<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 30, 1997
REGISTRATION NO. 333-17065
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
AMERIPATH, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8099 65-0642485
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
---------------------
7289 GARDEN ROAD, SUITE 200
RIVIERA BEACH, FLORIDA 33404
(561) 845-1850
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
---------------------
JAMES C. NEW
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AMERIPATH, INC.
7289 GARDEN ROAD, SUITE 200
RIVIERA BEACH, FLORIDA 33404
(561) 845-1850
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<C> <C>
DANIEL H. ARONSON, ESQ. JOHN J. HUBER, ESQ.
GREENBERG, TRAURIG, HOFFMAN, LATHAM & WATKINS
LIPOFF, ROSEN & QUENTEL, P.A. 1001 PENNSYLVANIA AVENUE
515 E. LAS OLAS BOULEVARD, SUITE 1500 SUITE 1300
FORT LAUDERDALE, FLORIDA 33301 WASHINGTON, DC 20004
(954) 765-0500 (202) 637-2200
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ] ______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
Dated January 30, 1997
6,200,000 SHARES
AMERIPATH (LOGO)
COMMON STOCK
---------------------
Of the 6,200,000 shares of Common Stock offered hereby (the "Shares"), 5,700,000
shares are being offered by AmeriPath, Inc. (the "Company") and 500,000 shares
are being offered by certain stockholders of the Company (the "Selling
Stockholders"). See "Principal and Selling Stockholders." The net proceeds
received by the Company will be used to repay indebtedness, including
amounts due to Selling Stockholders. The Company will not receive any
proceeds from shares sold by Selling Stockholders. See "Use of
Proceeds." Prior to this offering, there has been no public market
for the Common Stock. It is currently anticipated that the
initial public offering price will be between $13.00 and
$15.00 per share. See "Underwriting." The Shares have
been approved for quotation on the Nasdaq National
Market under the symbol "PATH" subject to
official notice of issuance.
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN INFORMATION
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(3)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE $ $ $ $
TOTAL(3) $ $ $ $
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company, the Selling Stockholders and certain other stockholders have
agreed to indemnify the several Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $2,500,000.
(3) The Company, the Selling Stockholders and certain other stockholders have
granted the several Underwriters 30-day options to purchase up to an
additional 130,000 shares, 450,000 shares and 350,000 shares, respectively,
of Common Stock to cover over-allotments, if any. If all such shares are
purchased, the total price to public, underwriting discounts and
commissions, proceeds to Company and proceeds to Selling Stockholders, which
will include proceeds to such other stockholders, will be $ ,
$ , $ and $ , respectively. See "Underwriting."
---------------------
The Shares are offered by the several Underwriters named herein when, as
and if received and accepted by them, subject to their right to reject any order
in whole or in part and subject to certain other conditions. It is expected that
delivery of the Shares will be made in New York, New York, on or about
, 1997.
---------------------
DEAN WITTER REYNOLDS INC.
HAMBRECHT & QUIST
PIPER JAFFRAY INC.
THE ROBINSON-HUMPHREY
COMPANY, INC.
, 1997
<PAGE> 3
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
---------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 8
The Company............................ 15
Use of Proceeds........................ 18
Dividend Policy........................ 18
Dilution............................... 19
Capitalization......................... 20
Selected Consolidated Financial Data... 21
Unaudited Pro Forma Consolidated
Financial Data....................... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 30
<CAPTION>
PAGE
-----
<S> <C>
Business............................... 41
Management............................. 54
Certain Transactions................... 60
Principal and Selling Stockholders..... 62
Description of Capital Stock........... 63
Shares Eligible for Future Sale........ 65
Underwriting........................... 67
Legal Matters.......................... 68
Experts................................ 68
Additional Information................. 69
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
---------------------
UNTIL , 1997 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
---------------------
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by its independent public
accountants and with quarterly reports for each of the first three quarters of
each fiscal year containing unaudited consolidated financial information.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the Consolidated Financial Statements and related notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated, the
information in this Prospectus assumes no exercise of the Underwriters' over-
allotment option. AmeriPath, Inc. ("AmPath") is structured and operates as a
holding company, with AmPath as the parent of five wholly-owned subsidiaries,
one of which is located in each state in which the Company operates. Three
wholly-owned subsidiaries (the "Direct Subsidiaries") own and operate nine
practices in Florida, Kentucky and Alabama, which subsidiaries directly own the
laboratory facilities, testing equipment and other assets, and which
subsidiaries directly employ 73 pathologists as well as technical and other
personnel, utilized in such practices. Two wholly-owned subsidiaries (the "PA
Contractor Subsidiaries" and, together with the Direct Subsidiaries, the
"Subsidiaries") are parties to long-term management agreements with three
separately organized professional associations or corporations (collectively,
the "PA Contractors") in Ohio and Texas. The PA Contractors directly employ
eight pathologists and directly contract with the Practice's payors and
providers, while the PA Contractor Subsidiaries directly employ all technical
and non-medical personnel, utilized in such practices. Unless the context
otherwise requires, references to: (a) the Company or AmeriPath include
AmeriPath, Inc., its predecessor and the Subsidiaries; (b) Affiliated Physicians
mean physicians employed by the Direct Subsidiaries or the PA Contractors; and
(c) the Practices mean the 12 physician practices, nine of which are owned and
operated by the Direct Subsidiaries and three of which are managed by the
Company, with medical services provided by the Affiliated Physicians employed by
the PA Contractors.
AmeriPath believes it is the leading physician practice management company
focused on anatomic pathology services, based on an analysis of geographic
breadth, number of physicians, number of hospital contracts, number of practices
and net revenue. The Company owns or is affiliated with 12 Practices located in
five states which, as of December 31, 1996, employed a total of 81 pathologists.
The pathologists provide medical services in 12 outpatient pathology
laboratories owned and operated by the Company, 46 hospital inpatient
laboratories and 17 outpatient surgery centers. Of these pathologists, 77 are
board certified and three are board eligible in anatomic pathology. Thirty-nine
of the pathologists are also board certified in a subspecialty of anatomic
pathology, including dermatopathology (diseases of the skin), hematopathology
(diseases of the blood) and cytopathology (diseases of the cells).
The Company manages and controls all of the non-medical functions of the
Practices, including: (i) recruiting, training, employing and managing the
technical and support staff of the Practices; (ii) developing, equipping and
staffing laboratory facilities; (iii) establishing and maintaining courier
services to transport specimens; (iv) negotiating and maintaining contracts with
hospitals, national clinical laboratories and managed care organizations and
other payors; (v) providing financial reporting and administration, clerical,
purchasing, payroll, billing and collection, information systems, sales and
marketing, risk management, employee benefits, legal, tax and accounting
services to the Practices; (vi) complying with applicable laws and regulations;
and (vii) with respect to the Company's ownership and operation of anatomic
pathology laboratories, providing slide preparation and other technical
services. The Company is not licensed to practice medicine. The practice of
medicine is conducted solely by Affiliated Physicians employed by either the
Direct Subsidiaries or the PA Contractors.
The practice of pathology includes anatomic pathology, which involves the
diagnosis of diseases through examination of tissues and cells, and clinical
pathology, which involves the chemical testing and analysis of body fluids, such
as blood and urine. Clinical pathology involves an interpretation of
standardized laboratory test results, a process which is frequently automated,
while anatomic pathology typically requires the involvement of a pathologist in
making a specific diagnosis. Anatomic pathologists do not treat patients but
rather assist physicians by establishing a definitive diagnosis. In addition,
anatomic pathologists may consult with attending physicians regarding treatment
plans. In these capacities, the anatomic pathologist serves as the "physician's
physician," creating what is often a long-term relationship. Based on
information published by the American Medical Association, there are 14,000
practicing pathologists in the United States. According to the American Society
of Dermatopathology, in 1994, approximately 900 practicing pathologists
specialized in dermatopathology. The Company expects the provision of anatomic
pathology services to continue to grow primarily due to the aging of the United
States population, increased incidence of cancer and medical advancements that
allow for earlier diagnosis and treatment of diseases.
During 1996, the Company acquired or affiliated with 11 anatomic pathology
Practices (the "Recent Acquisitions") in five states: six practices in Florida,
two practices in Ohio and one practice in each of Alabama, Kentucky and Texas.
The Company provides physician practice management services and the Affiliated
Physicians provide medical services in the Company's outpatient laboratories and
in inpatient
3
<PAGE> 5
laboratories owned by hospitals. Eight Practices owned by the Direct
Subsidiaries have exclusive contracts with a total of 46 hospitals to manage
their inpatient laboratories and provide professional pathology services. Four
of these eight Practices also have established outpatient laboratories that
focus on outpatient referral sources. Generally under a hospital contract, the
Practice provides the medical director for the hospital's laboratory who is
responsible for the laboratory's anatomic and clinical pathology operations.
Through their relationships with the medical staff of the hospitals and the
local medical community, inpatient based Practices also provide anatomic
pathology services to office based physicians, thereby capitalizing on the trend
towards more procedures being performed in an outpatient setting. The four other
Practices (three of which are PA Contractors) operate exclusively in outpatient
laboratories and provide services to attending physicians, national clinical
laboratories and managed care organizations. The outpatient pathology services
provided by the Practices are focused primarily on dermatopathology, which
relates to the examination of skin biopsies.
The Company's objective is to enhance its position as the leading provider
of physician practice management services to anatomic pathology practices
through the following strategies:
- Focus on Anatomic Pathology. The Company believes that its focus on
providing management services to anatomic pathology practices provides it
with a competitive advantage in the acquisition of such practices. As a
result of this focus, Affiliated Physicians are able to form an internal
network for consultations and to offer specialized services to their
clients. The Company believes that this focus allows it to develop
expertise in managing both inpatient and outpatient pathology practices.
- Acquire Leading Practices. The Company expects to increase its presence
in existing markets and enter into new markets through acquisitions of
and affiliations with leading practices. The Company intends to continue
to source acquisitions and affiliations by capitalizing on the
professional reputations of the Practices and the Affiliated Physicians,
the Company's management experience and the benefits of being part of a
public company, including increased resources and improved access to
capital.
- Expand Sales and Marketing Efforts. The Company focuses on generating
internal growth for the Practices by augmenting their existing physician
and contractual relationships with a professional sales and marketing
program. Since specimens can be transported, the Company's sales and
marketing efforts focus on expanding the geographic scope of the
Practices. The Company is seeking to extend existing contracts with
national clinical laboratories that subcontract for anatomic pathology
services to include multiple Practices that cover a broad geographic
area. The Company believes that its regional business model can offer
national clinical laboratories and managed care organizations a
convenient single source for anatomic pathology services.
- Increase Contracts with Hospitals. The Company seeks to gain additional
exclusive hospital contracts for the Practices through the acquisition of
or affiliation with anatomic pathology practices, as well as through
expansion of the Company's existing relationships with multi-hospital
systems. The Company believes that multi-hospital systems will benefit
from contracting with a single provider of pathology services in a
geographic region. The Company's management of inpatient laboratories can
also facilitate the growth of the Practices' outpatient services in the
same region.
- Achieve Operational Efficiencies. The Company intends to achieve
operational efficiencies by centralizing certain functions, enhancing
Practice efficiency and utilizing its size to negotiate discounts on
equipment, supplies and services. The Company intends to centralize
financial reporting, payroll and benefits administration and regulatory
compliance. The Company plans to introduce "bench-marking" programs to
enhance the efficiency of the Practices.
Through the implementation of these strategies, the Company intends to
develop integrated networks of anatomic pathology practices on a regional basis.
The Company is currently developing a regional business model in Florida, where
it owns and manages seven anatomic pathology practices that extend from Miami to
Orlando and from Fort Myers to Tampa. Together, these Practices employ 62
Affiliated Physicians, have contracts with 29 hospitals and 17 outpatient
surgery centers and operate six outpatient laboratories. The Company has
centralized its marketing efforts to managed care organizations, multi-hospital
systems and national clinical laboratories. The Company intends to leverage size
and geographic coverage to expand contracts with national clinical laboratories
and managed care organizations from a local to a regional basis. The Company's
contract with a national clinical laboratory for the exclusive provision of
anatomic pathology services in five Florida counties was expanded in November
1996 to include 59 of Florida's 67 counties. During 1997, the Company plans to
install a management information system that is designed to expand and enhance
the financial reporting capabilities of the Practices.
4
<PAGE> 6
In February 1994, the Company's predecessor consummated a recapitalization
(the "Recapitalization") in order to capitalize the Company and diversify its
stockholder base. In February 1996, AmPath was formed as a holding company in a
share exchange. The Recapitalization is further described in this Summary in
Footnote 1 to Summary Consolidated Financial Information as well as in "The
Company," "Certain Transactions -- Recapitalization" and Note 1 to Consolidated
Financial Statements.
THE OFFERING
Common Stock Offered by the
Company............................. 5,700,000 shares
Common Stock Offered by the Selling
Stockholders...................... 500,000 shares(1)
Common Stock Outstanding After the
Offering............................ 17,051,356 shares(1)
Use of Proceeds by the Company...... Net proceeds of $71.7 million to the
Company will be used: (i) to repay the
outstanding principal amount of and
accrued interest on the Company's 10%
junior subordinated notes due December
31, 2001 (the "Junior Notes"); (ii) to
repay the outstanding principal amount
of and accrued interest on the
Company's 8% senior subordinated notes
due December 31, 1998 (the "Senior
Notes"); (iii) to pay accrued and
unpaid dividends on the Convertible
Preferred Stock; and (iv) the balance
to repay a portion of the outstanding
indebtedness under the Company's
revolving credit facility (the "Credit
Facility"). See "Use of Proceeds."
Nasdaq National Market Symbol....... "PATH"
- ---------------
(1) The number of shares outstanding after the offering and the information set
forth in this Prospectus, unless otherwise indicated: (i) reflects a 40 for
one stock split effected as of August 1, 1994 and a 1.8 for one stock split
effected as of January 13, 1997, each by means of a stock dividend; (ii)
assumes the conversion of the Company's Series A 6% redeemable cumulative
convertible preferred stock (the "Convertible Preferred Stock") into shares
of Common Stock immediately prior to the consummation of this offering;
(iii) includes 1,833,433 shares of Common Stock (the "Restricted Stock")
issued during November 1996 pursuant to the Stock Rights Surrender &
Restricted Stock Grant Agreements (collectively, the "Restricted Stock
Agreements") which resulted in the surrender of contingent rights to receive
Common Stock (the "Contingent Shares") that had been granted to the sellers
of nine Practices in connection with the Recent Acquisitions (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Acquisitions"); (iv) excludes 1,620,000 shares of
Common Stock reserved for issuance under the Company's Amended and Restated
1996 Stock Option Plan (the "Option Plan"), of which options to purchase
972,011 shares of Common Stock have been granted and options to purchase
97,200 shares of Common Stock were exercisable at December 31, 1996 (See
"Management -- Option Plan"); and (v) excludes 180,000 shares of Common
Stock reserved for issuance under the Company's 1996 Director Stock Option
Plan (the "Director Option Plan"), of which no options have been granted.
See "Management -- Director Option Plan."
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ ----------------------------------
1995 1996
------------------------ ------------------------
PRO FORMA PRO FORMA
1992 1993 1994(1) ACTUAL AS ADJUSTED(2) 1995 ACTUAL AS ADJUSTED(2)
------- ------- ------- ------- -------------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total net revenue......... $11,443 $13,419 $14,461 $16,024 $83,188 $12,176 $20,840 $63,997
Operating costs:
Cost of services........ 8,791 10,803 6,780 8,271 38,519 6,147 10,234 29,508
Selling, general and
administrative
expense............... 1,696 1,634 2,287 2,644 12,884 1,931 4,026 10,782
Provision for doubtful
accounts.............. 787 953 1,003 1,161 7,702 910 1,655 5,804
Amortization expense.... -- -- -- -- 4,536 -- 357 3,386
------- ------- ------- ------- ------- ------- ------- -------
Total operating
costs.......... 11,274 13,390 10,070 12,076 63,641 8,988 16,272 49,480
------- ------- ------- ------- ------- ------- ------- -------
Income from operations.... 169 29 4,391 3,948 19,547 3,188 4,568 14,517
Interest expense.......... (62) (48) (1,584) (1,504) (2,664) (1,151) (1,637) (1,757)
Other income (expense),
net..................... 10 9 (46) (46) 42 (13) (143) (44)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes............ 117 (10) 2,761 2,398 16,925 2,024 2,788 12,716
Provision for income
taxes(3)................ -- -- 696 900 7,122 759 1,075 5,331
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)......... $ 117 $ (10) $ 2,065 $ 1,498 $ 9,803 $ 1,265 $ 1,713 $ 7,385
======= ======= ======= ======= ======= ======= ======= =======
Supplemental pro forma
data:(4)
Pro forma net income per
share................. $ .19 $ .55 $ .16 $ .20 $ .42
======= ======= ======= ======= =======
Pro forma weighted
average shares
outstanding........... 8,085 17,742 8,085 8,555 17,742
======= ======= ======= ======= =======
OPERATING DATA(5):
Pathologists.............. 5 5 6 6 75 6 55 80
Hospital contracts........ -- -- -- -- 43 -- 34 46
Outpatient laboratories... 1 1 1 1 12 1 9 12
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------
PRO PRO FORMA
ACTUAL FORMA(6) AS ADJUSTED(7)
-------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................................................... $ 193 $ 4,008 $ 4,008
Total assets...................................................................... 50,793 144,047 144,047
Long term debt, including current portion......................................... 44,684 96,031 25,242
Convertible Preferred Stock(8).................................................... 6,123 6,123 --
Stockholders' equity (deficit)(1)................................................. (9,416) 14,549 91,461
</TABLE>
6
<PAGE> 8
(1) In connection with the Recapitalization consummated on February 14, 1994,
the Company's predecessor, American Laboratory Associates, Inc. ("ALA"):
(i) acquired the assets of E.G. Poulos, M.D., M.J. Demaray, M.D. and A.P.
Kowalczyk, M.D., P.A. ("PDK") from Drs. Poulos, Demaray and Kowalczyk in
exchange for an aggregate of: (a) $3.5 million of Senior Notes; (b) $2.5
million principal amount of 8% non-negotiable subordinated contingent notes
(the "ALA Contingent Notes"); and (c) $20.5 million in cash, financed
partially by borrowings under the Company's line of credit with The First
National Bank of Boston; (ii) issued to Summit Ventures III, L.P., Summit
Subordinated Debt Fund, L.P. and Summit Investors II, L.P. (collectively,
"Summit") and Schroder Incorporated, Schroder Ventures Limited Partnership
and Schroder Ventures U.S. Trust (collectively, "Schroder") an aggregate of
(a) 3,208,120 shares of Convertible Preferred Stock for $5.5 million and
(b) $7.5 million of Junior Notes; and (iii) issued an aggregate of
1,425,600 shares of ALA common stock to Drs. Poulos, Demaray and Kowalczyk
for an aggregate of $1.0 million. The Company recorded a charge of
approximately $24.0 million to retained earnings as a distribution to the
holders of Common Stock. Cost of services includes $3.1 million and $4.4
million in 1992 and 1993, respectively, representing compensation paid to
stockholders in excess of the compensation of such stockholders following
the Recapitalization. Net income for the years ended December 31, 1994 and
1995 and the nine months ended September 30, 1995 and 1996 does not reflect
dividends payable on the Convertible Preferred Stock. See "The Company,"
"Certain Transactions -- Recapitalization" and Note 1 to Consolidated
Financial Statements.
(2) Reflects (i) the Recent Acquisitions, and (ii) the sale of the Shares
offered by the Company hereby, at an assumed initial public offering price
of $14.00 per share, and the application of the estimated net proceeds
therefrom, as if such transactions had been effected on January 1, 1995.
The Recent Acquisitions were financed in part by borrowings of $78.6
million under the Credit Facility, which replaced the Company's line of
credit, and involved the issuance of 2,037,308 shares of Common Stock and
the 1,833,433 shares of Restricted Stock subsequent to September 30, 1996.
(3) Prior to the Recapitalization, the Company elected to be taxed as a
Subchapter S corporation for federal income tax purposes and, accordingly,
consolidated statements of operations in 1992 and 1993, and a portion of
1994, do not include a provision for income taxes.
(4) For all periods presented, pro forma net income per share is computed on
the basis of the weighted average number of shares of common stock and
common stock equivalents, including: (i) the number of shares of Common
Stock issuable upon conversion of the Convertible Preferred Stock; (ii)
Common Stock issued by the Company during the 12 months immediately
preceding the date of this Prospectus; (iii) with respect to the "Actual"
columns above, the Restricted Stock issued in connection with the Recent
Acquisitions completed prior to September 30, 1996 and with respect to "Pro
Forma" columns above, the Restricted Stock issued in connection with all of
the Recent Acquisitions; and (iv) shares of Common Stock which become
issuable pursuant to the grant of Common Stock options, using the treasury
stock method and an assumed initial public offering price of $14.00 per
share.
(5) Operating data is measured as of the end of the period indicated.
(6) Pro forma to reflect: (i) six Recent Acquisitions which were completed in
the fourth quarter of 1996 (the "Fourth Quarter Recent Acquisitions"); and
(ii) the issuance of (a) the 1,833,433 shares of Restricted Stock and (b)
85,999 shares of Common Stock for loan fees related to the Credit Facility
(collectively, the "Fourth Quarter Stock Issuances"), as if each such
transaction had occurred on September 30, 1996.
(7) Pro forma as adjusted to reflect the conversion of the Convertible
Preferred Stock and the sale of the Shares offered by the Company hereby at
an assumed initial public offering price of $14.00 per share, and the
application of the estimated net proceeds therefrom, as if both
transactions had occurred as of September 30, 1996.
(8) Includes Convertible Preferred Stock of $5.2 million plus accrued and
unpaid dividends of $925,000 at September 30, 1996.
7
<PAGE> 9
RISK FACTORS
Reliance upon Government Programs. The Company derived 57.0%, 43.3% and an
estimated 38.0% of collections for the year ended December 31, 1995, the nine
months ended September 30, 1996 and on a pro forma basis the nine months ended
September 30, 1996, respectively, from payments made by government sponsored
healthcare programs (principally Medicare and Medicaid). Regulatory changes or
enactment of legislation, including legislation to balance the federal budget,
can result in reduction in reimbursement rates, limitations in reimbursement,
program reductions or elimination of coverage for certain individuals under the
programs. Such regulatory changes or legislation could have a material adverse
effect on the Company's financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Introduction." Legislation could also result in a reduction of
Medicare and Medicaid funding or an increase in state discretion over the
funding of Medicaid, or a combination thereof. Increased state discretion in
Medicare and Medicaid funding, coupled with the fact that such expenditures
comprise a substantial and growing share of state budgets, could lead to
significant reductions in reimbursement. Since these programs generally
reimburse on a fee schedule basis, rather than a charge-related basis, the
Company generally cannot increase net revenue by increasing the amount charged
for services provided. In addition, cost increases may not be able to be
recovered from government payors. Furthermore, because of cost containment
measures and market changes in non-governmental payors, the Company may not be
able to shift cost increases to, or recover them from, non-governmental payors.
Future increases in services provided by health maintenance organizations
("HMOs") and other managed care organizations to Medicare, Medicaid and other
government program beneficiaries will result in a change in referral practices,
and may result in the elimination or reduction of referrals or payments to
providers. Some states have recently enacted legislation to require that all
Medicaid patients be treated by HMOs, and similar legislation may be enacted in
other states, which could result in the redirection of certain referrals away
from the Practices or reduce reimbursement for services provided for such
patients. Funds received under these programs are subject to audit with respect
to the proper billing for laboratory and physician services and, accordingly,
retroactive adjustments of revenue from these programs may occur. Government
sponsored healthcare program changes which result in the inability to recover
cost increases through price increases or otherwise, could have a material
adverse effect on the Company's financial condition and results of operations.
See "Business -- Government Regulation."
Risks Relating to Acquisition Strategy. The Company's strategy includes
growth through acquisitions of and affiliations with practices that provide
anatomic pathology services. The Recent Acquisitions were the Company's first
actions in implementing this strategy as well as its first purchases of
pathology practices. In implementing its strategy, the Company will compete with
other potential acquirors, some of which may have greater financial resources
than the Company. Competition for acquisitions may intensify due to ongoing
consolidation in the healthcare industry, which may increase the costs of
capitalizing on acquisition opportunities. Several companies, both publicly
traded and privately held, which may have greater resources than the Company are
pursuing the acquisition of practices. In addition, companies in other
healthcare segments such as hospitals and managed care organizations, many of
which have greater financial and other resources than the Company, may pursue
the acquisition of practices. While the Company believes that it will be able to
compete for acquisitions, particularly in an environment of reduced
reimbursement rates, there can be no assurance that new competitors will not
enter the market, the Company will be able to identify and complete future
acquisitions or competitors will not make it more difficult for the Company to
complete acquisitions on favorable terms. While the Company routinely evaluates
acquisition and affiliation candidates and is continually engaged in on going
discussions, at present the Company is not involved in negotiations with any
such candidate, nor has it reached any agreement or understanding with respect
to any future acquisition or affiliation. In pursuing its acquisition strategy,
the Company intends to expand in areas where the Practices currently operate as
well as in new markets. Although the Company believes that it is in compliance
with applicable anti-trust laws, there can be no assurance that governmental
authorities would not view the Company as being dominant in a particular market
and, therefore, cause the Company to divest itself of any particular practice.
Acquisitions involve numerous short and long term risks, including diversion of
management's attention, failure to retain key personnel and contracts of the
acquired practices, government investigations of the activities of practices
prior to being acquired, inability to integrate acquired businesses
8
<PAGE> 10
without material disruption, amortization of acquired intangible assets and the
effects of contingent purchase price payments and one-time acquisition expenses.
There can be no assurance that the Recent Acquisitions or any future acquisition
will be successfully integrated into the Company's operations or that practices,
once acquired, will grow. Consummation of acquisitions or affiliations could
result in the incurrence or assumption by the Company of additional
indebtedness, including contingent indebtedness, or the issuance of additional
equity. The issuance of shares of Common Stock to make acquisitions or
affiliations may result in dilution to the Company's stockholders. There can be
no assurance that the Company will be able to implement its acquisition
strategy, or that this strategy will ultimately be successful. See "Use of
Proceeds," and "Business -- Business Strategy."
Risks Relating to Growth. In addition to acquisitions of and affiliations
with practices, the Company intends to continue to grow through internal
expansion. The Company derives its net revenue from the net revenue of the
Practices. The Company's growth strategy requires: (i) capital investment; (ii)
compliance with present or future laws and regulations that may differ from
those pursuant to which the Company currently operates; (iii) further
development of the Company's corporate management and operational, financial and
accounting resources to accommodate and manage growth; and (iv) the ability to
expand the Affiliated Physician and employee base and to train, motivate and
manage employees of the Subsidiaries. While the Company is in the process of
integrating the marketing activities, courier networks and management
information systems of the Practices and of implementing consistent billing
systems, accounting policies and internal control procedures in the Practices,
delays in completing, or the inability to successfully complete such processes
could have a material adverse effect on the Company's financial condition and
results of operations. Although the Company is taking steps to manage rapid
growth, there can be no assurance that the Company will be able to do so
efficiently or that the Company's growth rate will continue in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business -- Physician, PA Contractor and Other Contractual
Relationships" and "Business -- Government Regulation."
Dependence on Pathologists. The Company's business is dependent upon the
Practices' recruiting and retaining pathologists, particularly those with
subspecialities, such as dermatopathology. While the Practices have been able to
recruit and retain the Affiliated Physicians, no assurance can be given that the
Company or the Practices will be able to continue to do so on terms similar to
its current arrangements. The relationship between the pathologists and their
respective local medical communities is important to the profitability of the
Practices. In the event that a significant number of Affiliated Physicians were
to terminate their relationships with the Direct Subsidiaries or the PA
Contractors or become unable or unwilling to continue their employment, the
Company's business would be materially adversely affected. See
"Business -- Physician, PA Contractor and Other Contractual Relationships" and
"Business -- Affiliation Structure."
Reimbursement Risks. Virtually all of the Company's net revenue in 1995,
the nine months ended September 30, 1996 and on a pro forma basis the nine
months ended September 30, 1996 was derived from the Practices' charging for
services on a fee-for-service basis. Accordingly, the Company assumes the
financial risk related to collection, including the potential uncollectibility
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 reimbursement or potential retroactive
adjustments resulting from audits by government payors may require the Company
to borrow funds to meet its current obligations. The Company's financial
condition and results of operations would be adversely affected if it were
unable to borrow funds on terms acceptable to the Company. See
"Business -- Government Regulation."
Cancellation or Non-renewal of Hospital Contracts; Dependence on Hospital
Contracts. Hospital contracts maintained by the Direct Subsidiaries generally
have terms of one to five years and are cancelable by the hospital upon notice
of 30 to 180 days. While the Practices have been able to successfully negotiate
renewal of such contracts in the past, no assurance can be given that such
contracts with hospitals will not be canceled or will be renewed in the future.
Loss of any particular hospital contract would result in a loss of net revenue
to the Practice, and therefore to the Company, from that contract as well as
from outpatient net revenue that may be derived from the relationship with a
hospital and its medical staff. In addition, consolidation in the hospital
industry may result in fewer hospitals or fewer laboratories as hospitals move
to
9
<PAGE> 11
combine their operations. At December 31, 1996, the Direct Subsidiaries had 46
hospital contracts, 20 of which were with hospitals owned by Columbia/HCA
Healthcare Corporation ("Columbia/HCA"). For the nine months ended September 30,
1996 and on a pro forma basis for the same period, 15.3% and 24.5%,
respectively, of net revenue was generated directly from contracts with
hospitals owned by Columbia/HCA. If the hospital contracts are canceled, not
renewed or not replaced with other contracts on at least as favorable terms, the
Company's financial condition and results of operations would be materially
adversely affected. See "Business -- Physician, PA Contractor and Other
Contractual Relationships."
Unpaid Contingent Acquisition Consideration. In connection with the Recent
Acquisitions, the Company has agreed to pay to sellers of ten Practices
additional consideration in the form of debt obligations (the "Contingent
Notes"), payment of which is contingent upon the Practice achieving its
specified profitability criteria over periods ranging from three to five years
from the date of acquisition. The principal amount of Contingent Notes to be
paid cannot be determined until the contingency periods terminate and
achievement of the profitability criteria is determined. If the maximum criteria
for the contingency payments with respect to each Recent Acquisition are
achieved, the Company will be obligated to make cash payments of $31.3 million
between December 31, 1996 and September 30, 2001. Lesser amounts of cash will be
paid if the maximum financial criteria are not met. Payments pursuant to the
Contingent Notes will result in an increase to the purchase price for such
Practice and an adjustment to goodwill attributable to such Practice. Although
the Company believes that it will be able to make such cash payments from
internally generated funds or proceeds of future borrowings, there can be no
assurance that the Company will be able to do so. The Contingent Notes are
payable annually only if the Practice attains its specified profitability
criteria. To the extent profitability goals are met, the incremental cash
generated from operations would exceed the cash required to satisfy the
Company's contingent obligations in any one year in which a payment is to be
made. Since the profitability criteria are calculated on a cumulative basis over
the period of the Contingent Notes, the performance of a Practice in one year
may affect the payment of the Contingent Notes in another year. In the event the
profitability criteria for a Practice are not met in a particular year, the
shortfall in that year may be satisfied by excess profitability in a later year,
in which event a payment would be made in that later year. To the extent that
the maximum profitability criteria are exceeded in any particular year, the
amount of the excess will be carried backward to a prior year when the
profitability criteria were not satisfied or forward to a subsequent year in
determining whether the profitability criteria for such year have been met. This
cumulative effect may cause contingent payments to be made with respect to a
year in which profitability criteria would not have been met if such year was
evaluated separately, and could cause contingent payments with respect to
multiple years to become due in a single or later year. Payments of Contingent
Notes will affect the Company's earnings per share and may cause volatility in
the market price of the Common Stock. While the Company has discontinued the use
of Contingent Shares, the Company expects to continue to use Contingent Notes as
partial consideration for acquisitions and affiliations. While the Company
believes that the Contingent Notes do not violate federal or state
"anti-kickback" or "self-referral" statutes, there can be no assurance that such
arrangements will not be challenged by regulatory authorities seeking to enforce
such laws. See "Business -- Government Regulation," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 3 to the
Consolidated Financial Statements.
Risks Related to Intangible Assets. The Recent Acquisitions resulted in
significant increases in net identifiable intangible assets and goodwill. Net
identifiable intangible assets, which include hospital contracts, physician
referral lists, a management service agreement and laboratory contracts acquired
in the Recent Acquisitions were approximately $26.7 million at September 30,
1996 and $64.3 million on a pro forma, as adjusted, basis at September 30, 1996
representing approximately 52.6% and 44.6%, respectively, of the Company's 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, or a weighted average of 28.6 years. Goodwill, which relates to the
excess of cost over the fair value of net assets of businesses acquired, was
approximately $10.1 million at September 30, 1996 and $55.1 million on a pro
forma, as adjusted, basis at September 30, 1996 representing approximately 19.8%
and 38.2%, respectively, of the Company's total assets. The Company amortizes
goodwill on a straight line basis over periods ranging from 15 to 35 years, or a
weighted average of 34.1 years. There can be no assurance that the value of
intangible assets will ever be realized by the Company. On an ongoing basis, the
Company makes an evaluation based on undiscounted
10
<PAGE> 12
cash flows, 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. Although at September
30, 1996 the net amortized balance of intangible assets is not considered to be
impaired, any future determination requiring the write off of a significant
portion of unamortized intangible assets could have a material adverse effect on
the Company's financial condition and results of operations. See Notes 2 and 6
to the Consolidated Financial Statements.
Possible Reform of Healthcare Industry. Federal and state governments have
recently focused significant attention on healthcare reform. It is not possible
to predict which, if any, proposal that has been or will be considered will be
adopted. There can be no assurance that the healthcare regulatory environment
will not change so as to restrict the existing operations of, impose additional
requirements on or limit the expansion of the Company and the PA Contractors.
Costs of compliance with changes in government regulations may not be subject to
recovery by the Company through price increases. Some of the proposals under
consideration, or others which may be introduced, could, if adopted, have a
material adverse effect on the Company's financial condition and results of
operations. See "Business -- Government Regulation."
Competition. The healthcare industry generally, and physician practice
management specifically, is highly competitive and has been subject to continual
changes in the method in which healthcare services are provided and the manner
in which healthcare providers are selected and compensated. The Company believes
that private and public reforms in the healthcare industry emphasizing cost
containment and accountability have resulted in increased competition and will
result in an increasing shift of hospital and related medical facilities from
individual or small practices to large practices and physician practice
management companies. The Company competes with other physician practice
management companies that are focused on owning or providing management services
to anatomic pathology practices. In addition, through its Direct Subsidiaries
and affiliation with PA Contractors, the Company's Practices also compete in
local markets with anatomic pathology practices, national clinical laboratories,
hospitals and clinics which provide anatomic pathology medical services. The
Company competes with several other companies for the acquisition of anatomic
pathology practices. In addition, companies in other healthcare industry
segments, such as hospitals, HMOs and large physician practices, many of which
have financial and other resources greater than those of the Company, may become
competitors in acquiring, or providing physician practice management services
to, anatomic pathology practices. There can be no assurance that the Company
will be able to compete effectively or that additional competitors will not
enter its markets or make it more difficult for the Company to acquire practices
on favorable terms. See "Business -- Competition."
State Laws Regarding Prohibition of Corporate Practice of Medicine. The
laws of many states prohibit business corporations, such as AmPath and its
subsidiaries, from exercising control over the medical judgments or decisions of
physicians and from engaging in certain financial arrangements, such as fee
splitting with 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. Expansion into certain jurisdictions may require
structural and organizational modifications of the Company's form of
relationship with practices. Wherever possible, AmPath has, and will continue to
establish, wholly-owned subsidiaries incorporated in the respective state that
will own, control and operate practices and employ pathologists in that state.
In states with laws that prohibit such structure, AmPath will establish
affiliations and related arrangements that achieve the substance of such
ownership, control and operation, to the maximum extent practicable in
accordance with applicable state law, including the use of long-term management
agreements with professional associations and corporations. The Company provides
physician practice management services to 12 Practices in five states, including
Florida, Alabama, Kentucky, Texas and Ohio. In Florida, Alabama and Kentucky,
states that do not prohibit business corporations from directly employing
physicians, the Direct Subsidiaries employ physicians to provide medical
services. In Texas and Ohio, AmeriPath's PA Contractor Subsidiaries have
long-term management agreements with the PA Contractors (each of which is owned
by an Affiliated Physician or a trust of which AmPath is the sole beneficiary),
which in turn employ physicians to provide necessary medical services to
facilities for which the Company provides physician practice management
services. AmPath plans to organize a controlled non-profit corporate subsidiary
in Texas by June 1997 which will merge with or own the PA Contractor organized
in Texas (the "Texas PA") and will assume the management service agreement
11
<PAGE> 13
from such Texas PA. In Texas and Ohio, a wholly-owned subsidiary of AmPath
performs only laboratory, technical and non-medical administrative services and
does not exercise influence or control over the practice of medicine by the
physicians employed by the PA Contractors nor does the subsidiary practice
medicine or represent such to the public or to clients. Although the Company
believes, based upon the advice of counsel, that it is in compliance and that
the Texas non-profit corporate subsidiary will be in compliance with applicable
state laws and regulations relating to the corporate practice of medicine, there
can be no assurance that regulatory authorities or other parties will not assert
that AmPath or a Subsidiary is engaged in the corporate practice of medicine in
such states or that the management and administration fees paid to the Company
by the PA Contractors constitute fee splitting or the corporate practice of
medicine. If such a claim was successfully asserted, the Company could be
subject to civil and criminal penalties and the Company or the PA Contractor
Subsidiaries could be required to restructure their contractual arrangements.
