UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-22313
AMERIPATH, INC.
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(Exact name of registrant as specified in its charter)
Delaware 65-0642485
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7289 Garden Road, Suite 200, Riviera Beach, Florida 33404
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(Address of principal executive offices) (Zip Code)
(561) 845-1850
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and formal fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
The registrant had 25,280,583 shares of common stock, $.01 par value,
outstanding as of August 10, 2001.
AMERIPATH, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2001 and December 31, 2000 (Unaudited) 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2001 and 2000 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-31
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities and Use of Proceeds 32
Item 4. Submission of Matters to Vote of Security Holders 32-33
Item 6. Exhibits and Reports on Form 8-K 33-34
SIGNATURES 35
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
June 30, December 31,
2001 2000
--------- ------------
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.
3
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2001 2000 2001 2000
-------- ------- -------- --------
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.
4
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------
2001 2000
--------- --------
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.
5
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 in the Company's Annual Report on Form 10-K, as amended, for
the year ended December 31, 2000, as filed with the Securities and Exchange
Commission.
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 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.
6
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 conditions 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
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.
7
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Pro Forma (Unaudited)
Six Months Ended
June 30,
2000
---------------------
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.
8
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
healthcare 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
9
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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. 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 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.
10
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 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.
11
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following is a summary of the financial information for the three and six
months ended June 30 for the business segments and corporate.
Owned Three months ended June 30, Six months ended June 30,
------ ---------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
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
Managed Three months ended June 30, Six months ended June 30,
-------- ---------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
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
Corporate Three months ended June 30, Six months ended June 30,
---------- ---------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
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.
12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is a leading national provider of cancer diagnostics, genomic, and
related information services. Since the first quarter of 1996, the Company has
completed the acquisition of 49 physician practices (the "Practices") located in
21 states. These practices are either directly owned by the Company or managed
by the Company through one of its subsidiaries. This includes the acquisition of
Pathology Consultants of America, Inc., d/b/a Inform DX ("Inform DX"). The
Inform DX transaction was accounted for as a pooling of interests and therefore
all prior year information has been restated to reflect the acquisition of
Inform DX. As a result of the Inform DX acquisition, the Company now manages
several practices through which it derives management fees. The Company's 427
pathologists provide medical diagnostic services in outpatient laboratories
owned, operated and managed by the Company, hospitals, and outpatient ambulatory
surgery centers. Of these pathologists, 421 are board certified in anatomic and
clinical pathology, and 190 are also board certified in a subspecialty of
anatomic pathology, including dermatopathology (study of diseases of the skin),
hematopathology (study of diseases of the blood) and cytopathology (study of
abnormalities of the cells).
Under the 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").
As of June 30, 2001, the Company and the Managed Practices had contracts and/or
business relationships with a total of 237 hospitals pursuant to which the
Company manages their clinical pathology and other laboratories and provides
professional pathology services. The majority of these hospital contracts and
relationships are exclusive provider relationships of the Company and the
Managed Practices. The Company and the Managed Practices also have 42 licensed
outpatient laboratories.
The Company manages and controls all of the non-medical functions of the
practices, including: (i) recruiting, training, employing and managing the
technical and support staff of the practices; (ii) developing, equipping and
staffing laboratory facilities; (iii) establishing and maintaining courier
services to transport specimens; (iv) negotiating and maintaining contracts with
hospitals, national clinical laboratories and managed care organizations and
other payors; (v) 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; and (vi) with respect to the Company's ownership and operation of
anatomic pathology laboratories, providing slide preparation and other technical
services. The Company is not licensed to practice medicine.
The Company has commenced its transition to becoming a fully integrated
healthcare diagnostic information provider, which includes the Company's
development of new ways to generate additional revenues through leveraging the
Company's personnel, technology and resources. Two examples of such endeavors
(one with Genomics Collaborative, Inc. and one with Ampersand Medical of
Chicago) are described below. Although the Company believes that such new
endeavors are promising, there can be no assurance that they will be profitable.
During the second 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 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 the
Company's 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 the Company's operations during 2000 and
for the six months ended June 30, 2001. The Company is working with GCI to
develop
13
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 of the Company. On September 15,
2000, the Company 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, the Company announced an agreement with Ampersand Medical of
Chicago ("Ampersand") which illustrates another example of leveraging the
Company's existing resources. In this alliance, AmeriPath 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. The Company
will be paid on a fee-for-service basis for each clinical trial we conduct. The
agreement also calls for the Company to assist Ampersand with the development of
associated products and tests. The Company 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. AmeriPath is particularly excited about the
prospects for 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.
Net Revenues
AmeriPath derives its net revenue primarily from the operations of the 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.
Net patient revenues. The majority of services furnished by the Company's
pathologists are anatomic pathology diagnostic services. Medicare reimbursement
for these services represented approximately 21% of the Company's cash
collections at June 30, 2001 and 2000. The Company typically bills 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.
