLDS INC. ALEX. BROWN & SONS INCORPORATED DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION HAMBRECHT & QUIST SMITH BARNEY INC. , 1996