Such results or the inability of the Company or the PA Contractor Subsidiaries
to successfully restructure their relationships to comply with such statutes
could have a material adverse effect on the Company's financial condition and
results of operations. See "Business -- Affiliation Structure" and
" -- Physician, PA Contractor and Other Contractual Relationships."
Effect of Government Regulation. The business of the Company and the PA
Contractors is subject to extensive and increasing regulation by federal and
state governments. Laws and regulations governing the Company's activities
include anti-kickback and self-referral laws, fraud and abuse statutes and
licensing requirements. These laws and regulations are enforced by various
federal and state regulatory agencies, including the Office of the Inspector
General ("OIG") of the Department of Health and Human Services ("HHS"). The
Health Insurance Portability and Accountability Act of 1996 has strengthened the
powers of the OIG and increased the funding for healthcare fraud investigations.
As a result, the OIG is currently expanding the scope of its healthcare fraud
investigations. In addition, federal and certain state laws provide individuals
(so-called "whistle-blowers") with a right to bring claims on behalf of federal
and state government agencies, and with a significant economic incentive to the
whistle-blower in the event a claim produces monetary recovery. These actions
are becoming increasingly prevalent in the healthcare industry, and have
resulted in increased scrutiny of healthcare providers. Federal anti-kickback
laws and regulations prohibit any knowing and willful offer, payment,
solicitation or receipt of any form of remuneration, either directly or
indirectly, in return for, or to induce: (i) the referral of an individual for a
service for which payment may be made by Medicare and Medicaid or certain other
federal healthcare 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 and Medicaid programs. The Practices rely upon
referrals of patient tests from physicians. Subject to certain exceptions, laws
known as "Stark I" and "Stark II" prohibit Medicare or Medicaid payments for
certain services furnished by an entity pursuant to referrals by a physician who
has a financial relationship with the entity through ownership, investment or a
compensation arrangement. This prohibition is broad and extends to immediate
family members of the physician and to the other physicians in a group practice.
See "Business -- Government Regulation." Possible sanctions against the Company,
the PA Contractors and the Affiliated Physicians for violation of these laws
include civil monetary penalties, exclusion from Medicare and Medicaid programs
and forfeiture of amounts collected in violation of such prohibitions. The
Company will notify physicians of the restrictions on referrals by physicians
who own capital stock of the Company and will seek a certification of compliance
from all physicians who refer tests to the Practices. Each of the states in
which the Subsidiaries and the PA Contractors do business, except Alabama, has
similar anti-kickback, anti-fee splitting and self-referral laws, which apply to
all payors and impose substantial penalties for violations. Certain of these
laws contain exceptions for relationships with pathologists and group practices.
Many of the Affiliated Physicians have a financial interest in the Company as a
result of the acquisition of their respective practices. These interests include
Contingent Notes and Common Stock which have been used by AmPath to purchase at
fair market value the assets or stock of the Practices. While the Company
believes that the current operations and transactions of the Company and the PA
Contractors comply with existing laws and regulations, the federal and state
self-referral and fraud and abuse laws and regulations are broadly written, and
the possibility exists that such current operations or transactions
12
<PAGE> 14
may be deemed to violate the federal or state fraud and abuse or self-referral
prohibitions. Further, there can be no assurance that physicians who own capital
stock of the Company will not violate these laws or that the Company will have
knowledge of the identity of all beneficial owners of its capital stock. In
connection with the Recent Acquisitions, the Company reviewed the Practices'
compliance with federal and state healthcare laws and regulations and revised
certain policies and procedures with respect to certain of the Practices. 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, if reviewed,
would be found to be in full compliance with such laws and regulations, as such
laws may be ultimately interpreted. A violation of such laws and regulations by
a Practice prior to its acquisition could result in civil and criminal
penalties, exclusion from participation in Medicare and Medicaid programs and/or
loss of a physician's license to practice medicine. To the extent the Practices
were found not to be in compliance with such laws and regulations, the Company's
financial condition and results of operations could be materially adversely
affected. The relationships, including fee payments, among the PA Contractors,
hospital clients and physicians have not been examined by federal or state
authorities under these laws and regulations. The Medicare and Medicaid fraud
and abuse provisions apply to laboratories participating in such programs. These
provisions include prohibitions of improper and unnecessary billing for tests
under these programs. Penalties for violations of these federal laws include
exclusion from participation in Medicare and Medicaid programs, asset
forfeitures and civil and criminal penalties. Although the Company believes that
the Company and the PA Contractors are in compliance with these laws and
regulations, there can be no assurance that federal or state regulatory
authorities will not challenge the current or future activities of the Company
or the PA Contractors under these laws. See "Business -- Government Regulation."
Professional Liability and Insurance. The business of the Company and the
PA Contractors entails an inherent risk of claims of liability for acts of
Affiliated Physicians and laboratory technicians. The Company, the PA
Contractors and Affiliated 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. See
"Business -- Legal Proceedings." Certain of the Practices' contracts with
hospitals require the Practices to indemnify certain parties for losses
resulting from the negligence of Affiliated Physicians. The Company maintains
malpractice insurance coverage for the Affiliated Physicians, including coverage
for prior acts, with per physician primary limits of $1.0 million per occurrence
and $5.0 million in the annual aggregate, as well as surplus coverage shared
with the Company for up to $15.0 million per occurrence and $20.0 million in the
aggregate. While the Company believes it has adequate professional liability
insurance coverage for itself, the PA Contractors and each Affiliated Physician,
there can be no assurance that a future claim or claims will not be successful
or if successful will not exceed the limits of available insurance coverage or
that such coverage will continue to be available at acceptable costs and on
favorable terms. See "Business -- Insurance." A malpractice claim asserted
against the Company, a PA Contractor or an Affiliated Physician could, in the
event of an adverse outcome, have a material adverse effect on the Company's
financial condition and results of operations.
Dependence on Key Personnel. The success of the Company is dependent upon
the efforts and abilities of its key management personnel, particularly the
President and Chief Executive Officer, James C. New, and Executive Vice
President and Chief Financial Officer, Robert P. Wynn. The loss of service of
one or both of these persons could have a material adverse effect on the
Company's financial condition and results of operations. See
"Management -- Employment Agreements."
Control by Current Stockholders. Upon completion of this offering, Summit
will beneficially own an aggregate of approximately 28.5% of the outstanding
shares of Common Stock and the Company's Chief Executive Officer, Chief
Financial Officer and Affiliated Physicians will beneficially own an aggregate
of approximately 34.1% of the outstanding shares of Common Stock. Accordingly,
Summit, such executive officers and Affiliated Physicians will be able, if
acting together, to elect all of the Company's directors, determine the outcome
of all corporate actions requiring approval of the Board of Directors or
stockholders and to control the business affairs and policies of the Company.
Such control may also have the effect of delaying or preventing a change in
control of the Company and consequently may adversely affect the market price of
the Common Stock. See "Management" and "Principal and Selling Stockholders."
13
<PAGE> 15
No Prior Market; Volatility of Stock Price. Prior to this offering, there
has been no public market for the Common Stock, and there can be no assurance
that an active trading market will develop or be sustained after this offering.
The initial public offering price will be determined by negotiation among the
Company, the Selling Stockholders and the representatives of the Underwriters.
See "Underwriting." There has been significant volatility in the market price of
securities of healthcare companies that often has been unrelated to the
operating performance of such companies. The Company believes that various
factors, such as legislative and regulatory developments, quarterly variations
in the actual or anticipated results of operations of the Company, and lower
revenues or earnings than those anticipated by securities analysts in the
financial results of the Company, the overall economy and the financial markets,
could cause the price of the Common Stock to fluctuate substantially.
Immediate and Substantial Dilution. The purchasers of the Shares will
experience immediate and substantial dilution in net tangible book value of
approximately $14.49 per share of Common Stock as a result of the sale of
5,700,000 shares of Common Stock offered by the Company hereby. See "Dilution."
Shares Eligible for Future Sale. After consummation of this offering,
10,851,356 shares, representing 63.6% of the outstanding shares of Common Stock,
will be eligible for future sale in the public market at prescribed times
pursuant to Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"). Of such shares, 6,678,609 shares are subject to registration
rights and all shares are subject to lock-up agreements for a period of 180 days
following the date of this Prospectus. Sales of such shares in the public
market, or the perception that such sales may occur, could adversely affect the
market price of the Common Stock or impair the Company's ability to raise
additional capital in the future through the sale of equity securities. See
"Dilution," "Shares Eligible for Future Sale" and "Underwriting."
Anti-Takeover Provisions; Possible Issuance of Preferred Stock. Certain
provisions of the Company's Amended and Restated Certificate of Incorporation
(the "Certificate of Incorporation") and Restated Bylaws (the "Bylaws") may be
deemed to have anti-takeover effects and may delay, defer or prevent a takeover
attempt that a stockholder might consider in its best interest. Such provisions
of the Certificate of Incorporation and Bylaws: (i) divide the Company's Board
of Directors into three classes, each of which will serve for different
three-year periods; (ii) provide that the stockholders may not take action by
written consent, but only at duly called annual or special meetings of
stockholders; (iii) provide that special meetings of the stockholders may be
called only by the Chairman of the Board of Directors, a majority of the entire
Board of Directors or the Chief Executive Officer; and (iv) establish certain
advance notice procedures for nomination of candidates for election as directors
and for stockholder proposals to be considered at annual stockholders' meetings.
The Certificate of Incorporation also authorizes the Board of Directors to
determine the rights, preferences, privileges and restrictions of unissued
series of the Company's authorized preferred stock (the "Preferred Stock") and
to fix the number of shares and the designation of any such series, without any
vote or action by stockholders. Thus, the Board of Directors can authorize and
issue shares of Preferred Stock with voting or conversion rights that could
adversely affect the voting or other rights of holders of the Common Stock.
Further, certain provisions of the Delaware General Corporation Law ("DGCL") may
have the effect of delaying, deferring or preventing a change in control of the
Company. See "Description of Capital Stock -- Anti-takeover Effects of Certain
Provisions of Delaware Law and the Certificate of Incorporation and Bylaws."
14
<PAGE> 16
THE COMPANY
AmeriPath believes it is the leading physician practice management company
focused on anatomic pathology services, based on an analysis of geographic
breadth, number of physicians, number of hospital contracts, number of practices
and net revenue. The Company owns or is affiliated with 12 Practices located in
five states which, as of December 31, 1996, employed a total of 81 pathologists.
The pathologists provide medical services in 12 outpatient laboratories owned
and operated by the Company, 46 hospital inpatient laboratories and 17
outpatient surgery centers. Of these pathologists, 77 are board certified and
three are board eligible in anatomic pathology. Thirty-nine of the pathologists
are also board certified in a subspecialty of anatomic pathology, including
dermatopathology (diseases of the skin), hematopathology (diseases of the blood)
and cytopathology (diseases of the cells).
The Company completed the Recapitalization in 1994 pursuant to which the
Company's predecessor, ALA, (i) acquired the assets of PDK, an outpatient
pathology practice formed in 1982 in Fort Lauderdale, Florida; (ii) issued
shares of Convertible Preferred Stock to Summit and Schroder; and (iii) issued
common stock to the former owners of PDK. The Recapitalization resulted in a
more diversified stockholder base with the investment by Summit and Schroder. In
February 1996, AmPath was formed as a holding company (the "Share Exchange") and
acquired the practice of Demaray and Poulos, P.A. ("D&P"), an inpatient practice
based in Fort Lauderdale, Florida, that provides pathology services to three
hospitals. The acquisition of D&P expanded the Company's presence in Broward
County, Florida. See "Certain Transactions -- Recapitalization."
The Company's principal executive offices are located at 7289 Garden Road,
Suite 200, Riviera Beach, Florida 33404 and its telephone number is (561)
845-1850.
RECENT ACQUISITIONS
In January 1996, with the appointment of James C. New as the Company's
President and Chief Executive Officer, the Company accelerated the acquisition
program it initiated in 1995. Since June 1996, the Company has acquired or
affiliated with ten anatomic pathology practices in five states: five practices
in Florida, one practice in Alabama, one practice in Kentucky, two practices in
Ohio and one practice in Texas. The Company believes that the Recent
Acquisitions, which include the ten Practices referred to above as well as D&P,
established the Company -- in terms of geographic breadth, number of physicians,
number of hospital contracts, number of practices and net revenue -- as the
leading physician practice management company focused on anatomic pathology.
Since the Recent Acquisitions, the Company has integrated certain aspects of the
billing, sales and marketing, accounting and certain other functions of the
Practices. Integration of such functions has resulted in, among other things,
certain cost efficiencies and more effective marketing efforts. The Company is
consolidating the financial reporting systems of and implementing uniform
internal control procedures for the acquired Practices.
In acquiring or affiliating with an anatomic pathology practice, the
Company generally (to the extent permitted by applicable state law): (i)
purchases all of the assets of that practice, including, but not limited to, its
fixed assets (including laboratory facilities and testing equipment), referral
base, customer lists, contract rights, accounts receivable and goodwill and
other identifiable intangibles; and (ii) through a wholly-owned subsidiary, (a)
directly employs all technical and other personnel utilized in such practice and
(b) except in Ohio and Texas (where the PA Contractor employs the physicians),
directly employs the pathologists who conduct the practice of medicine. The
Recent Acquisitions in Ohio and Texas were effected (in addition to the
foregoing) through (1) long-term management agreements between the PA Contractor
Subsidiaries and each PA Contractor in such states, and (2) in the case of the
two Practices in Ohio, contribution of the stock of each Ohio PA to trusts, of
which AmeriPath is the sole beneficiary, and, in the case of the Practice in
Texas, an agreement by the Affiliated Physician who owns all of the stock in the
Texas PA Contractor to transfer such stock to a corporation controlled by
AmeriPath (without further consideration to or action on the part of such
Affiliated Physician). The Recent Acquisitions were funded with various
combinations of cash, Common Stock, debt and contingent consideration. The
aggregate non-contingent purchase price paid for the Recent Acquisitions was
approximately $108.0 million. For additional information regarding the
consideration paid in the Recent Acquisitions, see "Management's Discussion and
Analysis of Financial Condition and
15
<PAGE> 17
Results of Operations -- Recent Acquisitions" and Note 3 to the Consolidated
Financial Statements. All references below to numbers of facilities, contracts
and employees, including pathologists, are as of December 31, 1996.
FLORIDA
Since June 1996, AmeriPath completed five acquisitions in Florida which,
together with the prior acquisitions of PDK and D&P, established the Company as
the leading provider of anatomic pathology services in Florida and established
the Company's model for growth.
Derrick and Associates Pathology, Inc. ("Derrick") was acquired in June
1996. Based in Orlando and founded in 1975, Derrick employs 148 people,
including 24 pathologists, and provides a broad range of pathology
subspecialties, including dermatopathology. Derrick's physicians provide
anatomic pathology services at 14 hospitals and 13 outpatient surgery centers
throughout Central and Southern Florida and Derrick operates one of the largest
outpatient anatomic pathology laboratories in Florida. The acquisition of
Derrick established the Company's presence in Central Florida.
Amazon and Rosen, M.D., Inc. d/b/a Florida Pathology Associates ("FPA") was
also acquired in June 1996. Based in Miami and founded in 1988, FPA employs 14
people, including two pathologists, and operates the pathology laboratory in the
Columbia Miami Heart Institute, a Columbia/HCA hospital. The acquisition of FPA
established the Company's presence in Dade County.
Volusia Pathology Group, M.D., Inc. ("Volusia") was acquired in October
1996. Based in Ormond Beach and founded in 1970, Volusia employs 34 people,
including seven pathologists. Volusia's operations are primarily hospital based,
with three hospital contracts in the Daytona area. Volusia also operates an
outpatient anatomic pathology laboratory.
Drs. Seidenstein, Levine & Associates, Inc. ("Seidenstein") was also
acquired in October 1996. Based in Ft. Myers and founded in 1983, Seidenstein
employs 40 people, including nine pathologists who provide anatomic pathology
services at five hospitals and three outpatient surgery centers owned by
Columbia/HCA. Seidenstein also manages an outpatient anatomic pathology
laboratory and an outpatient clinical laboratory owned by Columbia/HCA.
Gulf Coast Pathology Associates, Inc. ("Gulf Coast") was acquired in
November 1996. Based in Cape Coral and founded in 1986, Gulf Coast employs 31
people, including five pathologists, and has contracts with three hospitals and
four outpatient surgery centers. Gulf Coast also operates two outpatient
clinical laboratories. Together with the acquisition of Seidenstein, Gulf Coast
established the Company's presence, and provides the Company strategic,
marketing and other operational synergies, on the West Coast of Florida.
ALABAMA
SkinPath, P.C. ("SkinPath") was acquired in August 1996. Based in
Birmingham and founded in 1995, SkinPath employs 22 people, including three
pathologists, and operates an outpatient dermatopathology laboratory. SkinPath
represented the Company's first entry into a market outside Florida and
established its presence in Alabama.
KENTUCKY
Pathology Associates, P.S.C. and Technical Pathology Services,
Inc. (collectively, "Pathology Associates") was acquired in August 1996. Based
in Lexington and founded in 1988, Pathology Associates employs 57 people,
including eight pathologists. Pathology Associates operates two outpatient
cytology laboratories and an outpatient histology laboratory and has contracts
with 16 hospitals. The acquisition of Pathology Associates represented the
Company's initial acquisition in the Midwest and established the Company's
presence in Kentucky.
OHIO
Beno Michel, M.D., Inc. d/b/a Cutaneous Pathology & Immunofluorescense
Laboratory ("CPI") became affiliated with the Company in October 1996. Based in
Cleveland and founded in 1976, CPI employs
16
<PAGE> 18
15 people, including three pathologists who each specialize in dermatopathology.
CPI operates an outpatient dermatopathology laboratory and a dermatology
practice.
David R. Barron, M.D., Inc. d/b/a Richfield Laboratory of Dermatopathology
("Richfield Labs") also became affiliated with the Company in October 1996.
Richfield Labs, founded in 1968, employs 32 people, including three
pathologists, and operates the largest outpatient dermatopathology laboratory in
Cincinnati. Together with CPI, Richfield Labs established the Company's presence
in Ohio.
Under separate long-term management agreements between a PA Contractor
Subsidiary and each Ohio PA Contractor, the Company has control over all
non-medical functions of the PA Contractors, including all administrative,
management, billing and support functions. The PA Contractors and the physicians
they employ have control over all functions relating to the provision of medical
services. The PA Contractor Subsidiary receives a management fee from each Ohio
PA Contractor equal to the net revenue (less practice expenses) of the pathology
practice. The Company does not receive the net revenue from the dermatology
practice of CPI, which net revenue is paid to the Affiliated Physicians in this
Practice as compensation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Acquisitions" and "-- Practices."
TEXAS
Freeman-Cockerell Laboratories, Inc. ("Freeman") was acquired, and Clay J.
Cockerell, M.D., P.A. (the "Texas PA") became affiliated with the Company
through a long-term management service agreement, in October 1996. Based in
Dallas and founded in 1994, Freeman employs 40 people and the Texas PA, also
based in Dallas and founded in 1993, employs two pathologists who operate an
outpatient dermatopathology laboratory. The acquisition of Freeman and the
affiliation with the Texas PA established the Company's presence in Texas.
17
<PAGE> 19
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of 5,700,000
shares of Common Stock offered by the Company hereby, based upon an assumed
initial public offering price of $14.00 per share, are estimated to be
approximately $71.7 million (approximately $73.4 million if the Underwriters
exercise the over-allotment option in full).
The Company intends to apply the net proceeds from this offering as
follows: (i) approximately $7.5 million to repay the outstanding principal
amount of and accrued interest on the Junior Notes; (ii) approximately $3.5
million to repay the outstanding principal amount of and accrued interest on the
Senior Notes; (iii) approximately $1.1 million to pay the accrued and unpaid
dividends on the Convertible Preferred Stock; and (iv) to repay approximately
$59.6 million of the approximately $81.7 million outstanding balance of
indebtedness under the Credit Facility at December 31, 1996.
The Junior Notes, which are held by Summit and Schroder, mature on December
31, 2001, and bear interest at an annual rate of 10%. The Senior Notes, which
are held by Drs. Poulos, Demaray and Kowalczyk, mature on December 31, 1998 and
bear interest at an annual rate of 8%. See "Certain Transactions."
The Company currently maintains an $85.0 million Credit Facility for
acquisition and working capital purposes with a syndicate of banks (the "Banks")
led by The First National Bank of Boston, as agent (the "Agent"). The Credit
Facility provides for borrowings of up to $85.0 million: (i) for working capital
in an amount limited to a maximum of 80% of the Company's eligible accounts
receivable; and (ii) to fund acquisitions, which borrowings may be made up to
$85.0 million if borrowings are not otherwise used for working capital purposes.
The Credit Facility requires the Company to make quarterly payments of an annual
commitment fee equal to 0.375% of the unused portion of the commitment. All
outstanding advances are due and payable on December 31, 1998. The Company has
pledged its assets, including the capital stock of its subsidiaries, as
collateral. The Credit Facility bears interest at variable interest rates based,
at the Company's option, on the Agent's base rate or the Eurodollar rate plus
2.50%. As of December 31, 1996, $81.7 million was outstanding under the Credit
Facility at an annual effective interest rate of 8.25%. The Credit Facility
provides that the Company may reborrow funds which it has previously borrowed
and repaid. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
In the event the Underwriters exercise their over-allotment option, net
proceeds to the Company from such exercise will be applied to reduce the
remaining outstanding balance under the Credit Facility.
The Company will not receive any of the proceeds from the sale of the
Common Stock by the Selling Stockholders. See "Principal and Selling
Stockholders."
DIVIDEND POLICY
Other than the Company's stock dividends declared in connection with (i)
the 40 for one stock split effected as of August 1, 1994 and (ii) the 1.8 for
one stock split effected as of January 13, 1997, the Company has not declared or
paid, nor does it currently intend to declare or pay, any dividends on its
Common Stock. The Company intends to retain all earnings for the operation and
expansion of its business. The declaration and payment of future dividends will
be at the discretion of the Board of Directors, subject to such factors as the
Board of Directors may deem relevant, including future earnings, results of
operations, capital requirements, the general financial condition of the
Company, general business conditions and contractual restrictions, as well as
such other factors as the Board of Directors may deem relevant. In addition, the
Credit Facility prohibits the payment of dividends by the Company without the
consent of the Agent. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Prior to the Recapitalization, the Company's predecessor elected to be
treated as a Subchapter S corporation under Section 1361(a) of the Internal
Revenue Code of 1986, as amended. The aggregate amount of the shareholders'
compensation and distributions were $4.2 million in 1992 and $5.5 million in
1993. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
18
<PAGE> 20
DILUTION
The net tangible book value (deficit) of the Company at September 30, 1996,
was approximately $(37.2) million, or $(12.75) per share of Common Stock. Net
tangible book value (deficit) per share represents the amount of total assets of
the Company, less: (i) goodwill and identifiable intangible assets; (ii) total
liabilities (not including the deferred income tax liability recorded in
accordance with SFAS 109, Accounting for Income Taxes, for differences between
the assigned values and the tax bases of the indentifiable intangible assets
recognized in purchase business combinations); and (iii) Convertible Preferred
Stock, divided by the number of outstanding shares of Common Stock. The increase
in net tangible book value (deficit) per share of $9.38 attributable to the
Fourth Quarter Recent Acquisitions assumes those transactions were completed as
of September 30, 1996. The decrease in net tangible book value (deficit) per
share of $7.11 attributable to the issuance of the Restricted Stock in November
1996 assumes those issuances were made at September 30, 1996. The decrease in
net tangible book value (deficit) per share of $0.30 resulted from the issuance
of shares of Common Stock for loan fees related to the Credit Facility. The
decrease in net tangible book value (deficit) per share of $7.67 attributable to
the conversion of the Convertible Preferred Stock assumes the conversion of
3,088,116 shares of the Convertible Preferred Stock using a conversion rate of
1.8 for one, into Common Stock immediately prior to the consummation of this
offering. After giving effect to the sale of 5,700,000 shares offered by the
Company hereby at an assumed initial public offering price of $14.00 per share,
and the application of estimated net proceeds therefrom, the pro forma net
tangible book value (deficit) of the Company at September 30, 1996 would have
been approximately $(8.3) million, or $(0.49) per share. This represents an
immediate decrease in net tangible book value (deficit) of $6.56 per share to
existing stockholders and an immediate dilution of $14.49 per share to new
investors. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $ 14.00
Net tangible book value (deficit) per share at September 30, 1996............ $(12.75)
Pro forma (increase) decrease in net tangible book value (deficit)
attributable to:
Fourth Quarter Recent Acquisitions......................................... (9.38)
Issuance of Restricted Stock............................................... 7.11
Issuance of Common Stock for loan fees..................................... 0.30
Conversion of Convertible Preferred Stock.................................. 7.67
New investors.............................................................. 6.56
-------
Pro forma net tangible book value (deficit) per share after the offering..... (0.49)
------
Dilution per share to new investors.......................................... $ 14.49
======
</TABLE>
The pro forma net tangible book value (deficit) per share after this
offering would be further decreased by ($1.09), in the event the deferred income
tax liabilities related to the Recent Acquisitions were deducted from total
assets, resulting in an immediate dilution of $15.58 per share to new investors.
The following table sets forth, on a pro forma basis, at September 30,
1996, the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing holders of
Common Stock and by new investors purchasing shares of Common Stock offered
hereby:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)................. 11,351,356 66.6% $ 31,809,300 28.5% $ 2.80
New investors(1)......................... 5,700,000 33.4 79,800,000 71.5 14.00
---------- ---- ----------- ----
Total........................... 17,051,356 100.0% $111,609,300 100.0%
========== ==== =========== ====
</TABLE>
- ---------------
(1) Includes 5,558,609 shares of Common Stock that will be issued upon
conversion of the Convertible Preferred Stock, 957,299 shares issued in
connection with the Fourth Quarter Recent Acquisitions, 1,833,433 Restricted
Shares issued pursuant to the Restricted Stock Agreements and 85,999 shares
issued for loan fees related to the Credit Facility. See "Certain
Transactions -- Recapitalization," and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Recent Acquisitions."
The sale of Common Stock by the Selling Stockholders in this offering will
reduce the number of shares held by the existing stockholders to 10,851,356,
or 63.6% of the total number of shares of Common Stock to be outstanding
after this offering, and will increase the number of shares to be purchased
by new investors to 6,200,000 or 36.4% of the total shares of Common Stock
to be outstanding after this offering. See "Principal and Selling
Stockholders."
The foregoing tables assume no exercise of outstanding options. At
September 30, 1996, there were outstanding options to purchase 912,611 shares of
Common Stock at a weighted average exercise price of $3.85 per share. Options to
purchase 90,000 shares are exercisable at September 30, 1996. See
"Management -- Option Plan" and Note 11 of Notes to Consolidated Financial
Statements.
19
<PAGE> 21
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of September 30, 1996, (i) on an actual basis (ii) on a pro forma
basis assuming the Fourth Quarter Recent Acquisitions and the Fourth Quarter
Stock Issuances had been consummated on September 30, 1996 and (iii) on a pro
forma basis, as adjusted to give effect to the conversion of the Convertible
Preferred Stock and the sale of the Common Stock offered by the Company hereby
and the application of the estimated net proceeds therefrom as described under
"Use of Proceeds." This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Unaudited Pro Forma Consolidated Financial Data, the Consolidated Financial
Statements and related notes thereto and the other financial information
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Credit Facility(1)............................................ $ 30,844 $ 80,241 $ 20,452
Senior Notes(1)............................................... 3,500 3,500 --
Junior Notes(1)............................................... 7,500 7,500 --
Subordinated Notes(2)......................................... 2,840 4,677 4,677
Note payable(3)............................................... -- 113 113
Convertible Preferred Stock:
Series A 6% redeemable cumulative convertible preferred
stock, $.01 par value, 5,000,000 shares authorized;
3,088,116 shares issued and outstanding at September 30,
1996(4)(5)............................................... 6,123 6,123 --
Common stockholders' equity (deficit):
Common stock, $.01 par value, 8,000,000 shares authorized;
2,916,016 issued and outstanding; 5,792,747 shares issued
and outstanding, pro forma and 17,051,356 shares issued
and outstanding pro forma as adjusted(5)(6).............. 29 58 171
Additional paid-in capital -- accumulated deficit remaining
from conversion from Subchapter S corporation tax
status(8)................................................ (13,253) 10,683 87,482
Note receivable from executive officer(7)................... (270) (270) (270)
Retained earnings(8)........................................ 4,078 4,078 4,078
-------- -------- -------
Total common stockholders' equity (deficit)......... (9,416) 14,549 91,461
-------- -------- -------
Total capitalization................................ $ 41,391 $ 116,703 $ 116,703
======== ======== =======
</TABLE>
- ---------------
(1) The increase of $49.4 million in the Credit Facility between Actual and Pro
Forma relates to borrowings under the Credit Facility in connection with the
Fourth Quarter Recent Acquisitions. The decrease in the Credit Facility and
Senior and Junior Notes from the Pro Forma to the Pro Forma As Adjusted,
results from the application of the estimated net proceeds of the offering
to the Company. See "Use of Proceeds."
(2) Includes current maturities of $782,000 actual and $1.1 million pro forma.
(3) Represents a note assumed in connection with the acquisition of Gulf Coast.
See Notes 7 and 9 to the financial statements of Fernandez and Kalemeris,
P.A. d/b/a Gulf Coast Pathology Associates.
(4) Prior to the consummation of this offering, the holders of the Convertible
Preferred Stock will convert the shares of Convertible Preferred Stock into
5,558,609 shares of Common Stock. See "Principal and Selling Stockholders"
and "Certain Transactions -- Preferred Stockholders."
(5) Immediately prior to the consummation of this offering, the Company will
amend the Certificate of Incorporation to increase the number of authorized
shares of Common Stock to 30,000,000 and to provide for 2,000,000 shares of
Preferred Stock. See "Description of Capital Stock."
(6) Excludes (i) 1,620,000 shares of Common Stock reserved for issuance under
the Option Plan, of which options to purchase 912,611 shares and 972,011
shares of Common Stock have been granted at September 30, 1996 and September
30, 1996 on a pro forma basis, respectively, and options to purchase 90,000
shares of Common Stock were exercisable at September 30, 1996 and (ii)
180,000 shares of Common Stock reserved for issuance under the Director
Option Plan, of which no options have been granted. See
"Management -- Option Plan" and "-- Director Option Plan." Includes
1,833,433 shares of Common Stock issued in November 1996 pursuant to the
Restricted Stock Agreements that resulted in the surrender of contingent
rights to receive Contingent Shares. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Acquisitions."
(7) Represents a loan to the Chief Executive Officer in connection with his
purchase of Common Stock. See "Certain Transactions."
(8) The Recapitalization resulted in a charge of approximately $24.0 million to
retained earnings as a distribution to the common stockholders at that time.
The remaining deficit was transferred to additional paid-in capital upon
conversion from Subchapter S corporation tax status in 1994. See Note 1 to
the Consolidated Financial Statements.
20
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
The Selected Consolidated Financial Data set forth below as of and for each
of the four years in the period ended December 31, 1995 and as of and for the
nine months ended September 30, 1996, have been derived from the Company's
consolidated financial statements, audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports which are included in this Prospectus and
elsewhere in the Registration Statement. The Selected Consolidated Financial
Data of the Company as of and for the year ended December 31, 1991 and as of and
for the nine months ended September 30, 1995 have been derived from the
unaudited consolidated financial statements of the Company which, in the opinion
of the Company, include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the information set forth
therein. The results of operations for the nine months ended September 30, 1996
are not necessarily indicative of the results for any other interim period or
full year. The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Unaudited Pro Forma Condensed Consolidated Financial Data, the Consolidated
Financial Statements and the related notes thereto and the other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------- -----------------
1991 1992 1993 1994(1) 1995 1995 1996
------ ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue................................ $8,070 $11,443 $13,419 $14,461 $16,024 $12,176 $20,840
Operating costs:
Cost of services......................... 4,800 8,791 10,803 6,780 8,271 6,147 10,234
Selling, general and administrative
expense................................ 1,640 1,696 1,634 2,287 2,644 1,931 4,026
Provision for doubtful accounts.......... 234 787 953 1,003 1,161 910 1,655
Amortization expense..................... -- -- -- -- -- -- 357
------ ------- ------- ------- ------- ------- -------
Total operating costs............. 6,674 11,274 13,390 10,070 12,076 8,988 16,272
------ ------- ------- ------- ------- ------- -------
Income from operations..................... 1,396 169 29 4,391 3,948 3,188 4,568
Interest expense........................... (121) (62) (48) (1,584) (1,504) (1,151) (1,637)
Other income (expense), net................ (2) 10 9 (46) (46) (13) (143)
------ ------- ------- ------- ------- ------- -------
Income (loss) before income taxes.......... 1,273 117 (10) 2,761 2,398 2,024 2,788
Provision for income taxes(2).............. -- -- -- 696 900 759 1,075
------ ------- ------- ------- ------- ------- -------
Net income (loss).......................... $1,273 $ 117 $ (10) $ 2,065 $ 1,498 $ 1,265 $ 1,713
====== ======= ======= ======= ======= ======= =======
Supplemental pro forma data:(3)
Pro forma net income per share........... $ .19 $ .16 $ .20
======= ======= =======
Pro forma weighted average shares
outstanding............................ 8,085 8,085 8,555
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994(1) 1995 1996
------ ------ ------ -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................... $ 99 $ 113 $ 322 $ 103 $ 58 $ 193
Total assets................................ 2,116 2,437 2,676 10,264 9,992 50,793
Long term debt, including current portion... 826 752 513 17,005 15,146 44,684
Convertible Preferred Stock(4).............. -- -- -- 5,735 6,085 6,123
Stockholders' equity (deficit)(1)........... 1,052 1,169 913 (13,281) (12,133) (9,416)
</TABLE>
21
<PAGE> 23
(1) In connection with the Recapitalization, ALA, the predecessor to the
Company: (i) acquired the assets of PDK in exchange for an aggregate of: (a)
$3.5 million of Senior Notes; (b) $2.5 million of ALA Contingent Notes; and
(c) $20.5 million in cash; (ii) issued to Summit and Schroder an aggregate
of (a) 3,208,120 shares of Convertible Preferred Stock for $5.5 million and
(b) $7.5 million of Junior Notes; and (iii) issued to Drs. Poulos, Demaray
and Kowalczyk an aggregate of 1,425,600 shares of ALA common stock for $1.0
million. The Company recorded a charge of approximately $24.0 million to
retained earnings as a distribution to the holders of Common Stock. Cost of
services includes $2.1 million, $3.1 million and $4.4 million in 1991, 1992
and 1993, respectively, representing compensation paid to stockholders in
excess of the compensation of such stockholders following the
Recapitalization. Net income for the years ended December 31, 1994 and 1995
and the nine months ended September 30, 1995 and 1996 does not reflect
dividends payable on the Convertible Preferred Stock. See "The Company,"
"Certain Transactions -- Recapitalization" and Note 1 to Consolidated
Financial Statements.
(2) Prior to the Recapitalization, the Company elected to be taxed as a
Subchapter S corporation for federal income tax purposes and, accordingly,
the consolidated statements of operations in 1992 and 1993 and a portion of
1994 do not include a provision for income taxes.
(3) For all periods presented, pro forma net income per share is computed on the
basis of the weighted average number of shares of common stock and common
stock equivalents, including (i) the number of shares of Common Stock
issuable upon conversion of the Convertible Preferred Stock; (ii) Common
Stock issued by the Company during the 12 months immediately preceding the
date of this Prospectus; (iii) the Restricted Stock issued in connection
with the five Recent Acquisitions completed prior to September 30, 1996; and
(iv) shares of Common Stock which become issuable pursuant to the grant of
Common Stock options, using the treasury stock method and an assumed initial
public offering price of $14.00 per share.
(4) Includes Convertible Preferred Stock of $5.2 million plus accrued and unpaid
dividends of $925,000 at September 30, 1996.
22
<PAGE> 24
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following Unaudited Pro Forma Consolidated Balance Sheet at September
30, 1996 and the Unaudited Pro Forma Consolidated Statements of Operations for
the year ended December 31, 1995 and the nine months ended September 30, 1996
give effect to: (i) the Recent Acquisitions, including the acquisitions of D&P,
Derrick, FPA, Volusia, Seidenstein, Gulf Coast, SkinPath, Pathology Associates,
CPI, Richfield Labs and Freeman; and (ii) the consummation of this offering and
the application of the estimated net proceeds therefrom as if these transactions
had occurred at January 1, 1995 with respect to the consolidated statements of
operations and as if the Fourth Quarter Recent Acquisitions had been completed
on September 30, 1996 with respect to the Pro Forma Consolidated Balance Sheet.
See "The Company -- Recent Acquisitions" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Recent
Acquisitions." The Unaudited Pro Forma Consolidated Financial Data should be
read in conjunction with the Consolidated Financial Statements and related notes
thereto.
The Unaudited Pro Forma Consolidated Data has been prepared by the Company
based, in part, on the financial statements of the Recent Acquisitions which
financial statements are included elsewhere in the Prospectus, adjusted where
necessary to the Company's basis of accounting policies used in the Consolidated
Financial Statements. The Unaudited Pro Forma Consolidated Data is not intended
to be indicative of the results that would have occurred if the Recent
Acquisitions had occurred on the dates indicated or which may be realized in the
future.