In recent years, there has been a shift away from traditional indemnity
insurance plans to managed care as employers and other payors move their
participants into lower cost plans. The Company benefits more from patients
covered by Medicare and traditional indemnity insurance than managed care
organizations and national clinical laboratories, which contract directly under
capitated agreements with managed care organizations to provide clinical as well
as anatomic pathology services. The Company also contracts with national
clinical laboratories and is attempting to increase the number of such contracts
to increase test volume. Since the majority of the Company's operating costs --
principally the compensation of physicians and non-physician technical
personnel--are relatively fixed, increases in volume, whether from indemnity or
non-indemnity plans, enhance the Company's profitability. Historically, net
patient service revenue from capitated contracts has represented an
insignificant amount of total net patient service revenue.
Virtually all of the Company's net patient service revenue is derived from the
Practices' charging for services on a fee-for-service basis. Accordingly, the
Company assumes 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 AmeriPath
to borrow funds to meet its current obligations or may otherwise have a material
adverse effect on AmeriPath's financial condition and results of operations. In
addition to services billed on a fee-for-service
14
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, AmeriPath bills 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 payors are continuing to increase pressure to reduce the payment
of these clinical professional component billing charges and "Part A" fees, and
in the future the Company may sustain substantial decreases in these payments.
Medicare calculates and reimburses fees for all physician services ("Part B"
fees), including anatomic pathology services, based on a methodology known as
the resource-based relative value system ("RBRVS"), which Medicare began phasing
in since 1992 and had fully implemented by 1997. 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 AmeriPath.
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 each
service is in turn calculated by adding three separate components: work RVU
(intensity of work), practice expense RVU (expense related to performing the
service) and malpractice RVU (malpractice costs associated with the service).
The Balanced Budget Act of 1997 ("BBA") added coverage for an annual screening
pap smear for Medicare beneficiaries who are at high risk of developing cervical
or vaginal cancer and for beneficiaries of childbearing age effective January 1,
1998, as well as coverage for annual prostate cancer screening, including a
prostate-specific antigen blood test, for beneficiaries over age 50, effective
January 1, 2000. Although most women of childbearing age and men under age 65
are not Medicare beneficiaries, the addition of Medicare coverage for these
tests could provide additional revenues for the Company. With the BBA, Congress
merged the three existing conversion factors into one for all types of services
provided resulting in a single conversion factor.
In July 1999, the Centers for Medicare and Medicaid Services ("CMS") (formerly
Health Care Financing Administration "HCFA") announced several proposed rule
changes, and issued a final rule on November 2, 1999 that impacts payment for
pathology services. The changes include: (a) the implementation of
resource-based malpractice relative value units ("RVUs"), which should not
significantly change reimbursement; and (b) the 1997 regulations required CMS to
develop a methodology for resource-based practice expense RVUs for each
physician service beginning in 1998. The BBA provided for a four-year transition
period. CMS has established, and is proposing, a new methodology for computing
resource-based practice expense that uses available practice expense data. In
the November 2, 1999 final rule, an interim solution was developed which created
a separate practice expense pool for all services with zero work RVUs. As
published in the final rule, certain reimbursement codes were removed from the
zero work RVU pool. The impact of these procedures from the zero work pool
varies by procedure and geographic region. The impact of the changes for
pathology revenue were estimated by CMS to be 8%; however, the magnitude of the
impact that Medicare has on AmeriPath depends upon the mix of Medicare and
non-Medicare services. For those outpatient facilities that AmeriPath bills
globally, the average percentage increase was 16.6% for a common CPT code 88305.
On August 10, 2000, the Final Update to the 2000 Medicare Physician Fee Schedule
Database was published by CMS. The changes included increases to various codes
including CPT code 88305. Increases vary by region and averaged 5.7%.
In addition, CMS announced that it will cease the direct payment by Medicare for
the technical component of inpatient physician pathology services to an outside
independent laboratory on the basis that it believes that the cost of the
technical component for inpatient services is already included in the payment to
hospitals under the hospital inpatient prospective payment system.
Implementation of this change was scheduled to commence January 1, 2001.
Congress, however, recently "grandfathered" certain existing hospital-lab
arrangements. CMS has increased the physician fee schedule conversion factor
from $36.61 to $38.26 in 2001.
15
Due to the implementation of the hospital outpatient prospective payment system
("PPS"), independent pathology laboratories providing services to hospital
outpatients generally will no longer be able to bill Medicare for the technical
component ("TC") of those services. Rather, they will need to bill the hospital
for the TC. The hospital will be reimbursed as part of the new Ambulatory
Payment Classification ("APC") payment system. This change will require new
billing arrangements to be made with the hospitals which may result in an
increase in the amount of time necessary for collections and reduction in the
amounts paid. The actual change in revenue has not been determined due to
current negotiations in progress with the hospitals that don't meet the
acceptable "grandfather" clause. There can be no assurance that these changes
will not have an adverse effect on the Company.
