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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
AMERIPATH, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 65-0642485
(State or Other Jurisdiction (I.R.S. Employer
Incorporation or Organization) Identification No.)
7289 Garden Road, Suite 200, Riviera Beach, Florida 33404
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (561) 845-1850
Securities Registered Pursuant to Section 12(B) of the Act:
Securities Registered Pursuant to Section 12(G) of the Act:
Common Stock (Par Value $.01 Per Share)
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 16, 2001 was approximately $430.4 million based on the
$17.44 closing sale price for the Common Stock on the NASDAQ National Market
System on such date. For purposes of this computation, all executive officers
and directors of the Registrant have been deemed to be affiliates. Such
determination should not be deemed to be an admission that such directors and
officers are, in fact, affiliates of the Registrant.
The number of shares of Common Stock of the Registrant outstanding as of
March 16, 2001 was 24,941,749.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement relating to the
Registrant's 2001 Annual Meeting of Shareholders to be filed with the Securities
and Exchange Commission no later than 120 days after the end of the year covered
by this Report are incorporated by reference into Part III of this Report.
INDEX TO ITEMS
Page
----
PART I
Item 1. General Business 1
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
PART II.
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 18
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 38
Item 8. Financial Statements and Supplementary Data; Index to
Consolidated Financial Statements 39
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 39
PART III.
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners and Management 40
Item 13. Certain Relationships and Related Transactions 40
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 41
Exhibits 41
Signatures 45
Financial Statements F-1
PART I
ITEM 1. GENERAL BUSINESS
AmeriPath, Inc. and its subsidiaries ("AmeriPath" or the "Company") is the
largest physician and laboratory company focused on providing anatomic
pathology, cancer diagnostic, genomics, and healthcare 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"). This 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 (each a "Managed Practice"). Although such Managed Practices are
not owned by the Company, the statistical data appearing throughout this report
on form 10-K including the description of such items as the number of
pathologists, hospital contracts, employees and outpatient laboratories
incorporates the statistical data from the Managed Practices as if they were
owned by the Company. Unless otherwise indicated, the information presented in
the current and previous years includes Inform DX for all periods. The Company's
425 pathologists provide medical diagnostic services in outpatient laboratories
owned, operated and managed by the Company, hospitals, and outpatient ambulatory
surgery centers. Of these pathologists, 419 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).
As of December 31, 2000, the Company and the Managed Practices had
contracts with a total of 224 hospitals to manage their clinical pathology and
other laboratories and provide professional pathology services. The majority of
these hospital contracts are exclusive provider relationships of the Company and
the Managed Practices. The Company and the Managed Practices also have 42
licensed outpatient laboratories. The historical information included in this
statistical data chart includes Inform DX changes as if the acquisition had
occurred prior to 1998.
Statistical Data:
December 31,
------------------------------------------
1998 1999 2000
------------ ------------ ------------
. Pathologists 299 370 425
. Hospital Contracts 168 207 224
. Employees 1,616 1,865 2,325
. Outpatient laboratories 28 36 42
The Company essentially operates as a pathology group practice and is
legally structured so as to comply with the different laws dealing with the
corporate practice of medicine. Refer to the section entitled "AmeriPath
Corporate Structure" for a more detailed discussion of the Company's legal
structure in the various states.
AmeriPath manages and controls all of the non-medical functions of the
Practices, including:
. recruiting, training, employing and managing the technical and support
staff of the Practices;
. developing, equipping and staffing laboratory facilities;
. establishing and maintaining courier services to transport specimens;
. negotiating and maintaining contracts with hospitals, national
clinical laboratories and managed care organizations and other
payors;
. providing financial reporting and administration, clerical,
purchasing, payroll, billing and collection, information systems,
sales and marketing, risk management, employee benefits, legal, tax
and accounting services;
. maintaining compliance with applicable laws, rules and regulations;
and
. providing slide preparation and other technical services for the
Practices.
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During 2000, the Company acquired eight Practices, including Inform DX, in
14 states (adding a total of 128 pathologists): six of these were in states in
which the Company previously operated (Pennsylvania, New York, Georgia, Florida,
Mississippi and Texas) and eight were in additional states (Virginia, Oklahoma,
Missouri, Tennessee, Massachusetts, California, Colorado and West Virginia).
Anatomic Pathology; Industry Overview
Pathologists are medical doctors who specialize in the science of
pathology, the study of disease. Following college and medical school,
pathologists typically spend five or more years to become eligible to sit for
certification by the American Board of Pathology in anatomic and clinical
pathology. Many pathologists spend additional years of training to receive
certification in subspecialty areas of pathology such as dermatopathology (study
of diseases of the skin), hematopathology (study of diseases of the blood and
bone marrow), immunopathology (study of diseases of the immune system), and
cytopathology (study of abnormalities of cells).
Anatomic pathology involves evaluating tissues (surgical pathology) and
cells (cytopathology) through variable magnifications using a microscope. In
surgical pathology, the goal of such microscopic evaluations is to make a
definitive diagnosis of a patient's disease. Virtually all tissues removed from
patients during surgery (hence the term "surgical" pathology) are examined under
the microscope by pathologists in order to determine whether or not a disease is
present; examples of surgical pathology specimens seen by pathologists include
breasts, prostate, skin, and bone marrow biopsies. Thus, pathologists play an
indispensable role in determining whether a patient's illness is benign,
inflammatory or cancerous. The surgical patient's subsequent treatment almost
always depends on the diagnosis rendered by the surgical pathologist. For this
reason, doctors often refer to pathologists as the "physician's physician" a
compliment that acknowledges the fact that the pathologist's diagnosis
represents a critical factor in determining a patient's future care.
Pathologists receive tissue samples from surgical procedures performed on
both inpatients (patients seen in hospitals) and outpatients (patients seen in
physician offices and in ambulatory surgery centers). Subspecialties within the
area of surgical pathology include dermatopathology and hematopathology. The
Company currently employs 419 pathologists who are board certified in anatomic
pathology (6 are board eligible); over 190 of them have additional subspecialty
board certification.
Cytopathology involves the evaluation of cells under the magnification of a
microscope. Pathologists examine cells obtained from body fluids, from solid
tissues aspirated through needles and from scrapings of body tissues. The most
widely known cytopathologic examination is the "Pap" smear, developed by George
Papanicolaou in 1940. A conventional "Pap" smear consists of a scraping of cells
taken from the cervix, spread on a slide, stained with a dye to color the cells,
and examined by a pathologist using a microscope. To help reduce the number of
false negatives, another form of cell accumulation was developed. This mono-
layer technology collects a sample from the cervix using a cyto-brush, which is
then rinsed into a vial filled with preserved solution. The cell solution is
processed at a laboratory by a technician. The device filters the blood and
mucous and spreads cells in a thin layer, making the slide easier to read.
Despite the higher cost of mono-layer methods, the technology is rapidly gaining
acceptance in the medical community. "Pap" smears are considered screening
tests, which provide another physician with information that suggests whether or
not a potentially dangerous condition is present. If an abnormality is detected,
the pathologist recommends what additional diagnostic procedures (such as biopsy
of the affected tissue) may be necessary. Other cytopathology examinations may,
in and of themselves, be diagnostic of a specific disease condition. As with
surgical pathology specimens, cytopathology specimens may come from hospitalized
patients, from patients in ambulatory surgery centers, from patients being seen
in private physician offices, from clinics, or from pathologists taking
aspiration biopsies directly from patients. Experts in this subspecialty of
pathology are called cytopathologists. All of the Company's anatomic
pathologists possess board certification that qualifies them to read cytology
cases. Of these pathologists, 62 are also board certified cytopathologists.
Clinical pathology represents the second major category of pathology.
Broadly defined, clinical pathology involves the study of diseases identified by
analyzing blood or other body fluids such as urine or spinal fluid (the liquid
that surrounds the brain and spinal cord). Frequently, high volume, high
technology automated equipment performs these analyses. Pathologists'
responsibilities related to automated testing revolve around their roles as
medical directors and clinical consultants. Pathologists are legally responsible
for the validity and accuracy of clinical laboratory test results and for the
function of the clinical laboratory under the federal Clinical Laboratory
Improvement Act of 1988 ("CLIA"), for identifying
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additional diagnostic and/or therapeutic approaches suggested by the laboratory
result; and for discussing the possible clinical significance of laboratory
results with attending physicians in light of the patient's history and
symptoms.
In other words, pathologists play a critical role in ensuring that
laboratory tests are performed accurately and in a timely fashion. Once again,
the pathologist's role as a "physician's physician" makes a critical
contribution to the proper diagnosis and efficient management of patients with
virtually every disease.
Pathologists perform their duties in laboratories within hospitals, within
free-standing local, regional, and national laboratories independent of
hospitals, within ambulatory surgery centers, and within a variety of other
settings. Because tissue and fluid samples are readily transportable,
pathologists working within one of these settings may actually receive specimens
for evaluation and diagnosis from multiple sources including physician offices,
clinics, other laboratories, and even other hospitals. This ability to deliver
work to sites having capacity to handle additional volume enhances the
pathologists' productivity and allows a pathology practice to serve a larger
geographic area. The Company uses this strategy to ensure the growth of "same
practice net revenues," while making its pathologists more productive and
efficient, and enabling the Company to better serve the customer by utilizing
the specialized expertise available within the Company's pathologists.
The Company expects the market for anatomic pathology services to grow
primarily due to the aging of the United States population, the increasing
incidence of cancer, and accelerating medical advancements that allow for the
earlier diagnosis and treatment of diseases. The American Cancer Society
estimates that approximately 13 million Americans alive today have had, or still
have, some form of cancer and in 2000, about 1.2 million new cancer cases are
expected to be diagnosed, 47,700 of which will be new melanoma cases. Studies
published by the American Cancer Society revealed that there were approximately
1.3 million new cases of non-melanoma cases (basal cell carcinoma and squamous
cell carcinoma) diagnosed in 1999. According to the American Medical
Association, there are approximately 14,000 practicing pathologists in the
United States.
Current trends within healthcare may accelerate the demand for the
Company's services. Healthcare cost containment pressures, the increasing
influence of managed care, and medical and technological advancements drive
hospitals to reduce the length of patient stays, decrease the number of
procedures being performed as inpatients, and increase the number of procedures
shifted to the outpatient setting. The Company expects to capitalize on this
trend by working with hospitals to eliminate the redundancies within the typical
anatomic pathology laboratories that exist within hospitals, thereby reducing
hospitals' costs. By consolidating and centralizing these functions into more
efficient and cost effective outpatient anatomic pathology laboratories, the
Company will also be able to broaden the range of subspecialty services it
offers and to develop new esoteric testing capabilities. Because the trend
toward providing medical services in outpatient settings almost certainly will
continue, the Company will be well positioned to capitalize on these
opportunities.
Although the selection of a pathologist is primarily made by individual
referring physicians, a trend is evolving toward decisions being made by managed
care organizations and other third-party payors. While the majority of referrals
by managed care organizations for outpatient anatomic pathology services are
made directly to pathology practices on a local basis, in certain instances
managed care organizations contract with national clinical laboratories.
Generally, these national clinical laboratories subcontract anatomic pathology
and cytology services to large practices that can provide a comprehensive range
of anatomic pathology and cytology services. The Company believes that hospitals
and national clinical laboratories will continue to outsource for the provision
of anatomic pathology services.
Historically, the anatomic pathology industry has been highly fragmented,
with the majority of the services being provided by relatively small practices.
The Company estimates that there are over 3,300 pathology practices operating in
outpatient laboratories in the United States. There is an evolving trend among
pathologists to form larger practices to provide a broader range of outpatient
and inpatient services and enhance the utilization of the practice's
pathologists. The Company believes this trend can be attributed to several
factors, including cost containment pressures by government and other third-
party payors, increased competition, managed care and the increased costs and
complexities associated with operating a medical practice. Moreover, given the
current trends of increasing outpatient services, outsourcing and the
consolidation of hospitals, pathologists are seeking to align themselves with
larger practices and physician practice management companies that can assist
providers in the evolving healthcare environment. Larger practices and corporate
structures can offer physicians certain advantages, such as:
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. obtaining and negotiating contracts with hospitals, managed care
providers and national clinical laboratories;
. marketing and selling of professional services;
. providing continuing education and career advancement opportunities;
. making available a broad range of specialists with whom to consult;
. providing access to capital and business and management experience;
. establishing and implementing more efficient and cost effective
billing and collection procedures; and
. expanding the practice's geographic coverage area.
Each of the foregoing factors support the pathologists in the efficient
management of the complex and time-consuming non-medical aspects of their
practice.
Business Strategy
The Company's objective is to enhance its position as the largest provider
of anatomic pathology services through the following strategies:
Focus on Anatomic Pathology. The Company believes that its focus of
providing management services to anatomic pathology practices provides it with a
competitive advantage in the management of such practices. As a result of the
Company's single focus, pathologists are able to form an internal network for
consultations and to offer specialized services and testing to their clients.
The Company also believes that its single specialty focus enhances its expertise
in managing both inpatient and outpatient pathology practices.
In the fourth quarter of 1998, the Company began the operation of its
Center for Advanced Diagnostics ("CAD") in Fort Myers, Florida. In the second
quarter of 2000, this operation was moved to an expanded facility in Orlando,
Florida. CAD focuses on the detection and diagnosis of cancers. CAD offers a
full array of diagnostics for hematopoietic and solid tissue malignancies,
including molecular genetics, cytogenetics, flow cytometry, specialized
immunohistochemistry, and minimal residual disease detection. CAD's staff
includes multiple doctoral scientists with extensive experience and reputations
in molecular genetics, cytogenetics, flow cytometry, and pathology.
Pathologists, board certified in anatomic and clinical pathology, with
subspecialty expertise in hematopathology, cytopathology, and solid tumor
diagnosis complete the medical and scientific staff. In addition to diagnostic
testing for both AmeriPath and non-AmeriPath physicians, hospitals, and other
healthcare providers, CAD will be able to perform developmental work for
diagnostic manufacturers, clinical research organizations ("CROs"), and big
pharmaceutical companies using AmeriPath's unparalleled access to normal,
abnormal, and cancerous tissues.
During the second quarter of 1999, the Company entered into a services
agreement with A. Bernard Ackerman, M.D., widely regarded as the preeminent
dermatopathologist in the world. In order to maximize the effectiveness of Dr.
Ackerman's affiliation with the Company, AmeriPath established the "Ackerman
Academy of Dermatopathology" and a diagnostic facility in New York City. The
Academy has an accredited dermatopathology fellowship training program with
state-of-the-art instrumentation, including a 27-head microscope, and one of the
most technologically advanced audiovisual systems available. The diagnostic
facility, AmeriPath New York, operates as a licensed independent outpatient
laboratory specializing in dermatopathology and offers adjunctive methods for
diagnosis, including immunoperoxidase, marker studies, gene rearrangement, and
immunofluorescence.
Acquire Leading Practices. The Company expects to increase its presence in
existing markets and enter into new markets through acquisitions of,
affiliations with and strategic minority investments in leading practices. The
Company's acquisition criteria include market demographics, size, profitability,
local prominence, payor relationships, synergy with other acquisitions in a
given geographic region and opportunities for growth of the acquired practice.
The Company intends to continue to source acquisitions and affiliations by
capitalizing on the professional reputations of its acquired practices and its
pathologists, and the Company's management experience and the benefits of being
part of a public company, including increased resources and access to capital.
In existing markets, the Company targets acquisitions and affiliations that can
expand its presence, provide specialization, such as dermatopathology, and
provide operational efficiencies for the practices in that market. In new
markets, the Company seeks to acquire and affiliate with prominent practices to
serve as a platform for building upon their long-standing relationships and
reputations. The Company is revisiting its acquisition strategy, particularly
its pace of
4
acquisitions, and will focus on fold-in acquisitions that will densify its
operations in strategically targeted markets and larger pedestal acquisitions.
Diagnostic Healthcare Provider. 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. In
addition to the Company's establishment of its Center for Advanced Diagnostics,
the Company has taken the steps described in the paragraph above in connection
with such transition. 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, all 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. The Company is working with GCI to
develop procedures to comply with informed consent requirements and other
regulations regarding the taking and processing of specimens from donors and
related records. However, 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.
Expand Sales and Marketing Efforts. The Company focuses on generating
internal growth for the Practices by augmenting their existing physician and
contractual relationships through a professional sales and marketing program.
The Company's marketing program is designed to: increase relationships with
physicians over a broader geographic region; expand contracts with national
clinical laboratories that subcontract for anatomic pathology services; and
capitalize on existing managed care relationships. Since specimens are readily
transportable, the Company's sales and marketing efforts focus on expanding the
geographic scope of the Practices. Ten Practices presently have contracts to
provide outpatient anatomic and cytopathology pathology services with the two
major national clinical laboratories. These contracts generally are exclusive to
the individual Practice. The Company is seeking to extend its existing contracts
with the national clinical laboratories to include multiple Practices that cover
broader geographic regions. The Company believes that its regional business
model offers national clinical laboratories and managed care organizations a
convenient single source for anatomic pathology services.
Increase Contracts with Hospitals. The Company seeks to obtain additional
exclusive hospital contracts for each Practice in a region through the
acquisition of other anatomic pathology practices, as well as through the
expansion of the Company's existing relationships with multi-hospital systems.
The Company believes that multi-hospital systems can benefit from contracting
with a single provider of pathology services in a geographic region through the
consolidation of clinical laboratory, histology and other ancillary hospital
support functions, thereby reducing costs, and simplifying and consolidating
contractual relationships with managed care organizations and other third party
payors. In addition, the Company believes that providing inpatient laboratory
services to multiple hospitals within a geographic area facilitates the
development and effectiveness of a successful outpatient services network by
creating market presence and economies of scale offering a broader range of
pathology expertise while maintaining the important physician relationships.
Achieve Operational Efficiencies. The Company believes that its Practices
will benefit from the management and administrative support provided by the
Company's corporate staff, which provides oversight and technical and
administrative support services. The Company has centralized accounting and
financial reporting, payroll, benefits administration, purchasing, managed care
contracting, risk management and corporate compliance. Furthermore, the Company
has achieved and continues to pursue certain cost and operational efficiencies,
enhancing the Practices' profitability and efficiency by utilizing the Company's
collective buying power to negotiate discounts on laboratory equipment and
medical supplies and reductions in premiums for health, property, casualty and
professional liability insurance. Also, prior to their acquisition, each of the
Practices either managed their billing and collections in-house or outsourced
these functions. The Company continues to evaluate the billing and collection
systems of the Practices and centralizes such functions to the extent determined
practicable and efficient.
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Regional Business Model
The Company believes that its regional business model offers short and
long-term benefits to the Company, its pathologists, referring physicians, third
party payors and patients. The Company continues to integrate the Practices'
administrative and technical support functions, including accounting, payroll,
purchasing, risk management, billing and collections, and expects such
integration to result in enhanced operational efficiencies. The Company's
courier system for transporting specimens enables the Practices to penetrate
areas outside their current markets and enhance the utilization of their
laboratory facilities. The Company also integrates and coordinates the sales and
marketing personnel of the Practices to promote the Practices to physicians,
hospitals, surgery centers, managed care organizations and national clinical
laboratories. This marketing effort is based upon promoting the broad geographic
coverage, professional pathologist expertise and the extensive professional
services offered by the Company. The Company's strategy is to leverage its size
to expand its contracts with national clinical laboratories to all of the areas
covered by its Practices. The Company markets its services under the name
"AmeriPath" in order to develop brand identification of products and services to
payors and other clients. The Company plans to integrate the Practices'
management information systems into a single system (or at a minimum consolidate
the information resident on the various lab information systems) that will
expand the financial and diagnostic reporting capabilities of each of the
Practices and the Company. Based on the foregoing, the Company believes that
implementation of this regional model increases the revenues and profitability
of the Practices in the region, and the Company is applying this regional
business model, in whole or in part, to other states in which it operates.
Through the implementation of its operating strategies, the Company
continues to develop integrated networks of anatomic pathology practices on a
regional basis. These networks consist of a number of practices that together:
(i) have a substantial regional market presence; (ii) offer a broad range of
services; (iii) have extensive physician contacts; and (iv) possess
complementary strengths and opportunities for operational and production
efficiencies. The Company has developed its regional business model in Florida
and is replicating its model in Texas and the Midwest. The Company believes that
Florida represents an attractive market due to its population, demographics,
including the growth of the general population and a large elderly population,
as well as the Company's familiarity and understanding of the anatomic pathology
market in Florida. The Company currently owns, controls and manages anatomic
pathology practices throughout Florida including Miami, Fort Lauderdale,
Jacksonville, Orlando, Daytona, Fort Myers and Tampa. In addition, the Company
contracts with Quest Diagnostics ("Quest"), a national clinical laboratory, to
provide anatomic pathology services on an exclusive basis in most of Florida's
counties.
The Company believes that its improving performance in Florida, as
reflected in the following table, is due in part to the favorable results of its
regional model in Florida:
December 31,
---------------------------------------
1998 1999 2000
------------ ------------ ------------
Florida Statistics (dollars in millions)
Number of Practices 11 12 14
Pathologists 82 80 83
Hospital contracts 31 31 32
Net revenues $85.1 $92.5 $104.0
Operating margin before amortization $25.6 $27.7 $ 30.4
Operating margin as a percent of net revenues 30.1% 30.0% 29.2%
AmeriPath Corporate Structure
AmeriPath is a holding company that, through its subsidiaries, provides
pathology services and management services to other pathology laboratories. The
Company's revenues are primarily derived from two segments: its Owned Practices
and its Managed Practices, as further described below. The Owned Practices
consist of subsidiaries (the "Practice Subsidiaries") that directly employ
physicians, and subsidiaries (the "Manager Subsidiaries") that enter into
management services agreements with affiliated practices (each, a "PA
Contractor") which, in turn, employ the physicians. The Manager Subsidiaries are
typically utilized in states with laws that restrict the corporate practice of
medicine. As a result of the corporate practice of medicine doctrine, the
affiliated physicians in these states retain ownership of the PA Contractor, but
the Manager Subsidiaries typically enter into contractual arrangements that
generally (i) prohibit the affiliated physicians from transferring their
ownership interests in the PA Contractor, except in very limited circumstances,
and (ii) require the affiliated physicians to transfer their ownership in the PA
Contractor to designees of AmeriPath upon the occurrence of specified
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events. The Managed Practices are affiliated practices that are not owned by the
Company, but they contract with the Company to provide management services. The
manner in which AmeriPath operates a particular Practice is determined primarily
by whether it is an Owned or Managed Practice and the corporate practice of
medicine restrictions of the state in which the Practice is located and other
applicable regulations. The Company believes that it exercises care in its
efforts to structure its practices and arrangements with hospitals and
physicians and its subsidiaries so as to comply with relevant federal and state
laws and believes that such current arrangements and practices comply with all
applicable statutes and regulations. However, due to uncertainties in the law
there can be no assurance that such arrangements or practices could be deemed to
be in noncompliance in the future, or that such occurrence could not result in a
material adverse effect on the Company.
Corporate practice of medicine restrictions, which are discussed in further
detail under "Government Regulation" below, generally prohibit corporate
entities from employing or otherwise exercising control over physicians. In
states that do not prohibit a for-profit corporation from employing physicians
such as Florida, Alabama, Mississippi and Kentucky, AmeriPath operates its Owned
Practices through Practice Subsidiaries, which are subsidiary corporations of
AmeriPath that directly employ the physicians. In states that prohibit a for-
profit corporation from employing physicians, such as Texas, Indiana, Ohio,
North Carolina, Michigan, Wisconsin, New York and Pennsylvania, AmeriPath
operates each Owned Practice through a Manager Subsidiary, which is a subsidiary
of AmeriPath that has a long-term management agreement with the applicable PA
Contractor, which in turn employs the physicians (see "--Ownership and
Management of the PA Contractor" for explanation of PA Contractor). In many
cases, several Practices are included within or organized under a single
Practice Subsidiary or PA Contractor, as the case may be.
Owned Practices. Owned practices are operated through Manager and Practice
Subsidiaries. The Manager and Practice Subsidiaries are wholly-owned
subsidiaries of AmeriPath and the officers and directors of such companies are
generally members of AmeriPath's executive management team. The financial
statements of the Manager and Practice Subsidiaries are included in the
consolidated financial statements of AmeriPath.
Ownership and Management of the PA Contractors. The term PA Contractor, is
used throughout this document to refer to an entity which has a contractual
relationship with the Company but is not owned directly by AmeriPath. These
entities can be a professional corporation or professional association, as
permitted and defined in various state statutes. The PA Contractors operating in
North Carolina, Wisconsin, New York, Michigan and Pennsylvania are owned by
physicians affiliated with AmeriPath. To the extent permitted by law, the
officers and directors of the PA Contractors are members of AmeriPath's
executive management team. However, in states where law prohibits such non-
licensed physician personnel from serving as an officer or director of a PA
Contractor, eligible affiliated physicians serve in such positions. The
affiliated physicians who own PA Contractors have entered into agreements with
AmeriPath that generally (i) prohibit such affiliated physicians from
transferring their ownership interests in the PA Contractor, except in very
limited circumstances and (ii) require such affiliated physicians to transfer
their ownership in the PA Contractor to designees of AmeriPath upon the
occurrence of specified events.
The PA Contractors in Ohio and Indiana are owned by trusts. The beneficiary
of such trusts is AmeriPath and the Trustees of such trusts are affiliated
physicians. The PA Contractors operating in Texas are organized as not-for-
profit 5.01(a) corporations, which are discussed in greater detail under the
caption "Government Regulation" below. The sole member of the not-for-profit PA
Contractors in Texas is AmeriPath.
Each PA Contractor is party to a long-term management agreement with one of
the Company's Manager Subsidiaries. Under the terms of these management
agreements, AmeriPath generally provides all non-medical and administrative
support services to the Practices including accounting and financial reporting,
human resources, payroll, billing, and employee benefits administration. In
addition, the management agreements give the Manager Subsidiaries certain rights
with respect to the management of the non-medical operations of the PA
Contractors. The management agreements require the PA Contractors to pay a
management fee to the applicable Manager Subsidiaries. The fee structure is
different for each Practice based upon various factors, including applicable
law, and includes fees based on a percentage of earnings, performance-based
fees, and flat fees that are adjusted from time to time.
