AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 23, 2001
REGISTRATION NO. 333-69526
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMERIPATH, INC.
(Exact name of registrant as specified in its charter)
---------------------
DELAWARE 65-0642485
(State or other (I.R.S. Employer
jurisdiction of
Incorporation or Identification
organization) Number)
JAMES C. NEW
CHIEF EXECUTIVE OFFICER
AMERIPATH, INC.
7289 GARDEN ROAD, SUITE 200
RIVIERA BEACH, FLORIDA 33404
TELEPHONE: (561) 845-1850
FACSIMILE: (561) 845-0129
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices and agent for service)
---------------------
THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATIONS TO:
J. VAUGHAN CURTIS, ESQ. PAUL MICHALSKI, ESQ.
ALSTON & BIRD LLP CRAVATH, SWAINE & MOORE
1201 WEST PEACHTREE STREET 825 EIGHTH AVENUE
ATLANTA, GEORGIA 30309-3424 NEW YORK, NY 10019-7475
TELEPHONE: (404) 881-7000 TELEPHONE: (212) 474-1000
FACSIMILE: (404) 881-7777 FACSIMILE: (212) 474-3700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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--------------------------------------------------------------------------------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION
IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED OCTOBER 22, 2001
PROSPECTUS
4,125,000 SHARES
(AMERIPATH(R) LOGO)
COMMON STOCK
$ PER SHARE
------------------
We are selling 4,125,000 shares of our common stock. We have granted the
underwriters an option to purchase up to 618,750 additional shares of common
stock to cover over-allotments.
Our common stock is quoted on the Nasdaq National Market under the symbol
"PATH." The last reported sale price of our common stock on the Nasdaq National
Market on October 18, 2001 was $25.41 per share.
------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------
PER SHARE TOTAL
--------- -------
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to AmeriPath, before expenses $ $
The underwriters expect to deliver the shares to purchasers on or about
, 2001.
------------------
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
U.S. BANCORP PIPER JAFFRAY
WACHOVIA SECURITIES
, 2001
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Cautionary Statement Concerning Forward-Looking
Statements................................................ 18
Use of Proceeds............................................. 20
Dividend Policy............................................. 20
Market Price of Common Stock................................ 21
Capitalization.............................................. 22
Selected Financial Data..................................... 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Business.................................................... 42
Management.................................................. 63
Certain Transactions........................................ 65
Principal Stockholders and Beneficial Ownership of
Management................................................ 66
Material United States Federal Tax Consequences............. 68
Underwriting................................................ 72
Legal Matters............................................... 74
Experts..................................................... 74
Where You Can Find More Information......................... 74
Incorporation of Certain Documents by Reference............. 75
Index to Financial Statements............................... F-1
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in this offering. Therefore, you should read the entire
prospectus carefully, including the "Risk Factors" section and our financial
statements and the related notes. In addition, we incorporate by reference
important business and financial information in this prospectus.
OUR COMPANY
We are one of the nation's leading providers of anatomic pathology
services. Anatomic pathology involves the diagnosis of disease through the
examination of tissues and cells that have been processed and mounted on slides.
Pathologists do not treat patients, but rather assist other physicians in
determining the correct diagnosis of their patients' ailments. For this reason,
anatomic pathologists are sometimes referred to as a "physician's physician."
The 427 anatomic pathologists in our owned and managed practices as of June 30,
2001 work in one of the 237 hospitals to which we provide professional pathology
and medical director services or in one of our 42 outpatient laboratories.
Historically, our strategy has been to build regional density in specific
geographic markets through the acquisition of successful and prominent anatomic
pathology practices and the development of new laboratories and diagnostic
centers. More recently, we have focused on achieving internal, or same store,
growth in revenues and profits by improving our operational and sales and
marketing infrastructure, further penetrating our local base of referring
physicians and expanding our contracts with managed care payors and national
clinical laboratories. These strategies, including the acquisition of 49
practices since 1996, have allowed us to experience significant growth. Our net
revenues grew from $193.3 million in 1998 to $330.1 million in 2000,
representing a compound annual growth rate of 30.7%.
We typically serve as the exclusive provider of professional pathology
services for the 237 hospitals in which our pathologists work. Under these
arrangements, we typically bill third-party payors for the professional
component of the inpatient testing and earn small medical director fees from the
hospital. Our hospital arrangements provide a relatively steady stream of
revenue and, while not long-term commitments, tend to continue uninterrupted. We
also provide outpatient anatomic pathology services to primary care physicians
and other specialty physicians including dermatologists, gastroenterologists,
urologists, oncologists and gynecologists. In the hospital setting, key revenue
sources include the study of tissues, or pathology, and the study of cells, or
cytopathology. Key revenue sources for the outpatient business include
dermatopathology and urologic pathology, which consist principally of the study
of biopsies for skin and prostate cancer, respectively. We have recently
established a separate dermatopathology sales and marketing division called
Dermpath Diagnostics to enhance our focus on this high growth component of our
business.
In order to expand the number of services, we perform and provide
opportunities for future growth, we are implementing strategies intended to
capture a share of the rapidly growing market for genomic tests and other more
advanced, or esoteric, tests. We believe that our nationwide network of
pathologists and our breadth of expertise in anatomic pathology provide us with
key competitive advantages in expanding into these and other technologically
advanced testing services. As part of this strategy, we opened a specialty
testing facility called the Center for Advanced Diagnostics, or CAD, in 1999. We
believe CAD's rapid growth is a consequence of these competitive advantages and
our aggressive marketing of its esoteric and genomic testing services to
physicians.
In the fourth quarter of 2000, we completed the acquisition of Pathology
Consultants of America, Inc., d/b/a Inform DX, our largest acquisition to date.
Inform DX provided us additional pathology resources in several of our markets
and gave us a presence in six new states. The acquisition of Inform DX added 22
dermatopathologists, bringing our current total to 68 and greatly expanding our
capacity in this high growth business. The Inform DX acquisition also augmented
our sales efforts with the addition of 18 sales people and enhanced our
management team through the addition of several key officers.
1
OUR INDUSTRY
Anatomic pathology involves evaluating tissues and cells that have been
processed and mounted on slides for examination under a microscope. In surgical
pathology, tissues removed from a patient during an inpatient or outpatient
procedure are examined to determine whether disease is present. Examples of
surgical pathology include breast, prostate, skin and bone marrow biopsies.
Cytopathology involves the examination of cells obtained from body fluids, from
solid tissues aspirated through needles and from scrapings of body tissues. An
example of cytopathology is the "Pap" smear, a test for determining cervical
cancer.
According to the College of American Pathologists, there are more than
12,000 pathologists in the United States. We believe that many of these
pathologists work in small, independent practices. However, we believe there has
been a recent trend among pathologists to form larger practices in order to
offer a broader range of outpatient and inpatient services and enhance the
utilization of the practices' pathologists. We believe the scale achieved by
creating these larger practices leads to competitive advantages in anatomic
pathology because of resulting improvements in sales, operations and contracting
efficiency.
We believe the market for anatomic pathology, esoteric testing and related
services is approximately $6.0 billion and will continue to grow for the
following reasons:
- an aging population;
- an increasing incidence of certain forms of cancer;
- the development of new esoteric tests; and
- the genomics revolution.
OUR BUSINESS STRATEGY
Our objective is to be a premier provider of diagnostic health care
information by continuing to enhance our position as a leading provider of
anatomic pathology services. While acquisitions remain an important element of
our strategy, we are increasingly focused on achieving same store growth. We are
pursuing the following strategies to achieve this objective:
- Enhance our regional business model with our recently augmented sales and
marketing organization;
- Expand our exclusive relationships with hospitals and multi-hospital
systems;
- Broaden our range of testing services and further penetrate high growth
esoteric testing markets;
- Acquire leading anatomic pathology practices to further expand our
national presence and support our regional growth model; and
- Build upon our leadership position in anatomic pathology to participate
in the growing genomics and genomics testing market.
PROPOSED REFINANCING
We will use the net proceeds of this offering to repay a portion of the
outstanding indebtedness under our credit facility. In addition, we intend to
put in place $175 to $225 million of new debt facilities and repay the remaining
balance of our existing credit facility. While this proposed refinancing will
result in special charges, we anticipate that we will be able to lower our
effective interest rate and obtain greater flexibility to pursue our strategic
objectives, including further acquisitions. We expect to complete this
refinancing during the fourth quarter of 2001. However, there can be no
assurance that we can obtain this financing on terms acceptable to us.
2
THE OFFERING
Common stock offered by us................... 4,125,000 shares
Common stock outstanding after this
offering................................... 29,333,835 shares
Use of proceeds.............................. To repay indebtedness under our credit
facility
Nasdaq National Market symbol................ PATH
The number of shares of common stock to be outstanding after the offering:
- is based upon 25,208,835 shares of common stock outstanding as of June
30, 2001;
- assumes no exercise of the underwriters' option to purchase up to 618,750
additional shares of common stock to cover over-allotments;
- does not take into account 2,235,741 shares of common stock issuable upon
exercise of options outstanding as of June 30, 2001, at a weighted
average exercise price of $15.45 per share, and an additional 135,621
shares of common stock issuable upon the exercise of options granted
subsequent to June 30, 2001, at an exercise price of $30.03 per share;
- does not take into account 13,334 shares of common stock issuable upon
the exercise of warrants outstanding as of June 30, 2001, at a weighted
average exercise price of $1.21 per share; and
- does not take into account up to 19,776 shares of common stock issuable
pursuant to a contingent payment obligation resulting from one of our
physician practice acquisitions.
---------------------
Our principal executive offices are located at 7289 Garden Road, Suite 200,
Riviera Beach, Florida 33404. Our telephone number is (561) 845-1850. Our
Internet address is www.ameripath.com. The information contained on our web site
is not part of this prospectus.
3
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------
1998 1999 2000 2000 2001
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues................................ $193,316 $257,432 $330,094 $155,977 $203,797
-------- -------- -------- -------- --------
Operating costs and expenses:
Cost of services.......................... 87,700 122,685 163,390 75,776 97,822
Selling, general and administrative
expenses............................... 36,709 47,159 58,411 27,426 35,386
Provision for doubtful accounts........... 18,698 25,289 34,040 15,452 23,206
Amortization expense...................... 9,615 12,827 16,172 7,734 9,180
Merger-related charges.................... -- -- 6,209 -- 7,103
Asset impairment and related charges...... -- -- 9,562 5,245 --
-------- -------- -------- -------- --------
Total operating costs and
expenses........................ 152,722 207,960 287,784 131,633 172,697
-------- -------- -------- -------- --------
Income from operations...................... 40,594 49,472 42,310 24,344 31,100
Interest expense............................ (8,560) (9,573) (15,376) (6,976) (9,437)
Other (expense) income, net................. 150 286 226 113 144
-------- -------- -------- -------- --------
Income before income taxes.................. 32,184 40,185 27,160 17,481 21,807
Provision for income taxes.................. 13,941 17,474 14,068 8,411 9,419
-------- -------- -------- -------- --------
Net income................................ 18,243 22,711 13,092 9,070 12,388
Induced conversion and accretion of
redeemable preferred stock................ (75) (131) (1,604) (1,604) --
-------- -------- -------- -------- --------
Net income attributable to common
stockholders........................... $ 18,168 $ 22,580 $ 11,488 $ 7,466 $ 12,388
======== ======== ======== ======== ========
Earnings per share data:
Basic earnings per common share........... $ 0.87 $ 1.03 $ 0.49 $ 0.33 $ 0.50
======== ======== ======== ======== ========
Diluted earnings per common share......... $ 0.84 $ 1.00 $ 0.47 $ 0.32 $ 0.48
======== ======== ======== ======== ========
Basic weighted average shares
outstanding............................ 20,911 21,984 23,473 22,575 24,951
Diluted weighted average shares
outstanding............................ 21,610 22,516 24,237 23,100 26,065
OPERATING DATA (AT END OF PERIOD):
Pathologists................................ 299 370 425 385 427
Hospital relationships...................... 168 207 235 205 237
Outpatient laboratories..................... 28 36 42 40 42
We have restated all historical information presented above to reflect our
acquisition of Inform DX on November 30, 2000, which we accounted for as a
pooling of interests. In connection with the Inform DX acquisition, we recorded
merger-related costs of $6.2 million and $7.1 million in 2000 and the first
quarter 2001, respectively, relating to transaction fees, change in control
payments and various exit costs associated with the consolidation of certain
operations. In addition, we recorded non-recurring asset impairment and related
charges totaling $9.6 million in 2000 in connection with Quest Diagnostics'
termination of a pathology services contract with us in South Florida, the loss
of a contract with a hospital in South Florida and the loss of three hospital
contracts and an ambulatory care facility contract in Cleveland, Ohio. The
charges were based on the remaining projected cash flows from these contracts in
which we determined that the intangible assets that were recorded from
acquisitions in these areas had been impaired. In connection with an acquisition
by Inform DX completed on June 30, 2000, Inform DX provided for an induced
conversion of redeemable preferred stock. The induced conversion resulted in the
issuance of 642,640 shares of common stock. Inform DX estimated, based on a
third-party valuation, the fair market value of its common stock at June 30,
2000 to be $6.22 per share. Based on this valuation, in the second quarter of
2000 Inform DX recorded a charge for the induced conversion of approximately
$1.5 million, or $6.22 per share times the additional common shares issued of
247,169.
4
AS OF JUNE 30, 2001
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,489 $ 2,489
Total assets................................................ 587,874 587,874
Long-term debt, including current portion................... 212,744 114,306
Total stockholders' equity.................................. 261,415 359,853
The as adjusted consolidated balance sheet data presented above reflects
our receipt of the net proceeds from the sale of the 4,125,000 shares of common
stock offered hereby at an assumed public offering price of $25.41 per share,
after deducting underwriting discounts and commissions and estimated offering
expenses payable by us, and our application of the net proceeds as described in
"Use of Proceeds."
5
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should carefully consider each of the following risks and all of the other
information set forth in this prospectus before purchasing our common stock. If
any of the following risks actually occur, our business prospects, financial
condition and results of operations could be materially harmed and the trading
price of our common stock could decline. In any such case, you could lose all or
part of your investment in our company.
OUR BUSINESS COULD BE MATERIALLY HARMED BY FUTURE INTERPRETATION OR
IMPLEMENTATION OF STATE LAWS REGARDING PROHIBITIONS ON THE CORPORATE PRACTICE OF
MEDICINE.
We acquire or affiliate with physician practices located in many states
across the country. However, the laws of many states prohibit business
corporations, including AmeriPath and its subsidiaries, from owning corporations
that employ physicians, or from exercising control over the medical judgments or
decisions of physicians. These laws and their interpretations vary from state to
state and are enforced by both the courts and regulatory authorities, each with
broad discretion. The manner in which we operate each practice is determined
primarily by the corporate practice of medicine restrictions of the state in
which the practice is located and other applicable regulations.
We believe that we are currently in material compliance with the corporate
practice of medicine laws in each of the states in which we operate.
Nevertheless, it is possible that regulatory authorities or other parties may
assert that we are engaged in the unauthorized corporate practice of medicine.
If such a claim were successfully asserted in any jurisdiction, we could be
subject to civil and criminal penalties, which could exclude us from
participating in Medicare, Medicaid and other governmental health care programs,
or we could be required to restructure our contractual and other arrangements.
Any restructuring of our contractual and other arrangements with physician
practices could result in lower revenues from such practices, increased expenses
in the operation of such practices and reduced influence over the business
decisions of such practices. Alternatively, some of our existing contracts could
be found to be illegal and unenforceable, which could result in the termination
of those contracts and an associated loss of revenue. In addition, expansion of
our operations to other corporate practice states may require structural and
organizational modification to the form of relationships that we currently have
with physicians, affiliated practices and hospitals. Such modifications could
result in less profitable relationships with physicians, affiliated practices
and hospitals, less influence over the business decisions of physicians and
affiliated practices and failure to achieve our growth objectives.
WE COULD BE HURT BY FUTURE INTERPRETATION OR IMPLEMENTATION OF FEDERAL AND STATE
ANTI-KICKBACK LAWS.
Federal anti-kickback laws and regulations prohibit the offer, payment,
solicitation and receipt of any form of remuneration in exchange for referrals
of products or services for which payment may be made by Medicare, Medicaid or
other federal health care programs. Violations of federal anti-kickback laws are
punishable by monetary fines, civil and criminal penalties and exclusion from
participation in Medicare, Medicaid and other governmental health care programs.
Several states have similar laws. While we believe our operations are in
material compliance with applicable Medicare and fraud and abuse laws, including
the anti-kickback law, there is a risk that government authorities might take a
contrary position or might investigate our arrangements with physicians and
third parties, particularly those arrangements that do not satisfy the
compliance safe harbors provided under the relevant regulations or that are
similar to arrangements found to be problematic in advisory opinions of the
Department of Health and Human Services Office of Inspector General (OIG). For
example, the OIG has addressed physician practice management arrangements in an
advisory opinion and found that management fees based on a percentage of
practice revenues may violate the federal anti-kickback statute. While we
believe our fee arrangements can be distinguished from those addressed in the
opinion, government authorities may disagree. Such occurrences, regardless of
their outcome, could damage our reputation and adversely affect important
business relationships that we have with third parties, including physicians,
hospitals and private payors. If our arrangements with physicians and third
parties were found to be illegal, we could be subject to civil and criminal
penalties, including fines and possible exclusion from participation in
government payor
6
programs. Significant fines could cause liquidity problems and adversely affect
our results of operations. Exclusion from participation in government payor
programs, which represented 19% of our collections from owned practices in 2000,
would eliminate an important source of revenue and could materially adversely
affect our business. In addition, some of our existing contracts could be found
to be illegal and unenforceable, which could result in the termination of those
contracts and an associated loss of revenue.
OUR BUSINESS COULD BE HARMED BY FUTURE INTERPRETATION OR IMPLEMENTATION OF THE
FEDERAL STARK LAW AND OTHER STATE AND FEDERAL ANTI-REFERRAL LAWS.
We are also subject to federal and state statutes and regulations banning
payments for referrals of patients and referrals by physicians to health care
providers with whom the physicians have a financial relationship. The federal
Stark Law applies to Medicare and Medicaid and prohibits a physician from
referring patients for certain services, including laboratory services, to an
entity with which the physician has a financial relationship. Financial
relationship includes both investment interests in an entity and compensation
arrangements with an entity. The state laws and regulations vary significantly
from state to state, are often vague and, in many cases, have not been
interpreted by courts or regulatory agencies. These state laws and regulations
generally apply to services reimbursed by both governmental and private payors.
Violations of these federal and state laws and regulations may result in
prohibition of payment for services rendered, loss of licenses, fines, criminal
penalties and exclusion from governmental and private payor programs. We have
financial relationships with our physicians, as defined by the federal Stark
Law, in the form of compensation arrangements, ownership of our common stock and
contingent promissory notes issued by us in connection with acquisitions. While
we believe that our financial relationships with physicians and referral
practices are in material compliance with applicable laws and regulations,
government authorities might take a contrary position or prohibited referrals
may occur. We cannot be certain that physicians who own our capital stock or
hold contingent promissory notes will not violate these laws or that we will
have knowledge of the identity of all beneficial owners of our capital stock. If
our financial relationships with physicians were found to be illegal, or if
prohibited referrals were found to have been made, we could be subject to civil
and criminal penalties, including fines, exclusion from participation in
government and private payor programs and requirements to refund amounts
previously received from government and private payors. In addition, expansion
of our operations to new jurisdictions, or new interpretations of laws in our
existing jurisdictions, could require structural and organizational
modifications of our relationships with physicians to comply with that
jurisdiction's laws. Such structural and organizational modifications could
result in lower profitability and failure to achieve our growth objectives.
OUR BUSINESS COULD BE MATERIALLY HARMED BY FUTURE INTERPRETATION OR
IMPLEMENTATION OF STATE LAWS REGARDING PROHIBITIONS ON FEE-SPLITTING.
Many states prohibit the splitting or sharing of fees between physicians
and non-physicians. These laws vary from state to state and are enforced by
courts and regulatory agencies, each with broad discretion. Some states have
interpreted management agreements between entities and physicians as unlawful
fee-splitting. We believe our arrangements with physicians comply in all
material respects with the fee-splitting laws of the states in which we operate.
Nevertheless, it is possible regulatory authorities or other parties could claim
we are engaged in fee-splitting. If such a claim were successfully asserted in
any jurisdiction, our pathologists could be subject to civil and criminal
penalties and we could be required to restructure our contractual and other
arrangements. Any restructuring of our contractual and other arrangements with
physician practices could result in lower revenues from such practices,
increased expenses in the operation of such practices and reduced influence over
the business decisions of such practices. Alternatively, some of our existing
contracts could be found to be illegal and unenforceable, which could result in
the termination of those contracts and an associated loss of revenue. In
addition, expansion of our operations to other states with fee-splitting
prohibitions may require structural and organizational modification to the form
of relationships that we currently have with physicians, affiliated practices
and hospitals. Any modifications could result in less profitable relationships
with physicians, affiliated practices and hospitals, less influence over the
business decisions of physicians and affiliated practices and failure to achieve
our growth objectives.
7
WE COULD BE HURT BY FUTURE INTERPRETATION OR IMPLEMENTATION OF STATE AND FEDERAL
ANTI-TRUST LAWS.
In connection with the corporate practice of medicine laws, the physician
practices with which we are affiliated in some states are organized as separate
legal entities. As such, the physician practice entities may be deemed to be
persons separate both from us and from each other under the antitrust laws and,
accordingly, subject to a wide range of laws that prohibit anti-competitive
conduct among separate legal entities. In addition, we are seeking to acquire or
affiliate with established and reputable practices in our new geographic
markets. While we believe that we are in material compliance with these laws and
intend to comply with any laws that may apply to our development of integrated
health care delivery networks, courts or regulatory authorities could
nevertheless take a contrary position or investigate our business practices. If
our business practices were found to violate these laws, we could be required to
pay substantial fines, penalties and damage awards, or we could be required to
restructure our business in a manner that would materially reduce our
profitability or impede our growth.
OUR BUSINESS COULD BE HARMED BY FUTURE INTERPRETATION OR IMPLEMENTATION OF THE
HEALTH CARE INSURANCE PORTABILITY AND ACCOUNTABILITY ACT.
The Health Care Insurance Portability and Accountability Act, or HIPAA,
created provisions that impose criminal penalties for fraud against any health
care benefit program, for theft or embezzlement involving health care and for
false statements in connection with the payment of any health benefits. The
HIPAA provisions apply not only to federal programs, but also to private health
benefit programs. HIPAA also broadened the authority of the OIG to exclude
participants from federal health care programs. Because of the uncertainties as
to how the HIPAA provisions will be enforced, we are currently unable to predict
their ultimate impact on us. Compliance with HIPAA could cause us to modify our
business operations in a manner that would increase our operating costs or
impede our growth. In addition, although we are unaware of any current
violations of HIPAA, if we were found to be in violation of HIPAA, the
government could seek penalties against us or seek to exclude us from
participation in government payor programs. Significant fines could cause
liquidity problems and adversely affect our results of operations. Exclusion
from participation in government payor programs, which represented 19% of our
collections from owned practices in 2000, would eliminate an important source of
revenue and could materially adversely affect our business.
FEDERAL AND STATE REGULATION OF THE PRIVACY, SECURITY AND TRANSMISSION OF HEALTH
INFORMATION COULD RESTRICT OUR OPERATIONS, IMPEDE THE IMPLEMENTATION OF OUR
BUSINESS STRATEGIES OR CAUSE US TO INCUR SIGNIFICANT COSTS.
The privacy, security and transmission of health information is subject to
federal and state laws and regulations, including HIPAA. Some of our operations
will be subject to HIPAA and its regulations. Because HIPAA's privacy
regulations do not supercede state laws that are more stringent, we will have to
comply both with the federal privacy regulations under HIPAA and with any state
privacy laws that are more stringent than HIPAA. Our operations that are subject
to HIPAA must be in compliance with HIPAA's regulations by April 2003. Another
set of regulations issued under HIPAA establish uniform standards relating to
data reporting, formatting, and coding that covered entities must use when
conducting certain transactions involving health information. The compliance
date for these regulations is October 2002. A third set of regulations, which
have not yet been finalized, will establish minimum security requirements to
protect health information. The HIPAA regulations could result in significant
financial obligations for us and will pose increased regulatory risk. The
privacy regulations could limit our use and disclosure of patient health
information and could impede the implementation of some of our business
strategies, such as our genomics initiatives. For example, the Department of
Health and Human Services, or HHS, has indicated that cells and tissues are not
protected health information, but that analyses of them are protected. HHS has
stated that if a person provides cells to a researcher and tells the researcher
that the cells are an identified individual's cancer cells, that accompanying
statement is protected health information. At this time, we are unable to
determine the full impact of the HIPAA regulations on our business and our
business strategies or the total cost of complying with the regulations, but the
impact and
8
the cost could be significant. Many states have enacted, or indicated an
intention to enact, privacy laws similar to HIPAA. These state laws could also
restrict our operations, impede the implementation of our business strategies or
cause us to incur significant compliance costs. In addition, failure to comply
with federal or state privacy laws and regulations could subject us to civil or
criminal penalties.
WE CHARGE OUR CLIENTS ON A FEE-FOR-SERVICE BASIS, SO WE INCUR FINANCIAL RISK
RELATED TO COLLECTIONS AS WELL AS POTENTIALLY LONG COLLECTION CYCLES WHEN
SEEKING REIMBURSEMENT FROM THIRD-PARTY PAYORS.
Substantially all of our net revenues are derived from our practices'
charging for services on a fee-for-service basis. Accordingly, we assume the
financial risk related to collection, including the potential uncollectability
of accounts, long collection cycles for accounts receivable and delays attendant
to reimbursement by third-party payors, such as governmental programs, private
insurance plans and managed care organizations. Our provision for doubtful
accounts for 2000 was 10.3% of net revenues, with net revenues from inpatient
services having a provision for doubtful accounts of approximately 17%. If our
revenue from hospital-based services increases as a percentage of our total net
revenues, our provision for doubtful accounts as a percentage of total net
revenues may increase. Increases in write-offs of doubtful accounts, delays in
receiving payments or potential retroactive adjustments and penalties resulting
from audits by payors may adversely affect our operating cash flow and
liquidity, require us to borrow funds to meet our current obligations, reduce
our profitability, impede our growth or otherwise materially adversely affect
our business.
WE RELY UPON REIMBURSEMENT FROM GOVERNMENT PROGRAMS FOR A SIGNIFICANT PORTION OF
OUR COLLECTIONS, AND THEREFORE OUR BUSINESS WOULD BE HARMED IF REIMBURSEMENT
RATES FROM GOVERNMENT PROGRAMS DECLINE.
We derived 19% of our collections from owned practices in 2000 from
payments made by government sponsored health care programs, principally Medicare
and Medicaid. These programs are subject to substantial regulation by federal
and state governments. Any changes in reimbursement regulations, policies,
practices, interpretations or statutes that place limitations on reimbursement
amounts or change reimbursement coding practices could materially harm our
business by reducing revenues and lowering profitability. Increasing budgetary
pressures at both the federal and state levels and concerns over escalating
costs of health care have led, and may continue to lead, to significant
reductions in health care reimbursements. State concerns over the growth in
Medicaid expenditures also could result in significant payment reductions. Since
these programs generally reimburse on a fee schedule basis, rather than a
charge-related basis, we generally cannot increase net revenue by increasing the
amount charged for services provided. As a result, cost increases may not be
able to be recovered from government payors. In addition, Medicare, Medicaid and
other government health care programs are increasingly shifting to forms of
managed care, which generally offer lower reimbursement rates. Some states have
enacted legislation to require that all Medicaid patients be transitioned to
managed care organizations, which could result in reduced payments to us for
such patients. Similar legislation may be enacted in other states. In addition,
a state-legislated shift of Medicaid patients to a managed care organization
could cause us to lose some or all Medicaid business in that state if we were
not selected by the managed care organization as a participating provider.
Additionally, funds received under all health care reimbursement programs are
subject to audit with respect to the proper billing for physician services and,
accordingly, repayments and retroactive adjustments of revenue from these
programs could occur. We expect that there will continue to be proposals to
reduce or limit Medicare and Medicaid reimbursements.
THE CONTINUED GROWTH OF MANAGED CARE MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS.
The number of individuals covered under managed care contracts or other
similar arrangements has grown over the past several years and may continue to
grow in the future and a substantial portion of our net revenue is from
reimbursement from managed care organizations. Entities providing managed care
coverage have been successful in reducing payments for medical services in
numerous ways, including entering into arrangements under which payments to a
service provider are capitated, limiting testing to specified procedures,
denying payment for services performed without prior authorization and refusing
to
9
increase fees for specified services. These trends reduce revenues, increase the
cost of doing business and limit the ability to pass cost increases on to
customers. The continued growth of the managed care industry and increased
efforts to reduce payments to medical care providers could materially harm our
business.
THERE HAS BEEN AN INCREASING NUMBER OF STATE AND FEDERAL INVESTIGATIONS OF
HOSPITALS AND HOSPITAL LABORATORIES, WHICH MAY INCREASE THE LIKELIHOOD OF
INVESTIGATIONS OF OUR BUSINESS PRACTICES.
Significant media and public attention has been focused on the health care
industry due to ongoing federal and state investigations reportedly related to
referral and billing practices, laboratory and home health care services and
physician ownership and joint ventures involving hospitals. Most notably, HCA-
The Healthcare Company, or HCA, is reportedly under investigation with respect
to such practices. We provide medical director services for numerous hospital
laboratories, including 28 HCA hospital laboratories as of June 30, 2001.
Therefore, the government's ongoing investigation of HCA or other hospital
operators could result in governmental investigations of one or more of our
operations. In addition, the OIG and the Department of Justice have initiated
hospital laboratory billing review projects in certain states, including some in
which we operate, and are expected to extend such projects to additional states,
including states in which we operate. These projects further increase the
likelihood of governmental investigations of laboratories that we own or
operate. Although we monitor our billing practices and hospital arrangements for
compliance with prevailing industry practices under applicable laws, such laws
are complex and constantly evolving, and it is possible that governmental
investigators may take positions that are inconsistent with our practices or
industry practices. The government's investigations of entities with which we
contract may materially harm our business, including termination or amendment of
one or more of our contracts or the sale of hospitals, potentially disrupting
the performance of services under our contracts. In addition, some indemnity
insurers and other non-governmental payors have sought repayment from providers,
including laboratories, for alleged overpayments.
THE HEIGHTENED SCRUTINY OF MEDICARE AND MEDICAID BILLING PRACTICES IN RECENT
YEARS MAY INCREASE THE POSSIBILITY THAT WE WILL BECOME SUBJECT TO COSTLY AND
TIME CONSUMING LAWSUITS AND INVESTIGATIONS.
Payors periodically reevaluate the services for which they provide
reimbursement. In some cases, government payors such as Medicare also may seek
to recoup payments previously made for services determined not to be
reimbursable. Any such action by payors would adversely affect our revenues and
earnings. In addition, under the federal False Claims Act, any person convicted
of submitting false or fraudulent claims to the government may be required to
make significant payments, including damages and penalties in addition to
repayments of amounts not properly billed, and may be excluded from
participating in Medicare, Medicaid and other government health care programs.
Many states have similar false claims laws. The federal government has become
more aggressive in examining laboratory billing practices and seeking repayments
and penalties allegedly resulting from improper billing for services, such as
using an improper billing code for a test to realize higher reimbursement. While
the primary focus of this initiative has been on hospital laboratories and on
routine clinical chemistry tests, which comprise only a portion of our revenues,
the scope of this initiative could expand and it is not possible to predict
whether or in what direction the expansion might occur. In addition, recent
government enforcement efforts have asserted poor quality of care as the basis
for a false claims action. Private insurers may also bring actions under false
claims laws and, in some circumstances, private whistleblowers may bring false
claim suits on behalf of the government. While we believe that our practices are
proper and do not include any allegedly improper practices now being examined,
the government could take a contrary position or could investigate our
practices. Furthermore, HIPAA and the joint federal and state anti-fraud
initiative commenced in 1995 called Operation Restore Trust have strengthened
the powers of the OIG and increased funding for Medicare and Medicaid audits and
investigations. As a result, the OIG is expanding the scope of its health care
audits and investigations. Federal and state audits and inspections, whether on
a scheduled or unannounced basis, are conducted from time to time at our
facilities. If a negative finding is made as a result of any such investigation,
we could be required to change coding practices, repay amounts paid for
10
incorrect practices, pay substantial penalties or cease participating in
Medicare, Medicaid and other government health care programs.
In August 2001, we received two letters from the Civil Division of the U.S.
Department of Justice ("DOJ") requesting information regarding billing practices
and documentation of gross descriptions on skin biopsy reports. We are providing
documentation to the DOJ regarding the tests that are the subjects of its
requests for information. While we currently do not believe there is any basis
for the DOJ to pursue any significant enforcement action against us with respect
to these tests, no assurances can be given regarding the ultimate outcome of the
investigation. Requests for information such as these are often the result of a
qui tam, or whistleblower, action filed by a private party. If this information
request is the result of a qui tam action and if the DOJ decides not to pursue
an action against us, the private party could still proceed with the action.
Defending a qui tam lawsuit, even where there is little or no merit to the
allegations, can be expensive and time consuming.
WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUES FROM SHORT-TERM HOSPITAL
CONTRACTS AND HOSPITAL RELATIONSHIPS THAT CAN EASILY BE TERMINATED.
Many of our hospital contracts provide that the hospital or we may
terminate the agreement prior to the expiration of the initial or any renewal
term with relatively short notice and without cause. We also have business
relationships with hospitals that are not subject to written contracts and that
may be terminated by the hospitals at any time. Loss of any particular hospital
contract or relationship would not only result in a loss of net revenue to us
under that contract or relationship, but may also result in a loss of outpatient
net revenue that may be derived from our association with the hospital and its
medical staff. Any such loss could also result in an impairment of the value of
the assets we have acquired or may acquire, requiring substantial charges to
earnings. For example, during the fourth quarter of 2000, we were unsuccessful
in retaining a contract to perform pathology services for a hospital in South
Florida. Based upon the remaining projected cash flow from this hospital
network, we determined that the intangible assets were impaired and recorded a
pre-tax non-cash charge of approximately $1.0 million. This hospital contract
accounted for approximately $800,000 of net revenue during 2000. Continuing
consolidation in the hospital industry may result in fewer hospitals or fewer
laboratories as hospitals move to combine their operations. Our contracts and
relationships with hospitals may be terminated or, in the case of contracts, may
not be renewed as their current terms expire.
OUR BUSINESS STRATEGY EMPHASIZES GROWTH, WHICH PLACES SIGNIFICANT DEMANDS ON OUR
FINANCIAL, OPERATIONAL AND MANAGEMENT RESOURCES AND CREATES THE RISK OF FAILING
TO MEET THE GROWTH EXPECTATIONS OF INVESTORS.
Our growth strategy includes efforts to acquire and develop new practices,
develop and expand managed care and national clinical laboratory contracts and
develop new products, services, technologies and related alliances with third
parties. The pursuit of this growth strategy consumes capital resources, thereby
creating the financial risk that we will not realize an adequate return on this
investment. In addition, our growth may involve the acquisition of companies,
the development of products or services or the creation of strategic alliances
in areas in which we do not currently operate. This would require our management
to develop expertise in new areas, manage new business relationships and attract
new types of customers. The success of our growth strategy also depends on our
ability to expand our physician and employee base and to train, motivate and
manage employees. The success or failure of our growth strategy is difficult to
predict. The failure to achieve our stated growth objectives or the growth
expectations of investors could disappoint investors and harm our stock price.
We may not be able to implement our growth strategy successfully or to manage
our expanded operations effectively and profitably.
WE ARE PURSUING BUSINESS OPPORTUNITIES IN NEW MARKETS, SUCH AS GENOMICS, WHICH
ADDS UNCERTAINTY TO OUR FUTURE RESULTS OF OPERATIONS AND COULD DIVERT FINANCIAL
AND MANAGEMENT RESOURCES AWAY FROM OUR CORE BUSINESS.
As we pursue business opportunities in new markets, such as genomics, we
anticipate that significant investments and costs will be related to, and future
revenue may be derived from, products, services and
11
alliances that do not exist today or have not been marketed in sufficient
quantities to measure accurately market acceptance. Similarly, operating costs
associated with new business endeavors are difficult to predict with accuracy,
thereby adding further uncertainty to our future results of operations. We may
experience difficulties that could delay or prevent the successful development
and introduction of new products and services and such products and services may
not achieve market acceptance. Any failure by us to pursue new business
opportunities successfully could result in financial losses and could inhibit
our anticipated growth. In addition, the pursuit of new business endeavors could
divert financial and management resources away from our core business.
ETHICAL, SOCIAL AND LEGAL ISSUES CONCERNING GENOMIC RESEARCH AND TESTING MAY
RESULT IN REGULATIONS RESTRICTING THE USE OF GENOMIC TESTING OR REDUCE THE
DEMAND FOR GENOMIC TESTING PRODUCTS, WHICH COULD IMPEDE OUR ABILITY TO ACHIEVE
OUR GROWTH OBJECTIVES.
Ethical, social and legal concerns about genomic testing and genomic
research could result in regulations restricting our or our customers'
activities or in only limited demand for those products. For example, the
potential availability of testing for some genomic predispositions to illness
has raised issues regarding the use and confidentiality of information obtained
from this testing. Some states in the United States have enacted legislation
restricting the use of information from some genomic testing, and the United
States Congress and some foreign governments are considering similar
legislation. The United States Food and Drug Administration, or FDA, has
subjected the commercialization of certain elements of genomic testing to
limited regulation. The federal Centers for Disease Control and Prevention has
published notice of its intent to revise the regulations under the Clinical
Laboratory Improvements Amendments, or CLIA, to specifically recognize and
regulate a genomic testing specialty. The Department of Health and Human
Services' Secretary's Advisory Committee on Genetic Testing advises the
Department of Health and Human Services as to various issues raised by the
development and use of genomic testing and has published preliminary
recommendations for increased participation on the part of the FDA and increased
regulation of genomic testing under CLIA. As a result of these activities, it is
likely that genomic testing will be subject to heightened regulatory standards.
Restrictions on our or our customers' use of genomic information or testing
products could impede our ability to broaden the range of testing services we
offer and to penetrate the genomic and genomic testing markets.
IF WE ARE UNABLE TO MAKE ACQUISITIONS IN THE FUTURE, OUR RATE OF GROWTH WILL
SLOW.
Much of our historical growth has come from acquisitions, and we continue
to pursue growth through the acquisition and development of laboratories and
physician practices. However, we may be unable to continue to identify and
complete suitable acquisitions at prices we are willing to pay or to obtain the
necessary financing on acceptable terms. In addition, as we become a bigger
company, the amount that acquired businesses contribute to our revenue and
profits will likely be smaller on a percentage basis. We compete with other
companies to identify and complete suitable acquisitions. We expect this
competition to intensify, making it more difficult to acquire suitable companies
on favorable terms. For example, we may be unable to accurately and consistently
identify physician practices whose pathologists have strong professional
reputations in their local medical communities. Further, we may acquire
physician practices whose pathologists' individual marketing and other sales
efforts do not produce a profitable customer base. As a result, the businesses
we acquire may not perform well enough to justify our investment. Our
flexibility in structuring acquisitions is inhibited by restrictive covenants in
our current credit facility. For example, our credit facility requires us to use
no less than 30% equity and no more than 20% contingent notes as part of the
purchase price for any acquisition and requires us to obtain lender consent for
any acquisition with a purchase price greater than $10 million. These
limitations may impede our ability to complete acquisitions. If we are unable to
make additional acquisitions on suitable terms, we may not meet our growth
expectations.
12
WE INTEND TO RAISE ADDITIONAL CAPITAL, WHICH MAY BE DIFFICULT TO OBTAIN AT
ATTRACTIVE PRICES AND WHICH MAY CAUSE US TO ENGAGE IN FINANCING TRANSACTIONS
THAT ADVERSELY AFFECT OUR STOCK PRICE.
We need capital for both internal growth and the acquisition and
integration of new practices, products and services. Therefore, we intend to
raise additional capital through public or private offerings of equity
securities or debt financings. Our issuance of additional equity securities
could cause dilution to holders of our common stock and may adversely affect the
market price of our common stock. The incurrence of additional debt could
increase our interest expense and other debt service obligations and could
result in the imposition of covenants that restrict our operational and
financial flexibility. Additional capital may not be available to us on
commercially reasonable terms or at all. The failure to raise additional needed
capital could impede the implementation of our operating and growth strategies.
THE SUCCESS OF OUR GROWTH STRATEGY DEPENDS ON OUR ABILITY TO ADAPT TO NEW
MARKETS AND EFFECTIVELY INTEGRATE NEWLY ACQUIRED PRACTICES.
Our expansion into new markets will require us to maintain and establish
payor and customer relationships and to convert the patient tracking and
financial reporting systems of new practices to our systems. Significant delays
or expenses with regard to this process could materially harm the integration of
additional practices and our profitability. The integration of additional
practices also requires the implementation and centralization of purchasing,
accounting, sales and marketing, payroll, human resources, management
information systems, cash management, risk management and other systems, which
may be difficult, costly and time-consuming. Accordingly, our operating results,
particularly in fiscal quarters immediately following a new practice
affiliation, may be adversely affected while we attempt to complete the
integration process. We may encounter significant unanticipated costs or other
problems associated with the future integration of practices into our combined
network of affiliated practices. Our expansion into new markets may require us
to comply with present or future laws and regulations that may differ from those
to which we are currently subject. Failure to meet these requirements could
materially impede our growth objectives or materially harm our business.
WE MAY INHERIT SIGNIFICANT LIABILITIES FROM PRACTICES THAT WE HAVE ACQUIRED OR
ACQUIRE IN THE FUTURE.
We perform due diligence investigations with respect to potential
liabilities of acquired and affiliated practices and typically obtain
indemnification with respect to liabilities from the sellers of such practices.
Nevertheless, undiscovered claims may arise and liabilities for which we become
responsible may be material and may exceed either the limitations of any
applicable indemnification provisions or the financial resources of the
indemnifying parties. Claims or liabilities of acquired and affiliated practices
may include matters involving compliance with laws, including health care laws.
While we believe, based on our due diligence investigations, that the operations
of our practices prior to their acquisition were generally in compliance with
applicable health care laws, it is nevertheless possible that such practices
were not in full compliance with such laws and that we will become accountable
for their non-compliance. We have, from time to time, identified certain past
practices of acquired physician groups that do not conform to our standards. A
violation of applicable health care laws by a practice, whether or not the
violation occurred prior to our acquisition of the practice, could result in
civil and criminal penalties, exclusion of the physician, the practice or us
from participation in Medicare and Medicaid programs and loss of a physician's
license to practice medicine. Significant fines and other penalties could cause
liquidity problems and adversely affect our results of operations. Exclusion
from participation in government payor programs, which represented 19% of our
collections from owned practices in 2000, would eliminate an important source of
revenue and could materially harm our business.