As indicated above, a significant portion of AmeriPath's net patient service
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 services under these programs could have a material adverse effect on
AmeriPath's financial position and results of operations.
The impact of legislative changes on AmeriPath's 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 conversion
factors (budget neutrality adjustments) which are published in November of each
year. Management continuously monitors changes in legislation impacting
reimbursement.
In prior years, AmeriPath has been able to mitigate the impact of reductions in
Medicare reimbursement rates for anatomic pathology services through the
achievement of economies of scale and the introduction of alternative
technologies that are not dependent upon reimbursement through the RBRVS system.
Despite any offsets, the recent substantial modifications to the physician fee
schedule, along with additional adjustments by Medicare, could have an effect on
the 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 have a negative impact on
the average unit reimbursement.
Net management service revenue. Net management service revenue is based on a
predetermined percentage of net operating income of the practices managed by the
Company 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.
The underlying calculation of net management service revenue is net physician
group revenue less amounts retained by the physician groups ("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. Physician
Group Retainage is the net physician group revenue less practice expenses and
management fee charged by the Company in accordance with the terms of the
service agreement.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Changes in the results of operations between the three and six month periods
ended June 30, 2001 and 2000 are due primarily to the various acquisitions which
were consummated by the Company subsequent to June 30, 2000. References to "same
store" means practices at which the Company provided services for the entire
period for which the amount is calculated and the entire prior comparable
period, including acquired hospital contracts and relationships and expanded
ancillary testing services added to existing practices. During the first six
months of 2001, the Company completed no acquisitions.
16
PERCENTAGE OF NET REVENUE
The following table sets forth, for the periods indicated, certain consolidated
financial data as a percentage of net revenue (billings net of contractual and
other allowances):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
2001 2000 2001 2000
-------- ------ -------- ------
NET REVENUES 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
OPERATING COSTS AND EXPENSES:
Cost of services 47.0% 48.0% 48.0% 48.6%
Selling, general and administrative expenses 17.3% 17.6% 17.4% 17.6%
Provision for doubtful accounts 11.9% 10.3% 11.4% 9.9%
Amortization expense 4.5% 4.8% 4.5% 4.9%
Merger-related charges -- -- 3.4% --
Asset impairment and related charges -- 6.5% -- 3.4%
------ ------ ------ ------
Total operating costs and expenses 80.7% 87.2% 84.7% 84.4%
------ ------ ------ ------
INCOME FROM OPERATIONS 19.3% 12.8% 15.3% 15.6%
Interest expense and other income, net 4.3% 4.3% 4.6% 4.4%
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 15.0% 8.5% 10.7% 11.2%
PROVISION FOR INCOME TAXES 6.3% 4.8% 4.6% 5.4%
------ ------ ------ ------
NET INCOME 8.7% 3.7% 6.1% 5.8%
Induced conversion and accretion of
redeemable preferred stock -- 2.0% -- 1.0%
------ ------ ------ ------
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
8.7% 1.7% 6.1% 4.8%
------ ------ ------ ------
Net Revenues
Net revenues increased by $24.2 million, or 29.8%, from $80.9 million for the
three months ended June 30, 2000, to $105.1 million for the three months ended
June 30, 2001. Same store net revenue increased $12.0 million, or 15%, from
$80.2 million for the three months ended June 30, 2000 to $92.2 million for the
three months ended June 30, 2001, including approximately $1.3 million related
to the increase in Medicare reimbursement. Same store outpatient revenue
increased $8.4 million, or 27%, same store hospital revenue increased $2.4
million, or 6%, and same store management service revenue increased $1.2
million, or 18%, compared to the same period of the prior year. The remaining
increase in revenue of $12.2 million resulted from the operations of
laboratories acquired during the year 2000.
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. The remaining increase in revenue
of $24.5 million resulted from the operations of laboratories acquired during
the year 2000.
During the six months ended June 30, 2001, approximately $15.1 million, or 7%,
of the Company's net revenue was attributable to contracts with national labs
including Quest Diagnostics ("Quest") and Laboratory Corporation of America
Holdings ("LabCorp"). Effective December 31, 2000, Quest
17
terminated AmeriPath's 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
AmeriPath discontinued its Quest work in San Antonio. Decisions by Quest and/or
LabCorp to discontinue or redirect pathology services, at any or all of its
practices, or the Company's decision to discontinue processing work from the
national labs, could have a material adverse effect on AmeriPath's financial
position and results of operations.