In accordance with Emerging Issues Task Force 97-2:"Application of FASB
Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Agreements"
("EITF 97-2"), the financial statements of the PA Contractors are included in
the consolidated financial statements of AmeriPath
7
since AmeriPath has a controlling interest in the PA Contractor.
Managed Practices. The term Managed Practices refers to AmeriPath's
operation and management of pathology practices under long-term service
agreements with affiliated physician groups. Generally, the Company acquires the
practice's assets, and the physician groups maintain their separate corporate or
partnership entities and enter into employment and noncompete agreements with
the practicing physicians. Costs of obtaining service agreements are amortized
using the straight-line method over 25 years.
Service agreements represent the exclusive right to operate the Company's
practices in affiliation with the related physician groups during the term of
the agreements. Pursuant to the service agreements, the Company provides the
physician groups with equipment, supplies, support personnel, and management and
financial advisory services. Physician groups are responsible for the
recruitment and hiring of physicians and all other personnel who provide
pathological services, and for all issues related to the professional, clinical
and ethical aspects of the practice. As part of the service agreements,
physician groups are required to maintain medical malpractice insurance which
names the Company as an additional insured. The Company is also required to
maintain general liability insurance and name the physician groups as additional
insureds. Upon termination of the service agreements, the respective physician
groups are required to obtain continuing liability insurance coverage under
either a "tail policy" or a "prior acts policy."
The management services fees charged under the service agreements are based
on a predetermined percentage of net operating income of the Managed Practices.
Management service revenue is recognized by the Company at the time physician
service revenue is recorded by the physician group. The Company also
participates to varying degrees in non-physician revenues generated from
ancillary services offered through the laboratories. The Company charges a
capital fee for the use of depreciable assets owned by the Company and
recognizes revenue for all practice expenses that are paid on behalf of the
practices. Practice expenses exclude the salaries and benefits of the
physicians.
AmeriPath does not consolidate the financial statements of the Managed
Practices because it does not have a controlling financial interest, as defined
by EITF 97-2.
Operation of Practices Generally. AmeriPath manages and controls all of the
non-medical functions of the Practices. AmeriPath is not licensed to practice
medicine. The practice of medicine is conducted solely by the affiliated
physicians.
In managing the Owned Practices, the Board of Directors and management of
AmeriPath formulate strategies and policies which are implemented locally on a
day-to-day basis by each Owned Practice, without regard to whether such practice
is organized as a Manager or Practice Subsidiary or PA Contractor. Each Owned
Practice has a pathologist Managing Director who is responsible for overseeing
the day-to-day management of the Owned Practice, who reports to one of four
Regional Managing Directors, three of whom are pathologists, who in turn report
to executive officers of the Company. AmeriPath's Medical Director and Chief
Operating Officer develop and review standards for the affiliated physicians and
their medical practices and review quality and peer review matters with each
Owned Practice's Medical Director (or a medical review committee). AmeriPath's
Chief Operating Officer, a physician, oversees all employment matters with
respect to affiliated physicians and staffing decisions at the Owned Practices.
The Managed Practices, pursuant to their service agreements, manage all
aspects of the affiliated physician groups other than the provision of medical
services, which is controlled solely by the physician groups. The affiliated
physician group's joint policy board, equally represented by physicians and
employees of AmeriPath, focus on strategic and operational planning, marketing,
managed care arrangements and other major issues facing the group.
Hospital Contracts and Laboratories. The Practices typically contract with
hospitals to exclusively provide pathology services. The Practices staff each
hospital with at least one pathologist who generally serves as the Medical
Director of the hospital laboratory and who facilitates the hospital's
compliance with licensing requirements. The Practices are responsible for
recruiting, staffing and scheduling the Practice's affiliated physicians in the
local hospital's inpatient laboratories. The Medical Director of the laboratory
is responsible for: (i) the overall management of the laboratory, including
quality of care, professional discipline and utilization review; (ii) serving as
a liaison to the hospital administrators and medical staff; and (iii)
maintaining professional and public relations in the hospital and the community.
Several Practices
8
have both outpatient laboratories and hospital contracts, which allow outpatient
specimens to be examined by the hospital pathologists, enhancing the utilization
of pathologists in inpatient facilities. In the hospitals, technical personnel
are typically employed by the hospital, rather than by the Practices. Upon
initiation, the hospital contracts typically have terms of one to five years and
contain conditional renewal provisions. Some of the contracts also contain
clauses that allow for termination by either party with relatively short notice.
Loss of any particular hospital contract would not only result in a loss of net
revenue to the Company, but also a loss of outpatient net revenue that may be
derived from the relationship with a hospital and its medical staff. Continuing
consolidation in the hospital industry may result in fewer hospitals or fewer
laboratories as hospitals move to combine their operations.
In the past, the Company provided services at four hospitals and an
ambulatory care facility owned by Primary Health Systems ("PHS"), a regional
hospital network in Cleveland, Ohio. During the first quarter of 2000, PHS began
implementing a plan of reorganization filed under Chapter 11 with the U.S.
Bankruptcy Court for the District of Delaware, and closed one hospital. During
the second quarter, the bankruptcy court approved the sale of two hospitals and
the ambulatory care facility to local purchasers in the Cleveland area. The
purchasers, who elected to employ their own pathologists, did not accept the
Company's contracts with these two hospitals and the ambulatory care facility.
One hospital has not been sold and continues to do business with the Company.
This resulted in asset impairment and related charges of $5.2 million in 2000.
In addition, during the fourth quarter of 2000, a hospital in South Florida
where AmeriPath had the pathology contract, requested proposals for its
pathology services, and AmeriPath was unsuccessful in retaining this contract.
Based upon the remaining projected cash flow from this hospital network, the
Company determined that the intangible assets were impaired and recorded a pre-
tax non-cash charge of approximately $1.0 million.
As of December 31, 2000, the Practices had contracts with 224 hospitals, of
which the majority are exclusive, and 27 of which are owned by HCA - The
Healthcare Company ("HCA"), the country's largest publicly owned hospital
company formerly known as Columbia/HCA Healthcare Corporation. Although the
Company, through its acquisitions, has had relationships with these hospitals
for extended periods of time, the closure and/or sales, or termination of one or
more of these contracts could have a material adverse effect on the Company's
financial position and results of operations. No assurance can be given that
such contracts with hospitals will not be terminated or that they will be
renewed in the future.
All of AmeriPath's outpatient laboratories are licensed and certified under
the guidelines established by CLIA and applicable state statutes and are managed
by a Medical Director of the laboratory. AmeriPath's corporate compliance,
quality assurance and quality improvement programs are designed to assure that
all laboratories and other operations are in compliance with applicable laws,
rules and regulations.
Information Technology
During 2000, the Company reorganized its Information Technology Group
("IT") to better serve the existing and planned model for the information needs
of the Company. IT focused on three central issues: increasing reliability of
our information systems, conversion to the new billing program, and beginning in
the fourth quarter, a heightened effort of sales and marketing technology
initiatives. During 2000, the IT staffing was increased, including the hiring of
a Chief Information Officer, Director of IT Operations, Director of Software
Development, and the establishment of a Project Management office. The new team
established a "Best Practice" approach to managing services to the Company
laboratories. These services have resulted in better performing information
systems, increased focus on centralization of information, and a greater level
of standardization across our businesses.
The Company recognized the opportunity in the market for enhanced reporting
to our customers and has launched a technology initiative to produce reports
that include organ maps, photomicrographs and patient education. Enhanced
reports in GI, Obstetrics and Gynecology, and Urology are available in most of
our markets and the technology initiative is expected to be completed by the end
of the second quarter of 2001. Our programs for acquiring the images and
producing the reports are very efficient and additional programs will be
implemented as customer sales increase.
Consolidation of data to our data warehouse continues and will be completed
at the end of the first quarter of 2001. The Inform DX acquisition provided
opportunities to reduce the effort and expense in completing this project
because Inform DX had already made a significant amount of investment in program
development and related technology. The information acquisition process and
repository of our utilization data has been completed. The sales and marketing
department will be the early adopters of the new program to manage and market
our business.
9
The company is focused on being federal Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") compliant and an audit will be conducted to
assure compliance. We are currently in the planning stages of the audit and have
interviewed outside services for engagement.
Sales and Marketing
Outpatient Market. The Company's marketing efforts are focused on
physicians, hospital and outpatient surgery center administrators, national
clinical laboratories and managed care organizations. Other than Inform DX,
prior to being acquired by the Company, the Practices' marketing efforts were
primarily based on the professional reputations and the individual efforts of
pathologists. The Company believes that there is an opportunity to capitalize on
these professional reputations by hiring experienced personnel and utilizing
professional sales and marketing techniques. Historically, some of the
outpatient practices marketed outpatient services primarily to dermatologists,
over a broad geographic area including neighboring states. The Company continues
to expand its sales force with additional sales personnel and management staff
to accommodate new acquisitions as well as increase same store growth. These
field representatives are supervised by regional sales managers who coordinate
the implementation of regional contracting efforts, leverage operational
capabilities, support national sales strategies and provide ongoing training and
field sales support. The Regional Sales Managers report to the Vice President of
Sales and Marketing to ensure the implementation of consistent and effective
sales activities nationwide. The sales and marketing staff also includes
Directors of Marketing and Managed Care. In 2000, the Company added one position
to the marketing department, a manager of art and creative design, to coordinate
support efforts for its product managers who report directly to the Director of
Marketing. The Director of Managed Care directs regional managers of managed
care in negotiating additional contracts. In 2000, the Company added one
northeast regional manager to its Managed Care Department. The Director of
Managed Care Sales supervises the department's efforts in securing national
contracts, while the Manager of Contract Administration ensures adherence to
contract terms and conditions.
National Clinical Laboratory Marketing. The national clinical laboratories
contract with managed care organizations to provide clinical laboratory
services, as well as anatomic pathology and cytology services. The clinical
laboratory market is primarily dominated by two laboratories, Quest and
Laboratory Corporation of America Holdings ("LabCorp"). Their contracts with
managed care organizations are typically capitated. Ten Practices have
subcontracts with these two large national clinical laboratories to provide
anatomic pathology and cytology services. Under these contracts, which typically
run from one to three years with automatic renewals unless terminated earlier,
the Practices bill the national clinical laboratories on a discounted fee-for-
service basis. The reduced fee is offset by the national clinical laboratories
provision of courier services, supplies, and reduced billing costs and lower bad
debts, since the national clinical labs bear the capitation risk. The Company is
directing its marketing efforts to national clinical laboratories to expand
these contracts on a regional basis to additional Practices as well as to enter
into new contracts. At the same time, the Company is seeking to secure new
contracts and expand existing provider contracts with managed care organizations
for the provision of anatomic pathology services directly to their members and
is prepared to negotiate flexible arrangements with managed care organizations,
including discounted fee-for-service or capitated contracts. There can be no
assurance that the Company's effort to contract directly with managed care
organizations will not adversely affect the Company's relationship with the
national clinical laboratories.
Client and Payor Relationships
The Practices also provide services to a wide variety of other healthcare
providers and payors including physicians, government programs, indemnity
insurance companies, managed care organizations and national clinical
laboratories. Fees for anatomic pathology services rendered to physicians are
billed either to the physicians, to the patient or to the patient's third party
payor.
Contracts and Relationships with Owned Practice Physicians
For the Owned Practices, the Company employs pathologists, or manages the
PA Contractors who employ pathologists, to provide medical services in hospitals
or in other inpatient and outpatient laboratories. Pathologist employment
agreements typically have terms of three to five years and generally can be
terminated at any time upon 60 to 180 days notice. The pathologists generally
receive a base salary, fringe benefits, and may be eligible for an incentive
performance bonus. In addition to compensation, the Company provides its
pathologists with uniform benefit plans, such as disability, supplemental
retirement,
10
life and group health insurance and medical malpractice insurance. The
pathologists are required to hold a valid license to practice medicine in the
jurisdiction in which they practice and, with respect to inpatient or hospital
services, to become a member of the medical staff at the contracting hospital
with privileges in pathology. The Company is responsible for billing patients,
physicians and third party payors for services rendered by the pathologists.
Most of the employment agreements prohibit the physician from competing with the
Company within a defined geographic area and prohibit solicitation of
pathologists, other employees or clients of the Company for a period of one to
two years after termination of employment.
The Company's business is dependent upon the recruitment and retention of
pathologists, particularly those with subspecialties, such as dermatopathology.
While the Company has been able to recruit (principally through practice
acquisitions) and retain pathologists, no assurance can be given that the
Company will be able to continue to do so successfully or on terms similar to
its current arrangements. The relationship between the Company's pathologists
and their respective local medical communities is important to the operation and
continued profitability of the Practices. In the event that a significant number
of pathologists terminate their relationships with the Company or become unable
or unwilling to continue their employment, the Company's business could be
materially and adversely affected.
The experience and specialized certifications of the Company's affiliated
physicians provide opportunities for immediate consultation in complex cases
among the internal network of affiliated physicians. Pathology is a specialized
field of medicine and is a core requirement in a dermatologist's training.
Through teaching at medical institutions, the Company's affiliated physicians
have an opportunity to develop a reputation and following among residents and
practicing physicians. Several affiliated physicians have teaching positions
with universities or affiliations with other educational institutions for the
training and continuing medical education of physicians, particularly
dermatologists.
Government Regulations
The Company's business is subject to many of governmental and regulatory
requirements relating to healthcare matters as well as laws and regulations that
relate to business corporations. The Company believes that it exercises care to
structure its practices and arrangements with hospitals and physicians to comply
with relevant federal and state law. It also believes such current arrangements
and practices do comply with applicable statutes and regulations. However, there
can be no assurance that the Company's current or prior practices or
arrangements will not be found to be in noncompliance with law, or that such
occurrence will not result in a material adverse effect to the Company.
The Company derived approximately 20% and 19% of its Owned Practices'
collections for the years ended December 31, 1999 and 2000, respectively, from
payments made by government sponsored healthcare programs (principally Medicare
and Medicaid). The decrease in the percentage of collections attributable to
government sponsored healthcare programs resulted primarily from the acquisition
of practices outside Florida, with smaller Medicare populations. These programs
are subject to substantial regulation by the federal and state governments. Any
change in payment regulations, policies, practices, interpretations or statutes
that places limitations on reimbursement amounts, or changes in reimbursement
coding, or practices could materially and adversely affect the Company's
financial condition and results of operations. Increasing budgetary pressures at
both the federal and state level and concerns over the continued increase of the
costs of healthcare have led, and may continue to lead, to significant
reductions in health care payments. State concerns over the growth in Medicaid
also could result in payment reductions. Although governmental payment
reductions have not materially affected the Company in the past, it is possible
that such changes in the future could have a material adverse effect on the
Company's financial condition and results of operations. In addition, Medicare,
Medicaid and other government sponsored healthcare programs are increasingly
shifting to some form of managed care. Some states have recently enacted
legislation to require that all Medicaid patients be converted to managed care
organizations, and similar legislation may be enacted in other states, which
could result in reduced payments to the Company for such patients. In addition,
a state-legislated shift in a Medicaid plan to managed care could cause the loss
of some, or all, Medicaid business for the Company in that state if the Company
were not selected as a participating provider. Additionally, funds received
under all health care reimbursement programs are subject to audit with respect
to the proper billing for physician services. Retroactive adjustments of revenue
from these programs could occur. The Company expects that there will continue to
be proposals to reduce or limit Medicare and Medicaid payment for services.
In connection with practice acquisitions, the Company performs certain due
diligence investigations with respect to the potential liabilities of acquired
practices and obtains indemnification with respect to certain liabilities from
the sellers of such practices. Nevertheless, there can be undiscovered claims
that subsequently arise. There can be no assurance that any liabilities for
which the Company becomes responsible (despite such indemnification) will not be
material or will not exceed either the
11
limitations of any applicable indemnification provisions or the financial
resources of the indemnifying parties. Furthermore, the Company, through its
Corporate Compliance Program, regularly reviews the Practices' compliance with
federal and state health care laws and regulations and revises as appropriate
the operations, policies and procedures of its Practices to conform with the
Company's policies and procedures and applicable law. While the Company believes
that the operations of the Practices prior to their acquisition were generally
in compliance with such laws and regulations, there can be no assurance that the
prior operations of the Practices were in full compliance with such laws, as
such laws may ultimately be interpreted. Moreover, although the Company
maintains an active compliance program, it is possible that the government might
challenge some of the current practices of the Company as not being in full
compliance with such laws. A violation of such laws by a practice or the Company
could result in civil and criminal penalties, exclusion of the physician, the
practice or the Company from participation in Medicare and Medicaid programs
and/or loss of a physician's license to practice medicine.
Fraud and Abuse. Federal anti-kickback law and regulations prohibit any
knowing and willful offer, payment, solicitation or receipt of any form of
remuneration, either directly or indirectly, in return for, or to induce: (i)
the referral of an individual for a service for which payment may be made by
Medicare and Medicaid or certain other federal health care programs; or (ii) the
purchasing, leasing, ordering or arranging for, or recommending the purchase,
lease or order of, any service or item for which payment may be made by
Medicare, Medicaid or certain other federal healthcare programs. Violations of
federal anti-kickback rules are punishable by monetary fines, civil and criminal
penalties and exclusion from participation in Medicare, Medicaid and other
federal health care programs. Several states have laws that are similar.
Safe Harbors. The federal government has published regulations that provide
"safe-harbors" that protect from prosecution under federal anti-kickback laws
business transactions that meet certain requirements. Failure to meet the
requirements of a safe harbor, however, does not necessarily mean a transaction
violates the anti-kickback law. The Company believes its operations are in
material compliance with applicable Medicare and fraud and abuse laws and seeks
to structure arrangements to comply with applicable safe harbors where
reasonably possible. There is a risk however, that the federal government might
investigate such arrangements and conclude they violate the anti-kickback
statute. If the Company's arrangements were found to be illegal, the Company,
the physician groups and/or the individual physicians would be subject to civil
and criminal penalties, including exclusion from the participation in government
reimbursement programs, which could materially adversely affect the Company.
Advisory Opinions. The Department of Health and Human Services Office of
Inspector General ("OIG") issues advisory opinions that provide advice on
whether proposed business arrangements violate the anti-kickback law. In
Advisory Opinion 99-13, the OIG opined when prices for laboratory services for
non-governmental patients are discounted below Medicare reimbursable rate, the
anti-kickback law may be implicated. The OIG found prices discounted below the
laboratory supplier's costs to be particularly problematic. In the same opinion,
OIG suggested that a laboratory may be excluded from federal health care
programs if it charges Medicare or Medicaid amounts substantially in excess of
discounted charges to the physician. In the OIG's opinion, charges are likely
excessive if the profit margin for Medicare business exceeds profit margin for
non-federally reimbursed business.
The OIG also has addressed physician practice management arrangements in an
advisory opinion. In Advisory Opinion 98-4, the OIG found that management fees
based on a percentage of practice revenues may violate the anti-kickback
statute. These Advisory Opinions suggest that OIG might challenge certain prices
below Medicare reimbursement rates or arrangements based on a percentage of
revenues. While the Company believes its arrangements comply with applicable
law, OIG's advisory opinions suggest there is a risk of an adverse OIG finding
relating to practices reviewed in the advisory opinions. Any such finding could
have a material adverse impact on the Company.
Self-Referral and Financial Inducement Laws. The Company is also subject to
federal and state statutes and regulations banning payments for referral of
patients and referrals by physicians to health care providers with whom the
physicians have a financial relationship. The federal Stark 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 relationships include both
investment interests in an entity and compensation arrangements with an entity.
If an arrangement is covered by the Stark Law, all of the requirements of a
Stark Law exception must be satisfied. Many states also have laws that are
similar to the Stark Law. These statutes and regulations generally apply to
services reimbursed by both governmental and private payors. Violations of these
laws may result in prohibition of payment for services rendered, loss of
licenses as well as fines and criminal penalties. In addition, violation of the
Stark Law may result in exclusion from Medicare and Medicaid. State statutes and
regulations affecting the referral of patients to health care providers range
from statutes and regulations that are substantially
12
the same as the federal laws and the safe harbor regulations to a simple
requirement that physicians or other health care professionals disclose to
patients any financial relationship the physicians or health care professionals
have with a health care provider that is being recommended to the patients.
These laws and regulations vary significantly from state to state, are often
vague and, in many cases, have not been interpreted by courts or regulatory
agencies. Adverse judicial or administrative interpretations of any of these
laws could have a material adverse effect on the operating results and financial
condition of the Company. In addition, expansion of the Company's operations to
new jurisdictions, or new interpretations of laws in existing jurisdictions,
could require structural and organizational modifications of the Company's
relationships with physicians to comply with that jurisdiction's laws. Such
structural and organizational modifications could have a material adverse effect
on the operating results and financial condition of the Company.
Physicians affiliated with the Company may have financial relationships
with the Company, as defined by the federal Stark Law, in the form of
compensation arrangements, ownership of Company shares, contingent promissory
notes with the Company, or a combination of the above. With respect to
compensation arrangements, the Company believes that existing arrangements are
structured to comply with an applicable Stark Law exception. With respect to the
ownership of shares, the Company believes that the ownership of Company shares
by physicians should fall within the publicly traded stock exception to the
Stark Law's definition of financial relationship. However, certain physician-
owned shares do have a transfer restriction and, as a result, the government
could take the position that all of the requirements of this exception are not
met. The contingent notes held by some physicians do not meet an exception to
the Stark Law's definition of financial relationship. In either case, however,
the Company believes that its current operations comply with the Stark Law.
Pathologists are exempted from the Stark regulations for work that they order
themselves and perform themselves or in their associated laboratory. However,
physicians affiliated with the Company do make referrals that could be
considered covered under the Stark law. We believe however, that the Company
does meet, at a minimum, one of the applicable exceptions stated in the Stark
Law and regulations, in the event that the government considers these
transactions to covered by the Stark Law. All physicians affiliated with the
Company have been instructed on the Stark Law and regulations and are believed
to be following such instructions. To the extent physicians affiliated with the
Company may make a referral to the Company and a financial relationship exists
between the Company and the referring physician through either the ownership of
Company shares or contingent notes, the government might take the position that
the arrangement does not comply with the Stark Law. Any such finding could have
a material adverse impact on the Company.
Government Investigations of Hospitals and Hospital Laboratories.
Significant media and public attention has been focused on the health care
industry due to ongoing federal and state investigations reportedly related to
certain referral and billing practices, laboratory and home health care services
and physician ownership and joint ventures involving hospitals. Most notably,
HCA is under investigation with respect to such practices. The Company operates
laboratories on behalf of and has numerous contractual agreements with
hospitals, including 27 pathology service contracts with HCA hospitals as of
December 31, 2000. The government's ongoing investigation of HCA could result in
a governmental investigation of one or more of the Company's operations that
have arrangements with HCA. In addition, the OIG and the Department of Justice
have initiated hospital laboratory billing review projects in certain states and
are expected to extend such projects to additional states, including states in
which the Company operates hospital laboratories. These projects increase the
likelihood of governmental investigations of laboratories owned and operated by
the Company. Although the Company monitors its billing practices and hospital
arrangements for compliance with prevailing industry practices under applicable
laws, such laws are complex and constantly evolving and there can be no
assurance that the governmental investigators will not challenge the Company's
or industry practices. The government's investigations of entities with which
the Company contracts may have other effects which could materially and
adversely affect the Company, including termination or amendment of one or more
of the Company's contracts or the sale of hospitals potentially disrupting the
performance of services under such contracts.
Corporate Practice of Medicine. The Company is not licensed to practice
medicine. The practice of medicine is conducted solely by its licensed
pathologists. The manner in which licensed physicians can be organized to
perform and bill for medical services is governed by the laws of the state in
which medical services are provided and by the medical boards or other entities
authorized by such states to oversee the practice of medicine. Business
corporations are generally not permitted under certain state laws to exercise
control over the medical judgments or decisions of physicians, or engage in
certain practices such as fee-splitting with physicians. In states where the
Company is not permitted to directly own a medical practice, the Company
performs only non-medical and administrative and support services, does not
represent to the public or its clients that it offers medical services and does
not exercise influence or control over the practice of medicine. See discussion
"AmeriPath Corporate Structure", above.
13
The Company believes that it currently is in material compliance with the
corporate practice laws in the states in which it operates. Nevertheless, there
can be no assurance that regulatory authorities or other parties will not assert
that the Company is engaged in the corporate practice of medicine. If such a
claim were successfully asserted in any jurisdiction, the Company, and its
pathologists could be subject to civil and criminal penalties under such
jurisdiction's laws and could be required to restructure their contractual and
other arrangements. Alternatively, some of the Company's existing contracts
could be found to be illegal and unenforceable. In addition, expansion of the
operations of the Company to other "corporate practice" states may require
structural and organizational modification of the Company's form of relationship
with physicians, PA Contractors or hospitals. Such results or the inability to
successfully restructure contractual arrangements could have a material adverse
effect on the Company's financial condition and results of operations.
Medicare Fee Schedule Payment for Clinical Diagnostic Laboratory Testing.
Medicare reimburses hospitals based on locality-specific fee schedules on the
basis of a reimbursement methodology with Consumer Price Index ("CPI") related
adjustments. Medicare includes payment for services performed for clinical
diagnostic laboratory inpatients within the prospectively determined Diagnosis
Related Group rate paid to the hospital. Additionally, state Medicaid programs
may pay no more than the Medicare fee schedule amount. Congress also has
implemented a national cap on Medicare clinical diagnostic laboratory fee
schedules. This national cap has been lowered several times and is now at
approximately 74% of the national median. In addition, Congress frequently has
either limited or eliminated the annual CPI adjustments of the Medicare clinical
diagnostic laboratory fee schedules. The Omnibus Budget Reconciliation Act of
1993 eliminated the adjustment for the years 1994 and 1995. In 1996 and 1997,
however, the fee schedule adjustments were 3.2% and 2.7%, respectively. Even
these modest increases were reduced in some areas due to a recalculation of
national medians and by conversion in some carrier areas to a single statewide
fee schedule. In the Balanced Budget Act of 1997 ("BBA"), Congress again
eliminated the annual adjustments, this time for the years 1998 through 2002.