WE HAVE SIGNIFICANT CONTINGENT LIABILITIES PAYABLE TO MANY OF THE SELLERS OF
PRACTICES THAT WE HAVE ACQUIRED.
In connection with our practice acquisitions, we typically agree to pay the
sellers additional consideration in the form of contingent debt obligations,
payment of which depends upon the practice achieving specified profitability
criteria over periods ranging from three to five years after the acquisition.
13
The amount of these contingent payments cannot be determined until the
contingency periods terminate and achievement of the profitability criteria is
determined. As of December 31, 2000, if the maximum criteria for the contingency
payments with respect to all prior acquisitions were achieved, we would be
obligated to make payments, including principal and interest, of approximately
$198.4 million over the next three to five years. This amount could increase
significantly as we continue selectively to acquire new practices. Lesser
amounts would be paid if the maximum criteria are not met. Although we believe
we will be able to make such payments from internally generated funds or
proceeds of future borrowings, it is possible that such payments could cause
significant liquidity problems for us. We continue to use contingent notes as
partial consideration for acquisitions and affiliations.
WE HAVE RECORDED A SIGNIFICANT AMOUNT OF INTANGIBLE ASSETS, WHICH MAY NEVER BE
REALIZED.
Our acquisitions have resulted in significant increases in net identifiable
intangible assets and goodwill. Net identifiable intangible assets, which
include hospital contracts, physician client lists, management service
agreements and laboratory contracts acquired in acquisitions were approximately
$263.2 million at June 30, 2001, representing approximately 44.8% of our total
assets. Net identifiable intangible assets are recorded at fair value on the
date of acquisition and are being amortized over periods ranging from 10 to 40
years. Goodwill, which relates to the excess of cost over the fair value of net
assets of businesses acquired, was approximately $196.7 million at June 30,
2001, representing approximately 33.5% of our total assets. On an ongoing basis,
we make an evaluation to determine whether events and circumstances indicate
that all or a portion of the carrying value of intangible assets may no longer
be recoverable, in which case an additional charge to earnings may be necessary.
For example, during the fiscal year ended December 31, 2000, we recorded asset
impairment charges to intangible assets in the amount of $9.6 million. We may
not ever realize the full value of our intangible assets. Any future
determination requiring the write-off of a significant portion of intangible
assets could materially harm our results of operations for the period in which
the write-off occurs, which could adversely affect our stock price.
OUR BUSINESS IS HIGHLY DEPENDENT ON THE RECRUITMENT AND RETENTION OF QUALIFIED
PATHOLOGISTS.
Our business is dependent upon recruiting and retaining pathologists,
particularly those with subspecialties, such as dermatopathology,
hematopathology, immunopathology and cytopathology. While we have been able to
recruit principally through practice acquisitions, and retain pathologists, we
may be unable to continue to do so in the future as competition for the services
of pathologists increases. In addition, we may have to modify the economic terms
of our relationships with pathologists in order to enhance our recruitment and
retention efforts. Because it may not be possible to recover increased costs
through price increases, this could materially harm our profitability. The
relationship between the pathologists and their respective local medical
communities is important to the operation and continued profitability of each
practice. Loss of one of our pathologists for any reason could lead to the loss
of hospital contracts or other sources of revenue that depend on our continuing
relationship with that pathologist. Our revenues and earnings could be adversely
affected if a significant number of pathologists terminate their relationships
with our practices or become unable or unwilling to continue their employment,
or if a number of our non-competition agreements with physicians are terminated
or determined to be invalid or unenforceable. For example, the two pathologists
in our Birmingham, Alabama practice recently terminated their employment with us
and opened their own pathology lab. As a result, we no longer have an operating
lab in Alabama. We have implemented a strategy to retain our Alabama customers
and service them through other AmeriPath facilities. If we are unable to retain
these customers, we could incur a non-cash asset impairment charge of up to $3.9
million, and possibly a charge for other related non-recurring costs. If such
charges are necessary, depending upon the magnitude of the charges, we may have
to seek a waiver from our lenders to avoid violating a covenant under our credit
facility.
ENACTMENT OF PROPOSALS TO REFORM THE HEALTH CARE INDUSTRY MAY RESTRICT OUR
EXISTING OPERATIONS, IMPOSE ADDITIONAL REQUIREMENTS ON US, LIMIT OUR EXPANSION
OR INCREASE OUR COSTS OF REGULATORY COMPLIANCE.
Federal and state governments periodically focus significant attention on
health care reform. It is not possible to predict which, if any, proposal will
be adopted. It is possible that the health care regulatory environment will
change so as to restrict our existing operations, impose additional requirements
on us or
14
limit our expansion. Costs of compliance with changes in government regulations
may not be subject to recovery through price increases.
COMPETITION FROM OTHER PROVIDERS OF PATHOLOGY SERVICES MAY MATERIALLY HARM OUR
BUSINESS.
Health care companies such as hospitals, national clinical laboratories,
third-party payors and health maintenance organizations may compete with us in
the employment of pathologists and the management of pathology practices. We
also expect to experience increasing competition in the provision of pathology
and cytology diagnostic services from other anatomic pathology practices,
companies in other health care industry segments, such as other hospital-based
specialties, national clinical laboratories, large physician group practices or
other pathology physician practice management companies. Some of our competitors
may have greater financial and other resources than we, which could further
intensify competition. Increasing competition may erode our customer base,
reduce our sources of revenue, cause us to reduce prices or enter into a greater
number of capitated contracts in which we take on greater pricing risks or
increase our marketing and other costs of doing business. Increasing competition
may also impede our growth objectives by making it more difficult or more
expensive for us to acquire or affiliate with additional pathology practices.
WE ARE SUBJECT TO SIGNIFICANT PROFESSIONAL OR OTHER LIABILITY CLAIMS, AND WE
CANNOT ASSURE YOU THAT INSURANCE COVERAGE WILL BE AVAILABLE OR SUFFICIENT TO
COVER SUCH CLAIMS.
Our business entails an inherent risk of claims of physician professional
liability or other liability for acts or omissions of our physicians and
laboratory personnel or of hospital employees who are under the supervision of
our hospital-based pathologists. We and our physicians periodically become
involved as defendants in medical malpractice and other lawsuits, some of which
are currently ongoing, and are subject to the attendant risk of substantial
damage awards. While we believe that we have a prudent risk management program,
including professional liability and general liability insurance coverage as
well as agreements from third parties, such as hospitals and national clinical
laboratories, to indemnify or insure us, it is possible that pending or future
claims will not be covered by or will exceed the limits of our risk management
program, including the limits of our insurance coverage or applicable
indemnification provisions, or that third parties will fail or otherwise be
unable to comply with their obligations to us. While we believe this practice is
routine, in a number of pending claims our insurers have reserved their rights
to deny coverage. In addition, we are currently in a dispute with our former
medical malpractice carrier on an issue related to the applicability of excess
insurance coverage. If we do not prevail, a gap of several months in our excess
insurance coverage may exist for a period in which significant claims have been
made. It is also possible that the costs of our insurance coverage will rise
causing us either to incur additional costs or to further limit the amount of
coverage we have. In addition, our insurance does not cover all potential
liabilities arising from governmental fines and penalties, indemnification
agreements and certain other uninsurable losses. For example, from time to time
we agree to indemnify third parties, such as hospitals and national clinical
laboratories, for various claims that may not be covered by insurance. As a
result, we may become responsible for substantial damage awards that are
uninsured. We are currently subject to indemnity claims which, if determined
adversely to us, could result in substantial uninsured losses.
WE DEPEND ON CERTAIN KEY EXECUTIVES, THE LOSS OF WHOM COULD DISRUPT OUR
OPERATIONS, CAUSE US TO INCUR ADDITIONAL EXPENSES AND IMPEDE OUR ABILITY TO
EXPAND OUR OPERATIONS.
Our success is dependent upon the efforts and abilities of our key
management personnel, particularly James C. New, our Chairman and Chief
Executive Officer, Brian C. Carr, our President, Gregory A. Marsh, our Vice
President and Chief Financial Officer, Alan Levin, M.D., our Chief Operating
Officer and Dennis M. Smith, Jr., M.D., our Executive Vice President of Genomic
Strategies and Medical Director. It would be costly, time consuming and
difficult to find suitable replacements for these individuals. The need to find
replacements combined with the temporary loss of these key services could also
materially disrupt our operations and impede our growth by diverting management
attention away from our core business and growth strategies.
15
WE DEPEND ON NUMEROUS COMPLEX INFORMATION SYSTEMS AND ANY FAILURE TO
SUCCESSFULLY MAINTAIN THOSE SYSTEMS OR IMPLEMENT NEW SYSTEMS COULD MATERIALLY
HARM OUR OPERATIONS.
We depend upon numerous information systems to provide operational and
financial information on our practices, provide test reporting to physicians and
handle our complex billing operations. We currently have several major
information technology initiatives underway, including the integration of
information from our practices. No assurance can be given that we will be able
to enhance existing and/or implement new information systems that can integrate
successfully the disparate operational and financial information systems of our
practices. In addition to their integral role in helping our practices realize
operating efficiencies, such new systems are critical to developing and
implementing a comprehensive enterprise-wide management information database. To
develop such an integrated network, we must continue to invest in and administer
sophisticated management information systems. We may experience unanticipated
delays, complications and expenses in implementing, integrating and operating
such systems. Furthermore, our information systems may require modifications,
improvements or replacements as we expand and as new technologies become
available. Such modifications, improvements or replacements may require
substantial expenditures and may require interruptions in operations during
periods of implementation. Moreover, implementation of such systems is subject
to the availability of information technology and skilled personnel to assist us
in creating and implementing the systems. The failure to successfully implement
and maintain operation, financial, test reports, billing and physician practice
information systems could substantially impede the implementation of our
operating and growth strategies and the realization of expected operating
efficiencies.
FAILURE TO TIMELY OR ACCURATELY BILL FOR OUR SERVICES MAY HAVE A SUBSTANTIAL
NEGATIVE IMPACT ON OUR REVENUES, CASH FLOW AND BAD DEBT EXPENSE.
Billing for laboratory testing services is complicated. The industry
practice of performing tests in advance of payment and without certainty as to
the outcome of the billing process may have a substantial negative impact on our
revenues, cash flow and bad debt expense. We bill various payors, such as
patients, insurance companies, Medicare, Medicaid, and national clinical
laboratories, all of which have different billing requirements. In addition, the
billing information requirements of the various payors have become increasingly
stringent, typically conditioning reimbursement to us on the provision of proper
medical necessity and diagnosis codes by the requisitioning client. This
complexity may increase our bad debt expense, due primarily to several
non-credit related issues such as missing or incorrect billing information on
test requisitions.
Among many other factors complicating our billing are:
- disputes between payors as to which party is responsible for payment;
- disparity in coverage among various payors; and
- the difficulty of adherence to specific compliance requirements,
diagnosis coding and procedures mandated by various payors.
The complexity of laboratory billing also tends to cause delays in our cash
collections. Confirming incorrect or missing billing information generally slows
down the billing process and increases the aging of accounts receivable. We
assume the financial risk related to collection, including the potential
uncollectability of accounts and delays due to incorrect and missing information
and the other complex factors identified above.
DISRUPTION IN NEW YORK CITY AND IN U.S. COMMERCIAL ACTIVITIES GENERALLY
FOLLOWING THE SEPTEMBER 2001 TERRORIST ATTACKS ON THE U.S. IS EXPECTED TO
ADVERSELY IMPACT OUR RESULTS OF OPERATIONS AND MAY ADVERSELY IMPACT OUR ABILITY
TO RAISE CAPITAL OR OUR FUTURE GROWTH.
The operations of our laboratories have been and may continue to be harmed
by the recent terrorist attacks on the U.S. For example, transportation systems
and couriers that we rely upon to receive and process specimens have been and
may continue to be disrupted, thereby causing a decrease in testing volumes and
revenues. In addition, we may experience a rise in operating costs, such as
costs for transportation, courier services, insurance and security. In
particular, the operations of our laboratory in
16
New York City may be harmed as a result of the terrorist attacks on New York
City. We also may experience delays in receiving payments from payors that have
been affected by the attacks, which, in turn, would harm our cash flow. The U.S.
economy in general may be adversely affected by the terrorist attacks or by any
related outbreak of hostilities. Any such economic downturn could adversely
impact our results of operations, impair our ability to raise capital or impede
our ability to continue growing our business.
OUR STOCK PRICE IS VOLATILE AND THE VALUE OF YOUR INVESTMENT MAY DECREASE FOR
VARIOUS REASONS, INCLUDING REASONS THAT ARE UNRELATED TO THE PERFORMANCE OF OUR
BUSINESS.
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. In fact, since January 1, 2000, our common stock, which
trades on the Nasdaq National Market, has traded from a low of $7.00 per share
to a high of $37.16 per share. We believe that various factors, such as
legislative and regulatory developments, investigations by regulatory bodies or
third-party payors, quarterly variations in our actual or anticipated results of
operations, lower revenues or earnings than those anticipated by securities
analysts, the overall economy and the financial markets could cause the price of
our common stock to fluctuate substantially. For example, in the fourth quarter
of 1998, our stock price declined significantly as a result of an announcement
by the government of its intent to seek recovery of amounts allegedly improperly
reimbursed to us under Medicare. Although the claim was resolved to our
satisfaction and resulted only in a small fine, similar investigations may be
announced having the same effect on the market price of our stock. In addition,
securities class action claims have been brought against companies whose stock
prices have been volatile. Several such suits were brought against us as a
result of the decline in our stock price described above. This kind of
litigation could be very costly and could divert our management's attention and
resources. Any adverse determination in this type of litigation could also
subject us to significant liabilities, any or all of which could materially harm
our liquidity and capital resources.
IF OUR STOCKHOLDERS SELL SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK AFTER THIS
OFFERING, THE MARKET PRICE OF OUR COMMON STOCK MAY FALL.
The market price of our common stock could decline as a result of sales by
our existing stockholders after this offering or the perception that these sales
could occur. These sales also might make it difficult for us to sell equity
securities in the future at a time and price that we deem appropriate. In
particular, we note that we issued approximately 2.6 million shares of common
stock in connection with our acquisition of Inform DX. Of these 2.6 million
shares, 664,359 have been registered for re-sale and are freely tradable without
restriction or further registration, and the approximately 1.9 million remaining
shares will become eligible for sale under Rule 144 on November 30, 2001,
subject to the volume and other limitations of such rule. However, between
approximately 600,000 and approximately 1.0 million of these 2.6 million shares
will be subject to lock-up provisions until 90 days from the date of this
prospectus.
CERTAIN PROVISIONS OF OUR CHARTER, BY-LAWS AND DELAWARE LAW MAY DELAY OR PREVENT
A CHANGE OF CONTROL OF OUR COMPANY.
Our corporate documents and Delaware law contain provisions that may enable
our board of directors or management to resist a change of control of our
company. These provisions include a staggered board of directors, limitations on
persons authorized to call a special meeting of stockholders and advance notice
procedures required for stockholders to make nominations of candidates for
election as directors or to bring matters before an annual meeting of
stockholders. We also have a rights plan designed to make it more costly and
more difficult to gain control of our company. These anti-takeover defenses
could discourage, delay or prevent a change of control. These provisions could
also discourage proxy contests and make it more difficult for you and other
stockholders to elect directors and cause us to take other corporate actions. In
addition, the existence of these provisions, together with Delaware law, might
hinder or delay an attempted takeover other than through negotiations with our
board of directors.
17
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. The forward-looking
statements are contained principally in the sections entitled "Prospectus
Summary," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." These statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performances or achievements expressed or implied by the
forward-looking statements. Forward-looking statements include, but are not
limited to, statements about:
- Our expectations regarding financial results for periods after June 30,
2001;
- Our ability to continue to grow our dermatopathology business;
- Our ability to develop our genetic and other esoteric testing
capabilities;
- Our ability to grow through acquisitions and to successfully integrate
operations of acquired businesses;
- The timing and amount of annual operating synergies expected to result
from combining the operations of acquired businesses;
- Our ability to sustain our market position;
- Our expectations of the sources, timing and magnitude of future special
charges;
- Our expectations of the accretive or dilutive impact of past or future
acquisitions;
- The interpretation or implementation of current or future laws and
regulations;
- Our expectations regarding the outcome of pending governmental
investigations and related claims;
- The reimbursement levels of third-party payors, including government
payors, managed care companions and indemnity insurers;
- Our ability to maintain our hospital contracts and relationships;
- Our ability to attract and retain pathologists;
- Our goals and expectations regarding improvements in our results of
operations on a same store basis;
- Our planned capital expenditure levels and our ability to fund such
expenditures from various sources;
- Our expectations regarding cost savings and other benefits resulting from
information systems enhancements;
- Our anticipation regarding the ability of funds from various sources to
satisfy our future working capital needs, contingent note obligations and
capital expenditure needs; and
- Our expectations regarding obtaining new or additional financing and
refinancing existing indebtedness.
In some cases, you can identify forward-looking statements by terms such as
"may," "will," "should," "could," "would," "expects," "plans," "anticipates,"
"believes," "estimates," "projects," "predicts," "potential," and similar
expressions intended to identify forward-looking statements. These statements
reflect our current views with respect to future events and are based on
assumptions and subject to risks and uncertainties. Given these uncertainties,
you should not place undue reliance on these forward-looking statements. We
discuss many of these risks in this prospectus in greater detail under the
heading "Risk Factors." Also, these forward-looking statements represent our
estimates and assumptions only as of the date of this prospectus.
18
You should read this prospectus and the documents that we reference in this
prospectus and have filed as exhibits to the registration statement, of which
this prospectus is a part, completely and with the understanding that our actual
future results may be materially different from what we expect. We qualify all
of our forward-looking statements by these cautionary statements. Except as
required by law, we assume no obligation to update such forward-looking
statements publicly for any reason, or to update the reasons actual results
could differ materially from those anticipated in such forward-looking
statements, even if new information becomes available in the future.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY
STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.
19
USE OF PROCEEDS
We expect to receive net proceeds of approximately $98.4 million from the
sale of 4,125,000 shares of common stock by us in this offering, or $113.3
million if the underwriters' over-allotment option is exercised in full, based
on an assumed public offering price of $25.41 per share and after deducting
underwriting discounts and commissions and the estimated offering expenses we
will pay. We intend to use the net proceeds of this offering to repay
approximately $98.4 million of our existing debt under our credit facility,
which matures on December 16, 2004 and had a weighted average interest rate of
8.2% as of September 30, 2001. Certain affiliates of underwriters of this
offering are lenders under our credit facility. See "Underwriting." See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
intend to retain any future earnings to finance the growth and development of
our business and therefore do not anticipate paying any cash dividends in the
foreseeable future. Our revolving line of credit prohibits us from paying
dividends without the prior written consent of our lenders. The payment of cash
dividends in the future will be at the discretion of our Board of Directors and
will depend upon factors such as our earnings, capital requirements, financial
condition and other factors deemed relevant by our Board of Directors. We are
unable to assure you that we will pay any dividends in the future.
20
MARKET PRICE OF COMMON STOCK
Our common stock began trading publicly on the Nasdaq National Market on
October 21, 1997 and is traded under the symbol "PATH." The following table
shows the range of high and low sales prices per share of our common stock as
reported by the Nasdaq National Market for the periods indicated.
COMMON STOCK PRICE
------------------
HIGH LOW
------ ------
Year ended December 31, 1999:
First Quarter............................................. $14.50 $ 7.19
Second Quarter............................................ 9.75 7.38
Third Quarter............................................. 10.69 7.19
Fourth Quarter............................................ 10.31 7.00
Year ended December 31, 2000:
First Quarter............................................. $10.00 $ 7.50
Second Quarter............................................ 9.50 7.00
Third Quarter............................................. 14.88 8.00
Fourth Quarter............................................ 27.13 13.25
Year ended December 31, 2001:
First Quarter............................................. $27.75 $16.00
Second Quarter............................................ 32.00 20.06
Third Quarter............................................. 37.16 24.26
Fourth Quarter (through October 18, 2001)................. 28.50 23.64
On October 18, 2001, the last sales price for the common stock on the
Nasdaq National Market was $25.41 per share. As of October 18, 2001, there were
308 shareholders of record of our common stock.
21
CAPITALIZATION
The following table describes our capitalization as of June 30, 2001
- on an actual basis; and
- on an as-adjusted basis to reflect our sale of 4,125,000 shares of common
stock hereby at an assumed offering price of $25.41 per share, the
receipt of the estimated net proceeds of such sale after deducting
underwriting discounts and commissions and estimated offering expenses,
and the application of net proceeds as described in "Use of Proceeds."
This table assumes no exercise of the underwriters' option to purchase up
to 618,750 additional shares of common stock to cover over-allotments. You
should read this table together with the section of this prospectus entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes appearing
elsewhere in this prospectus.
AS OF JUNE 30, 2001
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
Debt, including current portion:
Credit facility........................................... $209,000 $110,562
Notes payable............................................. 97 97
Capitalized lease obligations............................. 500 500
Subordinated notes(1)..................................... 3,147 3,147
-------- --------
Total debt............................................. 212,744 114,306
-------- --------
Stockholders' equity:
Common stock, $.01 par value per share, 60,000,000 shares
authorized: 25,208,835 and 29,333,835 issued and
outstanding actual and as adjusted, respectively(2).... 252 293
Additional paid-in capital................................ 191,103 289,500
Accumulated other comprehensive loss...................... (3,696) (3,696)
Retained earnings......................................... 73,756 73,756
-------- --------
Total stockholders' equity............................. 261,415 359,853
-------- --------
Total capitalization................................. $474,159 $474,159
======== ========
-------------------------
(1) Includes current maturities of $512,000 for subordinated notes issued and
assumed in connection with acquisitions, payable in varying amounts through
2005, with interest at rates of 6.5% and 9.5%.
(2) Excludes 2,235,741 shares of common stock issuable upon the exercise of
options outstanding as of June 30, 2001, at a weighted average exercise
price of $15.45 per share; 13,334 shares of common stock issuable upon the
exercise of warrants outstanding as of June 30, 2001, at a weighted average
exercise price of $1.21 per share, and up to 19,776 shares of common stock
issuable pursuant to a contingent payment obligation resulting from one of
our physician practice acquisitions.
22
SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the related notes
included elsewhere in this prospectus. We have derived the selected financial
data as of and for the fiscal years ended December 31, 1996, 1997, 1998, 1999
and 2000 from our consolidated audited financial statements. We have derived the
selected financial data at June 30, 2001 and for the six months ended June 30,
2000 and 2001 from our unaudited consolidated financial statements, which, in
our opinion, include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the information set out in
this prospectus. The information below is not necessarily indicative of the
results of future operations. We have restated all historical information
presented below to reflect our acquisition of Inform DX, on November 30, 2000,
which we accounted for as a pooling of interests.
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues..................................... $42,558 $108,406 $193,316 $257,432 $330,094 $155,977 $203,797
------- -------- -------- -------- -------- -------- --------
Operating costs and expenses:
Cost of services............................... 20,106 48,833 87,700 122,685 163,390 75,776 97,822
Selling, general and administrative expenses... 8,483 21,386 36,709 47,159 58,411 27,426 35,386
Provision for doubtful accounts................ 3,576 10,892 18,698 25,289 34,040 15,452 23,206
Amortization expense........................... 1,958 5,763 9,615 12,827 16,172 7,734 9,180
Merger-related charges(1)...................... -- -- -- -- 6,209 -- 7,103
Asset impairment and related charges(2)........ -- -- -- -- 9,562 5,245 --
Loss on cessation of clinical lab
operations(3)................................ 910 -- -- -- -- -- --
------- -------- -------- -------- -------- -------- --------
Total operating costs and expenses........... 35,033 86,874 152,722 207,960 287,784 131,633 172,697
------- -------- -------- -------- -------- -------- --------
Income from operations........................... 7,525 21,532 40,594 49,472 42,310 24,344 31,100
Interest expense................................. (3,540) (8,772) (8,560) (9,573) (15,376) (6,976) (9,437)
Nonrecurring charge(4)........................... -- (1,289) -- -- -- -- --
Other (expense) income, net...................... (431) (96) 150 286 226 113 144
Income before income taxes....................... 3,554 11,375 32,184 40,185 27,160 17,481 21,807
Provision for income taxes....................... 1,528 5,522 13,941 17,474 14,068 8,411 9,419
------- -------- -------- -------- -------- -------- --------
Net income..................................... 2,026 5,853 18,243 22,711 13,092 9,070 12,388
Induced conversion and accretion of redeemable
preferred stock(5)............................. -- -- (75) (131) (1,604) (1,604) --
------- -------- -------- -------- -------- -------- --------
Net income attributable to common
stockholders................................. $ 2,026 $ 5,853 $ 18,168 $ 22,580 $ 11,488 $ 7,466 $ 12,388
======= ======== ======== ======== ======== ======== ========
Earnings per share data:
Basic earnings per common share................ $ 0.53 $ 0.66 $ 0.87 $ 1.03 $ 0.49 $ 0.33 $ 0.50
======= ======== ======== ======== ======== ======== ========
Diluted earnings per common share.............. $ 0.22 $ 0.42 $ 0.84 $ 1.00 $ 0.47 $ 0.32 $ 0.48
======= ======== ======== ======== ======== ======== ========
Basic weighted average shares outstanding...... 3,115 8,880 20,911 21,984 23,473 22,575 24,951
======= ======== ======== ======== ======== ======== ========
Diluted weighted average shares outstanding.... 9,014 13,986 21,610 22,516 24,237 23,100 26,065
======= ======== ======== ======== ======== ======== ========
23
AS OF DECEMBER 31, AS OF
---------------------------------------------------- JUNE 30,
1996 1997 1998 1999 2000 2001
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 2,262 $ 2,030 $ 6,383 $ 1,713 $ 2,418 $ 2,489
Total assets............................................. 157,854 272,532 390,413 478,896 562,166 587,874
Long-term debt, including current portion................ 97,239 77,630 123,917 168,614 201,747 212,744
Redeemable equity securities(6).......................... 18,427 -- 15,373 15,504 -- --
Total stockholders' equity............................... 12,693 145,603 180,378 206,214 249,665 261,415
---------------
(1) In connection with the Inform DX merger, we recorded $6.2 million and $7.1
million in 2000 and the first quarter 2001, respectively, for costs related
to transaction fees, change in control payments and various exit costs
associated with the consolidation of certain operations.
(2) In connection with Quest Diagnostics' termination of a pathology services
contract with us in South Florida, the loss of a contract with a hospital in
South Florida and the loss of three hospital contracts and an ambulatory
care facility contract in Cleveland, Ohio, we recorded non-recurring asset
impairment and related charges totaling $9.6 million in 2000. The charges
were based on the remaining projected cash flows from these contracts in
which we determined that the intangible assets that were recorded from
acquisitions in these areas had been impaired.
(3) In connection with the closing of a clinical laboratory operation in May
1996, we recorded a non-recurring charge to operations aggregating $910,000,
which included severance payments, write-downs of property, equipment and
other assets to estimated realizable values, and the write-off of the
unamortized balances of intangible assets associated with the clinical
laboratory operations.
(4) In the year ended December 31, 1997, we recorded a nonrecurring charge of
$1.3 million, primarily attributable to professional fees and printing
costs, as a result of the postponement of a planned initial public offering
of common stock.
(5) In connection with an acquisition by Inform DX completed on June 30, 2000,
Inform DX provided for an induced conversion of preferred stock. The induced
conversion resulted in the issuance of 642,640 shares of common stock.
Inform DX estimated, based on a third party valuation, the fair market value
of its common stock at June 30, 2000 to be $6.22 per share. Based on this
valuation, in the second quarter of 2000 Inform DX recorded a charge for the
induced conversion of approximately $1.5 million, or $6.22 per share times
the additional common shares issued of 247,169.
(6) For December 31, 1996 amounts include Convertible Preferred Stock of $5.2
million plus accrued and unpaid dividends and $12.2 million of Redeemable
Common Stock. For December 31, 1998 and 1999 amounts included Convertible
Preferred Stock of $15.4 million and $15.5 million, respectively.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the "Selected Financial Data" and our consolidated financial statements and the
related notes, which are included elsewhere in this prospectus.
OVERVIEW
We are one of the leading national providers of anatomic pathology
services. The 427 pathologists in our owned and managed practices as of June 30,
2001 provide medical diagnostic services in outpatient laboratories owned,
operated and managed by us, in hospitals, and in ambulatory surgery centers.
Under our ownership or employment model, we acquire a controlling equity (i.e.,
voting) interest or have a controlling financial interest in pathology
practices. We refer to these practices as our owned practices. Under our
management or equity model, we acquire certain assets of, and operate pathology
practices under long-term management services agreements with, pathology
practices. We refer to these practices as our managed practices. Under the
management services agreements, we provide facilities and equipment as well as
administrative and technical support for the managed practices. As of June 30,
2001, we had seven managed practices, employing 69 physicians. When we refer to
"practices" generally, we mean our owned and managed practices as a group.
As of June 30, 2001, our practices had contracts or business relationships
with a total of 237 hospitals pursuant to which we manage their clinical
pathology and other laboratories and provide professional pathology services.
The majority of these hospital contracts and relationships are exclusive
provider relationships. We also have 42 licensed outpatient laboratories.
Generally, we manage and control all of the non-medical functions of the
practices, including:
- recruiting, training, employing and managing the technical and support
staff;
- developing, equipping and staffing laboratory facilities;
- establishing and maintaining courier services to transport specimens;
- negotiating and maintaining contracts with hospitals, national clinical
laboratories and managed care organizations and other payors;
- providing financial reporting and administration, clerical, purchasing,
payroll, billing and collection, information systems, sales and
marketing, risk management, employee benefits, legal, tax and accounting
services;
- maintaining compliance with applicable laws, rules and regulations; and
- with respect to our ownership and operation of outpatient anatomic
pathology laboratories, providing slide preparation and other technical
services.
ACQUISITIONS
Since the first quarter of 1996, we have completed the acquisition of 49
physician practices located in 21 states. These acquisitions include the
acquisition of Inform DX, during the fourth quarter of 2000. We accounted for
the Inform DX transaction as a pooling of interests and, therefore, we have
restated all historical information to reflect the acquisition of Inform DX. As
a result of the Inform DX acquisition, we now have managed practices from which
we derive management fees. Prior to the Inform DX transaction, we only had owned
practices.
There were no acquisitions in the first six months of 2001. While we
regularly explore additional acquisition opportunities and are in various stages
of discussions with a number of acquisition candidates, we currently have no
specific agreements or commitments with any third party regarding any potential
acquisition.
25
During 2000, we acquired nine anatomic pathology practices, including the
two practices acquired by Inform DX. The total consideration paid by us in
connection with these acquisitions included cash of $32.5 million, 1.5 million
shares of common stock (with an aggregate value of $12.2 million based upon
amounts recorded on our consolidated financial statements) and subordinated debt
of $2.8 million. In addition, we issued additional purchase price consideration
in the form of contingent notes. During the year ended December 31, 2000, we
made contingent note payments of $26.6 million and other purchase price
adjustments of approximately $2.9 million in connection with certain
post-closing adjustments and acquisition costs.
During 1999, we acquired eleven anatomic pathology practices, including one
practice acquired by Inform DX. The total consideration paid by us in connection
with these acquisitions included cash of $51.7 million, 486,796 shares of common
stock (with an aggregate value of $3.0 million based upon amounts recorded on
our consolidated financial statements) and subordinated debt of $848,000. In
addition, we issued additional purchase price consideration in the form of
contingent notes. During the year ended December 31, 1999, we issued an
additional 23,930 shares of common stock, valued at $195,000, and made
contingent note payments of $17.4 million and other purchase price adjustments
of $3.0 million in connection with certain post-closing adjustments and
acquisition costs.
BUSINESS COLLABORATIONS
We have commenced our transition to becoming a fully integrated health care
diagnostic information provider. As part of this transition, we have entered
into business collaborations intended to generate additional revenues through
leveraging our personnel, technology and resources. Two examples of such
endeavors, one with Genomics Collaborative, Inc. ("GCI") and one with Ampersand
Medical of Chicago ("Ampersand"), are described below. Although we believe such
new endeavors are promising, we cannot assure you that they will be profitable.
During the third quarter of 2000, we formed an alliance with GCI to provide
fresh frozen samples from normal, diseased, and cancerous tissue to GCI for
subsequent sale to researchers in industry and academic laboratories who are
working to discover genes associated with more common disease categories, such
as heart disease, hypertension, diabetes, osteoporosis, depression, dementia,
asthma and cancer, with a special focus on breast, colon and prostate tumors.
This alliance utilizes our national network of hospitals, physicians and
pathologists and GCI's capabilities in large-scale DNA tissue analysis and
handling, tied together by proprietary information systems and bioinformatics.
The financial results of the alliance with GCI were not material to our
operations during 2000 or for the six months ended June 30, 2001. We are working
with GCI to develop procedures to comply with informed consent requirements and
other regulations regarding the taking and processing of specimens from donors
and related records. Failure to comply with such regulations could result in
adverse consequences including potential liability to us. On September 15, 2000,
we made a $1.0 million investment in GCI in exchange for 333,333 shares of
Series D Preferred Stock, par value $0.01.
On March 27, 2001, we announced an agreement with Ampersand which
illustrates another example of leveraging our existing resources. In this
alliance, we will be performing clinical trial work for Ampersand's cytology
platform that utilizes proteomic biomarkers to help pathologists and cytologists
identify abnormal and cancerous cells in pap smears and other body fluids, such
as sputum and urine. We will be paid on a fee-for-service basis for each
clinical trial we conduct. The agreement also calls for us to assist Ampersand
with the development of associated products and tests. We would receive equity
in Ampersand for the developmental work and would be entitled to royalty
payments based on future sales of these products and tests. One of the Ampersand
products we are currently evaluating is a new test for human papilloma virus or
HPV, which causes over 99% of all cervical dysplasia and cancer. This new test
involves the application of genomic and proteomic markers directed against the
specific oncogenes and oncoproteins of HPV that are directly responsible for the
virus' ability to cause cancer. Preliminary studies indicate superior
performance of these markers compared to currently available tests. However,
there can be no assurance that such tests or such markers will be successful or
become commercially viable.
26
SOURCES OF NET REVENUE
We derive our net revenue primarily from the operations of our owned and
managed practices. Net revenue was comprised of net patient service revenue from
our owned practices and net management service revenue from our managed
practices.
The percent of our net revenue from outpatient and inpatient pathology and
management services is presented below. The type and mix of business among these
three categories, which can change from period to period as a result of new
acquisitions and other factors, may change our ratio of operating costs to net
revenue, particularly the provision for doubtful accounts as discussed below in
our results of operations.
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ --------------
1998 1999 2000 2000 2001
REVENUE TYPE ---- ---- ---- ----- -----
Outpatient.................................... 43% 39% 42% 40% 44%
Inpatient..................................... 49% 51% 51% 52% 49%
Management service revenues................... 8% 10% 7% 8% 7%
NET PATIENT REVENUES
The majority of services furnished by our pathologists are anatomic
pathology diagnostic services. We typically bill government programs,
principally Medicare and Medicaid, indemnity insurance companies, managed care
organizations, national clinical laboratories, physicians and patients. Net
patient revenue differs from amounts billed for services due to:
- Medicare and Medicaid reimbursements at annually established rates;
- payments from managed care organizations at discounted fee-for-service
rates;
- negotiated reimbursement rates with national clinical laboratories and
other third-party payors; and
- other discounts and allowances.
The national clinical laboratories contract directly under capitated
agreements with managed care organizations to provide clinical as well as
anatomic pathology services. We, in turn, subcontract with national clinical
laboratories to provide anatomic pathology services at a discounted
fee-for-service rate and are attempting to increase the number of such
subcontracts to increase test volume. Since the majority of our operating
costs -- principally the compensation of physicians and non-physician technical
personnel -- are relatively fixed, increases in test volume generally enhance
our profitability. Historically, net patient service revenue from capitated
contracts has represented an insignificant amount of total net patient service
revenue. However, we may be required to enter into more capitated arrangements
in order to compete effectively for managed care contracts in the future.
Virtually all of our net patient service revenue is derived from our
practices' charging for services on a fee-for-service basis. Accordingly, we
assume the financial risk related to collection, including potential
uncollectability of accounts, long collection cycles for accounts receivable and
delays in reimbursement by third-party payors, such as governmental programs,
private insurance plans and managed care organizations. Increases in write-offs
of doubtful accounts, delays in receiving payments or potential retroactive
adjustments and penalties resulting from audits by payors may require us to
borrow funds to meet current obligations or may otherwise have a material
adverse effect on our financial condition and results of operations.
In addition to services billed on a fee-for-service basis, the
hospital-based pathologists have supervision and oversight responsibility for
their roles as Medical Directors of the hospitals' clinical, microbiology and
blood banking operations. For this role, we bill non-Medicare patients according
to a fee schedule for what is referred to as clinical professional component
charges. For Medicare patients, the pathologist is typically paid a director's
fee or a "Part A" fee by the hospital. Hospitals and third-party
27
payors are continuing to increase pressure to reduce the payment of these
clinical professional component charges and "Part A" fees, and in the future we
may sustain substantial decreases in these payments.
Approximately 19% of our collections from owned practices in 2000 was from
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
increased regulatory audits and adjustments, or changes in the interpretation of
the coding of services or the amounts payable for services under these programs
could have a material adverse effect on our financial position and results of
operations.
The impact of legislative changes on our results of operations will depend
upon several factors, including the mix of inpatient and outpatient pathology
services, the amount of Medicare business, and changes in reimbursement levels
which are published in November of each year. Management continuously monitors
changes in legislation impacting reimbursement.
In prior years, we have been able to mitigate the impact of reductions in
Medicare reimbursement rates for anatomic pathology services through the
achievement of economies of scale and production efficiencies. Despite any
offsets, the recent substantial modifications to the physician fee schedule,
along with additional adjustments by Medicare, could have a material adverse
effect on average unit reimbursement in the future. In addition, other
third-party payors could adjust their reimbursement based on changes to the
Medicare fee schedule. Any reductions made by other payors could also have a
material negative impact on average unit reimbursement.
NET MANAGEMENT SERVICE REVENUE
Net management service revenue is based on a predetermined percentage of
operating income of the managed practices, before physician group retainage,
plus reimbursement of certain practice expenses as defined in each management
service agreement. Management fees are recognized at the time the physician
group revenue is recorded by the physician group.
Generally, net management service revenue equates to net physician group
revenue less amounts retained by the physician groups, which we refer to as
physician group retainage. Net physician group revenue is equal to billed
charges reduced by provisions for bad debt and contractual adjustments.
Contractual adjustments represent the difference between amounts billed and
amounts reimbursable by commercial insurers and other third-party payors
pursuant to their respective contracts with the physician group. The provision
for bad debts represents management's estimate of potential credit issues
associated with amounts due from patients, commercial insurers, and other
third-party payors. Net physician group revenue, which underlies our management
service revenue, is subject to the same legislative and regulatory factors
discussed above with respect to net patient revenue.
MEDICARE REIMBURSEMENT
Since 1992 the Centers for Medicare and Medicaid Services ("CMS") (formerly
known as the Health Care Financing Administration, or "HCFA") has paid for
physician's services under section 1848 of the Social Security Act. CMS
calculates and reimburses fees for all physician services ("Part B" fees),
including anatomic pathology services, based on a fee schedule methodology known
as the resource-based relative value system ("RBRVS"). The RBRVS initially was
phased in over a four year period. Subsequently, CMS proposed changes in the
computation of the malpractice portion and practice expense portion of the RVUs.
Although these changes have changed reimbursement to some extent, they are not
expected to have a material impact on the Company's revenues. Overall, anatomic
pathology reimbursement rates declined during the fee schedule phase-in period,
despite an increase in payment rates for certain pathology services performed by
us.
The Medicare Part B fee schedule payment for each service is determined by
multiplying the total relative value units ("RVUs") established for the service
by a Geographic Practice Cost Index ("GPCI"). The sum of this value is
multiplied by a statutory conversion factor. The number of RVUs assigned to
28
each service is in turn calculated by adding three separate components: work RVU
(intensity of work), practice exposure RVU (expense related to performing the
service) and malpractice RVU (malpractice costs associated with the service).
CMS reviews annually the RBRVS payment schedule in conjunction with its
budgeting process. The resulting payment schedule is published each year in the
Federal Register in November. The blended payment rates for services provided by
AmeriPath to Medicare patients, based on our values and locations of services,
increased by 11.3% from 1999 to 2000, and by 6.8% from 2000 to 2001. However,
there can be no assurance that we will receive similar increases in the future,
and it is possible that our blended rates may decrease at some point in the
future.
In 1999, CMS announced that it would cease the direct payment by Medicare
for the technical component of inpatient physician pathology services to an
outside independent laboratory because they concluded payment for the technical
component is included already in the payment to hospitals under the hospital
inpatient prospective payment system. Implementation of this change commenced
January 1, 2001. Under these rules, independent pathology laboratories would be
required to bill the hospital directly for technical services on hospital
Medicare inpatients. Congress, however, "grandfathered," for a period of two
years, certain existing hospital-lab arrangements in effect before July 22,
1999. Effective January 2001, hospital arrangements that were not grandfathered
are not reimbursed by Medicare for the technical component. Upon expiration of
the two years, the grandfather provision is scheduled to expire.
Additionally, with the implementation of the hospital outpatient
prospective payment system ("PPS") during 2000, independent pathology
laboratories providing technical services to Medicare hospital outpatients
generally are no longer able to bill Medicare for the technical component ("TC")
of those services. Rather, they need to bill the hospital for the TC. The
hospital is reimbursed as part of the new Ambulatory Payment Classification
("APC") payment system. Laboratories providing these services now need to
contract directly with hospitals for reimbursement. As the amount paid to
hospitals for the most common pathology services is less than the technical
component under the RBRVS, it is likely that those laboratories will incur
substantial reductions in reimbursement under PPS. However, services provided by
us which are subject to PPS are not material to our total net revenue.
RECENT DEVELOPMENTS
We will use the net proceeds of this offering, estimated to be $98.4
million, to repay a portion of the outstanding indebtedness under our credit
facility. In addition, we intend to put in place $175 to $225 million of new
debt facilities and repay the remaining balance of our existing credit facility.
The refinancing will result in the termination of three interest rate swaps with
a combined notional amount of $105 million and the write-off of associated
unamortized debt costs of approximately $1.7 million. The termination of these
interest rate swaps would result in a special charge, after tax, of
approximately $3.6 million. The write-off of the unamortized debt costs will
result in an extraordinary charge, net of tax, of approximately $1.0 million.