In addition, during the six months ended June 30, 2001, approximately $27.1
million, or 13%, of the Company's net revenue was derived from 28 hospitals
operated by HCA-The Healthcare Company ("HCA"), formerly known as Columbia/HCA
Healthcare Corporation. Generally, any contracts we may have with these and
other hospitals have remaining terms of less than five years and contain clauses
that allow for termination by either party with relatively short notice. 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 the Company's
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 $10.6 million, or 27.2%, from $38.8 million for the three months ended June
30, 2000 to $49.4 million for the same period in 2001. The increase in cost of
services relates primarily to the increase in net revenues (approximately $5.0
million) and the practices acquired since June 30, 2000 (approximately $4.9
million). The increase can also be attributed to the increase in physician
compensation. However, cost of services, as a percentage of net revenues,
decreased slightly from 48.0% for the three months ended June 30, 2000 to 47.0%
in the comparable period of 2001. Gross margin increased from 52.0% in the three
months ended June 30, 2000 to 53.0% for the same period in 2001.
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 million) and the practices acquired since June
30, 2000 (approximately $10.9 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.
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. As a percentage of consolidated net revenues, selling,
general and administrative expenses decreased from 17.6% for the three months
ended June 30, 2000 to 17.3% for the same period of 2001, as the Company
continues to implement measures to better control these costs and continues to
spread these costs over a larger revenue base. One of the Company's objectives
is to decrease these costs as a percentage of net revenues; however, these
costs, as a percentage of net revenue, may increase as the Company continues to
invest in marketing, information systems and billing operations.
Selling, general and administrative expenses increased by $3.9 million, or
27.2%, from $14.3 million for the three months ended June 30, 2000 to $18.2
million for the comparable period of 2001. Of this increase, approximately $1
million was attributable to the increase in billing and collection costs and
approximately $1.2 million is attributable to the acquisitions the Company
completed after June 30, 2000. The remaining increase of $1.7 million 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 the Company's administrative support infrastructure and
to enhance the Company's information systems support services. The increase in
marketing costs includes the cost of additional marketing personnel to
18
cover new markets for dermatopathology, marketing literature, and products to
expand the Company's penetration in the urology, gastroenterology and oncology
markets. The Company's objective is to achieve annual same practice net revenue
growth in excess of 10%; however, there can be no assurance that the Company
will achieve this objective.
As a percentage of consolidated net revenues, selling, general and
administrative expenses decreased from 17.6% for the six months ended June 30,
2000 to 17.4% for the same period of 2001. Selling, general and administrative
expenses 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.
The increase can be attributed to the same reasons stated above, including
approximately $2.1 million attributable to the increase in billing and
collection costs and approximately $2.6 million attributable to the acquisitions
the Company completed after June 30, 2000.
Provision for Doubtful Accounts
The provision for doubtful accounts increased by $4.2 million, or 50.3%, from
$8.3 million for the three months ended June 30, 2000, to $12.5 million for the
same period in 2001. The provision for doubtful accounts as a percentage of net
revenues was 10.3% and 11.9% for the three month periods ended June 30, 2000 and
2001, respectively. This increase was driven by three factors: conservative
reserve practices as the same store revenue accelerates; extended account aging
in some practices where billing systems have been converted and; increased
clinical professional component billing, which generally has a higher bad debt
ratio.
The 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.
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.
Amortization Expense
Amortization expense increased by $757,000, or 19.4%, from $3.9 million for the
three months ended June 30, 2000, to $4.7 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, and payments made on contingent notes,
as well as a reduction in the weighted average amortization periods from 30 to
28 years. Amortization expense is expected to increase for the remainder of 2001
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.
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.
During the third quarter of 2001, 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 which would not exceed, in the
aggregate, $3.9 million. If an impairment charge is necessary, depending upon
the magnitude of the charge, we may have to seek a waiver from our lenders to
avoid violating a covenant under our credit facility.
19
The Company continually evaluates whether events or circumstances have occurred
that may warrant revisions to the carrying values of its 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 the
Company's goodwill or other identifiable intangible assets could have a material
adverse effect on the Company's consolidated financial position and 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 AmeriPath's 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. AmeriPath effectively closed the
Nashville office on March 31, 2001 and based on its current plans expects, 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 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, AmeriPath expects the acquisition of Inform DX to be nominally dilutive
for the first six months and accretive for the year 2001.
Interest Expense
Interest expense increased by $1.1 million, or 32.0%, from $3.6 million for the
three months ended June 30, 2000, to $4.7 million for the same period in 2001.
The majority of this increase was attributable to the higher average amount of
debt outstanding during the three months ended June 30, 2001. For the three
months ended June 30, 2001, average indebtedness outstanding was $211.9 million,
compared to average indebtedness of $172.9 million outstanding in the same
period of 2000. The Company's effective interest rate was 8.9% and 8.2% for the
three month periods ended June 30, 2001 and 2000, respectively.
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.