The adjustment limitations and changes in the national cap made to date have not
had, and are not expected by the Company to have, a material adverse effect on
the Company's results of operations. Any further significant decrease in such
fee schedules could have a material adverse effect on the Company.
Due to uncertainty regarding the implementation of the above-described
Medicare developments, the Company currently is unable to predict their ultimate
impact on the laboratory industry generally or on the Company in particular.
Reforms may also occur at the state level (and other reforms may occur at the
federal level) and, as a result of market pressures, changes are occurring in
the marketplace as the number of patients covered by some form of managed care
continues to increase. In the past, the Company has offset a substantial portion
of the impact of price decreases and coverage changes through the achievement of
economies of scale, more favorable purchase contracts and greater operational
efficiencies. However, if further substantial price decreases or coverage
changes were to occur, or if the government were to seek any substantial
repayments or penalties from the Company, such developments would likely have an
adverse impact on gross profits from the Company's testing services unless
management had an opportunity to mitigate such impact.
Reevaluations and Examination of Billing. Payors periodically reevaluate
the services they cover. In some cases, government payors such as Medicare also
may seek to recoup payments previously made for services determined not to be
covered. Any such action by payors would have an adverse affect on the Company's
revenues and earnings.
Moreover, in recent months the federal government has become more
aggressive in examining laboratory billing and seeking repayments and penalties
as the result of improper billing for services (e.g., the billing codes used),
regardless of whether carriers had furnished clear guidance on this subject. The
primary focus of this initiative has been on hospital laboratories and on
routine clinical chemistry tests which comprise only a small part of the
Company's revenues. Although the scope of this initiative could expand, it is
not possible to predict whether or in what direction the expansion might occur.
The Company believes its practices are proper and do not include any allegedly
improper practices now being examined. However, no assurance can be given that
the government will not broaden its initiative to focus on the type of services
furnished by the Company or, if this were to happen, on how much money, if any,
the Company might be required to repay.
Furthermore, HIPAA and Operation Restore Trust have strengthened the powers
of the OIG and increased the funding for Medicare and Medicaid audits and
investigations. As a result, the OIG has expanded and continues to expand the
scope of its health care audits and investigations. State enforcement actions
are similarly expanding. Federal and state audits and inspections, whether on a
scheduled or unannounced basis, are conducted from time to time at the Company's
facilities.
Due to the uncertain nature of coding for pathology services, the Company
cannot assure that issues such as those addressed in the 1997 Operation Restore
Trust investigation will not arise again. If a negative finding is made as a
result of such
14
an investigation, the Company could be required to change coding practices or
repay amounts paid for incorrect practices either of which could have a
materially adverse effect on the operating results and financial condition of
the Company.
BBA Additions to Coverage. The 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 for 2000 of $36.61. The
physician fee schedule conversion factor has increased from $36.61 to $38.26 in
2001.
Laboratory Compliance Plan. In February 1997, OIG released a model
compliance plan for laboratories that is based largely on the corporate
integrity agreements negotiated with the laboratories which settled a number of
government enforcement actions against laboratories under Operation Restore
Trust, initiated in 1995. The Company adopted and maintains a compliance plan,
which includes components of OIG's model compliance plan, as the Company deemed
appropriate to the conduct of its business. The Company's Senior Vice President
of Operations serves as the Company's Compliance Officer and reports directly to
the Chief Executive Officer and the Board of Directors. One key aspect of the
corporate integrity agreements and the model compliance plan is an emphasis on
the responsibilities of laboratories to notify physicians that Medicare covers
only medically necessary services. Although these requirements focus on
chemistry tests, especially routine tests, rather than on anatomic pathology
services or the non-automated tests which make up the majority of the Company's
business, they could affect physician test ordering habits more broadly. The
Company is unable to predict whether or to what extent these developments may
have an impact on the utilization of the Company's services.
Antitrust Laws. In connection with state corporate practice of medicine
laws discussed above, the physician practices with which the Company is
affiliated in some states are organized as separate legal entities. As such, the
physician practice entities may be deemed to be persons separate both from the
Company and from each other under the antitrust laws and, accordingly, subject
to a wide range of federal and state laws that prohibit anti-competitive conduct
among separate legal entities. In addition, the Company also is seeking to
acquire or affiliate with established and reputable practices in its target
geographic markets. The Company believes it is in compliance with federal and
state antitrust laws and intends to comply with any state and federal laws that
may affect its development of integrated health care delivery networks. There
can be no assurance, however, that a review of the Company's business by courts
or regulatory authorities would not adversely affect the operations of the
Company and it's affiliated physician groups.
HIPAA Criminal Penalties. HIPAA created criminal provisions, which impose
criminal penalties for fraud against any health care benefit program for theft
or embezzlement involving health care and for false statements in connection
with the payment of any health benefits. HIPAA also provided broad prosecutorial
subpoena authority and authorized property forfeiture upon conviction of a
federal health care offense. Significantly, the HIPAA provisions apply not only
to federal programs, but also to private health benefit programs as well. HIPAA
also broadened the authority of the OIG to exclude participants from federal
health care programs. Because of the uncertainties as to how the HIPAA
provisions will be enforced, the Company currently is unable to predict their
ultimate impact on the Company. If the government were to seek any substantial
penalties against the Company, this could have a material adverse effect on the
Company.
Licensing. CLIA extends federal oversight to virtually all clinical
laboratories by requiring that laboratories be certified by the government. Many
laboratories must also meet governmental quality and personnel standards,
undergo proficiency testing and be subject to biennial inspection. Rather than
focusing on location, size or type of laboratory, this extended oversight is
based on the complexity of the test performed by the laboratory. The CLIA
quality standards regulations divide all tests into three categories (waived,
moderate complexity and high complexity) and establish varying requirements
depending upon the complexity of the test performed. The Company's outpatient
laboratories are licensed by Health and Human Services ("HHS") under CLIA to
perform high complexity testing. Generally, the HHS regulations require
laboratories that perform high complexity or moderate complexity tests to
implement systems that ensure the accurate performance and reporting of tests
results, establish quality control systems, have proficiency testing conducted
by approved agencies and have biennial inspections. The Company is also subject
to state regulation. CLIA provides that a state may adopt more stringent
regulations than federal law. For example, some state laws require that
laboratory personnel meet certain qualifications, specify certain quality
controls, maintain certain records and undergo proficiency testing.
15
Other Regulations. In addition, the Company is subject to licensing and
regulation under federal, state and local laws relating to the collecting,
storing, handling and disposal of medical specimens, infectious and hazardous
waste and radioactive materials as well as the safety and health of laboratory
employees. All Company laboratories are operated in a manner designed to comply
with applicable federal and state laws and regulations relating to the
generation, storage, treatment and disposal of all laboratory specimens and
other biohazardous waste. The Company utilizes licensed vendors for the disposal
of such specimen and waste.
In addition to its comprehensive regulation of safety in the workplace, the
federal Occupational Safety and Health Administration ("OSHA") has established
extensive requirements relating to workplace safety for healthcare employees,
including clinical laboratories, whose workers may be exposed to blood-borne
pathogens, such as HIV and the hepatitis B virus. These regulations require work
practice controls, protective clothing and equipment, training, medical follow-
up, vaccinations and other measures designed to minimize exposure to, and
transmission of, blood-borne pathogens. Regulations of the Department of
Transportation, the Public Health Services and the U.S. Postal Service also
apply to the transportation of laboratory specimens.
HIPAA Medical Information Confidentiality, Security and Financial
Transaction Requirements. Among other things, HIPAA established several
requirements regarding the confidentiality, security and transmission of medical
information. HCFA has published proposed and final regulations that explain the
application of such requirements. The final confidentiality regulations have
been reopened for comment by the Bush Administration. The security regulations
are proposed and the transaction standards are final. It is unclear whether
these requirements will result in additional financial obligations for the
Company or pose increased regulatory risk.
Insurance
The Company's business entails an inherent risk of claims of physician
professional liability for acts or omissions of its physicians and laboratory
personnel. The Company and its 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. The Company
has consolidated its physician professional liability insurance coverages with
the St. Paul Fire and Marine Insurance Company, whereby each of the pathologists
is insured under claims-made policies with primary limits of $1.0 million per
occurrence and $5.0 million in the annual aggregate, and share with the Company
in surplus coverage of up to $20.0 million in the aggregate. The Company's
coverage until July 1999 was with Steadfast Insurance Company (Zurich-American).
The policy also provides "prior acts" coverage for each of the physicians with
respect to the practices prior to their acquisition by the Company. Further, the
Company has provided reserves for incurred but not reported claims in connection
with its claims-made policies. The terms of the purchase agreements relating to
each practice acquisition contain certain limited rights of indemnification from
the sellers of the practices. The Company also maintains property and umbrella
liability insurance policies. While the Company believes it has adequate
professional liability insurance coverage for itself, and physicians, there can
be no assurance that a future claim or claims will not be successful and, if
successful, will not exceed the limits of available insurance coverage or that
such coverage will continue to be available at acceptable costs or on favorable
terms. In addition, the Company's insurance does not cover all potential
liabilities arising from governmental fines and penalties, indemnification
agreements and certain other uninsurable losses. A malpractice claim asserted
against the Company, an Owned or Managed Practice, or an affiliated physician
could, in the event of an adverse outcome exceeding limits of available
insurance coverage, have a material adverse effect on the Company's financial
condition and results of operations.
Competition
The markets for the services provided by the Company, its Practices and
pathologists are in the provision of physician practice management services to
pathology practices and the provision of pathology and cytology diagnostic
services. Competition may result from other anatomic pathology practices,
companies in other healthcare industry segments, such as other hospital-based
specialties, national clinical laboratories, large physician group practices or
pathology physician practice management companies that may enter the Company's
markets, some of which may have greater financial and other resources than the
Company.
With respect to physician practice management services, the Company
believes that the principal competitive factors are the Company's pathologist
leadership, and single specialty focus, sales and marketing expertise, its
administrative support
16
capabilities (billing, collections, accounting and financial reporting,
information systems, and human resources). The Company believes that the
infrastructure it is building provides a competitive advantage in such markets.
To date, the Company has not experienced significant competition in its primary
market areas. However, it does compete with several other companies, and such
competition can reasonably be expected to increase. In addition, companies in
other healthcare segments, such as hospitals, national clinical laboratories,
third party payors, and HMO's, many of which have greater financial resources
may become competition in the employment and managers of pathology practices.
The Company competes for acquisitions and affiliations on the basis of its
reputation, management experience, status and resources as a public company and
its single focus on anatomic pathology. There can be no assurance that the
Company will be able to compete effectively or that additional competitors will
not enter the Company's markets or make it more difficult for the Company to
acquire or affiliate with practices on favorable terms.
Service Marks
The Company has registered the service marks "AmeriPath", "CAD - The Center
for Advanced Diagnostics" and the AmeriPath logo with the United States Patent
and Trademark Office.
Employees
At December 31, 2000, the Company's Owned and Managed Practices employ
2,325 people, including 425 physicians. In addition to physicians, the employees
of the Company and the Managed Practices include 676 laboratory technicians, 151
couriers and 1,073 billing, marketing, transcription and administrative staff,
of which 98 personnel are located at the Company's executive offices. None of
the Company's employees or prospective employees is subject to collective
bargaining agreements.
ITEM 2. PROPERTIES
The Company leases its executive offices located in Riviera Beach, Florida
(approximately 12,000 square feet) and its centralized billing office in Fort
Lauderdale, Florida (approximately 13,000 square feet) and the Company and its
Managed Practices lease 65 other facilities: 20 in Florida, two in Alabama,
three in Kentucky, four in Ohio, eight in Texas, six in Pennsylvania, five in
Tennessee, four in Mississippi, two in Missouri, two in New York, two in
Oklahoma, two in North Carolina and one in Indiana, Colorado, California,
Massachusetts, and Wisconsin. These facilities are used for laboratory
operations, administrative and billing and collections operations and storage
space. The 67 facilities encompass an aggregate of approximately 300,000 square
feet, have an aggregate annual rent of approximately $5.1 million and have lease
terms expiring from 2001 to 2009. As laboratory leases are scheduled to expire,
the Company will consider whether to extend or renegotiate the existing lease or
move the facility to another location within the defined geographic area of the
Practice.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fiscal
quarter ended December 31, 2000.
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
AmeriPath's Common Stock, is listed for quotation on the NASDAQ National
Market System under the symbol "PATH". The following table sets forth, the high
and low closing sales prices for the Common Stock, as reported on the NASDAQ
National Market System during the Company's fiscal quarters indicated below. The
Common Stock first began trading on October 21, 1997. As of March 16, 2001,
there were approximately 300 shareholders of record and over 3,000 beneficial
owners based upon broker searches conducted for solicitation purposes.
High Low
--------- --------
First Quarter 1999 $ 12 9/16 $ 7 1/2
Second Quarter 1999 $ 9 5/8 $ 7 1/2
Third Quarter 1999 $ 10 1/8 $ 8 3/32
Fourth Quarter 1999 $ 10 $ 7 7/16
First Quarter 2000 $ 9 15/16 $ 8
Second Quarter 2000 $ 9 7/16 $ 7 1/4
Third Quarter 2000 $ 14 5/8 $ 8 3/8
Fourth Quarter 2000 $26 15/16 $13 9/16
The Company has not during the past two fiscal years and presently has no
plans to pay any dividends on its Common Stock. All earnings will be retained
for the foreseeable future to support operations and to finance the growth and
development of the Company's business. The payment of future cash dividends, if
any, will be at the discretion of the Board of Directors of the Company and will
depend upon, among other things, future earnings, capital requirements, the
Company's financial condition, any applicable restrictions under credit
agreements existing from time to time and on such other factors as the Board of
Directors may consider relevant. The terms of the Company's existing credit
facility prohibit the payment of dividends without the lenders' consent.
Recent Sales of Unregistered Securities
Recent Sales of Unregistered Securities - In connection with two of the
acquisitions completed during the fourth quarter of 2000, the Company issued the
following shares of Common Stock pursuant to Rule 144A promulgated under the
Securities Act of 1933, as amended:
Effective Shares
Location Date Issued
----------------- ----------------- ----------
(1) Pathology Consultants of America, Inc. d/b/a Nashville, TN November 30, 2000 2,576,305
Inform DX
(2) Diagnostic Pathology Management Services, Inc. Oklahoma City, OK December 1, 2000 81,620
and Diagnostic Pathology Services, Inc. and
Tulsa Diagnostics, Inc. and Anatomic Pathology Tulsa, OK December 1, 2000 76,334
Services, Inc.
ITEM 6. SELECTED FINANCIAL DATA
The selected Consolidated Financial Data set forth below have been derived
from the Company's consolidated financial statements and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Consolidated Financial Statements and the
related Notes thereto and the other financial information included elsewhere in
this Annual Report on Form 10-K. All information for the prior years has been
restated to reflect the acquisition of Inform DX, which has been accounted for
as a pooling of interest.
18
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
YEAR ENDED DECEMBER 31,
(in thousands, except per share data)
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Net revenue $ 42,558 $108,406 $193,316 $257,432 $330,094
-------- -------- -------- -------- --------
Operating costs:
Cost of services 20,106 48,833 87,700 122,685 163,390
Selling, general and administrative
expense 8,483 21,386 36,709 47,159 58,411
Provision for doubtful accounts 3,576 10,892 18,698 25,289 34,040
Amortization expense 1,958 5,763 9,615 12,827 16,172
Merger-related costs (1) -- -- -- -- 6,209
Asset impairment and related charges (2) -- -- -- -- 9,562
Loss on cessation of clinical lab operations (3) 910 -- -- -- --
-------- -------- -------- -------- --------
Total 35,033 86,874 152,722 207,960 287,784
-------- -------- -------- -------- --------
Income from operations 7,525 21,532 40,594 49,472 42,310
Interest expense (3,540) (8,772) (8,560) (9,573) (15,376)
Nonrecurring charge (4) -- (1,289) -- -- --
Other (expense) income, net (431) (96) 150 286 226
-------- -------- -------- -------- --------
Income before income taxes 3,554 11,375 32,184 40,185 27,160
Provision for income taxes 1,528 5,522 13,941 17,474 14,068
-------- -------- -------- -------- --------
Net income 2,026 5,853 18,243 22,711 13,092
Induced conversion and accretion
of redeemable preferred stock -- -- (75) (131) (1,604)
-------- -------- -------- -------- --------
Net income available to common shareholders $ 2,026 $ 5,853 $ 18,168 $ 22,580 $ 11,488
======== ======== ======== ======== ========
Earnings per share data (5)
Basic earnings per common share $0.53 $0.66 $0.87 $1.03 $0.49
======== ======== ======== ======== ========
Diluted earnings per common share $0.22 $0.42 $0.84 $1.00 $0.47
======== ======== ======== ======== ========
Basic weighted average shares outstanding 3,115 8,880 20,911 21,984 23,473
======== ======== ======== ======== ========
Diluted weighted average shares outstanding 9,014 13,986 21,610 22,516 24,237
======== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET DATA:
DECEMBER 31,
(in thousands)
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Cash and cash equivalents $ 2,262 $ 2,030 $ 6,383 $ 1,713 $ 2,418
Total assets 157,854 272,532 390,413 478,896 562,166
Long-term debt, including current
portion 97,239 77,630 123,917 168,614 201,747
Redeemable equity securities (6) 18,427 -- 15,373 15,504 --
Stockholders' equity 12,693 145,603 180,378 206,214 249,665
- ----------------------
(1) In connection with the Inform DX merger, the Company recorded $6.2 million
of costs related to transaction fees, change in control payments and
various exit costs associated with the consolidation of certain operations.
(2) In connection with Quest Diagnostics termination of its contract in South
Florida, the loss of a contract with a hospital in South Florida and the
loss of three hospital contracts and an ambulatory care facility contract
in Cleveland, Ohio, the Company recorded non-recurring charges totaling
$9.6 million. The charges were based on the
19
remaining projected cash flows from these contracts in which the Company
determined that the intangible assets that were recorded from acquisitions
in these areas had been impaired.
(3) In connection with the closing of a clinical operation in May 1996, the
Company recorded a nonrecurring charge to operations aggregating $910,000,
which included severance payments, write-downs of property, equipment and
other assets to estimated realizable values, and the write-off of the
unamortized balances of intangible assets associated with the clinical
operations.
(4) In the year ended December 31, 1997, the Company recorded a nonrecurring
charge of $1.3 million, primarily attributable to professional fees and
printing costs, as a result of the postponement of the Company's planned
initial public offering of Common Stock.
(5) Earnings per share for all periods are computed and presented in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share". Basic earnings per share excludes dilution and is
computed by dividing income attributable to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity. Prior reported earnings per
share data have been restated in accordance with SFAS No. 128.
(6) For December 31, 1996 amounts include Convertible Preferred Stock of $5.2
million plus accrued and unpaid dividends and $12.2 million of Redeemable
Common Stock. For December 31, 1998 and 1999 amounts included Convertible
Preferred Stock of $15.4 million and $15.5 million, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the Company's results of operations and
financial condition should be read together with the consolidated financial
statements and other financial information included elsewhere in this Report.
General
AmeriPath operates in two operating segments, Managed and Owned Practices,
as the largest physician and laboratory company focused on providing anatomic
pathology, cancer diagnostic, genomics, and healthcare information services. The
Company operates as a large group practice of pathologists in both hospital
inpatient laboratories and outpatient independent laboratories.
The pathologists provide diagnostic anatomic pathology and related
histologic services with particular emphasis on dermatopathology (study of
diseases of the skin), hematopathology (study of diseases of the blood), and
cytopathology (study of abnormalities of the cells), as well as surgical
pathology (diagnostic services in connection with surgical procedures).
Outpatient pathology services are performed in licensed freestanding,
independent pathology laboratories owned and operated by the Company. Services
performed are billed to patients, Medicare, Medicaid, other third party payors,
national clinical laboratories and attending physicians primarily on a fee-for-
service basis, which cover both the professional and technical components of
such services.
Inpatient pathology services are performed under exclusive contractual
arrangements with hospitals. Net revenue for inpatient pathology services is
dependent in large part on the level of inpatient admissions and outpatient
surgeries performed at the hospitals. Such arrangements typically provide that a
pathologist will provide diagnostic pathology services for the hospital's staff
physicians and serve as the Medical Director of the hospital's laboratories with
responsibility for the clinical laboratory and histology departments, as well as
the hospital's blood banking and microbiology services.
Achieving growth through acquisitions is one of the Company's principal
business strategies. The following table depicts the Company's growth through
acquisition activity. The table includes the acquisition of Inform DX in 2000,
but does not separately include any practices acquired by Inform DX before being
acquired by AmeriPath.
20
Year Ended December 31,
--------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
Number of practices acquired 11 5 15 10 8
Pathologists added 79 45 93 71 128
Outpatient laboratories added 10 3 5 8 13
Hospital contracts added 47 28 47 39 63
At December 31, 2000, the Company and its Managed Practices operated in 21
states, with 425 pathologists providing services in 224 hospitals and 42
outpatient laboratories. The Company focuses on developing regional networks,
such as in the state of Florida, and expanding the practices through its
internal marketing efforts. The Company is revisiting its acquisition strategy,
particularly its pace of acquisitions, and will focus on fold-in acquisitions
that will densify its operations in strategically targeted markets and larger
pedestal acquisitions.
Results of Operations
The following table sets forth, for the periods indicated, certain
consolidated financial data as a percentage of net revenue.
PERCENTAGE OF NET REVENUE Year Ended December 31,
---------------------------------
1998 1999 2000
------ ------ ------
Net revenue 100.0% 100.0% 100.0%
Operating costs:
Cost of services 45.3 47.7 49.5
Selling, general and administrative expense 19.0 18.3 17.7
Provision for doubtful accounts 9.7 9.8 10.3
Amortization expense 5.0 5.0 4.9
Merger-related charges -- -- 1.9
Asset impairment and related charges -- -- 2.9
----- ----- -----
Total operating costs and expenses 79.0 80.8 87.2
----- ----- -----
Income from operations 21.0 19.2 12.8
Interest expense and other income (4.4) (3.6) (4.6)
----- ----- -----
Income before income taxes 16.6 15.6 8.2
Provision for income taxes 7.2 6.8 4.2
----- ----- -----
Net income 9.4 8.8 4.0
Induced conversion and accretion of redeemable preferred stock -- -- 0.5
----- ----- -----
Net income attributable to common stockholders 9.4% 8.8% 3.5%
===== ===== =====
The Company completed the acquisition of eight Practices in 2000, ten
Practices in 1999 and 15 Practices in 1998, the results of which are included in
the Company's operating results from the date of acquisition. Changes in
operations between years were primarily due to these acquisitions. The
acquisition of Inform DX was accounted for as a pooling of interest and
therefore all prior year amounts have been restated to reflect the combined
historical operations of Inform DX and AmeriPath.
Net Revenues
AmeriPath derives its net revenue 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.
21
Net Patient Revenues. The majority of services furnished by AmeriPath's
pathologists are anatomic pathology diagnostic services. Medicare reimbursement
for these services represented approximately 22%, 20% and 19% of AmeriPath's
cash collections in 1998, 1999 and 2000, respectively. The Company typically
bills government programs (principally Medicare and Medicaid), indemnity
insurance companies, managed care organizations, national clinical laboratories,
physicians and patients. Net revenue differs from amounts billed for services
due to:
. Medicare and Medicaid reimbursements are limited to annually established
rates;
. payments from managed care organizations limited to discounted fee-for-
service rates;
. negotiated reimbursement rates with other third party payors;
. rates negotiated under sub-contracts with national clinical laboratories for
the provision of anatomic pathology services; 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. AmeriPath 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 AmeriPath'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 AmeriPath's profitability. Historically, net
patient service revenue from capitated contracts has represented an
insignificant amount of total net patient service revenue.
Virtually all of AmeriPath'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
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. For the
year ended December 31, 2000, the Company recorded approximately $9.3 million of
revenue from director fees. For the year 2001, the Company estimates that
director fees will be approximately $10.5 million. Hospitals and third-party
payors are continuing to increase pressure to reduce the payment of these
clinical component billing charges and "Part A" fees, and in the future
AmeriPath 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).
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
22
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, 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) as noted above, the 1997 regulations required HCFA to develop a methodology
for resource-based practice expense RVUs for each physician service beginning in
1998. The Balanced Budget Act of 1997 provided for a four-year transition
period. HCFA 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 HCFA 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 is 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 HFCA. The changes included increases to various codes
including CPT code 88305. Increases vary by region and averaged 5.7%.
In addition, HCFA 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. The physician fee schedule conversion factor increased from $34.73
to $36.61 in 2000. HCFA has increased the physician fee schedule conversion
factor from $36.61 to $38.26 in 2001.
Due to the implementation of the hospital outpatient prospective payment
system ("PPS"), effective as of January 1, 2001, independent pathology
laboratories providing services to hospital outpatients 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 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. 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.
23
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 debt 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. The following table illustrates the
computation of net management service revenue.
Gross physician group revenue $ XXX
Contractual adjustments and bad debt expense (XXX)
-----
Net physician group revenue XXX
Less amounts retained by physician groups (XXX)
-----
Net management service revenue $ XXX
=====
Net revenue for the year 2000 increased by $72.7 million, or 28.2%, from
$257.4 million for 1999 to $330.1 million for 2000. During the fourth quarter,
management reviewed the collectibility of Inform DX's accounts receivable in
light of historical collections, aging of accounts receivable, AmeriPath's
reserve methods and policies, and billing and collection performance. In
addition, two of Inform DX's laboratories converted billing systems in the
fourth quarter of 1999. As the result of these conversions, the billings and
collections for 2000 were negatively impacted. Based on this review and
evaluation, during the fourth quarter AmeriPath recorded an additional estimated
allowance against accounts receivable of $5.2 million. Since the majority of
this allowance relates to the accounts receivable of the Managed Practices, as
discussed above, the additional allowance was recorded as a reduction of net
management service revenue.