These estimates are based on information as of June 30, 2001 and actual charges
could increase or decrease based upon the fair value of the swaps at the time of
termination. We expect to complete this refinancing during the fourth quarter of
2001 and we anticipate that we will be able to lower our effective interest rate
as well as obtain greater flexibility to pursue our strategic objectives,
including further acquisitions. However, there can be no assurance that we can
obtain this financing on terms acceptable to us.
During the third quarter of 2001, two pathologists in our Birmingham,
Alabama practice terminated their employment with us and opened their own
pathology laboratory. As a result, we no longer have an operating laboratory in
Alabama. We have implemented a strategy to retain our Alabama customers and
service them through other AmeriPath facilities. If we are unable to retain
these customers we could incur a non-cash asset impairment charge, which would
not exceed $3.9 million in the aggregate, and possibly a charge for other
related non-recurring costs. If such charges are necessary, depending upon the
magnitude of the charges, we may have to seek a waiver from our lenders to avoid
violating a covenant under our existing credit facility.
29
RESULTS OF OPERATIONS
The following table outlines, for the periods indicated, selected operating
data as a percentage of net operating revenues.
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- -------------
1998 1999 2000 2000 2001
----- ----- ----- ----- -----
Net revenues........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Operating costs and expenses:
Cost of services..................................... 45.3 47.7 49.5 48.6 48.0
Selling, general and administrative expenses......... 19.0 18.3 17.7 17.6 17.4
Provision for doubtful accounts...................... 9.7 9.8 10.3 9.9 11.4
Amortization expense................................. 5.0 5.0 4.9 4.9 4.5
Merger-related charges............................... -- -- 1.9 -- 3.4
Asset impairment and related charges................. -- -- 2.9 3.4 --
----- ----- ----- ----- -----
Total operating costs and expenses................ 79.0 80.8 87.2 84.4 84.7
----- ----- ----- ----- -----
Income from operations................................. 21.0 19.2 12.8 15.6 15.3
Interest (expense) and other income, net............... (4.4) (3.6) (4.6) (4.4) (4.6)
----- ----- ----- ----- -----
Income before income taxes............................. 16.6 15.6 8.2 11.2 10.7
Provision for income taxes............................. 7.2 6.8 4.2 5.4 4.6
----- ----- ----- ----- -----
Net income............................................. 9.4 8.8 4.0 5.8 6.1
Induced conversion and accretion of redeemable
preferred stock...................................... (0.0) (0.0) (0.5) (1.0) --
----- ----- ----- ----- -----
Net income attributable to common stockholders......... 9.4% 8.8% 3.5% 4.8% 6.1%
===== ===== ===== ===== =====
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Net Revenues
Net revenues increased by $47.8 million, or 30.7%, from $156.0 million for
the six months ended June 30, 2000 to $203.8 million for the six months ended
June 30, 2001. Same store net revenue increased $23.3 million, or 15%, from
$80.2 million for the six months ended June 30, 2000 to $92.2 million for the
six months ended June 30, 2001, including approximately $1.5 million related to
the increase in Medicare reimbursement. Same store outpatient revenue increased
$15.0 million, or 25%, same store hospital revenue increased $6.3 million, or
8%, and same store management service revenue increased $2.0 million, or 16%,
compared to the same period of the prior year. Reference to same store means
practices at which we provided services for the entire period for which the
amount is calculated and the entire prior comparable period, including acquired
hospital contracts and relationships, the New York laboratory operations and
expanded ancillary testing services added to existing practices. The remaining
increase in revenue of $24.5 million resulted from the operations of
laboratories acquired during the year 2000. Our objective is to achieve annual
same store net revenue growth in excess of [10%]; however, there can be no
assurance that we will achieve this objective.
During the six months ended June 30, 2001, approximately $15.1 million, or
7%, of our net revenue was attributable to contracts with national laboratories
including Quest Diagnostics ("Quest") and Laboratory Corporation of America
Holdings ("LabCorp"). Effective December 31, 2000, Quest terminated our
pathology contract in South Florida. In 2000, this contract accounted for
approximately $1.5 million of net patient service revenue. This contract
termination resulted in a $3.3 million asset impairment charge in the fourth
quarter of 2000. In addition, during the fourth quarter, we discontinued our
Quest work in San Antonio. Decisions by Quest or LabCorp to discontinue or
redirect pathology services, at any or all of its practices, or our decision to
discontinue processing work from the national laboratories, could materially
harm our financial position and results of operations.
30
In addition, during the six months ended June 30, 2001, approximately $27.1
million, or 13%, of our net revenue was derived from 28 hospitals operated by
HCA -- The Healthcare Company ("HCA"), formerly known as Columbia/HCA Healthcare
Corporation. Generally, any contracts or relationships we may have with these
and other hospitals are short-term and allow for termination by either party
with relatively short notice. HCA has been under government investigation for
some time, and we believe that HCA is evaluating its operating strategies,
including the possible sale, spin-off or closure of certain hospitals. Closures
or sales of HCA hospitals or terminations or non-renewals of one or more of our
contracts or relationships with HCA hospitals could have a material adverse
effect on our financial position and results of operations.
Cost of Services
Cost of services consists principally of the compensation and fringe
benefits of pathologists, licensed technicians and support personnel, laboratory
supplies, shipping and distribution costs and facility costs.
Cost of services increased by $22.0 million, or 29.1%, from $75.8 million
for the six months ended June 30, 2000 to $97.8 million for the same period in
2001. The increase in cost of services can be attributed primarily to the
increase in net revenues (approximately $11.0 million) and the practices
acquired since June 30, 2000 (approximately $11.0 million). Cost of services as
a percentage of net revenues decreased slightly from 48.6% for the six months
ended June 30, 2000 to 48.0% in the comparable period of 2001. Gross margin
increased from 51.4% in the six months ended June 30, 2000 to 52.0% for the same
period in 2001. Because a substantial portion of our net revenues come from
third-party payors, it is often difficult to compensate for cost increases
through price increases.
Selling, General and Administrative Expenses
The cost of corporate support, sales and marketing, and billing and
collections comprise the majority of what is classified as selling, general and
administrative expenses ("SG&A").
As a percentage of consolidated net revenues, SG&A decreased from 17.6% for
the six months ended June 30, 2000 to 17.4% for the same period of 2001. SG&A
increased by $8.0 million, or 29.0%, from $27.4 million for the six months ended
June 30, 2000 to $35.4 million for the comparable period of 2001. Of this
increase, approximately $2.1 million is attributable to the increase in billing
and collection costs and approximately $2.6 million is attributable to the
acquisitions we completed after June 30, 2000. The remaining increase was due
primarily to increased staffing levels in marketing, human resources and
accounting, salary increases effected during the fourth quarter of 2000, and
costs incurred to expand our administrative support infrastructure and to
enhance our information systems support services. The increase in marketing
costs includes the cost of additional marketing personnel to cover new markets
for dermatopathology, marketing literature, and products to expand our
penetration in the urology, gastroenterology and oncology markets.
One of our objectives is to decrease these costs as a percentage of net
revenues; however, these costs, as a percentage of net revenue, may increase as
we continue to invest in marketing, information systems and billing operations.
For 2001, we expect to make significant investments in sales and marketing
focused on achieving our goal for same store revenue growth. Therefore we do not
expect any significant reduction in the ratio of SG&A to net revenue in 2001.
Provision for Doubtful Accounts
Our provision for doubtful accounts can be affected by our mix of revenue
from outpatient, inpatient, and management services. The provision for doubtful
accounts for outpatient revenue, including revenue from national labs, is
approximately 4% and for inpatient revenue is approximately 17%. Management
service revenue generally does not have a provision for doubtful accounts. The
provision for doubtful accounts as a percentage of net revenue is higher for
inpatient services than for outpatient services due primarily to a larger
concentration of indigent and private pay patients, more difficulties gathering
complete and accurate billing information, and longer billing and collection
cycles for inpatient services. If our
31
revenue from hospital-based services increases as a percentage of our total net
revenues, our provision for doubtful accounts as a percentage of total net
revenues may increase.
Our provision for doubtful accounts increased by $7.8 million, or 50.2%,
from $15.4 million for the six months ended June 30, 2000 to $23.2 million for
the same period in 2001. The provision for doubtful accounts as a percentage of
net revenues was 9.9% and 11.4% for the six month periods ended June 30, 2000
and 2001, respectively. This increase was driven principally by three factors:
conservative reserve practices as same store revenue accelerates; extended
account aging in some practices where billing systems have been standardized,
and increased hospital clinical professional component billing, which generally
has a higher bad debt ratio.
Amortization Expense
Our acquisitions completed since 1996 resulted in significant increases in
net identifiable intangible assets and goodwill. Net identifiable intangible
assets are recorded at fair value on the date of acquisition and are amortized
over periods ranging from 10 to 40 years. We amortize goodwill on a
straight-line basis over periods ranging from 10 to 35 years. We cannot assure
you that we will ever realize the value of intangible assets.
Amortization expense increased by $1.5 million, or 18.7%, from $7.7 million
for the six months ended June 30, 2000 to $9.2 million for the same period of
2001. The increase is attributable to the amortization of goodwill and other
identifiable intangible assets recorded in connection with anatomic pathology
practices acquired after June 30, 2000, payments made on contingent notes, and a
reduction in the weighted average amortization periods from 30 to 28 years.
Amortization expense is expected to increase on an annual basis as a result of
additional identifiable intangible assets and goodwill arising from future
acquisitions and any payments required to be made pursuant to the contingent
notes issued in connection with acquisitions.
We continually evaluate whether events or circumstances have occurred that
may warrant revisions to the carrying values of our goodwill and other
identifiable intangible assets, or to the estimated useful lives assigned to
such assets. Any significant impairment recorded on the carrying values of our
goodwill or other identifiable intangible assets could materially harm results
of operations. Such impairment would be recorded as a charge to operating profit
and reduction in intangible assets.
Merger-related Charges
The merger-related charges of $7.1 million for the six months ended June
30, 2001 relate to our acquisition of Inform DX and include transaction costs
and costs related to the closing of the Inform DX corporate office in Nashville
and the consolidation or closing of the overlapping operations of Inform DX in
New York and Pennsylvania. We effectively closed the Nashville office on March
31, 2001 and, based on current plans, we expect to complete the integration of
the New York and Pennsylvania operations by the end of the third quarter of
2001. The restructuring of the combined operations of AmeriPath and Inform DX
are expected to result in potential annual operating synergies of up to $5.0
million. Since the majority of the positive effect of such savings on operations
will not begin to be realized until the second half of 2001, we believe the
acquisition of Inform DX has been nominally dilutive for the first six months of
2001, but we expect it to be accretive for the year 2001.
Income from Operations
Income from operations increased $6.8 million, or 27.8%, from $24.3 million
for the six months ended June 30, 2000 to $31.1 million in the same period of
2001. Without giving effect to asset impairment charges of $5.2 million in 2000
and merger-related charges of $7.1 million in 2001, income from operations
increased by $8.6 million, or 29.1%, from $29.6 million in the six months ended
June 30, 2000 to $38.2 million in the same period of 2001.
32
Interest Expense
Interest expense increased by $2.4 million, or 35.3%, from $7.0 million for
the six months ended June 30, 2000 to $9.4 million for the same period in 2001.
The majority of this increase was attributable to the higher average amount of
debt outstanding during the six months ended June 30, 2001. For the six months
ended June 30, 2001, average indebtedness outstanding was $210.0 million
compared to average indebtedness of $172.2 million outstanding in the same
period of 2000. Our effective interest rate was 9.0% and 8.1% for the six-month
periods ended June 30, 2001 and 2000, respectively. Although there have been
some declines in interest rates in the first and second quarters of 2001, $105
million of the credit facility is hedged with an interest rate swap which is at
a fixed rate of roughly 10%, while the remaining balance of the credit facility
floats with LIBOR.
Provision for Income Taxes
The effective income tax rate was approximately 48.1% and 43.2% for the
six-month periods ended June 30, 2000 and 2001, respectively. Generally, the
effective tax rate is higher than our statutory rates primarily due to the
non-deductibility of the goodwill amortization related to our acquisitions. In
addition to non-deductible goodwill amortization, we had non-deductible asset
impairment charges and merger-related charges for the six-month periods ended
June 30, 2000 and 2001, respectively, which further increased the effective tax
rate. The effective tax rate for the six-month periods ended June 30, 2000 and
2001 excluding these items would have been approximately 42.7% and 41.7%,
respectively.
Net Income Attributable to Common Stockholders
Net income attributable to common stockholders for the six months ended
June 30, 2001 was $12.4 million, an increase of $4.9 million, or 65.9%, over the
same period in 2000. Without giving effect to asset impairment charges of $5.2
million and a $1.6 million charge for the induced conversion of redeemable
preferred stock in 2000, and the merger-related charges of $7.1 million in 2001,
net income increased by $3.9 million, or 29.6%, from $13.0 million in the six
months ended June 30, 2000 to $16.9 million in the same period of 2001. Diluted
earnings per share for the six months ended June 30, 2001 increased to $0.48
from $0.32 for the comparable period of 2000, based on 26.1 million and 23.1
million weighted average shares outstanding, respectively. Diluted earnings per
share was $0.65 and $0.56 for the six months ended June 30, 2001 and 2000,
respectively, without giving effect to any special charges.
YEARS ENDED DECEMBER 31, 2000 AND 1999
Net Revenues
Net revenue for the year 2000 increased by $72.7 million, or 28.2%, from
$257.4 million for 1999 to $330.1 million for 2000. During the fourth quarter of
2000, we reviewed the collectability of Inform DX's accounts receivable in light
of historical collections, aging of accounts receivable, our reserve methods and
policies, and billing and collection performance. In addition, two of Inform
DX's laboratories converted billing systems in the fourth quarter of 1999. As a
result of these conversions, the billings and collections for 2000 were
negatively impacted. Based on this review and evaluation, during the fourth
quarter we recorded an additional estimated allowance against accounts
receivable of $5.2 million. Since the majority of this allowance relates to the
accounts receivable of our managed practices, as discussed above, the additional
allowance was recorded as a reduction of net management service revenue,
resulting in a decline in net management services revenue from 1999 to 2000.
Without the $5.2 million adjustment to net revenue, 2000 net revenue would
have increased $77.9 million, or 30%, over the year ended 1999. Of this $77.9
million increase, $44.3 million resulted from the operations of practices
acquired during 1999 and 2000. Same store net revenue for 2000 increased by
$33.6 million, or 14%, over the prior year. Of the same store increase we
estimate that approximately $6.8 million resulted from the increase in Medicare
reimbursement in 2000. The remaining $26.8 million resulted from a combination
of volume increases and price impacts of other payors. Same
33
store outpatient net revenue increased $23.8 million, or 24%, same store
hospital net revenue increased $6.5 million, or 5%, and management service
revenue increased $3.3 million, or 15%, compared to the same period of the prior
year. An expansion of our New York operation contributed approximately $4.2
million to the same store outpatient growth for the year 2000.
During 2000, approximately $29.4 million, or 9%, of our revenue was from
contracts with national laboratories including Quest and LabCorp. This
represents a 35% increase over the prior year revenue from national laboratory
contracts of approximately $21.7 million. Effective December 31, 2000, Quest
terminated our pathology contract in South Florida. In 2000, this contract
accounted for approximately $1.5 million of net patient service revenue. This
contract termination resulted in a $3.3 million asset impairment charge in the
fourth quarter of 2000. In addition, during the fourth quarter we discontinued
our Quest work in San Antonio.
Approximately 13% and 15% of our 2000 and 1999 net revenue, respectively,
came from pathology contracts with 27 HCA hospitals. During 1999, HCA closed one
hospital and sold another hospital where we provided pathology services. The
estimated net revenue from these hospitals was less than 1% of our 1999
consolidated net patient revenue.
Cost of Services
Cost of services for 2000 increased by $40.7 million, or 33.2%, from $122.7
million for 1999 to $163.4 million for 2000. Cost of services, as a percentage
of net revenues, increased from 47.7% in 1999 to 49.5% in 2000. Gross margin
decreased from approximately 52.3% in 1999 to 50.5% in 2000. Excluding the
impact of the increased reimbursement from Medicare, the gross margin in 2000
would have decreased to approximately 49.5%. The increase in cost of services,
and corresponding reduction in gross margin, resulted primarily from higher
pathologist and medical technicians salaries and medical malpractice and health
benefit costs.
Selling, General and Administrative Expense
SG&A expense, as a percentage of net revenues decreased from 18.3% in 1999
to 17.7% in 2000, as we imposed measures to control the growth in these costs
and continued to spread these costs over a larger revenue base. Our objective is
to decrease these costs as a percentage of net revenues; however, these costs,
as a percentage of net revenue, may increase as we continue to invest in
marketing, information systems and billing operations.
Provision for Doubtful Accounts
The provision for doubtful accounts, which relates to our owned practices,
increased by $8.8 million, or 34.6%, from $25.3 million for 1999 to $34.0
million for 2000. The dollar increase is primarily due to the increase in net
revenues and accounts receivable from the acquisitions completed during 1998 and
1999. The provision for doubtful accounts as a percentage of net revenues was
9.8% and 10.3% for 1999 and 2000, respectively. The increase as a percentage of
net revenue was primarily attributable to a shift in revenue mix from management
service to outpatient.
34
Amortization Expense
Amortization expense increased by $3.4 million, or 26.1%, from $12.8
million for 1999 to $16.2 million for 2000. This increase is attributable to the
amortization of goodwill and net identifiable intangible assets from the
acquisitions we completed during 2000 and a full year of amortization from the
acquisitions we completed during 1999. In addition, during 2000, we made
contingent note payments totaling $26.6 million. These contingent note payments
are recorded as goodwill and, therefore, create additional amortization expense.
Amortization expense, as a percentage of net revenues, was 5.0% and 4.9% in 1999
and 2000, respectively.
Merger-related Charges and Asset Impairment and Related Charges (Special
Charges)
During 2000, we recorded special charges totaling $21.0 million for
merger-related charges, an allowance against uncollectible accounts receivable
related to our acquisition of Inform DX and certain asset impairment charges.
The following summarizes these special charges by category for 2000 (in
millions).
Merger-related charges...................................... $ 6.2
Allowance against accounts receivable....................... 5.2
Asset impairment and related charges........................ 9.6
-----
Total special charges............................. $21.0
=====
Of the total $21.0 million in special charges, approximately $14.7 million
are non-cash charges, and the remaining $6.3 million are cash charges. As of
December 31, 2000, we had paid $4.3 million of the cash charges.
The merger-related charges of $6.2 million in 2000 relate to our
acquisition of Inform DX and include transaction costs, change in control
payments and costs related to the closing of the Inform DX corporate office in
Nashville. Of the $6.2 million, approximately $4.3 million related to
transaction costs and $1.9 million related to employee-related costs of closing
the Nashville facility.
During the second quarter of 2000, we recorded a pre-tax non-cash charge of
approximately $4.7 million and related cash charges of approximately $545,000 in
connection with the impairment of intangible assets at an acquired practice in
Cleveland, Ohio. During the fourth quarter of 2000, we recorded a pre-tax
non-cash charge of approximately $4.3 million related to the impairment of
certain intangible assets. $3.3 million of the fourth quarter charge relates to
Quest Diagnostics' termination of our contract with them in South Florida,
effective December 31, 2000. The net patient service revenue in 2000 related to
this contract was approximately $1.5 million. Although we have aggressively
marketed and retained a portion of this operating income, accounting rules
required a charge to be taken, as there was no longer a contract. In addition,
during the fourth quarter of 2000, a hospital in South Florida with which we had
a pathology contract requested proposals for its pathology services and we were
unsuccessful in retaining this contract. Based upon the remaining projected cash
flow from this hospital network, we determined that the intangible assets were
impaired and recorded a pre-tax non-cash charge of approximately $1.0 million.
For 2000, this contract accounted for approximately $800,000 of net revenue.
Income from Operations
Income from operations decreased $7.2 million, or 14.5%, from $49.5 million
in 1999 to $42.3 million in 2000. Without giving effect to asset impairment
charges of $6.2 million and merger-related charges of $9.6 million in 2000,
income from operations increased by $8.6 million, or 17.4%, from $49.5 million
in 1999 to $58.1 million in 2000.
35
Interest Expense
Interest expense increased by $5.8 million, or 60.6%, from $9.6 million for
1999 to $15.4 million for 2000. The increase was due in part to an increase in
the average outstanding balance under the credit facility. In 2000, the average
indebtedness under the credit facility was $175.5 million compared to $140.0
million outstanding in 1999. In addition, the effective interest rate on the
credit facility increased from 6.8% to 8.7% primarily due to the periodic
increases in interest rates during the year by the Federal Reserve Board and the
expiration of our interest rate swap in October 2000. The interest rate swap was
renewed in October 2000 at approximately 7.65% plus the credit spread (2.0% as
of December 31, 2000) compared to 5% plus credit spread for the expired swap,
therefore increasing interest expense.
Provision for Income Taxes
The effective income tax rate was approximately 43.5% and 51.8% for 1999
and 2000, respectively. Generally, the effective tax rate is higher than our
statutory rates primarily due to the non-deductibility of the goodwill
amortization related to our acquisitions. In addition, for 2000 we had
non-deductible asset impairment charges and merger-related charges that further
increased the effective tax rate. The effective tax rate for 2000, excluding
these items would have been approximately 41.8%.
Net Income Attributable to Common Stockholders
Net income attributable to common stockholders for 2000 was $11.5 million,
a decrease of $11.1 million, or 49.1%, over 1999. Without giving effect to asset
impairment charges of $9.6 million, the merger-related charges of $6.2 million
and a $1.6 million charge for the induced conversion of redeemable preferred
stock in 2000, net income attributable to common stockholders increased by $5.4
million, or 24.1%, from $22.6 million in 1999 to $28.0 million in 2000. Diluted
earnings per share for 2000 decreased to $0.47 from $1.00 for 1999, based on
24.2 million and 22.5 million weighted average shares outstanding, respectively.
Diluted earnings per share were $1.16 and $1.00 for 2000 and 1999, respectively,
without giving effect to any special charges.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Net Revenues
Net revenue for 1999 increased by $64.1 million, or 33.2%, from $193.3
million for 1998 to $257.4 million for 1999. Of this increase, $55.5 million was
attributable to the acquisitions we completed during 1998 and 1999. Same store
net revenue for 1999 increased by $8.6 million, or 5%. For 1999, same store
hospital net revenue increased $2.7 million, or 3%, same store outpatient net
revenue increased $3.8 million, or 5% and management service revenue increased
$2.1 million, or 26%, compared to 1998. During 1999, we experienced a 1%
Medicare reimbursement decrease, which was effective January 1, 1999.
Cost of Services
Cost of services for 1999 increased by $35.0 million, or 39.9%, from $87.7
million for 1998 to $122.7 million for 1999. Cost of services, as a percentage
of net revenues, increased from 45.3% in 1998 to 47.7% in 1999. Gross margin
decreased from approximately 54.7% in 1998 to 52.3% in 1999. A portion of the
decline is related to the decrease in Medicare reimbursement rates. In addition,
we incurred expenses related to the start-up of a de novo outpatient
dermatopathology laboratory in New York. This facility commenced operations in
late July 1999. Excluding the results of operations for the New York start up,
our gross margin would have been approximately 52.8% in 1999.
Selling, General and Administrative Expense
SG&A expense for 1999 increased by $10.5 million, or 28.5%, from $36.7
million for 1998 to $47.2 million for 1999. A portion of the increase relates to
the acquisitions made during 1998 and 1999. The remaining increase was due to
increased staffing levels in marketing, billing, human resources and
36
accounting and costs incurred to expand our administrative support
infrastructure and to upgrade information systems.
Provision for Doubtful Accounts
The provision for doubtful accounts increased by $6.6 million, or 35.2%,
from $18.7 million for 1998 to $25.3 million for 1999. The dollar increase is
primarily due to the increase in net revenues and accounts receivable from the
acquisitions completed during 1998 and 1999. The provision for doubtful accounts
as a percentage of net revenues was 9.7% and 9.8% for the years ended December
31, 1998 and 1999, respectively. The increase in the percentage of net revenue
was primarily attributable to an overall increase in hospital-based revenues.
Net revenue from hospital inpatient services increased as a percentage of
consolidated net revenue from 49% in 1998 to 51% in 1999.
Amortization Expense
Amortization expense increased by $3.2 million, or 33.4%, from $9.6 million
for 1998 to $12.8 million for 1999. This increase is attributable to the
amortization of goodwill and net identifiable intangible assets from the
acquisitions we completed during 1999 and a full year of amortization from the
acquisitions we completed during 1998. In addition, during 1999 we made
contingent note payments totaling $17.4 million. These contingent note payments
are recorded as goodwill and therefore create additional amortization expense.
Amortization expense, as a percentage of net revenues, was 5.0% in both 1998 and
1999.
Income from Operations
Income from operations increased $8.9 million, or 21.9%, from $40.6 million
in 1998 to $49.5 million in 1999, which is mainly attributable to higher net
revenue.
Interest Expense
Interest expense increased by $1.0 million, or 11.8%, from $8.6 million for
1998, to $9.6 million for 1999. The increase was due in part to an increase in
the average indebtedness outstanding under the credit facility. In 1999, average
indebtedness outstanding was $140.0 million compared to $101.3 million
outstanding in 1998. This increase in average indebtedness was offset by a
reduction in the effective interest rate from 8.0% to 6.8% primarily due to the
interest rate swap that was in effect for all of 1999. This interest rate swap
was entered into in October 1998.
Provision for Income Taxes
The effective income tax rate was approximately 43.3% and 43.5% for 1998
and 1999, respectively. Generally, the effective tax rate is higher than our
statutory rates primarily due to the non-deductibility of the goodwill
amortization related to our acquisitions.
Net Income Attributable to Common Stockholders
Net income attributable to common stockholders for 1999 was $22.6 million,
an increase of $4.4 million, or 24.3%, from 1998. Diluted earnings per share for
1999 increased to $1.00 from $0.84 for 1998, based on 22.5 million and 21.6
million weighted average shares outstanding, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, we had working capital of approximately $52.0 million, an
increase of $11.2 million from the working capital of $40.8 million at December
31, 2000. The increase in working capital was due primarily to increases in net
accounts receivable of $11.3 million.
For the six month periods ended June 30, 2000 and 2001, cash flows from
operations were $17.8 million, or 11% of net revenue, and $15.8 million, or 7.7%
of net revenue, respectively. Excluding pooling merger-related charges paid for
Inform DX of $3.1 million, cash flow from operations for the 2001 period
37
would have been $18.9 million, or 9.3% of net revenue. For the six months ended
June 30, 2001, cash flow from operations and borrowings under our credit
facility were used to make contingent note payments of $23.8 million and acquire
$4.6 million of property and equipment.
At December 31, 2000, we had working capital of $40.8 million, a decrease
of $1.7 million from the working capital of $42.5 million at December 31, 1999.
The decrease in working capital was primarily due to an increase in net accounts
receivable of $13.2 million, offset by an increase in current liabilities
related to merger-related charges associated with the acquisition of Inform DX
of $2.9 million and accounts payable and accrued expenses of $14.4 million. The
majority of these changes resulted from our acquisitions completed during 2000.
We manage our cash balances against amounts available under our revolving credit
facility. Cash balances, for the most part, are managed on a zero-balance basis
and all available cash flows are used to reduce outstanding debt in order to
minimize interest cost.
For the years ended December 31, 1998, 1999 and 2000, cash provided by
operations was $20.5 million, $32.7 million and $31.9 million, respectively.
Excluding pooling merger-related charges paid for Inform DX of $3.8 million,
cash flow from operations for 2000 would have been $35.7 million. For the year
ended December 31, 2000, cash flow from operations and borrowings under our
credit facility were used primarily: (1) for capital expenditures aggregating
$9.2 million; (2) to fund the $24.9 million cash portion of our acquisitions;
(3) for payments on our contingent notes of $26.6 million; (4) to pay $2.4
million of other merger-related charges, mainly for Inform DX; (5) for the $1.0
million investment in GCI; and (6) to make $800,000 in principal payments on
long-term debt.
During 2000, we amended our credit facility to allow $22.9 million of
special charges to be excluded from the credit facility's covenant computations.
On March 29, 2001, we further amended our credit facility to exclude an
additional $5.4 million, or $28.3 million in total, of special charges from its
covenant calculations. In addition, the March 2001 amendment (1) increased our
borrowing rate by 37.5 basis points; (2) requires us to use a minimum of 30%
equity for all acquisitions; (3) requires us to use no more than 20% of
consideration for acquisitions in the form of contingent notes; and (4) requires
lender approval of all acquisitions with a purchase price greater than $10.0
million. We paid an amendment fee to those lenders who consented to the
amendment of approximately $600,000.
On June 11, 2001 we increased committed funding from $230.0 million to
$282.5 million under our credit facility. Citicorp, USA, Inc. committed $37.5
million and agreed to serve as documentation agent for the Credit Facility.
Credit Suisse First Boston committed $15.0 million.
At June 30, 2001, we had $73.5 million available under our credit facility
with a syndicate of banks led by Fleet National Bank (formerly BankBoston,
N.A.). The amended facility provides for borrowings of up to $282.5 million in
the form of a revolving loan that may be used for working capital purposes and
to fund acquisitions. As of June 30, 2001, $209.0 million was outstanding under
the revolving loan with an annual effective interest rate of 8.28%.
In May 2000, we entered into three interest rate swaps transactions with an
effective date of October 5, 2000, variable maturity dates, and a combined
notional amount of $105.0 million. See the discussion under "Interest Rate Risk"
below for details on these swap agreements. These interest rate swap
transactions involve the exchange of floating for fixed rate interest payments
over the life of the agreement without the exchange of the underlying principal
amounts. The differential to be paid or received is accrued and is recognized as
an adjustment to interest expense. These agreements are indexed to 30 day LIBOR.
We use derivative financial instruments to reduce interest rate volatility and
associated risks arising from the floating rate structure of our credit facility
and such derivative financial instruments are not held or issued for trading
purposes. We are required by the terms of our credit facility to keep some form
of interest rate protection in place. At June 30, 2001, we believe that we are
in compliance with the covenants of the credit facility.
During 2000, we acquired nine anatomic pathology practices, including the
two practices acquired by Inform DX. The total consideration paid by us in
connection with these acquisitions included cash of
38
$32.5 million and approximately 1,532,000 shares of common stock (aggregate
value of $12.2 million based upon amounts recorded on our consolidated financial
statements).
We issued approximately 2,600,000 shares of common stock (1,219,000 shares
of which are included above) in exchange for all the outstanding common stock of
Inform DX. In addition, we assumed certain obligations to issue shares of common
stock pursuant to outstanding Inform DX stock options and warrants.
In connection with our acquisitions, we generally agree to pay a base
purchase price plus additional contingent purchase price consideration to the
sellers of the practices. The additional payments are generally contingent upon
the achievement of stipulated levels of operating earnings by the acquired
practices over periods of three to five years from the date of the acquisition,
and are not contingent on the continued employment of the sellers of the
practices. In certain cases, the payments are contingent upon other factors such
as the retention of certain hospital contracts or relationships for periods
ranging from three to five years. The amount of the payments cannot be
determined until the achievement of the operating earnings levels or other
factors during the terms of the respective agreements. If the maximum specified
levels of operating earnings for each acquired practice are achieved, we would
make aggregate maximum payments, including principal and interest, of
approximately $198.4 million over the next three to five years. At the mid-point
level, the aggregate principal and interest would be approximately $89.7 million
over the next three to five years. A lesser amount or no payments at all would
be made if the stipulated levels of operating earnings specified in each
agreement are not met. Through June 30, 2001, we made contingent note payments
aggregating $23.8 million.
Historically, our capital expenditures have been primarily for laboratory
equipment, information technology equipment and leasehold improvements. Total
capital expenditures were $4.4 million, $8.7 million, $9.2 million and $4.6
million in 1998, 1999, 2000 and the first six months of 2001, respectively.
During the first six months of 2001, capital expenditures included approximately
$2.7 million related to information technology, $1.1 million for laboratory
equipment and $800,000 for various other capital assets. During 2000, capital
expenditures included approximately $2.9 million related to information
technology, $2.4 million for laboratory equipment, $2.6 million for leasehold
improvements and $1.3 million for office equipment and furniture and fixtures.
During 1999, capital expenditures included approximately $1.6 million related to
information systems, $2.0 million for laboratory equipment, $1.7 million for
leasehold improvements, $1.5 million for the construction of the New York lab
and $1.2 million for the new billing system at the consolidated billing office
in Fort Lauderdale. During 1998, capital expenditures included approximately
$2.3 million related to information systems, $1.6 million for laboratory
equipment and $258,000 for leasehold improvements.
Planned capital expenditures for 2001 are estimated to be $6.5 million to
$7.0 million, with priority being given to the new billing system at the
consolidated billing office in Fort Lauderdale and enhancements in financial and
lab information systems. Historically, we have funded our capital expenditures
with cash flows from operations. For the years ended December 31, 1998, 1999,
2000 and the first six months of 2001, capital expenditures were approximately
2.3%, 3.4%, 2.8% and 2.3% of net revenue, respectively. We are consolidating and
integrating our financial information, billing and collection systems, which may
result in an increase in capital expenditures as a percentage of net revenue. We
believe, however, that such information systems enhancements may result in cost
savings that will enable us to continue to fund capital expenditures with cash
flows from operations.
We expect to continue to use our credit facility to fund acquisitions and
for working capital. We anticipate that funds generated by operations and funds
available under our credit facility will be sufficient to meet working capital
requirements and anticipated contingent note obligations, and to finance capital
expenditures over the next 12 months. Further, in the event additional payments
under the contingent notes issued in connection with acquisitions become due, we
believe that the incremental cash generated from operations would exceed the
cash required to satisfy our payment, if any, of the contingent obligations in
any one year period. Such payments, if any, will result in a corresponding
increase in goodwill and the related amount of amortization thereof in periods
following the payment. Funds generated
39
from operations and funds available under the credit facility may not be
sufficient to implement our longer-term growth strategy. We may be required to
seek additional financing through additional increases in the credit facility,
to negotiate credit facilities with other banks or institutions or to seek
additional capital through private placements or public offerings of equity or
debt securities. No assurances can be given that we will be able to extend or
increase the existing credit facility, secure additional bank borrowings or
complete additional debt or equity financings on terms favorable to us or at
all.
INTEREST RATE RISK
We are subject to market risk associated principally with changes in
interest rates. Interest rate exposure is principally limited to the revolving
loan of $209.0 million at June 30, 2001.
In May 2000, we entered into three interest rate swaps transactions with an
effective date of October 5, 2000, variable maturity dates, and a combined
notional amount of $105 million. These interest rate swap transactions involve
the exchange of floating for fixed rate interest payments over the life of the
agreement without the exchange of the underlying principal amounts. The
differential to be paid or received is accrued and is recognized as an
adjustment to interest expense. These agreements are indexed to 30 day LIBOR.
The following table summarizes the terms of the swaps:
NOTIONAL AMOUNT (IN MILLIONS) FIXED RATE TERM IN MONTHS MATURITY
----------------------------- ---------- -------------- --------
$45.0.............................................. 6.760% 48 10/05/04
$30.0.............................................. 7.612% 36 10/06/03
$30.0.............................................. 7.626% 48 10/05/04
The fixed rates do not include the credit spread, which is currently
2.375%. The fixed rates under the new agreements are approximately 2.6% higher
than the prior agreements reflecting the numerous interest rate increases by the
Federal Reserve between October 1998 and October 2000. In addition, further
changes in interest rates by the Federal Reserve may increase or decrease our
interest cost on the outstanding balance of the credit facility not subject to
interest rate protection. All of our swap transactions involve the exchange of
floating for fixed rate interest payments over the life of the agreement without
the exchange of the underlying principal amounts. The differential to be paid or
received is accrued and is recognized as an adjustment to interest expense. We
use derivative financial instruments to reduce interest rate volatility and
associated risks arising from the floating rate structure of its credit facility
and are not held or issued for trading purposes. We are required by the terms of
its credit facility to keep some form of interest rate protection in place.
INFLATION
Inflation was not a material factor in either revenue or operating expenses
during the periods presented.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements, which provided the staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. In June 2000, SAB
101 was amended by SAB 101B, which delayed the implementation of SAB 101 until
no later than the fourth fiscal quarter of fiscal years beginning after December
15, 1999. We adopted SAB 101 in the fourth quarter of 2000. The adoption of the
provisions of SAB 101 did not have a material impact on our financial position
or results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
133") and in June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137 "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," which
delayed the effective date we are required to adopt SFAS 133 until its fiscal
year 2001. In June 2000, the FASB
40
issued Statement of Financial Accounting Standards No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities -- an Amendment to
FASB Statement No. 133." This statement amended certain provisions of SFAS 133.
SFAS 133 requires us to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. We do not enter into
derivative financial instruments for trading purposes. Since the adoption of
SFAS 133 in the first fiscal quarter of 2001, these activities have been
recognized on our Consolidated Balance Sheet. Our adoption of FAS 133 has not
had a material effect on our earnings. The adoption of SFAS 133 resulted in a
negative transition adjustment of $3.0 million (net of tax of $2.0 million)
recorded on January 1, 2001.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" ("SFAS 141"). SFAS 141 requires the purchase
method of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. We do not believe that the adoption
of SFAS 141 will have a significant impact on our financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which is effective
January 1, 2002. SFAS 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires us to complete a transitional
goodwill impairment test six months from the date of adoption. We are currently
assessing, but have not yet determined, the impact of SFAS 142 on our financial
position and results of operations.
41
BUSINESS
OVERVIEW
AmeriPath is one of the nation's leading providers of anatomic pathology
services. The 427 anatomic pathologists in AmeriPath's owned and managed
practices as of June 30, 2001 work in one of the 237 hospitals to which
AmeriPath provides professional pathology and medical director services or in
one of AmeriPath's 42 outpatient laboratories. AmeriPath typically serves as the
exclusive provider of professional pathology services for the hospitals in which
its pathologists work. Under these arrangements, AmeriPath typically bills
third-party payors for the professional component of the inpatient testing and
earns small medical director fees from the hospitals. AmeriPath's hospital
arrangements provide a relatively steady stream of revenue and, while not
long-term commitments, tend to continue uninterrupted. The Company also provides
outpatient anatomic pathology services to primary care physicians and other
specialty physicians including dermatologists, gastroenterologists, urologists,
oncologists and gynecologists. In the hospital setting, key revenue sources
include the study of tissues, or surgical pathology, and the study of cells, or
cytopathology. Key revenue sources for the outpatient business include
dermatopathology and urologic pathology, which consist principally of the study
of biopsies for skin and prostate cancer, respectively.
AmeriPath generally manages and controls all of the non-medical functions
of the practices, including:
- recruiting, training, employing and managing the technical and support
staff;
- developing, equipping and staffing laboratory facilities;
- establishing and maintaining courier services to transport specimens;
- negotiating and maintaining contracts with hospitals, national clinical
laboratories and managed care organizations and other payors;
- providing financial reporting and administration, clerical, purchasing,
payroll, billing and collection, information systems, sales and
marketing, risk management, employee benefits, legal, tax and accounting
services;
- maintaining compliance with applicable laws, rules and regulations; and
- with respect to our ownership and operation of anatomic pathology
laboratories, providing slide preparation and other technical services.
Since the first quarter of 1996, the Company has completed the acquisition
of 49 physician practices located in 21 states. This includes the acquisition of
Inform DX. As a result of the Inform DX acquisition, the Company now manages
several pathology practices from which it derives management fees. Although the
managed practices are not owned or controlled by the Company, the statistical
data appearing throughout this prospectus including the description of items
such as the number of pathologists, hospitals, employees and outpatient
laboratories incorporates the statistical data from the managed practices as if
they were owned by the Company. In addition, because the Inform DX transaction
was accounted for as a pooling-of-interests, the information presented in this
prospectus for current and previous years includes Inform DX for all periods,
unless otherwise indicated.
42
The following table summarizes certain statistical and financial
information about AmeriPath's business:
YEARS ENDED AND
AS OF DECEMBER 31,
------------------------------ SIX MONTHS ENDED AND
1998 1999 2000 AS OF JUNE 30, 2001
-------- -------- -------- --------------------
Pathologists......................... 299 370 425 427
Hospital relationships............... 168 207 235 237
Employees............................ 1,616 1,865 2,325 2,428
Outpatient laboratories.............. 28 36 42 42
Practices:
Owned.............................. 28 34 38 38
Managed............................ 8 7 7 7
Net revenues (in 000's):
Owned practices.................... $177,304 $233,269 $308,365 $143,260
Managed practices.................. $ 16,012 $ 24,163 $ 21,729 $ 12,717
INDUSTRY OVERVIEW
Pathologists are medical doctors who specialize in the study of disease.
Pathologists do not treat patients, but rather assist other physicians in
determining the correct diagnosis of their patient's ailments. A pathologist's
diagnosis represents a critical factor in determining a patient's future care.
Pathologists perform their duties in hospital laboratories, in independent
free-standing local, regional and national laboratories, in ambulatory surgery
centers and in a variety of other settings.
Anatomic pathology involves evaluating tissues and cells that have been
processed and mounted on slides for examination under a microscope. In surgical
pathology, tissues removed from a patient during inpatient or outpatient
procedures are examined to determine whether disease is present. Examples of
surgical pathology include breast, prostate, skin and bone marrow biopsies.
Cytopathology involves the examination of cells obtained from body fluids, from
solid tissues aspirated through needles and from scrapings of body tissues. An
example of cytopathology is the "Pap" smear, a test for determining cervical
cancer.
According to the College of American Pathologists, there are more than
12,000 pathologists in the United States. The Company believes that many of
these pathologists work in small, independent practices. However, the Company
believes there has been a recent trend among pathologists to form larger
practices in order to offer a broader range of outpatient and inpatient services
and enhance the utilization of the practices' pathologists. The Company believes
this trend can be attributed to several factors, including cost containment
pressures by government and other third-party payors, increased competition and
the increased costs and complexities associated with operating a medical
practice. Because tissue and fluid samples are easily transportable,
pathologists working in one setting may receive samples from many sources,
thereby enhancing productivity and permitting a large pathology practice to
service a wider geographic area. The Company believes scale leads to competitive
advantages in anatomic pathology because of resulting improvements in sales,
operations and contracting efficiency.
The Company believes the market for anatomic pathology, esoteric testing
and related services is approximately $6.0 billion and will continue to grow for
the following reasons:
Aging Population. According to the American Geriatrics Society, the number
of people aged 65 and older in the United States will increase approximately 60%
by the year 2020. Older populations consume a greater amount of health care
services than do younger populations. The Company believes these factors will
combine to drive the demand for anatomic pathology services to diagnose and
treat disease.