The Company's effective interest rate was 9.0% and 8.1% for the six month
periods ended June 30, 2001 and 2000, respectively. Although there have seen
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 56.4% and 41.8% for the
three-month period ended June 30, 2000 and 2001, respectively. Generally, the
effective tax rate is higher than AmeriPath's statutory rates primarily due to
the non-deductibility of the goodwill amortization related to the Company's
acquisitions. In addition, for the three-month period ended June 30, 2000, the
Company had non-deductible asset impairment charges, which further increased the
effective tax rate. The effective tax rate for the three-month period ended June
30, 2000, excluding these items would have been approximately 42.7%.
The effective income tax rate was approximately 48.1% and 43.2% for the
six-month periods ended June 30, 2000 and 2001, respectively. In addition to
non-deductible goodwill amortization, the Company 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.
20
Income from Operations and Net Income Attributable to Common Stockholders
Income from operations increased $10.0 million, or 96.4%, from $10.3 million for
the three months ended June 30, 2000, to $20.3 million in the same period of
2001. Without giving effect to asset impairment charges of $5.2 million in 2000,
income from operations increased by $4.7 million, or 30.3%, from $15.6 million
in the three months ended June 30, 2000 to $20.3 million in the same period of
2001.
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.
Net income attributable to common stockholders for the three months ended June
30, 2001 was $9.1 million, an increase of $7.7 million, or 552%, 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, net income increased by $2.2 million, or 32.2%, from
$6.9 million in the three months ended June 30, 2000 to $9.1 million in the same
period of 2001. Diluted earnings per share for the three months ended June 30,
2001 increased to $0.35 from $0.06 for the comparable period of 2000, based on
26.1 million and 23.4 million weighted average shares outstanding, respectively.
Diluted earnings per share for the three months ended June 30, 2000 would have
been $0.30 without the asset impairment charges and the charge for the induced
conversion of redeemable preferred stock.
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.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, the Company 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, 11% of net revenue, and $15.8 million, 7.7% of
net revenue, respectively. Excluding pooling merger-related charges paid for
Inform DX of $3.1 million, cash flow from operations 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 the Company's Credit Facility were
used to make contingent note payments of $22.1 million and acquire $4.6 million
of property and equipment.
At June 30, 2001, the Company had $73.5 million available under its 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, the Company entered into three interest rate swaps transactions
with an effective date of October 5, 2000, various maturity dates, and a
combined notional amount of $105 million. See Item 3. - Quantitative and
Qualitative Disclosures About Market Risk 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
21
received is accrued and is recognized as an adjustment to interest expense.
These agreements are indexed to 30 day LIBOR. The Company uses derivative
financial instruments to reduce interest rate volatility and associated risks
arising from the floating rate structure of its credit facility and they 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. At June
30, 2001, the Company believes that it is in compliance with the covenants of
the Credit Facility.
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.
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.
The Company expects to continue to use its credit facility to fund acquisitions
and for working capital. The Company anticipates that funds generated by
operations and funds available under the credit facility will be sufficient to
meet working capital requirements and contingent note obligations, and to
finance capital expenditures over the next 12 months. Further, in the event
payments under the contingent notes issued in connection with acquisitions
become due, the Company believes that the incremental cash generated from
operations would exceed the cash required to satisfy the Company's payment, if
any, of the contingent obligations in any one year period. Such payments, if
any, will result in a corresponding increase in goodwill in periods following
the payment. Funds generated from operations and funds available under the
credit facility may not be sufficient to implement the Company's longer-term
growth strategy.
QUALIFICATION OF FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements made
pursuant to the safe harbor provisions of the Securities Litigation Reform Act
of 1995. Statements contained anywhere in this Form 10-Q that are not limited to
historical information are considered forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including, without limitation, statements
regarding the Company's expectations, beliefs, intentions, plans or strategies
regarding the future. These forward-looking statements are based largely on the
Company's expectations which are subject to a number of known and unknown risks,
uncertainties and other factors discussed in this report and in other documents
filed by the Company with the Securities and Exchange Commission (including,
without limitation, the Company's Annual Report on Form 10-K, as amended, for
the year ended December 31, 2000 and the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001), which may cause actual results to be
materially different from those anticipated, expressed or implied by the
forward-looking statements. All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements to reflect future events or circumstances. Forward-looking statements
are sometimes indicated by words such as "may," "should," "believe," "expect,"
"anticipate" and similar expressions.
In addition to the risks and uncertainties identified elsewhere herein and in
other documents filed by the Company with the Securities and Exchange
Commission, the following factors should be carefully considered when evaluating
the Company's business and future prospects: general economic conditions;
competition and changes in competitive factors; the extent of success of the
Company's operating initiatives and growth strategies (including without
limitation, the Company's continuing efforts to (i) achieve continuing
improvements in performance of its current operations, by reason of various
synergies, marketing efforts, revenue growth, cost savings or otherwise, (ii)
transition into becoming a fully integrated
22
healthcare diagnostic information provider, including the Company's efforts to
develop, and the Company's investment in, new products, services, technologies
and related alliances, such as the alliance with Genomics Collaborative, Inc.