Without the $5.2 million adjustment to net revenue, 2000 net revenue would
have increased $77.9 million or 30% over the year ended 1999. Of the $77.9
million increase, $44.3 million resulted from the operations of practices
acquired during 1999 and 2000. Same practice net revenue for 2000 increased by
$33.6 million, or 14%, over the prior year. Of the same practice increase
AmeriPath estimates that approximately $6.8 million resulted from the increase
in Medicare reimbursement in 2000. The remaining $26.8 million resulted from a
combination of volume increases and price impacts of other payors. Same practice
outpatient net revenue increased $23.8 million, or 24%, same practice hospital
net revenue increased $6.5 million, or 5%, and management service revenue
increased $3.3 million, or 15%, compared to the same period of the prior year.
The expansion of the New York operation contributed approximately $4.2 million
to the same practice outpatient growth for the year 2000. Reference to same
practice 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, the New York Lab operations and
expanded ancillary testing services added to existing practices.
During 2000, approximately $29.4 million, or 9%, of AmeriPath's revenue was
from contracts with national labs including Quest and LabCorp. This represents a
35% increase over the prior year revenue from national lab contracts of
approximately $21.7 million. Effective December 31, 2000, Quest 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. Although the Company has had these
national lab contracts for a number of years, these types of decisions by Quest
and/or LabCorp to discontinue or redirect pathology services, at any or all of
its practices, could have a material adverse effect on AmeriPath's financial
position and results of operations.
Approximately 13% of AmeriPath's net revenue comes from pathology contracts
with 27 HCA hospitals. Generally, these contracts and other hospital contracts
have remaining terms of less than five years and contain renewal provisions.
Some of the contracts also contain clauses that allow for termination by either
party with relatively short notice. HCA has been under government investigation
for some time and is evaluating its operating strategies; including the sale,
spin- off or closure of certain hospitals. During 1999, HCA closed one hospital
and sold another hospital where the Company provided
24
pathology services. The estimated net revenue from the loss of these contracts
was less than 1% of consolidated net patient revenue. Further closures and/or
sales of HCA hospitals could have a material adverse effect on the Company's
financial position and results of operations. Although the Company, through its
acquisitions, has had relationships with these and other hospitals for extended
periods of time, the termination of one or more of these contracts could have a
material adverse effect on the Company's financial position and results of
operations.
Net revenue for 1999 increased by $64.1 million, or 33.2%, from $193.3
million for 1998 to $257.4 million for 1999. Of this increase, $55.5 million was
attributable to the acquisitions the Company completed during 1998 and 1999.
Same practice net revenue for 1999 increased by $8.6 million, or 5%. For 1999,
same practice hospital net revenue increased $2.7 million, or 3%, same practice
outpatient net revenue increased $3.8 million, or 5% and management service
revenue increased $2.1 million or 26% compared to 1998. During 1999, the Company
experienced a 1% Medicare reimbursement decrease, which was effective January 1,
1999. Reference to same practice 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 expanded
ancillary testing services added to existing practices.
The percent of the Company's net revenue from outpatient and inpatient
pathology and management services is presented below. The type and mix of
business, outpatient, inpatient or management service, which changes as a result
of new acquisitions, may change the ratio of operating costs to net revenue,
specifically the provision for doubtful accounts, as noted in the sections that
follow.
Year Ended December 31,
------------------------
REVENUE TYPE 1998 1999 2000
---- ---- ----
Outpatient 43% 39% 42%
Inpatient 49% 51% 51%
Management service revenues 8% 10% 7%
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
for 2000 increased by $40.7 million, or 33.2%, from $122.7 million for 1999 to
$163.4 million for 2000. Cost of services, as a percentage of net revenues,
increased from 47.7% in 1999 to 49.5% in 2000. Gross margin decreased from
approximately 52.3% in 1999 to 50.5% in 2000. Excluding the impact of the
increased reimbursement from Medicare, the gross margin would have decreased to
approximately 49.5%. The increase in cost of services, and corresponding
reduction in gross margin, results primarily from higher pathologist and medical
technicians salaries and medical malpractice and health benefit costs. While we
attempt to mitigate the impact of these higher costs through productivity
increases, we expect to see continuing rising costs in these areas for 2001.
Cost of services for 1999 increased by $35.0 million, or 39.9%, from $87.7
million for 1998 to $122.7 million for 1999. Cost of services, as a percentage
of net revenues, increased from 45.3% in 1998 to 47.7% in 1999. Gross margin
decreased from approximately 54.7% in 1998 to 52.3% in 1999. A portion of the
decline is related to the decrease in Medicare reimbursement rates. In addition,
the Company incurred expenses related to the start-up of a de novo outpatient
dermatopathology laboratory in New York. This facility commenced operations in
late July 1999. Excluding the results of operations for the New York start up,
the Company's gross margin would have been approximately 52.8% in 1999.
Selling, General and Administrative Expense
The cost of corporate support, sales and marketing, and billing and
collections comprise the majority of what is classified as selling, general and
administrative expense ("SG&A"). SG&A expense, as a percentage of net revenues
decreased from 18.3% in 1999 to 17.7% in 2000, as the Company imposed measures
to control the growth in these costs and continued to spread these costs over a
larger revenue base. An objective of the Company is to decrease these costs as a
percentage of net revenues, however, these costs, as a percentage of net
revenue, may increase as we continue to invest in marketing, information systems
and billing operations. For 2001, AmeriPath expects to make significant
investments in sales and marketing focused on
25
attaining double digit same practice revenue growth. Therefore the Company does
not expect any significant reduction in the ratio of SG&A to net revenue in
2001.
SG&A expense for 1999 increased by $10.5 million, or 28.5%, from $36.7
million for 1998 to $47.2 million for 1999. A portion of the increase relates to
the acquisitions made during 1998 and 1999. The remaining increase was due to
increased staffing levels in marketing, billing, human resources and accounting
and costs incurred to expand the Company's administrative support infrastructure
and to upgrade information systems.
Provision for Doubtful Accounts
The provision for doubtful accounts, which relates to our Owned Practices,
increased by $8.8 million, or 34.6%, from $25.3 million for 1999 to $34.0
million for 2000. The dollar increase is primarily due to the increase in net
revenues and accounts receivable from the acquisitions completed during 1998 and
1999. The provision for doubtful accounts as a percentage of net revenues was
9.8% and 10.3% for 1999 and 2000, respectively. The increase in the percentage
of net revenue was primarily attributable to a shift in revenue mix from
management service to outpatient. Management service revenue has no associated
bad debt expense compared to outpatient that has a 4% to 6% ratio of bad debt to
revenue. The provision for doubtful accounts as a percentage of net revenue is
higher for inpatient (hospital) services than for outpatient or management
services due primarily to a larger concentration of indigent and private pay
patients, more difficulties gathering complete and accurate billing information,
and longer billing and collection cycles for inpatient services.
The provision for doubtful accounts increased by $6.6 million, or 35.2%,
from $18.7 million for 1998, to $25.3 million for the same period in 1999. The
dollar increase is primarily due to the increase in net revenues and accounts
receivable from the acquisitions completed during 1998 and 1999. The provision
for doubtful accounts as a percentage of net revenues was 9.7% and 9.8% for the
year ended December 31, 1998 and 1999, respectively. The increase in the
percentage of net revenue was primarily attributable to an overall increase in
hospital-based revenues. Net revenue from hospital inpatient services increased
as a percentage of consolidated net revenue from 49% in 1998 to 51% in 1999. The
provision for doubtful accounts as a percentage of net revenue is higher for
inpatient (hospital) services than for outpatient services due primarily to a
larger concentration of indigent and private pay patients, more difficulties
gathering complete and accurate billing information, and longer billing and
collection cycles for inpatient services.
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
The Company's acquisitions completed since 1996 resulted in significant
increases in net identifiable intangible assets and goodwill. Net identifiable
intangible assets and goodwill, which include hospital contracts, physician
client lists, management service agreements and laboratory contracts acquired in
the acquisitions were approximately $389.8 million and $445.9 million at
December 31, 1999 and 2000, respectively, representing approximately 81.4% and
79.3%, respectively, of the Company's total assets. Net identifiable intangible
assets are recorded at fair value on the date of acquisition and are amortized
over periods ranging from 10 to 40 years, with a weighted average of 29.0 years
as of December 31, 2000. The Company amortizes goodwill on a straight-line basis
over periods ranging from 10 to 35 years, with a weighted average of 30.5 years
as of December 31, 2000. There can be no assurance that the Company will ever
realize the value of intangible assets. 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.
See the discussion of asset impairment charges below.
26
Amortization expense increased by $3.4 million, or 26.1%, from $12.8
million for 1999 to $16.2 million for 2000. This increase is attributable to the
amortization of goodwill and net identifiable intangible assets from the
acquisitions the Company completed during 2000 and a full year of amortization
from the acquisitions the Company completed during 1999. In addition, during
2000 AmeriPath made contingent note payments totaling $26.6 million. These
contingent note payments are recorded as goodwill and therefore create
additional amortization expense. Amortization expense is expected to increase on
an annual basis as a result of identifiable intangible assets and goodwill
arising from future acquisitions and any contingent payments required to be made
pursuant to the acquisitions completed since 1996. Amortization expense, as a
percentage of net revenues, was 5.0% and 4.9% in 1999 and 2000, respectively.
Amortization expense increased by $3.2 million, or 33.4%, from $9.6 million
for 1998 to $12.8 million for 1999. This increase is attributable to the
amortization of goodwill and net identifiable intangible assets from the
acquisitions the Company completed during 1999 and a full year of amortization
from the acquisitions the Company completed during 1998. In addition, during
1999 AmeriPath made contingent note payments totaling $17.4 million. These
contingent note payments are recorded as goodwill and therefore create
additional amortization expense. Amortization expense, as a percentage of net
revenues, was 5.0% in both 1998 and 1999.
Merger-related Charges and Asset Impairment and Related Charges (Special
Charges)
During 2000, AmeriPath recorded special charges totaling $21.0 million, for
merger-related charges, an allowance against uncollectible accounts receivable
related to AmeriPath's acquisition of Inform DX and certain asset impairment
charges. AmeriPath expects to record an additional $7.3 million of merger-
related charges in the first quarter of 2001.
The following summarizes these special charges by category for 2000 and first
quarter estimates for 2001 (in millions).
2000 Q1 2001
----- -------
Merger-related charges (see below) $ 6.2 $7.3
Allowance against accounts receivable (see previous discussion) 5.2 --
Asset impairment and related charges (see below) 9.6 --
----- ----
Total special charges $21.0 $7.3
===== ====
Based on the above, the special charges for 2000 and the first quarter of
2001 are estimated to be $28.3 million. Of the total $28.3 million in special
charges, approximately $14.7 million are non-cash charges and the remaining
$13.6 million are cash charges. As of December 31, 2000, the Company has paid
$4.3 million of the cash charges. The remaining cash charges of $9.3 million
will be paid out $7.2 million, $1.6 million and $500,000 in 2001, 2002 and 2003,
respectively.
During 2000, the Company had discussed these special charges with its bank
syndicate and received amendments that allow $22.9 million of these charges to
be excluded from its covenant computations. The $5.4 million of charges in
excess of the $22.9 million allowed resulted from the formalization of the
Inform DX integration plans, and are expected to result in further synergies.
These additional charges could have caused the Company to be in technical
default of one or more of its covenants under its credit facility at the end of
the first quarter of 2001. Effective March 29, 2001, the Company and the lenders
executed an amendment to the credit facility which excludes an additional $5.4
million, or $28.3 million in total, of charges from its covenant calculations.
In addition, the amendment (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 consent to the amendment. The maximum
amount of the amendment fee would be $700,000.
The merger-related charges of $6.2 million in 2000 relate to AmeriPath's
acquisition of Inform DX and include transaction costs, change in control
payments and costs related to the closing of the Inform DX corporate office in
Nashville. Of the $6.2 million, approximately $4.3 million related to
transaction costs and $1.9 million related to employee-related costs of closing
the Nashville facility. AmeriPath expects to record an additional $7.3 million
of merger-related charges in the first quarter of 2001 related primarily to the
consolidation or closing of the overlapping operations of Inform DX in New York
and
27
Pennsylvania. Based on its current plans, AmeriPath expects to complete the
closing of the Nashville operations by the end of the second quarter and 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 should result in potential annual operating synergies of $4.5 to $5.5
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.
As more fully described in Note 4 to the consolidated financial statements,
during the second quarter of 2000 AmeriPath recorded a pre-tax non-cash charge
of approximately $4.7 million and related cash charges of approximately $545,000
in connection with the impairment of intangible assets at an acquired practice
in Cleveland, Ohio. During the fourth quarter of 2000, AmeriPath recorded a pre-
tax non-cash charge of approximately $4.3 million related to the impairment of
certain intangible assets. $3.3 million of the fourth quarter charge relates to
Quest Diagnostics' termination of its contract with AmeriPath in South Florida,
effective December 31, 2000. The net patient service revenue in 2000 related to
this contract was approximately $1.5 million. Although the Company has
aggressively marketed and retained a portion of this operating income,
accounting rules require a charge to be taken, as there is no longer a contract.
In addition to the $3.3 million, during the fourth quarter, a hospital in South
Florida where AmeriPath had the pathology contract, requested proposals for its
pathology services, and AmeriPath was unsuccessful in retaining this contract.
Based upon the remaining projected cash flow from this hospital network, the
Company determined that the intangible assets were impaired and recorded a
pre-tax non-cash charge of approximately $1.0 million. For 2000, this contract
accounted for approximately $800,000 of net revenue.
Interest Expense
Interest expense increased by $5.8 million, or 60.6%, from $9.6 million for
1999 to $15.4 million for 2000. The increase was due in part to an increase in
the average outstanding balance under the credit facility. In 2000, the average
indebtedness under the credit facility was $175.5 million, compared to $140.0
million outstanding in 1999. In addition, the effective interest rate on the
credit facility increased from 6.8% to 8.7% primarily due to the periodic
increases in interest rates during the year by the Federal Reserve Board and the
expiration of the interest rate swap in October 2000. The interest rate swap was
renewed in October 2000 at approximately 7.65% plus the credit spread (currently
2.0%) compared to 5% plus credit spread for the expired swap, therefore
increasing interest expense.
Interest expense increased by $1.0 million, or 11.8%, from $8.6 million for
1998, to $9.6 million for 1999. The increase was due in part to an increase in
the average indebtedness outstanding under the credit facility. In 1999, average
indebtedness outstanding was $140.0 million, compared to $101.3 million
outstanding in 1998. This increase in average indebtedness was offset by a
reduction in the effective interest rate from 8.0% to 6.8% primarily due to the
interest rate swap that was in effect for all of 1999. This interest rate swap
was entered into in October 1998.
Income Tax Rate
The effective income tax rate was approximately 43.3%, 43.5% and 51.8% for
1998, 1999 and 2000, respectively. Generally, the effective tax rate is higher
than AmeriPath's statutory rates primarily due to the non-deductibility of the
goodwill amortization and section 481(a) adjustments (cash to accrual) related
to the Company's acquisitions. In addition, for 2000 AmeriPath had non-
deductible asset impairment charges and merger-related charges, which further
increased the effective tax rate. The effective tax rate for 2000, excluding
these items would have been approximately 41.8%.
Liquidity and Capital Resources
At December 31, 2000, AmeriPath had working capital of $40.8 million, a
decrease of $1.7 million from the working capital of $42.5 million at December
31, 1999. The decrease in working capital was primarily due to an increase in
net accounts receivable of $13.2 million, offset by an increase in current
liabilities related to merger-related charges associated with the acquisition of
Inform DX of $2.9 million and accounts payable and accrued expenses of $14.4
million. The majority of these changes resulted from AmeriPath's acquisitions
completed during 2000. AmeriPath manages its cash balances against amounts
available under its revolving credit facility. Cash balances, for the most part,
are managed on a zero-balance basis and all available cash flows are used to
reduce outstanding debt in order to minimize interest cost.
28
For the years ended December 31, 1999 and 2000, cash provided by operations
was $32.7 million and $31.9 million, respectively. Excluding pooling
merger-related charges paid for Inform DX of $3.8 million, cash flow from
operations would have been S35.7 million. For the year ended December 31, 2000,
cash flow from operations and borrowings under the Company's credit facility
were used primarily: (i) for capital expenditures aggregating $9.2 million; (ii)
to fund the $24.9 million cash portion of the acquisitions the Company; (iii)
for payments on AmeriPath's contingent notes of $26.6 million; (iv) to pay $2.4
million of other merger-related charges, mainly Inform DX; (v) for the $1.0
million investment in GCI and (vi) to make $800,000 in principal payments on
long-term debt.
During 2000, the Company acquired nine anatomic pathology practices,
including the two practices acquired by Inform DX. The total consideration paid
by the Company in connection with these acquisitions included cash of $32.5
million and approximately 1,532,000 shares of common stock (aggregate value of
$12.2 million based upon amounts recorded on the Company's consolidated
financial statements). Generally, the shares of common stock, excluding the two
practices acquired by Inform DX, are restricted as to transfer, which
restrictions lapse over three to five years, based solely on the passage of
time.
The Company issued approximately 2,600,000 shares of common stock
(1,219,000 shares of which are included above) in exchange for all the
outstanding common stock of Inform DX. In addition, the Company assumed certain
obligations to issue shares of common stock pursuant to outstanding Inform DX
stock option plans.
At December 31, 2000, the Company had $32.8 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 $230
million in the form of a revolving loan that may be used for working capital
purposes and to fund acquisitions to the extent not otherwise used for working
capital purposes. As of December 31, 2000, $197.2 million was outstanding under
the revolving loan with an annual effective interest rate of 9.6%. See previous
discussion regarding the recent amendment to the credit facility.
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. See Item 7A. - Quantitative and
Qualitative Disclosures About Market Risk for details on these new swap
agreements. These interest rate swap transactions involve the exchange of
floating for fixed rate interest payments over the life of the agreement without
the exchange of the underlying principal amounts. The differential to be paid or
received is accrued and is recognized as an adjustment to interest expense.
These agreements are indexed to 30 day LIBOR. 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 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
December 31, 2000, the Company believes that it is in compliance with the
covenants of the credit facility. See Note 13 to the consolidated financial
statements.
In connection with the Company's acquisitions, the Company generally agrees
to pay a minimum purchase price and to pay additional purchase price
consideration to the sellers of the Practices in proportion to their respective
ownership interest in each Practice. The additional payments are generally
contingent upon the achievement of stipulated levels of operating earnings by
each of the Practices over periods of three to five years from the date of the
acquisition as set forth in the respective agreements, and are not contingent on
the continued employment of the sellers of the Practices. In certain cases, the
payments are contingent upon other factors such as the retention of certain
hospital contracts for periods ranging from three to five years. The amount of
the payments cannot be determined until the achievement of the operating
earnings levels or other factors during the terms of the respective agreements.
If the maximum specified levels of operating earnings for each Practice are
achieved, the Company would make aggregate maximum payments, including principal
and interest, of approximately $198.4 million over the next three to five years.
At the mid-point level, the aggregate principal and interest would be
approximately $89.7 million over the next three to five years. A lesser amount
or no payments at all would be made if the stipulated levels of operating
earnings specified in each agreement are not met. Through December 31, 2000, the
Company made contingent note and interest payments aggregating $53.4 million,
which amounts, represent 63% of the maximum amount payable. See Note 3 to the
consolidated financial statements.
Historically, the Company's capital expenditures have been primarily for
laboratory equipment, IT equipment and leasehold improvements. Total capital
expenditures were $4.4 million, $8.7 million and $9.2 million in 1998, 1999 and
2000, respectively. During 2000, capital expenditures included approximately
$2.9 million related to IT, $2.4 million for laboratory equipment, $2.6 million
for leasehold improvements and $1.3 million for office equipment and furniture
and fixtures. During
29
1999, capital expenditures included approximately $1.6 million related to
information systems, $2.0 million for laboratory equipment, $1.7 million for
leasehold improvements, $1.5 million for the construction of the New York lab
and $1.2 million for the new billing system at the consolidated billing office
in Fort Lauderdale. During 1998, capital expenditures included approximately
$2.3 million related to information systems, $1.6 million for laboratory
equipment and $258,000 for leasehold improvements.
Planned capital expenditures for 2001 are estimated to be $5.5 million to
$7.0 million, with priority being given to the new billing system at the
consolidated billing office in Fort Lauderdale and enhancements in financial and
lab information systems. Historically, the Company has funded its capital
expenditures with cash flows from operations. For the years ended December 31,
1998, 1999 and 2000, capital expenditures were approximately 2.3%, 3.4.% and
2.8% of net revenue, respectively. The Company is consolidating and integrating
its financial information, billing and collection systems, which may result in
an increase in capital expenditures as a percentage of net revenue. The Company
believes, however, that such information systems enhancements will result in
cost savings that may enable the Company to continue to fund its capital
expenditures with cash flows from operations.
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 and the related amount
of amortization thereof 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. The Company may be
required to seek additional financing through additional increases in the credit
facility, to negotiate credit facilities with other banks or institutions or to
seek additional capital through private placements or public offerings of equity
or debt securities. No assurances can be given that the Company will be able to
extend or increase the existing credit facility, secure additional bank
borrowings or complete additional debt or equity financings on terms favorable
to the Company or at all.
Qualification of Forward Looking Statements
This Annual Report on Form 10-K contains forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Statements contained anywhere in this Annual Report on Form
10-K 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, 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 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;
30
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. Certain of the risks, uncertainties and other
factors discussed or noted above are more fully described elsewhere in this
Report, including under the caption -"Risk Factors" below.
Risk Factors
You should carefully consider each of the following risks and all of the
other information set forth in this report on Form 10-K. 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. We cannot
assure you that regulatory authorities or other parties will not 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 under such jurisdiction's laws and could be required to
restructure our contractual and other arrangements. Alternatively, some of our
existing contracts could be found to be illegal and unenforceable. 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/or hospitals. Such
results or the inability to successfully restructure contractual arrangements
could have a material adverse effect on our business, financial condition and
results of operations.
We could be hurt by future interpretation or implementation of federal anti-
kickback laws.
The federal anti-kickback law and regulations prohibit any knowing and
willful offer, payment, solicitation and receipt of any form of remuneration,
either directly or indirectly, in return for, or to induce the referral of an
individual for a service for which payment may be made by Medicare and Medicaid
or certain other federal health care programs, or the purchasing, leasing,
ordering or arranging for, or recommending the purchase, lease or order of, any
service or item for which payment may be made by Medicare, Medicaid or certain
other federal health care programs. Violations of federal anti-kickback law 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.
The federal government has published regulations that provide "safe-
harbors" that protect business transactions that meet enumerated requirements
from prosecution under the federal anti-kickback law. The failure to meet the
requirements of
31
a safe harbor does not necessarily mean that a transaction violates the anti-
kickback law. While arrangements that we enter into with physicians and third
parties may not satisfy all requirements under applicable safe harbors, 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 however,
that the federal government might investigate arrangements which do not satisfy
the safe harbors. If our arrangements with physicians and third parties were
found to be illegal, we would be subject to civil and criminal penalties,
including exclusion from the participation in government payor programs, which
could materially adversely affect our business, financial condition and results
of operations.
The Department of Health and Human Services Office of the Inspector General
issues advisory opinions that provide advice on whether proposed business
arrangements violate the anti-kickback statute. In Advisory Opinion 99-13, the
OIG opined that when prices for laboratory services for non-governmental
patients are discounted below Medicare reimbursable rate, the anti-kickback
statute may be implicated. The OIG found prices discounted below the laboratory
supplier's costs to be particularly problematic. In the same opinion, OIG
suggests that a laboratory may be excluded from federal health care programs if
it charges Medicare or Medicaid amounts substantially in excess of discounted
charges to the physician. In the OIG's opinion, charges are likely excessive if
the profit margin for Medicare business exceeds profit margin for non-federally
reimbursed business.
The OIG also has addressed physician practice management arrangements in an
advisory opinion. In Advisory Opinion 98-4, the OIG found that management fees
based on a percentage of practice revenues may violate the anti-kickback
statute. Although these advisory opinions only apply to the parties who request
them, in the event that we our found to have arrangements that are inconsistent
with the OIG's opinions, the OIG might take the position that the arrangements
violate the anti-kickback law. Any such finding could have a material adverse
impact on us.
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 referral 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 a physician has a financial relationship. Financial
relationship includes both investment interests in an entity and compensation
arrangements with an entity. If an arrangement is covered by the Stark Law, all
of the requirements of the Stark Law exception must be satisfied. Many states
also have laws that are similar to the Stark Law. These statutes and regulations
generally apply to services reimbursed by both governmental and private payors.
Violations of these laws may result in prohibition of payment for services
rendered, loss of licenses as well as fines and criminal penalties. In addition,
violation of the Stark Law may result in exclusion from Medicare and Medicaid.
State statutes and regulations affecting the referral of patients to health care
providers range from statutes and regulations that are substantially the same as
the federal laws and the safe harbor regulations to a requirement that
physicians or other health care professionals disclose to patients any financial
relationship the physicians or health care professionals have with a health care
provider that is being recommended to the patients. These laws and regulations
vary significantly from state to state, are often vague and, in many cases, have
not been interpreted by courts or regulatory agencies. Adverse judicial or
administrative interpretations of any of these laws could have a material
adverse effect on our business, financial condition and results of operations.
In addition, expansion of our operations to new jurisdictions, or new
interpretations of laws in 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
have a material adverse effect on our business, financial condition and results
of operations.