Increasing Incidence of Cancer. The National Cancer Institute estimates
that approximately 8.9 million Americans with a history of cancer were alive in
1997. The most common type of cancer is skin cancer. The American Cancer Society
estimates that over 1.3 million cases of basal cell and squamous cell
43
skin cancer are expected to be diagnosed this year. From 1981 to 1997, the
incidence rate of melanoma increased about 3% per year on average, to a rate of
14.3 per 100,000 in 1997. Dermatopathology, or the study of diseases of the
skin, is a growing anatomic pathology specialty because of the increasing
incidence of skin cancer and the biopsies that must be performed to diagnose it.
Esoteric Testing. Esoteric tests are highly complex tests, typically
ordered when a physician requires additional information to establish a
diagnosis or to choose a therapeutic regimen. Esoteric tests require
sophisticated instrumentation and highly skilled personnel to perform and
analyze results, and consequently carry higher prices than routine tests.
Commonly ordered esoteric tests include flow cytometry (leukemia/ lymphoma
testing), DNA analysis, molecular genetics and cytogenetics. According to the
Lab Industry Strategic Outlook 2000, published by Washington G-2 Reports, the
esoteric clinical laboratory testing market accounts for approximately $2.0
billion in annual revenue and is poised for approximately 10%-15% annual growth.
We believe that the future growth in the esoteric testing market will be fueled
by scientific advances facilitating the development of more sophisticated and
specialized esoteric tests, increased focus on cost-effective disease
prevention, detection and management and increased life expectancy.
The Genomic Revolution. Genetic and biotech companies are developing
therapeutics which allow physicians to target treatments for individuals based
on their particular genetic make-up. Anatomic pathology laboratories have access
to large volumes of tissue samples that contain important genetic data that is
valuable to drug discovery companies in the development of new drugs. We believe
a significant opportunity exists to build tissue banks with samples from normal,
diseased and cancerous tissues and, subject to patient confidentiality and
informed consent procedures, make such tissues available to drug testing and
drug discovery companies.
BUSINESS STRATEGY
The Company's objective is to be the premier provider of diagnostic health
care information by continuing to enhance its position as a leading provider of
anatomic pathology services. Historically, the Company's growth strategy was
focused primarily on acquiring leading pathology practices in order to enter new
markets and expand its national presence. While acquisitions remain an important
element of the Company's strategy, AmeriPath is increasingly focused on
maximizing its internal, or same store, growth. The Company is pursuing the
following strategies to achieve its objective:
- ENHANCE ITS REGIONAL BUSINESS MODEL WITH ITS RECENTLY AUGMENTED SALES AND
MARKETING ORGANIZATION. The Company is utilizing its regional business
model to deploy new sales people focused on general anatomic pathology
markets such as urology, gastroenterology and obstetrics and gynecology
(OB/GYN). Through regionally focused direct sales and marketing efforts,
AmeriPath is seeking to penetrate more deeply the base of referring
physicians in its markets and expand its contracts with managed care
payors, hospitals and national clinical laboratories. In addition, the
Company has recently established a separate sales and marketing division
called Dermpath Diagnostics to market exclusively the Company's
substantial dermatopathology resources, which include 68 board certified
dermatopathologists.
- EXPAND ITS EXCLUSIVE RELATIONSHIPS WITH HOSPITALS AND MULTI-HOSPITAL
SYSTEMS. The Company continues to seek additional exclusive hospital
relationships through the acquisition of anatomic pathology practices and
the expansion of existing relationships with multi-hospital systems.
AmeriPath's hospital relationships provide a relatively stable and
recurring source of revenue. Moreover, the Company believes that
providing inpatient laboratory services to multiple hospitals within a
geographic area enhances its ability to contract with managed care
companies, facilitates the development and effectiveness of successful
outpatient services networks and increases opportunities to perform
esoteric and other specialty testing services. As of June 30, 2001,
AmeriPath's pathologists were providing services in 237 hospitals in the
U.S., typically on an exclusive basis.
- BROADEN ITS RANGE OF TESTING SERVICES AND PENETRATE FURTHER THE HIGH
GROWTH ESOTERIC TESTING MARKETS. The Company has undertaken a number of
initiatives to broaden its range of testing services into
44
the high growth market segment of esoteric testing. Because many requests
for these specialty tests originate in the hospital, the Company believes
its large network of hospital-based pathologists and its relationships
with multi-hospital systems provide it with significant competitive
advantages in pursuing this business. As part of this strategy, the
Company opened the Center for Advanced Diagnostics, or CAD, in 1999 in an
effort to capture specialty testing services that historically had to be
performed by third parties. The success of this strategy to date is
evidenced by the strong revenue growth CAD has experienced.
- ACQUIRE LEADING ANATOMIC PATHOLOGY PRACTICES TO FURTHER EXPAND ITS
NATIONAL PRESENCE AND SUPPORT ITS REGIONAL GROWTH MODEL. The Company has
successfully completed 49 acquisitions since 1996. The Company expects to
increase its presence in existing markets and enter into new markets
through additional acquisitions of leading pathology practices.
Acquisitions are intended to enhance the Company's profitability, augment
its range of subspecialties and testing services and strengthen its
reputation by adding locally or nationally prominent pathologists.
- THE COMPANY INTENDS TO BUILD UPON ITS LEADERSHIP POSITION IN ANATOMIC
PATHOLOGY TO PARTICIPATE IN THE RAPIDLY GROWING GENOMICS AND GENOMICS
TESTING MARKET. The Company is aggressively exploring ways to build upon
its national scale, leading market position and access to tissue samples.
The Company's objective is to create new revenue streams distinct from
its anatomic, esoteric and genomic testing revenues. In the third quarter
of 2000, the Company formed an alliance with Genomics Collaborative, Inc.
("GCI") to provide fresh frozen samples from normal, diseased, and
cancerous tissue to GCI for subsequent sale to researchers in industry
and academic laboratories who are working to discover genes associated
with certain common disease categories. Under this alliance, the Company
will be paid a fee for each sample it supplies to researchers and will be
compensated for developing new laboratory tests for use in research or
clinical settings. In addition to providing the Company with expected new
revenue streams, this alliance should give it a "first look" at genetic
markers and tests resulting from the research and should provide a
corresponding competitive advantage with respect to the commercialization
of such markers and tests.
SALES AND MARKETING
OUTPATIENT MARKET
The Company's marketing efforts are focused on physicians, hospital and
ambulatory surgery center administrators, national clinical laboratories and
managed care organizations. With the exception of Inform DX, the pre-acquisition
marketing efforts of practices acquired by the Company were primarily based on
the professional reputations and the individual efforts of pathologists. The
Company believes that there is an opportunity to capitalize on these
professional reputations by hiring experienced personnel and utilizing
professional sales and marketing techniques. Historically, some of the
outpatient practices marketed outpatient services primarily to dermatologists,
over a broad geographic area including neighboring states. The Company continues
to expand its sales force with additional sales personnel and management staff
to accommodate new acquisitions as well as increase same store growth. These
field representatives are supervised by regional sales managers who coordinate
the implementation of regional contracting efforts, leverage operational
capabilities, support national sales strategies and provide ongoing training and
field sales support. The regional sales managers report to the Vice President of
Sales and Marketing to ensure the implementation of consistent and effective
sales activities nationwide. The sales and marketing staff also includes
Directors of Marketing and Managed Care. In 2000, the Company added one position
to the marketing department, a manager of art and creative design, to coordinate
support efforts for its product managers who report directly to the Director of
Marketing. The Director of Managed Care directs regional managers of managed
care in negotiating additional contracts. In 2000, the Company added one
northeast regional manager to its Managed Care Department. The Director of
Managed Care Sales supervises the department's efforts in securing national
contracts, while the Manager of Contract Administration ensures adherence to
contract terms and conditions.
45
After examining its current business model and conducting market research,
including customer focus groups and an analysis of the demographic distribution
of patients and referring physicians, AmeriPath created two distinct field sales
organizations to provide dedicated service and support to referring physicians
along specialty lines. Dermpath Diagnostics will focus on servicing and growing
the national skin pathology market comprised of dermatologists, plastic
surgeons, family practitioners, otolaryngologists and podiatrists. This
division, which promotes AmeriPath's 68 board-certified dermatopathologists,
will expand its sales and marketing initiative throughout the U.S. market. The
existing AmeriPath field sales organization has the responsibility for servicing
and growing the outpatient anatomic pathology market with urologists,
gastroenterologists, gynecologists, surgery centers, oncologists and any
specialist requiring esoteric laboratory testing, which is provided through CAD.
AmeriPath's managed care and national clinical laboratory contracting
organization will support both organizations in an effort to expand such
contracts.
NATIONAL CLINICAL LABORATORY MARKETING
The national clinical laboratories contract with managed care organizations
to provide clinical laboratory services, as well as anatomic pathology and
cytology services. The clinical laboratory market is primarily dominated by two
laboratories, Quest and LabCorp. Their contracts with managed care organizations
are typically capitated, meaning they generally get paid a fixed fee per covered
member per month to provide all necessary testing services for such members
regardless of the number of tests actually performed. Ten of AmeriPath's
practices have subcontracts with these two large national clinical laboratories
to provide anatomic pathology and cytology services. Under these contracts,
which typically run from one to three years with automatic renewals unless
terminated earlier, the practices bill the national clinical laboratories on a
discounted fee-for-service basis. The reduced fee is partially offset by the
national clinical laboratories provision of courier services, supplies, and
reduced billing costs and lower bad debts, since the national clinical
laboratories bear the capitation risk. Net revenues from these contracts
constituted 9.0% and 7.0% of the Company's net revenues in 2000 and the first
six months of 2001, respectively. The Company is directing its marketing efforts
to national clinical laboratories to expand these contracts on a regional basis
to additional practices as well as to enter into new contracts. At the same
time, the Company is seeking to secure new contracts and expand existing
provider contracts with managed care organizations for the provision of anatomic
pathology services directly to their members and is prepared to negotiate
flexible arrangements with managed care organizations, including discounted fee-
for-service or capitated contracts. There can be no assurance that the Company's
effort to contract directly with managed care organizations will not adversely
affect the Company's relationship with the national clinical laboratories.
AMERIPATH CORPORATE STRUCTURE
AmeriPath's revenues are derived primarily from two segments: owned
practices and managed practices. In the owned practices, AmeriPath either
directly employs physicians or, in states with laws that restrict the direct
employment of physicians by for-profit corporations, contracts with an
affiliated practice entity which, in turn, employs physicians. As a result of
the corporate practice of medicine restrictions, the affiliated physicians in
these states retain ownership of a separate practice entity through which they
practice medicine, but the Company enters into contractual arrangements that
generally (1) prohibit the affiliated physicians from transferring their
ownership interests in the practice entity, except in very limited
circumstances, and (2) require the affiliated physicians to transfer their
ownership interests in the practice entity to designees of AmeriPath upon the
occurrence of specified events. Through these contractual arrangements,
AmeriPath has a controlling voting or financial interest in the separate
practice entities and, therefore, refers to them as owned practices. Managed
practices are practices that are not owned by the Company and that are not
subject to contractual arrangements that give AmeriPath a controlling interest
in the practice. Rather, the managed practices are controlled by the physicians
who own them, and the Company provides management services to them under
long-term management services agreements.
46
The manner in which AmeriPath operates a particular practice is determined
primarily by whether it is an owned or managed practice and the corporate
practice of medicine restrictions of the state in which the practice is located
and other applicable regulations. The Company exercises care in structuring its
practices and arrangements with hospitals, physicians and other providers in an
effort to comply with applicable federal and state laws and regulations, and the
Company believes that its current practices and arrangements do comply in all
material respects with applicable laws and regulations. However, due to
uncertainties in the law there can be no assurance that the Company's practices
and arrangements would be deemed to be in compliance with applicable laws and
regulations, and any noncompliance could result in a material adverse effect on
the Company.
Owned practices are owned and operated by AmeriPath through one or more
subsidiaries or physician-owned practice entities controlled by AmeriPath
through contractual arrangements. The financial statements of the owned
practices are included in the consolidated financial statements of AmeriPath.
Managed practices refers to AmeriPath's management of pathology practices
under long-term management services agreements with physician groups. Generally,
the Company acquires the practice's assets, and the physician groups maintain
their separate corporate or partnership entities that enter into employment
agreements with the practicing physicians. The management service agreements
give AmeriPath the exclusive right to manage the managed practices during the
term of the agreements. Pursuant to the management services agreements, the
Company provides the managed practices with equipment, supplies, support
personnel, and management and financial advisory services. The managed practices
are responsible for the recruitment and hiring of physicians and all other
personnel who provide pathology services, and for all issues related to the
professional, clinical and ethical aspects of the practice. As part of the
management services agreements, managed practices are required to maintain
medical malpractice insurance which names the Company as an additional insured.
The Company is required to maintain general liability insurance and name the
physician groups as additional insureds. Upon termination of the management
services agreements, the respective physician groups are required to obtain
continuing liability insurance coverage under either a "tail policy" or a "prior
acts policy."
The management services fees charged under the management services
agreements are based on a predetermined percentage of net operating income of
the managed practices. The Company also participates to varying degrees in
non-physician revenues generated from ancillary services offered through the
managed practices' laboratories. The Company charges a capital fee for the use
of depreciable assets owned by the Company and recognizes revenue for all
practice expenses that are paid on behalf of the practices and reimbursed to the
Company pursuant to the management service agreements. Such practice expenses
exclude the salaries and benefits of the physicians.
AmeriPath manages and controls all of the non-medical functions of the
owned and managed practices. AmeriPath is not licensed to practice medicine. The
practice of medicine is conducted solely by the physicians in the owned and
managed practices.
In operating the owned practices, the Board of Directors and management of
AmeriPath formulate strategies and policies which are implemented locally on a
day-to-day basis by each owned practice. Each owned practice has a pathologist
managing director who is responsible for overseeing the day-to-day management of
the owned practice, who reports to one of four regional managing directors,
three of whom are pathologists, who in turn report to executive officers of the
Company. AmeriPath's Medical Director and Chief Operating Officer develop and
review standards for the practicing physicians and their medical practices and
review quality and peer review matters with each owned practice's medical
director (or a medical review committee). AmeriPath's Chief Operating Officer, a
physician, oversees all employment matters with respect to practicing physicians
and staffing decisions at the owned practices.
Pursuant to its management services agreements with managed practices,
AmeriPath manages all aspects of the managed practices other than the provision
of medical services, which is controlled solely by the physicians of the managed
practices. The managed practices have joint policy boards, equally represented
by physicians and employees of AmeriPath, that focus on strategic and
operational planning, marketing, managed care arrangements and other major
issues facing the managed practice.
47
AmeriPath's owned and managed practices typically serve as the exclusive
provider of professional pathology services for the hospitals in which
AmeriPath's pathologists work. The practices staff each hospital with at least
one pathologist who generally serves as the medical director of the hospital
laboratory and who facilitates the hospital's compliance with licensing
requirements. The practices are generally responsible for recruiting, staffing
and scheduling the practice's affiliated physicians in the hospital's inpatient
laboratories. The medical director of the laboratory is generally responsible
for: (1) the overall management of the laboratory, including quality of care,
professional discipline and utilization review; (2) serving as a liaison to the
hospital administrators and medical staff; and (3) maintaining professional and
public relations in the hospital and the community. Several practices have both
outpatient laboratories and hospital contracts or relationships, which allow
outpatient specimens to be examined by the hospital pathologists, enhancing the
utilization of pathologists in inpatient facilities. In the hospitals, technical
personnel are typically employed by the hospital, rather than by the practices.
As of June 30, 2001, the owned and managed practices had contracts or
relationships with 237 hospitals. Substantially all of the practices' hospital
contracts are short-term in nature and allow for termination by either party
with relatively short notice. In many cases, the practices' relationships with
hospitals are not subject to written contracts. Accordingly, AmeriPath's
hospital contracts and relationships can easily be terminated. AmeriPath
believes, however, that the long-standing associations that many of its
pathologists have with hospitals generally tend to cause AmeriPath's contracts
and relationships with hospitals to continue uninterrupted. Loss of any
particular hospital contract or relationship would not only result in a loss of
net revenue to the Company, but also a loss of outpatient net revenue that may
be derived from the relationship with a hospital and its medical staff.
Continuing consolidation in the hospital industry may result in fewer hospitals
or fewer laboratories as hospitals move to combine their operations.
In the past, the Company provided services at four hospitals and an
ambulatory care facility owned by Primary Health Systems ("PHS"), a regional
hospital network in Cleveland, Ohio. During the first quarter of 2000, PHS began
implementing a plan of reorganization, filed under Chapter 11 with the U.S.
Bankruptcy Court for the District of Delaware, and closed one hospital. During
the second quarter, the bankruptcy court approved the sale of two hospitals and
the ambulatory care facility to local purchasers in the Cleveland area. The
purchasers, who elected to employ their own pathologists, did not accept the
Company's contracts with these two hospitals and the ambulatory care facility.
One hospital has not been sold and continues to do business with the Company.
This resulted in asset impairment and related charges of $5.2 million in 2000.
In addition, during the fourth quarter of 2000, a hospital in South Florida
where AmeriPath had the pathology contract, requested proposals for its
pathology services, and AmeriPath was unsuccessful in retaining this contract.
Based upon the remaining projected cash flow from this hospital network, the
Company determined that the intangible assets were impaired and recorded a
pre-tax non-cash charge of approximately $1.0 million.
As of June 30, 2001, the Company had contracts or relationships with 28
hospitals that are owned by HCA. Net revenues generated from contracts with HCA
hospitals were $32.0 million in 1998, $39.4 million in 1999, $43.5 million in
2000 and $27.1 million in the first six months of 2001. HCA has been under
government investigation for some time and we believe that it is evaluating its
operating strategies, including the possible sale, spin-off or closure of
certain hospitals. Closures and/or sales of HCA hospitals and/or terminations or
non-renewals of one or more of our contracts or relationships with HCA hospitals
could have a material adverse effect on our financial position and results of
operations.
All of AmeriPath's outpatient laboratories are licensed and certified under
the guidelines established by the Clinical Laboratory Improvement Amendments, or
CLIA, and applicable state statutes and are managed by a medical director of the
laboratory. AmeriPath's corporate compliance, quality assurance and quality
improvement programs are designed to assure that all laboratories and other
operations are in compliance in all material respects with applicable laws,
rules and regulations.
48
REGIONAL BUSINESS MODEL
The Company believes that its strategy of developing integrated networks of
anatomic pathology practices on a regional basis benefits the Company, its
pathologists, referring physicians, third-party payors and patients. These
networks, which generally will be modeled on the Company's existing Florida
network, will consist of a number of practices that together: (i) have a
substantial regional market presence; (ii) offer a broad range of services;
(iii) have extensive physician contacts; and (iv) possess complementary
strengths and opportunities for operational and production efficiencies. The
Company continues to integrate the practices' administrative and technical
support functions, including accounting, payroll, purchasing, risk management,
billing and collections, and expects such integration to result in enhanced
operational efficiencies. The Company's courier system for transporting
specimens enables the practices to penetrate areas outside their current markets
and enhance the utilization of their laboratory facilities. The Company also
integrates and coordinates the sales and marketing personnel of the practices to
promote the practices to physicians, hospitals, surgery centers, managed care
organizations and national clinical laboratories. This marketing effort is based
upon promoting the broad geographic coverage, professional pathologist expertise
and the extensive professional services offered by the Company. The Company's
strategy is to leverage its size to expand its contracts with national clinical
laboratories to all of the areas covered by its practices. The Company markets
its services under the name "AmeriPath" in order to develop brand identification
of products and services to payors and other clients. The Company plans to
integrate the practices' management information systems into a single system (or
at a minimum consolidate the information resident on the various lab information
systems) that will expand the financial and diagnostic reporting capabilities of
each of the practices and the Company. Based on the foregoing, the Company
believes that implementation of this regional model increases the revenues and
profitability of the practices in the region, and the Company is applying this
regional business model, in whole or in part, to other states in which it
operates.
The Company has developed its regional business model in Florida and is
replicating its model in Texas and the Midwest. The Florida regional model has
been an effective tool in building the Company's business. Net revenues for the
Florida region have increased 22.2% in the past two years while adding only one
pathologist to the region. Operating margins as a percent of net revenue for the
region have declined in the past two years, primarily due to an increase in
laboratory staffing costs, including physicians, and a higher percentage of
revenue from national clinical laboratory contracts which have lower revenue per
unit. However, this lower net revenue per unit from national lab contracts has
been offset in part by increased efficiencies attributable to the Florida
regional business model. The Florida region's operating margin was 29.2% for the
year ended December 31, 2000 compared to the Company's overall operating margin,
excluding corporate expenses, of 26.9% for the same period.
The Company believes that its improving performance in Florida, as
reflected in the following table, is due in part to the favorable results of its
regional model in Florida:
AS OF DECEMBER 31,
--------------------------
1998 1999 2000
----- ----- ------
(DOLLARS IN MILLIONS)
FLORIDA STATISTICS:
Number of Practices...................................... 11 12 14
Pathologists............................................. 82 80 83
Hospital relationships................................... 31 31 32
Net revenues............................................. $85.1 $92.5 $104.0
Operating profit before amortization..................... $25.6 $27.7 $ 30.4
Operating margin as a percent of net revenues............ 30.1% 30.0% 29.2%
The Company has a higher concentration of practices, laboratories and
administrative offices in Florida than in any other region. In addition, Florida
is an attractive market due to its population and demographics, including the
growth of the general population and the large elderly population, and the
Company's familiarity and understanding of the anatomic pathology market in
Florida. Accordingly, there
49
can be no assurance that the Company's regional business model will be as
effective outside of Florida as it has been in Florida, or that it will be
effective at all outside of Florida.
INFORMATION TECHNOLOGY
The Company's Information Technology ("IT") Group was reorganized in 2000
to better serve the Company's information needs. During 2000, IT staffing was
increased, including the hiring of a Chief Information Officer, Director of IT
Operations, Director of Software Development, and the establishment of a Project
Management Office. The new team established a "Best Practice" approach to
managing services to the Company's laboratories. The Company believes these
services have resulted in better performing information systems, increased focus
on centralization of information and a greater level of standardization across
the Company's businesses. IT has several major development efforts underway.
These efforts include building enhanced reporting capabilities, creating a data
mart, developing a customer information system and converting to a new billing
system.
The Company recognized the opportunity in the market for enhanced reporting
to customers and has launched a technology initiative to produce reports that
include organ maps, photomicrographs and patient education. Enhanced reports in
gastroenterology, obstetrics and gynecology and urology are available in most of
the Company's markets and this technology initiative has been implemented at
four regional sites. The Company believes its software programs for acquiring
the images and producing the reports are efficient and the Company intends to
implement additional software programs as customer sales increase.
Because information management systems for our practices are not
integrated, it is difficult to access consolidated operating data for the
Company. The creation of a data mart involves the consolidation from numerous
information systems of select utilization data for services provided by all
specialties and includes inpatient and outpatient information. Approximately 90%
of the Company's pre-Inform DX merger data for 2000 and 2001 has been loaded
into a single database. The Company intends to use this database to help develop
new products and services for its customers. Also, this system provides a better
opportunity to benchmark the Company's laboratories and monitor the use of CAD,
the Company's esoteric testing facility in Orlando. There have been several
reports developed using the data mart including Commissions, Revenue by
Customer, Revenue Variance, Payor, and Lab Utilization. The Company is currently
reconciling and validating its data, organizing the effort to consolidate the
remaining locations and establishing the procedures and processes to make the
data mart operational. We intend to make all reports web enabled.
The AmeriPath Customer Information System is in the early stages of
planning and currently the Company has outlined a set of goals and objectives
that were defined by personnel in the Company's sales and marketing and
operations departments as well as certain of the Company's pathologists. The
plans for this system are under development, and process with the Company's
customers is being established. Generally, the Company initially will build
on-line reporting and then use the data mart and program interfaces in an effort
to meet demand by customers for improved interoperability and information.
Billing for the Company's practices is currently performed by several
different internal billing systems and through a number of outsourcing
arrangements. The Company's systems include an outpatient billing software
program at its Fort Lauderdale centralized billing operation, which is being
utilized for the integration of outpatient billing. In its effort to further
increase the capacity of its centralized billing operations, during 1999 the
Company signed an agreement with a large health care software provider for a
billing, accounts receivable and collections system. In addition to performing
services for outpatient billing, hospital billing is being tested on the new
billing system. Conversion from the current billing systems to the new billing
system is anticipated to be completed by the end of 2002. The Company has
installed a complete general ledger and financial reporting system to handle
accounting for the practices and to consolidate all accounting and financial
information. As of March 2001, all of the practices have been integrated onto
one common accounting system.
The Company believes that its increasing integration and consolidation of
its laboratory information, billing and collections and financial reporting
systems enable it to monitor the operations of the practices,
50
enhance utilization of the pathologists, develop practice protocols and archives
and provides the Company with a competitive advantage in negotiating national
clinical laboratory and managed care contracts. Each of the Company's
laboratories has a laboratory information system that enables laboratory
personnel to track, process, report and archive patient diagnostic information.
The Company is also focused on being compliant with new regulations under
the Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
regarding privacy, security and transmission of health information. The
Company's sensitivity to these new regulations will increase as the Company
moves its information systems on-line. The Company is currently in the planning
stages of a compliance assessment and has engaged an outside consulting firm to
assist in the assessment and measurement of its existing standards and policies,
and in determining which requirements remain to be implemented. At this time,
the Company is not able to determine the full consequences of the HIPAA
regulations to the Company's business or the total cost of complying with these
regulations. However, the HIPAA regulations are expected to significantly impact
the Company operationally and financially.
CLIENT AND PAYOR RELATIONSHIPS
The practices also provide services to a wide variety of other health care
providers and payors including physicians, government programs, indemnity
insurance companies, managed care organizations and national clinical
laboratories. Fees for anatomic pathology services rendered to physicians are
billed either to the physicians, to the patient or to the patient's third party
payor.
The following table provides the percentages of cash collections of our
owned practices from the identified sources:
YEARS ENDED
DECEMBER 31, SIX MONTHS
------------------ ENDED
1998 1999 2000 JUNE 30, 2001
---- ---- ---- -------------
SOURCE OF CASH COLLECTIONS:
Government payors...................................... 22% 20% 19% 21%
National clinical laboratories......................... 10% 11% 11% 9%
Other.................................................. 68% 69% 70% 70%
Other sources of cash collections consists primarily of third-party payors,
such as preferred provider organizations (PPOs), health maintenance
organizations (HMOs) and indemnity insurance companies.
CONTRACTS AND RELATIONSHIPS WITH PHYSICIANS OF OWNED PRACTICES
For the owned practices, the Company employs pathologists, or controls the
practice entities who employ pathologists, to provide medical services in
hospitals or in other inpatient and outpatient laboratories. While the Company
exercises legal control over the owned practices, the Company does not exercise
control over, or otherwise influence, the medical judgment or professional
decisions of any pathologist associated with the owned practices. Pathologist
employment agreements typically have terms of three to five years and generally
can be terminated at any time upon 60 to 180 days notice. The pathologists
generally receive a base salary, fringe benefits and may be eligible for an
incentive performance bonus. In addition to compensation, the Company provides
its pathologists with uniform benefit plans, such as disability, supplemental
retirement, life and group health insurance and medical malpractice insurance.
The pathologists are required to hold a valid license to practice medicine in
the jurisdiction in which they practice and, with respect to inpatient or
hospital services, to become a member of the medical staff at the contracting
hospital with privileges in pathology. The Company is responsible for billing
patients, physicians and third party payors for services rendered by the
pathologists. Most of the employment agreements prohibit the physician from
competing with the Company within a defined geographic area and prohibit
solicitation of pathologists, other employees or clients of the Company for a
period of one to two years after termination of employment.
51
The Company's business is dependent upon the recruitment and retention of
pathologists, particularly those with subspecialties, such as dermatopathology.
While the Company has been able to recruit (principally through practice
acquisitions) and retain pathologists, no assurance can be given that the
Company will be able to continue to do so successfully or on terms similar to
its current arrangements. The relationship between the Company's pathologists
and their respective local medical communities is important to the operation and
continued profitability of the practices. In the event that a significant number
of pathologists terminate their relationships with the Company or become unable
or unwilling to continue their employment, the Company's business could be
materially harmed.
GOVERNMENT REGULATIONS
The Company's business is subject to many of the governmental and
regulatory requirements relating to health care matters as well as laws and
regulations that relate to business corporations. The Company believes that it
exercises care to structure its practices and arrangements with hospitals and
physicians to comply with relevant federal and state law. It also believes such
current arrangements and practices are in material compliance with applicable
statutes and regulations. However, the Company has not received or applied for
legal opinions from counsel or from any federal or state regulation authority to
this effect, and many aspects of the Company's business operations have not been
the subject of federal or state regulatory interpretation. As a result, there
can be no assurance that the Company's current or prior practices or
arrangements will not be found to be in noncompliance with applicable laws and
regulations, or that any such occurrence will not result in a material adverse
effect to the Company.
The Company derived approximately 20%, 19% and 21% of its owned practices'
collections for the years ended December 31, 1999 and 2000, and the first six
months of 2001, respectively, from payments made by government sponsored health
care programs (principally Medicare and Medicaid). The decrease in the
percentage of collections attributable to government sponsored health care
programs resulted primarily from the acquisition of practices outside Florida,
in states with smaller Medicare populations. These programs are subject to
substantial regulation by the federal and state governments. Any change in
payment regulations, policies, practices, interpretations or statutes that
places limitations on reimbursement amounts, or changes in reimbursement coding,
or practices could materially and adversely affect the Company's financial
condition and results of operations. Increasing budgetary pressures at both the
federal and state level and concerns over the continued increase of the costs of
health care have led, and may continue to lead, to significant reductions in
health care payments. State concerns over the growth in Medicaid also could
result in payment reductions. Although governmental payment reductions have not
materially affected the Company in the past, it is possible that such changes in
the future could have a material adverse effect on the Company's financial
condition and results of operations. In addition, Medicare, Medicaid and other
government sponsored health care programs are increasingly shifting to some form
of managed care. Some states have recently enacted legislation to require that
all Medicaid patients be converted to managed care organizations, and similar
legislation may be enacted in other states, which could result in reduced
payments to the Company for such patients. In addition, a state-legislated shift
in a Medicaid plan to managed care could cause the loss of some, or all,
Medicaid business for the Company in that state if the Company were not selected
as a participating provider. Additionally, funds received under all health care
reimbursement programs are subject to audit with respect to the proper billing
for physician services. Retroactive adjustments of revenue from these programs
could occur. The Company expects that there will continue to be proposals to
reduce or limit Medicare and Medicaid payment for services.
In connection with practice acquisitions, the Company performs certain due
diligence investigations with respect to the potential liabilities of acquired
practices and obtains indemnification with respect to certain liabilities from
the sellers of such practices. Nevertheless, there can be undiscovered claims
that subsequently arise. There can be no assurance that any liabilities for
which the Company becomes responsible (despite such indemnification) will not be
material or will not exceed either the limitations of any applicable
indemnification provisions or the financial resources of the indemnifying
parties. Furthermore, the Company, through its Corporate Compliance Program,
regularly reviews the practices'
52
compliance with federal and state health care laws and regulations and revises
as appropriate the operations, policies and procedures of its practices to
conform with the Company's policies and procedures and applicable law. While the
Company believes that the operations of the practices prior to their acquisition
were generally in compliance with such laws and regulations, there can be no
assurance that the prior operations of the practices were in full compliance
with such laws, as such laws may ultimately be interpreted. Moreover, although
the Company maintains an active compliance program, it is possible that the
government might challenge some of the current practices of the Company as not
being in full compliance with such laws and regulations. A violation of such
laws by a practice or the Company could result in civil and criminal penalties,
exclusion of the physician, the practice or the Company from participation in
Medicare and Medicaid programs and/or loss of a physician's license to practice
medicine.
Fraud and Abuse. Federal anti-kickback law 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)
the referral of an individual for a service for which payment may be made by
Medicare and Medicaid or certain other federal health care programs; or (ii) the
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
Medicare, Medicaid or certain other federal health care programs. Violations of
federal anti-kickback rules are punishable by monetary fines, civil and criminal
penalties and exclusion from participation in Medicare, Medicaid and other
federal health care programs. Several states have laws that are similar.
The federal government has published regulations that provide
"safe-harbors" that protect from prosecution under federal anti-kickback laws
business transactions that meet certain requirements. Failure to meet the
requirements of a safe harbor, however, does not necessarily mean a transaction
violates the anti-kickback law. The Company believes its operations are in
material compliance with applicable Medicare and fraud and abuse laws and seeks
to structure arrangements to comply with applicable safe harbors where
reasonably possible. There is a risk however, that the federal government might
investigate such arrangements and conclude they violate the anti-kickback
statute. If the Company's arrangements were found to be illegal, the Company,
the physician groups and/or the individual physicians would be subject to civil
and criminal penalties, including exclusion from the participation in government
reimbursement programs, which could materially adversely affect the Company.
The Department of Health and Human Services Office of Inspector General
("OIG") issues advisory opinions that provide advice on whether proposed
business arrangements violate the anti-kickback law. In Advisory Opinion 99-13,
the OIG opined when prices for laboratory services for non-governmental patients
are discounted below Medicare reimbursable rates, the anti-kickback law may be
implicated. The OIG found prices discounted below the laboratory supplier's
costs to be particularly problematic. In the same opinion, OIG suggested that a
laboratory may be excluded from federal health care programs if it charges
Medicare or Medicaid amounts substantially in excess of discounted charges to
the physician. In the OIG's opinion, charges are likely excessive if the profit
margin for Medicare business exceeds the profit margin for non-federally
reimbursed business.
The OIG also has addressed physician practice management arrangements in an
advisory opinion. In Advisory Opinion 98-4, the OIG found that management fees
based on a percentage of practice revenues may violate the anti-kickback
statute. These Advisory Opinions suggest that OIG might challenge certain prices
below Medicare reimbursement rates or arrangements based on a percentage of
revenues. While the Company believes its arrangements are in material compliance
with applicable law and regulations, OIG's advisory opinions suggest there is a
risk of an adverse OIG finding relating to practices reviewed in the advisory
opinions. Any such finding could have a material adverse impact on the Company.
Self-Referral and Financial Inducement Laws. The Company is also subject
to federal and state statutes and regulations banning payments for referral of
patients and referrals by physicians to health care providers with whom the
physicians have a financial relationship. The federal Stark Physician Anti-Self
Referral Law applies to Medicare and Medicaid and prohibits a physician from
referring patients for certain services, including laboratory services, to an
entity with which the physician has a financial
53
relationship. Financial relationships include both investment interests in an
entity and compensation arrangements with an entity. If an arrangement or
relationship is covered by the Stark Law, all of the requirements of a Stark Law
exception must be satisfied. The state laws and regulations vary significantly
from state to state, are often vague and, in many cases, have not been
interpreted by courts or regulatory agencies. These statutes and regulations
generally apply to services reimbursed by both governmental and private payors.
Violations of these laws may result in prohibition of payment for services
rendered, loss of licenses as well as fines and criminal penalties. In addition,
violation of the Stark Law may result in exclusion from Medicare and Medicaid.
State statutes and regulations affecting the referral of patients to health care
providers range from statutes and regulations that are substantially the same as
the federal laws and safe harbor regulations to a simple requirement that
physicians or other health care professionals disclose to patients any financial
relationship the physicians or health care professionals have with a health care
provider that is being recommended to the patients. These laws and regulations
vary significantly from state to state, are often vague and, in many cases, have
not been interpreted by courts or regulatory agencies. Adverse judicial or
administrative interpretations of any of these laws could have a material
adverse effect on the operating results and financial condition of the Company.
In addition, expansion of the Company's operations to new jurisdictions, or new
interpretations of laws in existing jurisdictions, could require structural and
organizational modifications of the Company's relationships with physicians to
comply with that jurisdiction's laws. Such structural and organizational
modifications could have a material adverse effect on the operating results and
financial condition of the Company.
Some physicians affiliated with the Company make referrals for services
that are covered by the Stark Law. Many of these physicians have financial
relationships with the Company in the form of compensation arrangements,
ownership of Company stock or ownership of contingent promissory notes issued by
the Company. The Company believes, however, that its current operations comply
in all material respects with the Stark Law due to, among other things, various
exceptions stated in the Stark Law and regulations that except either the
referral or the financial relationship involved. For example, many referrals
fall within exceptions applicable to pathologists or to ancillary services
performed by members of a common group practice. With respect to compensation
arrangements, the Company believes that existing arrangements are structured to
comply with an applicable Stark Law exception. With respect to the ownership of
stock, the Company believes that the ownership of Company stock by physicians
should fall within the publicly traded stock exception to the Stark Law's
definition of financial relationship. However, certain physician-owned shares
were acquired prior to the Company's initial public offering and, as a result,
the government could take the position that all of the requirements for this
exception are not met. With respect to contingent notes, the Company believes
that an exception to the Stark Law's definition of financial relationship is
available. In addition, the contingent notes contain provisions that permit the
Company to modify or replace them if necessary to comply with law. Nevertheless,
to the extent physicians affiliated with the Company make referrals to the
Company and a financial relationship exists between the Company and the
referring physicians, the government might take the position that the
arrangement does not comply with the Stark Law. Any such finding could have a
material adverse impact on the Company.
False Claims Laws. Under the federal False Claims Act, the government may
fine any person who knowingly submits, or participates in submitting, claims for
payment to the federal government that are false or fraudulent, or that contain
false or misleading information. In addition, knowingly making or using a false
record or statement to avoid paying the federal government is also a violation.
Entities found to have violated the False Claims Act may be required to make
significant payments to the government (including damages and penalties in
addition to the reimbursements previously collected) and may be excluded from
participating in Medicare, Medicaid and other federal health care programs. Many
states have similar false claims statutes.
Health care fraud is a priority of the United States Department of Justice
and the FBI. They have devoted a significant amount of resources to
investigating health care fraud. Medicare carriers and state Medicaid agencies
also have certain fraud and abuse authority. In addition, private insurers may
bring actions under false claim laws. In certain circumstances, federal and some
state laws authorize private whistleblowers to bring false claim suits on behalf
of the government against providers and reward the
54
whistleblower with a portion of any final recovery. In addition, the federal
government has engaged a number of nongovernmental-audit organizations to assist
it in tracking and recovering false claims for health care services. The
practices targeted include: billing for tests not performed; billing for tests
not medically necessary or not ordered by the physician; "upcoding" tests to
realize higher reimbursement than what is owed; offering inducements to
physicians to induce them to refer testing; and duplicate billing. These
practices have led to governmental investigations and whistleblower suits that
have resulted in financially significant payments made by a number of health
care providers in the past decade.
Since investigations relating to false claims have increased in recent
years, it is more likely companies conducting business in the health care
industry could become the subject of a federal or state civil or criminal
investigation or action, could be required to defend the results of such
investigation, be subjected to possible civil and criminal fines, be sued by
private payors and be excluded from Medicare, Medicaid or other federally funded
health care programs. Although the Company monitors its billing practices for
compliance with prevailing industry practice under applicable laws, such laws
are complex and constantly evolving and there can be no assurance that
governmental investors, private insurers or private whistleblowers will not
challenge the Company's or industry practice. For example, the announcement of a
governmental investigation into the billing practices of one of the Company's
practices in the fourth quarter of 1998 resulted in a significant decrease in
the market price of the Company's common stock, even though the issue was
eventually resolved to the Company's satisfaction and resulted only in the
repayment of a small overpayment.
In August 2001, we received two letters from the Civil Division of the U.S.
Department of Justice ("DOJ") requesting information regarding billing practices
and documentation of gross descriptions on skin biopsy reports. We are providing
documentation to the DOJ regarding the tests that are the subjects of its
requests for information. We believe our billing and documentation practices for
these tests comply with applicable laws and regulations in all material
respects. Accordingly, while no assurances can be given regarding the ultimate
outcome of the investigation and while the DOJ may request additional
information, we currently do not believe there is any basis for the DOJ to
pursue any significant enforcement action against us with respect to these
tests. Requests for information such as these are often the result of a qui tam,
or whistleblower, action filed by a private party. If this information request
is the result of a qui tam action and if the DOJ decides not to pursue an action
against us, the private party could still proceed with the action. Defending a
qui tam lawsuit, even where there is little or no merit to the allegations, can
be expensive and time consuming.
Government Investigations of Hospitals and Hospital
Laboratories. Significant media and public attention has been focused on the
health care industry due to ongoing federal and state investigations reportedly
related to certain referral and billing practices, laboratory and home health
care services and physician ownership and joint ventures involving hospitals.
Most notably, HCA is under investigation with respect to such practices. The
Company provides medical director services for numerous hospital laboratories,
including 28 HCA hospital laboratories as of June 30, 2001. The government's
ongoing investigation of HCA could result in a governmental investigation of one
or more of the Company's operations that have arrangements with HCA. In
addition, the OIG and the Department of Justice have initiated hospital
laboratory billing review projects in certain states and are expected to extend
such projects to additional states, including states in which the Company
operates hospital laboratories. These projects increase the likelihood of
governmental investigations of laboratories owned and operated by the Company.
Although the Company monitors its billing practices and hospital arrangements
for compliance with prevailing industry practices under applicable laws, such
laws are complex and constantly evolving and there can be no assurance that the
governmental investigators will not challenge the Company's or industry
practices. The government's investigations of entities with which the Company
contracts may have other effects which could materially and adversely affect the
Company, including termination or amendment of one or more of the Company's
contracts or the sale of hospitals potentially disrupting the performance of
services under such contracts.
Corporate Practice of Medicine. The Company is not licensed to practice
medicine. The practice of medicine is conducted solely by its licensed
pathologists. The manner in which licensed physicians can be
55
organized to perform and bill for medical services is governed by the laws of
the state in which medical services are provided and by the medical boards or
other entities authorized by such states to oversee the practice of medicine.
Business corporations are generally not permitted under certain state laws to
exercise control over the medical judgments or decisions of physicians, or
engage in certain practices such as fee-splitting with physicians. In states
where the Company is not permitted to directly own a medical practice, the
Company performs only non-medical and administrative and support 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. See
discussion "AmeriPath Corporate Structure", above.
The Company believes that it currently is in material compliance with the
corporate practice laws in the states in which it operates. Nevertheless, there
can be no assurance that regulatory authorities or other parties will not assert
that the Company is engaged in the corporate practice of medicine. If such a
claim were successfully asserted in any jurisdiction, the Company, and its
pathologists could be subject to civil and criminal penalties under such
jurisdiction's laws and could be required to restructure their contractual and
other arrangements. Alternatively, some of the Company's existing contracts
could be found to be illegal and unenforceable. In addition, expansion of the
operations of the Company to other states may require structural and
organizational modification of the Company's form of relationship with
physicians, practices or hospitals. 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.