(iii) acquire or develop additional pathology practices (as further described
below), and (iv) develop and expand its managed care and national clinical lab
contracts); federal and state healthcare regulation (and compliance);
reimbursement rates under government-sponsored and third party healthcare
programs and the payments received under such programs; changes in coding;
changes in technology; dependence upon pathologists and contracts; the ability
to attract, motivate, and retain pathologists; labor and technology costs;
marketing and promotional efforts; the availability of pathology practices in
appropriate locations that the Company is able to acquire on suitable terms or
develop; the successful completion and integration of acquisitions (and
achievement of planned or expected synergies); access to sufficient amounts of
capital on satisfactory terms; and tax laws. In addition, the Company's strategy
to penetrate and develop new markets involves a number of risks and challenges
and there can be no assurance that the healthcare regulations of the new states
in which the Company enters and other factors will not have a material adverse
effect on the Company. The factors which may influence the Company's success in
each targeted market in connection with this strategy include: the selection of
appropriate qualified practices; negotiation, execution and consummation of
definitive acquisition, affiliation, management and/or employment agreements;
the economic stability of each targeted market; compliance with state, local and
federal healthcare and/or other laws and regulations in each targeted market
(including health, safety, waste disposal and zoning laws); compliance with
applicable licensing approval procedures; restrictions under labor and
employment laws, especially non-competition covenants. Past performance is not
necessarily indicative of future results.
RISK FACTORS
You should carefully consider each of the following risks and all of the other
information set forth in this Form 10Q. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not
presently known to us or that we currently believe to be immaterial may also
adversely affect our business.
If any of the following risks actually occur, our business prospects, financial
condition and results of operations could be materially adversely affected 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 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 and 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 relationship that we currently have with physicians, affiliated
practices and hospitals. Such modifications could result in less profitable
relationships with physicians, affiliated
23
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
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 federal 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 the federal government might
investigate our arrangements with physicians and third parties. Such
investigations, 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 programs. Significant fines could cause
liquidity problems and adversely affect our results of operations. Exclusion
from participation in government payor programs would eliminate an important
source of revenue and adversely affect our business.
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. Many states have similar laws. These state laws
generally apply to services reimbursed by both governmental and private payors.
Violations of these federal and state laws 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 are in material compliance with
applicable laws and regulations, government authorities might take a contrary
position. If our financial relationships with physicians were found to be
illegal, 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.
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 target geographic
markets. While we believe that we are in 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
investigate our business practices. If our business practices were found to
violate these laws, we could be required to pay fines, penalties and damage
awards and we could be required to restructure our business in a manner that
would reduce our profitability or impede our growth.
24
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 HIPPAA, the
government could seek penalties against us or seek to exclude us from
participation in government payor programs.
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. 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
adversely affect our business.
We rely upon reimbursement from government programs for a significant portion of
our revenues, and therefore our business would be harmed if reimbursement rates
from government programs decline.
We derive approximately 20% of our collections 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 changes in
reimbursement coding practices, could adversely affect our business by reducing
revenues and lowering profitability. Increasing budgetary pressures at both the
federal and state level 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 payment reductions. In addition, Medicare, Medicaid and other
government sponsored 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, 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.
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 is
reportedly under investigation with respect to such practices. We operate
laboratories on behalf of numerous hospitals and have numerous contractual
agreements with hospitals, including 28 HCA hospitals as of June 30, 2001.
Therefore, the government's ongoing investigation of HCA or other hospital
operators could result in governmental
25
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 and are expected to extend such projects to additional states,
including states in which we operate hospital laboratories. 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 have other adverse effects on us, 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 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. Moreover, the federal government has become more aggressive in
examining laboratory billing practices and seeking repayments and penalties
allegedly resulting from improper billing for services (e.g., the billing codes
used). 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.
While we believe that our practices are proper and do not include any allegedly
improper practices now being examined, the government could broaden its
initiative to focus on the type of services we furnish. If this were to happen,
we might be required to repay money. Furthermore, HIPAA and 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 is
currently 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 such an investigation, we could be required to change
coding practices or repay amounts paid for incorrect practices.
We derive a significant portion of our revenues from short-term hospital
contracts and hospital relationships that can easily be terminated.
Our hospital contracts typically have terms of one to five years and
automatically renew for additional one-year terms unless otherwise terminated by
either party. The contracts generally provide that the hospital may terminate
the agreement prior to the expiration of the initial or any renewal term. We
also have business relationships with hospitals that are not reduced 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. 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.
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 expect to
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. Further, the businesses
26
we acquire may not perform well enough to justify our investment. If we are
unable to make additional acquisitions on suitable terms, we may not meet our
growth expectations.