We have financial relationships with our physicians, as defined by the
federal Stark Law, in the form of compensation arrangements, ownership of our
shares, contingent promissory notes issued by us in connection with
acquisitions, or a combination of the above. We believe that such existing
compensation arrangements are structured to comply with an applicable Stark Law
exception. We also believe that the ownership of our shares by physicians should
fall within the publicly traded stock exception to the Stark Law's definition of
financial relationship. However, certain physician-owned shares do have transfer
restrictions and, as a result, the government could take the position that all
of the requirements of this exception are not met. The contingent notes held by
some physicians do not meet an exception to the Stark Law's definition of
financial relationship. In either case, however, we believe that our current
operations comply with the Stark law because physicians affiliated with us
ordinarily do not make referrals and in any event have been instructed, and are
believed
32
to be following such instructions, not to make referrals to us. To the extent
physicians affiliated with us may make a referral to us and a financial
relationship exists between us and the referring physician through either the
ownership of our shares or contingent notes, the government might take the
position that the arrangement does not comply with the federal Stark Law. Any
such finding may have a material adverse impact on our business, financial
conditions or results from operations.
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. We believe that we are in compliance with these laws and intend to
comply with any state and federal laws that may affect our development of
integrated health care delivery networks. However, we cannot assure you that a
review of our business by courts or regulatory authorities would not adversely
affect our business, financial condition or results from operations.
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 criminal provisions, which impose criminal penalties for fraud against
any health care benefit program for theft or embezzlement involving health care
and for false statements in connection with the payment of any health benefits.
HIPAA also provided broad prosecutorial subpoena authority and authorized
property forfeiture upon conviction of a federal health care offense.
Significantly, the HIPAA provisions apply not only to federal programs, but also
to private health benefit programs as well. HIPAA also broadened the authority
of the OIG to exclude participants from federal health care programs. Because of
the uncertainties as to how the HIPAA provisions will be enforced, we are
currently unable to predict their ultimate impact on us. Although we are unaware
of any current violations of HIPAA, the government may in the future seek
penalties against us for violations of HIPAA, which could have a material
adverse effect on business, financial condition or results from operations.
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 require us to
borrow funds to meet our current obligations or may otherwise have a material
adverse effect on our business, financial condition and results of operations.
We rely upon reimbursement from government programs for a significant portion of
our revenues, and if reimbursement rates from government programs decline, it
could have a material adverse effect on our business.
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 change in reimbursement regulations, policies, practices,
interpretations or statutes that places limitations on reimbursement amounts, or
changes in reimbursement coding, or practices could materially and adversely
affect our business, financial condition and results of operations. 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 also could result in payment reductions. Although
governmental payment reductions have not materially affected us in the past, it
is possible that such changes in the future could have a material adverse effect
on our business, financial condition and results of operations. In addition,
Medicare, Medicaid and other government sponsored health care programs are
increasingly shifting to some form of managed care. Some states have recently
enacted legislation to require that all Medicaid patients be converted to
managed care organizations, and similar legislation may be enacted in other
states, which could result in reduced payments to us for such patients. In
addition, a state-
33
legislated shift in a Medicaid plan to managed care could cause the loss of
some, or all, Medicaid business for us in that state if we were not selected as
a participating provider. Additionally, funds received under all health care
reimbursement programs are subject to audit with respect to the proper billing
for physician services 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 to the extent that we have
relationships with the hospitals being investigated.
Significant media and public attention has been focused on the health care
industry due to ongoing federal and state investigations reportedly related to
certain referral and billing practices, laboratory and home health care services
and physician ownership and joint ventures involving hospitals. Most notably,
HCA is under investigation with respect to such practices. We operate
laboratories on behalf of and have numerous contractual agreements with
hospitals, including 27 pathology service contracts with HCA hospitals as of
December 31, 2000. The government's ongoing investigation of HCA could result in
a governmental investigation of one or more of our operations that have
arrangements with HCA. In addition, the OIG and the Department of Justice have
initiated hospital laboratory billing review projects in certain states and are
expected to extend such projects to additional states, including states in which
we operate hospital laboratories. These projects increase the likelihood of
governmental investigations of laboratories owned and operated by us. 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 we cannot assure you that governmental investigators
will not take positions that are inconsistent with our practices or industry
practices. The government's investigations of entities with which we contract
may have other effects which could materially and adversely affect us, including
termination or amendment of one or more of our contracts or the sale of
hospitals potentially disrupting the performance of services under such
contracts. In addition, in certain instances indemnity insurers and other non-
governmental payors have sought repayment from providers, including
laboratories, for alleged overpayments.
There has been a heightened scrutiny of Medicare and Medicaid billing practices
in recent years, which may increase our possibility of being subject to costly
investigations.
Payors periodically reevaluate the services they reimburse. 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 have an adverse affect on our revenues and earnings.
Moreover, the federal government has become more aggressive in examining
laboratory billing and seeking repayments and penalties as the result of
improper billing for services (e.g., the billing codes used), regardless of
whether carriers had furnished clear guidance on this subject. The primary focus
of this initiative has been on hospital laboratories and on routine clinical
chemistry tests which comprise only a small portion of our revenues. Although
the scope of this initiative could expand, it is not possible to predict whether
or in what direction the expansion might occur. We believe that our practices
are proper and do not include any allegedly improper practices now being
examined. However, we cannot assure you that the government will not broaden its
initiative to focus on the type of services furnished by us or, if this were to
happen, on how much money, if any, we might be required to repay.
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 either of which could have a material adverse
effect on our business, financial condition and results from operations.
We are dependent on hospital contracts for a significant portion of our
revenues, which are short term and can easily be terminated.
Our hospital contracts typically have terms of one to five years from their
date of execution and automatically renew for additional terms of one year
unless otherwise terminated by either party. The contracts generally provide
that the hospital
34
may terminate the agreement prior to the expiration of the initial or any
renewal term. Loss of any particular hospital contract would not only result in
a loss of net revenue to us, but also a loss of outpatient net revenue that may
be derived from the relationship with a hospital and its medical staff.
Continuing consolidation in the hospital industry may result in fewer hospitals
or fewer laboratories as hospitals move to combine their operations. As of
December 31, 2000, our practices had contracts with 224 hospitals, of which the
majority are exclusive, and 27 of which are executed with HCA. We cannot assure
you that such contracts with hospitals will not be terminated or that they will
be renewed in the future.
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. 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. In addition, since we are a bigger company, the amount that acquired
businesses contribute to our revenue and profits will likely be smaller on a
percentage basis. We also 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 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.
Our future growth will depend on our ability to secure adequate capital
resources and to effectively integrate newly acquired practices.
In addition to acquisitions of and affiliations with practices, we intend
to continue to grow through internal expansion. We derive our net revenue from
the net revenue of our practices. Our growth strategy requires: (i) capital
investment; (ii) compliance with present or future laws and regulations that may
differ from those to which we are currently subject; (iii) further development
of our corporate management and operational, financial and accounting resources
to accommodate and manage growth; and (iv) the ability to expand our physician
and employee base and to train, motivate and manage employees. Failure to meet
these requirements could limit our growth potential and may have a material
adverse effect on our business, financial condition and results of operations.
Although we are taking steps to manage our growth, we cannot assure you that we
will be able to do so efficiently or that our growth rate will continue in the
future.
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 have a material adverse effect on
the integration of additional practices and on our financial condition and
results of operations. We cannot assure you that we will be able to maintain or
establish payor and customer relationships, convert management information
systems or integrate new practices into our combined network.
The integration of additional practices typically 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. 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. We cannot assure
you that future affiliations will not have a material adverse effect on our
business, financial condition and results of operations, particularly during the
period immediately following completion of such affiliations.
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 subsequently arise and we cannot assure you that any
liabilities for which we become responsible will not be material or will not
exceed either the limitations of any applicable indemnification provisions or
the financial resources of the indemnifying parties. Furthermore, through our
corporate compliance program, we regularly review each practice's compliance
with federal and state health care laws and regulations and revise, as
appropriate, the operations, policies and procedures of our practices to conform
with our policies and procedures and applicable law. While we believe that the
operations of our practices prior to their acquisition were generally in
compliance with such laws and regulations, we cannot assure you that the prior
operations of such practices were in full compliance with such laws, as such
laws may ultimately be interpreted. Moreover, although we
35
maintain an active compliance program, it is possible that the government might
challenge some of our current practices as not being in full compliance with
such laws. 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/or loss of a physician's
license to practice medicine.
We have significant contingent liabilities payable to many of the sellers of
practices that we recently acquired.
In connection with our practice acquisitions, we typically agree to pay to
sellers of the practices additional consideration in the form of debt
obligations, payment of which is contingent upon the practice achieving certain
specified profitability criteria over periods ranging from three to five years
from the date of acquisition. The principal amount and accrued interest of the
contingent amount to be paid 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 of cash would be paid if the
maximum financial criteria are not met. Although we believe that we will be able
to make such cash payments from internally generated funds or proceeds of future
borrowings, we cannot assure you that we will be able to do so. Payments of
these contingent amounts will 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.
While we believe that the contingent notes do not violate federal or state
"anti-kickback" or "self-referral" statutes, we cannot assure you that that such
arrangements will not be challenged by regulatory authorities seeking to enforce
such laws.
We have booked 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, a management service
agreement and laboratory contracts acquired in acquisitions were approximately
$268.6 million at December 31, 2000, representing approximately 47.8% 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 $177.3 million at December
31, 2000, representing approximately 31.5% 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, based on undiscounted cash flows, 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 cannot assure you that we
will ever realize the value of our intangible assets. Any future determination
requiring the write off of a significant portion of unamortized intangible
assets could have a material adverse effect on our business, financial condition
and results of operations.
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 cannot assure you that we or our practices will be
able to continue to do so successfully or on terms similar to our current
arrangements. The relationship between the pathologists and their respective
local medical communities is important to the operation and continued
profitability of each practice. In the event that a significant number of
pathologists terminate their relationships with our practices or become unable
or unwilling to continue their employment, or in the event non-compete
agreements with a number of physicians were terminated or determined to be
invalid or unenforceable, our business, financial condition and results from
operation could be materially and adversely affected.
Proposals to reform the health care industry may have a material adverse effect
on our business.
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. We cannot assure you that the health care regulatory
environment will not change so as to restrict the existing operations of, impose
additional requirements on or limit our expansion. Costs of compliance with
changes in government regulations may not be subject to recovery through price
increases. Some of the proposals under consideration, or others which may be
introduced, could, if adopted, have a material adverse effect on our business,
financial condition and results of operations.
36
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. Competition may result from other anatomic pathology
practices, companies in other health care industry segments, such as other
hospital-based specialties, national clinical laboratories, large physician
group practices or pathology physician practice management companies that may
enter our markets, some of which may have greater financial and other resources
than us.
We compete with several companies, and such competition can reasonably be
expected to increase. In addition, companies in other health care segments, such
as hospitals, national clinical laboratories, third party payors, and health
maintenance organizations, many of which have greater financial resources than
us, may become competition in the employment and management of pathology
practices. We compete for acquisitions and affiliations on the basis of our
reputation, management experience, status and resources as a public company and
our focus on anatomic pathology. We cannot assure you that we will be able to
compete effectively or that additional competitors will not enter our markets or
make it more difficult for us to acquire or affiliate with practices on
favorable terms.
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. We have consolidated our
physician professional liability insurance coverages with the St. Paul Fire and
Marine Insurance Company, whereby each of the pathologists is insured under
claims-made policies with primary limits of $1.0 million per occurrence and $5.0
million in the annual aggregate, and share with us in surplus coverage of up to
$20.0 million in the aggregate. The policy also provides "prior acts" coverage
for each of our physicians with respect to our practices prior to their
acquisition by us. Further, we have provided reserves for incurred but not
reported claims in connection with our claims-made policies. The terms of the
purchase agreements relating to each practice acquisition contain certain
limited rights of indemnification from the sellers of the practices. We also
maintain property and umbrella liability insurance policies. While we believe
that we have adequate professional liability insurance coverage, we can give no
assurances that a future claim or claims will not be successful and, if
successful, will not exceed the limits of available insurance coverage or that
such coverage will continue to be available at acceptable costs or on favorable
terms. In addition, our insurance does not cover all potential liabilities
arising from governmental fines and penalties, indemnification agreements and
certain other uninsurable losses. A malpractice claim asserted against us, a
management subsidiary, a practice subsidiary, an affiliated practice or an
affiliated physician could, in the event of an adverse outcome exceeding limits
of available insurance coverage, have a material adverse effect on our business,
financial condition and results of operations.
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
specified services unless prior authorization for such services has been
obtained and refusing to increase fees for specified services. The continued
growth of the managed care industry and its continued success in reducing
payments to medical service providers could have a material adverse effect on
our business, financial condition and results of operation.
We could be damaged by the loss of our key personnel.
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 loss of service of any of these persons could have a material
adverse effect on our business, financial condition and results of operations.
37
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, it
could have a material adverse effect on the our financial position and results
of operations.
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.
Anti-Takeover provisions in our charter documents could make it more difficult
for a third party to acquire us.
Certain provisions of our Amended and Restated Certificate of
Incorporation, Amended and Restated Bylaws and Preferred Share Purchase Rights
Plan may be deemed to have anti-takeover effects and may delay, defer or prevent
a takeover attempt that a shareholder might consider in its best interest. Any
of these anti-takeover provisions could lower the value of our common stock.
ITEM 7A. 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 $197.2 million at December 31, 2000.
In May 2000, the Company entered into three interest rate swaps
transactions with an effective date of October 5, 2000, variable maturity dates,
and a combined notional amount of $105 million. These interest rate swap
transactions involve the exchange of floating for fixed rate interest payments
over the life of the agreement without the exchange of the underlying principal
amounts. The differential to be paid or received is accrued and is recognized as
an adjustment to interest expense. These agreements are indexed to 30 day LIBOR.
The following table summarizes the terms of the swaps:
Notional Amount(in millions) Fixed Rate Term in Months Maturity
$45.0 7.604% 24 10/07/02
$30.0 7.612% 36 10/06/03
$30.0 7.626% 48 10/05/04
The 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 current interest rate environment. 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 will 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 and 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.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA; INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
The Company's consolidated financial statements and financial statement
schedule and independent auditors' report thereon appear beginning on page F-2.
See index to such consolidated financial statements and schedules and reports on
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this Item 10 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
Reference is made to the index set forth on page F-1 of this
Annual Report on Form 10-K.
2. Financial Statement Schedules:
Reference is made to the index set forth on page F-1 of this
Annual Report on Form 10-K.
3. Exhibits:
Exhibit No. Description
- ----------- -----------
2.1 Asset Purchase Agreement, dated February 13, 1998, by and among
AmeriPath, Inc., Anatomic Pathology Associates, LLP, Robert P.
Hooker, M.D., Ralph F. Winkler, M.D., Steven A. Clark, M.D.,
Edward R. Wills, M.D. Robin A. Helmuth, M.D., Garry A. Bolinger,
M.D., T. Max Warner II, M.D., F. Donald McGovern Jr., M.D.,
Richard O. McClure, M.D., Ann Moriarty, M.D., Janis K.
Fitzharris, M.D., Ph. D., James E. McDermott III, M.D., Robert A.
Quirey, M.D., Isabelle A. Buehl, M.D.(1)
2.2 Agreement and Plan of Merger by and among Ameripath, Inc. AMP
Merger Corp., and Pathology Consultants of America, Inc. (D/B/A
Inform DX), dated as of November 7, 2000 (3)
3.1 AmeriPath's Amended and Restated Bylaws (2)
3.2 Certificate of Designations of Series A Junior Participating
Preferred Stock (8)
3.3 AmeriPath's Certificate of Amendment to the Amended and Restated
Certificate of Incorporation (2)
4.1 Rights Agreement, dated as of April 8, 1999, between the
Registrant and American Stock Transfer & Trust Company, as Rights
Agent including the form of Certificate of Designations of Series
A Junior Participating Preferred Stock, the form of Rights
Certificate, and the form of Summary of Rights (8)
10.1 Amended and Restated 1996 Stock Option Plan (5)
10.2 Employment Agreement, dated as of October 24, 1995, between
AmeriPath and James C. New (2)
10.5 Employment Agreement, dated June 30, 1996, between AmeriPath and
Alan Levin, M.D. (2)
10.6 Employment Agreement, dated as of September 30, 1996, between
AmeriPath Florida and Alan Levin, M.D., as amended (2)
10.7 Employment Agreement, dated as of June 30, 1996, between
AmeriPath Florida and Timothy Kilpatrick, M.D. (2)
10.8 Employment Agreement, dated as of June 30, 1996, between
AmeriPath Florida and Les Rosen, M.D. (2)
10.9 Credit Agreement originally dated as of May 29, 1996 and amended
and restated as of June 27, 1997, among AmeriPath, Inc., the
subsidiaries of AmeriPath, Inc. from time to time party thereto,
the lenders from time to time party thereto and Bank of Boston,
N.A. (2)
10.11 Management Agreement by and between AmeriPath APA, L.L.C. and
AmeriPath Indiana, Inc., dated February 1, 1998 (1)
41
10.12 Stock Purchase Agreement, dated as of May 23, 1996, among
AmeriPath, Inc., Derrick & Associates and the shareholders of
Derrick & Associates (2)
10.13 Stock Purchase Agreement, dated as of September 30, 1996, by and
among AmeriPath, Inc., David R. Barron, M.D., Inc., Ruth S.
Kleier, M.D. and David R. Barron, M.D. (2)
10.14 Stock Purchase Agreement, dated as of October 31, 1996 among
AmeriPath, Inc., Gulf Coast Pathology Associates, Inc., Richard
Fernandez, M.D., and George Kalemeris, M.D. (2)
10.15 Form of Stock Rights Surrender & Restricted Stock Grant
Agreement. (2)
10.16 1996 Director Stock Option Plan (2)
10.17 American Laboratory Associates, Inc. Series A Preferred Stock,
Common Stock and Junior Subordinated Note Purchase Agreement,
dated as of January 1, 1994 (2)
10.18 Letter Agreement, dated September 18, 1996, between Acquisition
Management Services, Inc. and AmeriPath, Inc. (2)
10.19 AmeriPath Management Agreement by and between AmeriPath
Cincinnati, Inc. and AmeriPath Ohio, Inc., dated September 30,
1996 (2)
10.20 Management Agreement by and between Beno Michel, M.D., Inc. and
AmeriPath, Inc., dated October 15, 1996 (2)
10.21 Management Agreement by and between Clay J. Cockerell, M.D., P.A.
and AmeriPath Texas, Inc., dated September 30, 1996, as amended
January 16, 1997 (2)
10.22 Agreement for Professional Pathology Services between SmithKline
Beecham Clinical Laboratories, Inc. and Derrick and Associates
Pathology, P.A., dated April 1, 1992 (2)
10.23 Agreement for Medical Directorship between SmithKline Beecham
Clinical Laboratories, Inc. and Derrick and Associates Pathology,
P.A., dated April 1, 1992 (2)
10.24 Agreement for Professional Pathology Services between SmithKline
Beecham Clinical Laboratories, Inc. and AmeriPath Florida, Inc.,
dated November 1, 1996 (2)
10.25 Share Exchange Agreement, dated as of February 15, 1996, by and
among American Laboratory Associates, Inc., AmeriPath, Inc. and
the holders of common and convertible preferred stock of American
Laboratory Associates, Inc. (2)
10.26 Trust Agreement, dated as of October 15, 1996, between AmeriPath,
Inc. and Beno Michel, as trustee (2)
10.27 Trust Agreement, dated as of September 30, 1996, between
AmeriPath, Inc. and David R. Barron, M.D. as trustee (2)
10.28 Form of Nonqualified Stock Option Agreement (2)
10.29 Stock Purchase Agreement, dated as of October 15, 1996, by and
among AmeriPath, Inc., Beno Michel, M.D., Inc. and Beno Michel,
M.D. (2)
10.30 Stock Purchase Agreement, dated as of October 10, 1996, by and
among AmeriPath, Inc., Drs. Seidenstein, Levine and Associates,
Inc., Seidenstein, Levine Real Estate Partnership, Lawrence
Seidenstein, M.D., Steven E. Levine, M.D. and David M. Reardon,
M.D. (2)
42
10.31 Stock Issuance Agreement, dated as of June 26, 1996, among
AmeriPath, Inc., The First National Bank of Boston, FSC Corp.,
NationsBank, N.A. (South) and Atlantic Equity Corporation (2)
10.32 Stock Issuance Agreement, dated as of August 29, 1996, among
AmeriPath, Inc., The First National Bank of Boston, FSC Corp.,
NationsBank, N.A. (South) and Atlantic Equity Corporation (2)
10.33 Stock Issuance Agreement, dated as of November 4, 1996, among
AmeriPath, Inc., The First National Bank of Boston and FSC Corp.
(2)
10.34 Stock Purchase Agreement, dated August 21, 1997, by and among
AmeriPath, Inc., J. Sloan Leonard, M.D., Joseph A. Sonnier, M.D.,
Van Q. Telford, M.D., William C. Burton, M.D., James Scot
Milvenan, M.D., Leslie L. Walters, M.D., Thomas M. James, M.D.,
Stephen W. Aldred, M.D., John E. McDonald, M.D. and Barbara A.
Shinn, M.D. (2)
10.35 Stock Purchase Agreement, dated August 15, 1997, by and among
AmeriPath, Inc., Colab Incorporated Professional Corporation,
Anatomical Pathology Services, P.C., Microdiagnostics, P.C. and
the sellers set forth therein (2)
10.36 Lease effective June 1, 1995 by and between Dallas Pathology
Leasing and Unipath, Ltd. (2)
10.37 Trust Agreement, dated August 29, 1997, between AmeriPath, Inc.
and Jeffery A. Mossler, M.D. (2)
10.38 Management Agreement, by and between Colab, Inc. and AmeriPath
Indianapolis, L.L.C., effective September 1, 1997 (2)
10.39 Management Agreement by and between AmeriPath Texas, Inc. and DFW
5.01, effective September 1, 1997 (2)
10.40 Form of Executive Retention Agreement dated August 12, 1999,
between AmeriPath and each of James C. New, Alan Levin, M.D. and
Robert P. Wynn. (6)
10.41 Letter Agreement dated November 1, 1999 between AmeriPath, Inc.
and James C. New. (7)
10.42 Consulting and Non-competition Agreement dated November 1, 1999
between AmeriPath, Inc. and James C. New. (7)
10.43 Amended and Restated Credit Agreement dated as of December
16,1999, among AmeriPath, Inc., certain of its subsidiaries,
BankBoston N.A. and certain other lenders (9)
10.44 Amendment No. 1, dated July 21, 2000, to the Amended and Restated
Credit Agreement dated as of December 16, 1999, among AmeriPath,
Inc., certain of its subsidiaries, Fleet National Bank (formerly
BankBoston N.A.) and certain other lenders (10)
10.45 Amendment No. 2, dated November 29, 2000, to the Amended and
Restated Credit Agreement dated as of December 16, 1999, among
AmeriPath, Inc., certain of its subsidiaries, Fleet National Bank
(formerly BankBoston N.A.) and certain other lenders (3)
10.46 Registration Rights Agreement, dated November 30, 2000, among the
Company and PCA's Shareholders and Warrant Holders (3)
21.1 Subsidiaries of AmeriPath (3)
23.1 Independent Auditors' Consent of Deloitte & Touche LLP (3)
23.2 Independent Auditors' Consent of Ernst & Young LLP (3)
43
- ----------------------------
(1) Incorporated by reference and filed with the AmeriPath Form 8-K, dated
February 13, 1998.
(2) Incorporated by reference to the exhibit referenced and filed with the
AmeriPath Form S-1 (File No. 333-34265), effective October 21, 1997, and
the AmeriPath Form 8-A (File No. 000-22313), filed September 8, 1997.
(3) Filed herewith.
(4) Incorporated by reference to the exhibit referenced and filed with
AmeriPath Form 10-Q for the quarter ended June 30, 1998 dated August 14,
1998.
(5) Incorporated by reference to the Company's Proxy Statement for its 1999
Annual Meeting of Shareholders.
(6) Incorporated by reference to the exhibit referenced and filed with
AmeriPath Form 10-Q for the quarter ended June 30, 1999 dated August 16,
1999.
(7) Incorporated by reference to the exhibit referenced and filed with
AmeriPath Form 10-Q for the quarter ended September 30, 1999 dated November
15, 1999.
(8) Incorporated by reference to the exhibit referenced and filed with
AmeriPath Form 8-K, dated April 8, 1999.
(9) Incorporated by reference to the exhibit referenced and filed with
AmeriPath Annual Report on Form 10-K for the year ended December 31, 1999,
dated March 27, 2000.
(10) Incorporated by reference to the exhibit referenced and filed with
AmeriPath Form 8-K, dated July 21, 2000, filed on August 2, 2000.
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated November 30, 2000, was filed by the
Company with the Securities and Exchange Commission on December 8, 2000,
reporting that on November 30, 2000, the Company completed and
consummated the previously announced acquisition of Inform DX. In
connection with the acquisition, the Company issued approximately 2.6
million shares of common stock in exchange for all the outstanding
common stock of Inform DX. In addition, the Company assumed certain
obligations to issue shares of common stock pursuant to outstanding
Inform DX stock option plans. This transaction will be accounted for as
a pooling of interests.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Riviera Beach,
Florida, on April 2, 2001.
AMERIPATH, INC.
/s/ James C. New
----------------
James C. New,
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant in
the capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/ James C. New Chairman April 2, 2001
- -------------------------------
James C. New and Chief Executive Officer
/s/ Gregory A. Marsh Vice President, April 2, 2001
- -------------------------------
Gregory A. Marsh Chief Financial Officer
and Secretary
/s/ Alan Levin, M.D. Director April 2, 2001
- -------------------------------
Alan Levin, M.D.