Fee-Splitting. Many states prohibit the splitting or sharing of fees
between physicians and non-physicians. These laws vary from state to state and
are enforced by courts and regulatory agencies, each with broad discretion. Most
of the states with fee-splitting laws only prohibit a physician from sharing
fees with a referral source. However, some states have interpreted management
agreements between entities and physicians as unlawful fee-splitting.
The Company believes its arrangements with physicians comply in all
material respects with the fee-splitting laws of the states in which it
operates. Nevertheless, it is possible regulatory authorities or other parties
could claim the Company is engaged in fee-splitting. If such a claim were
successfully asserted in any jurisdiction, the Company's pathologists could be
subject to civil and criminal penalties and the Company could be required to
restructure its contractual and other arrangements. Any restructuring of the
Company's contractual and other arrangements with physician practices could
result in lower revenues from such practices, increased expenses in the
operation of such practices and reduced influence over the business decisions of
such practices. Alternatively, some of the Company's existing contracts could be
found to be illegal and unenforceable, which could result in the termination of
those contracts and an associated loss of revenue. In addition, expansion of the
Company's operations to other states with fee-splitting prohibitions may require
structural and organizational modification to the form of relationships that the
Company currently has with physicians, affiliated practices and hospitals. Any
modifications could result in less profitable relationships with physicians,
affiliated practices and hospitals, less influence over the business decisions
of physicians and affiliated practices and failure to achieve the Company's
growth objectives.
Medicare Fee Schedule Payment for Clinical Diagnostic Laboratory
Testing. Medicare reimburses hospitals based on locality-specific fee schedules
on the basis of a reimbursement methodology with Consumer Price Index ("CPI")
related adjustments. Medicare includes payment for services performed for
clinical diagnostic laboratory inpatients within the prospectively determined
Diagnosis Related Group rate paid to the hospital. Additionally, state Medicaid
programs may pay no more than the Medicare fee schedule amount. Congress also
has implemented a national cap on Medicare clinical diagnostic laboratory fee
schedules. This national cap has been lowered several times and is now at
approximately 74% of the national median. In addition, Congress frequently has
either limited or eliminated the annual CPI adjustments of the Medicare clinical
diagnostic laboratory fee schedules. The Omnibus Budget Reconciliation Act of
1993 eliminated the adjustment for the years 1994 and 1995. In 1996 and 1997,
however, the fee schedule adjustments were 3.2% and 2.7%, respectively. Even
these modest increases were reduced in some areas due to a recalculation of
national medians and by conversion in some carrier areas to a single statewide
fee schedule. In the Balanced Budget Act of 1997 ("BBA"), Congress again
56
eliminated the annual adjustments, this time for the years 1998 through 2002.
The adjustment limitations and changes in the national cap made to date have not
had, and are not expected by the Company to have, a material adverse effect on
the Company's results of operations. Any further significant decrease in such
fee schedules could have a material adverse effect on the Company.
Due to uncertainty regarding the implementation of the above-described
Medicare developments, the Company currently is unable to predict their ultimate
impact on the laboratory industry generally or on the Company in particular.
Reforms may also occur at the state level (and other reforms may occur at the
federal level) and, as a result of market pressures, changes are occurring in
the marketplace as the number of patients covered by some form of managed care
continues to increase. In the past, the Company has offset a substantial portion
of the impact of price decreases and coverage changes through the achievement of
economies of scale, more favorable purchase contracts and greater operational
efficiencies. However, if further substantial price decreases or coverage
changes were to occur, or if the government were to seek any substantial
repayments or penalties from the Company, such developments would likely have an
adverse impact on gross profits from the Company's testing services unless
management had an opportunity to mitigate such impact.
Reevaluations and Examination of Billing. Payors periodically reevaluate
the services they cover. In some cases, government payors such as Medicare also
may seek to recoup payments previously made for services determined not to be
covered. Any such action by payors would have an adverse affect on the Company's
revenues and earnings.
Moreover, in recent months the federal government has become more
aggressive in examining laboratory billing and seeking repayments and penalties
as the result of improper billing for services (e.g., using an improper billing
code for a test to realize higher reimbursement), regardless of whether carriers
had furnished clear guidance on this subject. The primary focus of this
initiative has been on hospital laboratories and on routine clinical chemistry
tests which comprise only a small part of the Company's revenues. Although the
scope of this initiative could expand, it is not possible to predict whether or
in what direction the expansion might occur. The Company believes its practices
are proper and do not include any allegedly improper practices now being
examined. However, no assurance can be given that the government will not
broaden its initiative to focus on the type of services furnished by the Company
or, if this were to happen, on how much money, if any, the Company might be
required to repay.
Furthermore, HIPAA and the joint federal and state anti-fraud initiative
commenced in 1995 called Operation Restore Trust have strengthened the powers of
the OIG and increased the funding for Medicare and Medicaid audits and
investigations. As a result, the OIG has expanded and continues to expand the
scope of its health care audits and investigations. State enforcement actions
are similarly expanding. Federal and state audits and inspections, whether on a
scheduled or unannounced basis, are conducted from time to time at the Company's
facilities.
Due to the uncertain nature of coding for pathology services, the Company
cannot assure that issues such as those addressed in the government
investigation it announced in the fourth quarter of 1998, which was related to
the Operation Restore Trust initiative, will not arise again. If a negative
finding is made as a result of such an investigation, the Company could be
required to change coding practices or repay amounts paid for incorrect
practices either of which could have a materially adverse effect on the
operating results and financial condition of the Company.
Laboratory Compliance Plan. In February 1997, the OIG released a model
compliance plan for laboratories that is based largely on the corporate
integrity agreements negotiated with the laboratories which settled a number of
government enforcement actions against laboratories under Operation Restore
Trust. The Company adopted and maintains a compliance plan, which includes
components of the OIG's model compliance plan, as the Company deemed appropriate
to the conduct of its business. The Company's Senior Vice President of
Operations serves as the Company's Chief Compliance Officer and reports directly
to the Audit Committee of the Board of Directors.
57
Antitrust Laws. In connection with state corporate practice of medicine
laws discussed above, the physician practices with which the Company is
affiliated in some states are organized as separate legal entities. As such, the
physician practice entities may be deemed to be persons separate both from the
Company and from each other under the antitrust laws and, accordingly, subject
to a wide range of federal and state laws that prohibit anti-competitive conduct
among separate legal entities. In addition, the Company also is seeking to
acquire or affiliate with established and reputable practices in its target
geographic markets and any market concentration could lead to antitrust claims.
The Company believes it is in compliance with federal and state antitrust laws
and intends to comply with any state and federal laws that may affect its
development of integrated health care delivery networks. There can be no
assurance, however, that a review of the Company's business by courts or
regulatory authorities would not adversely affect the operations of the Company
and its affiliated physician groups.
HIPAA Criminal Penalties. HIPAA created criminal provisions, which impose
criminal penalties for fraud against any health care benefit program for theft
or embezzlement involving health care and for false statements in connection
with the payment of any health benefits. HIPAA also provided broad prosecutorial
subpoena authority and authorized property forfeiture upon conviction of a
federal health care offense. Significantly, the HIPAA provisions apply not only
to federal programs, but also to private health benefit programs as well. HIPAA
also broadened the authority of the OIG to exclude participants from federal
health care programs. Because of the uncertainties as to how the HIPAA
provisions will be enforced, the Company currently is unable to predict their
ultimate impact on the Company. If the government were to seek any substantial
penalties against the Company, this could have a material adverse effect on the
Company.
Licensing. CLIA extends federal oversight to virtually all clinical
laboratories by requiring that laboratories be certified by the government. Many
laboratories must also meet governmental quality and personnel standards,
undergo proficiency testing and be subject to biennial inspection. Rather than
focusing on location, size or type of laboratory, this extended oversight is
based on the complexity of the test performed by the laboratory. The CLIA
quality standards regulations divide all tests into three categories (waived,
moderate complexity and high complexity) and establish varying requirements
depending upon the complexity of the test performed. The Company's outpatient
laboratories are licensed by Health and Human Services ("HHS") under CLIA to
perform high complexity testing. Generally, the HHS regulations require
laboratories that perform high complexity or moderate complexity tests to
implement systems that ensure the accurate performance and reporting of tests
results, establish quality control systems, have proficiency testing conducted
by approved agencies and have biennial inspections. The Company is also subject
to state regulation. CLIA provides that a state may adopt more stringent
regulations than federal law. For example, some states in which we operate
require that laboratory personnel meet certain qualifications, specify certain
quality controls, maintain certain records and undergo proficiency testing.
Persons engaged in the practice of medicine must be licensed by each state
in which they practice. The professional practice of physicians is regulated in
each state by the state board of medicine. Each board of medicine has rules
enumerating the activities that constitute unprofessional conduct. A board may
sanction unprofessional conduct by suspending, restricting or revoking a
professional's license. Other possible sanctions include restraining orders,
injunctions, imprisonment and fines.
HIPAA Regulations Relating to the Privacy, Security, and Transmission of
Health Information. Congress passed the Health Insurance Portability and
Accountability Act, or HIPAA, in 1996. Among other things, HIPAA established
several requirements regarding the privacy, security and transmission of health
information. The Department of Health and Human Services, or HHS, has issued
several sets of regulations in accordance with its authority under HIPAA. In
general, these regulations apply to health care providers, health plans, and
health care clearinghouses. Some operations of the Company will be subject to
the HIPAA regulations.
Pursuant to HIPAA, HHS issued final privacy regulations establishing
comprehensive federal standards relating to the use and disclosure of protected
health information. These regulations, among
58
other things, establish limits on the use and release of protected health
information, provide for patients' rights to access, amend, and receive an
accounting of the uses and disclosures of protected health information, and
require certain safeguards to protect identifiable health information. The
federal privacy regulations do not supersede state laws that are more stringent.
Thus, the Company must reconcile both the federal privacy regulations and other
state privacy laws that are more stringent than the federal laws. Those
operations of the Company which are regulated by HIPAA must be in compliance
with the federal privacy regulations by April 2003. Prior to the compliance
date, it is expected that HHS will release several guidance documents addressing
questions or concerns raised by the privacy regulations. On July 6, 2001, HHS
issued its first guidance document relating to these regulations.
Like the privacy regulations, the electronic transaction standards are also
final. These regulations establish uniform standards relating to data reporting,
formatting, and coding that covered entities must use in conducting certain
transactions. The electronic transaction standards presently apply to eight
different transactions, including transactions relating to health care claims
and health care payment and remittance advice. Upon the compliance date, health
care providers must use these standards when electronically conducting a covered
transaction with health plans or other health care providers. The compliance
date for these regulations is October 2002.
The security regulations promulgated pursuant to HIPAA have not been
finalized. The purpose of the proposed security regulations is to establish a
minimum standard for the protection of individual health information that is
stored or transmitted electronically. The regulations provide administrative
procedures, physical safeguards, and technical mechanisms that may be
implemented to satisfy the regulations.
The HIPAA regulations could result in significant financial obligations for
the Company and will pose increased regulatory risk. The privacy regulation
could limit the Company's use and disclosure of patient health information. For
example, HHS has indicated that cells and tissues are not protected health
information, but that analyses of them are protected. HHS has stated that if a
person provides cells to a researcher and tells the researcher that the cells
are an identified individual's cancer cells, that accompanying statement is
protected health information about that individual. At this time, the Company is
not able to determine the full consequences of the HIPAA regulations to the
Company's business or the total cost of complying with these regulations.
However, the HIPAA regulations are expected to significantly impact the Company
operationally and financially.
Violations of the privacy regulations are punishable by civil and criminal
penalties. State privacy laws may impose similar sanctions on us. Violations of
the standards for electronic transaction are punishable by civil penalties.
Other Regulations. In addition, the Company is subject to licensing and
regulation under federal, state and local laws relating to the collecting,
storing, handling and disposal of medical specimens, infectious and hazardous
waste and radioactive materials as well as the safety and health of laboratory
employees. The Company believes its laboratory operations are in material
compliance with applicable federal and state laws and regulations relating to
the generation, storage, treatment and disposal of all laboratory specimens and
other biohazardous waste. Nevertheless, there can be no assurance that the
Company's current or past laboratory operations would be deemed to be in
compliance with applicable laws and regulations, and any noncompliance could
result in a material adverse effect on the Company. The Company utilizes
licensed vendors for the disposal of such specimen and waste.
In addition to its comprehensive regulation of safety in the workplace, the
federal Occupational Safety and Health Administration ("OSHA") has established
extensive requirements relating to workplace safety for health care employees,
including clinical laboratories, whose workers may be exposed to blood-borne
pathogens, such as HIV and the hepatitis B virus. These regulations require work
practice controls, protective clothing and equipment, training, medical
follow-up, vaccinations and other measures designed to minimize exposure to, and
transmission of, blood-borne pathogens. Regulations of the Department of
Transportation, the Public Health Services and the U.S. Postal Service also
apply to the transportation of laboratory specimens.
59
COMPETITION
The Company, its practices and pathologists provide pathology and cytology
diagnostic services and pathology practice management services. Competition may
result from other anatomic pathology practices, companies in other health care
industry segments, such as other hospital-based specialties, national clinical
laboratories, large physician group practices or pathology physician practice
management companies that may enter the Company's markets, some of which may
have greater financial and other resources than the Company.
The Company competes primarily on the basis of service capability and
convenience of facilities, scope of testing services performed, accuracy,
timeliness and consistency in reporting test results, reputation in the medical
community, and pricing of testing services. The Company believes that its
principal competitive advantages are its pathologist leadership, single
specialty focus, sales and marketing expertise and administrative support
capabilities (e.g., billing, collections, accounting and financial reporting,
information systems, and human resources). The Company competes with several
other companies, and such competition can reasonably be expected to increase. In
addition, companies in other health care segments, such as hospitals, national
clinical laboratories, third party payors, and HMO's, many of which have greater
financial resources than the Company, may become competitive with the Company in
the employment of pathologists and management of pathology practices. The
Company competes for acquisitions and affiliations on the basis of its
reputation, management experience, status and resources as a public company and
its single focus on anatomic pathology. There can be no assurance that the
Company will be able to compete effectively or that additional competitors will
not enter the Company's markets or make it more difficult for the Company to
acquire or affiliate with practices on favorable terms.
INTELLECTUAL PROPERTY
The Company has registered the service marks "AmeriPath", "CAD-The Center
for Advanced Diagnostics" and the AmeriPath logo with the United States Patent
and Trademark Office.
To date, the Company has not relied heavily on patents or other
intellectual property in operating its business. Nevertheless, some of the tests
or related diagnostic products or the information technology purchased or used
by the Company may be patented or subject to other intellectual property rights.
As a result, the Company may be found to be, or actions may be brought against
it alleging that it is, infringing on the patent or other intellectual property
rights of others, which could give rise to substantial claims against the
Company. In addition, the Company's expansion into the genomics testing market
may result in its obtaining or developing patent or other intellectual property.
However, other practice and public entities, including universities, may have
filed applications for (or have been issued) patents that may be the same as or
similar to those developed or otherwise obtained by the Company or that it may
need in the development of its own products. The scope and validity of such
patent and other intellectual property rights, the extent to which the Company
may wish or need to acquire such rights, and the cost or availability of such
rights are presently unknown. In addition, the Company cannot provide assurance
that others will not obtain access to its intellectual property or independently
develop the same or similar products, tests or other intellectual property to
that developed or otherwise obtained by the Company. This may impede the
Company's ability to achieve its overall growth strategy, including its ability
to broaden the range of testing services it offers and to penetrate the genomic
and genomic testing markets.
EMPLOYEES
At June 30, 2001, the Company's owned and managed practices employ 2,428
people, including 427 physicians. In addition to physicians, the employees of
the Company and the managed practices include 704 laboratory technicians, 161
couriers and 1,136 billing, marketing, transcription and administrative staff,
of which 105 personnel are located at the Company's executive offices. None of
the Company's employees or prospective employees is subject to collective
bargaining agreements.
60
FACILITIES
The Company leases its executive offices located in Riviera Beach, Florida
(approximately 12,000 square feet) and its centralized billing office in Fort
Lauderdale, Florida (approximately 13,000 square feet) and the Company and its
managed practices lease 65 other facilities: 20 in Florida, two in Alabama,
three in Kentucky, four in Ohio, eight in Texas, six in Pennsylvania, five in
Tennessee, four in Mississippi, two in Missouri, two in New York, two in
Oklahoma, two in North Carolina and one each in Indiana, Colorado, California,
Massachusetts, and Wisconsin. These facilities are used for laboratory
operations, administrative and billing and collections operations and storage
space. The 67 facilities encompass an aggregate of approximately 300,000 square
feet, have an aggregate annual rent of approximately $5.1 million and have lease
terms expiring from 2001 to 2009. As laboratory leases are scheduled to expire,
the Company will consider whether to extend or renegotiate the existing lease or
move the facility to another location within the defined geographic area of the
practice.
INSURANCE
The Company's business entails an inherent risk of claims of physician
professional liability or other liability for acts or omissions of its
physicians and laboratory personnel or of hospital employees who are under the
supervision of its hospital-based pathologists. The Company and its physicians
periodically become involved as defendants in medical malpractice and other
lawsuits, some of which are currently ongoing, and are subject to the attendant
risk of substantial damage awards. The Company has consolidated its physician
professional liability insurance coverages with the St. Paul Fire and Marine
Insurance Company, whereby each of the pathologists is insured under claims-made
policies with primary limits of $1.0 million per occurrence and $5.0 million in
the annual aggregate, and share with the Company in excess coverage of up to
$20.0 million in the aggregate. The Company's coverage until July 1999 was with
Steadfast Insurance Company (Zurich-American). The policy also provides "prior
acts" coverage for each of the physicians with respect to the practices prior to
their acquisition by the Company. Further, the Company has provided reserves for
incurred but not reported claims in connection with its claims-made policies.
The terms of the purchase agreements relating to each practice acquisition
generally contain certain limited rights of indemnification from the sellers of
the practices. The Company also maintains property and general liability
insurance policies and obtains agreements from third parties, such as hospitals
and national clinical laboratories, to indemnify or insure the Company for
certain risks. While the Company believes it has a prudent risk management
system for itself and its physicians, it is possible that pending or future
claims will be successful and, if successful, will not be covered or will exceed
the limits of the Company's risk management program, including the limits of the
Company's insurance coverage or applicable indemnification provisions, or that
third parties will fail or otherwise be unable to comply with their obligations
to the Company. It is also possible that such coverage will not continue to be
available at acceptable costs or on favorable terms. The Company is currently in
a dispute with its former medical malpractice insurance carrier on an issue
related to the applicability of excess insurance coverage. If we do not prevail,
a gap of several months in our insurance coverage may exist for a period in
which significant claims have been made. In addition, the Company's insurance
does not cover all potential liabilities arising from governmental fines and
penalties, indemnification agreements and certain other uninsurable losses. For
example, from time to time the Company agrees to indemnify third parties, such
as hospitals and national clinical laboratories, for various claims that may not
be covered by insurance. As a result the Company may become responsible for
substantial damage awards that are uninsured. The Company is currently subject
to indemnity claims which, if determined adversely to the Company, could result
in substantial uninsured losses. A malpractice or other claim asserted against
the Company, an owned or managed practice or a physician or other employee of
such practices could, in the event of an adverse outcome that exceeds limits of
available insurance coverage or is not covered, have a material adverse effect
on the Company's financial condition and results of operations.
61
LEGAL PROCEEDINGS
During the ordinary course of business, the Company has become and may in
the future become subject to pending and threatened legal actions and
proceedings. The Company may have liability with respect to its employees and
its pathologists as well as with respect to hospital employees who are under the
supervision of the hospital based pathologists. The majority of the pending
legal proceedings involve claims of medical malpractice. Most of these relate to
cytology services. These claims are generally covered by insurance. The Company
has also become, and may in the future become, subject to claims under
agreements to indemnify third parties, such as hospitals and national clinical
laboratories, which may not be covered by insurance. Based upon investigations
conducted to date, the Company believes the outcome of such pending 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. If the Company is ultimately found liable under these
medical malpractice or other claims, there can be no assurance that the
Company's medical malpractice or general liability insurance coverage will be
available or adequate to cover any such liability. While we believe this
practice is routine, in a number of pending claims our insurers have reserved
their right to deny coverage. The Company is also, from time to time, involved
with legal actions related to the acquisition of and affiliation with physician
practices, the prior conduct of such practices, the employment (and restriction
on competition) of physicians, or the employment of non-physician personnel or
actions by employees of hospitals for which the Company provides pathology
services. There can be no assurance any costs or liabilities for which the
Company becomes responsible in connection with such claims or actions will not
be material or will not exceed the limitations of any applicable indemnification
provisions or the financial resources of the indemnifying parties.
62
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table shows information about our executive officers and
directors as of the date of this prospectus:
NAME AGE POSITION(S)
---- --- -----------
James C. New............................... 56 Chairman of the Board and Chief Executive
Officer
Brian C. Carr.............................. 39 President and Director
Alan Levin, M.D............................ 50 Chief Operating Officer and Director
Gregory A. Marsh........................... 40 Vice President, Chief Financial Officer and
Secretary
James E. Billington........................ 39 Senior Vice President, Operations
Dennis M. Smith, Jr., M.D.................. 49 Executive Vice President of Genomic
Strategies and Medical Director
Stephen V. Fuller.......................... 46 Senior Vice President, Human Resources
Michael J. Downs........................... 46 Chief Information Officer
Bruce C. Walton............................ 41 Vice President, Sales and Marketing
Haywood D. Cochrane, Jr.................... 52 Director
E. Martin Gibson........................... 62 Director
C. Arnold Renschler, M.D................... 59 Director
E. Roe Stamps, IV.......................... 54 Director
Messrs. New, Levin and Gibson are members of our acquisition committee.
Messrs. Cochrane, Gibson and Renschler are members of our audit committee.
Messrs. Gibson and Stamps are members of our compensation committee.
James C. New has been the Chairman of the Board of Directors and Chief
Executive Officer of AmeriPath since January 1996. From January 1996 to November
2000, Mr. New was also our President. Prior to joining AmeriPath, Mr. New served
as President and Chief Executive Officer, and as a director of RehabClinics,
Inc., one of the largest outpatient rehabilitation companies in the country,
which he founded in 1991. RehabClinics completed its initial public offering in
June 1992 and merged with NovaCare, Inc. in February 1994. Mr. New was President
of NovaCare, Inc.'s Outpatient Division from 1994 to 1995. Prior to founding
RehabClinics, Inc., he served as President of Greater Atlantic Health Service
and Physicians Choice of Southeastern Pennsylvania, both HMOs. From 1993 through
1996, Mr. New was the Chairman of the Acquisition Committee and member of the
Board of Directors of Pet Practice, Inc. From 1978 to 1985, Mr. New served in
various executive positions at Textron, Inc. and Emerson Electric, Inc.
Brian C. Carr has been President of AmeriPath since November 2000 and a
Director of the Company since December 2000. Prior to joining AmeriPath, he
served as Chief Executive Officer and a Director of Inform DX, which he
co-founded in 1997. Prior to founding Inform DX in 1997, Mr. Carr spent 2 years
at PhyCor, most recently serving as Director, Corporate Services, where he was
responsible for activities related to acquisitions of multispecialty medical
clinics. Prior to that, Mr. Carr spent seven years with Allied Clinical
Laboratories, serving in five different positions, most recently as Vice
President, General Manager of the Southwest Division. In the state of Texas, Mr.
Carr is a certified public accountant and a certified management accountant.
Alan Levin, M.D. has been Chief Operating Officer of AmeriPath since
September of 1996. He first joined AmeriPath as a director and physician in June
1996 after the Company acquired Derrick and Associates ("Derrick"). Prior to
joining AmeriPath, he served as director of Derrick from 1987 until the
Company's acquisition of Derrick in 1996, as Treasurer from 1990 to 1994, and as
President from 1994 until the Company's acquisition of Derrick in 1996. Dr.
Levin has 19 years of experience as a pathologist and is board-certified in
anatomic and clinical pathology. He has also served as the medical director of
the
63
inpatient pathology laboratory at Columbia Medical Center, Port St. Lucie
Medical Centre, Florida from 1983 until 1997, and presently is the Chairman of
that hospital's Board of Trustees.
Gregory A. Marsh has served as the Vice President, Chief Financial Officer
and Secretary of AmeriPath since February 2001. From August 1996 to February
2001, he served as Vice President, Corporate Controller of AmeriPath. Prior to
joining AmeriPath, Mr. Marsh was the Director of Budgeting and Financial
Analysis for Sensormatic Electronics Corporation from November 1991 to July
1996. From 1983 to October 1991, Mr. Marsh worked for Coopers & Lybrand in
Pittsburgh, PA and South Florida. Mr. Marsh is a Certified Public Accountant in
the State of Florida.
James E. Billington has been the Senior Vice President of Operations of
AmeriPath since November 2000. Mr. Billington joined AmeriPath when the Company
acquired Inform DX in November 2000. Prior to this position, he was the
co-founder, President, Chief Operating Officer and Chief Compliance Officer of
Inform DX. Prior to founding Inform DX in 1997, Mr. Billington served as Vice
President, Administration/Finance for LabCorp. In this capacity, he had
operational and financial oversight for six operating regions with combined
annual revenues of $532 million. Previously, Mr. Billington spent five years
with Allied Clinical Laboratories, most recently serving as Assistant Vice
President, Controller for the Texas Division. From 1984 to 1989, Mr. Billington
served in various audit roles in the public accounting industry.
Dennis M. Smith, Jr., M.D. has been the Executive Vice President of Genomic
Strategies of AmeriPath since April 2000 and the Medical Director of AmeriPath
since March 1999. From March 1999 to April 2000, Dr. Smith was a Senior Vice
President of AmeriPath. Dr. Smith heads AmeriPath's genomic strategies. He also
holds the position of Director of Laboratories at Memorial Hospital in
Jacksonville. Currently, Dr. Smith chairs the Board of Trustees of the National
Blood Foundation and serves as a director for the Florida-Georgia Blood
Alliance, and Immucor, Inc. He is also a member of Vanderbilt University's
School of Engineering's Committee of Visitors. Dr. Smith was previously
President of the American Association of Blood Banks and Director and Executive
Head of the American Red Cross Blood Services, Nashville Region.
Stephen V. Fuller began his employment at AmeriPath as Vice President of
Human Resources in November 1996, and was promoted to Senior Vice President of
Human Resources in June 1999. Prior to joining AmeriPath, he held executive
human resources positions at Miami Heart Institute, Delray Medical Center,
Hialeah Hospital, South Miami Hospital, Highland Park General Hospital, and the
University of Miami/Jackson Memorial Medical Center. Mr. Fuller has 23 years of
experience in health care human resources, and is certified by the HR
Certification Institute as a Senior Professional in Human Resources and
certified by World at Work (formerly the American Compensation Association) as a
Certified Compensation Professional. Mr. Fuller is an active member in the
Society for Human Resources Management, and has served in a variety of
leadership capacities, including Area II Board Member, Board Member of the HR
Florida State Council, State Director for Florida, District Director for South
Florida, and President of the Greater Miami Society for Human Resources
Management.
Michael J. Downs has been the Chief Information Officer of AmeriPath since
March 2000 and has 18 years of information technology experience in
laboratories, hospitals, and health care. Prior to joining AmeriPath, he held a
management consulting position with Interim Healthcare, senior management
positions with Corning Life Sciences/Quest Diagnostics, New York University
Medical Center, American Express International Bank, and American Home Products'
Wyeth-Ayerst Laboratory Division.
Bruce C. Walton has served as the Vice President of Sales, Marketing, and
Contracting since July 2000. He joined AmeriPath in July 1999 as National
Director of Sales. Prior to that, he spent 15 years with C.R. Bard in various
sales and management positions.
Haywood D. Cochrane, Jr. has been a Director of the Company since August
2001. Mr. Cochrane serves as the Chief Executive Officer of CHD Meridian
Corporate Healthcare ("CHD Meridian") in Nashville, Tennessee, and has since
February 1997. Prior to joining CHD Meridian, Mr. Cochrane served as a
consultant to LabCorp. From April 1995 to November 1996 he was Executive Vice
President, Chief
64
Financial Officer and Treasurer of LabCorp. Mr. Cochrane was an employee of
National Health Laboratories, Inc. ("NHL") from June 1994 to April 1995,
following NHL's acquisition of his former employer, Allied Clinical Laboratories
Inc. ("Allied"). Mr. Cochrane was President and Chief Executive Officer of
Allied from its formation in 1989 until its acquisition by NHL in June 1994. Mr.
Cochrane is currently a director at JDN Realty, Inc. and Sonus Corp., and
TriPath Imaging, Inc., all publicly traded companies, as well as CHD Meridian.
E. Martin Gibson has been a director of the Company since March 2001. Mr.
Gibson retired from Corning, Incorporated in 1994 after a 32-year career, where
his last position was Chairman and CEO of Corning Lab Services, Inc., the
company's largest subsidiary from 1990 to 1999. He also served as a Corning
Director for 11 years from 1983 to 1994. Mr. Gibson serves as a Director of The
IT Group, Inc. (formerly known as International Technology Corporation), an
environmental engineering and consulting firm, and Hardinge, Inc., a machine
tool company.
C. Arnold Renschler, M.D. has been a director of the Company since April
1997. Recently retired in May 2000, he had been Executive Vice President of
Bergen Brunswig Corp. since April 1999. From December 1997 to April 1999, he was
President and CEO of PharMerica, Inc. and a member of its Board of Directors.
From June 1996 to November 1997, Dr. Renschler was President and Chief Executive
Officer of Pharmacy Corporation of America, a division of Beverly Enterprises,
Inc. From July 1981 to June 1996, he held various positions, including serving
as a Director, President and Chief Operating Officer of Manor Care, Incorporated
and as a Director, President and Chief Operating Officer and Chief Clinical
Officer at NovaCare, Inc. He currently serves as a Director of two
privately-held health care companies, Cora Health, Inc. and Elderport, Inc. Dr.
Renschler is certified in pediatric medicine.
E. Roe Stamps, IV has been a Director of the Company since February 1996,
and was a Director of American Laboratory Associates from 1994 to 1996. Mr.
Stamps has over 25 years experience in private equity investing. Prior to
co-founding Summit Partners in 1984, Mr. Stamps was a General Partner at TA
Associates, a Senior Investment Manager at First Chicago Investment Corporation,
and an Associate with The Palmer Organization. He has served as a director of
numerous private and public companies, including Boca Research, Inc. and
Pediatrix Medical Group, Inc. He is also a past Director of the National Venture
Capital Association.
CERTAIN TRANSACTIONS
Pursuant to the Company's acquisition of Derrick in 1996, Dr. Levin
received in exchange for his interest in Derrick a Subordinated Contingent Note
in the maximum principal amount of $584,615. The Company paid $163,052,
including interest, to Dr. Levin in 2000 with respect to the Contingent Note
based upon operating earnings achieved in 1999.
Pursuant to the Company's acquisition of Laboratory Physicians,
Jacksonville ("LPJ") in 1997, Dr. Smith received in exchange for his interest in
LPJ a Subordinated Contingent Note in the maximum principal amount of
$1,420,000. The Company paid $171,052, including interest, to Dr. Smith in 2000
with respect to the Contingent Note based upon operating earnings achieved in
1999.
65
PRINCIPAL STOCKHOLDERS AND BENEFICIAL OWNERSHIP OF MANAGEMENT
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless otherwise indicated below, to our knowledge, the
persons and entities named in the table have sole voting and sole investment
power with respect to all shares beneficially owned. The number of shares of
common stock outstanding after this offering includes shares of common stock
being offered and does not include the shares that are subject to the
underwriters' over-allotment option. Unless otherwise indicated, the address for
each listed stockholder is the same as AmeriPath. Unless otherwise indicated the
following information is provided as of June 30, 2001 for each person known to
the Company to be the beneficial owner of more than five percent of the
Company's common stock and for the Company's current directors and executive
officers.
SHARES OF COMMON STOCK
BENEFICIALLY OWNED PRIOR TO OFFERING PERCENTAGE OF SHARES
------------------------------------- BENEFICIALLY OWNED(2)
NUMBER OF SHARES NUMBER OF SHARES ----------------------
BENEFICIALLY SUBJECT TO BEFORE AFTER
NAME OF BENEFICIAL OWNER(1) OWNED(2) OPTIONS(3) OFFERING OFFERING
--------------------------- ----------------- ----------------- ----------- --------
Wasatch Advisors, Inc.(4).................. 2,887,531 -- 11.5 9.8
T. Rowe Price Associates, Inc.(5).......... 2,050,200 -- 8.1 7.0
Dimensional Fund Advisors, Inc.(6)......... 1,633,882 -- 6.5 5.6
James C. New(7)............................ 275,218 266,211 1.1 0.9
Alan Levin, M.D.(8)........................ 6,500 -- * *
Dennis M. Smith, Jr., M.D.(9).............. 215,576 22,800 0.9 0.7
Gregory A. Marsh(10)....................... 10,500 10,500 * *
Stephen V. Fuller(11)...................... 3,200 3,200 * *
Brian C. Carr(12).......................... 40,486 -- 0.2 0.1
E. Martin Gibson(13)....................... -- -- * *
C. Arnold Renschler(14).................... 8,000 6,000 * *
Haywood D. Cochrane, Jr.................... 10,041 1,928 * *
E. Roe Stamps, IV(15)...................... 2,000 2,000 * *
James E. Billington(16).................... 9,881 1,205 * *
Michael J. Downs(17)....................... -- -- * *
Bruce C. Walton(18)........................ -- -- * *
All directors and executive officers as a
group (13 persons)(19)................... 581,402 313,844 2.3 1.9
---------------
* Less than one percent.
(1) Unless otherwise indicated in the footnotes, the address of each of the
beneficial owners identified as 7289 Garden Road, Suite 200, Rivera Beach,
Florida 33404.
(2) Based on 25,208,835 shares of Common Stock outstanding as of June 30, 2001.
Pursuant to the rules of the Securities and Exchange Commission, shares of
Common Stock which a person had the right to acquire within 60 days
pursuant to the exercise of stock options or the conversion of a
convertible security 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) Represents the number of shares subject to stock options or warrants which
are exercisable or become exercisable within 60 days.
(4) Represents shares beneficially owned by Wasatch Advisors, Inc. ("Wasatch"),
as to which Wasatch has sole voting power with respect to 2,887,531 of such
shares and sole dispositive power with respect to all such shares. The
address of Wasatch is 150 Social Hall Avenue, Salt Lake City, Utah 84111.
This disclosure of Wasatch's beneficial ownership is based solely upon
information set forth in Wasatch's Schedule 13G dated June 11, 2001.
(5) Represents shares beneficially owned by T. Rowe Price Associates, Inc.
("Price"), as to which Price has sole voting power with respect to 316,000
of such shares and sole dispositive power with respect to 2,050,200 such
shares. The address of Price is 100 E. Pratt Street, Baltimore, Maryland
21202.
66
This disclosure of Price's beneficial ownership is based solely upon
information set forth in Price's Schedule 13G dated February 12, 2001.
(6) Represents shares beneficially owned by Dimensional Fund Advisors, Inc.
("Dimensional"), as to which Dimensional has sole voting power with respect
to 1,633,882 of such shares and sole dispositive power with respect to all
such shares. The address of Dimensional is 1299 Ocean Avenue, 11th Floor,
Santa Monica, California 90401. This disclosure of Dimensional's beneficial
ownership is based solely upon information set forth in Price" Schedule 13G
dated February 2, 2001.
(7) Does not include 169,800 shares subject to presently unexercisable stock
options.
(8) Does not include 75,000 shares subject to presently unexercisable stock
options.
(9) Does not include 71,200 shares subject to presently unexercisable stock
options.
(10) Does not include 59,200 shares subject to presently unexercisable stock
options.
(11) Does not include 54,800 shares subject to presently unexercisable stock
options.
(12) Does not include 200,000 shares subject to presently unexercisable stock
options.
(13) Does not include 5,000 shares subject to presently unexercisable stock
options.
(14) Does not include 14,000 shares subject to presently unexercisable stock
options.
(15) Does not include 8,000 shares subject to presently unexercisable stock
options.
(16) Does not include 75,000 shares subject to presently unexercisable stock
options.
(17) Does not include 22,000 shares subject to presently unexercisable stock
options.
(18) Does not include 34,000 shares subject to presently unexercisable stock
options.
(19) Does not include 788,000 shares subject to presently unexercisable stock
options.
67
MATERIAL UNITED STATES FEDERAL TAX CONSEQUENCES
GENERAL
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of our
common stock. .This discussion is based on current law, which is subject to
change, possibly with retroactive effect, or different interpretations. This
discussion is limited to holders that hold shares of common stock as capital
assets. Moreover, this discussion is for general information only and does not
address all the tax consequences that may be relevant to you in light of your
personal circumstances, nor does it discuss special tax provisions, which may
apply to you if you relinquished United States citizenship or residence. This
discussion does not address all aspects of United States federal income and
estate taxes and does not deal with foreign, state and local consequences that
may be relevant to certain holders of common stock in light of their particular
personal circumstances.
EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT A TAX
ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF
PURCHASING, OWNING AND DISPOSING OF OUR COMMON STOCK AS WELL AS ANY TAX
CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY UNITED STATES STATE,
MUNICIPALITY OR OTHER TAXING JURISDICTION.
UNITED STATES HOLDERS
This subsection describes the tax consequences to a United States Holder of
owning and disposing of the common stock. You are a United States Holder if you
are a beneficial owner of shares of common stock and you are:
- a citizen or resident of the United States. You will be deemed to be a
resident if you are present in the United States for at least 31 days in
the calendar year and for an aggregate of at least 183 days during a
three-year period ending in the current calendar year. For these purposes
all the days present in the current year, one-third of the days present
in the immediately preceding year, and one-sixth of the days present in
the second preceding year are counted;
- a corporation, partnership or other entity created or organized under the
laws of the United States or political subdivision thereof;
- an estate whose income is subject to United States federal income tax
regardless of its source; or
- a trust if a United States court can exercise primary supervision over
the trust's administration and one or more United States persons are
authorized to control all substantial decisions of the trust.
If you are not a United States holder, this section does not apply to you
and you should refer to the section titled "Non-United States Holders" below.
DIVIDENDS
The amount of any distribution in respect of the common stock will be equal
to the amount of cash and the fair market value of property distributed, on the
date of distribution. Generally, distributions will be treated as a dividend,
subject to tax as ordinary income, to the extent of our current or accumulated
earnings and profits, then as a tax-free return of capital to the extent of a
holder's tax basis in the common stock, and thereafter, as gain from the sale or
exchange of the common stock, as described below. In general, a dividend
distribution to a corporate holder will qualify for the 70% dividends-received
deduction if the holder owns less than 20% of the voting power and value of our
outstanding stock (other than any non-voting, non-convertible, non-participating
preferred stock). A corporate United States Holder that owns 20% or more of the
voting power and value of our stock (other than any non-voting, non-convertible,
non-participating preferred stock) generally will qualify for an 80% dividends
received deduction. The dividends received deduction is subject to certain
holding period, taxable income, and other limitations.
68
United States Holders that are corporations should consult their own tax
advisors regarding the availability of the dividends received deduction to them
in light of their particular factual circumstances.
SALE OR EXCHANGE OF COMMON STOCK
Upon the sale or exchange of shares of common stock, you will generally
recognize gain or loss equal to the difference between (i) the amount of cash
proceeds and the fair market value of any property you receive on the sale or
exchange, and (ii) your adjusted federal income tax basis in the common stock.
Such gain or loss will generally constitute capital gain or loss and will be
long-term capital gain or loss if you have held the common stock for longer than
one year. Non-corporate taxpayers are generally subject to a maximum regular
federal income tax rate of 20% on net long-term capital gains, and 18% in the
case of property acquired after December 31, 2000 and held for over five years.
The deductibility of capital losses is subject to certain limitations. United
States Holders are urged to consult their own tax advisors with respect to the
rate of taxation of capital gains and the ability to deduct capital losses.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to dividends paid
with respect to the common stock and to the proceeds of the sale or exchange of
the common stock by you (unless you are an exempt recipient such as a
corporation). A backup withholding tax at a rate not to exceed 31% will apply to
such payments if you fail to file a Form W-9 or a substitute Form W-9, and
therefore fail either to provide a taxpayer identification number, furnish an
incorrect taxpayer identification number, fail to certify foreign or other
exempt status from backup withholding or fail to report in full dividend and
interest income.
Backup withholding is not an additional tax. Any amounts withheld from a
payment to you under the backup withholding rules will be allowed as a credit
against your United States federal income tax liability and may entitle you to a
refund, provided that the required information is furnished in a timely manner
to the Internal Revenue Service.
NON-UNITED STATES HOLDERS
A "non-United States Holder" is a beneficial owner of common stock that is
not a United States Holder. This subsection describes the tax consequences to
non-United States Holders of owning and disposing of the common stock.
DIVIDENDS
If dividends are paid, as a non-United States Holder, you will be subject
to withholding of United States federal income tax at a 30% rate or a lower rate
as may be specified by an applicable income tax treaty. To claim the benefit of
a lower rate under an income tax treaty, you must properly file with the payor
an Internal Revenue Service Form W-8BEN, or successor form, claiming an
exemption from or reduction in withholding under the applicable tax treaty. In
addition, where dividends are paid to a non-United States Holder that is a
partnership or other pass through entity, persons holding an interest in the
entity may need to provide certification claiming an exemption or reduction in
withholding under the applicable treaty.
If dividends are considered effectively connected with the conduct of a
trade or business by you within the United States and, where a tax treaty
applies, are attributable to a United States permanent establishment of yours,
those dividends will not be subject to withholding tax, but instead will be
subject to United States federal income tax on a net basis at applicable
graduated individual or corporate rates, provided an Internal Revenue Service
Form W-8ECI, or successor form, is filed with the payor. If you are a foreign
corporation, any effectively connected dividends may, under certain
circumstances, be subject to an additional "branch profits tax" at a rate of 30%
or a lower rate as may be specified by an applicable income tax treaty.
69
You must comply with the certification procedures described above, or, in
the case of payments made outside the United States with respect to an offshore
account, certain documentary evidence procedures, directly or under certain
circumstances through an intermediary, to obtain the benefits of a reduced rate
under an income tax treaty with respect to dividends paid with respect to your
common stock. In addition, if you are required to provide an Internal Revenue
Service Form W-8ECI or successor form, as discussed above, you must also provide
your tax identification number.
If you are eligible for a reduced rate of United States withholding tax
pursuant to an income tax treaty, you may obtain a refund of any excess amounts
withheld by filing an appropriate claim for refund with the Internal Revenue
Service.
GAIN ON DISPOSITION OF COMMON STOCK
As a non-United States Holder, you generally will not be subject to United
States federal income tax on any gain recognized on the sale or other
disposition of common stock unless:
1. the gain is considered effectively connected with the conduct of a
trade or business by you within the United States and, where a tax treaty
applies, is attributable to a United States permanent establishment of
yours (and, in which case, if you are a foreign corporation, you may be
subject to an additional branch profits tax equal to 30% or a lower rate as
may be specified by an applicable income tax treaty).