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 and/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 to 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 adversely affect the integration of
additional practices and our profitability. The integration of additional
practices also requires the implementation and centralization of purchasing,
accounting, human resources, management information systems, cash management and
other systems, which may be difficult, costly and time-consuming. Accordingly,
our operating results 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
impede our growth objectives or adversely affect our profitability.
We may inherit significant liabilities from practices that we acquire.
We perform due diligence investigations with respect to potential liabilities of
acquired and affiliated practices and 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. 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. A violation of such laws by a 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.
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.
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. 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. Payments of these contingent amounts will
27
adversely affect our earnings per share and may cause volatility in the market
price of our common stock. We expect to 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 34.6% of our total assets. We amortize goodwill
on a straight-line basis over periods ranging from 15 to 35 years. 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. We may not ever realize the full value of our intangible assets. Any
future determination requiring the write-off of a significant portion of
unamortized intangible assets could adversely affect 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. While our
practices 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
enhance our recruitment and retention efforts, which could adversely affect 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 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
were terminated or determined to be invalid or unenforceable. 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, 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.
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 have recently focused 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 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 adversely affect our
business.
Our services include the provision of physician practice management services to
pathology practices and the provision of pathology and cytology diagnostic
services. Companies in other health care segments, 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
28
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 us, which could further
intensify competition. Increasing competition may erode our customer base and
reduce our sources of revenue and may 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 may be subject to significant professional liability claims and we cannot
assure you that our insurance coverage limits will be sufficient to cover such
claims.
Our business entails an inherent risk of claims of physician professional
liability for acts or omissions of our physicians and laboratory personnel. We
and our physicians periodically become involved as defendants in medical
malpractice lawsuits, some of which are currently ongoing, and are subject to
the attendant risk of substantial damage awards. While we believe that we have
an adequate risk management program, including professional liability insurance
coverage, it is possible that future claims will exceed the limits of our risk
management program, including the limits of our insurance coverage. It is also
possible that the costs of our insurance coverage will rise causing us to either
incur additional costs or 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.
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. 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 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. Therefore, the continued growth
of the managed care industry could adversely affect our business.
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 lab 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 a strategy of becoming a fully integrated healthcare diagnostic
information provider, which adds uncertainty to our future results of operations
and could divert financial and management resources away from our core business.
As we pursue our transition into becoming a fully integrated healthcare
diagnostic information provider, we anticipate that significant amounts of
future revenue may be derived from products, services and alliances that do not
exist today or have not been marketed in sufficient quantities to measure
accurately market
29
acceptance. Similarly, post-transition operating costs 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 healthcare diagnostic information
products and services and such products and services may not achieve market
acceptance. Any failure by us to complete this transition in a timely and cost-
efficient manner could result in financial losses and could inhibit our
anticipated growth. In addition, the pursuit of this transition could divert
financial and management resources away from our core business.
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 Senior Vice President and Medical Director. The services
of these individuals would be very difficult to replace. Therefore, it would be
costly and time consuming to find suitable replacements for these individuals.
The need to find replacements combined with the temporary loss of these key
services could also disrupt our operations and impede our growth by diverting
management attention away from our core business and growth strategies.
Because of the complex nature of our billing and reimbursement arrangements, we
may be at a greater risk of Internal Revenue Service Examinations.
The Internal Revenue Service, or IRS, conducted an examination of our 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 we
believe that we are in compliance with all applicable IRS rules and regulations,
if the IRS should determine that we are not in compliance in any other years, we
could be required to pay additional taxes, including penalties and interest. In
addition, IRS examinations are costly in that they can consume a great deal of
management time and attention that would otherwise be spent pursuing operational
improvements and growth strategies.
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, our common stock, which trades on the Nasdaq
National Market, has traded from a low of $8 per share to a high of $26 15/16
per share for the year ended December 31, 2000. We believe that various factors,
such as legislative and regulatory developments, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is 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, 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:
30
Notional Amount(in millions) Fixed Rate Term in Months Maturity
$45.0 6.760% 48 10/07/04
$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 2.0%. 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 since October 1998 and the interest rate environment at the time of the
swap transactions. Beginning in October 2000, these higher fixed rates will
increase the Company's annual interest cost by approximately $2.7 million. In
addition, further tightening of interest rates by the Federal Reserve could
increase the Company's interest cost on the outstanding balance of the credit
facility not subject to interest rate protection. All of the Company's 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. 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.
31
PART II - OTHER INFORMATION
ITEM 1. 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. 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. 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
There were no shares of Common Stock issued in the three months ended June 30,
2001 or through the date of this report.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 3, 2001. The
matters voted on at the Annual Meeting and the tabulation of votes on such
matters are as follows:
(a) Election of Class I Directors.