23
<PAGE> 25
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOURTH ACQUISITION
QUARTER RECENT PRO FORMA PRO FORMA OFFERING PRO FORMA
HISTORICAL ACQUISITIONS(A) ADJUSTMENTS(B) TOTAL ADJUSTMENTS(C) AS ADJUSTED
---------- --------------- -------------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.... $ 193 $ 3,815 $ -- $ 4,008 $ -- $ 4,008
Accounts receivable, net..... 7,944 5,438 -- 13,382 -- 13,382
Inventories.................. 142 -- -- 142 -- 142
Other current assets......... 840 252 -- 1,092 -- 1,092
------- ------- ------- -------- -------- --------
Total current assets... 9,119 9,505 -- 18,624 -- 18,624
Property and equipment, net.... 3,055 887 -- 3,942 -- 3,942
Goodwill, net.................. 10,068 345 44,655 55,068 -- 55,068
Identifiable intangibles,
net.......................... 26,726 -- 37,529 64,255 -- 64,255
Other.......................... 1,825 113 220(d) 2,158 -- 2,158
------- ------- ------- -------- -------- --------
Total assets........... $50,793 $10,850 $82,404 $144,047 $ -- $144,047
======= ======= ======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued
expenses................... $ 4,406 $ 4,695 $ 939(d) $ 10,040 $ -- $ 10,040
Current portion of long-term
debt....................... 782 300 -- 1,082 -- 1,082
Deferred tax liability....... 1,152 496 -- 1,648 -- 1,648
Other current liabilities.... 109 -- 1,326 1,435 -- 1,435
------- ------- ------- -------- -------- --------
Total current
liabilities.......... 6,449 5,491 2,265 14,205 -- 14,205
------- ------- ------- -------- -------- --------
Credit Facility................ 30,844 -- 49,397 80,241 (59,789) 20,452
Senior Notes................... 3,500 -- -- 3,500 (3,500) --
Junior Notes................... 7,500 -- -- 7,500 (7,500) --
Subordinated Notes............. 2,058 397 1,140 3,595 -- 3,595
Note payable................... -- 113 -- 113 -- 113
Deferred tax liability......... 3,735 -- 10,486 14,221 -- 14,221
------- ------- ------- -------- -------- --------
Total long-term
liabilities.......... 47,637 510 61,023 109,170 (70,789) 38,381
------- ------- ------- -------- -------- --------
Convertible Preferred Stock.... 6,123 -- -- 6,123 (6,123) --
Total common stockholders'
equity (deficit)............. (9,416) 4,849 19,116 14,549 76,912 91,461
------- ------- ------- -------- -------- --------
Total liabilities and
stockholders' equity
(deficit)............ $50,793 $10,850 $82,404 $144,047 $ -- $144,047
======= ======= ======= ======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial data.
24
<PAGE> 26
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------------------------------
RECENT PRO FORMA OFFERING PRO FORMA
HISTORICAL ACQUISITIONS(E) ADJUSTMENTS(F) PRO FORMA ADJUSTMENTS AS ADJUSTED
---------- --------------- -------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
Patient services.......... $16,024 $68,042 $ (3,711) $80,355 $ -- $80,355
Management service
agreement............... -- -- 2,833 2,833 -- 2,833
------- ------- -------- ------- ------ -------
Total net revenue... 16,024 68,042 (878) 83,188 -- 83,188
Operating costs:
Cost of services.......... 8,271 46,011 (15,763) 38,519 -- 38,519
Selling, general and
administrative
expense................. 2,644 10,773 (533) 12,884 -- 12,884
Provision for doubtful
accounts................ 1,161 6,634 (93) 7,702 -- 7,702
Amortization expense...... -- -- 4,536(g) 4,536 -- 4,536
------- ------- -------- ------- ------ -------
Total operating
costs............. 12,076 63,418 (11,853) 63,641 -- 63,641
------- ------- -------- ------- ------ -------
Income from operations...... 3,948 4,624 10,975 19,547 -- 19,547
Interest expense............ (1,504) (126) (7,146)(h) (8,776) 6,112(k) (2,664)
Other income (expense),
net....................... (46) 185 (116)(i) 23 19(l) 42
------- ------- -------- ------- ------ -------
Income before income
taxes..................... 2,398 4,683 3,713 10,794 6,131 16,925
Provision for income
taxes..................... 900 476 3,355(j) 4,731 2,391(j) 7,122
------- ------- -------- ------- ------ -------
Net income.................. $ 1,498 $ 4,207 $ 358 $ 6,063 $3,740 $ 9,803
======= ======= ======== ======= ====== =======
Supplemental pro forma data:
Pro forma net income per
share................... $ .19 $ .50 $ .55
======= ======= =======
Pro forma weighted average
shares outstanding(m)... 8,085 12,042 17,742
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
-----------------------------------------------------------------------------------------
RECENT PRO FORMA OFFERING PRO FORMA
HISTORICAL ACQUISITIONS(E) ADJUSTMENTS(F) PRO FORMA ADJUSTMENTS AS ADJUSTED
---------- --------------- -------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
Patient services.......... $20,840 $43,487 $ (2,770) $61,557 $ -- $61,557
Management service
agreement............... -- -- 2,440 2,440 -- 2,440
------- ------- -------- ------- ------ -------
Total net revenue... 20,840 43,487 (330) 63,997 -- 63,997
Operating costs:
Cost of services.......... 10,234 29,683 (10,409) 29,508 -- 29,508
Selling, general and
administrative
expense................. 4,026 7,772 (1,016) 10,782 -- 10,782
Provision for doubtful
accounts................ 1,655 4,149 -- 5,804 -- 5,804
Amortization expense...... 357 20 3,009(g) 3,386 -- 3,386
------- ------- -------- ------- ------ -------
Total operating
costs............. 16,272 41,624 (8,416) 49,480 -- 49,480
------- ------- -------- ------- ------ -------
Income from operations...... 4,568 1,863 8,086 14,517 -- 14,517
Interest expense............ (1,637) (71) (4,521)(h) (6,229) 4,472(k) (1,757)
Other income (expense),
net....................... (143) 27 58(i) (58) 14(l) (44)
------- ------- -------- ------- ------ -------
Income before income
taxes..................... 2,788 1,819 3,623 8,230 4,486 12,716
Provision for income
taxes..................... 1,075 259 2,247(j) 3,581 1,750(j) 5,331
------- ------- -------- ------- ------ -------
Net income.................. $ 1,713 $ 1,560 $ 1,376 $ 4,649 $2,736 $ 7,385
======= ======= ======== ======= ====== =======
Supplemental pro forma data:
Pro forma net income per
share................... $ .20 $ .39 $ .42
======= ======= =======
Pro forma weighted average
shares outstanding(m)... 8,555 12,042 17,742
======= ======= =======
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial data.
25
<PAGE> 27
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
<TABLE>
<S> <C>
(a) Represents the historical balance sheets of the Fourth
Quarter Recent Acquisitions as if the transactions had
occurred as of September 30, 1996.
(b) Reflects the total estimated costs of $72.2 million for the
Fourth Quarter Recent Acquisitions consisting of: (i) $49.4
million in cash; (ii) $1.5 million principal amount of
Subordinated Notes; (iii) $9.2 million of Common Stock
(957,299 shares); (iv) $10.9 million of Restricted Stock
(1,399,036 shares) pursuant to the Restricted Stock
Agreements; and (v) $1.2 million of estimated transaction
costs. The aggregate purchase price has been allocated, on a
preliminary basis, to the net assets acquired based on their
estimated fair market value and to identifiable intangible
assets, except the management service agreement, based on
reports of independent consultants. The identifiable
intangible asset related to the management service agreement
was assigned a value equal to the excess of cost over the
fair value of the acquired net assets. The allocation of the
purchase price is preliminary, while the Company continues
to obtain the information to determine the fair value of the
assets acquired and liabilities assumed. The identifiable
intangible assets relate to hospital contracts, physician
referral lists and laboratory contracts acquired in the
Recent Acquisitions. The remaining $45.0 million of the
unallocated purchase price has been recorded as goodwill.
The Company expects to perform a final analysis of the
purchase price and does not anticipate material changes to
the preliminary allocation. In addition, the Company issued
$3.4 million of additional Restricted Stock (434,398 shares)
related to the five Recent Acquisitions completed prior to
September 30, 1996 pursuant to the Restricted Stock
Agreements. The following summarizes the acquisition pro
forma adjustments related to the above transactions (in
thousands):
Total estimated costs for the Fourth Quarter Recent
Acquisitions.............................................. $ 72,239
Add additional Restricted Stock............................. 3,379
Net assets of Fourth Quarter Recent Acquisitions............ $ 4,849
Net assets distributable to former owners................... (1,326)
Repayment of Fourth Quarter Recent Acquisition debt......... 397
Goodwill recorded in the historical financial statements of
Fourth Quarter Recent Acquisitions........................ (345)
--------
Less net tangible assets acquired........................... 3,575
--------
Net intangible assets acquired.............................. 72,043
Add deferred tax liability recorded on identifiable
intangible assets......................................... 10,486
--------
Total intangible assets..................................... 82,529
Less identifiable intangible assets......................... 37,529
--------
Estimated goodwill.......................................... 45,000
Less goodwill recorded in the historical financial
statements of Fourth Quarter Recent Acquisitions.......... 345
--------
Adjustment to increase goodwill............................. $ 44,655
========
In connection with certain Fourth Quarter Recent
Acquisitions, net assets of $1.3 million included in the
historical financial statements of those acquired Practices
are distributable to the sellers of such Practices, in
accordance with the acquisition agreements.
(c) Reflects the conversion of the Convertible Preferred Stock
and the sale of the Shares offered by the Company hereby, at
an assumed initial public offering price of $14.00 per
share, and the application of the estimated net proceeds
therefrom, as if both transactions had occurred on September
30, 1996.
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Gross proceeds from this offering........................... $ 79,800
Underwriting discounts and commissions...................... (5,586)
Estimated expenses of this offering......................... (2,500)
--------
Net proceeds....................................... 71,714
Repayment of Junior Notes................................... (7,500)
Repayment of Senior Notes................................... (3,500)
Payment of Convertible Preferred Stock cumulative
dividends................................................. (925)
Repayment of Credit Facility................................ (59,789)
--------
Net increase in cash and cash equivalents.......... $ --
========
</TABLE>
26
<PAGE> 28
<TABLE>
<S> <C>
(d) Included is the $1.2 million of transaction costs (Note b)
and the effect of the issuance of 85,999 shares of Common
Stock for loan fees related to the Credit Facility of
$480,000, of which $260,000 reduced accounts payable and
accrued expenses and $220,000 increased deferred debt issue
costs included in other assets. Such shares have been
recorded at their estimated fair market value at the date of
the respective credit facility agreement and amendments
thereto. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity
and Capital Resources."
(e) With respect to the year ended December 31, 1995, represents
the historical results of operations of the Recent
Acquisitions as if these transactions occurred at January 1,
1995; with respect to the nine months ended September 30,
1996, represents the historical results of operations of the
Recent Acquisitions from January 1, 1996 through the date of
acquisition or affiliation for the five Recent Acquisitions
completed prior to September 30, 1996 and through September
30, 1996 for the Fourth Quarter Recent Acquisitions.
The acquisitions of Richfield Labs, CPI and Freeman involved
affiliations with the three PA Contractors in Ohio and
Texas.
In the case of Richfield Labs and CPI, all of the common
stock of each of these companies is held in trust. The
Company is the sole beneficiary of each trust and receives
all income from the trusts. The Company, at its sole
discretion, can replace the trustees, withdraw any asset
from the trusts, modify the terms of the trust agreements,
or terminate the trusts, and direct the trustees to
distribute income and any asset from the trusts. No assets
of the trusts can be sold or otherwise disposed of without
the Company's consent. Additionally, a wholly-owned PA
Contractor Subsidiary of the Company entered into 40-year
management agreements with each of Richfield Labs and CPI,
under which such subsidiary provides all management and
other non-medical services for Richfield Labs and CPI for a
fee equal to the practice's net revenue less practice
expenses, including physician salaries, which are fixed by
employment agreements, and related professional expenses.
Therefore, the Company is entitled to all of the net income
of these practices. Based on the provisions of the purchase
agreements, trust agreements and management agreements,
consolidation of Richfield Labs and CPI is required to
present the Company's financial position and results of
operations in conformity with generally accepted accounting
principles because the Company has the controlling financial
interest in Richfield Labs and CPI by means other than
direct record ownership of voting stock. Accordingly, these
acquisitions are accounted for as purchase business
combinations and are consolidated in the Unaudited Pro Forma
Consolidated Financial Statements.
In connection with the acquisition of Freeman and
affiliation with the Texas PA, a wholly-owned PA Contractor
Subsidiary and the Texas PA have entered into a 40-year
management service agreement under which the Company
provides, on an exclusive basis, the technical laboratory
services, management and all other non-medical practice
services for the Texas PA. The Company's PA Contractor
Subsidiary in Texas employs all of the technical employees
and owns all of the laboratory facilities, testing equipment
and other assets used in connection with the pathology
services performed by the Texas PA's physicians. The Texas
PA's payments to the PA Contractor Subsidiary under this
management service agreement are comprised of the
reimbursement of the costs and expenses for providing the
technical laboratory services, a base fee and a performance
fee based on achievement of goals and objectives established
annually. Assuming the PA Contractor Subsidiary achieves its
goals and objectives, such fees will result in the PA
Contractor Subsidiary receiving substantially all net
revenue less practice expenses of the Texas PA. Practice
expenses include physician salaries which are fixed by
employment agreement and related professional expenses.
Therefore, the Company is the direct beneficiary of
substantially all of the net income of the Texas PA. For
purposes of the Unaudited Pro Forma Consolidated Statement
of Operations, the annual base fee is equal to the current
base fee of $400,000 and the performance fee assumes that
the PA Contractor Subsidiary will achieve its goals and
objectives. The following displays the Texas PA's pro forma
net revenue and practice expenses, and the fees to the PA
Contractor Subsidiary for management and other services:
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
Texas PA:
Net revenue............................................... $3,160 $2,770
Practice expenses......................................... (327) (330)
------ ------
Management service agreement revenue...................... $2,833 $2,440
====== ======
Components of management service agreement revenue:
Reimbursement of technical costs.......................... $ 220 $ 303
Reimbursement of expenses and overhead.................... 1,942 1,656
Base management fee....................................... 400 300
Performance fee........................................... 271 181
------ ------
Total.............................................. $2,833 $2,440
====== ======
</TABLE>
27
<PAGE> 29
<TABLE>
<S> <C>
Under the terms of the acquisition agreement, the sole
shareholder of the Texas PA is prohibited from selling,
assigning or disposing of the common stock of the Texas PA
prior to September 30, 1997, except that at the direction of
the Company, without further consideration, such shareholder
is required to transfer ownership of the shares of the Texas
PA to, or merge the Texas PA into, a Texas 5.01(a)
non-profit corporation (the "501(a) corporation") which the
Company is in the process of forming and of which the
Company will be the sole member. The formation of the 501(a)
corporation is subject to review by Texas regulatory
authorities. Members of the board of directors of the 501(a)
corporation will be appointed by, and can be removed by, the
sole member, which will be the Company. The Company believes
that the formation of the 501(a) corporation and its merger
with the Texas PA prior to September 30, 1997 is virtually
assured. Upon such merger, the Company will have direct
voting control over the 501(a) corporation and will
consolidate its operations in the Company's consolidated
financial statements.
The Company will consolidate any future acquisitions or
affiliations in which it acquires the controlling financial
interest through the acquisition of direct ownership of
voting stock or other appropriate means. For any future
affiliations through management service or other agreements
in which the Company does not obtain the controlling
financial interest, but does have a net profits interest,
the Company will separately display management service
agreement revenue (at least, until such time that the
Company gains a controlling financial interest).
The Emerging Issues Task Force ("EITF"), in EITF No. 97-2,
is addressing accounting and reporting issues relating to
physician practice management company affiliations with
medical practices. Any consensus reached in EITF No. 97-2
could affect the presentation in the Company's consolidated
financial statements of the assets, liabilities, net revenue
or costs related to pathology practices affiliated with the
Company.
(f) The pro forma adjustments to net revenue, cost of services,
selling, general and administrative expense and the
provision for doubtful accounts include adjustments to: (1)
exclude the net revenue and related expenses attributable to
an inpatient laboratory in a hospital that was closed (the
"Closed Hospital") prior to the date of acquisition of
Derrick; (2) increase compensation expense for the net
profits of the dermatology practice (the "Derm Practice")
which are payable to the practicing dermatologists; (3)
eliminate certain non recurring expenses directly related to
the Recent Acquisitions and related transactions ("Non
Recurring"); (4) reduce cost of services to reflect the
reduction in physician compensation, including bonuses and
other compensation, to the amounts that will be paid to the
Affiliated Physicians after the acquisition of the Practices
in accordance with their employment agreements with the
Company ("Physician Compensation"); and (5) reclassify the
net revenue and expenses to display the results of
operations of the Texas PA as discussed in Note (e) above
("Management Service Agreement"). The following table
summarizes these adjustments:
</TABLE>
<TABLE>
<CAPTION>
MANAGEMENT
CLOSED PHYSICIAN SERVICE
HOSPITAL DERM PRACTICE NON RECURRING COMPENSATION AGREEMENT TOTAL
-------- ------------- ------------- ------------ ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1995
Patient services........... $(551) $ -- $ -- $ -- $ (3,160) $ (3,711)
Management service
agreement................ -- -- -- -- 2,833 2,833
Cost of services........... -- 180 -- (15,616) (327) (15,763)
Selling, general and
administrative expense... (41) -- (492) -- -- (533)
Provision for doubtful
accounts................. (93) -- -- -- -- (93)
SEPTEMBER 30, 1996
Patient services........... $ -- $ -- $ -- $ -- $ (2,770) $ (2,770)
Management service
agreement................ -- -- -- -- 2,440 2,440
Cost of services........... -- 111 -- (10,190) (330) (10,409)
Selling, general and
administrative expense... -- -- (1,016) -- -- (1,016)
</TABLE>
28
<PAGE> 30
<TABLE>
<S> <C>
(g) Represents the amortization expense for both net
identifiable intangible assets and goodwill based upon the
Company's preliminary allocation of purchase price. The net
identifiable intangible assets total approximately $64.3
million and are being amortized over periods ranging from 10
to 40 years. The amortization periods of identifiable
intangible assets, except the management service agreement,
were estimated by the Company based on reports of
independent consultants. The identifiable intangible asset
related to the management service agreement is being
amortized over 40 years which coincides with the term of the
agreement. In determining amortization periods the Company
considered each Practice's operating history, contract
renewals, stability of physician referral lists and industry
statistics. The values were determined using a discounted
cash flow valuation model. The goodwill is approximately
$55.1 million and is being amortized over periods ranging
from 15 to 35 years. The amortization periods for goodwill
were determined by the Company with consideration given to
the lives assigned to the identifiable intangible assets,
the reputation of each Practice, the length of each
Practice's operating history, and the potential of the
market in which the acquired Practice is located. In
addition, the adjustment includes the estimated amortization
of goodwill related to the Contingent Notes which would have
been payable based on the Recent Acquisitions' pro forma
profitability.
</TABLE>
The following table summarizes the values assigned to each
of the identifiable intangible assets and goodwill and the
related weighted average amortization periods.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AMORTIZATION
VALUE PERIOD
-------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Hospital contracts.......................................... $ 28,950 36.5
Physician referral lists.................................... 27,331 18.8
Laboratory contracts........................................ 1,800 10.0
Management service agreement................................ 6,429 40.0
Goodwill.................................................... 55,145 34.1
--------
Total.............................................. $119,655
========
(h) Represents interest expense related to amounts borrowed to
finance the Recent Acquisitions as if such borrowings had
occurred as of the beginning of the periods presented. The
amount of the outstanding borrowings under the Credit
Facility represents cash of approximately $78.6 million for
the purchase prices of the Recent Acquisitions and related
transaction fees at an interest rate of 8.5% and 8.25% for
1995 and for the nine months ended September 30, 1996,
respectively. In addition, the adjustment includes interest
expense in connection with the Subordinated Notes.
(i) Represents an adjustment to record the amortization of
deferred debt issuance costs as if the current Credit
Facility was in place from the beginning of the periods
presented.
(j) Represents the incremental tax effect of the pro forma and
offering adjustments related to the Recent Acquisitions and
the provision for income taxes related to three Recent
Acquisitions for the year ended December 31, 1995 and two
Recent Acquisitions for the nine months ended September 30,
1996, none of which provided for such taxes in their
historical financial statements because of the election by
such entities to be taxed as Subchapter S corporations for
federal income tax purposes.
(k) Reflects a reduction in interest expense in connection with
the repayment of certain outstanding debt of the Company
with the estimated net proceeds of this offering as
described under "Use of Proceeds," as if the transactions
had occurred as of the beginning of the periods presented.
(l) Reflects the elimination of the amortization of deferred
debt issuance costs related to the repayment of the
principal amounts of the Junior Notes and Senior Notes with
a portion of the estimated net proceeds of this offering.
(m) For all periods presented, pro forma net income per share is
computed based on the weighted average numbers of shares of
common stock and common stock equivalents, including (i) the
number of shares of Common Stock issuable upon conversion of
the Convertible Preferred Stock; (ii) Common Stock issued by
the Company during the 12 months immediately preceding the
date of this Prospectus; (iii) the Restricted Stock; and
(iv) shares of Common Stock which become issuable pursuant
to the grant of Common Stock options, using the treasury
stock method and an assumed initial public offering price of
$14.00 per share.
</TABLE>
29
<PAGE> 31
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 in conjunction with the Unaudited Pro Forma
Consolidated Financial Data, the Consolidated Financial Statements and related
notes thereto and other financial information included elsewhere in this
Prospectus.
INTRODUCTION
Prior to implementing the acquisition program, the Company's operations
consisted of providing outpatient anatomic pathology services, principally
dermatopathology, through pathologists employed by the Company. With the Recent
Acquisitions, the Company affiliated with three Practices that provide
exclusively outpatient anatomic pathology services and acquired eight Practices
that provide both inpatient anatomic pathology services under exclusive
contracts with hospitals as well as outpatient anatomic pathology services. The
Company intends to pursue acquisitions of and affiliations with inpatient and
outpatient anatomic pathology practices. The Company derives its net revenue
from the net revenue of the Practices.
The Practices provide anatomic pathology and related histological services
with particular emphasis on dermatopathology (diseases of the skin),
hematopathology (diseases of the blood), and cytopathology (diseases of the
cells), as well as surgical pathology (diagnostic services in connection with
surgical procedures).
Outpatient pathology services are performed in free-standing, independent
pathology laboratories owned and operated by the Company or in hospital-owned
laboratories operated by the Company. Services performed are billed to patients,
Medicare, Medicaid, other third party payors, national clinical laboratories and
attending physicians on a fee-for-service basis, which cover both the
professional and technical components of such services.
The Company currently derives management service agreement revenue from the
Texas PA. The Company is in the process of forming a Texas 501(a) corporation
which will permit the Company to consolidate the results of operations of the
Texas PA with the Company's other Direct Subsidiaries. In the event the Company
affiliates with practices in other states that prohibit the corporate practice
of medicine, the Company may have additional management service agreement
revenue. See Note 3 to the Consolidated Financial Statements.
Inpatient pathology services are performed pursuant to exclusive
contractual arrangements with hospitals. Net revenue for inpatient pathology
services is dependent in large part on the level of inpatient admissions at the
hospitals. Generally, such arrangements 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 laboratory with responsibility for the
clinical laboratory and histology departments, as well as the hospital's blood
bank and microbiology services. In exchange for these services, the Company and
the PA Contractors bill patients, Medicare, Medicaid and other third party
payors for the professional component of the services provided by the
pathologists on a fee-for-service basis. In certain cases, the Practices are
paid an annual fee for an Affiliated Physician to serve as the medical director
of the laboratory. Currently, the aggregate annual amount of such fees is
approximately $1.9 million.
The Company and the PA Contractors typically bill 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: (i) Medicare and
Medicaid reimbursements at annually established rates; (ii) payments from
managed care organizations at discounted fee-for-service rates; (iii) negotiated
reimbursement rates with other third party payors; (iv) rates negotiated under
sub-contracts with national clinical laboratories for the provision of anatomic
pathology services; and (v) discounted and uncollectible amounts, principally
from private pay patients.
In recent years, there has been a shift away from traditional indemnity
insurance companies to managed care as employers and other payors move their
participants into lower cost plans. The Company benefits more from patients
covered by Medicare and traditional indemnity insurance than managed care
organizations and
30
<PAGE> 32
national clinical laboratories, many of whom contract with managed care
organizations to provide anatomic pathology services. The Company and the PA
Contractors have contracts with managed care organizations and national clinical
laboratories and the Company is attempting to increase the number of such
contracts to increase test volume. Since the majority of the Company's operating
costs, principally physician and non-physician technical compensation, are
fixed, increases in volume resulting from contracts at discounted rates enhance
the Company's profitability. Historically, net revenue from capitated contracts
has represented an insignificant amount of net revenue. See "Risk
Factors -- Reliance upon Government Programs."
The Company estimates that, on a pro forma basis for the nine months ended
September 30, 1996, approximately one-third of net revenue was attributable to
government sponsored healthcare programs (principally Medicare and Medicaid).
The federal government sets reimbursement rates for services performed for
patients covered by Medicare on an annual basis. Medicare reimbursement rates
may also impact Medicaid and other reimbursement rates. From 1993 through 1996,
Medicare rates for the Company's primary reimbursement code in Florida
increased, on average, 4.0% per year. Effective January 1, 1997, the same
Medicare reimbursement rate is scheduled to decrease by 5.3% to 6.0% in Florida,
where a majority of the Company's net revenue from Medicare is derived. The
Company plans to mitigate the adverse effects of the reimbursement reduction on
net revenue and earnings through implementation of its strategy, specifically
(i) increasing marketing efforts to expand referral services and (ii) reducing
practice costs through implementation of operating and production efficiencies.
While the Company cannot predict future Medicare reimbursement rates, the
Company believes it will be able to offset any future reimbursement rate
decreases by increasing net revenue and maintaining profitability of the
Practices through implementation of its strategies. No assurance can be given
that the Company will be able to maintain or increase its net revenue or
profitability.
Prior to the Recapitalization, the Company elected to be treated as a
Subchapter S corporation for federal income tax purposes and accordingly was not
subject to federal and certain state income taxes during such period. During
1996, the Company ceased the unprofitable operation of a clinical laboratory and
acquired one Practice whose operations include two outpatient clinical
laboratories. Many anatomic pathology practices operate clinical pathology
laboratories incidental to their businesses. In implementing its acquisition
strategy, the Company may acquire other practices that provide outpatient
clinical pathology services. The Company believes that operating clinical
laboratories will continue to be incidental to its business. See "Business --
Government Regulation."
RECENT ACQUISITIONS
The Recent Acquisitions were funded with various combinations of cash,
Common Stock, debt and contingent consideration. The aggregate non-contingent
purchase price paid for the Recent Acquisitions was approximately $108.0
million, $78.6 million of which was paid in cash, $4.5 million of which was paid
in Subordinated Notes and $24.9 million of which was paid in shares of Common
Stock, at a weighted average price of $6.41 per share. The cash portion of the
purchase prices was financed with borrowings under the Credit Facility. The
Contingent Notes are payable based upon the Practices' achievement of specified
profitability objectives over periods ranging from 1996 to 2001. The contingent
payments vary in duration of payment and the minimum and maximum amounts to be
paid upon the achievement of profitability objectives relating to the Practice.
Generally, the amount of the contingent consideration to be paid cannot be
determined until the earlier of the termination of the contingency period or
until a profitability objective has been met. If the Practices achieve minimum
specified profitability objectives, the Company would be obligated to make
aggregate contingent payments of at least $8.7 million between 1997 and 2001. No
amounts would be paid if the minimum profitability objectives are not met. If
the Practices achieve the maximum profitability objectives, the Company would
make aggregate contingent payments of $31.3 million between 1997 and 2001. Since
the profitability criteria are calculated on a cumulative basis over the period
of the Contingent Notes, the performance of a Practice in one year may affect
the payment of the Contingent Notes in another year. In the event the
profitability criteria for a Practice are not met in a particular year, the
shortfall in that year may be satisfied by excess profitability in a later year
in which event a payment would be made in that later year. To the extent that
the maximum profitability criteria are exceeded in any particular year, the
amount of the excess will be carried backward to a prior year when the
profitability criteria were not
31
<PAGE> 33
satisfied or forward to a subsequent year in determining whether the
profitability criteria for such year have been met. This cumulative effect may
cause contingent payments to be made with respect to a year in which
profitability criteria would not have been met if such year was evaluated
separately, and could cause contingent payments with respect to multiple years
to become due in a single or later year. Additional consideration, if any, paid
in cash under these contingent arrangements will be accounted for as an
additional purchase price for the Practice. The Company believes that the
incremental cash generated from operations will be sufficient to satisfy the
payment, if any, of the contingent obligations in any one year period. See "Risk
Factors -- Unpaid Contingent Acquisition Consideration." Such payments, if any,
will result in a corresponding increase in goodwill and the related amount of
amortization thereof in periods following the payment.
The PA Contractor Subsidiaries have long-term management agreements with
three PA Contractors in Texas and Ohio (the "PA Management Agreements"). In
Texas, the Texas PA is owned by an Affiliated Physician. In Ohio, the PA
Contractors are owned by a trust, of which AmPath is the sole beneficiary. Under
the PA Management Agreements, the Company has control over all non-medical
functions of the PA Contractors, including all administrative, management,
billing and support functions, while the PA Contractors and the physicians they
employ have control over all functions relating to the provision of medical
services. AmeriPath's PA Contractor Subsidiaries receive a management fee for
the services. In Ohio, the fee is equal to the net revenue of the pathology
practice. In Texas, the management fee consists of a flat base fee, which is
determined on an annual basis according to the operating plan of the Practice,
and a performance-based percentage fee, which may be paid if the performance of
the Practice exceeds budgeted targets. In addition, the Texas PA reimburses the
PA Contractor Subsidiary in Texas for all direct operating and production costs.
Pursuant to a management service agreement with the Texas PA, the PA Contractor
Subsidiary expects to receive a flat base management fee of approximately
$400,000 in 1997, which amount excludes a performance fee the amount of which
will be determined by the PA Contractor Subsidiary in Texas. The base management
fee together with the performance fee are expected by the Company (assuming the
Texas PA Contractor Subsidiary meets its targets pursuant to the management
service agreement) to approximate the net revenue of the Texas PA in 1997. Each
of the PA Management Agreements have terms of 40 years and are subject to
renegotiation at the end of such term. See "Business -- Government Regulation,"
"Risk Factors -- Government Regulation" and "Risk Factors -- Dependence on
Pathologists."
Other than the acquisition of the assets of D&P, each of the Recent
Acquisitions involving Practices in Florida, Kentucky and Alabama were
structured as the purchase of all of the outstanding capital stock of the
acquired Practice. Each of the Recent Acquisitions involving Practices in Ohio
and Texas were effected through (i) in the case of the Practice in Texas, the
purchase of all tangible and intangible assets (or of stock including such
assets) of the Practice's laboratory facilities and related equipment and other
assets, (ii) a long-term management agreement between the PA Contractor
Subsidiaries and each PA Contractor, and (iii) in the case of the two Practices
in Ohio, contribution of the stock of each Ohio PA to a trust, of which AmPath
is the sole beneficiary, and, in the case of the Practice in Texas, an agreement
by the Affiliated Physician who owns all of the stock in the Texas PA Contractor
to transfer such stock to a corporation controlled by AmeriPath (without further
consideration to or action on the part of such Affiliated Physician). See Note
(e) to Unaudited Pro Forma Consolidated Financial Data and "Business-Affiliation
Structure." Each of the Recent Acquisitions was accounted for as a purchase of
the underlying net assets.
The Recent Acquisitions have resulted in a significant increase in
intangible assets. At September 30, 1996, net intangible assets were $36.8
million, including $26.7 million of net identifiable intangible assets and $10.1
million of goodwill, principally due to the Recent Acquisitions completed in the
nine months ended September 30, 1996. Virtually all of the Recent Acquisition's
aggregate purchase price of approximately $108.0 million was recorded as either
net identifiable intangible assets or goodwill. For a discussion of the
preliminary allocation of the purchase price in the Recent Acquisitions, see
Note 3 to the Consolidated Financial Statements. At September 30, 1996, on a pro
forma basis, approximately $64.3 million represents net identifiable intangible
assets and $55.1 million represents goodwill. Net identifiable intangible assets
include hospital contracts, physician referral lists, a management service
agreement, and laboratory contracts acquired in connection with the Recent
Acquisitions and will be amortized on a straight line basis over periods ranging
from 10 to 40 years. For the year ended December 31, 1995, and the nine months
ended
32
<PAGE> 34
September 30, 1996, amortization of net identifiable intangible assets on a pro
forma basis for the Recent Acquisitions was $2.7 million and $2.1 million,
respectively. Goodwill represents the excess of cost over the fair value of the
net assets of the Recent Acquisitions and will be amortized on a straight line
basis over periods ranging from 15 to 35 years. For the year ended December 31,
1995, and the nine months ended September 30, 1996 amortization of goodwill on a
pro forma basis for the Recent Acquisitions was $1.8 million and $1.3 million,
respectively. These amortization amounts will increase on an annual basis in the
event that the contingent payments are made pursuant to the Contingent Notes.
There can be no assurance that the value of the intangible assets will ever be
realized by the Company. The Company will evaluate the carrying values
attributed to intangible assets on an on-going basis. In the event of an
impairment of the values attributed to goodwill or identifiable intangible
assets, there would be a charge to earnings that could have a material adverse
effect on the Company's financial condition and results of operations. See "Risk
Factors -- Risks Related to Intangible Assets" and Unaudited Pro Forma
Consolidated Financial Data.
To date, the Company has integrated certain aspects of the billing, sales
and marketing, accounting, purchasing, insurance and courier functions of the
Practices. Integration of such functions has resulted in greater efficiency in
negotiating insurance coverage and effective marketing of the Practices to
national clinical laboratories. In addition, the Company has taken steps to
consolidate the accounting procedures and financial reporting systems of the
Practices and is implementing cash management and other fiscal control programs.
See "Business -- Regional Business Model" and "Business -- Affiliation
Structure."
33
<PAGE> 35
PRACTICES
As of December 31, 1996, the 12 Practices consisted of:
<TABLE>
<CAPTION>
AFFILIATED TOTAL HOSPITAL OUTPATIENT 1995
PRACTICE(1) LOCATION PHYSICIANS(2) PERSONNEL(3) CONTRACTS LABORATORY NET REVENUE
- --------------------- ------------------- ------------- ------------ --------- ---------- -----------
(IN
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
American Laboratory Fort Lauderdale, FL 6 121 -- X $16,024
Associates
Cutaneous Pathology & Beachwood, OH 3 15 -- X 3,798
Immunofluorescence
Laboratory
D&P Pathology Fort Lauderdale, FL 9 9 3 2,548
Derrick and Orlando, FL 24 148 14 X 21,706
Associates
Pathology
Florida Pathology Miami Beach, FL 2 14 1 X 3,055
Associates
Freeman-Cockerell Dallas, TX 2 40 -- X 3,160
Laboratories
Gulf Coast Pathology Cape Coral, FL 5 31 3 X 8,786
Associates
Pathology Associates Lexington, KY 8 57 16 X 4,934
Richfield Laboratory Cincinnati, OH 3 32 -- X 6,202
of Dermatopathology
Drs. Seidenstein, Fort Myers, FL 9 40 5 6,181
Levine & Associates
SkinPath Birmingham, AL 3 22 1 X 1,847
Volusia Pathology Ormond Beach, FL 7 34 3 X 5,825
Group
-- --- -- -------
Totals 81 563 46 $84,066
== === == =======
</TABLE>
- ---------------
(1) The Company is not licensed to practice medicine. The practice of medicine
is conducted solely by the Affiliated Physicians who are employed by either
the Direct Subsidiaries or the PA Contractors.
(2) In the Practices located in Ohio and Texas, the Affiliated Physicians are
employed directly by the Ohio PAs and the Texas PA, respectively.
(3) Does not include 22 administrative and executive personnel of AmPath. Does
include the Affiliated Physicians employed by the Ohio PAs and the Texas PA.
34
<PAGE> 36
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
consolidated financial data as a percentage of net revenue (patient billings net
of contractual allowances).
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUE
---------------------------------------------
NINE MONTHS
YEAR ENDED ENDED SEPTEMBER
DECEMBER 31, 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenue........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating costs:
Cost of services................................. 80.5 46.9 51.6 50.5 49.1
Selling, general and administrative expense...... 12.2 15.8 16.5 15.9 19.3
Provision for doubtful accounts.................. 7.1 6.9 7.2 7.5 7.9
Amortization expense............................. -- -- -- -- 1.7
----- ----- ----- ----- -----
Total operating costs.................... 99.8 69.6 75.3 73.9 78.0
----- ----- ----- ----- -----
Income (loss) from operations...................... 0.2 30.4 24.7 26.1 22.0
Interest expense................................... (0.4) (11.0) (9.4) (9.4) (7.9)
Other income (expense), net........................ 0.1 (0.3) (0.3) (0.1) (0.7)
----- ----- ----- ----- -----
Income (loss) before income taxes.................. (0.1) 19.1 15.0 16.6 13.4
Provision for income taxes......................... -- 4.8 5.6 6.2 5.2
----- ----- ----- ----- -----
Net income (loss).................................. (0.1)% 14.3% 9.4% 10.4% 8.2%
===== ===== ===== ===== =====
</TABLE>
Nine Months Ended September 30, 1996 as Compared to Nine Months Ended September
30, 1995
The Company completed the acquisition of five Practices in the first nine
months of 1996, the results of which are included in the Company's operating
results from the date of acquisition. Changes in operations between the nine
months ended September 30, 1995 and the nine months ended September 30, 1996
were primarily due to these acquisitions.