2. you are an individual who holds the common stock as a capital asset
and are present in the United States for 183 or more days in the taxable
year of the sale or other disposition and other conditions are met; or
3. we are or have been a "United States real property holding
corporation," or a USRPHC, for United States federal income tax purposes.
We believe that we are not currently, and are not likely not to become, a
USRPHC. If we were to become a USRPHC, then gain on the sale or other
disposition of common stock by you generally would not be subject to United
States federal income tax provided:
a. the common stock was "regularly traded on an established
securities market" within the meaning of Section 897(c)(3); and
b. you do not actually or constructively own more than 5% of the
common stock during the shorter of the five-year period preceding the
disposition or your holding period.
BACKUP WITHHOLDING AND INFORMATION REPORTING
We must report annually to the Internal Revenue Service and to each of you
the amount of dividends paid to you and the tax withheld with respect to those
dividends, regardless of whether withholding was required. Copies of the
information returns reporting those dividends and withholding may also be made
available to the tax authorities in the country in which you reside under the
provisions of an applicable income tax treaty or other applicable agreements.
Backup withholding is generally imposed at a rate not to exceed 31% on
certain payments to persons that fail to furnish the necessary identifying
information to the payor. You generally will be subject to backup withholding
tax with respect to dividends paid on your common stock at a rate not to exceed
31% rate unless you certify your non-United States status.
The payment of proceeds of a sale of common stock effected by or through a
United States office of a broker is subject to both backup withholding and
information reporting unless you provide the payor with your name and address
and you certify your non-United States status or you otherwise establish an
exemption. In general, backup withholding and information reporting will not
apply to the payment of the proceeds of a sale of common stock by or through a
foreign office of a broker. If, however, such broker is, for United States
federal income tax purposes, a United States person, a controlled foreign
corporation, a foreign person that derives 50% or more of its gross income for
certain periods from the conduct of a trade
70
or business in the United States, or, a foreign partnership that at any time
during its tax year either is engaged in the conduct of a trade or business in
the United States or has as partners one or more United States persons that, in
the aggregate, hold more than 50% of the income or capital interest in the
partnership, such payments will be subject to information reporting, but not
backup withholding, unless such broker has documentary evidence in its records
that you are a non-United States Holder and certain other conditions are met or
you otherwise establish an exemption.
Backup withholding is not an additional tax. Any amounts withheld from a
payment to you under the backup withholding rules will be allowed as a credit
against your United States federal income tax liability and may entitle you to a
refund, provided that the required information is furnished in a timely manner
to the Internal Revenue Service.
FEDERAL ESTATE TAX
If you are an individual, common stock held at the time of your death will
be included in your gross estate for United States federal estate tax purposes,
and may be subject to United States federal estate tax, unless an applicable
estate tax treaty provides otherwise. Recently enacted United States federal tax
legislation provides for reductions in United States federal estate tax through
2009 and the elimination of such estate tax entirely in 2010, so that the estate
tax generally has been repealed for decedents dying in 2010. Unless extended by
new legislation, however, the repeal expires and the estate tax is reinstated
beginning January 1, 2011.
71
UNDERWRITING
Salomon Smith Barney Inc. is acting as sole bookrunning lead manager of
this offering and, together with Credit Suisse First Boston Corporation, U.S.
Bancorp Piper Jaffray Inc. and First Union Securities, Inc., are acting as
representatives of the underwriters named below. Subject to the terms and
conditions stated in the underwriting agreement dated the date of this
prospectus, each underwriter named below has agreed to purchase, and we have
agreed to sell to that underwriter, the number of shares set forth opposite the
underwriter's name.
NUMBER
UNDERWRITER OF SHARES
----------- ---------
Salomon Smith Barney Inc....................................
Credit Suisse First Boston Corporation......................
U.S. Bancorp Piper Jaffray Inc..............................
First Union Securities, Inc.................................
---------
Total..................................................... 4,125,000
=========
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all the shares (other than those covered by the
over-allotment option described below) if they purchase any of the shares.
The underwriters propose to offer some of the shares directly to the public
at the public offering price set forth on the cover page of this prospectus and
some of the shares to dealers at the public offering price less a concession not
to exceed $ per share. The underwriters may allow, and dealers may
reallow, a concession not to exceed $ per share on sales to other
dealers. If all of the shares are not sold at the initial offering price, the
representatives may change the public offering price and the other selling
terms.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 618,750 additional shares of
common stock at the public offering price less the underwriting discount. The
underwriters may exercise the option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent the
option is exercised, each underwriter must purchase a number of additional
shares approximately proportionate to that underwriter's initial purchase
commitment.
We, our executive officers, directors, and some of our other stockholders,
including with respect to substantially all shares of our common stock currently
held by former institutional shareholders of Inform DX, will be subject to
restrictions providing that, until 90 days from the date of this prospectus, we
and they will not, without the prior written consent of Salomon Smith Barney,
dispose of or hedge any shares of our common stock or any securities convertible
into or exchangeable for our common stock, except that we may issue shares of
our common stock (1) pursuant to any of our employee stock option plans, stock
ownership plans or dividend reinvestment plans in effect at the time the
underwriting agreement is executed, (2) issuable upon the conversion of
securities or the exercise of warrants outstanding at the time the underwriting
agreement is executed or the satisfaction of contingencies under contingent
obligations to issue shares of our common stock in effect at the time the
underwriting agreement is executed and (3) in connection with acquisitions
provided that the recipients of shares of our common stock issued in connection
with acquisitions are bound by transfer restrictions no less restrictive than
those by which we are bound. In addition, CSFB Cayman International, LDC, one of
our stockholders, has agreed that, until November 30, 2001, it will not, without
the prior written consent of Salomon Smith Barney, dispose of or hedge (other
than to maintain any existing hedge position) any shares of our common stock or
any securities convertible into or exchangeable for our common stock. CSFB
Cayman International, LDC holds 557,016 shares of our common stock and has sold
557,016 shares of our common stock short. CSFB Cayman International, LDC, is an
affiliate of Credit Suisse First Boston Corporation, one of the
72
representatives. Salomon Smith Barney in its sole discretion may release any of
the securities subject to these lock-up agreements at any time without notice.
The following table shows the underwriting discounts and commissions that
we are to pay to the underwriters in connection with this offering. These
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of common stock.
PAID BY AMERIPATH
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
Per share................................................... $ $
Total....................................................... $ $
In connection with the offering, Salomon Smith Barney, on behalf of the
underwriters, may purchase and sell shares of common stock in the open market.
These transactions may include short sales, syndicate covering transactions and
stabilizing transactions. Short sales involve syndicate sales of common stock in
excess of the number of shares to be purchased by the underwriters in the
offering, which creates a syndicate short position. "Covered" short sales are
sales of shares made in an amount up to the number of shares represented by the
underwriters' over-allotment option. In determining the source of shares to
close out the covered syndicate short position, the underwriters will consider,
among other things, the price of shares available for purchase in the open
market as compared to the price at which they may purchase shares through the
over-allotment option. Transactions to close out the covered syndicate short
involve either purchases of the common stock in the open market after the
distribution has been completed or the exercise of the over-allotment option.
The underwriters may also make "naked" short sales of shares in excess of the
over-allotment option. The underwriters must close out any naked short position
by purchasing shares of common stock in the open market. The naked short
position is more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the shares in the open market
after pricing that could adversely affect investors who purchase in the
offering. Stabilizing transactions consist of bids for or purchases of shares in
the open market while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney repurchases shares originally sold by that syndicate member
in order to cover syndicate short positions or make stabilizing purchases.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the common stock. They may also cause the price
of the common stock to be higher than the price that would otherwise exist in
the open market in the absence of these transactions. The underwriters may
conduct these transactions on the Nasdaq National Market or in the
over-the-counter market, or otherwise. If the underwriters commence any of these
transactions, they may discontinue them at any time.
In addition, in connection with this offering, some of the underwriters
(and selling group members) may engage in passive market making transactions in
the common stock on the Nasdaq National Market, prior to the pricing and
completion of the offering. Passive market making consists of displaying bids on
the Nasdaq National Market no higher than the bid prices of independent market
maker and making purchases at prices no higher than those independent bids and
effected 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 period and
must be discontinued when that limit is reached. Passive market making may cause
the price of the common stock to be higher than the price that otherwise would
exist in the open market in the absence of those transactions. If the
underwriters commence passive market making transactions, they may discontinue
them at any time.
We estimate that our portion of the total expenses of this offering will be
$875,000.
73
The underwriters have performed investment banking and advisory services
for us from time to time for which they have received customary fees and
expenses. The underwriters may, from time to time, engage in transactions with
and perform services for us in the ordinary course of their business. We intend
to use the proceeds of this offering to repay existing indebtedness under our
credit facility. Because more than 10% of the proceeds from this offering will
be paid to affiliates of Salomon Smith Barney Inc., Credit Suisse First Boston
Corporation, U.S. Bancorp Piper Jaffray Inc. and First Union Securities, Inc.,
who are lenders under our credit facility, this offering is being conducted in
compliance with Rule 2710(c)(8) of the Conduct Rules of the National Association
of Securities Dealers. An affiliate of Credit Suisse First Boston Corporation
owns 557,016 shares of our common stock.
First Union Securities, Inc., one of the underwriters, is an indirect,
wholly-owned subsidiary of Wachovia Corporation. Wachovia Corporation conducts
its investment banking, institutional, and capital markets businesses through
its various bank, broker-dealer and nonbank subsidiaries (including First Union
Securities, Inc.) under the trade name of Wachovia Securities. Any references to
Wachovia Securities in this prospectus, however, do not include Wachovia
Securities, Inc., member NASD/SIPC and a separate broker-dealer subsidiary of
Wachovia Corporation and an affiliate of First Union Securities, Inc., which may
or may not be participating as a selling dealer in the distribution of the
securities offered by this prospectus.
A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters. The representatives may agree to
allocate a number of shares to underwriters for sale to their online brokerage
account holders. The representatives will allocate shares to underwriters that
may make Internet distributions on the same basis as other allocations. In
addition, shares may be sold by the underwriters to securities dealers who
resell shares to online brokerage account holders.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make because of any of those
liabilities.
LEGAL MATTERS
Alston & Bird LLP, Atlanta, Georgia, will pass upon the validity of the
Common Stock offered in this offering and certain other legal matters on behalf
of AmeriPath. Sidley Austin Brown & Wood, Chicago, Illinois, special health care
regulatory counsel for AmeriPath, will pass upon certain regulatory matters on
behalf of AmeriPath. Cravath, Swaine & Moore, New York, New York will pass upon
certain legal matters in connection with this offering on behalf of the
underwriters.
EXPERTS
The financial statements of AmeriPath, Inc. and its consolidated
subsidiaries, as of December 31, 2000 and 1999 and for each of the three years
in the period ended December 31, 2000, except the financial statements of
Pathology Consultants of America, Inc. (d/b/a "Inform DX") as of December 31,
1999 and for the years ended December 31, 1999 and 1998, included in this
prospectus have been audited by Deloitte & Touche LLP as stated in their report
included herein. The financial statements of Inform DX as of December 31, 1999
and for the two year period then ended consolidated with those of AmeriPath,
Inc. and not presented separately herein have been audited by Ernst & Young, LLP
as stated in their report included herein. Such financial statements of the
Company and its consolidated subsidiaries are included herein in reliance upon
the respective reports of such firms given upon their authority as experts in
accounting and auditing. All of the foregoing firms are independent auditors.
74
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the reporting requirements of the Securities Exchange Act
of 1934 and in accordance with its requirements file annual, quarterly and
current reports, proxy statements and other information with the Securities and
Exchange Commission. These reports, proxy statements and other information may
be obtained:
- At the public reference room of the Commission, Room 1024 -- Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;
- At the public reference facilities at the Commission's regional office
located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661;
- From the Commission, Public Reference Room, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549;
- At the offices of The Nasdaq Stock Market, Inc., Reports Section, 1735 K
Street, N.W., Washington, D.C. 20006; or
- From the internet site maintained by the Commission at
http://www.sec.gov, which contains reports, proxy and information
statements and other information regarding issuers, including us, that
file electronically with the Commission.
Some locations may charge prescribed rates or modest fees for copies. For
more information on the public reference room, call the Commission at
1-800-SEC-0330.
We filed with the Securities and Exchange Commission a registration
statement on Form S-3 (which contains this prospectus) under the Securities Act
of 1933, as amended, to register with the Securities and Exchange Commission the
shares of our common stock offered by this prospectus. This prospectus does not
contain all the information you can find in the registration statement or the
exhibits and schedules to the registration statement. For further information
with respect to us, and our common stock, please refer to the registration
statement, including the exhibits and schedules. You may inspect and copy the
registration statement, including the exhibits and schedules, as described
above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Securities and Exchange Commission allows us to "incorporate by
reference" the information that we file with them in other documents, which
means that we can disclose important information to you by referring to those
documents. The information incorporated by reference is considered to be part of
this prospectus, and later information that we file with the Securities and
Exchange Commission will automatically update and supersede this information.
This prospectus incorporates by reference the documents listed below and all
future documents filed with the Securities and Exchange Commission under
Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 until
the termination of the offering to which this prospectus relates:
- Current Report on Form 8-K, filed March 6, 2001;
- Current Report on Form 8-K, filed April 6, 2001;
- Current Report on Form 8-K, filed August 8, 2001;
- Current Report on Form 8-K, filed September 18, 2001;
- Current Report on Form 8-K, filed September 24, 2001;
75
- Annual Report on Form 10-K for the year ended December 31, 2000, filed
April 2, 2001, including those portions of our proxy statement for our
2001 annual meeting of stockholders that are incorporated into the Form
10-K by reference;
- Amendment No. 1 on Form 10-K/A to the Annual Report on Form 10-K for the
year ended December 31, 2000, filed August 8, 2001;
- Amendment No. 2 on Form 10-K/A to the Annual Report on Form 10-K for the
year ended December 31, 2000, filed October 19, 2001;
- Quarterly Report on Form 10-Q for the quarterly period ended March 31,
2001, filed May 15, 2001;
- Amendment No. 1 on Form 10-Q/A to the Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2001, filed October 19, 2001;
- Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2001, filed August 14, 2001;
- The description of common stock set forth in our Registration Statement
on Form 8-A, as filed on September 23, 1997 with the SEC pursuant to
Section 12 of the Exchange Act, and any amendment or report filed for the
purpose of updating such description; and
- The description of rights to purchase Series A Junior Participating
Preferred Stock set forth in our Registration Statement on Form 8-A, as
filed on April 16, 1999 with the SEC pursuant to Section 12 of the
Exchange Act, and any amendment or report filed for the purpose of
updating such description.
On written or oral request, we will provide at no cost to each person who
receives a copy of this prospectus, a copy of any or all of the documents
incorporated in this prospectus by reference. We will not provide exhibits to
any of the documents listed above, however, unless those exhibits are
specifically incorporated by reference into those documents. You should direct
your request to the Secretary of AmeriPath, 7289 Garden Road, Suite 200, Riviera
Beach, Florida 33404, telephone number (561) 845-1850.
You should rely only on the information that we incorporate by reference or
provide in this prospectus or any supplement. You should consider any statement
contained in a document incorporated or considered incorporated by reference
into this prospectus to be modified or superseded to the extent that a statement
contained in this prospectus, or in any other subsequently filed document that
is also incorporated or deemed to be incorporated by reference in this
prospectus, modifies or conflicts with the earlier statement. You should not
consider any statement modified or superseded, except as so modified or
superseded, to constitute a part of this prospectus. We have not authorized
anyone else to provide you with different information. You should not assume
that the information in this prospectus or any supplement is accurate as of any
date other than the date on the front of those documents.
76
AMERIPATH, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Condensed Consolidated Balance Sheets as of June 30, 2001
and December 31, 2000, (Unaudited)........................ F-2
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2001 and 2000
(Unaudited)............................................... F-3
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2001 and 2000 (Unaudited)........... F-4
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... F-5
AUDITED:
Independent Auditors' Reports............................... F-12
Consolidated Balance Sheets as of December 31, 1999 and
2000...................................................... F-14
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1999 and 2000.......................... F-15
Consolidated Statements of Redeemable Preferred Stock and
Common Stockholders' Equity for the Years Ended December
31, 1998, 1999 and 2000................................... F-16
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1999 and 2000.......................... F-17
Notes to Consolidated Financial Statements.................. F-18
F-1
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2001 2000
-------- ------------
(IN THOUSANDS)
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,489 $ 2,418
Accounts receivable, net.................................. 82,240 70,939
Inventories............................................... 1,396 1,406
Other current assets...................................... 10,666 11,446
-------- --------
Total current assets.............................. 96,791 86,209
-------- --------
PROPERTY AND EQUIPMENT, NET................................. 24,604 23,580
-------- --------
OTHER ASSETS:
Goodwill, net............................................. 196,688 177,263
Identifiable intangibles, net............................. 263,204 268,627
Other..................................................... 6,587 6,487
-------- --------
Total other assets................................ 466,479 452,377
-------- --------
TOTAL ASSETS...................................... $587,874 $562,166
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 34,073 $ 35,712
Current portion of long-term debt......................... 512 1,055
Other current liabilities................................. 10,226 8,627
-------- --------
Total current liabilities......................... 44,811 45,394
-------- --------
LONG-TERM LIABILITIES:
Revolving loan............................................ 209,000 197,216
Long-term debt............................................ 3,232 3,476
Other liabilities......................................... 7,970 2,369
Deferred tax liability.................................... 61,446 64,046
-------- --------
Total liabilities................................. 326,459 312,501
-------- --------
STOCKHOLDERS' EQUITY:
Common stock.............................................. 252 247
Additional paid-in capital................................ 191,103 188,050
Accumulated other comprehensive loss...................... (3,696) --
Retained earnings......................................... 73,756 61,368
-------- --------
Total stockholders' equity........................ 261,415 249,665
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $587,874 $562,166
======== ========
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
F-2
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
2001 2000 2001 2000
-------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NET REVENUES:
Net patient service revenue.......................... $ 97,335 $74,372 $189,059 $143,260
Net management service revenue....................... 7,717 6,562 14,738 12,717
-------- ------- -------- --------
Total net revenues........................... 105,052 80,934 203,797 155,977
-------- ------- -------- --------
OPERATING COSTS AND EXPENSES:
COST OF SERVICES:
Net patient service revenue.......................... 44,189 34,244 87,777 67,028
Net management service revenue....................... 5,201 4,582 10,045 8,748
-------- ------- -------- --------
Total cost of services....................... 49,390 38,826 97,822 75,776
Selling, general and administrative expenses........... 18,168 14,285 35,386 27,426
Provision for doubtful accounts........................ 12,548 8,349 23,206 15,452
Amortization expense................................... 4,654 3,897 9,180 7,734
Asset impairment and related charges................... -- 5,245 -- 5,245
Merger-related charges................................. -- -- 7,103 --
-------- ------- -------- --------
Total operating costs and expenses........... 84,760 70,602 172,697 131,633
-------- ------- -------- --------
INCOME FROM OPERATIONS................................. 20,292 10,332 31,100 24,344
-------- ------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense..................................... (4,695) (3,558) (9,437) (6,976)
Other, net........................................... 120 50 144 113
-------- ------- -------- --------
Total other expense.......................... (4,575) (3,508) (9,293) (6,863)
-------- ------- -------- --------
INCOME BEFORE INCOME TAXES............................. 15,717 6,824 21,807 17,481
PROVISION FOR INCOME TAXES............................. 6,570 3,852 9,419 8,411
-------- ------- -------- --------
NET INCOME............................................. 9,147 2,972 12,388 9,070
Induced conversion and accretion of redeemable
preferred stock...................................... -- (1,570) -- (1,604)
-------- ------- -------- --------
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS......... $ 9,147 $ 1,402 $ 12,388 $ 7,466
======== ======= ======== ========
BASIC EARNINGS PER COMMON SHARE:
Basic earnings per common share...................... $ 0.36 $ 0.06 $ 0.50 $ 0.33
======== ======= ======== ========
Basic weighted average shares outstanding............ 25,092 22,873 24,951 22,575
======== ======= ======== ========
DILUTED EARNINGS PER COMMON SHARE:
Diluted earnings per common share.................... $ 0.35 $ 0.06 $ 0.48 $ 0.32
======== ======= ======== ========
Diluted weighted average shares outstanding.......... 26,139 23,381 26,065 23,100
======== ======= ======== ========
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
F-3
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 12,388 $ 9,070
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 12,497 10,137
Loss on disposal of assets.................................. (38) 9
Deferred income taxes....................................... (2,600) (2,150)
Provision for doubtful accounts............................. 23,206 15,452
Asset impairment and related charges........................ -- 5,245
Merger-related charges...................................... 7,103 --
Changes in assets and liabilities (net of effects of
acquisitions):
Increase in accounts receivable........................... (34,507) (20,559)
Decrease in inventories................................... 10 107
Decrease in other current assets.......................... 743 618
(Increase)/decrease in other assets....................... (239) 81
Increase in accounts payable and accrued expenses......... 326 (185)
Pooling merger-related charges paid......................... (3,099) --
-------- --------
Net cash provided by operating activities......... 15,790 17,825
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment..................... (4,591) (3,828)
Merger-related charges paid............................... (402) (112)
Cash paid for acquisitions and acquisition costs, net of
cash acquired.......................................... (164) (507)
Payments of contingent notes.............................. (23,781) (16,247)
-------- --------
Net cash used in investing activities............. (28,938) (20,694)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants...... 2,235 106
Debt issuance costs....................................... (94) (70)
Principal payments on long-term debt...................... (706) (415)
Net borrowings under revolving loan....................... 11,784 8,775
-------- --------
Net cash provided by financing activities......... 13,219 8,396
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 71 5,527
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 2,418 1,713
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 2,489 $ 7,240
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................. $ 9,515 $ 6,932
Income taxes.............................................. $ 10,798 $ 12,466
Contingent stock issued..................................... $ 822 --
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
F-4
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements,
which include the accounts of AmeriPath, Inc. and its subsidiaries
(collectively, "AmeriPath" or the "Company"), have been prepared in accordance
with accounting principles generally accepted in the United States ("GAAP") for
interim financial reporting and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, the financial statements do not include all of the
information and notes required by GAAP for complete financial statements. In the
opinion of management, such interim financial statements contain all adjustments
(consisting of normal recurring items) considered necessary for a fair
presentation of the Company's financial position, results of operations and cash
flows for the interim periods presented. The results of operations and cash
flows for any interim periods are not necessarily indicative of results which
may be reported for the full year. On November 30, 2000, the Company acquired
Pathology Consultants of America, Inc., d/b/a Inform DX ("Inform DX"). In
connection with the acquisition, the Company issued approximately 2.6 million
shares of common stock in exchange for all the outstanding common stock of
Inform DX. In addition, the Company assumed certain obligations to issue shares
of common stock pursuant to outstanding Inform DX stock options and warrants.
This transaction was accounted for as a pooling of interests. All prior year
information has been restated to reflect the acquisition of Inform DX.
The accompanying unaudited interim financial statements should be read in
conjunction with the audited consolidated financial statements, and the notes
thereto, included elsewhere in this prospectus.
In order to maintain consistency and comparability between periods
presented, certain amounts have been reclassified in order to conform with the
financial statement presentation of the current period.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements, which provided the staff's views in applying GAAP to selected
revenue recognition issues. In June 2000, SAB 101 was amended by SAB 101B, which
delayed the implementation of SAB 101 until no later than the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. The Company adopted
SAB 101 in the fourth quarter of 2000. The adoption of the provisions of SAB 101
did not have a material impact on the Company's financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133") and in June 1999, the FASB
issued Statement of Financial Accounting Standards No. 137 "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133," which delayed the effective date the Company is
required to adopt SFAS 133 until its fiscal year 2001. In June 2000, the FASB
issued Statement of Financial Accounting Standards No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities -- an Amendment to
FASB Statement No. 133." This statement amended certain provisions of SFAS 133.
SFAS 133 requires the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company does not
enter into derivative financial instruments for trading purposes. The adoption
of SFAS 133 did not result in a cumulative effect adjustment being recorded to
net income for the change in accounting. However, the
F-5
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company recorded a transition adjustment of approximately $3.0 million (net of
tax of $2.0 million) in accumulated other comprehensive loss on January 1, 2001.
See Notes 9 and 10 to the unaudited condensed consolidated financial statements.
In September 2000, FASB issued Statement of Financial Accounting Standards
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 140"). SFAS 140 is a replacement of
Statement of Financial Accounting Standards No. 125. SFAS 140 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities occurring after March 31, 2001. The
Company has evaluated this standard and has concluded that the provisions of
SFAS 140 will not have a significant effect on the financial condition or
results of operations of the Company.
In July 2001, FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" ("SFAS 141"). SFAS 141 requires the purchase method
of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The Company does not believe that
the adoption of SFAS 141 will have a significant impact on its financial
statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which is effective
January 1, 2002. SFAS 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
Company is currently assessing but has not yet determined the impact of SFAS 142
on its financial position and results of operations.
NOTE 2 -- ACQUISITIONS
There were no acquisitions made in the first six months of 2001.
The accompanying unaudited financial statements include the results of
operations of the Company's 2000 acquisitions from the date acquired through
June 30, 2001. The allocation of the purchase price of some of the acquisitions
occurring in the latter half of 2000 are preliminary, while the Company
continues to obtain the information necessary to determine the fair value of the
assets acquired and liabilities assumed. When the Company obtains such final
information, management believes that adjustments, if any, will not be material
in relation to the consolidated financial statements.
The following unaudited pro forma information presents the consolidated
results of the Company's operations and the results of operations of the
acquisitions for the six months ended June 30, 2000, after giving effect to
amortization of goodwill and identifiable intangible assets, interest expense on
debt incurred in connection with these acquisitions, and the reduced level of
certain specific operating expenses (primarily compensation and related expenses
attributable to former owners) as if the acquisitions had been consummated on
January 1, 2000. Such unaudited pro forma information is based on historical
financial information with respect to the acquisitions and does not include
operational or other changes which might have been effected by the Company.
The unaudited pro forma information for the six months ended June 30, 2000
presented below is for illustrative information purposes only and is not
indicative of results which would have been achieved or results which may be
achieved in the future. There is no pro forma information presented for the six
F-6
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
months ended June 30, 2001, since there were no acquisitions made during the
first six months of 2001. These amounts are in thousands, except per share
amounts.
PRO FORMA
SIX MONTHS ENDED
JUNE 30, 2000
----------------
(UNAUDITED)
Net revenues................................................ $176,134
========
Net income attributable to common stockholders.............. $ 8,806
========
Diluted earnings per common share........................... $ 0.33
========
NOTE 3 -- INTANGIBLE ASSETS
Intangible assets and the related accumulated amortization and amortization
periods are set forth below (dollars in thousands):
JUNE 30, 2001
AMORTIZATION
PERIODS
(YEARS)
----------------
JUNE 30, DECEMBER 31, WEIGHTED
2001 2000 RANGE AVERAGE
-------- ------------ ----- --------
Hospital contracts.............................. $211,738 $211,738 25-40 31.5
Physician client lists.......................... 71,447 71,447 10-30 19.9
Laboratory contracts............................ 4,543 4,543 10 10.0
Management service agreement.................... 11,379 11,214 25 25.0
-------- --------
299,107 298,942
Accumulated amortization........................ (35,903) (30,315)
-------- --------
Identifiable intangibles, net................... $263,204 $268,627
======== ========
Goodwill........................................ $216,247 $193,231 10-35 29.2
Accumulated amortization........................ (19,559) (15,968)
-------- --------
Goodwill, net................................... $196,688 $177,263
======== ========
The weighted average amortization period for identifiable intangible assets
and goodwill is 27.7 years.
NOTE 4 -- MERGER-RELATED CHARGES
In connection with the Inform DX merger and other previous acquisitions,
the Company has recorded reserves for transaction costs, employee-related costs
(including severance agreement payouts) and various exit costs associated with
the consolidation of certain operations, including the elimination of duplicate
facilities and certain exit and restructuring costs. During the first quarter of
2001, the Company recorded merger-related costs totaling $7.1 million related to
the Inform DX merger. As part of the Inform DX acquisition, the Company is
closing or consolidating certain facilities.
F-7
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the activity for the six months ended June 30, 2001
with respect to the merger-related reserves is as follows:
BALANCE STATEMENT OF BALANCE
DECEMBER 31, OPERATIONS JUNE 30,
2000 CHARGES PAYMENTS 2001
------------ ------------ -------- --------
Transaction costs................................... $ 1,726 $2,863 $(2,242) $ 2,347
Employee termination costs.......................... 1,417 4,240 (1,090) 4,567
Lease commitments................................... 2,128 -- (169) 1,959
Other exit costs.................................... 263 -- -- 263
------- ------ ------- -------
Total..................................... 5,534 $7,103 $(3,501) 9,136
====== =======
Less: portion included in current liabilities....... (3,165) (4,862)
------- -------
Total included in other liabilities....... $ 2,369 $ 4,274
======= =======
NOTE 5 -- MARKETABLE SECURITIES
The Company accounts for investments in certain debt and equity securities
under the provisions of Statement of Financial Accounting Standards No. 115
("SFAS No. 115"), "Accounting for Certain Debt and Equity Securities". Under
SFAS No. 115, the Company must classify its debt and marketable equity
securities in one of three categories: trading, available-for-sale, or
held-to-maturity.
In September 2000, the Company made a $1 million investment in Genomics
Collaborative, Inc ("GCI") for which it received 333,333 shares of Series D
Preferred Stock, par value $0.01. The shares of GCI Series D Preferred Stock are
convertible into shares of GCI common stock on a one-for-one basis and are
redeemable after 2005 at $3.00 per share at the option of the holder. GCI is a
privately held, start-up company, which has a history of operating losses. As of
June 30, 2001, it appears that GCI has sufficient cash to fund operations for
the next twelve months. In the event that they are unable to become profitable
and/or raise additional funding, it could result in an impairment of our
investment. This available for sale security is recorded at its estimated fair
value, which approximates cost, and is classified as other assets on the
Company's balance sheet. At June 30, 2001, there were no unrealized gains or
losses associated with this investment.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
Liability Insurance. The Company is insured with respect to general
liability on an occurrence basis and medical malpractice risks on a claims made
basis. The Company records an estimate of its liabilities for claims incurred
but not reported. Such liabilities are not discounted. Effective July 1, 2000,
the Company changed its medical malpractice carrier and the Company is currently
in a dispute with its former insurance carrier on an issue related to the
applicability of surplus insurance coverage. The Company believes that an
unfavorable resolution, if any, of such dispute would not have a material
adverse effect on the Company's financial position or results of operations.
Healthcare Regulatory Environment and Reliance on Government Programs. The
health care industry in general, and the services that the Company provides, are
subject to extensive federal and state laws and regulations. Additionally, a
significant portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
increased regulatory audits and adjustments, or changes in the interpretation of
the coding of services or the amounts payable for the Company's services under
these programs could have a material
F-8
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adverse effect on the Company's financial position and results of operations.
The Company's operations are continuously subject to review and inspection by
regulatory authorities.
Internal Revenue Service Examination. The Internal Revenue Service ("IRS")
conducted an examination of the Company's federal income tax returns for the tax
years ended December 31, 1996 and 1997 and concluded that no changes to the tax
reported needed to be made. Although the Company believes it is in compliance
with all applicable IRS rules and regulations, if the IRS should determine the
Company is not in compliance in any other years, it could have a material
adverse effect on the Company's financial position and results of operations.
Employment Agreements. The Company has entered into employment agreements
with certain of its management employees, which include, among other terms,
noncompetition provisions and salary continuation benefits.
NOTE 7 -- EARNINGS PER SHARE
Earnings per share is computed and presented in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic
earnings per share, which excludes the effects of any dilutive common equivalent
shares that may be outstanding, such as shares issuable upon the exercise of
stock options and warrants, is computed by dividing net income attributable to
common stockholders by the weighted average number of common shares outstanding
for the respective periods. Diluted earnings per share gives effect to the
potential dilution that could occur upon the exercise of certain stock options
and warrants that were outstanding at various times during the respective
periods presented. The dilutive effects of stock options and warrants are
calculated using the treasury stock method.
Basic and diluted earnings per share for the respective periods are set
forth in the table below (amounts in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
Earnings Per Common Share:
Net income attributable to common stockholders...... $ 9,147 $ 1,402 $12,388 $ 7,466
======= ======= ======= =======
Basic earnings per common share..................... $ 0.36 $ 0.06 $ 0.50 $ 0.33
======= ======= ======= =======
Diluted earnings per common share................... $ 0.35 $ 0.06 $ 0.48 $ 0.32
======= ======= ======= =======
Basic weighted average shares outstanding............. 25,092 22,873 24,951 22,575
Effect of dilutive stock options and warrants......... 1,047 508 1,114 525
------- ------- ------- -------
Diluted weighted average shares outstanding........... 26,139 23,381 26,065 23,100
======= ======= ======= =======
Options to purchase 78,845 and 847,095 shares, 967,395 and 755,355 shares,
of common stock which were outstanding for the quarter and six months ended June
30, 2001 and 2000, respectively, have been excluded from the calculation of
diluted earnings per share for each period, because their effect would be
anti-dilutive. Warrants to purchase 38,867 shares for the three and six months
ended June 30, 2000, were excluded from the calculation of diluted earnings per
share because their effect would be anti-dilutive.
F-9
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- LONG TERM DEBT
On June 11, 2001 the Company increased committed funding from $230 million
to $282.5 million under its existing credit facility. Citicorp, USA, Inc.
committed $37.5 million and agreed to serve as documentation agent for the
credit facility. Credit Suisse First Boston committed $15 million.
On March 29, 2001, the Company and its lenders executed an amendment
("Amendment No. 3") to its Credit Facility, dated December 16, 1999, which
excluded an additional $5.4 million, or $28.3 million in total, of charges from
its covenant calculations. In addition, Amendment No. 3 (i) increased the
Company's borrowing rate by 37.5 basis points; (ii) requires the Company to use
a minimum of 30% equity for all acquisitions; (iii) requires the Company to use
no more than 20% of consideration for acquisitions in the form of contingent
notes and; (iv) requires lender approval of all acquisitions with a purchase
price greater than $10 million. The Company paid an amendment fee of up to 30
basis points to those lenders which consented to the amendment. The amendment
fee was approximately $600,000. The amendment is not expected to have an adverse
effect on the Company's operations or strategies.
NOTE 9 -- INTEREST RATE RISK MANAGEMENT
The Company utilizes interest rate swap contracts to effectively convert a
portion of its floating-rate obligations to fixed-rate obligations. Under SFAS
133, the Company accounts for its interest rate swap contracts as cash flow
hedges whereby the fair value of the related interest rate swap agreement is
reflected in other comprehensive loss with the corresponding liability being
recorded as a component of other liabilities on the condensed consolidated
balance sheet. The Company has no ineffectiveness with regard to its interest
rate swap contracts as each interest rate swap agreement meets the criteria for
accounting under the short-cut method as defined in SFAS 133 for cash flow
hedges of debt instruments. The Company uses derivative financial instruments to
reduce interest rate volatility and associated risks arising from the floating
rate structure of its Credit Facility. Such derivative financial instruments are
not held or issued for trading purposes. The Company is required by the terms of
its Credit Facility to keep some form of interest rate protection in place. The
effectiveness of the strategies will be monitored, measuring the intended
benefit or cost of protection against the actual market conditions.
NOTE 10 -- COMPREHENSIVE INCOME
The Company includes changes in the fair value of certain derivative
financial instruments which qualify for hedge accounting in comprehensive
income. For the six months ended June 30, 2001, comprehensive income was
approximately $8.7 million. This includes a transition adjustment recorded on
January 1, 2001 of $3.0 million (net of tax of $2.0 million). The difference
between net income and comprehensive income for the six months ended June 30,
2001, is as follows (in thousands):
Net income.................................................. $12,388
Change in fair value of derivative financial instruments,
net of tax of $2,463...................................... (3,696)
-------
Comprehensive income........................................ $ 8,692
=======
NOTE 11 -- SEGMENT REPORTING
The Company has two reportable segments, Owned and Managed practices. The
segments were determined based on the type of service and customer. Owned
practices provide anatomic pathology services to hospitals and referring
physicians, while under the management relationships the Company provides
management services to the affiliated physician groups. The accounting policies
of the segments are the same as those described in the summary of accounting
policies. The Company evaluates
F-10
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
performance based on revenue and income before amortization of intangibles,
merger-related charges, asset impairment charges, interest expense, other income
and expense and income taxes ("Operating Income"). In addition to the business
segments above, the Company evaluates certain corporate expenses which are not
allocated to the business segments.
The following is a summary of the financial information for the three and
six months ended June 30 for the business segments and corporate.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
OWNED
Net patient service revenue............................. $97,335 $74,372 $189,059 $143,260
Operating income........................................ 30,488 24,551 57,814 45,935
Segment assets.......................................... 301,498 201,503
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------- -----------------
2001 2000 2001 2000
------ ------ ------- -------
MANAGED
Net management service revenue.............................. $7,717 $6,562 $14,738 $12,717
Operating income............................................ 1,152 1,173 2,281 1,421
Segment assets.............................................. 21,950 16,531
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
CORPORATE
Operating loss.......................................... $(6,694) $(6,250) $(12,712) $(10,033)
Segment assets.......................................... 294,489 325,259
Elimination of intercompany accounts.................... (30,063) (27,497)
NOTE 12 -- SUBSEQUENT EVENTS
Subsequent to June 30, 2001, the Company paid approximately $1.5 million on
contingent notes issued in connection with previous acquisitions as additional
purchase price.
During the third quarter of 2001, two pathologists in our Birmingham,
Alabama practice terminated their employment with us and opened their own
pathology lab. As a result, we no longer have an operating lab in Alabama. We
have implemented a strategy to retain our Alabama customers and service them
through other AmeriPath facilities. If we are unable to retain these customers
we could incur a non-cash asset impairment charge, which would not exceed $3.9
million in the aggregate, and possibly a charge for other related non-recurring
costs. If such charges are necessary, depending upon the magnitude of the
charges, we may have to seek a waiver from our lenders to avoid violating a
covenant under our credit facility.
F-11
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of AmeriPath, Inc.:
We have audited the consolidated balance sheets of AmeriPath, Inc. and
subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related
consolidated statements of operations, redeemable preferred stock and common
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits. The consolidated financial statements
give retroactive effect to the merger of AmeriPath, Inc. and subsidiaries and of
Pathology Consultants of America, Inc. (d/b/a "Inform DX"), which has been
accounted for as a pooling of interests as described in Note 3 to the
consolidated financial statements. We did not audit the balance sheet of Inform
DX as of December 31, 1999, or the related statements of operations,
stockholders' equity, and cash flows of Inform DX for the years ended December
31, 1999 and 1998, which statements reflect total assets of $28,786,000 as of
December 31, 1999, and total revenues of $24,652,000 and $16,012,000 for the
years ended December 31, 1999 and 1998, respectively. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Inform DX for 1999
and 1998, is based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Miami, Florida
March 29, 2001
F-12
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Pathology Consultants of America, Inc. and Subsidiaries
We have audited the consolidated balance sheets of Pathology Consultants of
America, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended (not presented separately herein). 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Pathology Consultants of America, Inc. and subsidiaries at December 31, 1999 and
1998, and the consolidated results of their operations and their cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States.
Ernst & Young LLP
Nashville, Tennessee
March 24, 2000
F-13
AMERIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------
1999 2000
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 1,713 $ 2,418
Accounts receivable, net.................................... 57,788 70,939
Inventories................................................. 995 1,406
Deferred tax asset.......................................... 5,405 8,593
Other current assets........................................ 2,468 2,853
-------- --------
Total current assets.............................. 68,369 86,209
-------- --------
PROPERTY AND EQUIPMENT, NET................................. 16,540 23,580
-------- --------
OTHER ASSETS:
Goodwill, net............................................... 143,383 177,263
Identifiable intangibles, net............................... 246,394 268,627
Other....................................................... 4,210 6,487
-------- --------
Total other assets................................ 393,987 452,377
-------- --------
TOTAL ASSETS...................................... $478,896 $562,166
======== ========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses....................... $ 21,337 $ 35,712
Due to managed practices.................................... 2,853 4,055
Current portion of long-term debt........................... 698 808
Current portion of capital lease obligations................ 232 247
Accrued merger-related charges.............................. 275 3,165
Other current liabilities................................... 518 1,407
-------- --------
Total current liabilities......................... 25,913 45,394
-------- --------
LONG-TERM LIABILITIES:
Revolving loan.............................................. 165,800 197,216
Other notes payable, less current portion................... 73 197
Subordinated notes, less current portion.................... 1,206 2,843
Capital lease obligations, less current portion............. 605 436
Accrued merger-related charges, less current portion........ 912 2,369
Other liabilities........................................... 148 --
Deferred tax liability...................................... 62,521 64,046
-------- --------
Total long-term liabilities....................... 231,265 267,107
-------- --------
REDEEMABLE PREFERRED STOCK.................................. 15,504 --
-------- --------
COMMITMENTS AND CONTINGENCIES
(Notes 3, 14 and 18)
COMMON STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 30,000 shares authorized,
22,271 and 24,734 shares issued and outstanding at
December 31, 1999 and 2000, respectively.................. 223 247
Additional paid-in capital.................................. 156,111 188,050
Retained earnings........................................... 49,880 61,368
-------- --------
Total common stockholders' equity................. 206,214 249,665
-------- --------
TOTAL LIABILITIES AND COMMON STOCKHOLDERS'
EQUITY........................................... $478,896 $562,166
======== ========
See accompanying notes to consolidated financial statements.