Number Against or
Name Voting For Withheld
--------------------- ------------ ------------- -------------
James C. New 20,575,838 17,888,201 2,687,637
E. Roe Stamps, IV. 20,575,838 18,705,710 1,870,128
The remaining directors whose terms continue after the meeting were Alan Levin,
MD, Brian C. Carr, E. Martin Gibson and C. Arnold Renschler, MD.
(b) To consider and vote upon a proposal to amend the Company's Amended
and Restated Certificate of Incorporation to increase the number of
authorized shares of Common Stock, of the Company from 30,000,000
shares to 60,000,000 shares;
The shareholders of the Company ratified the above proposal by the following
vote:
For Against Abstentions
--------------------- ------------------ ------------------
19,183,211 1,371,540 21,087
32
(c) To consider and vote upon a proposal to approve the Company's 2001
Stock Option Plan;
The shareholders of the Company ratified the above proposal by the following
vote:
For Against Abstentions Broker non-votes
------------------ --------------- --------------- -------------------
13,117,530 3,976,401 45,517 3,436,390
(d) To ratify the reappointment of Deloitte & Touche LLP as the Company's
independent public accountants.
The shareholders of the Company ratified the above proposal by the following
vote:
For Against Abstentions
------------------ --------------- ---------------
20,323,111 242,263 10,464
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Amendment to Amended and Restated Certificate of
Incorporation (incorporated by reference to Exhibit 4.4 to
Amendment No. 2 the Company's Registration Statement on Form S-3
filed August 8, 2001, Registration No. 333-59324)
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit
4.2 to Amendment No. 2 the Company's Registration Statement on
Form S-3 filed August 8, 2001, Registration No. 333-59324)
10.1 The Amended and Restated Credit Agreement dated as of December
16, 1999, Amended and Restated as of June 11, 2001, among
AmeriPath, Inc., certain of its subsidiaries, Fleet National Bank
(formerly BankBoston N.A.) and certain other lenders.
10.2 Amendment to Alan Levin, MD Employment Agreement, dated June 1,
2001
10.3 Amendment to Dennis M Smith, Jr, MD Employment Agreement, dated
June 11, 2001
10.4 Employment Agreement, dated April 9, 2001, between Ameripath and
Bruce C.Walton
10.5 Employment Agreement, dated April 9, 2001, between Ameripath and
Gregory A. Marsh
10.6 Employment Agreement, dated April 9, 2001, between Ameripath and
Michael J. Downs
10.7 Employment Agreement, dated April 9, 2001, between Ameripath and
Stephen V. Fuller
10.8 Employment Agreement, dated April 9, 2001, between Ameripath and
James C. New
10.9 Employment Agreement, dated November 30, 2000, between Ameripath
and James Billington
10.10 Employment Agreement, dated November 30, 2000, between Ameripath
and Brian C. Carr
10.11 Amendment to James Billington Employment Agreement, dated April
1, 2001
10.12 Amendment to Brian C. Carr Employment Agreement, dated April 1,
2001
33
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated March 29, 2001, was filed by the
Company with the Securities and Exchange Commission on April 6, 2001,
reporting that on March 29, 2001, the Company and its lenders executed
an amendment to the Credit Facility ("Amendment No. 3"), which
excludes an additional $5.4 million, or $28.3 million in total for all
three amendments to the Credit Facility, 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 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 $700,000.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERIPATH, INC.
Date: August 14, 2001 By: /s/ JAMES C. NEW
----------------
James C. New
Chairman and Chief Executive Officer
Date: August 14, 2001 By: /s/ GREGORY A. MARSH
--------------------
Gregory A. Marsh
Vice President and
Chief Financial Officer
35
Exhibit Index
Exhibit No. Description
----------- -----------
10.1 The Amended and Restated Credit Agreement dated as of December 16,
1999, Amended and Restated as of June 11, 2001, among AmeriPath,
Inc., certain of its subsidiaries, Fleet National Bank (formerly
BankBoston N.A.) and certain other lenders.
10.2 Amendment to Alan Levin, MD Employment Agreement, dated June 1,
2001
10.3 Amendment to Dennis M. Smith, Jr, MD Employment Agreement, dated
June 11, 2001
10.4 Employment Agreement, dated April 9, 2001, between Ameripath and
Bruce C. Walton
10.5 Employment Agreement, dated April 9, 2001, between Ameripath and
Gregory A. Marsh
10.6 Employment Agreement, dated April 9, 2001, between Ameripath and
Michael J. Downs
10.7 Employment Agreement, dated April 9, 2001, between Ameripath and
Stephen V. Fuller
10.8 Employment Agreement, dated April 9, 2001, between Ameripath and
James C. New
10.9 Employment Agreement, dated November 30, 2000, between Ameripath
and James Billington
10.10 Employment Agreement, dated November 30, 2000, between Ameripath
and Brian C. Carr
10.11 Amendment to James Billington Employment Agreement, dated April 1,
2001
10.12 Amendment to Brian C. Carr Employment Agreement, dated April 1,
2001