Net revenue increased by $8.7 million, or 71.2%, to $20.8 million for the
nine months ended September 30, 1996 from $12.2 million for the nine months
ended September 30, 1995. The increase was attributable to $8.9 million from the
five Recent Acquisitions, and $633,000 from same practice growth, offset by the
decline in net revenue of $892,000 from the Company's clinical laboratory which
ceased operations on May 31, 1996. Same practice net revenue increased $633,000,
compared to the same period in 1995, due to an increase in test volume and an
increase in the Medicare reimbursement rate for surgical biopsies of 2.6% which
became effective on January 1, 1996. References to same practice mean Practices
at which the Company provided services for the entire period for which the
amount is calculated and the entire prior comparable period.
Cost of services increased by $4.1 million, or 66.5%, to $10.2 million for
the nine months ended September 30, 1996 from $6.1 million for the nine months
ended September 30, 1995. The increase was attributable primarily to $4.8
million from the five Recent Acquisitions and a decrease of $690,000
attributable to the Company's clinical laboratory which ceased operations on May
31, 1996. Same practice cost of services decreased by $74,000 for the nine
months ended September 30, 1996 compared to the same period in 1995 due to
increased productivity by the Affiliated Physicians.
Selling, general and administrative expense increased by $2.1 million, or
108.5%, to $4.0 million for the nine months ended September 30, 1996 from $1.9
million for the nine months ended September 30, 1995. Of this increase, $1.2
million, or 57.1%, was attributable to the Practices acquired during the nine
months ended September 30, 1996. The remaining increase was due to the
appointment of a Chief Executive Officer, as of January 1, 1996, increased
staffing levels in marketing, billing and accounting and costs incurred to
expand the Company's administrative support infrastructure and complete the
transition to an upgraded billing system.
35
<PAGE> 37
Provision for doubtful accounts increased by $745,000, or 81.9%, to $1.7
million for the nine months ended September 30, 1996 from $910,000 for the nine
months ended September 30, 1995. This increase was primarily attributable to the
Practices acquired in the nine months ended September 30, 1996. The provision
for doubtful accounts as a percentage of net revenue was 7.9% and 7.5% for the
nine months ended September 30, 1996 and 1995, respectively. The provision for
doubtful accounts as a percentage of net revenue is higher for inpatient
services than for outpatient services due primarily to a larger concentration of
indigent and private pay patients and longer billing and collection cycles for
inpatient services.
Amortization expense of $357,000 for the nine months ended September 30,
1996 was attributable to amortization of goodwill and net identifiable
intangible assets from acquired Practices. There was no amortization expense
during the nine months ended September 30, 1995. In light of the identifiable
intangibles and goodwill arising in the Recent Acquisitions, these amortization
amounts will increase on an annual basis in connection with the Company's future
acquisitions and in the event that contingent payments are made pursuant to the
Contingent Notes. Additionally, the Company will evaluate the carrying values
attributed to identifiable intangible assets and goodwill on an on-going basis.
In the event of an impairment of the values attributed to goodwill or
identifiable intangible assets, there would be a charge to earnings that could
have a material adverse effect on the Company's financial condition and results
of operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Recent Acquisitions."
Interest expense increased by $486,000, or 42.2%, to $1.6 million for the
nine months ended September 30, 1996 from $1.2 million for the nine months ended
September 30, 1995. This increase was attributable to indebtedness incurred to
finance the acquisition of five Practices.
The effective income tax rate was approximately 38.6% for the nine months
ended September 30, 1996 as compared to 37.5% for the nine months ended
September 30, 1995. The Company anticipates an increase in its effective tax
rate due to the non-deductibility of amortization expense relating to intangible
assets resulting from certain of the Recent Acquisitions.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net revenue increased by $1.5 million, or 10.8%, to $16.0 million for the
year ended December 31, 1995 from $14.5 million for the year ended December 31,
1994. Of this increase, $891,000 was attributable to an increase in outpatient
net revenue resulting from volume and price increases implemented for certain
services during 1994. The remaining $673,000 was attributable to an increase in
net revenue from the Company's clinical laboratory.
Cost of services increased by $1.5 million, or 22.0%, to $8.3 million for
the year ended December 31, 1995 from $6.8 million for the year ended December
31, 1994. Of this increase, $981,000 was due to the addition of two Affiliated
Physicians, additional non-physician personnel and increased variable operating
costs for anatomic pathology services and $510,000 was due to increased variable
operating costs, additional non-physician personnel and overtime costs and
allocation of additional overhead for the Company's clinical laboratory. As a
percentage of net revenue, cost of services increased to 51.6% in 1995 from
46.9% in 1994.
Selling, general and administrative expense increased by $357,000, or
15.6%, to $2.6 million for the year ended December 31, in 1995, from $2.3
million for the year ended December 31, 1994. This increase was primarily
attributable to an increase in marketing costs, including the employment of two
additional full-time marketing representatives, and the addition of billing
personnel as the Company began a conversion and upgrade of its billing system.
Provision for doubtful accounts increased by $158,000, or 15.8%, to $1.2
million for the year ended December 31, 1995 from $1.0 million for the year
ended December 31, 1994. This increase was attributable to increases in net
revenue. Provision for doubtful accounts, as a percentage of net revenue,
increased from 6.9% to 7.2% due to the increase in the Company's clinical
laboratory operations which typically have a higher level of doubtful accounts
due to smaller per patient billings and a greater concentration of private pay
patients.
36
<PAGE> 38
Interest expense decreased by $80,000, or 5.1%, to $1.5 million for the
year ended December 31, 1995 from $1.6 million in 1994. This decrease was
attributable to a reduction in the amount of outstanding indebtedness and a
reduction in interest rates to 8.5% from 9.5% on the line of credit.
The effective income tax rate was approximately 37.5% for the year ended
December 31, 1995 compared to 25.2% for the year ended December 31, 1994, due to
the Company's conversion from Subchapter S tax status as of February 14, 1994.
Taxable income for the period January 1, 1994 to February 14, 1994 was
attributable to the shareholders prior to the Recapitalization.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
The Company completed the Recapitalization on February 14, 1994.
Net revenue increased by $1.0 million, or 7.8%, to $14.5 million for the
year ended December 31, 1994, as compared to $13.4 million for the year ended
December 31, 1993. This increase was primarily attributable to an increase in
test volume and an increase in the Medicare reimbursement rates for surgical
pathology services by 3.6%, effective January 1, 1994.
Cost of services decreased by $4.0 million, or 37.2%, to $6.8 million for
the year ended December 31, 1994 from $10.8 million for the year ended December
31, 1993. Prior to the Recapitalization, the Company elected to be taxed as a
Subchapter S corporation for federal income tax purposes and all the net income
therefrom was distributed to the principal shareholders as additional
compensation. Subsequent to the Recapitalization, the compensation of the
principal stockholders was reduced, resulting in a $4.0 million reduction in
compensation expense and cost of services, in 1994.
Selling, general and administrative expense increased by $653,000, or
40.0%, to $2.3 million for the year ended December 31, 1994 from $1.6 million
for the year ended December 31, 1993. Of this increase, $515,000 was
attributable to the addition of marketing and management personnel and related
expenses.
Provision for doubtful accounts increased by $50,000, to $1.0 million for
the year ended December 31, 1994 from $950,000 for the year ended December 31,
1993. This increase was attributable to increases in net revenue. Provision for
doubtful accounts, as a percentage of net revenue, decreased from 7.1% to 6.9%
of net revenue for the years ended December 31, 1993 and 1994, respectively.
Interest expense increased by $1.5 million to $1.6 million for the year
ended December 31, 1994 from $48,000 for the year ended December 31, 1993
primarily due to interest on the line of credit and the Senior Notes and Junior
Notes issued in connection with the Recapitalization.
The effective income tax rate was approximately 25.2% for the year ended
December 31, 1994 due to the fact that the Company's taxable income for the
period January 1, 1994 to February 14, 1994 was included in the income tax
returns of the shareholders prior to the Recapitalization. In 1993, the Company
elected to be taxed as a Subchapter S corporation for federal income tax
purposes and the taxation of the earnings thereof was the responsibility of the
individual shareholders. Therefore no provision was made for federal or state
income taxes in 1993.
37
<PAGE> 39
QUARTERLY RESULTS
The following table presents certain unaudited quarterly financial data for
each of the quarters in the years ended December 31, 1994 and 1995 and the
quarters ended March 31, June 30 and September 30, 1996. This information has
been prepared on the same basis as the Consolidated Financial Statements
appearing elsewhere in this Prospectus and include, in the opinion of the
Company, all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the quarterly results when read in conjunction with
the Consolidated Financial Statements and related notes thereto. The Company has
historically experienced fluctuations in its third quarter results due to
seasonal population variations in Florida. The addition of Practices in the
Midwest is expected to reduce this seasonal fluctuation. The operating results
for any quarter are not necessarily indicative of results for any future period
or for the full year.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1994 CALENDAR QUARTERS 1995 CALENDAR QUARTERS 1996 CALENDAR QUARTERS
---------------------------------- ----------------------------------- --------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND THIRD
------ ------ ------ ------- ------ ------- ------ ------- ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue................... $3,491 $3,672 $3,442 $3,856 $3,929 $4,267 $3,980 $3,848 $4,853 $4,837 $11,150
Operating costs:
Cost of services............ 1,534 1,696 1,748 1,802 1,968 2,130 2,049 2,124 2,403 2,141 5,690
Selling, general and
administrative expense.... 524 573 518 672 631 663 637 713 924 898 2,204
Provision for doubtful
accounts.................. 259 229 228 287 290 303 317 251 309 336 1,010
Amortization Expense........ 357
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Total operating
costs............... 2,317 2,498 2,494 2,761 2,889 3,096 3,003 3,088 3,636 3,375 9,261
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Income from operations........ 1,174 1,174 948 1,095 1,040 1,171 977 760 1,217 1,462 1,889
Interest expense.............. (380) (355) (402) (447) (401) (384) (366) (353) (374) (393) (870)
Other income (expense), net... (14) (14) (13) (5) (21) 27 (19) (33) (2) (199) 58
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Income before income taxes.... 780 805 533 643 618 814 592 374 841 870 1,077
Provision for income taxes.... 197 203 134 162 231 305 223 141 317 290 468
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Net income............ $ 583 $ 602 $ 399 $ 481 $ 387 $ 509 $ 369 $ 233 $ 524 $ 580 $ 609
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Recapitalization, the Company's principal cash requirements
were to fund working capital in order to support growth of net revenue and to
fund compensation and distributions to the shareholders. Prior to the
Recapitalization the Company elected to be treated as a Subchapter S
corporation. The Company funded such requirements principally with cash
generated from operations. Cash flows generated from operations were $424,000
for the year ended December 31, 1993 and $2.3 million for each of the years
ended December 31, 1994 and 1995. For the nine months ended September 30, 1996,
cash flows generated from operations were $2.2 million.
Pursuant to the Recapitalization, the Company acquired the assets and
assumed the liabilities of PDK for consideration consisting of $20.5 million in
cash, $3.5 million principal amount of Senior Notes and $2.5 million principal
amount of ALA Contingent Notes. In the Recapitalization, the Company issued an
aggregate of $5.5 million of Convertible Preferred Stock and issued the Junior
Notes in the aggregate principal amount of $7.5 million. ALA also issued an
aggregate of 1,425,600 shares of common stock to the owners of PDK for an
aggregate purchase price of $1.0 million. In the Recapitalization, the Company
also entered into the line of credit and borrowed $7.5 million thereunder. See
"Certain Transactions." The Recapitalization resulted in a significant increase
in the Company's interest expense beginning in the first three months of 1994.
In April 1996, the ALA Contingent Note obligations were satisfied by the
issuance of 194,400 shares of Common Stock.
Following the Recapitalization, the Company's principal cash requirements
have been to fund acquisitions and debt service and provide working capital to
support the growth of net revenue. The Company funded these requirements with
cash generated from operations and with borrowings under the line of credit and
the Credit Facility. The Credit Facility replaced the line of credit in May
1996. In connection with the Recent Acquisitions, the Company borrowed $78.6
million under the Credit Facility. At September 30, 1996
38
<PAGE> 40
and December 31, 1995, the Company had working capital of $2.7 million and $1.6
million, respectively, including $193,000 and $58,000, respectively, in cash and
cash equivalents. In addition, practices acquired by the Company are typically
required to have working capital at closing sufficient to fund one month of
operations or one payroll period.
Accounts receivable are primarily derived from fees due from patients and
other third party payors. These receivables are presented in the Consolidated
Financial Statements net of allowances for contractual adjustments and doubtful
accounts. The provision for uncollectible accounts, which is charged to
operations, is based on an evaluation of expected collections, based on an
analysis of current and past due accounts, historical collections experience in
relation to amounts billed and other relevant information. Contractual
adjustments result from the difference between the Company's scheduled rates for
services performed and the amount of reimbursement from government and other
third party payors for such services. See Note 4 to the Consolidated Financial
Statements.
At December 31, 1996 and September 30, 1996, of the $85.0 million available
under the Credit Facility, $81.7 million and $30.8 million, respectively, was
outstanding. Borrowings under the Credit Facility bear interest, at the
Company's option, at the Agent's base rate (8.25% at December 31, 1996) or the
Eurodollar rate plus 2.50%. At December 31, 1996, amounts outstanding under the
Credit Facility had an effective interest rate of 8.25%. The Credit Facility
provides for up to $85.0 million through two lines of credit: (i) a revolving
working capital line of credit in an amount equal to a maximum of 80% of the
Company's eligible accounts receivable, which at September 30, 1996 amounted to
available funds of $5.5 million, of which $2.9 million was outstanding; and (ii)
as a revolving line of credit available to fund acquisitions and which may be up
to $85.0 million if borrowings are not otherwise used for working capital
purposes. During the nine months ended September 30, 1996, the Company received
advances under the Credit Facility of $34.6 million and repaid $7.9 million,
primarily from cash available from operations. Pursuant to the Credit Facility,
the Company has pledged its assets, including the stock of the subsidiaries, as
security. The Credit Facility also contains covenants which require the Company
to maintain certain financial ratios (including minimum net income and operating
cash flow to total debt service), limit the amount of additional indebtedness
and annual capital expenditures the Company can incur, prohibit the payment of
dividends and specify restrictions on investments, mergers and sales of assets.
Additionally, the Company is required to obtain the consent of the Banks for
individual acquisitions utilizing bank debt in excess of $10.0 million. At
December 31, 1996, the Company was in compliance with the covenants in the
Credit Facility. See Note 8 to the Consolidated Financial Statements.
Historically, the Company's capital expenditures have been primarily for
laboratory equipment, management information systems and leasehold improvements.
Total capital expenditures were $488,000, $492,400 and $582,000 in 1994, 1995
and for the nine months ended September 30, 1996, respectively. The Company has
been assessing, and will continue to assess, the capabilities of the various
systems acquired in connection with each of the Recent Acquisitions, and is in
the process of replacing, upgrading and integrating the systems into a single
network. See "Business -- Management Information Systems." Priority has been
given to enhancements in billing and information systems. Planned capital
expenditures are expected to be between $1.7 million and $2.0 million in 1997.
The net proceeds of this offering, estimated to be $71.7 million, will be
used to repay the outstanding principal amount and accrued interest on the
Junior Notes and the Senior Notes, the accrued dividends on the Convertible
Preferred Stock and a portion of the outstanding indebtedness under the Credit
Facility. See "Use of Proceeds." As a result, after giving effect to this
offering and the application of the net proceeds therefrom, the Company will
have reduced its aggregate indebtedness from $96.0 million to $25.2 million. The
Company may reborrow under the Credit Facility to fund future acquisitions,
working capital and for general corporate purposes. In connection with the
prepayment of the Junior Notes and Senior Notes, the Company will write-off
approximately $90,000 of deferred financing costs associated with the incurrence
of these obligations which write-off will be reflected in the first quarter of
1997.
The Company anticipates that its outstanding indebtedness following the
consummation of this offering will be $25.2 million under the Credit Facility
and the Contingent Notes and Subordinated Notes issued in
39
<PAGE> 41
connection with the Recent Acquisitions. The Company expects to make further
borrowings under the Credit Facility in the short term to fund acquisitions. The
Company anticipates that funds generated by operations and funds available under
the Credit Facility will be sufficient to meet working capital requirements and
finance capital expenditures and, together with the issuance of shares of Common
Stock and Contingent Notes, acquisitions for the short term. Further, in the
event payments under the Contingent Notes 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. Historically, the Practices funded their capital expenditures with cash
flows from operations. For the year ended December 31, 1995, capital
expenditures of the Practices approximated 2.2% of net revenue. The Company is
integrating its laboratory information, billing and collections systems, which
may result in an increase in the percentage of capital expenditures to net
revenue. The Company believes, however, that such information systems
enhancements will result in cost efficiencies that may enable the Company to
continue to fund its capital expenditures with cash flows from operations. See
"Business -- Management Information Systems." Funds generated from operations
and funds available under the Credit Facility, along with the issuance of equity
and debt securities, may not be sufficient to implement the Company's growth
strategy in the long term. The Company may be required to seek additional
financing through increases to this Credit Facility, negotiation of credit
facilities with other banks or public or private placements of equity or debt
securities. No assurance can be given that the Company will be able to extend
the Credit Facility, secure additional bank borrowings or complete additional
debt or equity financings on terms favorable to the Company.
40
<PAGE> 42
BUSINESS
GENERAL
AmeriPath believes it is the leading physician practice management company
focused on anatomic pathology services, based on an analysis of geographic
breadth, number of physicians, number of hospital contracts, number of practices
and net revenue. The Company owns or is affiliated with 12 Practices located in
five states which, as of December 31, 1996, employed a total of 81 pathologists.
The pathologists provide medical services in 12 outpatient pathology
laboratories owned and operated by the Company, 46 hospital inpatient
laboratories and 17 outpatient surgery centers. Of these pathologists, 77 are
board certified and three are board eligible in anatomic pathology. Thirty-nine
of the pathologists are also board certified in a subspecialty of anatomic
pathology, including dermatopathology (diseases of the skin), hematopathology
(diseases of the blood) and cytopathology (diseases of the cells).
The Company provides physician practice management services and the
Affiliated Physicians provide medical services in the Company's outpatient
laboratories and in inpatient laboratories owned by hospitals. Eight Practices
owned by the Direct Subsidiaries have exclusive contracts with a total of 46
hospitals to manage their inpatient laboratories and provide professional
pathology services. Four of these eight Practices have established outpatient
laboratories that focus upon outpatient referral sources. Generally under a
hospital contract, the Practice provides the medical director for the hospital's
laboratory, who is responsible for the laboratory's anatomic and clinical
operations, as well as the hospital's blood bank and microbiology services.
Through their relationships with the medical staff of the hospitals and the
local medical community, inpatient based Practices also provide anatomic
pathology services to office based physicians. By using an inpatient laboratory
to conduct both outpatient and inpatient services, the Practices capitalize on
the trend towards more procedures being performed in an outpatient setting. The
four other Practices (three of which are PA Contractors) operate in outpatient
laboratories and provide services to attending physicians, national clinical
laboratories and managed care organizations. The outpatient pathology services
provided by the Practices are focused primarily on dermatopathology, which
relates to the examination of skin biopsies.
ANATOMIC PATHOLOGY
The practice of pathology includes anatomic pathology, which involves the
diagnosis of diseases through examination of tissues and cells, and clinical
pathology, which involves the chemical testing and analysis of body fluids, such
as blood and urine. Clinical pathology involves an interpretation of
standardized laboratory test results, a process which is frequently automated,
while anatomic pathology typically requires the involvement of a pathologist in
making a specific diagnosis. Anatomic pathologists do not treat patients, but
rather assist physicians by establishing a definitive diagnosis for many
diseases. In addition, anatomic pathologists may consult with attending
physicians regarding treatment plans. In these capacities, the anatomic
pathologist serves as the "physician's physician," creating what is often a
long-term relationship. Attending physicians remove specimens which are then
transported to a laboratory, either by courier or by overnight delivery service.
Once received at the laboratory, a specimen is processed and mounted onto a
slide by a laboratory technician for examination by a pathologist. Since
specimens may be transported, samples can be diagnosed by a pathologist from a
remote location. Therefore, pathologists are generally not needed "on-site" to
make a diagnosis, which enhances utilization of available capacity in outpatient
and inpatient laboratories and allows the practice to service a wider geographic
area.
An anatomic pathologist must have an understanding of a broad range of
medical specialties. Subspecialities within anatomic pathology include the
examination and diagnosis of skin biopsies taken by a dermatologist
(dermatopathology), of tissue samples, such as prostate or breast, taken during
a surgical procedure (surgical pathology), diagnostic analysis of diseases and
disorders in blood, bone marrow and lymph nodes (hematopathology) and
interpretation of pap smears, fine needle aspiration, biopsies, washings and
brushings and body fluids (cytopathology). While physical examination or
radiology procedures may suggest a diagnosis for many diseases, the definitive
diagnosis is generally established by the anatomic pathologist.
41
<PAGE> 43
Based on information published by the American Medical Association, there
are approximately 14,000 practicing pathologists in the United States. According
to the American Society of Dermatopathology, in 1994, approximately 900
practicing pathologists specialized in dermatopathology. The Company has
targeted outpatient pathology services and inpatient pathology services at
hospitals with 400 or fewer beds. Based on a study prepared for the Company, the
Company believes that the domestic market as of 1995 for non-hospital pathology
services (approximately 3,300 outpatient laboratories) was approximately $2.1
billion and inpatient pathology services at hospitals with 400 or fewer beds was
approximately $1.1 billion. The Company expects the provision of anatomic
pathology services to grow primarily due to the aging of the United States
population, increased incidence of cancer and medical advancements that allow
for earlier diagnosis and treatment of diseases. As an example, according to The
Journal of the American Academy of Dermatology, the number of new cases of
non-melanoma skin cancer diagnosed in 1977 was 480,000 as compared to over
900,000 new cases diagnosed in 1994. Further, estimates published by The
American Cancer Society in 1996 indicate that 50% of the U.S. population who
live to age 65 or older will develop some form of skin cancer during their
lifetimes.
Most hospitals operate a pathology laboratory to provide urgent anatomic
pathology services, as well as more routine testing, for the physicians on
staff. Laboratories operated by a hospital or by a single independent pathology
practice are limited in the range of specialty services that they can provide
and in their available referral sources for utilization of the pathologists, and
are often constrained by time and expense associated with administrative
functions. Cost containment pressures and medical advancements are expected to
decrease the number of tests being performed in hospitals and increase the
number of procedures that will be performed by a physician in an outpatient
setting. Further, as hospitals consolidate their operations and increase the
outsourcing of certain services, the Company expects growth in outpatient
pathology services to continue to outpace the growth in inpatient pathology
services. As a result of these trends, the Company believes that there will be
greater utilization of outpatient pathology laboratories, such as those operated
by the Company.
Cost containment pressures are also causing hospitals to increase their
utilization of outside contract management companies to manage specialized
functions, improve physician utilization and reduce the hospital's
responsibility for certain administrative duties. Physician practice management
companies, such as the Company, can provide a hospital with professional
management of its pathology laboratory staff, including recruiting and
scheduling, as well as the assumption of certain financial risks and
administrative duties associated with physician billing and collections,
utilization and outcome data and payment of physician malpractice insurance
premiums.
Although the selection of a pathologist is primarily made by individual
physicians, a trend is evolving toward decisions being made by managed care
organizations and other insurance plans. 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 cases managed care
organizations contract with national clinical laboratories. Generally, national
clinical laboratories subcontract anatomic pathology services to large practices
that can provide a comprehensive range of anatomic pathology services. The
Company believes that hospitals, managed care organizations and national
clinical laboratories will continue to contract 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 that can provide a broad range of
outpatient and inpatient services and enhance the utilization of the
pathologists. The Company believes this trend can be attributed to several
factors, including cost containment pressures by government and other
third-party payors, increased competition and rising costs of operating a
medical practice. In addition, given the current trends of increasing outpatient
services and outsourcing and consolidation by 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 physician practice management companies can
also offer physicians certain advantages, such as negotiating contracts with
hospitals, managed care providers and
42
<PAGE> 44
national clinical laboratories, marketing 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 experience, establishing and implementing billing and collection
procedures and expanding the Practice's geographic coverage area. Each of these
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 leading provider
of physician practice management services to anatomic pathology practices
through the following strategies:
Focus on Anatomic Pathology. The Company believes that its focus on
providing management services to anatomic pathology practices provides it
with a competitive advantage in the acquisition of such practices. A
significant opportunity exists to acquire or affiliate with anatomic
pathology practices that are seeking to be acquired or to affiliate with a
physician practice management company with experienced management and
access to capital. As a result of the Company's focus on providing
management services to anatomic pathology practices, Affiliated Physicians
are able to form an internal network for consultations and to offer
specialized services to their clients. The Company believes that its focus
allows it to develop expertise in managing both inpatient and outpatient
pathology practices.
Acquire Leading Practices. The Company expects to increase its
presence in existing markets and enter into new markets through
acquisitions of and affiliations with leading practices. The Company's
acquisition criteria include market demographics, size, profitability,
local prominence, payor relationships, fit with other acquisitions and
opportunities for growth of the acquired Practice. The Company intends to
continue to source acquisitions by capitalizing on the professional
reputations of the Practices and the Affiliated Physicians, the Company's
management experience and the benefits of being part of a public company,
including increased resources and improved access to capital. In existing
markets, the Company targets acquisitions that can expand its presence,
provide new medical services, 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 expansion.
Expand Sales and Marketing Efforts. The Company focuses on generating
internal growth for the Practices by augmenting their existing physician
and contractual relationships with a professional sales and marketing
program. The Company's marketing program is designed to (i) increase
relationships with physicians over a broader geographic region, (ii) expand
contracts with national clinical laboratories that subcontract for anatomic
pathology services, and (iii) capitalize on existing managed care
relationships. Since specimens can be transported, the Company's sales and
marketing efforts focus on expanding the geographic scope of the Practices.
Four Practices contract with national clinical laboratories to provide
outpatient anatomic pathology services. These contracts generally are
exclusive to the individual Practice and are limited to the local area. The
Company is seeking to extend existing contracts with national clinical
laboratories to include multiple Practices that cover a broad geographic
region. The Company believes that this regional business model can offer
national clinical laboratories and managed care organizations a convenient
single source for anatomic pathology services. The Company also intends to
apply its regional business model in obtaining managed care contracts.
Increase Contracts with Hospitals. The Company seeks to gain
additional exclusive hospital contracts for the Practices through the
acquisition of or affiliation with anatomic pathology practices, as well as
through expansion of the Company's existing relationships with
multi-hospital systems. The Company believes that multi-hospital systems
will benefit from contracting with a single provider of pathology services
in a geographic region. The Company's management of inpatient laboratories
can also facilitate the growth of the Practices' outpatient services in the
same region.
Achieve Operational Efficiencies. The Company believes that the
Practices will benefit from the management and administrative support the
Company provides. To maximize operational efficiencies, the Company is
implementing systems in which a small corporate staff develops policies
that are implemented by the Practices locally, on a day-to-day basis. The
corporate staff will also provide
43
<PAGE> 45
oversight, centralize reporting and other administrative functions. The
Company intends to achieve operational efficiencies by centralizing certain
functions, enhancing Practice efficiency and utilizing its size to
negotiate discounts on laboratory equipment, other medical supplies and
services and health and malpractice insurance. The Company intends to
centralize financial reporting, payroll and benefits administration and
regulatory compliance. Prior to their acquisition, the Practices either
managed their billing and collections inhouse or outsourced these
functions. In September 1996, the Company entered into a contract with
Medaphis Physician Services Corporation ("Medaphis") to provide inpatient
billing services for 20 hospital contracts of the Practices with rates
under the contract tied to billing volume. In addition, the Company's Fort
Lauderdale administrative office has assumed the outpatient billing for two
Practices. The Company will continue to evaluate billing and collections
systems at the Practices and may centralize such functions for other
Practices or newly acquired Practices in the future. The Company plans to
introduce "bench-marking" programs to enhance the efficiency of the
Practices. In certain markets, the Company intends to develop a regional
business model with centralized administrative functions, common marketing
plans, and integrated courier systems.
REGIONAL BUSINESS MODEL
Through the implementation of its strategies, the Company intends to
develop integrated networks of anatomic pathology practices on a regional basis.
These networks will consist of a number of practices that together, (i) have a
substantial market presence; (ii) offer a broad range of services; (iii) have an
extensive referral base; and (iv) possess complementary strengths and offer
operating efficiencies. The Company is currently developing its regional
business model in Florida. The Company believes that Florida represents an
attractive market due to its population demographics, including the growth of
the general population and a large population of senior citizens, as well as the
Company's familiarity and understanding of the anatomic pathology market in
Florida. The Company owns, controls and manages anatomic pathology practices in
Florida that extend from Miami to Orlando and from Fort Myers to Tampa.
Together, these Practices employ a total of 363 persons, including 62 Affiliated
Physicians, have contracts with 29 hospitals and 17 outpatient surgery centers
and operate six outpatient laboratories. In addition, five of the Affiliated
Physicians maintain faculty affiliations at medical schools in Florida,
including the University of Miami and the University of Florida, which positions
enhance their relationships with the medical community in Florida. The Company's
contract with SmithKline Beecham PLC ("SmithKline"), a national clinical
laboratory, to provide anatomic pathology services, on an exclusive basis, in
seven counties in Florida was expanded in November 1996 to include 59 of
Florida's 67 counties.
The Company believes that this regional business model offers short and
long term benefits to the Company, attending physicians, third party payors and
patients. The Company is integrating the administrative functions, including the
billing and collection function, of three Practices and expects such integration
to result in enhanced operational efficiencies. The Company has consolidated
outpatient billing for two Practices at the Company's Fort Lauderdale
administrative office. 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 is also
integrating and coordinating the marketing personnel of the Practices to
effectively promote the Practices to physicians, hospitals, managed care
organizations and national clinical laboratories to enhance the growth of the
Company. This marketing effort is based upon promoting the broad geographic
coverage and extensive professional services the Company offers. The Company's
strategy is to leverage its size to extend contracts with national clinical
laboratories to all of the Practices in Florida. The Company intends to market
its services under the name "AmeriPath" to develop a branded set of products and
services to payors and other clients. The Company plans to integrate the
Practices' management information systems into a single system that will expand
the financial and clinical reporting capabilities of each of the Practices. The
Company believes that implementation of this regional model will increase the
revenues of the Practices in the region. The Company plans to apply this
regional business model to Practices in other states.
44
<PAGE> 46
AFFILIATION STRUCTURE
AmPath is a holding company that owns, controls and manages the 12
Practices through five wholly-owned subsidiaries and long-term management
agreements with the three PA Contractors in Texas and Ohio (where the Company
manages and controls all non-medical functions). Each Practice is either a
Subsidiary, a division of a Subsidiary or a PA Contractor. AmPath controls all
non-medical functions of the Practices, including financial reporting, human
resources, payroll, billing, employee benefits and accounting. In Texas and
Ohio, the Affiliated Physicians are employed by the PA Contractors. In Florida,
Alabama and Kentucky, the Affiliated Physicians are employed by the Direct
Subsidiaries, which also own and operate the outpatient laboratories. See
" -- Physician, PA Contractor and Other Contractual Relationships."
In Texas and Ohio, states that prohibit the corporate practice of medicine,
a PA Contractor Subsidiary of the Company has entered into a 40 year management
agreements with the Ohio PA Contractors and the Texas PA Contractor. Pursuant to
the terms of these management contracts, the Company provides all non-medical
administrative support functions to the PA Contractor. See "-- Physician, PA
Contractors and Other Contractual Relationships."
The Board of Directors and management formulate strategies and policies
which are implemented locally on a day-to-day basis by each Practice. Each
Practice has a Managing Director who reports to the Company's Chief Operating
Officer. Management, particularly the Company's Medical Director and Chief
Operating Officer, develop and review standards for the Affiliated Physicians
and their medical practices. The Chief Operating Officer supervises all
employment matters with respect to Affiliated Physicians and staffing decisions
at the Practices. The Company coordinates marketing activities, negotiates
managed care and national clinical laboratory contracts and creates and
supervises the implementation of budgeting, accounting, billing, finance,
personnel and administrative policies. The Company is currently consolidating
the accounting procedures and financial reporting systems of the Practices and
is implementing cash management and other fiscal control programs. The Company
is also developing personnel policies and uniform benefit plans for all
employees of the Company.
The Company employs, or has long-term agreements with PA Contractors who
employ, 81 pathologists, 77 of whom are board certified and three of whom are
board eligible in anatomic pathology. Thirty-nine of the pathologists have
additional subspecialty board certifications in such areas as dermatopathology,
hematopathology and cytopathology. The experience and certification of the
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, an Affiliated Physician has
an opportunity to develop a reputation and following among residents and
practicing physicians. Eleven Affiliated Physicians have teaching positions with
a university or an affiliation with another institution for training and
continuing medical education of physicians, particularly dermatologists. In
addition to salary and bonuses, the Company provides Affiliated Physicians with
benefit plans, group health insurance and physician malpractice insurance. See
"-- Insurance" and "-- Physician, PA Contractor and Other Contractual
Relationships."
The Company manages and controls all of the non-medical functions of the
Practices, including: (i) recruiting, training, employing and managing the
technical and support staff of the Practices; (ii) developing, equipping and
staffing laboratory facilities; (iii) establishing and maintaining courier
services to transport specimens; (iv) negotiating and maintaining contracts with
hospitals, national clinical laboratories and managed care organizations and
other payors; (v) providing financial reporting and administration, clerical,
purchasing, payroll, billing and collection, information systems, sales and
marketing, risk management, employee benefits, legal, tax and accounting
services to the Practices; (vi) complying with applicable laws and regulations;
and (vii) with respect to the Company's ownership and operation of anatomic
pathology laboratories, providing slide preparation and other technical
services. The Company is not licensed to practice medicine. The practice of
medicine is conducted solely by the Affiliated Physicians. All of the Company's
outpatient laboratories are licensed under the guidelines established by the
federal Clinical Laboratory Improvement Act ("CLIA") and applicable state
statutes and are managed by the medical director of the laboratory. Seven
outpatient laboratories are accredited by the College of American Pathology.
45
<PAGE> 47
The Company's quality assurance and quality improvement programs are designed to
assure that all laboratories are in compliance with applicable law. Each of the
Company's laboratories has a management information system and modern laboratory
instrumentation that enables laboratory personnel to track, process, report and
archive biopsies and other specimens.
The Practices contract with hospitals to provide pathology services. The
Practices staff each hospital with at least one pathologist who generally serves
as the medical director of the laboratory, which facilitates the hospital's
compliance with licensing requirements. The Practices are responsible for
recruiting, staffing and scheduling the Affiliated Physicians in the hospital's
inpatient laboratories. In addition to providing pathology services, 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. Three Practices have both outpatient laboratories and
hospital contracts which allow outpatient specimens to be processed and examined
in inpatient laboratories, which enhances utilization of Affiliated Physicians
in inpatient facilities. In 42 hospital contracts, technical personnel are
employed by the hospital, rather than by the Practices. Three Practices have a
centralized histology laboratory which serves the needs of multiple hospitals.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that the integration of its laboratory information,
billing and collections and financial reporting systems will enable it to cost
effectively monitor the operations of the Practices, enhance utilization of the
Affiliated Physicians, develop practice protocols and archives and provide the
Company with a competitive advantage in negotiating national clinical laboratory
and managed care contracts. Each of the Company's laboratories has a management
information system and modern laboratory instrumentation that enables laboratory
personnel to track, process, report and archive biopsies and other specimens. In
1995, the Company acquired an outpatient billing and collections software
program and upgraded its computer hardware to increase operating efficiency and
storage capacity at its Fort Lauderdale administrative office. The Company is in
the process of installing a complete general ledger and financial reporting
system to handle the accounting for the Practices and facilitate the
consolidation of billing and financial information.
Historically, the Company and three of the Practices have outsourced their
inpatient billing and collections functions to Medaphis, a national provider of
physician billing services. The Company entered into a new contract with
Medaphis in September 1996 to provide inpatient billing services for 20 hospital
contracts with rates tied to billing volume. Prior to their acquisition, the
Practices either managed their billing and collections in house or outsourced
those functions. In the course of acquiring the Practices, the Company analyzed
and evaluated each of the billing and collections systems. Based on such
evaluations, the Company assumed outpatient billing for two Practices at the
Company's centralized billing operation at its Fort Lauderdale administrative
office and may transfer additional inpatient billing for two Practices to
Medaphis. The Company invested $332,000 and $302,000 in information systems in
1995 and for the nine months ended September 30, 1996, respectively, and plans
to invest approximately $1.7 million in 1997 to increase the capacity of its
centralized outpatient billing system and laboratory information systems at its
Fort Lauderdale administrative office. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources." In 1997, the Company expects to complete the integration of its
management information system that electronically links the accounting, billing
and collection systems of the Practices. While no assurance can be given, the
Company intends to complete an integrated management information system that
electronically links the laboratory information systems of its existing
Practices in 1998.