F-14
AMERIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
NET REVENUE:
Net patient service revenues.............................. $177,304 $233,269 $308,365
Net management service revenues........................... 16,012 24,163 21,729
-------- -------- --------
Net revenue............................................ 193,316 257,432 330,094
-------- -------- --------
OPERATING COSTS AND EXPENSES:
COST OF SERVICES:
Cost of services -- patient service revenues.............. 78,568 108,408 146,426
Cost of services -- management service revenues........... 9,132 14,277 16,964
-------- -------- --------
Cost of services....................................... 87,700 122,685 163,390
Selling, general and administrative expense................. 36,709 47,159 58,411
Provision for doubtful accounts............................. 18,698 25,289 34,040
Amortization expense........................................ 9,615 12,827 16,172
Merger-related charges...................................... -- -- 6,209
Asset impairment and related charges........................ -- -- 9,562
-------- -------- --------
Total operating costs and expenses................ 152,722 207,960 287,784
-------- -------- --------
INCOME FROM OPERATIONS...................................... 40,594 49,472 42,310
Interest expense............................................ (8,560) (9,573) (15,376)
Other income, net........................................... 150 286 226
-------- -------- --------
Income before income taxes.................................. 32,184 40,185 27,160
Provision for income taxes.................................. 13,941 17,474 14,068
-------- -------- --------
NET INCOME.................................................. 18,243 22,711 13,092
Induced conversion and accretion of redeemable preferred
stock..................................................... (75) (131) (1,604)
-------- -------- --------
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS.............. $ 18,168 $ 22,580 $ 11,488
======== ======== ========
Basic Earnings Per Common Share:
Basic weighted average shares outstanding................. 20,911 21,984 23,473
======== ======== ========
Basic earnings per common share........................... $ 0.87 $ 1.03 $ 0.49
======== ======== ========
Diluted Earnings Per Common Share:
Diluted weighted average shares outstanding............... 21,610 22,516 24,237
======== ======== ========
Diluted earnings per common share......................... $ 0.84 $ 1.00 $ 0.47
======== ======== ========
See accompanying notes to consolidated financial statements.
F-15
AMERIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
REDEEMABLE
PREFERRED STOCK COMMON STOCKHOLDERS' EQUITY
----------------- ---------------------------------------
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------ -------- ------ ------ ---------- --------
(IN THOUSANDS)
BALANCE, DECEMBER 31, 1997................. -- $ -- 19,931 $199 $136,272 $ 9,132
Stock issued in connection with
acquisitions.......................... -- -- 1,788 18 16,208 --
Advance stock subscription issued to
Affiliated Practices.................. -- -- 2 -- 9 --
Exercise of options and warrants......... -- -- 27 -- 263 --
Tax benefit from stock options........... -- -- -- -- 109 --
Issuance of Series A redeemable preferred
stock................................. 395 15,298 -- -- -- --
Accretion of redeemable preferred
stock................................. -- 75 -- -- -- --
Net income............................... -- -- -- -- -- 18,168
---- -------- ------ ---- -------- -------
BALANCE, DECEMBER 31, 1998................. 395 15,373 21,748 217 152,861 27,300
Stock issued in connection with
acquisitions.......................... -- -- 511 5 3,144 --
Exercise of options and warrants......... -- -- 12 1 15 --
Tax benefit from stock options........... -- -- -- -- 91 --
Accretion of redeemable preferred
stock................................. -- 131 -- -- -- --
Net income............................... -- -- -- -- -- 22,580
---- -------- ------ ---- -------- -------
BALANCE, DECEMBER 31, 1999................. 395 15,504 22,271 223 156,111 49,880
Stock issued in connection with
acquisitions.......................... -- -- 1,532 15 12,165 --
Exercise of options and warrants......... -- -- 288 3 1,584 --
Tax benefit from stock options........... -- -- -- -- 858 --
Accretion of redeemable preferred
stock................................. -- 65 -- -- -- --
Redemption of preferred stock............ (395) (15,569) 643 6 17,102 --
Lapse of warrant put option.............. -- -- -- -- 230 --
Net income............................... -- -- -- -- -- 11,488
---- -------- ------ ---- -------- -------
BALANCE, DECEMBER 31, 2000................. -- $ -- 24,734 $247 $188,050 $61,368
==== ======== ====== ==== ======== =======
See accompanying notes to consolidated financial statements.
F-16
AMERIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 18,243 $ 22,711 $ 13,092
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization............................. 12,601 16,758 21,291
Miscellaneous amortization and other...................... 220 49 22
Deferred income taxes..................................... (3,607) (2,006) (9,117)
Provision for doubtful accounts........................... 18,698 25,289 34,040
Asset impairment and related charges...................... -- -- 9,562
Accretion of put warrants................................. 54 92 --
Merger-related charges.................................... -- -- 6,209
Changes in assets and liabilities (net of effects of
acquisitions):
Increase in accounts receivable........................ (27,577) (31,756) (40,008)
Increase in inventories................................ (417) (39) (411)
(Increase) decrease in other current assets............ (4,321) 2,382 (265)
Decrease (increase) in other assets.................... 296 (731) (1,638)
Increase (decrease) in due to from managed practices... 2,744 (1,717) 1,202
Increase in accounts payable and accrued expenses...... 3,545 1,661 1,756
Pooling merger-related charges paid....................... -- -- (3,800)
-------- -------- --------
Net cash flows provided by operating activities... 20,479 32,693 31,935
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment..................... (4,393) (8,716) (9,235)
Cash paid for acquisitions and acquisition costs, net of
cash acquired.......................................... (60,472) (51,643) (24,929)
Other merger-related charges paid......................... (1,779) (1,741) (2,396)
Investment in Genomics Collaborative, Inc................. -- -- (1,000)
Decrease in restricted cash............................... 21 229 --
Payments of contingent notes.............................. (7,789) (17,440) (26,645)
-------- -------- --------
Net cash flows used in investing activities....... (74,412) (79,311) (64,205)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving loan....................... 53,069 44,713 31,416
Principal payments on long-term debt and capital leases... (9,966) (1,701) (818)
Debt issuance costs....................................... (496) (1,171) (82)
Net proceeds from sale of redeemable preferred stock...... 15,298 -- --
Tax benefit from stock options............................ 109 91 858
Other..................................................... -- -- 14
Proceed from issuance of common stock under stock option
plans and warrants..................................... 272 16 1,587
-------- -------- --------
Net cash flows provided by financing activities... 58,286 41,948 32,975
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 4,353 (4,670) 705
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 2,030 6,383 1,713
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 6,383 $ 1,713 $ 2,418
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................................. $ 8,034 $ 8,924 $ 14,645
Income taxes.............................................. $ 17,833 $ 15,890 $ 23,798
See accompanying notes to consolidated financial statements.
F-17
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BUSINESS AND ORGANIZATION
AmeriPath, Inc. and subsidiaries ("AmeriPath" or the "Company") was
incorporated in February 1996 to be the largest integrated physician group
practice focused on anatomic pathology diagnostic services, based on an analysis
of geographic breadth, number of physicians, number of hospital contracts,
number of practices and net revenues. Since the first quarter of 1996, the
Company has completed the acquisition of 49 physician practices located in
twenty-one states. The Company's 425 pathologists provide medical diagnostic
services in 42 outpatient laboratories owned and operated by the Company, and in
235 hospitals and associated outpatient surgery centers.
On November 30, 2000, the Company acquired Pathology Consultants of
America, Inc., d/b/a Inform DX ("Inform DX"). In connection with the
acquisition, the Company issued approximately 2.6 million shares of common stock
in exchange for all the outstanding common stock of Inform DX. In addition, the
Company assumed certain obligations to issue shares of common stock pursuant to
outstanding Inform DX stock option plans. This transaction was accounted for as
a pooling of interests. All prior years information has been restated to reflect
the acquisition of Inform DX.
Anatomic and clinical pathology diagnostic services are provided under
contractual arrangements with hospitals and in free-standing, independent
laboratory settings. The contractual arrangements with hospitals vary, but
essentially provide that, in exchange for physician representatives of the
Company serving as the medical director of a hospital's anatomic and clinical
laboratory operations, the Company is able to bill and collect the professional
component of the charges for medical services rendered by the Company's
pathologists. In some cases, the Company is also paid an annual fee for
providing the medical director for the hospital's clinical laboratory. The
Company also owns and operates outpatient pathology laboratories, for which it
bills patients and third party payors, principally on a fee-for-service basis,
covering both the professional and technical components of such services. In
addition, the Company contracts directly with national clinical laboratories,
principally on a fee-for-service basis.
The Company operates using either an ownership or employment model or a
management or equity model. Under management or equity model, the Company
acquires certain assets of and operates pathology practices under long-term
service agreements with affiliated physician groups (the "Managed Practices").
The Company provides facilities and equipment as well as administrative and
technical support for the affiliated physician groups under service agreements.
Through its ownership or employment model, the Company acquires a controlling
equity (voting) interest or has a controlling financial interest in the
pathology practice (the "Owned Practices").
Corporate practice of medicine restrictions generally prohibit corporate
entities from employing or otherwise exercising control over physicians. In
states that do not prohibit a for-profit corporation from employing physicians
such as Florida, Alabama, Mississippi and Kentucky, AmeriPath operates its Owned
Practices through Practice Subsidiaries, which are subsidiary corporations of
AmeriPath that directly employ the physicians. In states that prohibit a
for-profit corporation from employing physicians, such as Texas, Indiana, Ohio,
North Carolina, Michigan, Wisconsin, New York and Pennsylvania, AmeriPath
operates each Owned Practice through a Manager Subsidiary, which is a subsidiary
of AmeriPath that has a long-term management agreement with the applicable PA
Contractor, which in turn employs the physicians. In many cases, several
Practices are included within or organized under a single Practice Subsidiary or
PA Contractor, as the case may be.
Owned Practices. Owned practices are operated through Manager and Practice
Subsidiaries. The Manager and Practice Subsidiaries are wholly-owned
subsidiaries of AmeriPath and the officers and directors of such companies are
generally members of AmeriPath's executive management team. The
F-18
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial statements of the Manager and Practice Subsidiaries are included in
the consolidated financial statements of AmeriPath.
Ownership and Management of the PA Contractors. The PA Contractors are
entities which have contractual relationships with the Company but are not owned
directly by AmeriPath. These entities can be a professional corporation or
professional association, as permitted and defined in various state statutes.
The PA Contractors operating in North Carolina, Wisconsin, New York, Michigan
and Pennsylvania are owned by physicians affiliated with AmeriPath. To the
extent permitted by law, the officers and directors of the PA Contractors are
members of AmeriPath's executive management team. However, in states where law
prohibits such non-licensed physician personnel from serving as an officer or
director of a PA Contractor, eligible affiliated physicians serve in such
positions. The affiliated physicians who own PA Contractors have entered into
agreements with AmeriPath that generally (i) prohibit such affiliated physicians
from transferring their ownership interests in the PA Contractor, except in very
limited circumstances and (ii) require such affiliated physicians to transfer
their ownership in the PA Contractor to designees of AmeriPath upon the
occurrence of specified events.
The PA Contractors in Ohio and Indiana are owned by trusts. The beneficiary
of such trusts is AmeriPath and the Trustees of such trusts are affiliated
physicians. The PA Contractors operating in Texas are organized as
not-for-profit 5.01(a) corporations. The sole member of the not-for-profit PA
Contractors in Texas is AmeriPath.
Each PA Contractor is party to a long-term management agreement with one of
the Company's Manager Subsidiaries. Under the terms of these management
agreements, AmeriPath generally provides all non-medical and administrative
support services to the practices including accounting and financial reporting,
human resources, payroll, billing, and employee benefits administration. In
addition, the management agreements give the Manager Subsidiaries certain rights
with respect to the management of the non-medical operations of the PA
Contractors. The management agreements require the PA Contractors to pay a
management fee to the applicable Manager Subsidiaries. The fee structure is
different for each Practice based upon various factors, including applicable
law, and includes fees based on a percentage of earnings, performance-based
fees, and flat fees that are adjusted from time to time.
In accordance with Emerging Issues Task Force 97-2: "Application of FASB
Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Agreements"
("EITF 97-2"), the financial statements of the PA Contractors are included in
the consolidated financial statements of AmeriPath since AmeriPath has a
controlling interest in the PA Contractor.
Managed Practices. The term Managed Practices refers to AmeriPath's
operation and management of pathology practices under long-term service
agreements with affiliated physician groups. Generally, the Company acquires the
practice's assets, and the physician groups maintain their separate corporate or
partnership entities and enter into employment and noncompete agreements with
the practicing physicians. Costs of obtaining service agreements are amortized
using the straight-line method over 25 years.
Service agreements represent the exclusive right to operate the Company's
practices in affiliation with the related physician groups during the term of
the agreements. Pursuant to the service agreements, the Company provides the
physician groups with equipment, supplies, support personnel, and management and
financial advisory services. Physician groups are responsible for the
recruitment and hiring of physicians and all other personnel who provide
pathological services, and for all issues related to the professional, clinical
and ethical aspects of the practice. As part of the service agreements,
physician groups are required to maintain medical malpractice insurance which
names the Company as an additional insured. The Company is also required to
maintain general liability insurance and name the physician groups as additional
insureds. Upon termination of the service agreements, the respective physician
groups are
F-19
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
required to obtain continuing liability insurance coverage under either a "tail
policy" or a "prior acts policy."
The management services fees charged under the service agreements are based
on a predetermined percentage of net operating income of the Managed Practices.
Management service revenue is recognized by the Company at the time physician
service revenue is recorded by the physician group. The Company also
participates to varying degrees in non-physician revenues generated from
ancillary services offered through the laboratories. The Company charges a
capital fee for the use of depreciable assets owned by the Company and
recognizes revenue for all practice expenses that are paid on behalf of the
practices. Practice expenses exclude the salaries and benefits of the
physicians.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies followed by the Company are as
follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of AmeriPath, Inc., its wholly-owned subsidiaries, and companies in which the
Company has the controlling financial interest by means other than the direct
record ownership of voting stock, as discussed in Note 1. Intercompany accounts
and transactions have been eliminated. The Company does not consolidate the
affiliated physician groups it manages as it does not have operating control as
defined in EITF 97-2.
ACCOUNTING ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States ("generally
accepted accounting principles") requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses. Because of the inherent uncertainties in this process, actual results
could differ from those estimates. Such estimates include the recoverability of
intangible assets and the collectability of receivables.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, due to/from physician groups, accounts payable
and the credit facility. The carrying amounts of the Company's cash and cash
equivalents, accounts receivable and accounts payable approximate fair value due
to the short-term nature of these instruments. Approximately $92,000 of the
credit facility bears interest at a variable market rate, and thus has a
carrying amount that approximates fair value. The remaining $105,000 of the
credit facility was subject to interest rate swaps as described in Note 13. The
estimated fair value of the interest rate swaps, which is the amount necessary
to unwind the swap, was approximately $1,100 and ($4,968) as of December 31,
1999 and 2000, respectively. The estimated fair value of the Company's interest
rate swaps was obtained from outside sources.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid instruments with maturities at
the time of purchase of three months or less. Included in cash and cash
equivalents at December 31, 2000 was $818 of restricted cash used as collateral
under certain letters of credit.
INVENTORIES
Inventories, consisting primarily of laboratory supplies, are stated at the
lower of cost, determined on a first-in-first-out basis, or market.
F-20
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Routine maintenance and repairs
are charged to expense as incurred, while cost of betterments and renewals are
capitalized.
Depreciation and amortization are calculated on a straight-line basis and
accelerated methods, over the estimated useful lives of the respective assets
which lives range from 3 to 7 years. Leasehold improvements are amortized over
the shorter of the term of the related lease, including renewal options, or the
useful life of the asset.
INTANGIBLE ASSETS
The allocation of the purchase price of the 2000 acquisitions is
preliminary, while the Company continues to obtain the information necessary to
determine the fair value of the assets acquired and liabilities assumed. When
the Company obtains final information, management believes that adjustments, if
any, will not be material in relation to the consolidated financial statements.
Identifiable intangible assets include hospital contracts, physician
referral lists and laboratory contracts acquired in connection with
acquisitions. Such assets are recorded at fair value on the date of acquisition
as determined by management and are being amortized over the estimated periods
to be benefited, ranging from 10 to 40 years. In determining these lives the
Company considered each practice's operating history, contract renewals,
stability of physician referral lists and industry statistics.
Goodwill relates to the excess of cost over the fair value of net assets of
the businesses acquired. The amortization periods for goodwill were determined
by the Company with consideration given to the lives assigned to the
identifiable intangibles, the reputation of the practice, the length of the
practice's operating history, and the potential of the market in which the
acquired practice is located. Amortization is calculated on a straight line
basis over periods ranging from 10 to 35 years.
Management assesses on an ongoing basis if there has been an impairment in
the carrying value of its intangible assets. If the undiscounted future cash
flows over the remaining amortization period of the respective intangible asset
indicates that the value assigned to the intangible asset may not be
recoverable, the carrying value of the respective intangible asset will be
reduced. The amount of any such impairment would be determined by comparing
anticipated discounted future cash flows from acquired businesses with the
carrying value of the related assets. In performing this analysis, management
considers such factors as current results, trends and future prospects, in
addition to other relevant factors.
The Company has entered into a management service agreement with each of
the physician groups of the Managed Practices for a period up to 40 years. Upon
the Company's acquisition of the practice's assets, the physician groups
maintain their separate corporate or partnership entities and enter into
employment and noncompete agreements with the practicing physicians. Costs of
obtaining these management service agreements are amortized using the
straight-line method over 25 years.
DEFERRED DEBT ISSUANCE COSTS
The Company incurred costs in connection with bank financing. These costs
have been capitalized and are being amortized on a straight-line basis, which
approximates the interest method, over the five year term. Such amounts are
included in other assets in the consolidated balance sheet.
REVENUE RECOGNITION
The Company recognizes net patient service revenue at the time services are
performed. Unbilled receivables are recorded for services rendered during, but
billed subsequent to, the reporting period. Net patient service revenue is
reported at the estimated realizable amounts from patients, third-party payors
F-21
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and others for services rendered. Revenue under certain third-party payor
agreements is subject to audit and retroactive adjustments. Provision for
estimated third-party payor settlements and adjustments are estimated in the
period the related services are rendered and adjusted in future periods as final
settlements are determined. The provision and the related allowance are adjusted
periodically, based upon an evaluation of historical collection experience with
specific payors for particular services, anticipated collection levels with
specific payors for new services, industry reimbursement trends, and other
relevant factors.
Unbilled receivables for the Owned Practices, net of allowances, as of
December 31, 1999 and 2000 amounted to approximately $5,200 and $8,600,
respectively.
Net management service revenue reported by the Company represents net
physician group revenue less amounts retained by physician groups. The amounts
retained by physician groups represent amounts paid to the physicians pursuant
to the management service agreements between the Company and the physician
groups. Net physician group revenue is equal to billed charges reduced by
provisions for bad debt and contractual adjustments. Contractual adjustments
represent the difference between amounts billed and amounts reimbursable by
commercial insurers and other third-party payors pursuant to their respective
contracts with the physician groups. The provision for bad debts represents
management's estimate of potential credit issues associated with amounts due
from patients, commercial insurers, and other third-party payors.
INCOME TAXES
The Company's provision for income taxes includes federal and state income
taxes currently payable and changes in deferred tax assets and liabilities,
excluding the establishment of deferred tax assets and liabilities related to
acquisitions. Deferred income taxes are accounted for in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes and represent the estimated future tax effects resulting from
temporary differences between financial statement carrying values and tax
reporting bases of assets and liabilities. In addition, future tax benefits,
such as net operating loss ("NOL") carryforwards, are required to be recognized
to the extent that realization of such benefits is more likely than not. A
valuation allowance is established for those benefits that do not meet the more
likely than not criteria. A valuation allowance has been established for $3,548
of the net deferred tax assets at December 31, 2000 due to the uncertainty
regarding the Company's ability to utilize the acquired net operating loss
carryforwards of Inform DX due to Internal Revenue Code limitations.
SEGMENT REPORTING
The Financial Accounting Standards Board ("FASB") issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information effective
for fiscal years beginning after December 15, 1997. The Company has two
reportable segments, Owned Practices and Managed Practices, based upon
management reporting and the consolidated reporting structure.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements, which provided the staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. In June 2000, SAB
101 was amended by SAB 101B, which delayed the implementation of SAB 101 until
no later than the fourth fiscal quarter of fiscal years beginning after December
15, 1999. The Company adopted SAB 101 in the fourth quarter of 2000. The
adoption of the provisions of SAB 101 did not have a material impact on the
Company's financial position or results of operations.
F-22
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
133") and in June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137 "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133," which
delayed the effective date the Company is required to adopt SFAS 133 until its
fiscal year 2001. In June 2000, the FASB issued Statement of Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities -- an Amendment to FASB Statement No. 133." This
statement amended certain provisions of SFAS 133. SFAS 133 requires the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will either be offset against the change in fair value of
the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company does not enter into derivative
financial instruments for trading purposes. Upon adoption of SFAS 133 in the
first fiscal quarter of 2001, these activities will be recognized on the
Consolidated Balance Sheet. The Company's adoption of SFAS 133 did not have a
material effect on the Company's earnings. The adoption of SFAS 133 will result
in the reduction of other comprehensive income of approximately $5,000.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 2000
presentation and/or to reflect the merger with Inform DX accounted for as a
pooling-of-interests.
3. MERGER AND ACQUISITIONS
ACQUIRED PRACTICES: POOLING METHOD
On November 30, 2000, the Company completed a merger transaction with
Inform DX that was accounted for as a pooling-of-interests transaction. The
Company issued 2.6 million Common Shares to Inform DX stockholders and Inform
DX's outstanding stock options were converted into options to purchase
approximately 170,000 common shares of AmeriPath. The historical consolidated
financial statements for periods prior to the consummation of the combination
are restated as though the companies had been combined during such periods.
F-23
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The table below presents a reconciliation of total revenue and net income
available for Common Shares as reported in the accompanying consolidated
financial statements with those previously reported by the Company.
COMBINING
AMERIPATH INFORM DX ADJUSTMENTS (A) COMBINED
--------- --------- --------------- --------
Eleven months ended November 30, 2000
Total revenue.................................. $269,865 $34,329 -- $304,194
Net income (loss) attributable to common
stockholders................................ $ 20,514 $(6,250) -- $ 14,264
Year ended December 31, 1999
Total revenue.................................. $232,753 $24,652 $ 27 $257,432
Net income (loss) attributable to common
stockholders................................ $ 22,969 $ (31) $(358) $ 22,580
Year ended December 31, 1998
Total revenue.................................. $177,304 $16,012 -- $193,316
Net income (loss) attributable to common
stockholders................................ $ 18,639 $ (683) $ 212 $ 18,168
---------------
(A) The provision for income taxes has been adjusted by $358 and $(212) in 1999
and 1998, respectively, to reflect the recordation of acquired net operating
loss carry forwards, related valuation allowances and other various timing
differences of Inform DX in accordance with SFAS No. 109. In addition,
certain reclassifications totaling $27 were made to conform to the current
year presentation.
ACQUIRED PRACTICES: PURCHASE METHOD
During 2000, the Company acquired nine anatomic pathology practices,
including the two practices acquired by Inform DX. The total consideration paid
by the Company in connection with these acquisitions included cash of $32,457,
1,532,000 shares of common stock (aggregate value of $12,180 based upon amounts
recorded on the Company's consolidated financial statements) and subordinated
debt of $2,794. In addition, the Company issued additional purchase price
consideration in the form of contingent notes. During 1999, the Company acquired
eleven anatomic pathology practices, including one by Inform DX. The total
consideration paid by the Company in connection with these acquisitions included
cash of $51,746, 486,796 shares of common stock (aggregate value of $2,954 based
upon amounts recorded on the Company's consolidated financial statements) and
subordinated debt of $848. In addition, the Company issued additional purchase
price consideration in the form of contingent notes. During the year ended
December 31, 2000, the Company made contingent note payments of $26,645 and
other purchase price adjustments of approximately $2,876 in connection with
certain post-closing adjustments and acquisition costs. During the year ended
December 31, 1999, the Company issued an additional 23,930 shares of common
stock, valued at $195, and made contingent note payments of $17,440 and other
purchase price adjustments of $2,965 in connection with certain post-closing
adjustments and acquisition costs.
F-24
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the aggregate purchase price allocation for
the 1999 and 2000 acquisitions, including the amortization periods for
identifiable intangible assets and goodwill ($ in 000's):
1999 2000
-------- --------
Number of acquisitions...................................... 11 9
-------- --------
Cash paid................................................... $ 51,746 $ 32,457
Common Stock issued......................................... 3,149 12,180
Sub-debt.................................................... 848 2,794
-------- --------
Total purchase price.............................. $ 55,743 $ 47,431
-------- --------
ALLOCATION OF PURCHASE PRICE:
Tangible assets............................................. $ 7,468 $ 17,019
Goodwill (10-25 years)...................................... 20,860 12,043
Hospital contracts (25 years)............................... 39,710 21,337
Physician referral lists (18-25 years)...................... 3,603 14,234
Laboratory contracts (10 years)............................. 3,104 --
-------- --------
Total assets acquired............................. 74,745 64,633
Liabilities assumed less sub-debt........................... (19,002) (17,202)
-------- --------
Total purchase price.............................. $ 55,743 $ 47,431
-------- --------
The acquisitions have been accounted for using the purchase method of
accounting, except for the Inform DX acquisition. The aggregate consideration
paid, and to be paid, is based on a number of factors, including each practice's
demographics, size, local prominence, position in the marketplace and historical
cash flows from operations. Assessment of these and other factors, including
uncertainties regarding the health care environment, resulted in the sellers of
each of the practices and the Company being unable to reach agreement on the
final purchase price. The Company agreed to pay a minimum purchase price and to
pay additional purchase price consideration to the sellers of the practices in
proportion to their respective ownership interest in each practice. The
additional payments are contingent upon the achievement of stipulated levels of
operating earnings (as defined) by each of the practices over periods of three
to five years from the date of the acquisition as set forth in the respective
agreements, and are not contingent on the continued employment of the sellers of
the practices. In certain cases, the payments are contingent upon other factors
such as the retention of certain hospital contracts for periods ranging from
three to five years. The amount of the payments cannot be determined until the
achievement of the operating earnings levels or other factors during the terms
of the respective agreements. If the maximum specified levels of operating
earnings for each practice are achieved, the Company would make aggregate
maximum payments, including principal and interest, of approximately $198,359
over the next three to five years. At the mid-point level, the aggregate
principal and interest would be approximately $89,695 over the next three to
five years. A lesser amount or no payments at all would be made if the mid-point
levels of operating earnings specified in each agreement are not met. Through
December 31, 2000, the Company made contingent note payments aggregating
$53,398, which represent 63% of the maximum contingent payments that were
available for payment under these contingent note agreements. Additional
payments are accounted for as additional purchase price, which increases the
recorded goodwill.
The accompanying consolidated financial statements include the results of
operations of the acquisitions from the date acquired through December 31, 2000.
The following unaudited pro forma information presents the consolidated results
of the Company's operations and the results of operations of the 1999 and 2000
acquisitions for the years ended December 31, 1999 and 2000 after giving effect
to amortization of goodwill and identifiable intangible assets, interest expense
on long-term debt incurred in connection with these acquisitions, and the
reduced level of certain specific operating expenses (primarily compensation and
related expenses attributable to former owners) as if the acquisitions had been
F-25
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consummated on January 1, 1999. Such unaudited pro forma information is based on
historical financial information with respect to the 1999 and 2000 acquisitions
and does not include operational or other changes which might have been effected
by the Company.
The unaudited pro forma information for the years ended December 31, 1999
and 2000 presented below is for illustrative information purposes only and is
not necessarily indicative of results which would have been achieved or results
which may be achieved in the future:
PRO FORMA
DECEMBER 31,
-------------------
1999 2000
-------- --------
Net revenue................................................. $321,703 $357,638
======== ========
Net income attributable to common stockholders.............. $ 27,900 $ 15,849
======== ========
Net income per share attributable to common stockholders
(diluted)................................................. $ 1.09 $ 0.62
======== ========
4. ACCOUNTS RECEIVABLE
Accounts receivable are recorded at net realizable value. The allowance for
contractual and other adjustments and uncollectible accounts is based on
historical experience and judgments about future events. Accordingly, the actual
amounts experienced could vary significantly from the recorded allowances. For
Managed Practices, terms of the service agreements require the Company to
purchase receivables generated by the physician groups on a monthly basis. Such
amounts are recorded net of contractual allowances and estimated bad debts. For
Managed Practices, accounts receivable are a function of the net physician group
revenue rather than the net revenue of the Company.
DECEMBER 31,
-------------------
1999 2000
-------- --------
Gross accounts receivable................................... $130,791 $166,873
Less: Allowance for contractual and other adjustments....... (47,047) (54,840)
Allowance for uncollectible accounts...................... (25,956) (41,094)
-------- --------
Accounts receivable, net.................................... $ 57,788 $ 70,939
======== ========
The following table represents the rollforward of the allowances for
contractual adjustments and uncollectible accounts:
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
-------- --------- ---------
Beginning allowances for contractual adjustments and
uncollectible accounts............................. $ 26,522 $ 62,512 $ 73,003
Provision for contractual adjustments................ 80,664 128,585 178,873
Provision for doubtful accounts...................... 18,698 25,289 34,040
Managed Practice contractual adjustments and bad debt
expense............................................ 31,429 41,712 44,849
Write-offs and other adjustments..................... (94,801) (185,095) (229,831)
-------- --------- ---------
Ending allowance for contractual adjustments and
uncollectible accounts............................. $ 62,512 $ 73,003 $ 95,934
======== ========= =========
F-26
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company grants credit without collateral to individual patients, most
of whom are insured under third party payor agreements. The estimated mix of
receivables from patients and third-party payors are as follows:
DECEMBER 31,
-------------
1999 2000
----- -----
Government programs......................................... 18.8% 17.8%
Third-party payors.......................................... 53.7 53.3
Private pay patients........................................ 22.5 23.8
Other....................................................... 5.0 5.1
----- -----
100.0% 100.0%
===== =====
5. NET REVENUE
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
--------- --------- ---------
NET PATIENT SERVICE REVENUE CONSISTED OF THE
FOLLOWING:
Gross revenue..................................... $ 257,968 $ 361,854 $ 482,238
Less contractual and other adjustments............ (80,664) (128,585) (173,873)
--------- --------- ---------
Net patient service revenue....................... $ 177,304 $ 233,269 $ 308,365
========= ========= =========
YEARS ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
NET MANAGEMENT SERVICE REVENUE CONSISTED OF THE
FOLLOWING:
Gross physician group revenue........................ $ 61,694 $ 85,379 $ 86,203
Contractual adjustments and bad debt expense......... (31,429) (41,712) (44,849)
-------- -------- --------
Net physician group revenue.......................... 30,265 43,667 41,354
Less amounts retained by physician groups............ (14,253) (19,504) (19,625)
-------- -------- --------
Net management service revenue....................... $ 16,012 $ 24,163 $ 21,729
======== ======== ========
A significant portion of the Company's net revenue is generated by the
hospital-based practices through contracts with 168, 207 and 235 hospitals as of
December 31, 1998, 1999 and 2000, respectively. HCA -- The Healthcare Company
("HCA") owned 29, 27 and 27 of these hospitals as of December 31, 1998, 1999 and
2000, respectively. For the years ended December 31, 1998, 1999 and 2000,
approximately 17%, 15%, and 13%, respectively of net patient service revenue was
generated directly from contracts with hospitals owned by HCA. Generally, these
contracts and other hospital contracts have remaining terms of less than five
years and contain renewal provisions. Some of the contracts also contain clauses
that allow for termination by either party with relatively short notice. HCA has
been under government investigation for some time, and the Company believes that
HCA is evaluating its operating strategies, including the possible sale,
spin-off or closure of certain hospitals. Closures or sales of HCA hospitals or
terminations or non-renewals of one or more of our contracts or relationships
with HCA hospitals could have a material adverse effect on our financial
position and results of operations. The Company from time to time evaluates the
carrying values of identified intangibles and goodwill and the related useful
lives assigned to such assets. See Note 8 for additional information related to
the impairment of certain hospital contracts.
F-27
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
ESTIMATED DECEMBER 31,
USEFUL LIFE -------------------
(YEARS) 1999 2000
----------- -------- --------
Laboratory, office and data processing equipment....... 3-7 $ 19,336 $ 27,668
Construction in progress............................... 2,693 1,511
Leasehold improvements................................. 5-10 3,510 7,984
Furniture and fixtures................................. 3-7 2,070 2,590
Mobile laboratory units................................ 3 175 175
Automotive vehicles.................................... 3-5 1,058 1,380
-------- --------
28,842 41,308
Less accumulated depreciation.......................... (12,302) (17,728)
-------- --------
Property and equipment, net............................ $ 16,540 $ 23,580
======== ========
Depreciation expense was $2,669, $3,554 and $4,748 for the years ended
December 31, 1998, 1999 and 2000, respectively.
7. INTANGIBLE ASSETS
Intangible assets and the related accumulated amortization and amortization
periods are as follows:
AMORTIZATION
PERIODS
(YEARS)
DECEMBER 31, ----------------
------------------- WEIGHTED
1999 2000 RANGE AVERAGE
-------- -------- ----- --------
Hospital contracts............................... $193,899 $211,738 25-40 32.3
Physician client lists........................... 54,893 71,447 10-30 20.7
Laboratory contracts............................. 7,317 4,543 10 10.0
Management agreements............................ 11,022 11,214 25 25.0
-------- --------
267,131 298,942
Accumulated amortization......................... (20,737) (30,315)
-------- --------
Balance, net..................................... $246,394 $268,627
======== ========
Goodwill......................................... $153,749 $193,231 10-35 30.5
Accumulated amortization......................... (10,366) (15,968)
-------- --------
Balance, net..................................... $143,383 $177,263
======== ========
In determining the useful lives of the identifiable intangible assets, the
Company considered each practice's operating history, contract renewals,
stability of physician referral lists and industry statistics.
The amortization periods for goodwill were determined by the Company with
consideration given to the lives assigned to the identifiable intangibles, the
reputation of the practice, the length of the practice's operating history, and
the potential of the market in which the acquired practice is located.
The weighted average amortization period for identifiable intangible assets
and goodwill is 29.6 years.
8. ASSET IMPAIRMENTS AND RELATED CHARGES
During the second quarter ended June 30, 2000, the Company recorded a
pre-tax non-cash charge of approximately $4,700, and related cash charges of
approximately $545 in connection with the impairment
F-28
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of intangible assets at an acquired practice in Cleveland, Ohio. The Company had
provided services at four hospitals and an ambulatory care facility owned by
Primary Health Systems ("PHS"), a regional hospital network in Cleveland, Ohio.
During the first quarter of 2000, PHS began implementing a plan of
reorganization filed under Chapter 11 with the U.S. Bankruptcy Court for the
District of Delaware, and closed one hospital. During the second quarter, the
bankruptcy court approved the sale of two hospitals and the ambulatory care
facility to local purchasers in the Cleveland area. The Company's contracts with
these two hospitals and the ambulatory care facility were not accepted by the
purchasers, who have elected to employ their own pathologists. One hospital has
not been sold and continues to do business with the Company. As a result, the
Company determined, using the discounted cash flow method, that the intangible
assets, including goodwill, had no remaining fair value. Therefore, the Company
wrote off the unamortized intangible asset balance. In addition, the Company
recorded approximately $545 of related charges for potentially uncollectible
accounts receivable, employee termination costs and legal fees.
During the fourth quarter of 2000, the Company recorded a pre-tax non-cash
charge of approximately $4,300 related to the impairment of certain intangible
assets. Of this charge, $3,300 related to Quest Diagnostics' ("Quest")
termination of its contract with the Company in South Florida, effective
December 31, 2000. The Company believes that some portion of this work may be
transferred by Quest to other practices owned by the Company and the Company is
implementing a marketing strategy to retain and provide services directly to
these customers in South Florida. In addition, during the fourth quarter, a
hospital in South Florida where the Company had the pathology contract,
requested proposals for its pathology services, and the Company was unsuccessful
in retaining this contract. Based upon the remaining projected cash flow from
this hospital network, the Company determined that the intangible assets were
impaired and recorded a pre-tax non-cash charge of approximately $1,000.
9. INVESTMENT SECURITIES
The Company accounts for investments in certain debt and equity securities
under the provisions of Statement of Financial Accounting Standards No. 115
("SFAS No. 115"), "Accounting for Certain Debt and Equity Securities". Under
SFAS No. 115, the Company must classify its debt and marketable equity
securities in one of three categories: trading, available-for-sale, or
held-to-maturity.
In September 2000, the Company made a $1,000 investment in Genomics
Collaborative, Inc ("GCI") for which it received 333,333 shares of Series D
Preferred Stock, par value $0.01. The GCI Series D Preferred Stock is
convertible into one share of common stock and redeemable after 2005 at $3.00
per share at the option of the holder. GCI is a privately held, start-up,
company which has a history of operating losses. As of December 31, 2000, it
appears that GCI has sufficient cash to fund operations for the next twelve
months. In the event that they are unable to become profitable and/or raise
additional funding, it could result in an impairment of our investment. This
available for sale security is recorded at its estimated fair value, which
approximates cost, and is classified as other assets on the Company's balance
sheet. At December 31, 2000, there were no unrealized gains or losses associated
with this investment.
10. DUE TO MANAGED PRACTICES
In accordance with the terms of the management service agreements, the
owners of the managed practices are entitled to a predetermined percentage of
the net operating income of their managed practice ("physician group
retainage"). The amount of the liability is calculated monthly and is to be paid
by the fifteenth day of the following month. The monthly payment amount is
comprised of either the net revenues or the cash collected from revenues during
the month less any practice expenses and management fees charged by the Company.
The amounts owed to the owners of the Managed Practices were $4,055 and $2,853
as of December 31, 2000 and 1999, respectively.
F-29
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
DECEMBER 31,
-----------------
1999 2000
------- -------
Accounts payable............................................ $ 4,830 $12,034
Accrued compensation........................................ 7,978 12,604
Accrued acquisition costs................................... 1,739 2,332
Accrued interest............................................ 828 1,283
Income taxes payable........................................ 942 1,822
Other accrued expenses...................................... 5,020 5,637
------- -------
$21,337 $35,712
======= =======
12. MERGER-RELATED CHARGES
In connection with the Inform DX merger and other previous acquisitions,
the Company has recorded reserves for transaction costs, employee-related costs
(including severance agreement payouts) and various exit costs associated with
the consolidation of certain operations, including the elimination of duplicate
facilities and certain exit and restructuring costs.
During the fourth quarter of 2000, the Company recorded merger-related
costs totaling $6,209 ($5,102, net of tax). As part of the business
restructuring, the Company is closing certain facilities. In 1999, the Company
paid $1,741 of costs in connection with the May 1998 American Pathology
Resource, Inc. ("APR") acquisition. Payments were for various exit costs
associated with the disposal of certain operations of APR and the shutdown of
the APR corporate office.
The following is a reconciliation of the activity for the years ended
December 31, 2000 and 1999 with respect to the merger-related reserves. The
balance sheet charges relate to acquisitions accounted for under the purchase
method of accounting, with the offset resulting in additional goodwill.
Statement of operations charges relate to the acquisition of Inform DX, which
was accounted for under the pooling of interests method of accounting.
BALANCE STATEMENT OF BALANCE
DECEMBER 31, BALANCE SHEET OPERATIONS DECEMBER 31,
1999 CHARGES CHARGES PAYMENTS 2000
------------ ------------- ------------ -------- ------------
Transaction costs..................... -- $1,160 $4,348 $(3,782) $ 1,726
Employee termination costs............ 78 1,200 1,861 (1,722) 1,417
Lease commitments..................... 394 1,974 -- (240) 2,128
Other exit costs...................... 715 -- -- (452) 263
------ ------ ------ ------- -------
Total....................... 1,187 $4,334 $6,209 $(6,196) 5,534
====== ====== =======
Less: portion included in current
liabilities......................... (275) (3,165)
------ -------
Total included in other
liabilities............... $ 912 $ 2,369
====== =======
F-30
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BALANCE STATEMENT OF BALANCE
DECEMBER 31, BALANCE SHEET OPERATIONS DECEMBER 31,
1998 CHARGES CHARGES PAYMENTS 1999
------------ ------------- ------------ -------- ------------
Employee termination costs............ $ 414 $ (8) -- $ (328) $ 78
Lease Commitments..................... 1,851 (740) -- (717) 394
Other exit costs...................... 1,518 (107) -- (696) 715
------ ----- -- ------- ------
Total....................... 3,783 $(855) -- $(1,741) 1,187
===== == =======
Less: portion included in current
liabilities......................... (860) (275)
------ ------
Total included in other
liabilities............... $2,923 $ 912
====== ======
In addition, the Company plans to continue its consolidation efforts
related to its acquisition of Inform DX during the first half of 2001. As a
result, the Company expects to incur additional costs of $7,300 during this
period. Of this amount, approximately $5,400 is for employee-related costs,
$1,100 is for the consolidation of the Company's facilities in New York and
eastern Pennsylvania, and $800 is for other transaction costs related to the
Inform DX acquisition.
13. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31,
-------------------
1999 2000
-------- --------
Revolving loan.............................................. $163,300 $197,216
Revolving line of credit.................................... 2,500 --
Note payable................................................ 73 210
Capital leases.............................................. 837 683
Subordinated notes issued and assumed in connection with
acquisitions, payable in varying amounts through 2005,
with interest at rates of 6.5% and 9.5%................... 1,904 3,638
-------- --------
168,614 201,747
Less current portion........................................ (930) (1,055)
-------- --------
Long-term debt, net of current portion...................... $167,684 $200,692
======== ========
At December 31, 2000 maturities of long-term debt were as follows:
2001........................................................ $ 1,055
2002........................................................ 430
2003........................................................ 355
2004........................................................ 197,488
2005........................................................ 2,419
--------
Total............................................. $201,747
========
The Company has a revolving line of credit (the "Credit Facility") with a
syndicate of banks led by Fleet National Bank, formerly Bank Boston, N.A. as
lender and agent. On April 28, 1998, the Company amended its Credit Facility.
The amended facility provided for borrowings of up to $200,000 in the form of a
revolving loan that may be used for working capital purposes (in an amount
limited to 75% of the Company's net accounts receivable, as reflected on the
Company's quarterly consolidated balance sheet) and to fund acquisitions to the
extent not otherwise used for working capital purposes.
F-31
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On December 16, 1999, the Company amended its Credit Facility. The amended
facility provides for borrowings of up to $230,000 in the form of a revolving
loan that may be used for working capital purposes and to fund acquisitions to
the extent not otherwise used for working capital purposes. The Company must
comply with certain requirements as defined in the credit agreement to utilize
the Credit Facility to fund acquisitions.
On July 21, 2000, the Company amended its Credit Facility dated December
16, 1999 ("Amendment No. 1"). Amendment No. 1 allowed for the Company to be in
compliance with the Credit Facility by excluding non-cash charges totaling
approximately $5,200 from the calculation of the Company's consolidated
operating cash flow covenant through March 31, 2001. These charges relate to the
impairment of assets and related charges at an acquired practice in Cleveland,
Ohio as more fully discussed in Note 8 to the financial statements. The
amendment was obtained to cure a potential default that otherwise would likely
have occurred under the operating cash flow covenant contained in the Credit
Facility. In addition, Amendment No. 2 (i) increased the Company's operating
cash flow requirements under the facility for the trailing twelve months ending
December 31, 2002 and thereafter; (ii) requires that a minimum of 10% of the
purchase price of future acquisitions greater than $5,000 be in the form of the
Company's capital stock, and (iii) allowed for an investment of up to $3,000 in
Genomics Collaborative, Inc. The amendment is not expected to have a material
adverse effect on the Company's operations or strategies.