/s/ Brian C. Carr Director April 2, 2001
- -------------------------------
Brian C. Carr
Director April 2, 2001
- -------------------------------
E. Martin Gibson
/s/ C. Arnold Renschler, M.D. Director April 2, 2001
- -------------------------------
C. Arnold Renschler, M.D.
/s/ E. Roe Stamps, IV Director April 2, 2001
- -------------------------------
E. Roe Stamps, IV
45
AMERIPATH, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
----
Independent Auditors' Reports F-2 to F-3
Consolidated Balance Sheets as of December 31, 1999 and 2000 F-4 to F-5
Consolidated Statements of Operations for the years ended
December 31, 1998, 1999 and 2000 F-6
Consolidated Statements of Redeemable Preferred Stock and
Common Stockholders' Equity for the years ended
December 31, 1998, 1999 and 2000 F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000 F-8
Notes to Consolidated Financial Statements F-9 to F-31
All schedules called for by Regulation S-X have been omitted because they are
not applicable or because the required information is included in the financial
statements or the notes thereto.
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of AmeriPath, Inc.:
We have audited the consolidated balance sheets of AmeriPath, Inc. and
subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related
consolidated statements of operations, redeemable preferred stock and common
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits. The consolidated financial statements
give retroactive effect to the merger of AmeriPath, Inc. and subsidiaries and
Pathology Consultants of America, Inc. (d/b/a "Inform DX"), which has been
accounted for as a pooling of interests as described in Note 3 to the
consolidated financial statements. We did not audit the balance sheet of Inform
DX as of December 31, 1999, or the related statements of operations,
stockholders' equity, and cash flows of Inform DX for the years ended December
31, 1999 and 1998, which statements reflect total assets of $28,786,000 as of
December 31, 1999, and total revenues of $24,652,000 and $16,012,000 for the
years ended December 31, 1999 and 1998, respectively. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Inform DX for 1999
and 1998, is based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2000
and 1999, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
March 29, 2001
F-2
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Pathology Consultants of America, Inc. and Subsidiaries
We have audited the consolidated balance sheets of Pathology Consultants of
America, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended (not presented separately herein). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Pathology Consultants of America, Inc. and subsidiaries at December 31, 1999 and
1998, and the consolidated results of their operations and their cash flows for
the years then ended in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
March 24, 2000
F-3
AMERIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31,
------------------
1999 2000
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,713 $ 2,418
Accounts receivable, net 57,788 70,939
Inventories 995 1,406
Deferred tax asset 5,405 8,593
Other current assets 2,468 2,853
-------- --------
Total current assets 68,369 86,209
-------- --------
PROPERTY AND EQUIPMENT, NET 16,540 23,580
-------- --------
OTHER ASSETS:
Goodwill, net 143,383 177,263
Identifiable intangibles, net 246,394 268,627
Other 4,210 6,487
-------- --------
Total other assets 393,987 452,377
-------- --------
TOTAL ASSETS $478,896 $562,166
======== ========
See accompanying notes to consolidated financial statements.
F-4
AMERIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31,
------------------
1999 2000
-------- --------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 21,337 $ 35,712
Due to managed practices 2,853 4,055
Current portion of long-term debt 698 808
Current portion of capital lease obligations 232 247
Accrued merger-related charges 275 3,165
Other current liabilities 518 1,407
-------- --------
Total current liabilities 25,913 45,394
-------- --------
LONG-TERM LIABILITIES:
Revolving loan 165,800 197,216
Other notes payable, less current portion 73 197
Subordinated notes, less current portion 1,206 2,843
Capital lease obligations, less current portion 605 436
Accrued merger-related charges, less current portion 912 2,369
Other liabilities 148 --
Deferred tax liability 62,521 64,046
-------- --------
Total long-term liabilities 231,265 267,107
-------- --------
REDEEMABLE PREFERRED STOCK 15,504 --
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 3, 14 and 18)
COMMON STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 30,000 shares
authorized, 22,271 and 24,734 shares issued and
outstanding at December 31, 1999 and 2000,
respectively 223 247
Additional paid-in capital 156,111 188,050
Retained earnings 49,880 61,368
-------- --------
Total common stockholders' equity 206,214 249,665
-------- --------
TOTAL LIABILITIES AND COMMON STOCKHOLDERS' EQUITY $478,896 $562,166
======== ========
See accompanying notes to consolidated financial statements.
F-5
AMERIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended December 31,
------------------------------
1998 1999 2000
-------- -------- --------
NET REVENUE:
Net patient service revenues $177,304 $233,269 $308,365
Net management service revenues 16,012 24,163 21,729
-------- -------- --------
Net revenue 193,316 257,432 330,094
-------- -------- --------
OPERATING COSTS AND EXPENSES:
Cost of services 87,700 122,685 163,390
Selling, general and administrative expense 36,709 47,159 58,411
Provision for doubtful accounts 18,698 25,289 34,040
Amortization expense 9,615 12,827 16,172
Merger-related charges -- -- 6,209
Asset impairment and related charges -- -- 9,562
-------- -------- --------
Total operating costs and expenses 152,722 207,960 287,784
-------- -------- --------
INCOME FROM OPERATIONS 40,594 49,472 42,310
Interest expense (8,560) (9,573) (15,376)
Other income, net 150 286 226
-------- -------- --------
Income before income taxes 32,184 40,185 27,160
Provision for income taxes 13,941 17,474 14,068
-------- -------- --------
NET INCOME 18,243 22,711 13,092
Induced conversion and accretion of redeemable preferred stock (75) (131) (1,604)
-------- -------- --------
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 18,168 $ 22,580 $ 11,488
======== ======== ========
Basic Earnings Per Common Share:
Basic weighted average shares outstanding 20,911 21,984 23,473
======== ======== ========
Basic earnings per common share $0.87 $1.03 $0.49
======== ======== ========
Diluted Earnings Per Common Share:
Diluted weighted average shares outstanding 21,610 22,516 24,237
======== ======== ========
Diluted earnings per common share $0.84 $1.00 $0.47
======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
AMERIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK AND COMMON STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Redeemable
Preferred Stock Common Stockholders' Equity
-------------------- -------------------------------------------
Additional
Common Stock Paid - in Retained
-------------
Shares Amount Shares Amount Capital Earnings
------- -------- ------ ------ ------- --------
BALANCE, DECEMBER 31, 1997 -- $ -- 19,931 $199 $136,272 $ 9,132
Stock issued in connection with
acquisitions -- -- 1,788 18 16,208 --
Advance stock subscription issued to
Affiliated Practices -- -- 2 -- 9 --
Exercise of options and warrants -- -- 27 -- 263 --
Tax benefit from stock options -- -- -- -- 109 --
Issuance of Series A redeemable
preferred stock 395 15,298 -- -- -- --
Accretion of redeemable preferred
stock -- 75 -- -- -- --
Net income -- -- -- -- -- 18,168
------- -------- ------ ---- -------- --------
BALANCE, DECEMBER 31, 1998 395 15,373 21,748 217 152,861 27,300
Stock issued in connection with
acquisitions -- -- 511 5 3,144 --
Exercise of options and warrants -- -- 12 1 15 --
Tax benefit from stock options -- -- -- -- 91 --
Accretion of redeemable preferred
stock -- 131 -- -- -- --
Net income -- -- -- -- -- 22,580
------- -------- ------ ---- -------- --------
BALANCE, DECEMBER 31, 1999 395 15,504 22,271 223 156,111 49,880
Stock issued in connection with
acquisitions -- -- 1,532 15 12,165 --
Exercise of options and warrants -- -- 288 3 1,584 --
Tax benefit from stock options -- -- -- -- 858 --
Accretion of redeemable preferred
stock -- 65 -- -- -- --
Redemption of preferred stock (395) (15,569) 643 6 17,102 --
Lapse of warrant put option -- -- -- -- 230 --
Net income -- -- -- -- -- 11,488
------- -------- ------ ---- -------- --------
BALANCE, DECEMBER 31, 2000 -- $ -- 24,734 $247 $188,050 $ 61,368
======= ======== ====== ==== ======== ========
See accompanying notes to consolidated financial statements.
F-7
AMERIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended December 31,
------------------------------
1998 1999 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,243 $ 22,711 $ 13,092
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Depreciation and amortization 12,601 16,758 21,291
Miscellaneous amortization and other 220 49 22
Deferred income taxes (3,607) (2,006) (9,117)
Provision for doubtful accounts 18,698 25,289 34,040
Asset impairment and related charges -- -- 9,562
Accretion of put warrants 54 92 --
Merger-related charges -- -- 6,209
Changes in assets and liabilities (net of effects of acquisitions):
Increase in accounts receivable (27,577) (31,756) (40,008)
Increase in inventories (417) (39) (411)
(Increase) decrease in other current assets (4,321) 2,382 (265)
Decrease (increase) in other assets 296 (731) (1,638)
Increase (decrease) in due to/from managed practices 2,744 (1,717) 1,202
Increase in accounts payable and accrued expenses 3,545 1,661 1,756
Pooling merger-related charges paid -- -- (3,800)
-------- -------- --------
Net cash flows provided by operating activities 20,479 32,693 31,935
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (4,393) (8,716) (9,235)
Cash paid for acquisitions and acquisition costs, net of cash acquired (60,472) (51,643) (24,929)
Other merger-related charges paid (1,779) (1,741) (2,396)
Investment in Genomics Collaborative, Inc. -- -- (1,000)
Decrease in restricted cash 21 229 --
Payments of contingent notes (7,789) (17,440) (26,645)
-------- -------- --------
Net cash flows used in investing activities (74,412) (79,311) (64,205)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving loan 53,069 44,713 31,416
Principal payments on long-term debt and capital leases (9,966) (1,701) (818)
Debt issuance costs (496) (1,171) (82)
Net proceeds from sale of redeemable preferred stock 15,298 -- --
Tax benefit from stock options 109 91 858
Other -- -- 14
Proceed from issuance of common stock under stock option plans and warrants 272 16 1,587
-------- -------- --------
Net cash flows provided by financing activities 58,286 41,948 32,975
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,353 (4,670) 705
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,030 6,383 1,713
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,383 $ 1,713 $ 2,418
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 8,034 $ 8,924 $ 14,645
Income taxes $ 17,833 $ 15,890 $ 23,798
See accompanying notes to consolidated financial statements.
F-8
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. Business and Organization
AmeriPath, Inc. ("AmeriPath" or the "Company") was incorporated in February 1996
to be the largest integrated physician group practice focused on anatomic
pathology diagnostic services, based on an analysis of geographic breadth,
number of physicians, number of hospital contracts, number of practices and net
revenues. Since the first quarter of 1996, the Company has completed the
acquisition of 49 physician practices located in twenty-one states. The
Company's 425 pathologists provide medical diagnostic services in 42 outpatient
laboratories owned and operated by the Company, and in 224 hospitals and
associated outpatient surgery centers.
On November 30, 2000, the Company acquired Pathology Consultants of America,
Inc., d/b/a Inform DX ("Inform DX"). In connection with the acquisition, the
Company issued approximately 2.6 million shares of common stock in exchange for
all the outstanding common stock of Inform DX. In addition, the Company assumed
certain obligations to issue shares of common stock pursuant to outstanding
Inform DX stock option plans. This transaction was accounted for as a pooling of
interests. All prior years information has been restated to reflect the
acquisition of Inform DX.
Anatomic and clinical pathology diagnostic services are provided under
contractual arrangements with hospitals and in free-standing, independent
laboratory settings. The contractual arrangements with hospitals vary, but
essentially provide that, in exchange for physician representatives of the
Company serving as the medical director of a hospital's anatomic and clinical
laboratory operations, the Company is able to bill and collect the professional
component of the charges for medical services rendered by the Company's
pathologists. In some cases, the Company is also paid an annual fee for
providing the medical director for the hospital's clinical laboratory. The
Company also owns and operates outpatient pathology laboratories, for which it
bills patients and third party payors, principally on a fee-for-service basis,
covering both the professional and technical components of such services. In
addition, the Company contracts directly with national clinical laboratories,
principally on a fee-for-service basis.
The Company operates using either an ownership or employment model or a
management or equity model. Under management or equity model, the Company
acquires certain assets of and operates pathology practices under long-term
service agreements with affiliated physician groups (the "Managed Practices").
The Company provides facilities and equipment as well as administrative and
technical support for the affiliated physician groups under service agreements.
Through its ownership or employment model, the Company acquires a controlling
equity interest in the pathology practice (the "Owned Practices").
Corporate practice of medicine restrictions generally prohibit corporate
entities from employing or otherwise exercising control over physicians. In
states that do not prohibit a for-profit corporation from employing physicians
such as Florida, Alabama, Mississippi and Kentucky, AmeriPath operates its Owned
Practices through Practice Subsidiaries, which are subsidiary corporations of
AmeriPath that directly employ the physicians. In states that prohibit a for-
profit corporation from employing physicians, such as Texas, Indiana, Ohio,
North Carolina, Michigan, Wisconsin, New York and Pennsylvania, AmeriPath
operates each Owned Practice through a Manager Subsidiary, which is a subsidiary
of AmeriPath that has a long-term management agreement with the applicable PA
Contractor, which in turn employs the physicians. In many cases, several
Practices are included within or organized under a single Practice Subsidiary or
PA Contractor, as the case may be.
Owned Practices. Owned practices are operated through Manager and Practice
Subsidiaries. The Manager and Practice Subsidiaries are wholly-owned
subsidiaries of AmeriPath and the officers and directors of such companies are
generally members of AmeriPath's executive management team. The financial
statements of the Manager and Practice Subsidiaries are included in the
consolidated financial statements of AmeriPath.
Ownership and Management of the PA Contractors. The PA Contractors are entities
which have contractual relationships with the Company but are not owned directly
by AmeriPath. These entities can be a professional corporation or professional
association, as permitted and defined in various state statutes. The PA
Contractors operating in North Carolina, Wisconsin, New York, Michigan and
Pennsylvania are owned by physicians affiliated with AmeriPath. To the extent
permitted by law, the officers and directors of the PA Contractors are members
of AmeriPath's executive management team. However, in states
F-9
where law prohibits such non-licensed physician personnel from serving as an
officer or director of a PA Contractor, eligible affiliated physicians serve in
such positions. The affiliated physicians who own PA Contractors have entered
into agreements with AmeriPath that generally (i) prohibit such affiliated
physicians from transferring their ownership interests in the PA Contractor,
except in very limited circumstances and (ii) require such affiliated physicians
to transfer their ownership in the PA Contractor to designees of AmeriPath upon
the occurrence of specified events.
The PA Contractors in Ohio and Indiana are owned by trusts. The beneficiary of
such trusts is AmeriPath and the Trustees of such trusts are affiliated
physicians. The PA Contractors operating in Texas are organized as not-for-
profit 5.01(a) corporations. The sole member of the not-for-profit PA
Contractors in Texas is AmeriPath.
Each PA Contractor is party to a long-term management agreement with one of the
Company's Manager Subsidiaries. Under the terms of these management agreements,
AmeriPath generally provides all non-medical and administrative support services
to the practices including accounting and financial reporting, human resources,
payroll, billing, and employee benefits administration. In addition, the
management agreements give the Manager Subsidiaries certain rights with respect
to the management of the non-medical operations of the PA Contractors. The
management agreements require the PA Contractors to pay a management fee to the
applicable Manager Subsidiaries. The fee structure is different for each
Practice based upon various factors, including applicable law, and includes fees
based on a percentage of earnings, performance-based fees, and flat fees that
are adjusted from time to time.
In accordance with Emerging Issues Task Force 97-2:"Application of FASB
Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Agreements"
("EITF 97-2"), the financial statements of the PA Contractors are included in
the consolidated financial statements of AmeriPath since AmeriPath has a
controlling interest in the PA Contractor.
Managed Practices. The term Managed Practices refers to AmeriPath's operation
and management of pathology practices under long-term service agreements with
affiliated physician groups. Generally, the Company acquires the practice's
assets, and the physician groups maintain their separate corporate or
partnership entities and enter into employment and noncompete agreements with
the practicing physicians. Costs of obtaining service agreements are amortized
using the straight-line method over 25 years.
Service agreements represent the exclusive right to operate the Company's
practices in affiliation with the related physician groups during the term of
the agreements. Pursuant to the service agreements, the Company provides the
physician groups with equipment, supplies, support personnel, and management and
financial advisory services. Physician groups are responsible for the
recruitment and hiring of physicians and all other personnel who provide
pathological services, and for all issues related to the professional, clinical
and ethical aspects of the practice. As part of the service agreements,
physician groups are required to maintain medical malpractice insurance which
names the Company as an additional insured. The Company is also required to
maintain general liability insurance and name the physician groups as additional
insureds. Upon termination of the service agreements, the respective physician
groups are required to obtain continuing liability insurance coverage under
either a "tail policy" or a "prior acts policy."
The management services fees charged under the service agreements are based on a
predetermined percentage of net operating income of the Managed Practices.
Management service revenue is recognized by the Company at the time physician
service revenue is recorded by the physician group. The Company also
participates to varying degrees in non-physician revenues generated from
ancillary services offered through the laboratories. The Company charges a
capital fee for the use of depreciable assets owned by the Company and
recognizes revenue for all practice expenses that are paid on behalf of the
practices. Practice expenses exclude the salaries and benefits of the
physicians.
F-10
2. Summary of Significant Accounting Policies
A summary of significant accounting policies followed by the Company are as
follows:
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of
AmeriPath, Inc., its wholly-owned subsidiaries, and companies in which the
Company has the controlling financial interest by means other than the direct
record ownership of voting stock, as discussed in Note 1. Intercompany accounts
and transactions have been eliminated. The Company does not consolidate the
affiliated physician groups it manages as it does not have operating control as
defined in EITF 97-2.
Accounting Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States ("generally
accepted accounting principles") requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue and
expenses. Because of the inherent uncertainties in this process, actual results
could differ from those estimates. Such estimates include the recoverability of
intangible assets and the collectibility of receivables.
Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash equivalents,
accounts receivable, due to/from physician groups, accounts payable and the
credit facility. The carrying amounts of the Company's cash and cash
equivalents, accounts receivable and accounts payable approximate fair value due
to the short-term nature of these instruments. Approximately $92,000 of the
credit facility bears interest at a variable market rate, and thus has a
carrying amount that approximates fair value. The remaining $105,000 of the
credit facility was subject to interest rate swaps as described in Note 13. The
estimated fair value of the interest rate swaps, which is the amount necessary
to unwind the swap, was approximately $1,100 and ($4,968) as of December 31,
1999 and 2000, respectively. The estimated fair value of the Company's interest
rate swaps was obtained from outside sources.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid instruments with maturities at the
time of purchase of three months or less. Included in cash and cash equivalents
at December 31, 2000 was $818 of restricted cash used as collateral under
certain letters of credit.
Inventories
Inventories, consisting primarily of laboratory supplies, are stated at the
lower of cost, determined on a first-in-first-out basis, or market.
Property and Equipment
Property and equipment are stated at cost. Routine maintenance and repairs are
charged to expense as incurred, while cost of betterments and renewals are
capitalized.
Depreciation and amortization are calculated on a straight-line basis and
accelerated methods, over the estimated useful lives of the respective assets
which lives range from 3 to 7 years. Leasehold improvements are amortized over
the shorter of the term of the related lease, including renewal options, or the
useful life of the asset.
Intangible Assets
The allocation of the purchase price of the 2000 acquisitions is preliminary,
while the Company continues to obtain the information necessary to determine the
fair value of the assets acquired and liabilities assumed. When the Company
obtains final information, management believes that adjustments, if any, will
not be material in relation to the consolidated financial statements.
F-11
Identifiable intangible assets include hospital contracts, physician referral
lists and laboratory contracts acquired in connection with acquisitions. Such
assets are recorded at fair value on the date of acquisition as determined by
management based on independent consultants' reports performed to assist
management in this determination and are being amortized over the estimated
periods to be benefited, ranging from 10 to 40 years. In determining these lives
the Company considered each practice's operating history, contract renewals,
stability of physician referral lists and industry statistics.
Goodwill relates to the excess of cost over the fair value of net assets of the
businesses acquired. The amortization periods for goodwill were determined by
the Company with consideration given to the lives assigned to the identifiable
intangibles, the reputation of the practice, the length of the practice's
operating history, and the potential of the market in which the acquired
practice is located. Amortization is calculated on a straight line basis over
periods ranging from 10 to 35 years.
Management assesses on an ongoing basis if there has been an impairment in the
carrying value of its intangible assets. If the undiscounted future cash flows
over the remaining amortization period of the respective intangible asset
indicates that the value assigned to the intangible asset may not be
recoverable, the carrying value of the respective intangible asset will be
reduced. The amount of any such impairment would be determined by comparing
anticipated discounted future cash flows from acquired businesses with the
carrying value of the related assets. In performing this analysis, management
considers such factors as current results, trends and future prospects, in
addition to other relevant factors.
The Company has entered into a management service agreement with each of the
physician groups of the Managed Practices for a period up to 40 years. Upon the
Company's acquisition of the practice's assets, the physician groups maintain
their separate corporate or partnership entities and enter into employment and
noncompete agreements with the practicing physicians. Costs of obtaining these
management service agreements are amortized using the straight-line method over
25 years.
Deferred Debt Issuance Costs
The Company incurred costs in connection with bank financing. These costs have
been capitalized and are being amortized on a straight-line basis, which
approximates the interest method, over the five year term. Such amounts are
included in other assets in the consolidated balance sheet.
Revenue Recognition
The Company recognizes net patient service revenue at the time services are
performed. Unbilled receivables are recorded for services rendered during, but
billed subsequent to, the reporting period. Net patient service revenue is
reported at the estimated realizable amounts from patients, third-party payors
and others for services rendered. Revenue under certain third-party payor
agreements is subject to audit and retroactive adjustments. Provision for
estimated third-party payor settlements and adjustments are estimated in the
period the related services are rendered and adjusted in future periods as final
settlements are determined. The provision and the related allowance are adjusted
periodically, based upon an evaluation of historical collection experience with
specific payors for particular services, anticipated collection levels with
specific payors for new services, industry reimbursement trends, and other
relevant factors.
Unbilled receivables for the Owned Practices, net of allowances, as of December
31, 1999 and 2000 amounted to approximately $5,200 and $8,600, respectively.
Net management service revenue reported by the Company represents net physician
group revenue less amounts retained by physician groups. The amounts retained by
physician groups represent amounts paid to the physicians pursuant to the
management service agreements between the Company and the physician groups. Net
physician group revenue is equal to billed charges reduced by provisions for bad
debt and contractual adjustments. Contractual adjustments represent the
difference between amounts billed and amounts reimbursable by commercial
insurers and other third-party payors pursuant to their respective contracts
with the physician groups. The provision for bad debts represents management's
estimate of potential credit issues associated with amounts due from patients,
commercial insurers, and other third-party payors.
F-12
Income Taxes
The Company's provision for income taxes includes federal and state income taxes
currently payable and changes in deferred tax assets and liabilities, excluding
the establishment of deferred tax assets and liabilities related to
acquisitions. Deferred income taxes are accounted for in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes and represent the estimated future tax effects resulting from
temporary differences between financial and tax reporting bases of assets and
liabilities. In addition, future tax benefits, such as net operating loss
("NOL") carryforwards, are required to be recognized to the extent that
realization of such benefits is more likely than not. A valuation allowance is
established for those benefits that do not meet the more likely than not
criteria. A valuation allowance has been established for $3,548 of the net
deferred tax assets at December 31, 2000 due to the uncertainty regarding the
Company's ability to utilize the acquired net operating loss carryforwards of
Inform DX due to Internal Revenue Code limitations.
Segment Reporting
The Financial Accounting Standards Board ("FASB") issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information effective
for fiscal years beginning after December 15, 1997. The Company has two
reportable segments, Owned Practices and Managed Practices, based upon
management reporting and the consolidated reporting structure.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements, which
provided the staff's views in applying generally accepted accounting principles
to selected revenue recognition issues. In June 2000, SAB 101 was amended by SAB
101B, which delayed the implementation of SAB 101 until no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. The Company
adopted SAB 101 in the fourth quarter of 2000. The adoption of the provisions of
SAB 101 did not have a material impact on the Company's financial position or
results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
133") and in June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137 "Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB Statement No. 133," which delayed the
effective date the Company is required to adopt SFAS 133 until its fiscal year
2001. In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment to FASB Statement No. 133." This statement amended
certain provisions of SFAS 133. SFAS 133 requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company does not enter into derivative financial
instruments for trading purposes. Upon adoption of SFAS 133 in the first fiscal
quarter of 2001, these activities will be recognized on the Consolidated Balance
Sheet. The Company's adoption of SFAS 133 will not have a material effect on the
Company's earnings. The adoption of SFAS 133 will result in the reduction of
other comprehensive income of approximately $5,000.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 2000
presentation and/or to reflect the merger with Inform DX accounted for as a
pooling-of-interests.
3. Merger and Acquisitions
Acquired Practices: Pooling method
On November 30, 2000, the Company completed a merger transaction with Inform DX
that was accounted for as a pooling-of-interests transaction. The Company issued
2.6 million Common Shares to Inform DX stockholders and Inform DX's outstanding
stock options were converted into options to purchase approximately 170,000
common shares of AmeriPath. The
F-13
historical consolidated financial statements for periods prior to the
consummation of the combination are restated as though the companies had been
combined during such periods.
The table below presents a reconciliation of total revenue and net income
available for Common Shares as reported in the accompanying consolidated
financial statements with those previously reported by the Company.
Combined
AmeriPath Inform DX Adjustements (A) Combined
--------- --------- ---------------- --------
Eleven months ended November 30, 2000
- -------------------------------------
Total revenue $269,865 $34,329 -- $304,194
======== ======= ======== ========
Net income (loss) $ 20,514 $(6,250) -- $ 14,264
======== ======= ======== ========
Year ended December 31, 1999
- ----------------------------
Total revenue $232,753 $24,652 $ 27 $257,432
======== ======= ======== ========
Net income (loss) $ 22,969 $ (31) $ (358) $ 22,580
======== ======= ======== ========
Year ended December 31, 1998
- ----------------------------
Total revenue $177,304 $16,012 -- $193,316
======== ======= ======== ========
Net income (loss) $ 18,639 $ (683) $ 212 $ 18,168
======== ======= ======== ========
(A) The provision for income taxes has been adjusted by $357 and $(212) in
1999 and 1998, respectively, to reflect the recordation of acquired net
operating loss carry forwards, related valuation allowances and other
various timing differences of Inform DX in accordance with SFAS No.