MARKETING
The Company's marketing efforts are focused on physicians, hospital and
outpatient surgery center administrators, national clinical laboratories and
managed care organizations. Prior to being acquired by the Company, the
Practices' marketing efforts were primarily based upon the professional
reputations and individual efforts of the pathologists. The Company believes
that there is an opportunity to capitalize on the
46
<PAGE> 48
professional reputations of the Affiliated Physicians by hiring experienced
personnel and applying professional sales and marketing techniques to the
Practices. Historically, the Practices marketed outpatient services primarily to
dermatologists. The Company intends to increase the Practices' volume of
business by also directing its marketing efforts to other medical specialists,
including gynecologists, urologists and gastroenterologists. Since specimens may
be sent by courier service or overnight delivery, the Company will utilize its
sales professionals to expand the potential geographic market for each Practice
beyond its local physician community. Several of the Practices currently market
their outpatient services to a broad geographic area including neighboring
states. The Company intends to augment its 14 person sales force with additional
sales personnel. These representatives will report to the Company's Vice
President of Sales, who assists in the development of the Company's marketing
strategies and is responsible for their implementation.
The Practices have contracts with 46 hospitals, 20 of which are owned by
Columbia/HCA, the country's largest publicly-owned hospital company. The Company
plans to dedicate members of its professional sales force to meet the needs of
multi-hospital systems with facilities of 400 or fewer beds. The Company
believes it can assist multi-hospital systems which currently have numerous
contracts for pathology services by serving as a single source provider of
pathology services. The Company's marketing effort will be directed toward
consolidating the various contracts of multi-hospital systems on a regional
basis and thus facilitating more efficient operation of multiple laboratories
owned by such systems. See "-- Regional Business Model."
Four Practices, including the three PA Contractors, have an aggregate of
six contracts with two national clinical laboratories, SmithKline and Laboratory
Corporation of America Holdings ("LabCorp"), on a local basis. The Company is
directing 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. In addition, the Company is seeking to secure new contracts and
expand existing contracts with managed care organizations for the provision of
anatomic pathology services. The Company is prepared to negotiate flexible
arrangements for the Practices with managed care organizations, including on a
discounted fee-for-service or capitated contract basis. The Company does not
believe that contracting directly with managed care organizations will adversely
affect the Company's relationships with national clinical laboratories because
anatomic pathology services are not part of a national clinical laboratory's
core business.
CLIENT AND PAYOR RELATIONSHIPS
The Practices provide services to a wide variety of healthcare providers
and payors including physicians, government programs, indemnity insurance
companies, managed care organizations and national clinical laboratories.
Physicians that are not affiliated with a hospital or managed care organization
are a principal source of the business. Fees for anatomic pathology services
rendered to the physicians are billed either to the physicians, the patient, or
the patient's third party payor. Hospital contracts grant Practices the
exclusive right and responsibility to manage the pathology services at the
hospital. In this capacity, the Practices provide pathology services to staff
physicians and support personnel and administrative services for the laboratory,
as well as an Affiliated Physician who serves as the medical director of the
laboratory. Upon initiation, the contracts typically have terms of one to five
years. Thereafter, the contracts typically renew for additional terms of one
year unless otherwise terminated by either party. Since most of the contracts
have passed their initial term, 35 hospital contracts are currently subject to
renewal on an annual basis. One of the 11 remaining contracts is subject to
renewal in 1997. The contracts typically provide that the hospital may terminate
the agreement prior to the expiration of the initial or renewal term. With
respect to 42 hospital contracts, technical laboratory support personnel are
employed by the hospital, rather than by the Company. The Company is responsible
for the training and supervision of technical personnel who are employed by the
hospitals. As the medical director of the laboratory, the Affiliated Physician
may be responsible for hiring and terminating laboratory personnel. Neither the
Company nor any Practice prior to its acquisition has lost a contract in a
hospital with ongoing operations.
The national clinical laboratories that contract with managed care
organizations perform clinical laboratory services and generally subcontract
anatomic pathology services to large practices. Under these contracts, the
practices bill national clinical laboratories on a fee schedule basis. Contracts
with national clinical laboratories provide for the exclusive subcontracting of
anatomic pathology services for clients of the
47
<PAGE> 49
national clinical laboratories in a defined geographic area. These contracts
have terms of one to three years and generally provide for automatic renewal for
additional one to three year terms. The Company's relationships with managed
care organizations typically provide for the provision of services to their
participants on the basis of an agreed upon fee schedule.
PHYSICIAN, PA CONTRACTOR AND OTHER CONTRACTUAL RELATIONSHIPS
The Company employs pathologists, or contracts with the PA Contractors who
employ pathologists, to provide medical services in hospitals and in other
inpatient and outpatient laboratories. The employment agreements typically have
terms of five years and generally can be terminated at any time upon 60 to 180
days' notice. The Affiliated Physicians generally receive a base salary and a
performance bonus. The Affiliated Physicians are required to hold a valid
license to practice medicine in the jurisdiction in which the pathologist
practices and, with respect to inpatient 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 Affiliated Physicians. Substantially all of the
Affiliated Physicians have agreed, for a period of one to two years after
termination of employment, not to compete with AmeriPath or the PA Contractor
within a defined geographic area and not to solicit Affiliated Physicians, other
employees or certain clients of the Company. See "Risk Factors -- Professional
Liability and Insurance."
AmeriPath has management agreements with three PA Contractors in Texas and
Ohio (the "PA Management Agreements"). In Texas, the Texas PA is owned by an
Affiliated Physician, who is licensed in the state of Texas and is also an
officer of the PA Contractor. In Ohio, the PA Contractors are owned by a trust,
of which AmPath is the sole beneficiary. Under the PA Management Agreements, the
Company has control over all non-medical functions of the PA Contractors,
including all administrative, management, billing and support functions. The PA
Contractors pay AmeriPath a management fee for its services. In Ohio, the fee is
equal to the net revenue of the pathology practice. In Texas, the management fee
consists of a flat base fee, which is determined on an annual basis according to
the operating plan of the Practice, and a performance-based percentage fee,
which may be paid if the performance of the Practice exceeds budgeted targets.
The management fee may be adjusted from time to time to reflect industry
standards, the range of services provided by the PA Contractor and the level of
performance of AmeriPath. Each of the PA Management Agreements have terms of 40
years and are subject to renegotiation at the end of such term. See "Risk
Factors -- Government Regulation" and "Risk Factors -- Dependence on
Pathologists."
Acquisition Management Services, Inc. ("AMS") has served as the Company's
consultant in implementing its acquisition program. AMS has assisted the Company
with matters relating to human resources, due diligence, financial analyses,
valuations, projections, strategic analyses and negotiation of the Recent
Acquisitions. AMS performs its services for the Company on a non-exclusive,
independent contractor basis and is indemnified by the Company for actions other
than fraud, gross neglect or willful misconduct. Since the Company believes that
AMS's services have increased the efficiency of the Company's acquisition
process, the Company expects to continue to use AMS's services in the near term.
GOVERNMENT REGULATION
The business of the Company and the PA Contractors is subject to a variety
of governmental and regulatory requirements relating to healthcare matters as
well as laws and regulations which relate to business corporations in general.
The Company believes that it exercises care in an effort to structure its
practices and arrangements with hospitals and physicians to comply with relevant
federal and state law and believes that such current arrangements and practices
comply with all applicable statutes and regulations. In connection with the
Recent Acquisitions, the Company reviewed the Practices' compliance with federal
and state healthcare laws and regulations and revised certain policies and
procedures with respect to certain of the Practices. 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, if reviewed, would be found to be in full
compliance with such laws, as such laws may be ultimately interpreted. A
violation of such laws by a Practice prior to its acquisition could result in
civil and criminal penalties, exclusion from participation in Medicare and
Medicaid programs and/or loss of a
48
<PAGE> 50
physician's license to practice medicine. To the extent the Practices were found
not to be in compliance with such laws, the Company's financial condition and
results of operations could be materially adversely affected.
The Company derived 57.0%, 43.3% and an estimated 38.0% of collections for
the year ended December 31, 1995 and the nine months ended September 30, 1996
and on a pro forma basis for the nine months ended September 30, 1996,
respectively, from payments made by government-sponsored healthcare programs
(principally Medicare and Medicaid). The decrease in the percentage of net
revenue attributable to government sponsored healthcare programs resulted
primarily from the acquisition of Practices outside Florida. These programs are
subject to substantial regulation by the federal and state governments. Any
change in reimbursement regulations, policies, practices, interpretations or
statutes that places substantial limitations on reimbursement amounts or
practices could adversely affect the Company's financial condition and results
of operations. Increasing budgetary pressures at both the federal and state
level and the rapidly escalating costs of healthcare and reimbursement programs
have led, and may continue to lead, to significant reductions in government
reimbursements for certain medical charges and elimination of coverage for
certain individuals under these programs. Federal legislation could result in a
reduction of Medicare and Medicaid funding or an increase in state discretionary
Medicaid funding, or a combination thereof. Particularly in view of the fact
that Medicaid is a substantial and growing portion of state budgets, increases
in state discretion could result in payment reductions. Although governmental
payment reductions have not materially affected the Company in the past, it is
possible that changes in the future could have a material adverse effect on the
Company's financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Introduction." In addition, Medicare, Medicaid and other
government sponsored healthcare programs are increasingly shifting to managed
care. Some states have recently enacted legislation to require that all Medicaid
patients be treated by managed care organizations, and similar legislation may
be enacted in other states, which could result in reduced payments to the
Company for such patients. Funds received under these programs are subject to
audit with respect to the proper billing for physician services and,
accordingly, retroactive adjustments of revenue from these programs may occur.
The Company expects that there will continue to be proposals to reduce or limit
Medicare and Medicaid reimbursements. The Company cannot predict at this time
whether or when any of such proposals will be adopted or, if adopted and
implemented, what effect such proposals would have on the Company. There can be
no assurance that payments under government sponsored healthcare programs will
remain at levels comparable to present levels. See "Risk Factors -- Reliance
Upon Government Programs" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Introduction."
Federal law prohibits the offer, payment, solicitation or receipt of any
form of remuneration intended to compensate for the referral of Medicare,
Medicaid and certain other federal health program patients or patient care
opportunities, or in return for the purchase, lease or order of items or
services that are covered by Medicare, Medicaid or certain other government
health programs. In addition, absent an applicable exception, federal law
prohibits the referral of Medicare or Medicaid patients for designated health
services, which include laboratory services, to entities which have specific
types of financial relationships with the referring physician. One of the
relationships that results in a prohibition of referrals is ownership of certain
securities. Although there is an exception in the law for the ownership of
certain publicly held securities, the Common Stock does not currently qualify
for this exception. Consequently, no physician owning Common Stock will be able
to make referrals to the Company. The Company intends to notify referring
physicians of this prohibition. Violation of these laws can result in
substantial penalties and exclusion from the Medicare and Medicaid programs.
Each of the states in which the Company does business, except Alabama, have
anti-kickback, anti-fee splitting and self-referral laws that are similar to the
federal laws, apply to all payors and impose substantial penalties for
violations. Certain of these laws contain exceptions for relationships with
pathologists and group practices. Although the Company believes that its
operations do not violate these federal or state laws, which are commonly known
as the "anti-kickback" and "self-referral" statutes, there can be no assurance
that its activities will not be challenged by regulatory authorities seeking to
enforce these laws. See "Risk Factors -- Effect of Government Regulation."
The Company is not licensed to practice medicine. The practice of medicine
is conducted solely by the Affiliated Physicians. The manner in which licensed
physicians can be organized to perform and bill for
49
<PAGE> 51
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 state law 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 administrative services,
does not represent to the public or its clients that it offers medical services
and does not exercise influence or control over the practice of medicine by the
PA Contractors or the Affiliated Physicians employed by the PA Contractors.
Corporate practice of medicine restrictions in Ohio prohibit a business
corporation from employing physicians to engage in the practice of medicine, but
permit an entity employing physicians to practice medicine to be owned by a
trust, provided that the trustee of such trust is a licensed physician. In
addition, a business corporation is not prohibited from being the beneficial
owner of such trust or from performing administrative, marketing, billing and
other non-medical or other services on behalf of the entity employing physicians
engaged in the practice of medicine. In Ohio, the Company contracts with two PA
Contractors (which are owned by trusts of which AmPath is the sole beneficiary),
which in turn employ or contract with physicians to provide necessary physician
and medical services. The trustees of each of the trusts that own the stock of
the Ohio PA Contractors are physicians licensed to practice medicine in Ohio.
In Texas, corporate practice of medicine restrictions generally provide
that only certain entities that are owned by licensed physicians are permitted
to employ physicians to engage in the practice of medicine. However, such
entities are not prohibited from retaining business corporations to manage other
aspects of the business to provide administrative, marketing, billing and other
non-medical services. In Texas, the Company contracts with the Texas PA (which
is owned by a licensed physician employed by the Texas PA), which in turn
employs physicians to provide necessary physician and medical services.
Florida, Kentucky and Alabama do not have laws prohibiting business
corporations from directly employing physicians to practice medicine. Such
states, however, have medical practice acts which provide that only licensed
physicians may provide medical care. Accordingly, in Florida, Kentucky and
Alabama, business corporations may directly employ physicians to engage in the
provision of medical services, provided that the physicians have control over
the manner in which medical care is provided. The "Managing Directors" of the
Practices located in Florida, Kentucky and Alabama are each physicians licensed
to practice medicine in their respective states. Pursuant to their employment
agreements with the Subsidiaries, such Managing Directors have exclusive control
over the actual provision of medical care at their respective Practices and are
responsible for setting policies relating to and monitoring the practice of
medicine.
Based on the advice of the Company's state health care regulatory counsel,
Jenkens & Gilchrist, a professional corporation, Bricker & Eckler, Wyatt,
Tarrant & Combs and Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A.,
the Company believes that it is in compliance with the laws in Texas, Ohio,
Kentucky, Florida and Alabama, respectively, relating to the corporate practice
of medicine.
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, the PA
Contractors and the Affiliated Physicians could be subject to civil and criminal
penalties under such jurisdiction's laws and could be required to restructure
its contractual arrangements. In addition, expansion of the operations of the
Company to other "corporate practice" states will require similar structural and
organizational modification of the Company's form of relationship with 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. See "Risk
Factors -- State Laws Regarding Prohibition of Corporate Practice of Medicine."
The Medicare and Medicaid fraud and abuse provisions apply to laboratories
participating in such programs. These provisions include prohibitions of
improper and unnecessary billing for tests under these programs. Penalties for
violations of these federal laws include exclusion from participation in
Medicare and Medicaid programs, asset forfeitures and civil and criminal
penalties.
50
<PAGE> 52
In addition to current regulation, state and federal government sponsored
continue to focus significant attention on reforming the healthcare system in
the United States. A broad range of healthcare reform measures have been
introduced in Congress and in certain state legislatures. The Health Insurance
Portability and Accountability Act of 1996 has strengthened the powers of the
OIG and increased the funding for healthcare fraud investigations. As a result,
the OIG is currently expanding the scope of its healthcare fraud investigations.
In addition, federal and certain state laws provide individuals (so-called
"whistle-blowers") with a right to bring claims on behalf of federal and state
government agencies, and with a significant economic incentive to the
whistle-blower in the event a claim produces monetary recovery. These actions
are becoming increasingly prevalent in the healthcare industry, and have
resulted in increased scrutiny of healthcare providers. In addition, the U.S.
Congress is considering major reductions in the rate of increase of Medicare and
Medicaid spending as part of efforts to balance the budget of the United States.
Although the Company cannot predict whether these or other reductions in the
Medicare or Medicaid programs will be adopted, the adoption of such proposals
could have a material adverse effect on the business of the Company and the PA
Contractors. There can be no assurance that any proposed or future healthcare
legislation or other changes in the administration, interpretation or
enforcement of government sponsored healthcare programs will not have an adverse
effect on the financial condition and results or operations of the Company.
Concern about such proposals has been reflected in the volatility of the stock
prices of companies in healthcare and related industries. See "Risk
Factors -- Possible Reform of Healthcare Industry" and "-- No Prior Market;
Volatility of Stock Price."
CLIA extends federal oversight to virtually all 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. In 1992, HHS published regulations
implementing CLIA. The quality standards and enforcement procedure regulations
became effective in 1992. The quality standards regulations divide all tests
into three categories (waivered, moderate complexity and high complexity) and
establish varying requirements depending upon the complexity of the test
performed. A laboratory that performs high complexity tests must meet more
stringent requirements than a laboratory that performs only moderate complexity
tests, while those that perform only one or more of eight routine "waivered"
tests may apply for a waiver from most requirements of CLIA. The Company's
outpatient laboratories are certified by 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 and have proficiency testing conducted by approved agencies, and
biennial inspections. The sanction for failure to comply with these regulations
may be suspension, revocation or limitation of a laboratory's CLIA certificate
necessary to conduct business, significant fines and criminal penalties. The
loss of a license, imposition of a fine or future changes in such federal, state
and local laws and regulations (or in the interpretation of current laws and
regulations) could have a material adverse effect on the Company's financial
condition and results of operations. The Company is also subject to state
regulation. CLIA provides that a state may adopt more stringent regulations than
federal law. For example, state law may require that laboratory personnel meet
certain qualifications, specify certain quality controls, maintain certain
records and undergo proficiency testing.
In addition, the Company is subject to licensing and regulation under
federal, state and local laws relating to the handling and disposal of medical
specimens, infectious and hazardous waste and radioactive materials as well as
to the safety and health of laboratory employees. All Company laboratories are
operated in accordance with applicable federal and state laws and regulations
relating to the disposal of all laboratory specimens and other biohazardous
waste and the Company utilizes licensed vendors for disposal of such specimens.
Although the Company believes that it is currently in compliance with such
federal, state and local laws, failure to comply could subject the Company to
denial of the right to conduct business, fines, criminal penalties or other
enforcement actions.
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
51
<PAGE> 53
healthcare employers, 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 equipments,
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.
INSURANCE
The Company's business entails an inherent risk of claims of physician
professional liability. Prior to the Recent Acquisitions, the Practices had
coverages ranging from $500,000 to $5.0 million per occurrence, and $1.0 million
to $8.0 million in the annual aggregate. In October 1996, the Company
consolidated its medical liability coverages with Steadfast Insurance Company
(Zurich-American), whereby each of the Affiliated Physicians is insured 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 $15 million
per occurrence, and $20.0 million in the aggregate. The policy also provides
prior acts coverage for each of the Affiliated Physicians with respect to the
Practices prior to the their acquisition by the Company. Pursuant to the terms
of the purchase agreements for the Recent Acquisitions, the Company has 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 that its insurance is adequate for the Company's business,
there can be no assurance that a future successful claim will not exceed the
limits of available insurance coverage or that such coverage will continue to be
available at acceptable costs and on favorable terms. See "Risk
Factors -- Professional Liability and Insurance" and "-- Legal Proceedings."
COMPETITION
The markets for the services provided by the Company and the Practices
consist of: (1) the provision of physician practice management services to
anatomic pathology practices; and (2) the provision of anatomic pathology
services. The Company competes with other physician practice management
companies that are focused on the ownership or management of anatomic pathology
practices. Through its Direct Subsidiaries and affiliations with the PA
Contractors, the Company competes with anatomic pathology practices, national
clinical laboratories, hospitals and clinics which provide anatomic pathology
medical services. The Company estimates that there are over 3,300 pathology
practices operating in outpatient laboratories in the United States. In
addition, competition may result from companies in other healthcare industry
segments, such as managers of other hospital-based specialties or large
physician group practices, that may enter the Company's markets, some of which
have financial and other resources greater than those of the Company. With
respect to physician practice management services, the Company believes that the
principal competitive factors are sales and marketing, billing, collections and
financial reporting, management of physicians, laboratories and related medical
services and human resources. To date, the Company has not experienced
significant competition in the provision of physician practice management
services to anatomic pathology practices. The Company's Practices do, however,
experience competition in local markets in which the Practices provide anatomic
pathology services. The Company believes that the infrastructure it is building
provides a competitive advantage in its markets. The principal competitive
factors regarding the provision of anatomic pathology services are professional
reputation of the pathologist, the price charged for pathology services, the
scope of services offered, the ability to operate laboratories on an efficient
basis and geographic coverage. The Company competes with several other companies
for the acquisition of anatomic pathology practices. In addition, companies in
other healthcare segments, such as hospitals, HMOs and large physician
practices, many of which have greater financial and other resources than the
Company, may become competitors in acquiring, or providing physician practice
management services to, anatomic pathology practices. The Company competes for
acquisitions on the basis of the reputation of the Practices, its management
experience and its focus on anatomic pathology. There can be no assurance that
the Company will not experience more competition in its markets, that new
competitors will not enter such markets, or that such competition will not make
it more difficult for the Company to acquire practices on favorable terms.
52
<PAGE> 54
SERVICE MARKS
The Company has registered the service mark "AmeriPath" and
"AmeriPath -- Integrated Pathology Services" with the United States Patent and
Trademark Office, and has also filed applications for registration of the
Company's name and logo.
EMPLOYEES
At December 31, 1996, there were a total of 585 persons, including 81
Affiliated Physicians, employed by or affiliated with the Company. Of the
Affiliated Physicians, 73 are employed by subsidiaries of the Company and eight
are employed by PA Contractors. The Company's employees include 244 laboratory
technicians, 59 couriers and 201 billing, marketing and administrative staff, of
which 22 personnel are located at the Company's executive offices. None of the
Company's employees are subject to collective bargaining agreements. The Company
believes that its relations with its employees are good.
PROPERTIES
The Company leases its executive offices located in Riviera Beach, Florida
(approximately 4,000 square feet), its billing and administrative office in Fort
Lauderdale, Florida (approximately 3,500 square feet) and leases 16 other
facilities: ten in Florida, one in Alabama, two in Kentucky, two in Ohio and one
in Texas. See "Certain Transactions." These facilities are used for laboratory
operations, administrative and billing and collections operations and storage
space. The 16 facilities encompass an aggregate of approximately 71,000 square
feet, have an aggregate annual rent of approximately $742,000 and have lease
terms expiring from 1997 to 2006. 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.
LEGAL PROCEEDINGS
During the ordinary course of business, the Company has become and may in
the future be subject to pending and threatened legal actions and proceedings.
The Company may have liability with respect to its own employees as well as with
respect to hospital employees who are under the supervision of Affiliated
Physicians. The majority of the pending legal proceedings involve claims of
medical malpractice, particularly cytology, and are generally covered by
insurance. Based upon the investigations conducted to date, the Company believes
that the outcome of such legal actions and proceedings, individually or in the
aggregate, will not have a material adverse effect on the Company's financial
condition, results of operations or liquidity. If liability results from medical
malpractice claims, there can be no assurance that the Company's medical
malpractice insurance coverage will be adequate to cover liabilities arising out
of such proceedings. See "Risk Factors -- Professional Liability and Insurance."
53
<PAGE> 55
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
--------------------------------------- --- ---------------------------------------
<S> <C> <C>
James C. New(1)(2)..................... 51 President, Chief Executive Officer and
Director
Alan Levin, M.D........................ 45 Chief Operating Officer and Director
Robert P. Wynn......................... 50 Executive Vice President and Chief
Financial Officer
Michael J. Demaray, M.D................ 51 Executive Vice President, Medical
Director and Director
Annette L. Bell........................ 38 Vice President of Sales
Stephen V. Fuller...................... 41 Vice President of Human Resources
Thomas S. Roberts(1)(2)(3)............. 33 Chairman of the Board
Timothy Kilpatrick, M.D................ 41 Director and Managing Director of
Derrick
E. Roe Stamps, IV(3)................... 51 Director
</TABLE>
- ---------------
(1) Member of Acquisition Review Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
The Company's Board of Directors intends to appoint at least two additional
directors who are not affiliated with the Company within 90 days of the
consummation of this offering. The additional directors will serve on the
Compensation Committee and the Audit Committee and have not been identified as
of the date of this Prospectus.
James C. New has been the President, Chief Executive Officer and a director
of AmeriPath since January 1996. Prior to joining AmeriPath, Mr. New served as
President and as a director of RehabClinics, Inc., one of the largest outpatient
rehabilitation companies in the country, which he formed in 1991. RehabClinics
completed its initial public offering in June 1992 and merged with NovaCare,
Inc. in February 1994. Mr. New was President of NovaCare, Inc.'s Outpatient
Division from 1994 to 1995. Prior to founding RehabClinics, Inc., he served as
President of Greater Atlantic Health Service and Physicians Choice of
Southeastern Pennsylvania, a start-up HMO. From 1993 through 1996, Mr. New was
the Chairman of the Acquisition Committee of the Board of Directors of Pet
Practice, Inc. From 1978 to 1985, Mr. New served in various executive positions
at Textron, Inc. and Emerson Electric, Inc.
Alan Levin, M.D. has been Chief Operating Officer since September 1996. He
became a director and an Affiliated Physician in June 1996 after the Company
acquired Derrick. Prior to that, he served on the Board of Directors of Derrick
since 1987, as Treasurer from 1990 to 1994, and President from 1994 until the
acquisition of Derrick. Dr. Levin has 14 years experience as a pathologist and
is board certified in anatomic and clinical pathology. He serves as the medical
director of the inpatient pathology laboratory at Columbia Medical Center, Port
St. Lucie, Florida, and as a member of that hospital's Board of Trustees. Since
1990, he has served as an advisor to Florida's State Agency for Healthcare
Administration. Dr. Levin received his B.A. from Emory University and his M.D.
from the University of Miami Medical School. He performed his medical oncology
internship at Jackson Memorial Hospital and completed his anatomic and clinical
pathology residency at Mount Sinai Medical Center in Miami, Florida.
Robert P. Wynn has served as the Executive Vice President and Chief
Financial Officer since February 1996. He served as Vice President and Chief
Operating Officer of ALA from August 1993 to 1996. Mr. Wynn was Vice President
and Chief Financial Officer of International Magnetic Imaging, Inc. ("IMI"),
from May
54
<PAGE> 56
1991 until August 1993. Prior to joining IMI, Mr. Wynn, a certified public
accountant, was an audit partner with Deloitte, Haskins & Sells (predecessor to
Deloitte & Touche LLP). Mr. Wynn has over 26 years of experience in finance and
accounting. Mr. Wynn received his B.S. in Accounting from King's College in
Pennsylvania.
Michael J. Demaray, M.D. has been a director and the Medical Director of
AmeriPath since the Share Exchange in 1996 and was a director of ALA from the
Recapitalization to 1996. Dr. Demaray is also an Affiliated Physician. Along
with Dr. Poulos, he founded ALA in 1982 and was Vice President of that entity
until February 1996. He has 20 years experience as a pathologist and is
board-certified in anatomic and clinical pathology, as well as in
dermatopathology. He serves as Director of Pathology at each of Columbia
Northwest Regional Hospital in Margate, Florida and Columbia Pompano Beach
Medical Center in Pompano Beach, Florida. In addition, Dr. Demaray is an
Associate Pathologist at North Ridge Medical Center in Fort Lauderdale, Florida.
Dr. Demaray received his B.A. from DePauw University and his M.D. from Michigan
State University. He completed his residency in pathology at Jackson Memorial
Hospital at the University of Miami.
Annette L. Bell has been Vice President of Sales since September 1996. She
was Director of Sales and Marketing for ALA from 1990 to 1996 and for AmeriPath
since February 1996. From 1987 to 1989, Ms. Bell held various positions with HSN
Health Services, Inc., a subsidiary of Home Shopping Network, Inc., including
District Sales Manager. Ms. Bell has over 15 years experience in sales and
marketing. She attended Purdue University and Pensacola Christian College.
Stephen V. Fuller has been Vice President of Human Resources since November
1996. From 1993 to 1996, he served as Vice President, Human Resources for
Columbia Miami Heart Institute, a 315-bed full service hospital. From 1991 to
1993, Mr. Fuller served as Director, Human Resources for Delray Community
Hospital, an acute care trauma hospital with over 200 beds and 1,400 employees.
From 1990 to 1991, he served as Vice President, Human Resources for Hialeah
Hospital, a 411-bed hospital with 1,250 employees. Mr. Fuller is a Certified
Senior Professional in Human Resources with over 15 years experience in
healthcare human resources. He received his Bachelor of Science in Personnel
Management and Industrial Relations from Auburn University and his Masters of
Business Administration from Nova Southeastern University.
Thomas S. Roberts has been a director of the Company since the Share
Exchange in 1996 and was a director of ALA from the Recapitalization to 1996.
Mr. Roberts is a General Partner of Summit Partners, a general partnership
venture capital firm which is the general partner of various venture capital
funds (including Summit Ventures III, L.P. and Summit Investors II, L.P., and
Summit Subordinated Debt Fund, L.P., stockholders of the Company). Mr. Roberts
has been employed with Summit Partners in various positions since 1989. Mr.
Roberts is also a director of AMX Corporation, Intelligroup, Inc. and PowerCerv
Corporation, as well as several privately held companies.
Timothy Kilpatrick, M.D. has been a director of the Company and an
Affiliated Physician since June 1996 when the Company acquired Derrick. He has
also been Managing Director of Derrick since October 1996. Dr. Kilpatrick was a
shareholder and employee of Derrick since 1986. From 1995 until June 1996, Dr.
Kilpatrick was Vice President of Derrick and from 1992 until June 1996, Chairman
of its Strategic Planning Committee. He has 11 years experience as a pathologist
and is board certified in anatomic and clinical pathology, as well as in
Dermatopathology. Dr. Kilpatrick received his B.S. from the University of
Florida and his M.D. from the University of Florida, College of Medicine. He
completed his residency in pathology at Bowman Gray School of Medicine.
E. Roe Stamps, IV has been a director of the Company since the Share
Exchange in 1996 and was a director of ALA from the Recapitalization to 1996.
Mr. Stamps has more than 22 years experience in venture capital investing and is
the Managing General Partner of Summit Partners. He has served on the board of
numerous private and public companies. Mr. Stamps is currently the Chairman of
the Board of Boca Research, Inc. and is a director of Pediatrix Medical Group,
Inc.
After this offering, the Company expects that it will pay each director who
is neither an employee nor associated with one of the Company's principal
stockholders a $1,000 fee for each meeting of the Board of
55
<PAGE> 57
Directors attended in person by such director, $500 for each meeting of a
committee of the Board of Directors attended in person, which meeting is not
held in conjunction with a regular Board of Directors meeting, and fees of $500
and $250 for each Board of Directors meeting and committee meeting, respectively
attended by telephone conference. The Company expects that outside directors
will also be eligible to receive options to purchase shares of Common Stock
pursuant to the Directors Option Plan. The Company also reimburses all directors
for out-of-pocket expenses incurred in connection with the rendering of services
as a director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In 1996, the Board of Directors established a Compensation Committee to
administer the Option Plan consisting of Messrs. Roberts and Stamps. All
compensation decisions affecting Mr. New were approved by the Company's
directors, exclusive of Mr. New.
Pursuant to the Recapitalization, Summit, with which Messrs. Roberts and
Stamps are affiliated, purchased 3,084,730 shares of the Convertible Preferred
Stock for approximately $5.3 million. Additionally, the Company issued
approximately $7.2 million principal amount of Junior Notes to Summit. A
financing fee of $190,000 was paid to Summit in connection with these
transactions. In connection with the formation of AmPath in February 1996,
Summit exchanged its holdings of Junior Notes and Convertible Preferred Stock of
ALA for the same number and type of debt and equity securities of the Company.
In February 1996, Summit converted 115,388 shares of the Convertible Preferred
Stock into 207,698 shares of Common Stock and then sold such shares to Mr. New
for consideration of $432,691 pursuant to the terms of Mr. New's employment
agreement. The consideration paid approximated the fair value of such shares.
Summit will convert its shares of Convertible Preferred Stock into 5,344,817
shares of Common Stock prior to consummation of this offering.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the total
compensation paid or accrued by the Company, for services rendered during 1996
and 1995, to the Company's Chief Executive Officer and certain other officers
whose total 1996 salary and bonus exceeded $100,000 (collectively the "Named
Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
-----------------------------
FISCAL
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)
- ------------------------------------------------------------------- ------ --------- --------
<S> <C> <C> <C>
James C. New(2).................................................... 1996 213,942 50,000
President and Chief Executive Officer 1995 -- --
Alan Levin, M.D.(3)................................................ 1996 112,732 100,000
Chief Operating Officer 1995 -- --
Michael J. Demaray, M.D.(4)........................................ 1996 349,820 --
Executive Vice President and Medical Director 1995 350,000 --
Robert P. Wynn(5).................................................. 1996 141,605 --
Executive Vice President and Chief Financial Officer 1995 128,725 25,000
Annette L. Bell(6)................................................. 1996 64,153 56,559
Vice President of Sales 1995 64,592 50,744
</TABLE>
- ---------------
(1) The column for "Other Annual Compensation" has been omitted because there is
no compensation required to be reported in such columns. The aggregate
amount of perquisites and other personal benefits provided to each Named
Officer is less than 10% of the total annual salary and bonus of such
officer.
(2) Mr. New's employment with the Company commenced in January 1996.
(3) Dr. Levin was employed by Derrick during 1995 and the first six months of
1996. His employment with the Company commenced in June 1996 in connection
with the acquisition of Derrick. As of September 1996, Dr. Levin became the
Chief Operating Officer of AmPath.
(4) Dr. Demaray was employed by ALA during 1995. Dr. Demaray is currently
employed as an Affiliated Physician and is also employed by AmPath as its
Medical Director.
(5) Mr. Wynn was employed by ALA during 1995, and was acting in the capacity of
ALA's chief executive officer. Mr. Wynn is currently employed by AmPath as
its Executive Vice President and Chief Financial Officer.
(6) Ms. Bell was employed by ALA during 1995. Bonus amounts paid to Ms. Bell
include commissions.
56
<PAGE> 58
OPTIONS
The following table sets forth the options granted to the Named Officers
during the year ended December 31, 1996.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF RATES OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS GRANTED TO EXERCISE OR BASE TERM
OPTIONS EMPLOYEES IN FISCAL PRICE PER EXPIRATION -----------------------
GRANTED(1) YEAR SHARE(1),(2) DATE 5% 10%
---------- ------------------- ---------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
James C. New.............. 360,011 50% $ 1.67 1/1/06 $6,888,104 $10,469,602
Alan Levin, M.D........... 36,000 5% 10.00 9/26/06 231,768 365,010
Michael J. Demaray,
M.D..................... -- -- -- -- -- --
Robert P. Wynn............ -- -- -- -- -- --
Annette L. Bell........... 18,000 2% 10.00 9/26/06 115,884 182,505
</TABLE>
- ---------------
(1) After giving effect to the Company's 1.8 for 1 split of its Common Stock on
January 13, 1997.
(2) All options were granted at exercise prices greater than the fair market
value of the Common Stock on the date of the grant.
(3) Potential realizable value is based on the difference between the option
exercise price and the initial public offering price of the Common Stock
(based upon an assumed initial public offering price of $14.00 per share)
multiplied by the number of shares of Common Stock underlying the option.
These assumed annual rates of appreciation were used in compliance with the
rules of the Securities and Exchange Commission and are not intended to
forecast future price appreciation of the Common Stock or to take into
account the immediate increase in potential realizable value that will
occur. The actual value realized from the options could be higher or lower
than the values reported above, depending on the future appreciation or
depreciation of the Common Stock during the option period and the timing of
exercise of the options.
Year End Option Table. The following table sets forth information
regarding exercise of options and the number and value of options held at
December 31, 1996 by each of the Named Officers. No options were exercised
during 1996 by such executives.
AGGREGATE UNEXERCISED OPTIONS AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR END(#) AT YEAR END($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James C. New.................................... -- 360,011 -- $ 4,438,933
Alan Levin, M.D................................. -- 36,000 144,000
Michael J. Demaray, M.D......................... -- -- -- --
Robert P. Wynn.................................. 86,400 129,600 $ 1,113,696 1,670,544
Annette L. Bell................................. -- 18,000 -- 72,000
</TABLE>
- ---------------
(1) The value of the options is based on the difference between the option
exercise price of $1.67, $10.00, $1.11 and $10.00 with respect to Mr. New,
Dr. Levin, Mr. Wynn and Ms. Bell, respectively, and the initial public
offering price of the Common Stock (based upon an assumed initial public
offering price of $14.00) multiplied by the number of shares of Common Stock
underlying the option. No market existed for the Common Stock prior to this
offering.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Mr. New effective
January 1, 1996. The agreement, as amended, provides that Mr. New will receive a
base salary of $275,000 per year. In addition, for the year ending December 31,
1996 Mr. New will receive a bonus equal to 25% of his base salary and up to an
additional 25% of his base salary upon attaining mutually agreed upon objectives
relating to the Company's performance. Upon termination of his employment by the
Company for reasons other than disability, death or cause, Mr. New will receive
his base salary and benefits for a period of 12 months. In connection with his
employment, Mr. New purchased 216,007 shares of Common Stock of the Company from
Summit and Schroder, and the Company granted him an option to purchase 360,011
shares of Common Stock.
57
<PAGE> 59
In connection with the Recapitalization, the Company assumed ALA's
employment agreement with Mr. Wynn. The agreement, as amended, provides that Mr.
Wynn shall receive a base salary of $142,000 per year and may receive a
discretionary bonus based on his performance. In addition, for the year ended
December 31, 1996, Mr. Wynn shall receive a bonus equal to 35% of his base
salary upon attaining mutually agreed upon objectives relating to the Company's
performance. Upon termination of his employment without cause, Mr. Wynn shall
receive his base salary for a period of twelve months.
The Company entered into an employment agreement with Dr. Levin as an
Affiliated Physician as of June 30, 1996 in connection with the acquisition of
Derrick. Effective October 1, 1996, the Company entered into an additional
agreement with Dr. Levin pursuant to which Dr. Levin became Chief Operating
Officer of AmPath and amended his employment agreement with AmeriPath Florida,
Inc., the Florida subsidiary of AmPath. The agreements provide for an annual
salary of $255,000, $155,000 of which is paid by AmPath and $100,000 of which is
paid by AmeriPath Florida, Inc. Beginning in 1997, Dr. Levin will be eligible to
receive a bonus of up to $25,000 per year, subject to achievement of performance
objectives of the Company. Upon termination by the Company other than for cause,
Dr. Levin will receive his annual salary for one year. In connection with his
employment as Chief Operating Officer, the Company granted options to purchase
36,000 shares of Common Stock.