On November 29, 2000, the Company amended its Credit Facility dated
December 16, 1999 ("Amendment No. 2"). Amendment No. 2 allowed for the Company
to be in compliance with the Credit Facility by excluding from the covenant
calculations cash and non-cash charges totaling approximately $17,500. These
exclusions were comprised of a one time cash transaction and restructuring
charges of up to $7,500 in connection with the acquisition of Inform DX, and
nonrecurring non-cash charges of up to $10,000, including charges resulting from
an increase in the accounts receivable reserve in connection with the
acquisition of Inform DX, and potential asset impairment charges relating to
good will and other intangibles of not more than $5,000. In addition, Amendment
No. 2 (i) decreased the Company's operating cash flow requirements under the
facility for the trailing twelve months ending December 31, 2001, and increased
them thereafter; (ii) increased the amount of allowable Capital Lease
Obligations to $3,000; and (iii) decreased the levels of acquisition purchase
price used in the documentation requirements of the lenders. The amendment was
obtained to cure a potential default for the year ended December 31, 2000 that
otherwise would likely have occurred under the operating cash flow covenant
contained in the Credit Facility.
There is the potential of $5,400 of charges in excess of the $17,500
allowed in Amendment No. 2 which results from the formalization of the Inform DX
integration plans, and are expected to result in further synergies. These
additional charges could have caused the Company to be in technical default of
one or more of its covenants under its Credit Facility at the end of the first
quarter of 2001. On March 29, 2001, the Company and its lenders executed an
amendment ("Amendment No. 3") which excludes an additional $5,400, or $28,300,
in total, of charges from its covenant calculations. In addition, Amendment No.
3 (i) increased the Company's borrowing rate by 37.5 basis points; (ii) requires
the Company to use a minimum of 30% equity for all acquisitions; (iii) requires
the Company to use no more than 20% of consideration for acquisitions in the
form of contingent notes and; (iv) requires lender approval of all acquisitions
with a purchase price greater than $10,000. The Company will also be required to
pay an amendment fee of up to 30 basis points to those lenders which consented
to the amendment. The maximum amount of the amendment fee would be $700.
All outstanding advances under the Credit Facility are due and payable on
December 16, 2004. Interest is payable monthly at variable rates which are
based, at the Company's option, on the Agents' base rate (9.5% at December 31,
2000) or the Eurodollar rate plus a premium that is based on the
F-32
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's quarterly ratio of total debt to cash flow. The amended Credit
Facility also requires a commitment fee to be paid quarterly equal to 0.50% of
the annualized unused portion of the total commitment. The Company has used a
portion of the funds available under the amended Credit Facility to refinance
previously outstanding indebtedness, to fund acquisitions and for working
capital purposes. The Company intends to use the remaining availability for its
acquisition program and working capital.
In May 2000, the Company entered into three interest rate swaps
transactions with an effective date of October 5, 2000, variable maturity dates,
and a combined notional amount of $105 million. These interest rate swap
transactions involve the exchange of floating for fixed rate interest payments
over the life of the agreement without the exchange of the underlying principal
amounts. The differential to be paid or received is accrued and is recognized as
an adjustment to interest expense. These agreements are indexed to 30 day LIBOR.
The following table summarizes the terms of the swaps:
NOTIONAL AMOUNT FIXED RATE TERM IN MONTHS MATURITY
--------------- ---------- -------------- --------
(IN MILLIONS)
$45.0 7.604% 24 10/07/02
$30.0 7.612% 36 10/06/03
$30.0 7.626% 48 10/05/04
The amended Credit Facility contains covenants which, among other things,
require the Company to maintain certain financial operating ratios and impose
certain limitations or prohibitions on the Company with respect to the
incidence, guaranty or assumption of indebtedness, the payment of dividends,
cash distributions, new debt issuance, sale of assets, leasing commitments and
annual capital expenditures, and contains provisions which preclude mergers and
acquisitions under certain circumstances. All of the Company's assets are
pledged as collateral under the Credit Facility. The Company believes that it is
in compliance with all of the covenants at December 31, 2000.
On February 2, 1998, the Company entered into a revolving line of credit
agreement with Nations Bank providing available borrowings up to $5,000 that may
be used for general corporate purposes including working capital and the funding
of cash for acquisitions or affiliations with pathology practices. This
revolving line of credit was increased to $9,000 in September 2000. The balance
of this revolving line of credit was paid in full on December 1, 2000.
NOTE PAYABLE TO BANK
In October 1999, the Company assumed a long-term obligation pursuant to a
promissory note agreement with a bank in connection with the Columbus Pathology
Associates acquisition. The obligation is evidenced by an installment note
bearing interest at fixed rate of 9.75% and maturing in 2004. The note is
secured by certain assets of the acquired practice.
LETTERS OF CREDIT
As of December 31, 2000, the Company had letters of credit outstanding
totaling $1,186. The letters of credit secure payments under certain operating
leases and expire at various dates in 2001 and 2002. Some of the letters of
credit automatically decline in value over various lease terms. The letters of
credit have annual fees averaging 1.7%.
F-33
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. LEASE COMMITMENTS
The Company leases various office and laboratory space, and certain
equipment pursuant to operating lease agreements. The following information
includes the related party leases discussed in Note 19. Future minimum lease
commitments consisted of the following at December 31, 2000:
2001........................................................ $ 4,203
2002........................................................ 3,915
2003........................................................ 3,265
2004........................................................ 2,121
2005........................................................ 2,003
Thereafter.................................................. 4,690
-------
$20,197
=======
In addition, certain owners of the Managed Practices are lessees of various
equipment, auto and facility operating leases that are used in the operations of
the business. Future payments under these leases are $4,412 of which the Company
is responsible for their corresponding share as defined in the management
service agreements. The Company's obligations, based upon their management fee
percentage, are $705. In the event of termination of a management service
agreement, any related lease obligations are also terminated or assumed by the
Managed Practice.
The Company has entered into certain noncancelable subleases that reduce
its total commitments under operating leases by $186.
Owned Practices' rent expense under operating leases for the years ended
December 31, 1998, 1999 and 2000 was $1,687, $2,228 and $4,104 respectively.
15. OPTION PLAN
The Company's 1996 Stock Option Plan (the "Option Plan") provides for the
grant of options to purchase shares of common stock to key employees and others.
The plan provides that the option price shall not be less than the fair market
value of the shares on the date of the grant. All options granted under the
Option Plan have 10 year terms and vest and become exercisable at the rate of
20% a year, following the date of grant. As part of the Inform DX acquisition,
the Company assumed additional two option plans ("Additional Plans"). Options
granted under the Additional Plans have varying exercisable rates.
The Company's Director Option Plan provides for the grant of options to
purchase shares of common stock to Directors who are not employees of the
Company. All options granted under the Director Option Plan have 10 year terms
and are exercisable during the period specified in the agreement evidencing the
grant of such Director Option. At December 31, 2000, 35,000 options have been
granted under the Director Option Plan.
At December 31, 2000, 2,232,000 shares of common stock are reserved for
issuance pursuant to options granted under the Option Plan, the Director Option
Plan and the Additional Plans.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and the related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options approximates the fair value of the underlying stock on the date of
grant, no compensation expense is recognized.
F-34
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma information regarding earnings per share is required by SFAS No.
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using the Black-Scholes Option
Pricing Model with the following weighted-average assumptions for 1998, 1999 and
2000:
1998 1999 2000
----- ----- -----
Risk free interest rate..................................... 6.5% 6.5% 6.5%
Dividend yield.............................................. -- -- --
Volatility factors.......................................... 107.0% 120.0% 137.0%
Weighted average life (years)............................... 4.1 4.1 4.2
Using the Black-Scholes Option Pricing Model, the estimated
weighted-average fair value per option granted in 1998, 1999 and 2000 were
$10.65, $6.28 and $6.92, respectively.
The pro forma net income per common share assuming the amortization of the
estimated fair values over the option vesting period and diluted earnings per
common share, had the fair value method of accounting for stock options been
used, would have been as follows:
1998 1999 2000
------- ------- ------
Pro forma net income attributable to common shareholders... $16,754 $19,612 $8,018
Pro forma diluted earnings per common share................ $ 0.78 $ 0.87 $ 0.33
The Black-Scholes Option Pricing Model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different than those of traded options, and because changes in the assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models may not necessarily provide a reliable single measure of the
fair value of its employee stock options.
F-35
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the option plans as of and for the changes
during each of the three years in the period ended December 31, 2000 is
presented below:
OPTION PRICE PER SHARE
NUMBER OF --------------------------
SHARES LOW HIGH WEIGHTED
--------- ------ ------ --------
Outstanding December 31, 1997..................... 1,215,142 $ 1.11 $16.75 $ 5.78
Granted in 1998................................. 254,050 14.06 14.06 14.06
Granted in 1998................................. 2,000 16.13 16.13 16.13
Granted in 1998................................. 1,000 11.38 11.38 11.38
Granted in 1998................................. 8,971 3.74 3.74 3.74
Granted in 1998................................. 1,461 6.22 6.22 6.22
Granted in 1998................................. 4,017 11.20 11.20 11.20
Granted in 1998................................. 201 18.67 18.67 18.67
Granted in 1998................................. 12,974 40.46 40.46 40.46
Cancelled in 1998............................... (12,900) 8.33 16.75 11.45
Exercised in 1998............................... (27,560) 8.33 10.00 8.98
---------
Outstanding December 31, 1998..................... 1,459,356 1.11 40.46 7.46
Granted in 1999................................. 26,000 9.31 9.31 9.31
Granted in 1999................................. 259,500 7.63 7.63 7.63
Granted in 1999................................. 5,000 9.56 9.56 9.56
Granted in 1999................................. 2,000 9.16 9.16 9.16
Granted in 1999................................. 2,000 9.06 9.06 9.06
Granted in 1999................................. 9,000 7.75 7.75 7.75
Granted in 1999................................. 49,727 15.56 15.56 15.56
Granted in 1999................................. 3,736 40.46 40.46 40.46
Cancelled in 1999............................... (41,800) 10.00 16.75 10.58
Exercised in 1999............................... (8,000) 1.11 1.11 1.11
---------
Outstanding December 31, 1999..................... 1,766,519 1.11 40.46 7.76
Granted in 2000................................. 50,000 8.13 8.13 8.13
Granted in 2000................................. 356,000 7.63 7.63 7.63
Granted in 2000................................. 17,000 16.88 16.88 16.88
Granted in 2000................................. 73,703 41.58 41.58 41.58
Cancelled in 2000............................... (42,250) 7.63 14.06 9.64
Exercised in 2000............................... (260,521) 1.11 15.56 5.96
---------
Outstanding December 31, 2000................... 1,960,451 $ 1.11 $41.58 $ 9.30
=========
F-36
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the information about options outstanding at
December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- ----------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF EXERCISE NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------------- ----------- --------------- -------------- ----------- --------------
$ 1.11..................... 123,600 3.6 $ 1.11 123,600 $ 1.11
1.67..................... 360,011 5.1 1.67 288,009 1.67
3.74..................... 11,702 7.1 3.74 9,891 3.74
6.22..................... 1,461 7.3 6.22 1,461 6.22
7.63..................... 583,500 8.9 7.63 40,800 7.63
7.75..................... 9,000 8.9 7.75 1,800 7.75
8.13..................... 50,000 9.0 8.13 -- --
8.33..................... 111,720 5.5 8.33 69,600 8.33
9.06..................... 2,000 8.9 9.06 400 9.06
9.31..................... 26,000 8.2 9.31 5,200 9.31
9.56..................... 4,000 8.6 9.56 -- --
10.00..................... 236,200 6.5 10.00 128,800 10.00
11.20..................... 4,017 7.4 11.20 2,411 11.20
11.65..................... 600 7.5 11.65 -- --
14.06..................... 228,280 7.4 14.06 91,000 14.06
15.56..................... 49,246 8.9 15.56 23,420 15.56
16.13..................... 2,000 7.4 16.13 800 16.13
16.63..................... 6,000 6.9 16.63 3,600 16.63
16.75..................... 43,500 6.9 16.63 26,100 16.63
16.88..................... 17,000 9.8 16.88 -- --
18.68..................... 201 7.5 18.68 201 18.68
40.46..................... 16,710 7.8 40.46 11,658 40.46
41.58..................... 73,703 8.5 41.58 73,703 41.58
--------- -------
$1.11-$41.58................ 1,960,451 7.1 $ 9.30 902,454 $ 9.56
========= =======
As of December 31, 1998 and 1999 exercisable options were 499,845 and
860,366, respectively.
Warrants to purchase 38,867 and 16,226 shares of common stock were
outstanding at December 31, 1999 and 2000, respectively, at exercise prices
ranging from $0.01 to $0.30 per share. These warrants were issued in conjunction
with certain indebtedness incurred by the Company. Holders of warrants do not
have voting rights or any other rights as a shareholder of the Company.
In connection with indebtedness issued by the Company in 1997 (the "Junior
Notes"), the Company issued warrants to purchase 16,066 shares of the Company's
common stock to the holders of the Junior Notes. For each $10 Junior Note, the
holder was issued a warrant to purchase 161 shares of common stock at $0.01 per
share (the "Junior Warrants"). The Junior Warrants expire on December 24, 2002.
A value of approximately $58 was allocated to these warrants which was included
in deferred financing costs and additional paid-in capital in the Company's 1997
consolidated financial statements.
16. REDEEMABLE PREFERRED STOCK
This footnote describes the transactions related to Inform DX's Series A
Redeemable Preferred Stock (the "Preferred Stock"). All share amounts have been
converted using the conversion ratio for the pooling transaction.
F-37
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1998, Inform DX issued 395,471 shares of Preferred Stock at $40.46 per
share. The Preferred Stock was convertible into common stock at the option of
the holder. The conversion rate for the Preferred Stock was one share of common
stock per share of Preferred Stock. The Preferred Stock was redeemable after May
20, 2003 at $40.46 per share. Net proceeds from the Preferred Stock sale were
approximately $15,298 and were used to repay long-term obligations of the Inform
DX and certain indebtedness assumed, including accrued interest. Proceeds
received in excess of retired indebtedness were used to provide general working
capital and funding for Company acquisitions.
Offering costs and expenses of approximately $702 were recorded against the
aggregate preference value of the Preferred Stock and were being accreted over
five years. Accretion for the period ended December 31, 2000 and 1999 was
approximately $65 and $131, respectively.
The Preferred Stock voted on an as converted basis with the holders of
Inform DX's common stock. The Preferred Stock contained a liquidation preference
over all other classes of Inform DX's capital stock. Furthermore, holders of the
Preferred Stock could have elected to treat certain transactions as liquidation
events. Subject to certain conditions, the Preferred Stock also contained
anti-dilution and preemptive rights. Each holder of shares of the Preferred
Stock was entitled to receive, when and as declared by the Board of Directors,
if at all, dividends on a parity with each holder of shares of common stock.
On June 30, 2000, Inform DX acquired Pathsource, Inc. in a stock for stock
transaction accounted for as a purchase business combination. In connection with
this acquisition, Inform DX provided for an induced conversion of the Preferred
Stock. The induced conversion resulted in the issuance of 642,640 shares of
common stock. Inform DX estimated, based on a third party valuation, the fair
market value of its common stock at June 30, 2000 to be $6.22 per share. Based
on this valuation, Inform DX recorded a charge for the induced conversion of
$1,539, or $6.22 per share times the additional common shares issued of 247,169.
17. EMPLOYEE BENEFIT PLANS
Effective July 1, 1997, the Company consolidated its previous 401(k) plans
into a new qualified 401(k) retirement plan (the "401(k) Plan") covering
substantially all eligible employees as defined in the 401(k) plan. The new
401(k) Plan requires employer matching contributions equal to 50% (25% prior to
July 1, 2000) of the employees' contributions up to a maximum of one thousand
dollars per employee. The Company expensed matching contributions aggregating
$379, $451 and $648 to the new plan in 1998, 1999 and 2000, respectively. Also,
in connection with acquisitions, the Company assumes the obligations under
certain defined contribution plans which cover substantially all eligible
employees of the acquired practices. The Company has not made any contributions
from the dates of acquisition through December 31, 2000.
During 1999, the Company introduced a Supplemental Employee Retirement Plan
("SERP") which covers only selected employees. The SERP is a non-qualified
deferred compensation plan which was established to aid in the retention of the
non-selling physicians and other key employees. In 1999, the eligible
participants were allowed to defer up to ten thousand dollars of compensation
and/or eligible bonuses. If the subscription to the plan fell below an
established deferral range, the participating individuals were allowed to defer
additional funds. The Company may also make discretionary contributions to the
SERP. Employee and employer contributions to the SERP for the years ended
December 31, 1999 and 2000, were $428 and $20, and $484 and $76, respectively.
The Company also sponsors certain defined contribution plans for
substantially all employees of the former Inform DX who are at least 21 years
old, have been employed by the Company for at least one year and have completed
1,000 hours of service. These plans include a 401(k)/profit sharing plan and a
money purchase pension plan. Under the 401(k)/profit sharing plan, employees may
contribute up to 15%
F-38
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of their qualifying salary on a pre-tax basis, subject to Federal income tax
limitations. In 1998, the Company matched 100% of the employee contributions up
to 3% of employee contributions. In addition, the Company contributed 0.5% of
qualifying compensation as a profit sharing distribution and 3% of qualifying
compensation to the money purchase pension plan.
In 1999, the Company matched 100% of the first 3% of employee contributions
and 50% of employee contributions between 3% and 5%. The amount expensed under
all plans for Company contributions was approximately $536 and $765 in 1999 and
2000, respectively.
18. COMMITMENTS AND CONTINGENCIES
During the ordinary course of business, the Company has become and may in
the future become subject to pending and threatened legal actions and
proceedings. The Company may have liability with respect to its employees and
its pathologists as well as with respect to hospital employees who are under the
supervision of the hospital based pathologists. The majority of the pending
legal proceedings involve claims of medical malpractice. Most of these relate to
cytology services. These claims are generally covered by insurance. Based upon
investigations conducted to date, the Company believes the outcome of such
pending 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. If the Company is ultimately found liable under
these medical malpractice claims, there can be no assurance that the Company's
medical malpractice insurance coverage will be adequate to cover any such
liability. The Company may also, from time to time, be involved with legal
actions related to the acquisition of and affiliation with physician practices,
the prior conduct of such practices, or the employment (and restriction on
competition of) physicians, or the employment of non-physician personnel. There
can be no assurance any costs or liabilities for which the Company becomes
responsible in connection with such claims or actions will not be material or
will not exceed the limitations of any applicable indemnification provisions or
the financial resources of the indemnifying parties.
Liability Insurance. The Company is insured with respect to general
liability on an occurrence basis and medical malpractice risks on a claims made
basis. The Company records an estimate of its liabilities for claims incurred
but not reported. Such liabilities are not discounted. Effective July 1, 1999,
the Company changed its medical malpractice carrier and the Company is currently
in a dispute with its former insurance carrier on an issue related to the
applicability of surplus insurance coverage. The Company believes that an
unfavorable resolution, if any, of such dispute will not have a material adverse
effect on the Company's financial position or results of operations.
Healthcare Regulatory Environment and Reliance on Government Programs. The
health care industry in general, and the services that the Company provides, are
subject to extensive federal and state laws and regulations. Additionally, a
significant portion of the Company's net revenue is from payments by
government-sponsored health care programs, principally Medicare and Medicaid,
and is subject to audit and adjustments by applicable regulatory agencies.
Failure to comply with any of these laws or regulations, the results of
increased regulatory audits and adjustments, or changes in the interpretation of
the coding of services or the amounts payable for the Company's services under
these programs could have a material adverse effect on the Company's financial
position and results of operations.
Internal Revenue Service Examination. The Internal Revenue Service (the
"IRS") conducted an examination of the Company's federal income tax returns for
the tax years ended December 31, 1996 and 1997 and concluded during 2000 that no
changes to the tax reported needed to be made. Although the Company believes it
is in compliance with all applicable IRS rules and regulations, if the IRS
should determine the Company is not in compliance in any other years, it could
have a material adverse effect on the Company's financial position and results
of operations.
F-39
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employment Agreements. The Company has entered into employment agreements
with certain of its management employees, which include, among other terms,
noncompetitive provisions and salary benefits continuation.
19. RELATED PARTY TRANSACTIONS
Operating Leases. The Company leases laboratory and administrative
facilities used in the operations of eight practices from entities beneficially
owned by some of the Company's common stockholders. The terms of the leases
expire from 2000 to 2003 and some contain options to renew for additional
periods. Lease payments made under leases with related parties were $478, $644
and $1,140 in 1998, 1999 and 2000, respectively.
20. INCOME TAXES
The provision for income taxes for the years ended December 31, 1998, 1999
and 2000 consists of the following:
YEAR ENDED DECEMBER 31,
---------------------------
1998 1999 2000
------- ------- -------
Current:
Federal................................................. $15,177 $17,465 $20,958
State................................................... 2,371 2,015 2,227
------- ------- -------
Total current provision......................... 17,548 19,480 23,185
------- ------- -------
Deferred:
Federal................................................. (3,234) (1,799) (8,242)
State................................................... (373) (207) (85)
------- ------- -------
Total deferred benefit.......................... (3,607) (2,006) (9,117)
------- ------- -------
Total provision for income taxes................ $13,941 $17,474 $14,068
======= ======= =======
The effective tax rate on income before income taxes is reconciled to the
statutory federal income tax rate as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999 2000
----- ----- -----
Statutory federal rate...................................... 35.0% 35.0% 35.0%
State income taxes, net of federal income tax benefit....... 4.0 4.0 3.7
Non-deductible items, primarily amortization of goodwill.... 2.8 3.3 8.6
Non-deductible items, merger-related charges................ 0.0 0.0 4.8
Other....................................................... 1.5 1.2 (0.3)
---- ---- ----
43.3% 43.5% 51.8%
==== ==== ====
F-40
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the deferred income tax assets and
liabilities as of December 31, 1999 and 2000:
DECEMBER 31,
-------------------
1999 2000
-------- --------
Deferred tax assets (short term):
Allowance for doubtful accounts........................... $ 6,093 $ 8,479
Accrued liabilities....................................... 884 1,499
-------- --------
Deferred tax assets (short term)....................... 6,977 9,978
-------- --------
Deferred tax liabilities (short term):
481(a) adjustment......................................... (1,571) (1,385)
Other..................................................... (1) --
-------- --------
Deferred tax liabilities (short term)..................... (1,572) (1,385)
-------- --------
Net short term deferred tax assets................ 5,405 8,593
-------- --------
Deferred tax assets (long-term):
Net operating loss........................................ 5,105 6,955
Other..................................................... -- 1,255
-------- --------
Deferred tax assets (long-term)........................... 5,105 8,210
Less: valuation allowance.............................. (3,004) (3,548)
-------- --------
Net deferred tax assets (long-term)............... 2,101 4,662
-------- --------
Deferred tax liabilities (long-term):
Change from cash to accrual basis of accounting by the
acquisitions........................................... (1,355) (1,178)
Intangible assets acquired................................ (62,837) (67,059)
Property and equipment.................................... (430) (471)
-------- --------
Deferred tax liabilities (long-term)................... (64,622) (68,708)
-------- --------
Net long-term deferred tax liability.............. (62,521) (64,046)
-------- --------
Net deferred tax assets (liabilities)....................... $(57,116) $(55,453)
======== ========
F-41
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
21. EARNINGS PER SHARE
Earnings per share are computed and presented in accordance with SFAS No.
128, Earnings Per Share. Basic earnings per share excludes dilution and is
computed by dividing net income or loss attributable to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. The effects of Redeemable Preferred Stock are
calculated using the as if converted method and the effects of stock options are
calculated using the treasury stock method.
YEARS ENDED DECEMBER 31,
---------------------------
1998 1999 2000
------- ------- -------
Earnings Per Common Share:
Net income attributable to common shareholders.......... $18,168 $22,580 $11,488
======= ======= =======
Basic earnings per common share......................... $ 0.87 $ 1.03 $ 0.49
======= ======= =======
Diluted earnings per common share....................... $ 0.84 $ 1.00 $ 0.47
======= ======= =======
Basic weighted average shares outstanding............ 20,911 21,984 23,473
Effect of dilutive stock options and contingent
shares............................................. 699 532 764
------- ------- -------
Diluted weighted average shares outstanding.......... 21,610 22,516 24,237
======= ======= =======
Options to purchase 333,405 shares, 774,590 shares and 453,818 shares of
common stock which were outstanding at December 31, 1998, 1999 and 2000,
respectively, have been excluded from the calculation of diluted earnings per
share for the respective years because their effect would be anti-dilutive. In
addition, 395,471 shares of Preferred Stock were excluded from the calculation
of diluted earnings per share for the years ended December 31, 1998 and 1999
because their effect would be anti-dilutive. Warrants to purchase shares of
41,116 and 38,867 for the years December 31, 1998 and 1999, respectively, were
excluded from the calculation of diluted earnings per share because their effect
would be anti-dilutive.
22. SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental information presents the non-cash impact on the
balance sheet of assets acquired and liabilities assumed in connection with
acquisitions consummated during the years ended December 31, 1998, 1999 and
2000:
YEARS ENDED DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
Assets acquired........................................ $ 98,263 $ 74,745 $ 64,633
Liabilities assumed.................................... (24,543) (19,850) (19,996)
Common stock issued.................................... (16,226) (3,149) (12,180)
-------- -------- --------
Cash paid for acquisitions............................. 57,494 51,746 32,457
Less cash acquired..................................... (789) (1,541) (6,955)
-------- -------- --------
Net cash paid for acquisitions......................... 56,705 50,205 25,502
Costs related to completed and pending acquisitions.... 3,767 1,438 (573)
-------- -------- --------
Cash paid for acquisitions and acquisition costs, net
of cash acquired..................................... $ 60,472 $ 51,643 $ 24,929
======== ======== ========
F-42
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As more fully discussed in Note 16 to the consolidated financial
statements, in connection with the PathSource, Inc. acquisition, Inform DX
provided for an induced conversion of the Preferred Stock. The induced
conversion resulted in the issuance of 642,640 shares of common stock. Inform DX
estimated, based on a third party valuation, the fair market value of its common
stock at June 30, 2000 to be $6.22 per share. Based on this valuation, Inform DX
recorded a non-cash charge for the induced conversion of $1,539, or $6.22 per
share times the additional common shares issued of 247,169.
23. PREFERRED SHARE PURCHASE RIGHTS PLAN
On April 8, 1999, the Board of Directors of the Company adopted a Preferred
Share Purchase Rights Plan (the "Rights Plan") and, in connection therewith,
declared a dividend distribution of one preferred share purchase right ("Right")
on each outstanding share of the Company's common stock to shareholders of
record at the close of business on April 19, 1999. The Rights will expire on
April 8, 2009. The adoption of the Rights Plan and the distribution of the
Rights is not dilutive, does not affect reported earnings per share, and is not
taxable to shareholders.
Subject to the terms of the Rights Plan, each Right entitles the registered
holder to purchase from the Company one one-thousandth of a share of the
Company's Series A Junior Participating Preferred Stock (the "Preferred
Shares"). Each Right has an initial exercise price of $45.00 for one
one-thousandth of a Preferred Share (subject to adjustment). The Rights will be
exercisable only if a person or group acquires 15% or more of the Company's
common stock or announces a tender or exchange offer the consummation of which
would result in ownership by a person or group of 15% or more of the common
stock. Upon any such occurrence, each Right will entitle its holder (other than
such person or group of affiliated or associated persons) to purchase, at the
Right's then current exercise price, a number of the Company's common shares
having a market value of twice such price.
24. SEGMENT REPORTING
The Company has two reportable segments, Owned and Managed practices. The
segments were determined based on the type of service and customer. Owned
practices provide anatomic pathology services to hospitals and referring
physicians, while under the management relationships, the Company provides
management services to the affiliated physician groups. The accounting policies
of the segments are the same as those described in the summary of accounting
policies. The Company evaluates performance based on revenue and income before
amortization of intangible, merger-related charges, asset impairment and related
charges, interest expense, other income and expense and income taxes ("Operating
Income"). In addition to the business segments above the Company evaluates
certain corporate expenses which are not allocated to the business segments.
F-43
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the financial information for the business
segments and corporate.
1998 1999 2000
OWNED -------- -------- --------
Net patient service revenue................................. $177,304 $233,269 $308,365
Operating income............................................ 60,282 73,676 94,346
Segment assets.............................................. 108,941 139,791 250,814
MANAGED
Net management service revenue.............................. $ 16,012 $ 24,163 $ 21,729
Operating income (loss)..................................... 2,731 4,299 (304)
Segment assets.............................................. 14,622 15,533 18,723
CORPORATE
Operating (expense)......................................... $(12,804) $(15,676) $(19,789)
Segment assets.............................................. 292,763 351,138 330,143
Elimination of Intercompany Accounts........................ (25,913) (27,566) (37,514)
25. SUBSEQUENT EVENTS
Contingent Note Payments. Subsequent to December 31, 2000, the Company
paid approximately $17,590 on contingent notes issued in connection with
acquisitions.
26. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table presents certain unaudited quarterly financial data for
each of the quarters in the years ended December 31, 1999 and 2000. This
information has been prepared on the same basis as the Consolidated Financial
Statements and includes, 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 related Notes thereto. The operating results for any quarter are
not necessarily indicative of results for any future period or for the full
year. Adjustments have been made to the quarterly financial statements to
reflect the acquisition of Inform DX, which was accounted for as a pooling of
interests, as more further described in Note 3, Mergers and Acquisitions. These
adjustments are reflected in all line items below and for all quarters presented
except the fourth quarter of 2000.
F-44
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
1999 CALENDAR QUARTERS 2000 CALENDAR QUARTERS
------------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
------- ------- ------- ------- ------- ------- ------- -------
Net patient service revenue....... $52,336 $55,406 $59,866 $65,661 $68,888 $74,372 $79,650 $85,455
Management service revenue........ 5,581 6,053 6,209 6,320 6,155 6,562 6,871 2,141
------- ------- ------- ------- ------- ------- ------- -------
Net revenue.............. 57,917 61,459 66,075 71,981 75,043 80,934 86,521 87,596
------- ------- ------- ------- ------- ------- ------- -------
Operating costs and expenses:
Cost of services................ 26,950 28,377 31,638 35,720 36,950 38,826 42,415 45,199
Selling, general and
administrative expense........ 11,140 11,295 12,190 12,534 13,141 14,285 15,234 15,751
Provision for doubtful
accounts...................... 5,963 6,578 6,005 6,743 7,103 8,349 8,868 9,720
Amortization expense............ 2,757 2,947 3,420 3,703 3,837 3,897 4,043 4,395
Merger-related charges (1)...... -- -- -- -- -- -- -- 6,209
Asset impairment and related
charges (2)................... -- -- -- -- -- 5,245 -- 4,317
------- ------- ------- ------- ------- ------- ------- -------
Total.................... 46,810 49,197 53,253 58,700 61,031 70,602 70,560 85,591
------- ------- ------- ------- ------- ------- ------- -------
Income from operations............ 11,107 12,262 12,822 13,281 14,012 10,332 15,961 2,005
Interest expense.................. (1,973) (2,175) (2,580) (2,845) (3,418) (3,558) (3,657) (4,743)
Other income (expense), net....... 55 47 95 89 63 50 91 22
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes........................... 9,189 10,134 10,337 10,525 10,657 6,824 12,395 (2,716)
Provision for income taxes........ 4,057 4,394 4,540 4,483 4,559 3,852 5,159 498
------- ------- ------- ------- ------- ------- ------- -------
Net income........................ 5,132 5,740 5,797 6,042 6,098 2,972 7,236 (3,214)
Induced conversion and accretion
of redeemable preferred stock... (33) (33) (33) (32) (34) (1,570) -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income attributable to common
stockholders.................... $ 5,099 $ 5,707 $ 5,764 $ 6,010 $ 6,064 $ 1,402 $ 7,236 $(3,214)
======= ======= ======= ======= ======= ======= ======= =======
Per share data:
Basic earnings per common
share......................... $ .23 $ .26 $ .26 $ .27 $ .27 $ .06 $ .30 $ (.13)
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings per common
share......................... $ .23 $ .26 $ .25 $ .26 $ .27 $ .06 $ .29 $ (.13)
======= ======= ======= ======= ======= ======= ======= =======
---------------
(1) In connection with the Inform DX merger, the Company recorded $6,209 of
costs as they related to transaction fees, change in control payments and
various exit costs associated with the consolidation of certain operations.
(2) In connection with the loss of two hospital contracts and an ambulatory care
facility contract in Cleveland, Ohio, the Company recorded a non-recurring
charge of $5,245 in the second quarter of 2000. In connection with Quest
Diagnostics termination of its contract in South Florida and the loss of a
renewable contract with a hospital in South Florida, the Company recorded a
non-recurring charge of $4,317 in the fourth quarter of 2000. The charge was
based upon the remaining projected cash flows from these contracts in which
the Company determined that the intangible assets that were recorded from
acquisitions in these areas had been impaired.
Certain reclassifications have been made to the quarterly consolidated
statements of operations to conform to the annual presentations.
F-45
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
4,125,000 SHARES
AMERIPATH, INC.
COMMON STOCK
(AMERIPATH(R) LOGO)
------------
PROSPECTUS
, 2001
------------
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
U.S. BANCORP PIPER JAFFRAY
WACHOVIA SECURITIES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be borne by
AmeriPath in connection with the issuance and distribution of the securities
being registered hereby, other than underwriting discounts and commissions.
AmeriPath is paying all of these expenses in connection with the issuance and
distribution of the securities.
SEC Registration Fee........................................ $ 35,827
NASD Filing Fee............................................. 14,831
Nasdaq National Market Listing Fee.......................... 17,500
Accountants' Fee and Expenses............................... 100,000
Legal Fees and Expenses..................................... 600,000
Printing and Engraving Costs................................ 100,000
Transfer Agent and Registrar Fees........................... 3,500
Miscellaneous............................................... 3,342
--------
Total............................................. $875,000
========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our amended and restated certificate of incorporation eliminates the
personal liability of our directors to AmeriPath and its stockholders for
monetary damages for breach of fiduciary duty as a director, except that it does
not eliminate the liability of a director:
- for any breach of the duty of loyalty to AmeriPath and its stockholders;
- for acts or omissions not in good faith which involve intentional
misconduct or a knowing violation of law;
- under the Delaware General Corporation Law for a director's willful or
negligent violation of statutory provisions that prevent the unlawful
payment of a dividend; and
- for any transaction in which a director receives an improper personal
benefit.
In addition, if at any time the Delaware General Corporation Law is amended
to authorize further elimination or limitation of the personal liability of a
director, then the liability of each of our directors shall be eliminated or
limited to the fullest extent permitted by such provisions, as so amended,
without further action by the stockholders, unless otherwise required.
Our bylaws require us to indemnify any director or officer of AmeriPath who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding (other than an action by or in the right
of AmeriPath) by reason of the fact that the indemnified person was or is a
director, officer, employee or agent of AmeriPath, or is or was serving at the
request of AmeriPath as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by such indemnified person in connection with such action,
suit or proceeding, as long as the indemnified person:
- acted in good faith;
- acted in a manner reasonably believed to be in or not opposed to the best
interests of AmeriPath; and
- with respect to any criminal action or proceeding, had no reasonable
cause to believe his or her conduct was unlawful.
II-1
Our bylaws also require us to indemnify any director or officer of
AmeriPath who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of AmeriPath
to procure a judgment in AmeriPath's favor by reason of the fact that the
indemnified person was or is a director, officer, employee or agent of
AmeriPath, or is or was serving at the request of AmeriPath as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses actually and reasonably incurred by
such indemnified person in connection with the defense or settlement of such
action or suit, as long as the indemnified person:
- acted in good faith; and
- acted in a manner reasonably believed to be in or not opposed to the best
interests of AmeriPath.
However, no indemnification shall be made by us under the preceding
paragraph in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to AmeriPath unless otherwise determined by
court order.
The determination of whether the applicable standard of conduct described
above has been meet shall be made, with respect to a person who is director or
officer at the time of such determination:
- by a majority vote of the directors who are not parties to such action,
suit or proceeding ("disinterested directors"), even though less than a
quorum; or
- by a committee of disinterested directors designated by a majority vote
of the disinterested directors, even though less than a quorum; or
- if there are no disinterested directors, or if the disinterested
directors so direct, by independent legal counsel in a written opinion;
or
- by the stockholders.
AmeriPath also has written indemnification agreements with each of its
directors and executive officers that provide for substantially the same scope
of indemnification as is provided to directors and officers of AmeriPath under
AmeriPath's bylaws.
AmeriPath maintains a standard form of officers' and directors' liability
insurance policy that provides coverage to its officers and directors for
certain liabilities, including certain liabilities that may arise out of this
registration statement.
We have agreed to indemnify each underwriter, the directors, officers,
employees and agents of each underwriter and each person controlling any
underwriter within the meaning of the Securities Act or the Exchange Act against
any losses, claims, damages or liabilities, joint or several, to which they
become subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in this registration statement, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading.
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1 -- Form of Underwriting Agreement
2.1 -- Agreement and Plan of Merger by and among the Registrant,
AMP Merger Corp. and Pathology Consultants of America, Inc.
(d/b/a Inform DX), dated as of November 7, 2000
(incorporated by reference from Exhibit 2.2 to our Annual
Report on Form 10-K for the fiscal year ended December 31,
2000)
4.1 -- Amended and Restated Certificate of Incorporation
(incorporated by reference from Exhibit 3.1 to our
registration statement on Form S-1, Registration No.
333-34265)
4.2 -- Certificate of Amendment to the Amended and Restated
Certificate of Incorporation (incorporated by reference from
Exhibit 3.3 to our registration statement on Form S-1,
Registration No. 333-34265)
4.3 -- Certificate of Amendment to the Amended and Restated
Certificate of Incorporation (incorporated by reference from
Exhibit 4.4 to our registration statement on Form S-3,
Registration No. 333-59324)
4.4 -- Amended and Restated Bylaws (incorporated by reference from
Exhibit 4.2 to our registration statement on Form S-3,
Registration No. 333-59324)
4.5 -- Rights Agreement, dated as of April 8, 1999, between the
Registrant and American Stock Transfer & Trust Company, as
Rights Agent including the form of Certificate of
Designations of Series A Junior Participating Preferred
Stock, the form of Rights Certificate, and the form of
Summary of Rights (incorporated by reference to Exhibit 4.1
to our Current Report on Form 8-K filed April 16, 1999)
4.6 -- Registration Rights Agreement, dated November 30, 2000,
among the Registrant and the Shareholders and Warrant
Holders of Pathology Consultants of America, Inc. (d/b/a
Inform DX) (incorporated by reference from Exhibit 10.46 to
our Annual Report on Form 10-K for the fiscal year ended
December 31, 2000)
5.1 -- Opinion of Alston & Bird LLP, including consent
23.1 -- Consent of Deloitte & Touche LLP (previously filed)
23.2 -- Consent of Ernst & Young, LLP (previously filed)
23.3 -- Consent of Alston & Bird LLP (filed as part of Exhibit 5.1)
24.1 -- Power of Attorney (included as part of the signature page to
the registration statement as filed on September 17, 2001)
(b) Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of
II-3
securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this Section
do not apply if the registration statement is on Form S-3, Form S-8 or Form
F-3 and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with
or furnished to the Commission by the registrant pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby further undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Riviera Beach, State of Florida on the 19th day of
October, 2001.
AmeriPath, Inc.
By: /s/ GREGORY A. MARSH
------------------------------------
Name: Gregory A. Marsh
Title: Vice President, Chief Financial
Officer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Chairman and Chief Executive October 19, 2001
----------------------------------------------------- Officer (Principal Executive
James C. New Officer)
/s/ GREGORY A. MARSH Vice President, Chief October 19, 2001
----------------------------------------------------- Financial Officer and
Gregory A. Marsh Secretary (Principal
Financial and Accounting
Officer)
* Director October 19, 2001
-----------------------------------------------------
Brian C. Carr
* Director October 19, 2001
-----------------------------------------------------
Haywood D. Cochrane, Jr.
* Director October 19, 2001
-----------------------------------------------------
E. Martin Gibson
* Director October 19, 2001
-----------------------------------------------------
Alan Levin, M.D.
* Director October 19, 2001
-----------------------------------------------------
C. Arnold Renschler, M.D.
* Director October 19, 2001
-----------------------------------------------------
E. Roe Stamps, IV
*By: /s/ GREGORY A. MARSH
------------------------------------------------
Gregory A. Marsh
Attorney-in-Fact
II-5
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1 -- Form of Underwriting Agreement
2.1 -- Agreement and Plan of Merger by and among the Registrant,
AMP Merger Corp. and Pathology Consultants of America, Inc.
(d/b/a Inform DX), dated as of November 7, 2000
(incorporated by reference from Exhibit 2.2 to our Annual
Report on Form 10-K for the fiscal year ended December 31,
2000)
4.1 -- Amended and Restated Certificate of Incorporation
(incorporated by reference from Exhibit 3.1 to our
registration statement on Form S-1, Registration No.
333-34265)
4.2 -- Certificate of Amendment to the Amended and Restated
Certificate of Incorporation (incorporated by reference from
Exhibit 3.3 to our registration statement on Form S-1,
Registration No. 333-34265)
4.3 -- Certificate of Amendment to the Amended and Restated
Certificate of Incorporation (incorporated by reference from
Exhibit 4.4 to our registration statement on Form S-3,
Registration No. 333-59324)
4.4 -- Amended and Restated Bylaws (incorporated by reference from
Exhibit 4.2 to our registration statement on Form S-3,
Registration No. 333-59324)
4.5 -- Rights Agreement, dated as of April 8, 1999, between the
Registrant and American Stock Transfer & Trust Company, as
Rights Agent including the form of Certificate of
Designations of Series A Junior Participating Preferred
Stock, the form of Rights Certificate, and the form of
Summary of Rights (incorporated by reference to Exhibit 4.1
to our Current Report on Form 8-K filed April 16, 1999)
4.6 -- Registration Rights Agreement, dated November 30, 2000,
among the Registrant and the Shareholders and Warrant
Holders of Pathology Consultants of America, Inc. (d/b/a
Inform DX) (incorporated by reference from Exhibit 10.46 to
our Annual Report on Form 10-K for the fiscal year ended
December 31, 2000)
5.1 -- Opinion of Alston & Bird LLP, including consent
23.1 -- Consent of Deloitte & Touche LLP (previously filed)
23.2 -- Consent of Ernst & Young, LLP (previously filed)
23.3 -- Consent of Alston & Bird LLP (filed as part of Exhibit 5.1)
24.1 -- Power of Attorney (included as part of the signature page to
the registration statement as filed on September 17, 2001)