109. In addition, certain reclassifications totaling $27 were made to
conform to the current year presentation.
See Note 12 for additional information.
Acquired Practices: Purchase method
During 2000, the Company acquired nine anatomic pathology practices, including
the two practices acquired by Inform DX. The total consideration paid by the
Company in connection with these acquisitions included cash of $32,457,
1,532,000 shares of common stock (aggregate value of $12,180 based upon amounts
recorded on the Company's consolidated financial statements) and subordinated
debt of $2,794. In addition, the Company issued additional purchase price
consideration in the form of contingent notes. During 1999, the Company acquired
eleven anatomic pathology practices, including one by Inform DX. The total
consideration paid by the Company in connection with these acquisitions included
cash of $51,746, 486,796 shares of common stock (aggregate value of $2,954 based
upon amounts recorded on the Company's consolidated financial statements) and
subordinated debt of $848. In addition, the Company issued additional purchase
price consideration in the form of contingent notes. During the year ended
December 31, 2000, the Company made contingent note payments of $26,645 and
other purchase price adjustments of approximately $2,876 in connection with
certain post-closing adjustments and acquisition costs. During the year ended
December 31, 1999, the Company issued an additional 23,930 shares of common
stock, valued at $195, and made contingent note payments of $17,440 and other
purchase price adjustments of $2,965 in connection with certain post-closing
adjustments and acquisition costs.
The acquisitions have been accounted for using the purchase method of
accounting, except for the Inform DX acquisition. The aggregate consideration
paid, and to be paid, is based on a number of factors, including each practice's
demographics, size, local prominence, position in the marketplace and historical
cash flows from operations. Assessment of these and other factors, including
uncertainties regarding the health care environment, resulted in the sellers of
each of the practices and the Company being unable to reach agreement on the
final purchase price. The Company agreed to pay a minimum purchase price and to
pay additional purchase price consideration to the sellers of the practices in
proportion to their respective ownership interest in each practice. The
additional payments are contingent upon the achievement of stipulated levels of
operating earnings (as defined) by each of the practices over periods of three
to five years from the date of the acquisition as set forth in the respective
agreements, and are not contingent on the continued employment of the sellers of
the practices. In certain cases, the payments are contingent upon other factors
such as the retention of certain hospital contracts for periods ranging from
three to five years. The amount of the payments cannot be determined until the
achievement of the operating earnings levels or other factors during the terms
of the respective agreements. If the maximum specified levels of operating
earnings for each practice are achieved, the Company would make aggregate
maximum payments, including principal and interest, of approximately $198,359
over the next three to five years.
F-14
At the mid-point level, the aggregate principal and interest would be
approximately $89,695 over the next three to five years. A lesser amount or no
payments at all would be made if the mid-point levels of operating earnings
specified in each agreement are not met. Through December 31, 2000, the Company
made contingent note payments aggregating $53,398, which represent 63% of the
maximum amount available. Additional payments are accounted for as additional
purchase price, which increases the recorded goodwill.
The accompanying consolidated financial statements include the results of
operations of the acquisitions from the date acquired through December 31, 2000.
The following unaudited pro forma information presents the consolidated results
of the Company's operations and the results of operations of the 1999 and 2000
acquisitions for the years ended December 31, 1999 and 2000 after giving effect
to amortization of goodwill and identifiable intangible assets, interest expense
on long-term debt incurred in connection with these acquisitions, and the
reduced level of certain specific operating expenses (primarily compensation and
related expenses attributable to former owners) as if the acquisitions had been
consummated on January 1, 1999. Such unaudited pro forma information is based on
historical financial information with respect to the 1999 and 2000 acquisitions
and does not include operational or other changes which might have been effected
by the Company.
The unaudited pro forma information for the years ended December 31, 1999 and
2000 presented below is for illustrative information purposes only and is not
necessarily indicative of results which would have been achieved or results
which may be achieved in the future:
Pro Forma
December 31,
------------------
1999 2000
-------- --------
Net revenue $321,703 $357,638
======== ========
Net income attributable to common stock $ 27,900 $ 15,849
======== ========
Net income per share (diluted) $ 1.09 $ 0.62
======== ========
4. Accounts Receivable
Accounts receivable are recorded at net realizable value. The allowance for
contractual and other adjustments and uncollectible accounts is based on
historical experience and judgments about future events. Accordingly, the actual
amounts experienced could vary significantly from the recorded allowances. For
Managed Practices, terms of the service agreements require the Company to
purchase receivables generated by the physician groups on a monthly basis. Such
amounts are recorded net of contractual allowances and estimated bad debts. For
Managed Practices, accounts receivable are a function of the net physician group
revenue rather than the net revenue of the Company.
December 31,
-------------------
Accounts receivable consisted of the following: 1999 2000
-------- --------
Gross accounts receivable $130,791 $166,873
Less: Allowance for contractual
and other adjustments (47,047) (54,840)
Allowance for uncollectible accounts (25,956) (41,094)
-------- --------
Accounts receivable, net $ 57,788 $ 70,939
======== ========
F-15
The following table represents the rollforward of the allowances for contractual
adjustments and uncollectible accounts:
Years Ended December 31,
------------------------------------
1998 1999 2000
------- --------- ---------
Beginning allowances for contractual
adjustments and uncollectible accounts $26,522 $ 62,512 $ 73,003
Provision for contractual adjustments 80,664 128,585 $ 178,873
Provision for doubtful accounts 18,698 25,289 $ 34,040
Managed Practice contractual adjustments
and bad debt expense 31,429 41,712 $ 44,849
Write-offs and other adjustments (94,801) (185,095) $(229,831)
------- --------- ---------
Ending allowance for contractual
adjustments and uncollectible accounts $62,512 $ 73,003 $ 95,934
======= ========= =========
The Company grants credit without collateral to individual patients, most of
whom are insured under third party payor agreements. The estimated mix of
receivables from patients and third-party payors are as follows:
December 31,
---------------------
1999 2000
--------- ---------
Government programs 18.8% 17.8%
Third-party payors 53.7 53.3
Private pay patients 22.5 23.8
Other 5.0 5.1
--------- ---------
100.0% 100.0%
========= =========
5. Net Revenue
Years Ended December 31,
--------------------------------
Net patient service revenue consisted of the following: 1998 1999 2000
-------- --------- ---------
Gross revenue $257,968 $ 361,854 $ 482,238
Less contractual and other adjustments (80,664) (128,585) (173,873)
-------- --------- ---------
Net patient service revenue $177,304 $ 233,269 $ 308,365
======== ========= =========
Net management service revenue consisted of the following:
Years Ended December 31,
--------------------------------
1998 1999 2000
-------- --------- ---------
Gross physician group revenue $ 61,694 $ 85,379 $ 86,203
Contractual adjustments and bad debt expense (31,429) (41,712) (44,849)
-------- --------- ---------
Net physician group revenue 30,265 43,667 41,354
Less amounts retained by physician groups (14,253) (19,504) (19,625)
-------- --------- ---------
Net management service revenue $ 16,012 $ 24,163 $ 21,729
======== ========= =========
A significant portion of the Company's net revenue is generated by the hospital-
based practices through contracts with 168, 207 and 224 hospitals as of December
31, 1998, 1999 and 2000, respectively. HCA - The Healthcare Company ("HCA")
owned 29, 27 and 27 of these hospitals as of December 31, 1998, 1999 and 2000,
respectively. For the years ended December 31, 1998, 1999 and 2000,
approximately 17%, 15%, and 13%, respectively of net patient service revenue was
generated directly from contracts with hospitals owned by HCA. Generally, these
contracts and other hospital contracts have remaining terms of less than five
years and contain renewal provisions. Some of the contracts also contain clauses
that allow for termination by either party with relatively short notice. HCA has
been under government investigation for some time and is evaluating its
operating strategies; including the sale, spin-off or closure of certain
hospitals. Although the Company, through its acquisitions, has had relationships
with these hospitals and national labs for extended periods of time, the
termination of one or more of these contracts could have a material adverse
effect on the Company's financial position and results of operations. The
Company from time to
F-16
time evaluates the carrying values of identified intangibles and goodwill and
the related useful lives assigned to such assets. See Note 8 for additional
information related to the impairment of certain hospital contracts.
6. Property and Equipment
Estimated
Useful Life December 31,
-------------------
Property and equipment consisted of the following: (Years) 1999 2000
------- -------- --------
Laboratory, office and data processing equipment 3-7 $ 19,336 $ 27,668
Construction in progress 2,693 1,511
Leasehold improvements 5-10 3,510 7,984
Furniture and fixtures 3-7 2,070 2,590
Mobile laboratory units 3 175 175
Automotive vehicles 3-5 1,058 1,380
-------- --------
28,842 41,308
Less accumulated depreciation (12,302) (17,728)
-------- --------
Property and equipment, net $ 16,540 $ 23,580
======== ========
Depreciation expense was $2,669, $3,554 and $4,748 for the years ended December
31, 1998, 1999 and 2000, respectively.
7. Intangible assets
Intangible assets and the related accumulated amortization and amortization
periods are as follows:
Amortization Periods
(Years)
-------
December 31, Weighted
-------------------
1999 2000 Range Average
-------- -------- -------- -------
Hospital contracts $193,899 $211,738 25-40 32.3
Physician client lists 54,893 71,447 10-30 20.7
Laboratory contracts 7,317 4,543 10 10.0
Management agreements 11,022 11,214 25 25.0
-------- --------
267,131 298,942
Accumulated amortization (20,737) (30,315)
-------- --------
Balance, net $246,394 $268,627
======== ========
Goodwill $153,749 $193,231 10-35 30.5
Accumulated amortization (10,366) (15,968)
-------- --------
Balance, net $143,383 $177,263
======== ========
The amortization periods for the identifiable intangible assets were determined
by the Company based on reports of independent consultants, performed to assist
management in this determination. In determining these lives, the Company
considered each practice's operating history, contract renewals, stability of
physician referral lists and industry statistics.
The amortization periods for goodwill were determined by the Company with
consideration given to the lives assigned to the identifiable intangibles, the
reputation of the practice, the length of the practice's operating history, and
the potential of the market in which the acquired practice is located.
The weighted average amortization period for identifiable intangible assets and
goodwill is 29.6 years.
F-17
8. Asset Impairments and Related Charges
During the second quarter ended June 30, 2000, the Company recorded a pre-tax
non-cash charge of approximately $4,700, and related cash charges of
approximately $545 in connection with the impairment of intangible assets at an
acquired practice in Cleveland, Ohio. The Company had provided services at four
hospitals and an ambulatory care facility owned by Primary Health Systems
("PHS"), a regional hospital network in Cleveland, Ohio. During the first
quarter of 2000, PHS began implementing a plan of reorganization filed under
Chapter 11 with the U.S. Bankruptcy Court for the District of Delaware, and
closed one hospital. During the second quarter, the bankruptcy court approved
the sale of two hospitals and the ambulatory care facility to local purchasers
in the Cleveland area. The Company's contracts with these two hospitals and the
ambulatory care facility were not accepted by the purchasers, who have elected
to employ their own pathologists. One hospital has not been sold and continues
to do business with the Company. As a result, the Company determined, using the
discounted cash flow method, that the intangible assets, including goodwill, had
no remaining fair value. Therefore, the Company wrote off the unamortized
intangible asset balance. In addition, the Company recorded approximately $545
of related charges for potentially uncollectible accounts receivable, employee
termination costs and legal fees.
During the fourth quarter of 2000, the Company recorded a pre-tax non-cash
charge of approximately $4,300 related to the impairment of certain intangible
assets. Of this charge, $3,300 related to Quest Diagnostics' ("Quest")
termination of its contract with the Company in South Florida, effective
December 31, 2000. The Company believes that some portion of this work may be
transferred by Quest to other practices owned by the Company and the Company is
implementing a marketing strategy to retain and provide services directly to
these customers in South Florida. In addition, during the fourth quarter, a
hospital in South Florida where the Company had the pathology contract,
requested proposals for its pathology services, and the Company was unsuccessful
in retaining this contract. Based upon the remaining projected cash flow from
this hospital network, the Company determined that the intangible assets were
impaired and recorded a pre-tax non-cash charge of approximately $1,000.
9. Investment Securities
The Company accounts for investments in certain debt and equity securities under
the provisions of Statement of Financial Accounting Standards No. 115 ("SFAS No.
115"), "Accounting for Certain Debt and Equity Securities". Under SFAS No. 115,
the Company must classify its debt and marketable equity securities in one of
three categories: trading, available-for-sale, or held-to-maturity.
In September 2000, the Company made a $1,000 investment in Genomics
Collaborative, Inc ("GCI") for which it received 333,333 shares of Series D
Preferred Stock, par value $0.01. The GCI Series D Preferred Stock is
convertible into one share of common stock and redeemable after 2005 at $3.00
per share at the option of the holder. GCI is a privately held, start-up,
company which has a history of operating losses. As of December 31, 2000, it
appears that GCI has sufficient cash to fund operations for the next twelve
months. In the event that they are unable to become profitable and/or raise
additional funding, it could result in an impairment of our investment. This
available for sale security is recorded at its estimated fair value, which
approximates cost, and is classified as other assets on the Company's balance
sheet. At December 31, 2000, there were no unrealized gains or losses associated
with this investment.
10. Due to Managed Practices
In accordance with the terms of the management service agreements, the owners of
the managed practices are entitled to a predetermined percentage of the net
operating income of their managed practice ("physician group retainage"). The
amount of the liability is calculated monthly and is to be paid by the fifteenth
day of the following month. The monthly payment amount is comprised of either
the net revenues or the cash collected from revenues during the month less any
practice expenses and management fees charged by the Company. The amounts owed
to the owners of the Managed Practices were $4,055 and $2,853 as of December 31,
2000 and 1999, respectively.
F-18
11. Accounts Payable and Accrued Expenses
December 31,
--------------------
Accounts payable and accrued expenses consisted of the following: 1999 2000
------- -------
Accounts payable $ 4,830 $12,034
Accrued compensation 7,978 12,604
Accrued acquisition costs 1,739 2,332
Accrued interest 828 1,283
Income taxes payable 942 1,822
Other accrued expenses 5,020 5,637
------- -------
$21,337 $35,712
======= =======
12. Merger-related charges
In connection with the Inform DX merger and other previous acquisitions, the
Company has recorded reserves for transaction costs, employee-related costs
(including severance agreement payouts) and various exit costs associated with
the consolidation of certain operations, including the elimination of duplicate
facilities and certain exit and restructuring costs.
During the fourth quarter of 2000, the Company recorded merger-related costs
totaling $6,200 ($5,102, net of tax). As part of the business restructuring, the
Company is closing certain facilities. In 1999, the Company paid $1,741 of costs
in connection with the May 1998 American Pathology Resource, Inc. ("APR")
acquisition. Payments were for various exit costs associated with the disposal
of certain operations of APR and the shutdown of the APR corporate office.
A reconciliation of the activity for the years ended December 31, 2000 and 1999
with respect to the merger-related reserves is as follows:
Balance Balance Statement of Balance
December 31, Sheet Operations December 31,
1999 Charges Charges Payments 2000
---- ------- ------- -------- ----
Transaction costs -- $1,160 $4,348 $(3,782) $ 1,726
Employee termination
costs 78 1,200 1,861 (1,722) 1,417
Lease commitments
394 1,974 -- (240) 2,128
Other exit costs 715 -- -- (452) 263
------ ------ ------ ------- -------
Total 1,187 $4,334 $6,209 $(6,196) 5,534
====== ------ -------
Less: portion included
in current liabilities (275) (3,165)
------ -------
Total included in other
liabilities $ 912 $ 2,369
====== =======
F-19
Balance Balance Statement of Balance
December 31, Sheet Operations December 31,
1998 Charges Charges Payments 1999
---- ------- ------- -------- ----
Employee termination
costs $ 414 $ (8) -- $ (328) $ 78
Lease
Commitments 1,851 (740) -- (717) 394
Other exit costs 1,518 (107) -- (696) 715
------ ----- ---------- ------- ------
Total 3,783 $(855) -- $(1,741) 1,187
===== ========== =======
Less: portion included
in current liabilities (860) (275)
------ ------
Total included in other
liabilities $2,923 $ 912
====== ======
In addition, the Company plans to continue its consolidation efforts related to
its acquisition of Inform DX during the first half of 2001. As a result, the
Company expects to incur additional costs of $7,300 during this period. Of this
amount, approximately $5,400 is for employee-related costs, $1,100 is for the
consolidation of the Company's facilities in New York and eastern Pennsylvania,
and $800 is for other transaction costs related to the Inform DX acquisition .
13. Long-term Debt
December 31,
-------------------
Long-term debt consisted of the following: 1999 2000
-------- --------
Revolving loan $163,300 $197,216
Revolving line of credit 2,500 --
Note payable 73 210
Capital leases 837 683
Subordinated notes issued and assumed in connection with
acquisitions, payable in varying amounts through 2005,
with interest at rates of 6.5% and 9.5% 1,904 3,638
-------- --------
$168,614 $201,747
Less current portion (930) (1,055)
-------- --------
Long-term debt, net of current portion $167,684 $200,692
======== ========
At December 31, 2000 maturities of long-term debt were as follows:
2001 $ 1,055
2002 430
2003 355
2004 197,488
2005 2,419
--------
Total $201,747
========
The Company has a revolving line of credit (the "Credit Facility") with a
syndicate of banks led by Fleet National Bank, formerly Bank Boston, N.A. as
lender and agent. On April 28, 1998, the Company amended its Credit Facility.
The amended facility provided for borrowings of up to $200,000 in the form of a
revolving loan that may be used for working capital purposes (in an amount
limited to 75% of the Company's net accounts receivable, as reflected on the
Company's quarterly consolidated balance sheet) and to fund acquisitions to the
extent not otherwise used for working capital purposes.
F-20
On December 16, 1999, the Company amended its Credit Facility. The amended
facility provides for borrowings of up to $230,000 in the form of a revolving
loan that may be used for working capital purposes and to fund acquisitions to
the extent not otherwise used for working capital purposes. The Company must
comply with certain requirements as defined in the credit agreement to utilize
the Credit Facility to fund acquisitions.
On July 21, 2000, the Company amended its Credit Facility dated December 16,
1999 ("Amendment No. 1"). Amendment No. 1 allowed for the Company to be in
compliance with the Credit Facility by excluding non-cash charges totaling
approximately $5,200 from the calculation of the Company's consolidated
operating cash flow covenant through March 31, 2001. These charges relate to the
impairment of assets and related charges at an acquired practice in Cleveland,
Ohio as more fully discussed in Note 8 to the financial statements. The
amendment was obtained to cure a potential default that otherwise would likely
have occurred under the operating cash flow covenant contained in the Credit
Facility. In addition, Amendment No. 2 (i) increased the Company's operating
cash flow requirements under the facility for the trailing twelve months ending
December 31, 2002 and thereafter; (ii) requires that a minimum of 10% of the
purchase price of future acquisitions greater than $5,000 be in the form of the
Company's capital stock, and (iii) allowed for an investment of up to $3,000 in
Genomics Collaborative, Inc. The amendment is not expected to have a material
adverse effect on the Company's operations or strategies.
On November 29, 2000, the Company amended its Credit Facility dated December 16,
1999 ("Amendment No. 2"). Amendment No. 2 allowed for the Company to be in
compliance with the Credit Facility by excluding from the covenant calculations
cash and non-cash charges totaling approximately $17,500. These exclusions were
comprised of a one time cash transaction and restructuring charges of up to
$7,500 in connection with the acquisition of Inform DX, and nonrecurring non-
cash charges of up to $10,000, including charges resulting from an increase in
the accounts receivable reserve in connection with the acquisition of Inform DX,
and potential asset impairment charges relating to good will and other
intangibles of not more than $5,000. In addition, Amendment No. 2 (i) decreased
the Company's operating cash flow requirements under the facility for the
trailing twelve months ending December 31, 2001, and increased them thereafter;
(ii) increased the amount of allowable Capital Lease Obligations to $3,000; and
(iii) decreased the levels of acquisition purchase price used in the
documentation requirements of the lenders. The amendment was obtained to cure a
potential default for the year ended December 31, 2000 that otherwise would
likely have occurred under the operating cash flow covenant contained in the
Credit Facility.
There is the potential of $5,400 of charges in excess of the $17,500 allowed in
Amendment No. 2 which results from the formalization of the Inform DX
integration plans, and are expected to result in further synergies. These
additional charges could have caused the Company to be in technical default of
one or more of its covenants under its Credit Facility at the end of the first
quarter of 2001. On March 29, 2001, the Company and its lenders executed an
amendment ("Amendment No. 3") which excludes an additional $5,400, or $28,300,
in total, of charges from its covenant calculations. In addition, Amendment No.
3 (i) increased the Company's borrowing rate by 37.5 basis points; (ii) requires
the Company to use a minimum of 30% equity for all acquisitions; (iii) requires
the Company to use no more than 20% of consideration for acquisitions in the
form of contingent notes and; (iv) requires lender approval of all acquisitions
with a purchase price greater than $10,000. The Company will also be required to
pay an amendment fee of up to 30 basis points to those lenders which consented
to the amendment. The maximum amount of the amendment fee would be $700.
All outstanding advances under the Credit Facility are due and payable on
December 16, 2004. Interest is payable monthly at variable rates which are
based, at the Company's option, on the Agents' base rate (9.5% at December 31,
2000) or the Eurodollar rate plus a premium that is based on the Company's
quarterly ratio of total debt to cash flow. The amended Credit Facility also
requires a commitment fee to be paid quarterly equal to 0.50% of the annualized
unused portion of the total commitment. The Company has used a portion of the
funds available under the amended Credit Facility to refinance previously
outstanding indebtedness, to fund acquisitions and for working capital purposes.
The Company intends to use the remaining availability for its acquisition
program and working capital.
In May 2000, the Company entered into three interest rate swaps transactions
with an effective date of October 5, 2000, variable maturity dates, and a
combined notional amount of $105 million. These interest rate swap transactions
involve the exchange of floating for fixed rate interest payments over the life
of the agreement without the exchange of the underlying principal amounts. The
differential to be paid or received is accrued and is recognized as an
adjustment to interest expense. These agreements are indexed to 30 day LIBOR.
The following table summarizes the terms of the swaps:
F-21
Notional Amount(in millions) Fixed Rate Term in Months Maturity
$45.0 7.604% 24 10/07/02
$30.0 7.612% 36 10/06/03
$30.0 7.626% 48 10/05/04
The amended Credit Facility contains covenants which, among other things,
require the Company to maintain certain financial operating ratios and impose
certain limitations or prohibitions on the Company with respect to the
incidence, guaranty or assumption of indebtedness, the payment of dividends,
cash distributions, new debt issuance, sale of assets, leasing commitments and
annual capital expenditures, and contains provisions which preclude mergers and
acquisitions under certain circumstances. All of the Company's assets are
pledged as collateral under the Credit Facility. The Company believes that it is
in compliance with all of the covenants at December 31, 2000.
On February 2, 1998, the Company entered into a revolving line of credit
agreement with Nations Bank providing available borrowings up to $5,000 that may
be used for general corporate purposes including working capital and the funding
of cash for acquisitions or affiliations with pathology practices. This
revolving line of credit was increased to $9,000 in September 2000. The balance
of this revolving line of credit was paid in full on December 1, 2000.
Note Payable to Bank
In October 1999, the Company assumed a long-term obligation pursuant to a
promissory note agreement with a bank in connection with the Columbus Pathology
Associates acquisition. The obligation is evidenced by an installment note
bearing interest at fixed rate of 9.75% and maturing in 2004. The note is
secured by certain assets of the acquired practice.
Letters of Credit
As of December 31, 2000, the Company had letters of credit outstanding totaling
$1,186. The letters of credit secure payments under certain operating leases and
expire at various dates in 2001 and 2002. Some of the letters of credit
automatically decline in value over various lease terms. The letters of credit
have annual fees averaging 1.7%.
14. Lease Commitments
The Company leases various office and laboratory space, and certain equipment
pursuant to operating lease agreements. The following information includes the
related party leases discussed in Note 19. Future minimum lease commitments
consisted of the following at December 31, 2000:
2001 $ 4,203
2002 3,915
2003 3,265
2004 2,121
2005 2,003
Thereafter 4,690
-------
$20,197
=======
In addition, certain owners of the Managed Practices are lessees of various
equipment, auto and facility operating leases that are used in the operations of
the business. Future payments under these leases are $4,412 of which the Company
is responsible for their corresponding share as defined in the management
service agreements. The Company's obligations, based upon their management fee
percentage, are $705. In the event of termination of a management service
agreement, any related lease obligations are also terminated or assumed by the
Managed Practice.
The Company has entered into certain noncancelable subleases that reduce its
total commitments under operating leases by $186.
Owned practices' rent expense under operating leases for the years ended
December 31, 1998, 1999 and 2000 was $1,687, $2,228 and $4,104 respectively.
F-22
15. Option Plan
The Company's 1996 Stock Option Plan (the "Option Plan") provides for the grant
of options to purchase shares of common stock to key employees and others. The
plan provides that the option price shall not be less than the fair market value
of the shares on the date of the grant. All options granted under the Option
Plan have 10 year terms and vest and become exercisable at the rate of 20% a
year, following the date of grant. As part of the Inform DX acquisition, the
Company assumed additional two option plans ("Additional Plans"). Options
granted under the Additional Plans have varying exercisable rates.
The Company's Director Option Plan provides for the grant of options to purchase
shares of common stock to Directors who are not employees of the Company. All
options granted under the Director Option Plan have 10 year terms and are
exercisable during the period specified in the agreement evidencing the grant of
such Director Option. At December 31, 2000, 35,000 options have been granted
under the Director Option Plan.