In addition to their roles as executive officers and directors of the
Company, Drs. Levin, Demaray and Kilpatrick are also Affiliated Physicians and
have entered into separate employment agreements with the Company that govern
their relationship with the Company as an Affiliated Physician. These agreements
have terms of five years and provide for annual base salaries of $255,000,
$350,000 and $255,000, respectively. Each employment agreement provides for a
covenant not to compete during such Affiliated Physicians' employment with a
subsidiary of AmeriPath and thereafter, for a period of two years with respect
to Drs. Levin and Kilpatrick and 18 months with respect to Dr. Demaray.
Pursuant to their respective employment agreements, Drs. Levin, Demaray and
Kilpatrick have agreed to devote their full business time to providing services
to the Company. The Company expects that Dr. Levin will devote approximately 80%
of his professional time to his responsibilities as Chief Operating Officer,
with the balance of his professional time being devoted to his activities as an
Affiliated Physician. The Company expects that Dr. Demaray will devote
approximately 30% of his professional time to his responsibilities as Executive
Vice President and Medical Director, with the balance of his professional time
being devoted to his activities as an Affiliated Physician.
Certain executive officers hold options to purchase Common Stock granted
under the Option Plan. Such options may be terminated by the Compensation
Committee of the Board of Directors upon: (i) a merger, consolidation or similar
corporate transaction in which ownership of more than 50% of the voting power of
the Company's voting stock is transferred; or (ii) a sale or other disposition
of all or substantially all of the Company's assets.
EMPLOYEE BENEFIT PLAN
The Company established a 401(k) retirement plan (the "401(k) Plan"), which
covers substantially all eligible employees who have reached age 21 and have
completed one year of service (as defined in the 401(k) Plan). Under the terms
of the 401k Plan, employees may contribute up to 15% of their compensation, as
defined. Employer contributions are discretionary. During 1994, 1995 and the
first nine months of 1996, the Company elected not to make a contribution to the
401k Plan.
OPTION PLAN
Under the Option Plan, 1,620,000 shares of Common Stock are reserved for
issuance upon exercise of stock options. The Option Plan is designed to retain
and motivate key employees and consultants or advisors who have an opportunity
to contribute to the success of the Company. After this offering, the
Compensation Committee will administer and interpret the Option Plan and be
authorized to grant options thereunder to all eligible employees of and
consultants or advisors to the Company, except that no incentive stock options
(as
58
<PAGE> 60
defined in Section 422 of the Internal Revenue Code) may be granted to a
consultant or advisor who is not also an employee of the Company or a
subsidiary.
The Option Plan provides for the granting of both incentive stock options
and nonqualified stock options. Options are granted under the Option Plan on
such terms and at such prices as determined by the Compensation Committee,
except that the per share exercise price of incentive stock options cannot be
less than the fair market value of the Common Stock on the date of grant. Each
option is exercisable after the period or periods specified in the option
agreement, but no option may be exercisable after the expiration of ten years
from the date of grant. Options granted to an individual who owns (or is deemed
to own) at least 10% of the total combined voting power of all classes of stock
of the Company or its subsidiary must have an exercise price of at least 110% of
the fair market value of the Common Stock on the date of grant and a term of no
more than five years. Incentive stock options granted under the Option Plan are
not transferable other than by will or by the laws of descent and distribution.
Nonqualified options granted under the Option Plan may be transferred with the
consent of the Compensation Committee, which consent may be given at the time
such options are granted. Unless otherwise determined by the Compensation
Committee, individuals holding options may exercise such options by delivering
cash or Common Stock pursuant to the cashless exercise procedures. The Option
Plan also authorizes the Company to make or guarantee loans to optionees to
enable them to exercise their options. Such loans must: (i) provide for recourse
to the optionee; (ii) bear interest at a rate no less than the prime rate of
interest of the Company's principal lender; and (iii) be secured by the shares
of Common Stock purchased. The Board of Directors and the Compensation Committee
the authority to amend or terminate the Option Plan, provided that no such
action may impair the rights of the holder of any outstanding option without the
written consent of such holder, and provided further that certain amendments of
the Option Plan are subject to stockholder approval. Unless terminated sooner,
the Option Plan will continue in effect until all options granted thereunder
have expired or been exercised, provided that no incentive stock options may be
granted ten years after the effective date of the Option Plan, which is February
15, 1996.
As of December 31, 1996, the Company has outstanding options to purchase an
aggregate of 972,011 shares of Common Stock under the Option Plan at a weighted
average exercise price of $4.13 per share, of which options, to purchase 97,200
shares of Common Stock are currently exercisable at December 31, 1996.
DIRECTOR OPTION PLAN
Under the Director Option Plan, 180,000 shares of Common Stock are reserved
for issuance upon exercise of stock options granted thereunder. The purpose of
the Director Option Plan is to attract and retain qualified and competent
persons to serve as members of the Board of Directors and to provide such
directors with additional incentive to contribute to the success of the Company
by providing them with an opportunity to have an equity interest in the Company.
The Board of Directors or a committee thereof administering the Director
Option Plan, (the "Administrator") is authorized to grant options ("Director
Options") thereunder and to determine the terms and conditions applicable to
such Director Options. Directors who are not employees of the Company are
eligible to receive Director Options. Directors receive an initial grant of an
option to purchase 5,000 shares of Common Stock upon their initial election to
the Board of Directors. Each Director Option is exercisable during the period
specified in the agreement evidencing the grant of such Director Option, but no
option may be exercisable ten years after the day of grant. The Board of
Directors and the Administrator have the authority to amend or terminate the
Director Option Plan without the consent of such optionholder, and provided
further that certain amendments of the Director Option Plan are subject to
stockholder approval. Unless terminated sooner, the Director Option Plan will
continue in effect until all Director Options granted thereunder have expired or
been exercised, provided that no options may be granted ten years after the
effective date of the Director Option Plan, which, subject to stockholder
approval, is November 21, 1996.
No Director Options have been granted as of the date hereof.
59
<PAGE> 61
CERTAIN TRANSACTIONS
RECAPITALIZATION
Pursuant to the Recapitalization: (i) ALA acquired substantially all of the
assets and assumed substantially all of the liabilities of PDK for $20.5 million
in cash, $3.5 million principal amount of Senior Notes and $2.5 million
principal amount of ALA Contingent Notes; (ii) Summit and Schroder purchased
3,208,120 shares of the Convertible Preferred Stock for $5.5 million; and (iii)
Drs. Demaray, Poulos and Kowalczyk, the owners of PDK, purchased an aggregate of
1,425,600 shares of ALA common stock for an aggregate purchase price of $1.0
million. Prior to, and immediately following the Recapitalization, Drs. Demaray,
Poulos and Kowalczyk owned 100% of the then issued and outstanding shares of
common stock of ALA. However, as a result of the Recapitalization, the owners of
PDK, after the Recapitalization, held 19.8% of the voting interest, as compared
to 100% prior to the Recapitalization. Additionally, the Company issued an
aggregate $7.5 million principal amount of Junior Notes to Summit and Schroder
and borrowed $7.5 million under its line of credit to finance a portion of the
acquisition of the net assets from PDK. A financing fee of $190,000 was paid to
Summit in connection with these transactions. Summit and Schroder will convert
their shares of Convertible Preferred Stock into an aggregate of 5,558,609
shares of Common Stock prior to consummation of this offering. The Company has
reserved 5,558,609 shares of Common Stock for the conversion of the Convertible
Preferred Stock.
In the Recapitalization, each of Drs. Demaray, Poulos and Kowalczyk
received in exchange for the assets of PDK the following from the Company: (i) a
cash distribution of $6.8 million; (ii) Senior Notes in the principal amounts of
$1.2 million; and (iii) ALA Contingent Notes in the principal amounts of
$833,000. The ALA Contingent Notes were payable in annual installments of
$500,000, plus interest thereon, in years 1994 through 1998, if operating
earnings exceeded a specified annual level. If the specified operating earnings
levels were not achieved, the amounts payable for that year, including the
related accrued interest, were to be canceled. The specified levels of operating
earnings for the years ended December 31, 1995 and 1994 were not achieved;
therefore, $500,000 of the principal amount of the ALA Contingent Notes for each
such year and related accrued interest were canceled. In April 1996, the
remaining obligations under the ALA Contingent Notes were canceled in exchange
for an aggregate of 194,400 shares of Common Stock (64,800 shares to each of
Drs. Demaray, Poulos and Kowalczyk) with an aggregate fair value of $242,000. In
connection with the termination in January 1996 by the Company of the D&P Option
and the acquisition by the Company of substantially all of the assets of D&P,
the Company paid $851,684 to each of Drs. Demaray and Poulos.
In connection with the formation of AmPath in February 1996, each of
Summit, Schroder and Dr. Demaray, Poulos and Kowalczyk exchanged their
respective holdings of Junior Notes, Senior Notes, Convertible Preferred Stock
and common stock of ALA for the same number and type of debt and equity
securities of AmPath.
In February 1996, Summit and Schroder converted, in the aggregate, 120,004
shares of the Convertible Preferred Stock to 216,007 shares of Common Stock and
then sold such shares to Mr. New for an aggregate consideration of $450,000
pursuant to the terms of Mr. New's employment agreement. The consideration paid
approximated the fair value of such shares. In connection with his purchase of
216,007 shares of Common Stock from Summit and Schroder, Mr. New borrowed
$270,000 from the Company, payable in full on January 1, 2001, with interest
accruing at 8% and payable currently. The loan is secured by a pledge of 126,000
shares of the Common Stock.
AGREEMENTS WITH CERTAIN STOCKHOLDERS
The Company leases an outpatient laboratory in Fort Lauderdale, Florida
from an entity owned by the spouses of Drs. Demaray, Poulos and Kowalczyk. The
lease expires on March 31, 1998 and contains options to renew for two additional
five-year periods. The lease requires monthly rental payments of $10,973, plus
sales taxes, property taxes, insurance, utilities and maintenance costs. Rent
paid under this lease was $139,583 in 1995 and $104,687 for the nine months
ended September 30, 1996. The Company believes that the terms of the lease are
comparable to those which would be available to an unaffiliated entity on the
basis of an arms-length negotiation. Certain of the Company's subsidiaries have
entered into other leases with certain of the
60
<PAGE> 62
sellers of the Practices pursuant to the terms of the purchase agreements for
certain of the Recent Acquisitions. Such sellers are Affiliated Physicians who
are not executive officers or directors of the Company. The Company believes
that such leases are on terms comparable to those which would be available to an
unaffiliated entity on the basis of an arms-length negotiation.
Prior to the acquisition of D&P from Drs. Demaray and Poulos, ALA had
entered into certain transactions with D&P. ALA paid D&P a fee for the staffing
of three D&P frozen section laboratories. Such fee paid to the Company was
$120,300 during the year ended December 31, 1995. The Company also provided
certain administrative support services to D&P for which the Company was paid
$2,400 for the year ended December 31, 1995.
SHAREHOLDERS' AGREEMENT
Certain of the current directors were elected to the Board of Directors
pursuant to the terms of a shareholders' agreement among the Company's
stockholders (the "Shareholders' Agreement"). Effective upon the consummation of
this offering, the Shareholders' Agreement will terminate and will no longer
control the selection of the Board of Directors.
61
<PAGE> 63
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's outstanding Common Stock as of December 31, 1996 and
as adjusted to reflect the sale of the Common Stock offered hereby by: (i) each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock; (ii) each director and Named Officer of the
Company; (iii) each Selling Stockholder; and (iv) all directors and executive
officers of the Company as a group. Except as otherwise indicated, the persons
listed below have sole voting and investment power with respect to all shares of
Common Stock owned by them, except to the extent such power may be shared with a
spouse.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED AFTER THE
OWNED(2) NUMBER OF OFFERING(2)
---------------------- SHARES -------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT(3) OFFERED NUMBER PERCENT
- -------------------------------------------------- --------- ---------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Summit(4)......................................... 5,344,816 47.1% 481,000 4,863,816 28.5%
Schroder(5)....................................... 213,792 1.9 19,000 194,792 1.1
James C. New(6)................................... 252,009 2.2 -- 252,009 1.5
Alan Levin, M.D................................... 78,925 * -- 78,925 *
Michael J. Demaray, M.D.(7)....................... 540,000 4.8 -- 540,000 3.2
Robert P. Wynn(8)................................. 86,400 * -- 86,400 *
Annette L. Bell................................... -- -- -- -- --
Timothy M. Kilpatrick, M.D.(9).................... 78,925 * -- 78,925 *
Thomas S. Roberts(4).............................. 5,344,816 47.1 -- 4,863,816 28.5
E. Roe Stamps, IV(4).............................. 5,344,816 47.1 -- 4,863,816 28.5
All directors and executive officers as a group
(9 persons)(4)(6)(8)............................ 6,381,075 55.4 5,900,073 34.3
</TABLE>
- ---------------
* Less than one percent.
(1) Unless otherwise indicated, the address of each of the beneficial owners
identified is 7289 Garden Road, Suite 200, Riviera Beach, Florida 33404.
(2) Based on 11,351,354 shares of Common Stock outstanding prior to this
offering and 17,051,356 shares of Common Stock outstanding immediately after
this offering. Pursuant to the rules of the Commission, shares of the Common
Stock which a person has the right to acquire within 60 days of the date
hereof pursuant to the exercise of stock options or the conversion of a
convertible security are deemed to be outstanding for the purpose of
computing the percentage ownership of such person but are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person.
(3) Percentages reflect the conversion by Summit and Schroder of an aggregate of
3,088,116 shares of Convertible Preferred Stock into an aggregate of
5,558,609 shares of Common Stock prior to the consummation of this offering.
See "Certain Transactions."
(4) Includes 2,086,029.2, 19,823.6 and 863,490.2 shares of Convertible Preferred
Stock held by Summit Ventures III, L.P., Summit Investors II, L.P. and
Summit Subordinated Debt Fund, L.P., respectively, each of which is a
limited partnership, the general partner of which is Summit Partners, a
general partnership. These shares of Convertible Preferred Stock will be
converted into 5,344,816 shares of Common Stock prior to the consummation of
this offering. In the event the over-allotment option is exercised in full,
Summit will sell an additional 432,900 shares of Common Stock and will own
4,430,916 shares of Common Stock, or 25.7%, after the offering. Thomas S.
Roberts is a director of the Company and is a General Partner of Summit
Partners. E. Roe Stamps is a director of the Company and is Managing General
Partner of Summit Partners. Mr. Roberts and Mr. Stamps both disclaim
beneficial ownership of the shares of Convertible Preferred Stock and Common
Stock. The address of Summit and Messrs. Roberts and Stamps is 600 Atlantic
Avenue, Suite 2800, Boston, Massachusetts 02210-2227.
(5) Includes 47,509, 57,011 and 14,253 shares of Convertible Preferred Stock
held by Schroders Incorporated, Schroders Ventures, L.P., and Schroders
Ventures U.S. Trust, respectively. These shares of Convertible Preferred
Stock will be converted into 213,792 shares of Common Stock prior to
consummation of this offering. In the event the over-allotment option is
exercised in full, Schroder will sell an additional 17,100 shares of Common
Stock and will own 177,692 shares of Common Stock, or 1%, after the
offering.
(6) Includes 72,000 shares subject to stock options exercisable within 60 days.
Excludes 288,011 shares subject to unexercisable options. In the event the
over-allotment option is exercised in full, Mr. New will sell 80,000 shares
of Common Stock and will beneficially own 162,011 shares, or 1.0%, after the
offering.
(7) Includes 180,000 shares held in trust for the benefit of members of Dr.
Demaray's family. Dr. Demaray disclaims beneficial ownership with respect to
such shares. In the event the over-allotment option is exercised in full,
Dr. Demaray will sell 80,000 shares of Common Stock and will own 460,000
shares, or 2.7%, after the offering.
(8) Includes 86,400 shares subject to stock options exercisable within 60 days.
Excludes 129,600 shares subject to unexercisable options. In the event the
over-allotment option is exercised in full, Mr. Wynn will sell 30,000 shares
of Common Stock and will own 56,400 shares, or less than one percent after
the offering.
(9) Includes 36,000 shares held in trust for the benefit of members of Dr.
Kilpatrick's family. Dr. Kilpatrick disclaims beneficial ownership with
respect to such shares.
62
<PAGE> 64
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 8,000,000 shares of
Common Stock, par value $.01 per share, and 5,000,000 shares of Convertible
Preferred Stock, par value $.01 per share. As of December 31, 1996, an aggregate
of 5,792,747 shares of Common Stock were outstanding and held of record by 47
stockholders and 3,088,116 shares of Convertible Preferred Stock were
outstanding and held of record by Summit and Schroder. Summit and Schroder are
expected to convert all of the shares of Convertible Preferred Stock into shares
of Common Stock on a 1.8 for one basis prior to the consummation of this
offering. Prior to the consummation of this offering and subsequent to the
conversion by Summit and Schroder of the shares of Convertible Preferred Stock
into Common Stock, the Certificate of Incorporation will be amended to provide
authorized capital of 30,000,000 shares of Common Stock and 2,000,000 shares of
Preferred Stock. Copies of the Certificate of Incorporation and Bylaws have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part and are incorporated herein by reference.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of stockholders, including the election of directors. Since
the Common Stock does not have cumulative voting rights, the holders of a
majority of the outstanding shares voting for election of directors can elect
all members of the Board of Directors. A majority vote is also sufficient for
other actions that require the vote or concurrence of stockholders. Dividends
may be paid to holders of Common Stock when and if declared by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." Upon
liquidation or dissolution of the Company, holders of Common Stock will be
entitled to share ratably in the assets of the Company legally available for
distribution to stockholders in the event of liquidation or dissolution.
The holders of Common Stock have no preemptive or conversion rights. The
shares of Common Stock offered hereby will be, when issued and paid for, fully
paid and not liable to further call or assessment.
PREFERRED STOCK
The Convertible Preferred Stock will be converted by Summit and Schroder
into shares of Common Stock on a 1.8 for one basis prior to consummation of this
Offering. Upon any conversion of the Convertible Preferred Stock, all
accumulated and unpaid dividends on the Convertible Preferred Stock, whether or
not declared, since the date of issue up to and including the date of conversion
thereof will become due and payable. See "Use of Proceeds."
Although the Company has no present plans to issue shares of Preferred
Stock, Preferred Stock may be issued from time to time in one or more classes or
series with such designations, powers, preferences, rights, qualifications,
limitations and restrictions as may be fixed by the Board of Directors. The
Board of Directors, without obtaining stockholder approval, could issue the
Preferred Stock with voting and/or conversion rights and thereby dilute the
voting power and equity of the holders of Common Stock and adversely affect the
market price of such stock. Preferred Stock may also be used to delay, defer or
prevent a takeover attempt with respect to the Company. See "Risk
Factors -- Anti-Takeover Provisions; Possible Issuance of Preferred Stock."
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND THE COMPANY'S
CERTIFICATE OF INCORPORATION AND BYLAWS
The Company is subject to the provisions of Section 203 of the DGCL.
Subject to certain exceptions, Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the interested
stockholder attained such status with the approval of the Board of Directors or
unless the business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting
63
<PAGE> 65
stock. This statute could prohibit or delay the accomplishment of mergers or
other attempts to takeover or change control of the Company and, accordingly,
may discourage attempts to acquire the Company.
In addition, certain provisions of the Certificate of Incorporation and
Bylaws, which will be in effect upon the consummation of this offering and are
summarized in the following paragraphs, may be deemed to have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider in its best interest, including those attempts that
might result in a premium over the market price for the shares of Common Stock.
Classified Board of Directors. The Board of Directors will be divided into
three classes of directors serving staggered three-year terms. As a result,
approximately one-third of the Board of Directors will be elected each year.
These provisions, when coupled with the provision of the Certificate of
Incorporation authorizing only the Board of Directors to fill vacant
directorships or increase the size of the Board of Directors, may deter a
stockholder from removing incumbent directors and simultaneously gaining control
of the Board of Directors by filling the vacancies created by such removal with
its own nominees.
Stockholder Action; Special Meeting of Stockholders. The Certificate of
Incorporation provides that stockholders may not take action by written consent,
but only at duly called annual or special meetings of stockholders. The
Certificate of Incorporation further provides that special meetings of
stockholders of the Company be called only by the Chairman of the Board of
Directors, a majority of the Board of Directors or the President of the Company.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide timely notice
thereof in writing. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Company, not less
than 120 days nor more than 150 days prior to the first anniversary of the date
of the Company's notice of annual meeting provided with respect to the previous
year's annual meeting; provided, that if no annual meeting was held in the
previous year or the date of the annual meeting has been changed to be more than
30 calendar days earlier than or 60 calendar days after such anniversary, notice
by the stockholder, to be timely, must be so received not more than 90 days nor
later than the later of (i) 60 days prior to the annual meeting or (ii) the
close of business on the tenth day following the date on which notice of the
date of the meeting is given to stockholders or made public, whichever first
occurs. The Bylaws also specify certain requirements for a stockholder's notice
to be in proper written form. These provisions may preclude stockholders from
bringing matters before the stockholders at an annual meeting or from making
nominations for directors at an annual meeting.
Authorized But Unissued Shares. The authorized but unissued shares of
Common Stock and Preferred Stock are available for future issuance without
stockholder approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued and unreserved Common Stock and Preferred Stock may
enable the Board of Directors to issue shares to persons friendly to current
management which could render more difficult or discourage an attempt to obtain
control of the Company by means of a proxy contest, tender offer, merger or
otherwise, and thereby discourage or prevent a change of control of the Company.
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless a corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage. The
Certificate requires the affirmative vote of the holders of at least 80% of the
combined voting power of the outstanding shares of capital stock of the Company
entitled to vote for the election of directors to amend or repeal any of the
Certificate of Incorporation provisions discussed above. Such 80% vote is also
required to amend or repeal any of the Bylaws provisions discussed above,
although such Bylaws provisions may also be amended or repealed by a majority
vote of the entire Board of Directors. Such 80% stockholder vote would be in
addition to any separate class vote that might in the future be required
pursuant to the terms of any Preferred Stock that might be outstanding at the
time any such amendments are submitted to stockholders.
64
<PAGE> 66
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Certificate of Incorporation contains certain provisions permitted
under the DGCL relating to the liability of directors. These provisions
eliminate a director's liability for monetary damages for a breach of fiduciary
duty, except in certain circumstances involving certain wrongful acts, such as
the breach of a director's duty of loyalty or acts or omissions which involve
intentional misconduct or a knowing violation of law. The Certificate of
Incorporation also contains provisions indemnifying the directors and officers
of the Company to the fullest extent permitted by the DGCL. The Company believes
that these provisions will assist the Company in attracting and retaining
qualified individuals to serve as directors.
TRANSFER AGENT
The transfer agent and registrar of the Common Stock is American Stock
Transfer and Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock, and no prediction can be made as to the effect, if any, that market sales
of shares or the availability of such shares for sale will have on the market
price of the Common Stock. Nevertheless, sales of substantial amounts of Common
Stock in the public market may have an adverse impact of such market price.
Upon consummation of this offering, the Company will have 17,051,356 shares
of Common Stock outstanding, based upon the number of shares outstanding as of
December 31, 1996. Of these shares, the 6,200,000 shares sold in this offering
(7,130,000 shares if the Underwriters over-allotment is exercised in full) will
be freely tradeable without restriction or further registration under the
Securities Act, except for any shares purchased by "affiliates" of the Company,
as that term is defined in Rule 144 ("Rule 144") under the Securities Act
("Affiliates").
SALES OF RESTRICTED SHARES
There are 10,851,356 outstanding shares of Common Stock (the "Restricted
Shares") which are deemed "restricted securities" under Rule 144 and may not be
sold unless they are registered under the Securities Act or unless an exemption,
such as the exemption provided by Rule 144, is available. All of the Restricted
Shares are subject to the lock-up agreements described below (the "Lock-up
Agreements"). All of these shares may be eligible for sale in the public market
in accordance with Rule 144 under the Securities Act, subject to the terms of
the Lock-up Agreements. Certain security holders have the right to have their
Restricted Shares registered by the Company under the Securities Act as
described below.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least two years, is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of
(i) one percent of the then outstanding shares of Common Stock (approximately
170,513 shares after this offering) or (ii) the average weekly trading volume in
the Common Stock in the over-the-counter market during the four calendar weeks
preceding the date on which notice of such sale is filed with the Commission. In
addition, under Rule 144(k), a person who is not an Affiliate and has not been
an Affiliate for at least three months prior to the sale and who has
beneficially owned the Restricted Shares for at least three years may resell
such shares without compliance with the foregoing requirements. In meeting the
two and three year holding periods, a holder of Restricted Shares can include
the holding periods of a prior owner who was not an Affiliate. The Commission
has proposed to amend the holding periods under Rule 144 by reducing the two
year period to one year and the three year period to two years. The proposed
amendments have not yet been adopted by the Commission.
OPTIONS
As of December 31, 1996, options to purchase a total of 972,011 shares of
Common Stock were outstanding. All of these shares are subject to the Lock-up
Agreements. The Company intends to file one or
65
<PAGE> 67
more registration statements on Form S-8 under the Securities Act to register
all shares of Common Stock subject to outstanding stock options and Common Stock
issuable pursuant to the Option Plan. The Company expects to file these
registration statements promptly following the consummation of this offering,
and such registration statements are expected to become effective upon filing.
Shares covered by these registration statements will thereupon be eligible for
sale in the public markets, subject to the Lock-up Agreements, to the extent
applicable.
LOCKUP AGREEMENTS
The Company and holders of 10,851,356 shares of Common Stock outstanding
immediately prior to this offering and options to purchase an aggregate of
972,011 shares of Common Stock have agreed not to, directly or indirectly,
without the prior written consent of Dean Witter Reynolds Inc., offer, sell or
otherwise dispose of any shares of Common Stock, options or warrants to acquire
shares of Common Stock, or any securities exercisable for or convertible into
Common Stock for a period of 180 days following the date of consummation of this
Offering. See "Underwriting."
REGISTRATION RIGHTS
Following the consummation of this offering, Summit and Schroder will be
entitled to require the Company to register under the Securities Act a total of
5,058,609 shares of outstanding Common Stock (the "Registrable Shares"). Under
certain circumstances and subject to certain limitations, Summit and Schroder
may require the Company, on two occasions, to file a registration statement
under the Securities Act with respect to the Registrable Shares and the Company
must use all commercially reasonable efforts to effect such registration. In
addition, in the event the Company proposes to register any of its securities
under the Securities Act, either for its own account or for the account of a
security holder, Summit and Schroder may be entitled to include the Registrable
Shares in such registration, subject to certain limitations on the number of
shares to be included in the registration by the underwriter of such offering.
Following the consummation of this offering, Drs. Demaray, Poulos and
Kowalczyk will also have the right, under certain circumstances and subject to
certain limitations, to require the Company to register up to an aggregate
1,425,600 shares of Common Stock under the Securities Act. In addition, in the
event the Company proposes to register any of its securities under the
Securities Act, either for its own account or for the account of a security
holder, these persons may be entitled to include their shares in such
registration, subject to certain limitations on the number of shares to be
included in the registration by the underwriter of such offering. Furthermore,
in the event the Company proposes to register any of its securities under the
Securities Act, either for its own account or for the account of a security
holder, the Banks may be entitled to include up to 85,999 shares of Common Stock
in such registration, subject to certain limitations on the number of shares to
be included in the registration by the underwriter of such offering.
66
<PAGE> 68
UNDERWRITING
The Underwriters named below, for whom Dean Witter Reynolds Inc., Hambrecht
& Quist, Piper Jaffray Inc. and The Robinson-Humphrey Company, Inc. are acting
as representatives (the "Representatives"), have severally agreed, subject to
the terms and conditions of the Underwriting Agreement (a copy of which has been
filed as an exhibit to the Registration Statement), to purchase from the Company
and the Selling Stockholders the number of shares of Common Stock set forth
opposite their respective names in the table below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
------------------------------------------------------------------------- ----------
<S> <C>
Dean Witter Reynolds Inc.................................................
Hambrecht & Quist........................................................
Piper Jaffray Inc........................................................
The Robinson-Humphrey Company, Inc.......................................
----------
Total.......................................................... 6,200,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligation is such that they must purchase all of the shares (other than those
subject to the over-allotment option) if any are purchased.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
through negotiations between the Company, the Selling Stockholders and the
Representatives. Among the factors to be considered in making such determination
are prevailing market conditions and general economic conditions, the market
capitalization of publicly traded companies which the Company, the Selling
Stockholders and the Representatives believe to be comparable to the Company,
the revenues and earnings of the Company in recent periods, the experience of
the Company's management, the economic characteristics of the business in which
the Company competes, estimates of the business potential of the Company, the
present state of the Company's development and other factors deemed relevant.
The Underwriters have advised the Company and the Selling Stockholders that
they propose to offer the shares of Common Stock directly to the public at the
initial public offering price set forth on the cover page of this Prospectus and
to certain dealers (who may include the Underwriters) at such public offering
price less a concession not to exceed $ per share. Such dealers may
reallow a concession not to exceed $ per share to other dealers. After
the initial public offering, the public offering price may be reduced and
concessions and reallowances to dealers may be changed by the Underwriters. The
Representatives have informed the Company that the Underwriters do not intend to
confirm sales to any account over which they exercise discretionary authority.
The Representatives intend to make a market in the Common Stock after completion
of this offering.
The Company and the Selling Stockholders have granted to the Underwriters
an option, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to an additional 930,000 shares of Common Stock at
the initial public offering price, less underwriting discounts and commissions
to cover over-allotments, if any. After commencement of this offering, the
Underwriters may confirm sales subject to the over-allotment option.
67
<PAGE> 69
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required to
make in respect thereof.
The Company, the officers and directors of the Company, the Selling
Stockholders and certain other stockholders have agreed that they will not,
during the period commencing on the date hereof and ending 180 days after the
date of this Prospectus, without the prior written consent of Dean Witter
Reynolds Inc. (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for shares of Common Stock (whether such shares or
such securities are now owned by such officers, directors, Selling Stockholders
or stockholders or are hereafter acquired); (ii) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of shares of Common Stock whether any transaction
described in clause (i) or (ii) above is to be settled by delivery of shares of
Common Stock or other securities, in cash or otherwise.
At the Company's request, the Representatives have reserved up to 310,000
shares of Common Stock for sale at the initial public offering price to the
Company's employees and other persons having certain business relationships with
the Company. The number of shares of Common Stock available for sale to the
general public will be reduced to the extent these persons purchase such
reserved shares. Any reserved shares not purchased will be offered by the
Underwriters to the general public on the same terms as the other shares offered
hereby. Reserved shares purchased by individuals will, except as restricted by
applicable securities laws, be available for resale following this offering.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Stockholders by Greenberg, Traurig,
Hoffman, Lipoff, Rosen & Quentel, P.A., Miami, Florida. Certain legal matters
will be passed upon for the Underwriters by Latham & Watkins, Washington, D.C.
EXPERTS
The consolidated financial statements and the related consolidated
financial statement schedule of AmeriPath, Inc. as of December 31, 1994 and 1995
and September 30, 1996 and for the years ended December 31, 1993, 1994 and 1995
and the nine months ended September 30, 1996, included in this prospectus and
elsewhere in the registration statement, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein and
elsewhere in the Registration Statement, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
The combined financial statements of Clay J. Cockerell, M.D., P.A. and
Freeman-Cockerell Laboratories, Inc. as of December 31, 1994 and 1995 and
September 30, 1996 and for the years ended December 31, 1994 and 1995 and the
nine months ended September 30, 1996, and of Pathology Associates P.S.C. and
Technical Pathology Services, Inc. as of December 31, 1994 and 1995 and July 31,
1996 and for the years ended December 31, 1994 and 1995 and the seven months
ended July 31, 1996, included in this prospectus, have been audited by Deloitte
& Touche, LLP, independent auditors, as stated in their reports appearing
herein, and are included in reliance upon the reports of such firm given upon
their authority as experts in accounting and auditing.
The financial statements of Beno Michel, M.D., Inc., Drs. Seidenstein,
Levine & Associates, P.A. and Volusia Pathology Group, M.D., P.A. as of December
31, 1994 and 1995 and September 30, 1996 and for the years ended December 31,
1994 and 1995 and the nine months ended September 30, 1996, of David R. Barron,
M.D., Inc. and Fernandez and Kalemeris, P.A. as of December 31, 1995 and
September 30, 1996 and for the year ended December 31, 1995 and the nine months
ended September 30, 1996, of SkinPath P.C. as of December 31, 1995 and July 31,
1996 and for the period ended December 31, 1995 and the seven months
68
<PAGE> 70
ended July 31, 1996, of Derrick and Associates Pathology, Inc. and Amazon and
Rosen, M.D., P.A. as of December 31, 1994 and 1995 and June 30, 1996 and for the
years ended December 31, 1994 and 1995 and the six months ended June 30, 1996,
and of Demaray and Poulos, P.A. for the years ended December 31, 1994 and 1995,
included in this prospectus, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein, and are
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement. For further information with respect to
the Company and the Common Stock offered hereby, reference is hereby made to
such Registration Statement. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete and, in
each instance, reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statement and incorporated by reference
herein. Copies of the Registration Statement may be obtained from the
Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549,
and the following regional offices of the Commission: Seven World Trade Center,
New York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained from the public
reference section of the Commission at its Washington office upon payment of the
fees prescribed by the Commission, or may be examined without charge at the
offices of the Commission, or accessed through the Commission's Internet address
at http://www.sec.gov.
69
<PAGE> 71
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
THE REGISTRANT
AMERIPATH, INC. AND SUBSIDIARIES
Independent Auditors' Report......................................................... F-4
Consolidated Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996
and Pro Forma September 30, 1996 (Unaudited)....................................... F-5
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and
1995 and the Nine Months Ended September 30, 1995 (Unaudited) and 1996............. F-6
Consolidated Statements of Convertible Preferred Stock and Common Stockholders'
Equity (Deficit) for the years ended December 31, 1993, 1994 and 1995 and the Nine
Months Ended September 30, 1996.................................................... F-7
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and the Nine Months Ended September 30, 1995 (Unaudited) and 1996............. F-8
Notes to Consolidated Financial Statements........................................... F-9
ACQUIRED BUSINESSES
DEMARAY AND POULOS, P.A.
Independent Auditors' Report......................................................... F-27
Balance Sheets as of December 31, 1994 and 1995...................................... F-28
Statements of Operations and Retained Earnings for the years ended December 31, 1994
and 1995........................................................................... F-29
Statements of Cash Flows for the years ended December 31, 1994 and 1995.............. F-30
Notes to Financial Statements........................................................ F-31
AMAZON AND ROSEN, M.D., P.A. D/B/A FLORIDA PATHOLOGY ASSOCIATES
Independent Auditors' Report......................................................... F-34
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996.................... F-35
Statements of Operations and Retained Earnings for the years ended December 31, 1994
and 1995 and the Six Months Ended June 30, 1995 (Unaudited) and 1996............... F-36
Statements of Cash Flows for the years ended December 31, 1994 and 1995 and the Six
Months Ended June 30, 1995 (Unaudited) and 1996.................................... F-37
Notes to Financial Statements........................................................ F-38
DERRICK AND ASSOCIATES PATHOLOGY, INC.
Independent Auditors' Report......................................................... F-42
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996.................... F-43
Statements of Operations for the years ended December 31, 1994 and 1995 and the Six
Months Ended June 30, 1995 (Unaudited) and 1996.................................... F-44
Statements of Shareholders' Equity for the years ended December 31, 1994 and 1995 and
the Six Months Ended June 30, 1996................................................. F-45
Statements of Cash Flows for the years ended December 31, 1994 and 1995 and the Six
Months Ended June 30, 1995 (Unaudited) and 1996.................................... F-46
Notes to Financial Statements........................................................ F-47
SKINPATH, P.C.
Independent Auditors' Report......................................................... F-53
Balance Sheets as of December 31, 1995 and July 31, 1996............................. F-54
Statements of Operations and Retained Earnings for the Period from January 5, 1995
(Inception) through December 31, 1995 and Seven Months Ended July 31, 1996......... F-55
Statements of Cash Flows for the Period from January 5, 1995 (Inception) through
December 31, 1995 and the Seven Months Ended July 31, 1996......................... F-56
Notes to Financial Statements........................................................ F-57
</TABLE>
F-1
<PAGE> 72
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
PATHOLOGY ASSOCIATES, P.S.C. AND TECHNICAL PATHOLOGY SERVICES, INC.
Independent Auditors' Report......................................................... F-61
Combined Balance Sheets as of December 31, 1994 and 1995 and July 31, 1996........... F-62
Combined Statements of Operations for the years ended December 31, 1994 and 1995 and
the Seven Months Ended July 31, 1995 (Unaudited) and July 31, 1996................. F-63
Combined Statements of Stockholders' Equity for the year ended December 31, 1994 and
1995 and the Seven Months Ended July 31, 1996...................................... F-64
Combined Statements of Cash Flows for the years ended December 31, 1994 and 1995 and
the Seven Months Ended July 31, 1995 (Unaudited) and July 31, 1996................. F-65
Notes to Combined Financial Statements............................................... F-66
VOLUSIA PATHOLOGY GROUP, M.D., P.A.
Independent Auditors' Report......................................................... F-71
Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996............... F-72
Statements of Operations for the years ended December 31, 1994 and 1995 and the Nine
Months Ended September 30, 1995 (Unaudited) and 1996............................... F-73
Statements of Shareholders' Equity for the years ended December 31, 1994 and 1995 and
the Nine Months Ended September 30, 1996........................................... F-74
Statements of Cash Flows for the years ended December 31, 1994 and 1995 and the Nine
Months Ended September 30, 1995 (Unaudited) and 1996............................... F-75
Notes to Financial Statements........................................................ F-76
DAVID R. BARRON, M.D., INC. D/B/A RICHFIELD LABORATORY OF DERMATOPATHOLOGY
Independent Auditors' Report......................................................... F-80
Balance Sheets as of December 31, 1995 and September 30, 1996........................ F-81
Statements of Operations for the year ended December 31, 1995 and the Nine Months
Ended September 30, 1995 (Unaudited) and 1996...................................... F-82
Statements of Stockholders' Equity for the year ended December 31, 1995 and the Nine
Months Ended September 30, 1996.................................................... F-83
Statements of Cash Flows for the year ended December 31, 1995 and the Nine Months
Ended September 30, 1995 (Unaudited) and 1996...................................... F-84
Notes to Financial Statements........................................................ F-85
BENO MICHEL, M.D., INC. D/B/A CUTANEOUS PATHOLOGY & IMMUNOFLUORESCENSE LABORATORY
Independent Auditors' Report......................................................... F-88
Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996............... F-89
Statements of Operations for the years ended December 31, 1994 and 1995 and the Nine
Months Ended September 30, 1995 (Unaudited) and 1996............................... F-90
Statements of Stockholders' Equity for the years ended December 31, 1994 and 1995 and
the Nine Months Ended September 30, 1996........................................... F-91
Statements of Cash Flows for the years ended December 31, 1994 and 1995 and the Nine
Months Ended September 30, 1995 (Unaudited) and 1996............................... F-92
Notes to Financial Statements........................................................ F-93
DRS. SEIDENSTEIN, LEVINE & ASSOCIATES, P.A.
Independent Auditors' Report......................................................... F-96
Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996............... F-97
Statements of Operations and Retained Earnings for the years ended December 31, 1994
and 1995 and the Nine Months Ended September 30, 1995 (Unaudited) and 1996......... F-98
Statements of Cash Flows for the years ended December 31, 1994 and 1995 and the Nine
Months Ended September 30, 1995 (Unaudited) and 1996............................... F-99
Notes to Financial Statements........................................................ F-100
</TABLE>
F-2
<PAGE> 73
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
CLAY J. COCKERELL, M.D., P.A. AND FREEMAN-COCKERELL LABORATORIES, INC.
Independent Auditors' Report......................................................... F-104
Combined Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996...... F-105
Combined Statements of Income and Retained Earnings for the years ended December 31,
1994 and 1995 and the Nine Months Ended September 30, 1995 (Unaudited) and 1996.... F-106
Combined Statements of Cash Flows for the years ended December 31, 1994 and 1995 and
the Nine Months Ended September 30, 1995 (Unaudited) and 1996...................... F-107
Notes to Combined Financial Statements............................................... F-108
FERNANDEZ AND KALEMERIS, P.A. D/B/A GULF COAST PATHOLOGY ASSOCIATES
Independent Auditors' Report......................................................... F-112
Balance Sheets as of December 31, 1995 and September 30, 1996........................ F-113
Statements of Operations and Retained Earnings for the year ended December 31, 1995
and the Nine Months Ended September 30, 1995 (Unaudited) and 1996.................. F-114
Statements of Cash Flows for the year ended December 31, 1995 and the Nine Months
Ended September 30, 1995 (Unaudited) and 1996...................................... F-115
Notes to Financial Statements........................................................ F-116
</TABLE>
F-3
<PAGE> 74
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
AmeriPath, Inc.:
We have audited the accompanying consolidated balance sheets of AmeriPath, Inc.
and Subsidiaries (the "Company") as of December 31, 1994 and 1995 and September
30, 1996 and the related consolidated statements of operations, convertible
preferred stock and common stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1995 and the nine
months ended September 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1994
and 1995 and September 30, 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995 and the
nine months ended September 30, 1996 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Fort Lauderdale, Florida
November 19, 1996 (January 13, 1997, as to the effects of
the 1.8 for 1 stock split discussed in Note 1)
F-4
<PAGE> 75
AMERIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------- SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1996
-------- -------- ------------- -------------
(UNAUDITED)
(NOTE 2)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 103 $ 58 $ 193 $ 193
Accounts receivable, net............................... 1,741 2,114 7,944 7,944
Inventories............................................ 168 162 142 142
Other current assets................................... 195 130 840 840
-------- -------- -------- --------
Total current assets............................ 2,207 2,464 9,119 9,119
-------- -------- -------- --------
PROPERTY AND EQUIPMENT, NET.............................. 1,011 1,214 3,055 3,055
-------- -------- -------- --------
OTHER ASSETS:
Deferred tax asset..................................... 6,654 6,018
Goodwill, net.......................................... 10,068 10,068
Identifiable intangibles, net.......................... 26,726 26,726
Other.................................................. 392 296 1,825 1,825
-------- -------- -------- --------
Total other assets.............................. 7,046 6,314 38,619 38,619
-------- -------- -------- --------
TOTAL ASSETS.................................... $ 10,264 $ 9,992 $ 50,793 $ 50,793
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses.................. $ 805 $ 894 $ 4,515 $ 4,515
Current portion of long-term debt...................... 782 782
Deferred tax liability................................. 1,152 1,152
-------- -------- -------- --------
Total current liabilities....................... 805 894 6,449 6,449
-------- -------- -------- --------
LONG-TERM DEBT:
Credit Facility........................................ 6,005 4,146 30,844 30,844
Senior Notes due to common stockholders................ 3,500 3,500 3,500 3,500
Junior Notes due to preferred stockholders............. 7,500 7,500 7,500 7,500
Subordinated Notes..................................... 2,058 2,058
DIVIDEND PAYABLE -- CONVERTIBLE PREFERRED STOCK.......... 925
DEFERRED TAX LIABILITY................................... 3,735 3,735
COMMITMENTS AND CONTINGENCIES (Notes 10, 13 and 14)
CONVERTIBLE PREFERRED STOCK
Series A 6% Redeemable Cumulative Convertible Preferred
Stock -- $.01 par value, 5,000 shares authorized;
3,208, 3,208 and 3,088 shares issued and outstanding
at December 31, 1994 and 1995, and September 30,
1996, respectively; $6.2 million minimum aggregate
liquidation preference at September 30, 1996......... 5,735 6,085 6,123
-------- -------- -------- --------
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 8,000 shares authorized,
1,426, 1,426, 2,916 and 8,475 shares issued and
outstanding at December 31, 1994 and 1995, September
30, 1996 and pro forma (unaudited), respectively..... 14 14 29 85
Additional paid-in capital -- Accumulated deficit
remaining from conversion from Subchapter S
corporation tax status............................... (15,030) (15,030) (13,253) (8,111)
Note receivable from officer........................... (270) (270)
Retained earnings...................................... 1,735 2,883 4,078 4,078
-------- -------- -------- --------
Total common stockholders' deficit.............. (13,281) (12,133) (9,416) (4,218)
-------- -------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT.............. $ 10,264 $ 9,992 $ 50,793 $ 50,793
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 76
AMERIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------- ---------------------
1993 1994 1995 1995 1996
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue.................................... $13,419 $14,461 $16,024 $12,176 $20,840
Operating costs:
Cost of services............................. 10,803 6,780 8,271 6,147 10,234
Selling, general and administrative
expense................................... 1,634 2,287 2,644 1,931 4,026
Provision for doubtful accounts.............. 953 1,003 1,161 910 1,655
Amortization expense......................... 357
------- ------- ------- ------- -------
Total operating costs................ 13,390 10,070 12,076 8,988 16,272
------- ------- ------- ------- -------
Income from operations......................... 29 4,391 3,948 3,188 4,568
Interest expense............................... (48) (1,584) (1,504) (1,151) (1,637)
Other income (expense), net.................... 9 (46) (46) (13) (143)
------- ------- ------- ------- -------
Income (loss) before income taxes.............. (10) 2,761 2,398 2,024 2,788
Provision for income taxes..................... 696 900 759 1,075
------- ------- ------- ------- -------
Net income (loss).............................. $ (10) $ 2,065 $ 1,498 $ 1,265 $ 1,713
======= ======= ======= ======= =======
Pro forma net income per share information (unaudited) (Note 18):
Pro forma net income per share............... $ .19 $ .16 $ .20
======= ======= =======
Pro forma common and common equivalent shares
outstanding............................... 8,085 8,085 8,555
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 77
AMERIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
CONVERTIBLE PAID-IN-CAPITAL--
PREFERRED STOCK COMMON ACCUMULATED DEFICIT
------------------------------------------- STOCK REMAINING FROM CONVERSION RETAINED
ADDITIONAL ---------------- FROM SUBCHAPTER S EARNINGS
SHARES AMOUNT PAID-IN-CAPITAL TOTAL SHARES AMOUNT CORPORATION TAX STATUS (DEFICIT)
------- ------- --------------- ------ ------ ------ ------------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31,
1992..................... $ 1,168
Dividend distribution to
common stockholders.... (246)
Net loss................. (10)
----- --- ------ ------ ----- --- ------ -------
BALANCES, DECEMBER 31,
1993..................... 912
Issuance of common
stock.................. 1,426 $ 14 $ 986
Issuance of Convertible
Preferred Stock........ 3,208 $ 32 $ 5,468 $5,500
Cost of issuance......... (95) (95) (17)
Distribution to common
stockholders in
Recapitalization....... (24,011)
Tax benefit arising from
Recapitalization....... 7,100
Conversion from
Subchapter S
Corporation tax
status................. (23,099) 23,099
Accrued dividends on
Convertible Preferred
Stock.................. 330 330 (330)
Net income............... 2,065
----- --- ------ ------ ----- --- ------ -------
BALANCES, DECEMBER 31,
1994..................... 3,208 32 5,703 5,735 1,426 14 (15,030) 1,735
Accrued dividends on
Convertible Preferred
Stock.................. 350 350 (350)
Net income............... 1,498
----- --- ------ ------ ----- --- ------ -------
BALANCES, DECEMBER 31,
1995..................... 3,208 32 6,053 6,085 1,426 14 (15,030) 2,883
Conversion of Convertible
Preferred Stock to
common stock........... (120) (1) (206) (207) 216 2 205
Dividends paid on
Convertible Preferred
Stock converted........ (31) (31)
Settlement of ALA
Contingent Notes....... 194 2 240 (242)
Stock issued in
connection with
acquisition............ 1,080 11 1,332
Accrued dividends on
Convertible Preferred
Stock.................. 276 276 (276)
Net income............... 1,713
----- --- ------ ------ ----- --- ------ -------
BALANCES, SEPTEMBER 30,
1996..................... 3,088 $ 31 $ 6,092 $6,123 2,916 $ 29 $ (13,253) $ 4,078
===== === ====== ====== ===== === ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 78
AMERIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------- ---------------------
1993 1994 1995 1995 1996
----- ------- ------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)....................................... $ (10) $ 2,065 $ 1,498 $ 1,265 $ 1,713
Adjustments to reconcile net income (loss) to net cash
flows provided by operating activities:
Depreciation and amortization......................... 275 341 329 245 827
(Gain) loss on disposal of assets..................... (10) 28 49
Deferred income taxes................................. 446 636 536 105
Provision for doubtful accounts....................... 953 1,003 1,161 910 1,655
Changes in assets and liabilities:
Increase in accounts receivable..................... (782) (1,354) (1,534) (1,278) (715)
(Increase) decrease in inventories.................. (35) (49) 6 (8) 20
(Increase) decrease in other current assets......... (161) (166) 39 (108) (712)
(Increase) decrease in other assets................. (37) 21 20 (859)
Increase (decrease) in accounts payable, accrued
expenses, and other liabilities.................. 184 86 118 488 170
----- ------- ------- ------- --------
Net cash flows provided by operating
activities..................................... 424 2,325 2,302 2,070 2,253
----- ------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment................... (228) (492) (488) (368) (582)
Purchase of subsidiaries, net of cash acquired.......... (27,320)
----- ------- ------- ------- --------
Net cash flows used in investing activities...... (228) (492) (488) (368) (27,902)
----- ------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under long-term credit facility.............. 7,493
Repayments of borrowings under long-term credit
facility.............................................. (1,488) (1,859)
Issuance of common stock................................ 1,000
Issuance of Convertible Preferred Stock................. 5,500
Issuance of Junior Notes................................ 7,500
Debt and stock issuance costs........................... (525)
Principal payments on long-term debt.................... (500) (492) (19) (613)
Proceeds from issuance of long-term debt................ 261
Net borrowings (repayments) under Credit Facility....... 498 (529) (1,758) 26,698
Note receivable from officer............................ (270)
Dividends paid/distributions to common stockholders..... (246) (20,511) (28) (31)
----- ------- ------- ------- --------
Net cash flows provided by (used in) financing
activities..................................... 13 (2,052) (1,859) (1,805) 25,784
----- ------- ------- ------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... 209 (219) (45) (103) 135
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............ 113 322 103 103 58
----- ------- ------- ------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................. $ 322 $ 103 $ 58 $ $ 193
===== ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................ $ 48 $ 1,540 $ 1,504 $ 1,151 $ 1,425
Income taxes............................................ $ $ 409 $ 63 $ 10 $ 961
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 79
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BUSINESS AND ORGANIZATION
AmeriPath, Inc. was incorporated in February 1996 to be the leading
physician practice management company focused on providing anatomic
pathology services. The Company provides physician practice management
services to pathologists in both outpatient and hospital inpatient
laboratories, with particular focus on dermatopathology (pathology related
to diseases of the skin). Unless the context otherwise requires, references
to the Company or AmeriPath include AmeriPath, Inc., its predecessor,
American Laboratory Associates ("ALA") and its subsidiaries.
Such 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 health care
professionals. In some cases, the Company is also paid an annual fee for
providing the medical director for the hospital laboratory. The Company
also owns and operates outpatient pathology laboratories, for which it is
able to bill 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 and managed care organizations,
principally on a fee-for-service basis.
ALA was organized in December 1993 to acquire the net assets of E.G.
Poulos, M.D., M.J. Demaray, M.D. and A.P. Kowalczyk, M.D., P.A. ("PDK"), a
full service reference laboratory providing clinical laboratory testing and
anatomic pathology services, principally dermatopathology services.
Effective January 1, 1994, ALA and PDK entered into a series of
transactions which resulted in a recapitalization (the "Recapitalization").
ALA issued 1,425,600 shares of common stock to the owners of PDK for $1,000
in cash and 3,208,120 shares of voting Series A 6% Redeemable Cumulative
Convertible Preferred Stock (the "Convertible Preferred Stock") to other
investors, primarily Summit Partners, for $5,500 in cash. (See Note 9). In
addition, ALA issued 10% Junior Subordinated Notes due 2001 (the "Junior
Notes") in the amount of $7,500 to the purchasers of the Convertible
Preferred Stock and borrowed $7,493 under a line of credit to finance a
portion of the acquisition of the net assets from PDK. A financing fee of
$190 was paid to Summit.
In connection with the Recapitalization, ALA made distributions of cash of
$20,511 and issued 8% Senior Subordinated Notes due 1998 (the "Senior
Notes") in the principal amount of $3,500 to PDK. The shareholders of PDK
owned 100% of the shares of ALA's outstanding common stock immediately
subsequent to the Recapitalization. Giving effect to the conversion of the
Convertible Preferred Stock to common stock as if a conversion had occurred
at that time, such shareholders' ownership percentage in ALA's common stock
would have been 19.8% immediately following the Recapitalization. Since
there was no change in the common stockholders, and due to the mandatory
redemption features of the Convertible Preferred Stock, the transactions
have been accounted for as a recapitalization for financial accounting
purposes, and the amounts of cash paid, and Senior Notes issued, have been
charged to retained earnings as distributions to the common stockholders.
The assets and liabilities of PDK continued to be accounted for by the
Company at PDK's historical cost. The distributions to the common
stockholders and the balance of PDK's retained earnings, aggregating
$23,099, were transferred from retained earnings (deficit) to additional
paid-in-capital-accumulated deficit remaining from conversion from
Subchapter S corporation tax status.
For income tax purposes, the Recapitalization transaction is treated as a
purchase of assets, with the net assets acquired recorded at their fair
values, and the excess of cost over the fair value of net assets
F-9
<PAGE> 80
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
acquired amortized as a deduction over a period of 15 years as statutorily
required by tax laws and regulations.
Subsequent to the Recapitalization, and in connection with the formation of
the Company in February 1996, the shareholders of ALA and AmeriPath entered
into a series of exchange transactions, whereby the equity interests held
in ALA were exchanged for identical interests in the Company. The
operations of ALA are now conducted through a wholly owned subsidiary of
the Company, AmeriPath Florida, Inc.
On August 1, 1994, the Company effected a 40 for 1 stock split for its
common and preferred stock in the form of a stock dividend. The effect of
such stock split is reflected in all common and preferred share amounts.
On January 13, 1997, the Company effected a 1.8 for 1 stock split for its
common stock in the form of a stock dividend. The effect of such stock
split is reflected in all common share amounts.
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 include the accounts of AmeriPath,
Inc. and its wholly owned subsidiaries (collectively, the "Company"). All
significant intercompany accounts and transactions have been eliminated.
The companies included in the consolidation at September 30, 1996 include
the acquisitions through September 30, 1996, listed in Note 3.
PERVASIVENESS OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair values of financial instruments that are not actively traded are based
on market prices of similar instruments and/or valuation techniques using
market assumptions. Although management uses its best judgment in
estimating the fair value of these financial instruments, there are
inherent limitations in any estimation technique. Therefore, the fair value
estimates presented herein are not necessarily indicative of the amounts
which the Company could realize in a current transaction.
The Company's consolidated financial instruments consist mainly of cash and
cash equivalents, accounts receivable, accounts payable, the line of credit
and long-term debt. 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. The Company's
Credit Facility bears interest at a variable market rate, and thus has a
carrying amount that approximates fair value.
F-10
<PAGE> 81
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The fair value of long-term debt is estimated based on discounted cash
flows using current interest rates for financial instruments with similar
characteristics and maturity. The carrying amount of the Senior Notes and
Junior Notes aggregated $11,000 and the fair value at September 30, 1996
and December 31, 1995 was $10,400.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid instruments with maturities at
the time of purchase of three months or less.
INVENTORIES
Inventories, consisting 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. Equipment under capital leases
is stated at the net present value of the future minimum lease payments at
the inception of the related leases. 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 (20 years).
INTANGIBLE ASSETS
Identifiable intangible assets include hospital contracts, physician
referral lists, a management service agreement and laboratory contracts
acquired in connection with acquisitions. Such assets, except the
management service agreement, are recorded at fair value on the date of
acquisition as determined by management based on independent consultants'
reports and are being amortized over the estimated periods to be benefited,
ranging from 10 to 40 years. The management service agreement was assigned
a value equal to the excess of the cost over the fair value of the acquired
net assets and is being amortized over the term of the agreement, 40 years.
Goodwill relates to the excess of cost over the fair value of net assets of
the businesses acquired. Amortization is calculated on a straight line
basis over periods ranging from 15 to 35 years. The overall business
strategy of the Company includes the acquisition and integration of
independent pathology practices and related support services. The Company
believes that this strategy creates synergies, achieves operating
efficiencies and responds to the cost containment objectives of payors, all
of which will provide benefits for the foreseeable future.
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.
DEFERRED DEBT ISSUANCE COSTS
In connection with the Recapitalization and subsequent financings, the
Company incurred costs in connection with bank financing and issuing other
debt. These costs have been capitalized and are being amortized on a
straight-line basis, which approximates the interest method, over the
respective terms of
F-11
<PAGE> 82
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
the related debt (2 and 8 years). Such amounts are included in other assets
in the consolidated balance sheet.
REVENUE RECOGNITION
The Company recognizes revenue at the time services are performed. Unbilled
receivables are recorded for services rendered during, but billed
subsequent to, the reporting period. Net 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 are recorded for services rendered during, but billed
subsequent to, the reporting period. Such receivables, net of allowances,
as of September 30, 1996 amounted to approximately $941. Unbilled
receivables as of December 31, 1994 and 1995 were insignificant.
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.
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.
PDK elected to be taxed as a Subchapter S corporation and the taxation of
the earnings thereof was the responsibility of the individual shareholders.
The 1993 and 1994 earnings attributable to the period prior to consummation
of the Recapitalization were allocated to PDK and were not subject to
corporate federal and state income taxes.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. SFAS No. 121 establishes accounting standards for
the impairment of long-lived assets, including identifiable intangible
assets and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of.
SFAS No. 121 requires that long-lived assets, including identifiable
intangible assets held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. Measurement of an impairment
loss for such long-lived assets and identifiable intangibles should be
based on the fair value of the asset. Long-lived assets and certain
identifiable intangibles to be disposed of are required to be reported
generally at the lower of the carrying amount or fair value less cost to
sell. SFAS No. 121 is effective for fiscal years that begin after December
15, 1995. Adoption of the statement did not have a material effect on the
Company's financial statements.
INTERIM FINANCIAL DATA
The unaudited consolidated statements of operations and cash flows for the
nine months ended September 30, 1995 include, in the opinion of management,
all adjustments (consisting of normal
F-12
<PAGE> 83
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
recurring adjustments) necessary to present fairly the Company's
consolidated results of operations and cash flows. The data disclosed in
these notes to the consolidated financial statements for the nine months
ended September 30, 1995 is unaudited. Operating results for the nine month
period ended September 30, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996.
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
The unaudited pro forma consolidated balance sheet at September 30, 1996
gives effect to the planned conversion of 3,088,116 shares of Convertible
Preferred Stock (see Note 18) into common stock as if such conversion had
occurred as of September 30, 1996. Prior to the completion of the offering,
the holders of all outstanding Convertible Preferred Stock will convert
such shares into 5,558,609 shares of common stock of the Company. Accrued
dividends of $925 as of September 30, 1996 will be payable upon conversion
of the Convertible Preferred Stock.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1996
presentation.
3. ACQUISITIONS
During 1996, the Company completed eleven acquisitions of or affiliations
with (the "Recent Acquisitions") anatomic pathology practices (the
"Practices"). The consideration given by the Company in the Recent
Acquisitions was a combination of cash, subordinated notes, common stock,
contingent notes and/or contingently issuable common stock. In November
1996, pursuant to Stock Rights Surrender and Restricted Stock Grant
Agreements, the Company issued 1,833,433 shares of its common stock in
exchange for the surrender of all rights to the contingently issuable
common stock. Such shares represent purchase price consideration which is
not based on or related to future earnings. The shares issued pursuant to
such agreements are restricted as to transfer, which restrictions lapse
over three to five years, based solely on the passage of time. The Recent
Acquisitions have been accounted for using the purchase method of
accounting. 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 for each of the Practices. The Company agreed to pay a
minimum purchase price and has agreed to pay additional purchase price
consideration to all of the sellers of each 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 acquisition as set forth in the
respective agreements, and are not contingent on the continued employment
of the sellers of the Practices. The amount of the payments cannot be
determined until the achievement of the operating earnings levels 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 of $31,278 over three to five years. A lesser
amount of payments would be made if the maximum levels of operating
earnings specified in each acquisition agreement are not met. No amounts
would be paid if the minimum level of operating earnings specified in each
acquisition agreement is not met. Additional payments, if any, under these
agreements, will be accounted for as an additional cost of the Practices.
F-13
<PAGE> 84
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The total consideration paid by the Company in the Recent Acquisitions
included cash of $78,626, subordinated notes in the aggregate principal
amount of $4,511 and 3,870,742 shares of common stock (aggregate value of
$24,829). The following table presents for each Recent Acquisition, the
date of acquisition or affiliation, the total consideration paid, excluding
the contingent payments, if any, the number of shares of Common Stock
issued by the Company, and the maximum contingent payments:
<TABLE>
<CAPTION>
MAXIMUM
COMMON STOCK CONTINGENT
ISSUED (SHARES) PAYMENTS
DATE TOTAL ------------------------ -----------------
ACQUIRED CONSIDERATION AT IN NOVEMBER PERIOD
RECENT ACQUISITIONS: IN 1996 PAID CLOSING 1996 (YEARS) AMOUNT
----------------------------- ----------- ------------- ---------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Through September 30, 1996:
Demaray and Poulos, P.A.... January 1 $ 1,679
Derrick and Associates
Pathology, Inc........... July 1 16,844 1,080,009 5 $8,000
Amazon and Rosen, M.D.,
P.A...................... July 1 6,333 119,999 5 2,000
SkinPath, P.C.............. August 1 5,275 207,000 3 300
Pathology Associates,
P.S.C.................... August 1 6,795 107,399 5 750
Subsequent to September 30,
1996:
Freeman-Cockerell
Laboratories, Inc........ October 1 4,806 90,000 5 1,050
Volusia Pathology Group,
M.D., P.A................ October 3 7,344 11,999 157,815 5 1,841
David R. Barron, M.D.,
Inc...................... October 4 17,700 275,999 180,000 5 3,400
Drs. Seidenstein, Levine &
Associates, P.A.......... October 10 15,657 136,501 341,220 5 5,687
Beno Michel, M.D., Inc..... October 15 8,832 172,800 90,000 3 1,500
Fernandez & Kalemeris,
M.D., P.A................ November 1 16,700 360,000 540,000 5 6,750
</TABLE>
The allocation of the purchase price is preliminary, while the Company
continues to obtain the information to determine the fair value of the
assets acquired and liabilities assumed. Although the allocation of the
purchase price for the above acquisitions and the valuation of the shares
issued subsequent to September 30, 1996, are preliminary and subject to
adjustment when the Company obtains final information, management believes
that any such adjustments will not be material in relation to the Company's
consolidated financial statements. Information with respect to the
amortization periods for intangible assets is presented in Note 6.
The Company does not have technical majority ownership of the common stock
of David R. Barron, M.D., Inc. ("Richfield Labs") and Beno Michel, M.D.,
Inc. ("CPI"). All of the common stock of each of these companies is held in
trust. AmeriPath is the sole beneficiary of each trust and receives all
income from the trusts. The Company, at its sole discretion, can replace
the trustees, withdraw any asset from the trusts, modify the terms of the
trust agreements, or terminate the trusts, and direct the trustees to
distribute income and any asset from the trusts. No assets of the trusts
can be sold or otherwise disposed of without AmeriPath's consent.
Additionally, a wholly-owned subsidiary of the Company entered into 40-year
management agreements with each of Richfield Labs and CPI, under which such
subsidiary provides all management and other non-medical services to
Richfield Labs and CPI for a fee equal to the practice's net revenue less
practice expenses, including physician salaries, which are fixed by
employment agreements, and related professional expenses. Therefore, the
Company is entitled to all of the net income of these practices. Based on
the provisions of the purchase agreements,
F-14
<PAGE> 85
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
trust agreements and management agreements, consolidation of Richfield Labs
and CPI is required to present the Company's financial position and results
of operations in conformity with generally accepted accounting principles
because the Company has the controlling financial interest in Richfield
Labs and CPI by means other than direct record ownership of voting stock.
Accordingly, these acquisitions will be accounted for as purchase business
combinations and consolidated.
In connection with the acquisition of Freeman-Cockerell Laboratories, Inc.,
a wholly-owned subsidiary of the Company, and Clay J. Cockerell, M.D., P.A.
("Cockerell") have entered into a 40-year management service agreement
under which the Company provides, on an exclusive basis, the technical
laboratory services, management and all other non-medical practice services
for Cockerell. The Company employs all of the technical employees and owns
all of the laboratory facilities, testing equipment and other assets used
in connection with the pathology services performed by Cockerell's
physicians. Cockerell's payments to the Company under this management
service agreement are comprised of the reimbursement of the costs and
expenses for providing the technical laboratory services, a base fee and a
performance fee based on the achievement of goals and objectives
established annually. Assuming the wholly-owned subsidiary of the Company
achieves its goals and objectives, such fees will result in the Company
receiving substantially all net revenue less practice expenses of
Cockerell. Practice expenses include physician salaries which are fixed by
employment agreement and related professional expenses. Therefore, the
Company is the direct beneficiary of substantially all of the net income of
Cockerell. Because the Company has a net profits interest in Cockerell, the
net revenues and expenses of Cockerell will be displayed in the Company's
consolidated financial statements.
Under the terms of the acquisition agreement, the sole shareholder of
Cockerell is prohibited from selling, assigning or disposing of the common
stock of Cockerell prior to September 30, 1997, except that at the
direction of the Company, without further consideration, such shareholder
is required to transfer ownership of the shares of Cockerell to, or merge
Cockerell into, a Texas 5.01(a) non-profit corporation (the "5.01(a)
corporation") which the Company is in the process of forming and of which
the Company will be the sole member. The formation of the 5.01(a)
corporation is subject to review by Texas regulatory authorities. Members
of the board of directors of the 5.01(a) corporation will be appointed by,
and can be removed by, the sole member, which will be the Company. The
Company believes that the formation of the 5.01(a) corporation and its
merger with Cockerell prior to September 30, 1997 is virtually assured.
Upon such merger, the Company will have direct voting control over the
5.01(a) corporation and will consolidate it in the Company's consolidated
financial statements.
The accompanying consolidated financial statements include the results of
operations of the Recent Acquisitions that have been made by the Company
from the date acquired through September 30, 1996. The following unaudited
pro forma information presents the combined results of the Company's
operations and the results of operations of all of the Recent Acquisitions
for the year ended December 31, 1995 and the nine months ended September
30, 1996, after giving effect to amortization of goodwill and identifiable
intangible assets, interest expense on the long-term debt incurred in the
Recent Acquisitions, and the reduced level of certain specific operating
expenses (primarily compensation and related expenses attributable to the
former owners) in accordance with the agreements related to the Recent
Acquisitions, as if the acquisitions had been consummated on January 1,
1995. Such unaudited pro forma information is based on the historical
financial information of all of the Recent Acquisitions and does not
include operational or other changes which might have been effected
pursuant to the Company's management.
F-15
<PAGE> 86
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The unaudited pro forma information for the year ended December 31, 1995
and the nine months ended September 30, 1996 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:
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Total net revenue.......................................... $83,188 $63,997
======= =======
Net income................................................. $ 6,063 $ 4,649
======= =======
Net income per share....................................... $ .50 $ .39
======= =======
</TABLE>
Common and common equivalent shares used in calculating net income per
share include the effects of the planned conversion of the Convertible
Preferred Stock as discussed in Note 18.
4. ACCOUNTS RECEIVABLE AND NET REVENUE
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.
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
<S> <C> <C> <C>
Gross accounts receivable............................. $3,240 $4,037 $17,120
Less allowance for contractual and other adjustments
and uncollectible accounts.......................... (1,499) (1,923) (9,176)
------ ------ -------
Accounts receivable, net.............................. $1,741 $2,114 $ 7,944
====== ====== =======
</TABLE>
The Company grants credit without collateral to individual patients, most
of whom are insured under third party payor agreements. The mix of
receivables from patients and third-party payors at December 31, 1994 and
1995 and September 30, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Government programs....................... 36.4% 45.7% 29.1%
Third-party payors........................ 38.0 27.6 44.3
Private pay patients...................... 20.7 15.3 22.8
Other..................................... 4.9 11.4 3.8
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
F-16
<PAGE> 87
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Net revenue consisted of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ---------------------
1993 1994 1995 1995 1996
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gross revenue.......................... $15,353 $17,027 $19,121 $14,143 $29,102
Less contractual and other
adjustments.......................... (1,934) (2,566) (3,097) (1,967) (8,262)
------- ------- ------- ------- -------
Net revenue.................. $13,419 $14,461 $16,024 $12,176 $20,840
======= ======= ======= ======= =======
</TABLE>
A significant portion of the Company's net revenue is generated by the
hospital-based practices through contracts with 34 hospitals, as of
September 30, 1996, primarily as a result of the Recent Acquisitions
discussed in Note 3. Columbia/HCA Healthcare Corporation owns or manages 14
of these hospitals. Generally, these contracts have remaining terms of less
than five years and contain renewal provisions. Some of the contracts
contain clauses that allow for termination by either party with relatively
short notice. Although the Company, through the Practices, has had
relationships with these hospitals for extended periods of time, the
termination of one or more of these contracts would have a material adverse
effect on the Company's financial position and results of operations.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
(YEARS) 1994 1995 1996
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Laboratory and data processing......... 5 $ 1,743 $ 1,951 $ 3,196
Leasehold improvements................. 20 372 471 865
Furniture and fixtures................. 7 125 160 327
Mobile lab units....................... 3 99 99 303
Automotive vehicles.................... 3 13 46 99
Construction in progress............... 40 7 82
------- ------- -------
2,392 2,734 4,872
Less accumulated depreciation.......... (1,381) (1,520) (1,817)
------- ------- -------
Property and equipment, net............ $ 1,011 $ 1,214 $ 3,055
======= ======= =======
</TABLE>
Depreciation expense was $275, $275 and $257 for the years ended December
31, 1993, 1994 and 1995, respectively, and $191 and $287 for the nine month
periods ended September 30, 1995 (unaudited) and 1996, respectively.
F-17
<PAGE> 88
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. INTANGIBLE ASSETS
Intangible assets and the related accumulated amortization and amortization
periods are as follows:
<TABLE>
<CAPTION>
AMORTIZATION
PERIODS
RECORDED (YEARS)
SUBSEQUENT TO ----------------
SEPTEMBER 30, SEPTEMBER 30, WEIGHTED
1996 1996 RANGE AVERAGE
------------- -------------- ----- --------
<S> <C> <C> <C> <C>
Hospital contracts........................... $15,050 $13,900 35-40 36.5
Physician referral lists..................... 11,431 15,900 17-19 18.8
Management service agreement................. -- 6,429 40 40.0
Laboratory contracts......................... 500 1,300 10 10.0
------- -------
26,981 $37,529
=======
Accumulated amortization..................... (255)
-------
Balance, net................................. $26,726
=======
Goodwill..................................... $10,145 $45,000 15-35 34.1
Accumulated amortization..................... (77)
-------
Balance, net................................. $10,068
=======
</TABLE>
The amortization periods for the identifiable intangible assets, except the
management service agreement, were determined by the Company based on
reports of independent consultants. The amortization period for the
identifiable intangible asset related to the management service agreement
was determined by reference to the term of the agreement. 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 31.2 years.
The amounts recorded subsequent to September 30, 1996 include the Recent
Acquisitions that were consummated subsequent to September 30, 1996 and the
additional goodwill of $14,260 recorded in connection with the issuance of
1,833,433 shares of Common Stock pursuant to the Stock Rights Surrender and
Restricted Stock Grant Agreements. See Note 3.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1994 1995 1996
----- ----- -------------
<S> <C> <C> <C>
Accounts payable............................................ $318 $287 $1,973
Accrued compensation........................................ 261 432 1,180
Accrued interest............................................ 21
Income taxes payable........................................ 42 227
Other accrued expenses...................................... 226 133 1,114
---- ---- ------
$805 $894 $4,515
==== ==== ======
</TABLE>
F-18
<PAGE> 89
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
8. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
------- ------- -------------
<S> <C> <C> <C>
Credit Facility..................................... $ 6,005 $ 4,146 $30,844
Senior Notes due to common stockholders, principal
and any unpaid interest thereon, due and payable
on December 31, 1998; interest is payable
currently at the stated rate of 8%................ 3,500 3,500 3,500
Junior Notes due to preferred stockholders,
principal and any unpaid interest thereon, due and
payable on December 31, 2001; interest is payable
currently at the stated rate of 10%............... 7,500 7,500 7,500
Subordinated Notes issued in connection with the
Recent Acquisitions, payable in varying amounts
through 2001, with interest at the rate of 7%..... 2,840
------- ------- -------
17,005 15,146 44,684
Less current portion................................ (782)
------- ------- -------
Long term debt, net of current portion.............. $17,005 $15,146 $43,902
======= ======= =======
</TABLE>
As of September 30, 1996, the maturities of short-term and long-term debt
were as follows (in thousands):
<TABLE>
<S> <C>
1996............................................................ $ 135
1997............................................................ 782
1998............................................................ 35,126
1999............................................................ 3,048
2000............................................................ 2,815
2001............................................................ 2,778
-------
Total........................................................... $44,684
=======
</TABLE>
On May 29, 1996, the Company replaced its line of credit with a new
revolving line of credit (the "Credit Facility") with the First National
Bank of Boston, as lender and agent (the "Agent"), under which the Company
could borrow up to $40 million for working capital and acquisition
purposes. The Credit Facility was amended in October 1996, and the
aggregate amount available was increased to $85 million. Outstanding
advances under the Credit Facility are due and payable on December 31,
1998. Borrowings under the Credit Facility bear interest at variable rates
based, at the Company's option, on the bank's base rate or the sum of 2.50%
plus the Eurodollar rate. The Credit Facility also requires the quarterly
payment of an annual commitment fee equal to 0.375% of the unused portion
of the commitment until the commitment is terminated. Subsequent to
September 30, 1996, the Company issued to the Agent, 85,999 shares of
Common Stock in lieu of commitment fees. Such shares have been recorded at
the estimated fair market value at the date of the respective credit
facility agreement and amendments thereto.
The 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
F-19
<PAGE> 90
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
distributions, limitations on new debt issuance, sale of assets, leasing
commitments and annual capital expenditures, and contains provisions which
preclude mergers and acquisitions under certain circumstances and places.
All of the Company's assets are pledged as collateral under the agreement.
At September 30, 1996, the effective interest rate was approximately 8.29%.
The Company obtained a waiver from the Agent with respect to noncompliance
with the debt service coverage ratio requirements for the year ended
December 31, 1995. The Company believes that it is in compliance with all
of its existing covenants at September 30, 1996.