At December 31, 2000, 2,232,000 shares of common stock are reserved for issuance
pursuant to options granted under the Option Plan, the Director Option Plan and
the Additional Plans.
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and the related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Company's employee
stock options approximates the fair value of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using the Black-
Scholes Option Pricing Model with the following weighted-average assumptions for
1998, 1999 and 2000:
1998 1999 2000
----- ----- -----
Risk free interest rate
Dividend yield 6.5% 6.5% 6.5%
Volatility factors -- -- --
Weighted average life (years) 107.0% 120.0% 137.0%
4.1 4.1 4.2
Using the Black-Scholes Option Pricing Model, the estimated weighted-average
fair value per option granted in 1998, 1999 and 2000 were $10.65, $6.28 and
$6.92 respectively
The pro forma net income per common share assuming the amortization of the
estimated fair values over the option vesting period and diluted earnings per
common share, had the fair value method of accounting for stock options been
used, would have been as follows:
1998 1999 2000
------- ------- ------
Pro forma net income attributable to common shareholders $16,754 $19,612 $8,018
Pro forma diluted earnings per common share $ 0.78 $ 0.87 $ 0.33
The Black-Scholes Option Pricing Model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require highly subjective
assumptions including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different than those
of traded options, and because changes in the assumptions can materially affect
the fair value estimate, in management's opinion, the existing models may not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
F-23
A summary of the status of the option plans as of and for the changes during
each of the three years in the period ended December 31, 2000 is presented
below:
Option Price Per Share
Number ----------------------
of Shares Low High Weighted
---------- ------ --------- --------
Outstanding December 31, 1997 1,215,142 $ 1.11 $ 16.75 $ 5.78
Granted in 1998 254,050 14.06 14.06 14.06
Granted in 1998 2,000 16.13 16.13 16.13
Granted in 1998 1,000 11.38 11.38 11.38
Granted in 1998 8,971 3.74 3.74 3.74
Granted in 1998 1,461 6.22 6.22 6.22
Granted in 1998 4,017 11.20 11.20 11.20
Granted in 1998 201 18.67 18.67 18.67
Granted in 1998 12,974 40.46 40.46 40.46
Cancelled in 1998 (12,900) 8.33 16.75 11.45
Exercised in 1998 (27,560) 8.33 10.00 8.98
---------
Outstanding December 31, 1998 1,459,356 1.11 40.46 7.46
Granted in 1999 26,000 9.31 9.31 9.31
Granted in 1999 259,500 7.63 7.63 7.63
Granted in 1999 5,000 9.56 9.56 9.56
Granted in 1999 2,000 9.16 9.16 9.16
Granted in 1999 2,000 9.06 9.06 9.06
Granted in 1999 9,000 7.75 7.75 7.75
Granted in 1999 49,727 15.56 15.56 15.56
Granted in 1999 3,736 40.46 40.46 40.46
Cancelled in 1999 (41,800) 10.00 16.75 10.58
Exercised in 1999 (8,000) 1.11 1.11 1.11
---------
Outstanding December 31, 1999 1,766,519 1.11 40.46 7.76
Granted in 2000 50,000 8.13 8.13 8.13
Granted in 2000 356,000 7.63 7.63 7.63
Granted in 2000 17,000 16.88 16.88 16.88
Granted in 2000 73,703 41.58 41.58 41.58
Cancelled in 2000 (42,250) 7.63 14.06 9.64
Exercised in 2000 (260,521) 1.11 15.56 5.96
---------
Outstanding December 31, 2000 1,960,451 $ 1.11 $ 41.58 $ 9.30
=========
F-24
The following table summarizes the information about options outstanding at
December 31, 2000:
Options Outstanding Options Exercisable
----------------------------------------------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding (in years) Price Exercisable Price
----------------------------- ----------- ----------------- -------- ----------- --------
$ 1.11 123,600 3.6 $ 1.11 123,600 $ 1.11
$ 1.67 360,011 5.1 $ 1.67 288,009 $ 1.67
$ 3.74 11,702 7.1 $ 3.74 9,891 $ 3.74
$ 6.22 1,461 7.3 $ 6.22 1,461 $ 6.22
$ 7.63 583,500 8.9 $ 7.63 40,800 $ 7.63
$ 7.75 9,000 8.9 $ 7.75 1,800 $ 7.75
$ 8.13 50,000 9.0 $ 8.13 -- --
$ 8.33 111,720 5.5 $ 8.33 69,600 $ 8.33
$ 9.06 2,000 8.9 $ 9.06 400 $ 9.06
$ 9.31 26,000 8.2 $ 9.31 5,200 $ 9.31
$ 9.56 4,000 8.6 $ 9.56 -- --
$10.00 236,200 6.5 $10.00 128,800 $10.00
$11.20 4,017 7.4 $11.20 2,411 $11.20
$11.65 600 7.5 $11.65 -- --
$14.06 228,280 7.4 $14.06 91,000 $14.06
$15.56 49,246 8.9 $15.56 23,420 $15.56
$16.13 2,000 7.4 $16.13 800 $16.13
$16.63 6,000 6.9 $16.63 3,600 $16.63
$16.75 43,500 6.9 $16.63 26,100 $16.63
$16.88 17,000 9.8 $16.88 -- --
$18.68 201 7.5 $18.68 201 $18.68
$40.46 16,710 7.8 $40.46 11,658 $40.46
$41.58 73,703 8.5 $41.58 73,703 $41.58
--------- -------
$1.11 - $41.58 1,960,451 7.1 $ 9.30 902,454 $ 9.56
========= =======
As of December 31, 1998 and 1999 exercisable options were 499,845 and 860,366,
respectively.
Warrants to purchase 38,867 and 16,226 shares of common stock were outstanding
at December 31, 1999 and 2000, respectively, at exercise prices ranging from
$0.01 to $0.30 per share. These warrants were issued in conjunction with certain
indebtedness incurred by the Company. Holders of warrants do not have voting
rights or any other rights as a shareholder of the Company.
In connection with indebtedness issued by the Company in 1997 (the "Junior
Notes"), the Company issued warrants to purchase 16,066 shares of the Company's
common stock to the holders of the Junior Notes. For each $10 Junior Note, the
holder was issued a warrant to purchase 161 shares of common stock at $0.01 per
share (the "Junior Warrants"). The Junior Warrants expire on December 24, 2002.
A value of approximately $58 was allocated to these warrants which was included
in deferred financing costs and additional paid-in capital in the accompanying
consolidated financial statements.
F-25
16. Redeemable Preferred Stock
This footnote describes the transactions regarding Inform DX's Series A
Redeemable Preferred Stock (the "Preferred Stock"). All share amounts have been
converted using the conversion ratio for the pooling transaction.
In 1998, Inform DX issued 395,471 shares of Preferred Stock at $40.46 per share.
The Preferred Stock was convertible into common stock at the option of the
holder. The conversion rate for the Preferred Stock was one share of common
stock per share of Preferred Stock. The Preferred Stock was redeemable after May
20, 2003 at $40.46 per share. Net proceeds from the Preferred Stock sale were
approximately $15,298 and were used to repay long-term obligations of the Inform
DX and certain indebtedness assumed, including accrued interest. Proceeds
received in excess of retired indebtedness were used to provide general working
capital and funding for Company acquisitions.
Offering costs and expenses of approximately $702 were recorded against the
aggregate preference value of the Preferred Stock and were being accreted over
five years. Accretion for the period ended December 31, 2000 and 1999 was
approximately $65 and $131 respectively.
The Preferred Stock voted on an as converted basis with the holders of Inform
DX's common stock. The Preferred Stock contained a liquidation preference over
all other classes of Inform DX's capital stock. Furthermore, holders of the
Preferred Stock may have elected to treat certain transactions as liquidation
events. Subject to certain conditions, the Preferred Stock also contained anti-
dilution and preemptive rights. Each holder of shares of the Preferred Stock was
entitled to receive, when and as declared by the Board of Directors, if at all,
dividends on a parity with each holder of shares of common stock.
On June 30, 2000, Inform DX acquired Pathsource, Inc. in a stock for stock
transaction accounted for as a purchase business combination. In connection with
this acquisition, Inform DX provided for an induced conversion of the Preferred
Stock. The induced conversion resulted in the issuance of 642,640 shares of
common stock. Inform DX estimated, based on a third party valuation, the fair
market value of its common stock at June 30, 2000 to be $6.22 per share. Based
on this valuation, Inform DX recorded a charge for the induced conversion of
approximately $1,500, or $6.22 per share times the additional common shares
issued of 247,169.
17. Employee Benefit Plans
Effective July 1, 1997, the Company consolidated its previous 401(k) plans into
a new qualified 401(k) retirement plan (the "401(k) Plan") covering
substantially all eligible employees as defined in the 401(k) plan. The new 401
(k) Plan requires employer matching contributions equal to 50% (25% prior to
July 1, 2000) of the employees' contributions up to a maximum of one thousand
dollars per employee. The Company expensed matching contributions aggregating
$379, $451 and $648 to the new plan in 1998, 1999 and 2000, respectively. Also,
in connection with acquisitions, the Company assumes the obligations under
certain defined contribution plans which cover substantially all eligible
employees of the acquired practices. The Company has not made any contributions
from the dates of acquisition through December 31, 2000.
During 1999, the Company introduced a Supplemental Employee Retirement Plan
("SERP") which covers only selected employees. The SERP is a non-qualified
deferred compensation plan which was established to aid in the retention of the
non-selling physicians and other key employees. In 1999, the eligible
participants were allowed to defer up to ten thousand dollars of compensation
and/or eligible bonuses. If the subscription to the plan fell below an
established deferral range, the participating individuals were allowed to defer
additional funds. The Company may also make discretionary contributions to the
SERP. Employee and employer contributions to the SERP for the years ended
December 31, 1999 and 2000, were $428 and $20, and $484 and $76, respectively.
The Company also sponsors certain defined contribution plans for substantially
all employees of the former Inform DX who are at least 21 years old, have been
employed by the Company for at least one year and have completed 1,000 hours of
service. These plans include a 401(k)/profit sharing plan and a money purchase
pension plan. Under the 401(k)/profit sharing plan, employees may contribute up
to 15% of their qualifying salary on a pre-tax basis, subject to Federal income
tax limitations. In 1998, the Company matched 100% of the employee contributions
up to 3% of employee contributions. In addition, the Company contributed 0.5% of
qualifying compensation as a profit sharing distribution and 3% of qualifying
compensation to the money purchase pension plan.
F-26
In 1999, the Company matched 100% of the first 3% of employee contributions and
50% of employee contributions between 3% and 5%. The amount expensed under all
plans for Company contributions was approximately $536 and $765 in 1999 and
2000, respectively.
18. Commitments and Contingencies
During the ordinary course of business, the Company has become and may in
the future become subject to pending and threatened legal actions and
proceedings. The Company may have liability with respect to its employees and
its pathologists as well as with respect to hospital employees who are under the
supervision of the hospital based pathologists. The majority of the pending
legal proceedings involve claims of medical malpractice. Most of these relate to
cytology services. These claims are generally covered by insurance. Based upon
investigations conducted to date, the Company believes the outcome of such
pending legal actions and proceedings, individually or in the aggregate, will
not have a material adverse effect on the Company's financial condition, results
of operations or liquidity. If the Company is ultimately found liable under
these medical malpractice claims, there can be no assurance that the Company's
medical malpractice insurance coverage will be adequate to cover any such
liability. The Company may also, from time to time, be involved with legal
actions related to the acquisition of and affiliation with physician practices,
the prior conduct of such practices, or the employment (and restriction on
competition of) physicians. There can be no assurance any costs or liabilities
for which the Company becomes responsible in connection with such claims or
actions will not be material or will not exceed the limitations of any
applicable indemnification provisions or the financial resources of the
indemnifying parties.
Liability Insurance -- The Company is insured with respect to general liability
on an occurrence basis and medical malpractice risks on a claims made basis. The
Company records an estimate of its liabilities for claims incurred but not
reported. Such liabilities are not discounted. Effective July 1, 1999, the
Company changed its medical malpractice carrier and the Company is currently in
a dispute with its former insurance carrier on an issue related to the
applicability of surplus insurance coverage. The Company believes that an
unfavorable resolution, if any, of such dispute will not have a material adverse
effect on the Company's financial position or results of operations.
Healthcare Regulatory Environment and Reliance on Government Programs -- The
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 results of increased
regulatory audits and adjustments, or changes in the interpretation of the
coding of services or the amounts payable for the Company's services under these
programs could have a material adverse effect on the Company's financial
position and results of operations.
Internal Revenue Service Examination -- The Internal Revenue Service (the "IRS")
conducted an examination of the Company's federal income tax returns for the tax
years ended December 31, 1996 and 1997 and concluded during 2000 that no changes
to the tax reported needed to be made. Although the Company believes it is in
compliance with all applicable IRS rules and regulations, if the IRS should
determine the Company is not in compliance in any other years, it could have a
material adverse effect on the Company's financial position and results of
operations.
Employment Agreements -- The Company has entered into employment agreements with
certain of its management employees, which include, among other terms,
noncompetitive provisions and salary benefits continuation.
19. Related Party Transactions
Operating Leases -- The Company leases laboratory and administrative facilities
used in the operations of eight practices from entities beneficially owned by
some of the Company's common stockholders. The terms of the leases expire from
2000 to 2003 and some contain options to renew for additional periods. Lease
payments made under leases with related parties were $478, $644 and $1,140 in
1998, 1999 and 2000, respectively.
20. Income Taxes
The provision for income taxes for the years ended December 31, 1998, 1999 and
2000 consists of the following:
F-27
Year ended December 31,
------------------------------
1998 1999 2000
-------- -------- --------
Current:
Federal $ 15,177 $ 17,465 $ 20,958
State 2,371 2,015 2,227
-------- -------- --------
Total current provision 17,548 19,480 23,185
-------- -------- --------
Deferred:
Federal (3,234) (1,799) (8,242)
State (373) (207) (875)
-------- -------- --------
Total deferred benefit (3,607) (2,006) (9,117)
-------- -------- --------
Total provision for income taxes $ 13,941 $ 17,474 $ 14,068
======== ======== ========
The effective tax rate on income before income taxes is reconciled to the
statutory federal income tax rate as follows:
Year ended December 31,
------------------------------
1998 1999 2000
-------- -------- -------
Statutory federal rate 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit 4.0 4.0 3.7
Non-deductible items, primarily amortization
of goodwill 2.8 3.3 8.6
Non-deductible items, merger-related charges 0.0 0.0 4.8
Other 1.5 1.2 (0.3)
-------- -------- -------
43.3% 43.5% 51.8%
======== ======== =======
The following is a summary of the deferred income tax assets and liabilities as
of December 31, 1999 and 2000:
December 31,
-------------------
1999 2000
-------- --------
Deferred tax assets (short term):
Allowance for doubtful accounts $ 6,093 $ 8,479
Accrued liabilities 884 1,499
-------- --------
Deferred tax assets (short term) 6,977 9,978
-------- --------
Deferred tax liabilities (short term):
481 (a) adjustment (1,571) (1,385)
Other (1) --
-------- --------
Deferred tax liabilities (short term) (1,572) (1,385)
-------- --------
Net short term deferred tax assets 5,405 8,593
-------- --------
Deferred tax assets (long-term):
Net operating loss 5,105 6,955
Other -- 1,255
-------- --------
Deferred tax assets (long-term) 5,105 8,210
Less: valuation allowance (3,004) (3,548)
-------- --------
Net deferred tax assets (long-term) 2,101 4,662
-------- --------
Deferred tax liabilities (long-term):
Change from cash to accrual basis of accounting
by the acquisitions (1,355) (1,178)
Intangible assets acquired (62,837) (67,059)
Property and equipment (430) (471)
-------- --------
Deferred tax liabilities (long-term) (64,622) (68,708)
-------- --------
Net long-term deferred tax liability (62,521) (64,046)
-------- --------
Net deferred tax assets / (liabilities) $(57,116) $(55,453)
======== ========
F-28
21. Earnings Per Share
Earnings per share are computed and presented in accordance with SFAS No. 128,
Earnings Per Share. Basic earnings per share excludes dilution and is computed
by dividing income or loss attributable to common stockholders by the weighted-
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. The effects of Redeemable Preferred Stock are calculated using the as if
converted method and the effects of stock options are calculated using the
treasury stock method.
Years ended December 31,
--------------------------------------
1998 1999 2000
------- ------- --------
Earnings Per Common Share:
Net income attributable to common shareholders $18,168 $22,580 $11,488
------- ------- --------
Basic earnings per common share $ 0.87 $ 1.03 $ 0.49
------- ------- --------
Diluted earnings per common share $ 0.84 $ 1.00 $ 0.47
------- ------- --------
Basic weighted average shares outstanding 20,911 21,984 23,473
Effect of dilutive stock options and contingent shares 699 532 764
------- ------- --------
Diluted weighted average shares outstanding 21,610 22,516 24,237
======= ======= ========
Options to purchase 333,405 shares,774,590 shares and 453,818 shares of common
stock which were outstanding at December 31, 1998, 1999 and 2000, respectively,
have been excluded from the calculation of diluted earnings per share for the
respective years because their effect would be anti-dilutive. In addition,
395,471 shares of Preferred Stock were excluded from the calculation of diluted
earnings per share for the years ended December 31, 1998 and 1999 because their
effect would be anti-dilutive. Warrants to purchase shares of 41,116 and 38,867
for the years December 31, 1998 and 1999, respectively, were excluded from the
calculation of diluted earnings per share because their effect would be anti-
dilutive.
22. Supplemental Cash Flow Information
The following supplemental information presents the non-cash impact on the
balance sheet of assets acquired and liabilities assumed in connection with
acquisitions consummated during the years ended December 31, 1998, 1999 and
2000:
Years Ended December 31,
------------------------------
1998 1999 2000
-------- -------- --------
Assets acquired $ 98,263 $ 74,745 $ 64,633
Liabilities assumed (24,543) (19,850) (19,996)
Common stock issued (16,226) (3,149) (12,180)
-------- -------- --------
Cash paid for acquisitions 57,494 51,746 32,457
Less cash acquired (789) (1,541) (6,955)
-------- -------- --------
Net cash paid for acquisitions 56,705 50,205 25,502
Costs related to completed and pending acquisitions 3,767 1,438 (573)
-------- -------- --------
Cash paid for acquisitions and acquisition costs, net of cash acquired $ 60,472 $ 51,643 $ 24,929
======== ======== ========
23. Preferred Share Purchase Rights Plan
On April 8, 1999, the Board of Directors of the Company adopted a Preferred
Share Purchase Rights Plan (the "Rights Plan") and, in connection therewith,
declared a dividend distribution of one preferred share purchase right ("Right")
on each outstanding share of the Company's common stock to shareholders of
record at the close of business on April 19, 1999. The
F-29
Rights will expire on April 8, 2009. The adoption of the Rights Plan and the
distribution of the Rights is not dilutive, does not affect reported earnings
per share, and is not taxable to shareholders.
Subject to the terms of the Rights Plan, each Right entitles the registered
holder to purchase from the Company one one-thousandth of a share of the
Company's Series A Junior Participating Preferred Stock (the "Preferred
Shares"). Each Right has an initial exercise price of $45.00 for one one-
thousandth of a Preferred Share (subject to adjustment). The Rights will be
exercisable only if a person or group acquires 15% or more of the Company's
common stock or announces a tender or exchange offer the consummation of which
would result in ownership by a person or group of 15% or more of the common
stock. Upon any such occurrence, each Right will entitle its holder (other than
such person or group of affiliated or associated persons) to purchase, at the
Right's then current exercise price, a number of the Company's common shares
having a market value of twice such price.
24. Segment Reporting
The Company has two reportable segments, Owned and Managed practices. The
segments were determined based on the type of service and customer. Owned
practices provide anatomic pathology services to hospitals and referring
physicians, while under the management relationships, the Company provides
management services to the affiliated physician groups. The accounting policies
of the segments are the same as those described in the summary of accounting
policies. The Company evaluates performance based on revenue and income before
amortization of intangible, merger-related charges, asset impairment and related
charges, interest expense, other income and expense and income taxes ("Operating
Income"). In addition to the business segments above the Company evaluates
certain corporate expenses which are not allocated to the business segments.
The following is a summary of the financial information for the business
segments and corporate.
Owned 1998 1999 2000
- ----- ---- ---- ----
Net patient service revenue $177,304 $233,269 $308,365
Operating income 60,282 73,676 94,346
Segment assets 108,941 139,791 250,814
Managed
- -------
Net management service revenue $16,012 $24,163 $21,729
Operating income (loss) 2,731 4,299 (304)
Segment assets 14,622 15,533 18,723
Corporate
- ---------
Operating (expense) $(12,804) $(15,676) $(19,789)
Segment assets 292,763 351,138 330,143
Elimination of Intercompany Accounts (25,913) (27,566) (37,514)
25. Subsequent Events
Contingent Note Payments -- Subsequent to December 31, 2000, the Company paid
approximately $17,590 on contingent notes issued in connection with
acquisitions.
26. Quarterly Results of Operations (unaudited)
The following table presents certain unaudited quarterly financial data for each
of the quarters in the years ended December 31, 1999 and 2000. This information
has been prepared on the same basis as the Consolidated Financial Statements and
includes, in the opinion of the Company, all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the quarterly results
when read in conjunction with the Consolidated Financial Statements and related
Notes thereto. The operating results for any quarter are not necessarily
indicative of results for any future period or for the full year. Adjustments
have been made to the quarterly financial statements to reflect the acquisition
of Inform DX, which was accounted for as a pooling of interest, as more further
described in Note 3, Mergers and Acquisitions. These adjustments are reflected
in all line items below and for all quarters presented except the fourth quarter
of 2000.
F-30
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
1999 Calendar Quarters 2000 Calendar Quarters
------------------------ ------------------------
First Second Third Fourth First Second Third Fourth
-------- ----------- ----------- -------- -------- ----------- ----------- --------
Net patient service revenue $52,336 $55,406 $59,866 $65,661 $68,888 $74,372 $79,650 $85,455
Management service revenue 5,581 6,053 6,209 6,320 6,155 6,562 6,871 2,141
------- ------- ------- ------- ------- ------- ------- -------
Net revenue 57,917 61,459 66,075 71,981 75,043 80,934 86,521 87,596
------- ------- ------- ------- ------- ------- ------- -------
Operating costs and expenses:
Cost of services 26,950 28,377 31,638 35,720 36,950 38,826 42,415 45,199
Selling, general and
administrative expense 11,140 11,295 12,190 12,534 13,141 14,285 15,234 15,751
Provision for doubtful accounts 5,963 6,578 6,005 6,743 7,103 8,349 8,868 9,720
Amortization expense 2,757 2,947 3,420 3,703 3,837 3,897 4,043 4,395
Merger-related charges (1) -- -- -- -- -- -- -- 6,209
Asset impairment and
related charges (2) -- -- -- -- -- 5,245 -- 4,317
------- ------- ------- ------- ------- ------- ------- -------
Total 46,810 49,197 53,253 58,700 61,031 70,602 70,560 85,591
------- ------- ------- ------- ------- ------- ------- -------
Income from operations 11,107 12,262 12,822 13,281 14,012 10,332 15,961 2,005
Interest expense (1,973) (2,175) (2,580) (2,845) (3,418) (3,558) (3,657) (4,743)
Other income (expense), net 55 47 95 89 63 50 91 22
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes 9,189 10,134 10,337 10,525 10,657 6,824 12,395 (2,716)
Provision for income taxes 4,057 4,394 4,540 4,483 4,559 3,852 5,159 498
------- ------- ------- ------- ------- ------- ------- -------
Net income 5,132 5,740 5,797 6,042 6,098 2,972 7,236 (3,214)
Induced conversion and accretion
of redeemable preferred stock (33) (33) (33) (32) (34) (1,570) -- --
------- ------- ------- ------- ------- ------- ------- -------
Net income attributable to common
stockholders $ 5,099 $ 5,707 $ 5,764 $ 6,010 $ 6,064 $ 1,402 $ 7,236 $(3,214)
======= ======= ======= ======= ======= ======= ======= =======
Per share data:
Basic earnings per common share $.23 $.26 $.26 $.27 $. 27 $.06 $.30 $(.13)
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings per common share $.23 $.26 $.25 $.26 $. 27 $.06 $.29 $(.13)
======= ======= ======= ======= ======= ======= ======= =======
(1) In connection with the Inform DX merger, the Company recorded $6,209 of
costs as they related to transaction fees, change in control payments and
various exit costs associated with the consolidation of certain operations.
(2) In connection with the loss of two hospital contracts and an ambulatory
care facility contract in Cleveland, Ohio, the Company recorded a non-
recurring charge of $5,245 in the second quarter of 2000. In connection
with Quest Diagnostics termination of its contract in South Florida and the
loss of a renewable contract with a hospital in South Florida, the Company
recorded a non-recurring charge of $4,317 in the fourth quarter of 2000.
The charge was based upon the remaining projected cash flows from these
contracts in which the Company determined that the intangible assets that
were recorded from acquisitions in these areas had been impaired.
Certain reclassifications have been made to the quarterly consolidated
statements of operations to conform to the annual presentations.
F-31
Exhibit Index
Ex # Exhibit Description
2.2 Agreement and Plan of Merger by and among Ameripath, Inc. AMP Merger
Corp., and Pathology Consultants of America, Inc. (D/B/A Inform DX),
dated as of November 7, 2000
10.45 Amendment No. 2, dated November 29, 2000, to the Amended and Restated
Credit Agreement dated as of December 16, 1999, among AmeriPath, Inc.,
certain of its subsidiaries, Fleet National Bank (formerly BankBoston
N.A.) and certain other lenders
10.46 Registration Rights Agreement, dated November 30, 2000, among the
Company and PCA's Shareholders and Warrant Holders
21.1 Subsidiaries of AmeriPath
23.1 Independent Auditors' Consent of Deloitte & Touche LLP
23.2 Independent Auditors' Consent of Ernst & Young LLP