9. CONVERTIBLE PREFERRED STOCK
The Convertible Preferred Stock has an annual dividend rate of 6% of the
original purchase price and such dividends are cumulative from the date of
original issuance and payable when and as declared by the Company's Board
of Directors. In the event of liquidation or dissolution of the Company,
the amount distributed for each share is the greater of (i) $1.71 which is
subject to adjustment for certain capital transactions, plus unpaid
dividends (the "Liquidation Amount") or (ii) such amount as would have been
payable had the shares been converted to common stock. The Convertible
Preferred Stock is convertible into common stock of the Company at any
time, at the option of the holders at a conversion rate of 1.8 shares of
common stock for each share, subject to adjustment for certain capital
transactions. Upon conversion, all accumulated and unpaid dividends, up to
the date of conversion are payable in cash.
During the nine months ended September 30, 1996 the Company paid accrued
dividends in the amount of $31 on the 120,004 shares converted into 216,007
shares of common stock by the holders of the Convertible Preferred Stock in
connection with the acquisition of shares of common stock by the Company's
Chief Executive Officer (See Note 14).
The preferred stockholders have voting rights equal to the number of shares
of common stock into which their shares may be converted. At the election
of the holders of at least 51% of the Convertible Preferred Stock, the
Company shall redeem, for the Liquidation Amount, all of the Convertible
Preferred Stock in 1999, 2000, and 2001. Also, if prior to the earlier of
the liquidation, merger, sale or change in control (as defined) of the
Company or December 31, 2001, the Company has not consummated a qualified
public offering (as defined), the owners of not less than 20% of the
Convertible Preferred Stock may require the Company to redeem their stock
for fair market value, but not less than the original purchase price. These
redemption requirements terminate upon consummation of a qualified public
offering. Since the Company believes that it is probable that the preferred
shares will not be redeemed, accretion in excess of accumulated dividends
has not been recorded.
The holders of the Convertible Preferred Stock have certain preemptive
rights in the event of the issuance of common stock, and certain
registration rights with expenses to be borne by the Company. As of
September 30, 1996, the Company has reserved 5,558,609 shares of common
stock for the conversion of the Convertible Preferred Stock.
F-20
<PAGE> 91
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
10. 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 14. Future minimum
lease commitments consisted of the following at September 30, 1996:
<TABLE>
<S> <C>
1996............................................................. $ 133
1997............................................................. 511
1998............................................................. 490
1999............................................................. 452
2000............................................................. 437
2001............................................................. 404
Thereafter....................................................... $1,180
------
$3,607
======
</TABLE>
Rent expense under operating leases for 1993, 1994, and 1995 was $153,
$170, and $205 respectively, and $147 and $248 for the nine months ended
September 30, 1995 (unaudited) and 1996, respectively.
11. OPTION PLAN
The Company's 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. At September 30, 1996,
912,611 shares of common stock are reserved for issuance pursuant to
options granted under the Option Plan. All options granted have 10 year
terms and vest and become exercisable at the rate of 20% a year, following
the date of grant.
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 to be granted under the Director Option Plan will have
10 year terms and become exercisable during the period specified in the
agreement evidencing the grant of such Director Option. As of September 30,
1996, no options have been granted under the Director Option Plan.
The Company has elected to follow APB 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 1995 and 1996: risk-free interest rates
ranging from 5.18% to 6.85%; no volatility factors of the expected market
price of the Company's common stock has been included because the Company
was a private entity when the options were granted; and a weighted average
expected life of the option of 4.1 years. The estimated fair value of the
options was immaterial at the dates of grant, and therefore, the Company
has not provided pro forma net income or earnings per share information.
F-21
<PAGE> 92
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
A summary of the Company's stock option activity, and related information
is as follows:
<TABLE>
<CAPTION>
OPTION PRICE PER SHARE
NUMBER ---------------------------
OF SHARES LOW HIGH WEIGHTED
--------- ----- ------ --------
<S> <C> <C> <C> <C>
Granted 1994............................... 234,000 $1.11 $ 1.11 $1.11
-------
Outstanding December 31, 1994.............. 234,000 1.11 1.11 1.11
Granted in 1995............................ 18,000 1.67 1.67 1.67
-------
Outstanding December 31, 1995.............. 252,000 1.11 1.67 1.15
Granted in first quarter 1996.............. 360,011 1.67 1.67 1.67
Granted in second and third quarters
1996..................................... 300,600 8.33 10.00 8.73
-------
Outstanding September 30, 1996............. 912,611 $1.11 $10.00 $3.85
======= ===== ====== =====
</TABLE>
Options to purchase 90,000 shares are exercisable at September 30, 1996.
The weighted-average remaining contractual life of those options
outstanding at September 30, 1996 is 9.1 years.
During October 1996, 59,400 options were granted with an exercise price of
$8.33 per share.
12. EMPLOYEE BENEFIT PLANS
The Company established a 401(k) retirement plan (the "401(k) Plan") which
covers substantially all eligible employees as defined in the 401(k) Plan.
Under the terms of the 401(k) Plan, employees may contribute up to 15% of
their compensation, as defined. Employer contributions are discretionary.
During the years ended December 31, 1993, 1994 and 1995, and the nine
months ended September 30, 1996, the Company elected not to make
contributions to the 401(k) Plan.
In addition, in connection with the Recent Acquisitions completed through
September 30, 1996, the Company has assumed 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 September 30, 1996. The Company is in the
process of establishing a uniform benefit plan for all employees.
13. COMMITMENTS AND CONTINGENCIES
Liability Insurance -- The Company is insured with respect to general
liability and medical malpractice risks on a claims made basis. The Company
has not accrued a loss for unreported incidents or for losses in excess of
insurance coverage, as the amount, if any, cannot be reasonably estimated
and the probability of an adverse outcome cannot be determined at this
time. It is the opinion of management that the ultimate resolution of any
unasserted claims will not have a material adverse effect on the Company's
financial position or results of operations.
ALA Contingent Notes -- In connection with the Recapitalization, the
Company issued Subordinated Contingent notes in the amount of $2,500 which
have an interest rate of 8% (the "ALA Contingent
F-22
<PAGE> 93
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Notes"). The ALA Contingent Notes are payable in annual installments of
$500, plus interest thereon, in years 1994 through 1998, if operating
earnings (as defined) exceed a specified annual level. If the specified
operating earnings levels are not achieved, the amounts payable for that
year, including the related accrued interest, would be canceled. Operating
earnings for the years ended December 31, 1994 and 1995 were not achieved,
therefore, the ALA Contingent Notes of $500 and related accrued interest
for 1995 and 1994 were canceled.
In April 1996, the Company issued 194,400 shares of its common stock, with
a fair value of $242 to redeem and cancel the Company's contingent
obligation under the ALA Contingent Notes, which had a remaining principal
balance of $1,500. The remaining contingent obligation under the ALA
Contingent Notes of $1,500 and related accrued interest of approximately
$270 would have become payable in the future only if operating earnings (as
defined) of ALA were to have exceeded a specified annual level in 1996,
1997 and 1998.
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 for the years ended December 31, 1993, 1994 and 1995 and the nine
months ended September 30, 1996 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 regulatory audits and
adjustments, or changes in 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.
14. RELATED PARTY TRANSACTIONS
Operating Leases -- The Company leases its Fort Lauderdale laboratory
facilities from an entity beneficially owned by three of the Company's
common stockholders. The present term of the lease expires March 31, 1998
and contains options to renew for two additional five-year periods. The
lease requires monthly rental payments of $11, plus sales tax, and the
Company is also obligated to pay property taxes, insurance, utilities, and
maintenance. Lease payments made under the lease were $134, $140 and $140
in 1993, 1994 and 1995, respectively, and $105 and $105 during the nine
months ended September 30, 1995 (unaudited) and 1996, respectively.
Note Receivable from Officer -- In connection with the employment of the
Company's Chief Executive Officer, the Company provided financing of $270
to facilitate the purchase of 216,007 shares of the Company's issued and
outstanding stock from certain holders of the Convertible Preferred Stock.
The note is payable in full on January 1, 2001 and bears interest at the
rate of 8%, which is payable currently. A portion of the underlying shares
purchased (126,000 shares) are pledged as collateral.
Shareholders' compensation -- Cost of services include $4,445 in 1993 of
compensation paid to ALA's shareholders in excess of the compensation of
such individuals following the Recapitalization.
F-23
<PAGE> 94
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
15. INCOME TAXES
The provision for income taxes for the years ended December 31, 1994 and
1995, and for the periods ended September 30, 1995 (unaudited) and 1996
consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
----------- --------------------
1994 1995 1995 1996
---- ---- ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal............................................. $214 $224 $ 189 $ 845
State............................................... 36 40 34 125
---- ---- ---- ------
Total current............................... 250 264 223 970
---- ---- ---- ------
Deferred:
Federal............................................. 381 541 456 85
State............................................... 65 95 80 20
---- ---- ---- ------
Total deferred.............................. 446 636 536 105
---- ---- ---- ------
Total provision for income taxes............ $696 $900 $ 759 $1,075
==== ==== ==== ======
</TABLE>
PDK elected to be taxed as a Subchapter S corporation for federal income
tax purposes and, accordingly, there is no provision for income taxes for
1993 and for the portion of taxable income for 1994 attributable to PDK
prior to the Recapitalization. As a result of the Recapitalization, the
Company became a taxable Subchapter C corporation.
The effective tax rate on income before income tax is reconciled to
statutory federal income tax rates as follows:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- -------------------
1994 1995 1995 1996
----- ----- ----------- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory federal rate............................. 34.0% 34.0% 34.0% 34.0%
State income taxes, net of federal income tax
benefit.......................................... 2.4 3.7 3.7 3.4
Subchapter S corporation earnings attributable to
PDK.............................................. (11.1)
Other.............................................. (0.1) (0.2) (0.2) 1.2
----- ----- ---- ----
Effective rate..................................... 25.2% 37.5% 37.5% 38.6%
===== ===== ==== ====
</TABLE>
F-24
<PAGE> 95
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following is a summary of the deferred income tax assets and
liabilities as of December 31, 1994 and 1995 and September 30, 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
<S> <C> <C> <C>
Deferred Tax Assets:
Amortizable tax basis of intangibles arising in
Recapitalization.................................... $6,294 $5,757 $ 5,340
Property and equipment................................. 297 133 10
Allowance for doubtful accounts........................ 77 142 285
Accrued liabilities.................................... 224
Other.................................................. 28 20
------ ------ -------
Total Deferred Tax Assets................................ 6,696 6,052 5,859
------ ------ -------
Deferred Tax Liabilities:
Change from cash to accrual basis by Acquisitions...... $ (1,662)
Identifiable intangible assets acquired................ (9,038)
Other.................................................. $ (42) $ (34) (46)
------ ------ -------
Total Deferred Tax Liabilities........................... (42) (34) (10,746)
------ ------ -------
Net Deferred Tax Asset/(Liability)............. $6,654 $6,018 $ (4,887)
====== ====== =======
</TABLE>
The Recapitalization discussed in Note 1 is treated for income tax purposes
as the purchase of assets. A deferred tax benefit of $7,100 was recorded in
connection with the Recapitalization, which amount represents management's
best estimate of the tax effect of deductions in future income tax returns
of the amortization of the increase in tax basis of the assets over the
historical amounts used for financial accounting purposes.
16. SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental information presents the non-cash impact on the
balance sheet of assets acquired and liabilities assumed in the Recent
Acquisitions consummated during the nine months ended September 30, 1996:
<TABLE>
<S> <C>
Assets acquired............................................................ $47,886
Liabilities assumed........................................................ (14,729)
Debt issued................................................................ (2,975)
Common stock issued........................................................ (1,344)
-------
Cash paid.................................................................. 28,838
Less cash acquired......................................................... (1,518)
-------
Net cash paid.................................................... $27,320
=======
</TABLE>
F-25
<PAGE> 96
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
17. CLINICAL PATHOLOGY OPERATIONS OF AMERICAN LABORATORY ASSOCIATES
In May 1996, the Company ceased the clinical pathology operations of
American Laboratory Associates. The following summarizes the amounts of net
revenue and operating costs, including in 1996 a loss of $184 on exiting
the activity, included in the accompanying consolidated statements of
income:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------------
1993 1994 1995 1995 1996
------ ------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues....................... $2,159 $1,712 $2,385 $ 1,938 $1,046
Operating costs.................... 1,883 2,179 2,814 2,142 1,376
</TABLE>
18. PRO FORMA NET INCOME PER SHARE INFORMATION (UNAUDITED)
The Company is planning to issue shares of its common stock in an initial
public offering early in 1997. Immediately prior to the offering, the
outstanding shares of Convertible Preferred Stock will be converted into
5,558,609 of shares of common stock. In view of the planned conversion of
the Convertible Preferred Stock, historical net income per share is not
presented. Pro forma net income per share is presented giving effect to the
conversion of the Convertible Preferred Stock. The following presents the
calculation of pro forma common shares and common equivalent shares
outstanding for each period (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
AND
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
Shares outstanding at beginning of period.......... 1,426 1,426
Effects of shares subsequently issued:
Conversion of Convertible Preferred Stock in
January 1996.................................. 216
Settlement of ALA Contingent Notes in April
1996(1)....................................... 194 194
Recent Acquisitions completed through September
30, 1996...................................... 470
Effects of stock options(1)........................ 690 690
----- -----
2,310 2,996
Planned conversion of Convertible Preferred
Stock............................................ 5,775 5,559
----- -----
Pro forma common and common equivalent shares
outstanding...................................... 8,085 8,555
===== =====
</TABLE>
- ---------------
(1) Pursuant to the requirements of the Securities and Exchange Commission
(the "Commission"), common stock issued by the Company during the 12
months immediately preceding the initial filing of the registration
statement with the Commission, plus the effects of common stock
equivalents relating to the grant of options during the same period
using the treasury stock method and an assumed initial public offering
price of $14.00 per share, have been included in the calculation of pro
forma number of common and common stock equivalents outstanding for all
periods presented.
F-26
<PAGE> 97
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Demaray and Poulos, P.A.:
We have audited the accompanying balance sheets of Demaray and Poulos, P.A. (the
"Company") as of December 31, 1994 and 1995 and the related statements of
operations and retained earnings and of cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1994 and
1995, and the results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Fort Lauderdale, Florida
September 27, 1996
F-27
<PAGE> 98
DEMARAY AND POULOS, P.A.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 1,831 $ 3,211
Accounts receivable (net of allowances for contractual adjustments
and doubtful accounts of $884,068 and $990,282 at December 31,
1994 and 1995, respectively)...................................... 478,177 479,746
-------- --------
Total current assets......................................... 480,008 482,957
PROPERTY AND EQUIPMENT, NET (Note 3)................................... 1,961 1,151
OTHER ASSETS:
Cash surrender value of life insurance............................... 87,166
Other assets......................................................... 36
-------- --------
TOTAL........................................................ $569,171 $484,108
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................... $ 43,216 $ 17,172
Accrued compensation................................................. 24,325 28,016
Deferred compensation liability (Note 7)............................. 87,166
-------- --------
Total current liabilities.................................... 154,707 45,188
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, 200 shares authorized, issued and
outstanding....................................................... 200 200
Retained earnings.................................................... 414,264 438,720
-------- --------
Total shareholders' equity................................... 414,464 438,920
-------- --------
TOTAL........................................................ $569,171 $484,108
======== ========
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE> 99
DEMARAY AND POULOS, P.A.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
NET REVENUE (Note 4).................................................. $2,936,977 $2,547,908
---------- ----------
COSTS OF SERVICES:
Physician compensation -- owners.................................... 654,000 528,000
Physician compensation -- other..................................... 1,142,784 1,157,890
Consulting -- second opinions....................................... 163,447 88,544
Other............................................................... 222,438 197,296
---------- ----------
Total costs of services..................................... 2,182,669 1,971,730
---------- ----------
GENERAL AND ADMINISTRATIVE EXPENSES:
Administration...................................................... 9,210 11,575
Deferred compensation plan.......................................... 9,387 17,447
Billing service..................................................... 226,462 195,257
Bad debt expense.................................................... 426,347 357,566
---------- ----------
Total general and administrative expenses................... 671,406 581,845
---------- ----------
OPERATING INCOME (LOSS)............................................... 82,902 (5,667)
OTHER INCOME, NET..................................................... 5,174 30,123
---------- ----------
NET INCOME............................................................ 88,076 24,456
RETAINED EARNINGS, BEGINNING OF YEAR.................................. 326,188 414,264
---------- ----------
RETAINED EARNINGS, END OF YEAR........................................ $ 414,264 $ 438,720
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE> 100
DEMARAY AND POULOS, P.A.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $ 88,076 $ 24,456
Adjustments to reconcile net income to net cash flows provided by
operating activities:
Depreciation and amortization..................................... 590 810
Changes in assets and liabilities:
Increase in accounts receivable................................. (145,314) (1,569)
Increase (decrease) in accounts payable, accrued compensation
and deferred compensation liability............................ 43,173 (109,519)
Decrease in other assets........................................ 14,419 87,202
--------- ---------
Net cash provided by operating activities.................... 944 1,380
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment................................ (2,331)
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................... (1,387) 1,380
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........................... 3,218 1,831
--------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR................................. $ 1,831 $ 3,211
========= =========
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE> 101
DEMARAY AND POULOS, P.A.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995
1. ORGANIZATION AND BUSINESS
Demaray and Poulos, P.A. (the "Company") is a firm of licensed physicians
in Fort Lauderdale, Florida organized in January 1982 as a Florida
Professional Association to provide hospital-based pathology services. The
Company generates substantially all of its revenue through contracts with
three hospitals in South Florida. Two of these hospitals, representing
approximately 50% of the Company's revenues, are owned by Columbia/HCA
Healthcare Corporation. The arrangements with hospitals are contracts
whereby the hospitals agree, in exchange for the Company's services, to
authorize the Company and its healthcare professionals to bill and collect
the professional component of the charges for medical services rendered by
the Company's healthcare professionals. These contracts have terms of less
than two years and contain clauses that allow termination without cause by
either party with sixty days notice. The Company has had relationships with
the hospitals for approximately ten years; however, the termination of one
or more of these agreements would have a material adverse effect on the
Company's financial position and results of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies followed by the Company are as
follows:
Cash Equivalents -- The Company considers all cash and any highly liquid
debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Property and Equipment -- Property and equipment are recorded at cost and
depreciated over the estimated useful lives of the assets, ranging from 5
to 7 years, using accelerated methods.
Revenue Recognition -- The Company recognizes revenue at the time services
are performed. The Company provides services to certain patients covered by
various third-party payor programs including the federal Medicare program.
Revenue under certain third-party arrangements is subject to audit and
retroactive adjustment. Billings for services reimbursed by third-party
payors are included in revenues net of allowances for the estimated
differences between the amounts billed and the allowable program rates.
Adjustments to the estimated payment amounts are recorded based on the
final payment settlement with the third-party payors.
Unbilled receivables are recorded for services rendered during, but billed
subsequent, to the reporting period. Such receivables, net of allowances,
as of December 31, 1994 and 1995 amounted to $216,000 and $112,000,
respectively.
Income Taxes -- The Company has elected to be taxed as a Subchapter S
corporation for federal income tax purposes. There is no provision for
income taxes since those taxes are the responsibility of the individual
shareholders.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments -- The carrying amounts of cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value due to their short-term maturity.
F-31
<PAGE> 102
DEMARAY AND POULOS, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1994 and 1995 was as follows:
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Medical equipment.................................................... $9,856 $9,856
Less accumulated depreciation........................................ (7,895) (8,705)
------ ------
Property and equipment, net.......................................... $1,961 $1,151
====== ======
</TABLE>
4. NET REVENUE
Net revenue consists of gross charges, net of contractual, charity, and
other adjustments. Contractual adjustments are based on the difference
between charges at established rates and amounts estimated by management to
be collected under Medicare and Medicaid programs, and public and private
insurance and managed care contracts under applicable laws, regulations,
and program instructions. Collectable amounts are generally less than the
established rates. Final determination of certain amounts earned for
certain patients is subject to review by appropriate program
representatives. Charity and other adjustments represent services provided
to patients for which fees are not expected to be collected at the time the
service is provided.
Net revenue consists of the following for the years ended December 31, 1994
and 1995:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Gross charges at established rates............................ $5,191,975 $4,863,912
Less allowances for contractual, charity and other
adjustments................................................. (2,254,998) (2,316,004)
---------- ----------
Net revenue......................................... $2,936,977 $2,547,908
========== ==========
</TABLE>
5. CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of accounts receivable.
The Company grants credit without collateral to its patients, most of whom
are local residents and are insured under third party payor agreements. The
mix of receivables from patients and third-party payors at December 31,
1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Medicare................................................................. 23% 18%
Medicaid................................................................. 1 1
Humana managed care...................................................... 14 11
Third-party payors, including other managed care......................... 59 65
Private pay patients..................................................... 3 5
--- ---
100% 100%
=== ===
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company has entered into certain transactions with American Laboratory
Associates, Inc., a wholly owned subsidiary of AmeriPath, Inc., a majority
of whose common stock is owned by the Company's shareholders. American
Laboratory Associates, Inc. operates three "frozen section" laboratories
which are staffed by physician employees of the Company. Revenue recognized
by the Company under this arrangement amounted to $115,800 and $120,300
during the years ended December 31, 1994 and 1995, respectively. American
Laboratory Associates, Inc. also provides certain administrative support
services
F-32
<PAGE> 103
DEMARAY AND POULOS, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
for which the Company paid $200 per month during the years ended December
31, 1994 and 1995. (See Note 9).
7. EMPLOYEE BENEFIT PLANS
401(k) Plan -- The Company established a 401(k) retirement plan (the
"Plan"), which covers substantially all eligible employees who have reached
age 21 and have completed one year of service (as defined in the Plan).
Under the terms of the Plan, employees may contribute up to 15% of their
compensation, as defined. Employer contributions are discretionary. During
the years ended December 31, 1994 and 1995, the Company elected not to make
a contribution to the Plan.
Deferred Compensation Plan -- The Company established a non-qualified
deferred compensation plan in 1989. The plan is funded by the purchase of
insurance policies owned by the Company on the lives of key employees. Each
year deferred compensation expense was recorded for the premiums paid and
adjusted by the change in cash surrender value of the policies for the
year. Deferred compensation expense was $9,387 and $17,447 for the years
ended December 31, 1994 and 1995. In accordance with the plan, the Company
was ultimately obligated to transfer ownership of policies to the key
employees. During 1995, the plan was terminated and the ownership of the
remaining insurance policies was distributed to the employees.
8. COMMITMENTS AND CONTINGENCIES
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 are subject to audit and adjustment
by applicable regulatory agencies. Failure to comply with any of these laws
or regulations, the results of regulatory audits and adjustments, or
changes in the amounts payable for the Company's services under these
programs could have a material adverse effect on the Company's financial
position or results of operations.
Liability Insurance -- The Company is insured with respect to general
liability and medical malpractice risks on a claims made basis. Management
is not aware of any claims against the Company. In addition, the Company
has not accrued a loss for unreported incidents or for losses in excess of
insurance coverage, as the amount, if any, cannot be reasonably estimated
and the probability of an adverse outcome cannot be determined at this
time. It is the opinion of management that the ultimate resolution of any
claims that may be asserted will not have a material adverse effect on the
financial position or results of operations of the Company.
9. SUBSEQUENT EVENT
Effective January 1, 1996, the Company sold all of its assets and
liabilities to a wholly-owned subsidiary of AmeriPath, Inc.
F-33
<PAGE> 104
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Amazon and Rosen, M.D., P.A. d/b/a Florida Pathology Associates:
We have audited the accompanying balance sheets of Amazon and Rosen, M.D., P.A.
d/b/a Florida Pathology Associates (the "Company") as of December 31, 1994 and
1995 and June 30, 1996, and the related statements of operations and retained
earnings and of cash flows for the years ended December 31, 1994 and 1995 and
the six months ended June 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1994 and 1995
and June 30, 1996, and the results of its operations and its cash flows for the
years ended December 31, 1994 and 1995 and the six months ended June 30, 1996,
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Fort Lauderdale, Florida
September 27, 1996
F-34
<PAGE> 105
AMAZON AND ROSEN, M.D., P.A. D/B/A FLORIDA PATHOLOGY ASSOCIATES
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996
<TABLE>
<CAPTION>
DECEMBER DECEMBER JUNE 30,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 1,141 $ 2,480 $ 15,541
Accounts receivable (net of allowances for contractual
adjustments and doubtful accounts of $464,381, $660,318
and $716,992 at December 31, 1994 and 1995 and June 30,
1996, respectively)....................................... 447,298 504,333 500,064
-------- -------- --------
Total current assets................................. 448,439 506,813 515,605
-------- -------- --------
PROPERTY AND EQUIPMENT, NET (Note 3)........................... 28,936 20,765 16,612
OTHER ASSETS................................................... 757 50 50
-------- -------- --------
TOTAL................................................ $478,132 $527,628 $532,267
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................. $ 36,228 $ 33,656 $ 19,817
Due to shareholders.......................................... 21,166 19,056 17,056
Note payable to bank......................................... 35,683 9,372
Income taxes payable (Note 6)................................ 11,404 13,853
Deferred tax liability (Note 6).............................. 158,475 181,563 185,254
-------- -------- --------
Total current liabilities............................ 251,552 255,051 235,980
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, 100 shares authorized, issued and
outstanding............................................... 100 100 100
Additional paid-in capital................................... 1,900 1,900 1,900
Retained earnings............................................ 224,580 270,577 294,287
-------- -------- --------
Total shareholders' equity........................... 226,580 272,577 296,287
-------- -------- --------
TOTAL................................................ $478,132 $527,628 $532,267
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE> 106
AMAZON AND ROSEN, M.D., P.A. D/B/A FLORIDA PATHOLOGY ASSOCIATES
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1994 1995 1995 1996
------------ ------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUE (Note 4)........................... $2,390,016 $3,055,092 $ 1,542,224 $1,781,192
---------- ---------- ---------- ----------
COSTS OF SERVICES:
Physician compensation -- owners............. 1,132,400 1,618,800 766,263 914,500
Physician compensation -- other.............. 314,640 359,776 171,998 182,586
Other........................................ 264,003 306,826 147,810 154,159
---------- ---------- ---------- ----------
Total costs of services.............. 1,711,043 2,285,402 1,086,071 1,251,245
---------- ---------- ---------- ----------
GENERAL AND ADMINISTRATIVE EXPENSES:
Administration............................... 79,492 87,977 45,295 79,065
Billing service.............................. 174,654 221,885 129,939 123,431
Bad debt expense............................. 160,778 380,260 239,391 286,642
---------- ---------- ---------- ----------
Total general and administrative
expenses........................... 414,924 690,122 414,625 489,138
---------- ---------- ---------- ----------
OPERATING INCOME............................... 264,049 79,568 41,528 40,809
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense............................. (3,535) (1,711) (1,103) (241)
Other income................................. 3,410 2,632 2,367 686
---------- ---------- ---------- ----------
Total other (expense) income, net.... (125) 921 1,264 445
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES....... 263,924 80,489 42,792 41,254
PROVISION FOR INCOME TAXES..................... 104,172 34,492 16,090 17,544
---------- ---------- ---------- ----------
NET INCOME..................................... 159,752 45,997 26,702 23,710
RETAINED EARNINGS, BEGINNING OF PERIOD......... 64,828 224,580 224,580 270,577
---------- ---------- ---------- ----------
RETAINED EARNINGS, END OF PERIOD............... $ 224,580 $ 270,577 $ 251,282 $ 294,287
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-36
<PAGE> 107
AMAZON AND ROSEN, M.D., P.A. D/B/A FLORIDA PATHOLOGY ASSOCIATES
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1994 1995 1995 1996
------------ ------------ ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 159,752 $ 45,997 $ 26,702 $ 23,710
Adjustments to reconcile net income to net cash
flows provided by operating activities:
Depreciation................................ 20,092 19,073 11,246 4,153
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable............................. (286,407) (57,035) (20,999) 4,269
Increase (decrease) in accounts payable,
income tax payable and due to
shareholders........................... 27,404 6,722 (5,463) (13,390)
Increase in deferred income tax
liability.............................. 104,172 23,088 11,525 3,691
(Increase) decrease in other assets....... (494) 708 707
--------- -------- -------- --------
Net cash provided by operating
activities........................... 24,519 38,553 23,718 22,433
--------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment.......... (10,903) (5,360)
--------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt........... (24,486) (26,311) (12,907) (9,372)
--------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 33 1,339 5,451 13,061
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD... 1,108 1,141 1,141 2,480
--------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD......... $ 1,141 $ 2,480 $ 6,592 $ 15,541
========= ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.................................... $ 3,535 $ 1,711 $ 1,103 $ 241
========= ======== ======== ========
Income Taxes................................ $ $ 2,340 $ $ 9,771
========= ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-37
<PAGE> 108
AMAZON AND ROSEN, M.D., P.A. D/B/A FLORIDA PATHOLOGY ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996
1. ORGANIZATION AND BUSINESS
Amazon and Rosen, M.D., P.A. d/b/a Florida Pathology Associates (the
"Company") is a firm of licensed physicians in Miami, Florida organized in
August 1988 as a Florida Professional Association to provide hospital-based
pathology services. The Company generates substantially all of its revenues
through a contract with one hospital in South Florida. This contract has a
term of five years through September 1999. Under the contract, the hospital
agrees, in exchange for the Company's services, to authorize the Company
and its healthcare professionals to bill and collect the professional
component of the charges for medical services rendered by the Company's
healthcare professionals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies followed by the Company are as
follows:
Cash Equivalents -- The Company considers all cash and any highly liquid
debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Property and Equipment -- Property and equipment are recorded at cost and
depreciated over the estimated useful lives of the assets, ranging from 3
to 7 years, using accelerated methods.
Revenue Recognition -- The Company recognizes revenue at the time services
are performed. The Company provides services to certain patients covered by
various third-party payor programs including the federal Medicare program.
Revenue under certain third-party arrangements is subject to audit and
retroactive adjustment. Billings for services reimbursed by third-party
payors are included in revenues net of allowances for the estimated
differences between the amounts billed and the allowable program rates.
Adjustments to the estimated payment amounts are recorded based on the
final payment settlement with the third-party payors.
Unbilled receivables are recorded for services rendered during, but billed
subsequent, to the reporting period. Such receivables, net of allowances,
as of December 31, 1994 and 1995 and June 30, 1996 amounted to
approximately $124,000, $92,000 and $66,000, respectively.
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. Deferred income taxes are accounted for in accordance with
Statement of Financial Accounting Standards No. 109, and represents the
estimated future tax effects resulting from temporary differences between
financial and tax reporting bases of assets and liabilities.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments -- The carrying amounts of cash and
cash equivalents, accounts receivable, accounts payable and notes payable
approximate fair value due to their short-term maturity.
Interim Financial Data -- The unaudited statements of operations and
retained earnings and of cash flows for the six months ended June 30, 1995
include, in the opinion of management, all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the Company's
results of operations and cash flows. Operating results for the six month
period ended June 30, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996.
F-38
<PAGE> 109
AMAZON AND ROSEN, M.D., P.A. D/B/A FLORIDA PATHOLOGY ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1994 and 1995 and June 30, 1996 was
as follows:
<TABLE>
<CAPTION>
DECEMBER DECEMBER JUNE 20,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Furniture, fixtures and equipment....................... $95,185 $106,087 $106,087
Less accumulated depreciation........................... (66,249) (85,322) (89,475)
------- ------- -------
Property and equipment, net............................. $28,936 $ 20,765 $ 16,612
======= ======= =======
</TABLE>
4. NET REVENUE
Net revenue consists of gross charges, net of contractual, charity, and
other adjustments. Contractual adjustments are based on the difference
between charges at established rates and amounts estimated by management to
be collected under Medicare and Medicaid programs, and public and private
insurance and managed care contracts under applicable laws, regulations,
and program instructions. Collectable amounts are generally less than the
established rates. Final determination of certain amounts earned for
certain patients is subject to review by appropriate program
representatives. Charity and other adjustments represent services provided
to patients for which fees are not expected to be collected at the time the
service is provided.
Net revenue consists of the following for the years ended December 31, 1994
and 1995 and the six months ended June 30, 1996:
<TABLE>
<CAPTION>
DECEMBER DECEMBER JUNE 30,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Gross charges at established rates................. $2,760,935 $4,243,300 $2,541,450
Less allowances for contractual, charity and other
adjustments...................................... (550,919) (1,368,208) (850,258)
---------- ---------- ----------
2,210,016 2,875,092 1,691,192
Medical director fees.............................. 180,000 180,000 90,000
---------- ---------- ----------
Net revenue........................................ $2,390,016 $3,055,092 $1,781,192
========== ========== ==========
</TABLE>
5. CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of accounts receivable.
The Company grants credit without collateral to its patients, most of whom
are local residents and are insured under third party payor agreements. The
mix of receivables from patients and third-party payors at December 31,
1994 and 1995 and June 30, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER DECEMBER JUNE 30,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Medicare.............................................. 54% 48% 48%
Medicaid.............................................. 1 2 2
Third-party payors, including managed care............ 22 32 33
Private pay patients.................................. 23 18 17
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
F-39
<PAGE> 110
AMAZON AND ROSEN, M.D., P.A. D/B/A FLORIDA PATHOLOGY ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. INCOME TAXES
The provision for income taxes in the accompanying statements of operations
for the years ended December 31, 1994 and 1995 and the six months ended
June 30, 1996 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ --------
<S> <C> <C> <C>
Current:
Federal........................................ $ 10,093 $ 12,147
State.......................................... 1,311 1,706
------- -------
11,404 13,853
------- -------
Deferred:
Federal........................................ $ 89,319 19,796 3,165
State.......................................... 14,853 3,292 526
-------- ------- -------
104,172 23,088 3,691
-------- ------- -------
Total.................................. $104,172 $ 34,492 $ 17,544
======== ======= =======
</TABLE>
The Company's effective tax rate differs from the statutory federal income
tax rate for the following reasons:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1994 1995 1996
---- ---- -------------
<S> <C> <C> <C>
Statutory federal income tax rate........................ 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit.... 3.7% 3.8% 3.6%
Other.................................................... 1.8% 5.1% 4.9%
---- ---- ----
Effective tax rate..................................... 39.5% 42.9% 42.5%
==== ==== ====
</TABLE>
The significant components of the net deferred income tax liability at
December 31, 1994 and 1995 and June 30, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1994 1995 1996
------------ ------------ ---------
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Allowance for contractuals and bad debts....... $ 179,135 $ 254,718 $ 276,580
Tax cash basis items........................... (337,610) (436,281) (461,834)
--------- --------- ---------
$ (158,475) $ (181,563) $(185,254)
========= ========= =========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
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 healthcare programs,
principally Medicare and Medicaid, and are subject to audit and adjustment
by applicable regulatory agencies. Failure to comply with any of these laws
or regulations, the results of regulatory audits and adjustments, or
changes in the amounts payable for the Company's services under these
programs could have a material adverse effect on the Company's financial
position or results of operations.
Liability Insurance -- The Company is insured with respect to general
liability and medical malpractice risks on a claims made basis. Management
is not aware of any claims against the Company. In addition,
F-40
<PAGE> 111
AMAZON AND ROSEN, M.D., P.A. D/B/A FLORIDA PATHOLOGY ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the Company has not accrued a loss for unreported incidents or for losses
in excess of insurance coverage, as the amount, if any, cannot be
reasonably estimated and the probability of an adverse outcome cannot be
determined at this time. It is the opinion of management that the ultimate
resolution of any claims that may be asserted will not have a material
adverse effect on the financial position or results of operations of the
Company.
8. SUBSEQUENT EVENT
Effective July 1, 1996, the Company's shareholders sold all of the
Company's issued and outstanding common stock to AmeriPath, Inc.
F-41
<PAGE> 112
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Derrick and Associates Pathology, Inc.:
We have audited the accompanying balance sheets of Derrick and Associates
Pathology, Inc. (the "Company") as of December 31, 1994 and 1995 and June 30,
1996, and the related statements of operations, shareholders' equity, and cash
flows for the years ended December 31, 1994 and 1995 and the six months ended
June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1994 and 1995
and June 30, 1996, and the results of its operations and its cash flows for the
years ended December 31, 1994 and 1995 and the six months ended June 30, 1996,
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Orlando, Florida
October 1, 1996
F-42
<PAGE> 113
DERRICK AND ASSOCIATES PATHOLOGY, INC.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $1,199,117 $1,105,141 $ 723,801
Investments (Note 3)..................................... 757,243 955,817
Accounts receivable (net of allowances for contractual
adjustments and doubtful accounts of $4,822,221,
$5,053,200, and $5,188,251 at December 31, 1994 and
1995 and June 30, 1996, respectively)................. 4,067,442 4,780,539 4,648,363
Amounts receivable from shareholders..................... 196,887
Prepaid expenses and other current assets................ 337,766 264,138 493,521
---------- ---------- ----------
Total current assets............................. 6,361,568 7,105,635 6,062,572
PROPERTY AND EQUIPMENT, NET (Note 4)....................... 805,044 880,911 1,056,457
OTHER ASSETS............................................... 82,900 98,200 67,488
---------- ---------- ----------
TOTAL............................................ $7,249,512 $8,084,746 $7,186,517
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit (Note 2)............................. $1,750,100 $1,600,100
Current portion of long-term debt (Note 6)............... 190,671 $ 96,974
Accounts payable......................................... 190,821 218,164 380,427
Accrued liabilities (Note 5)............................. 354,859 366,884 381,009
Accrued profit sharing contribution...................... 564,357 545,006 200,612
Deferred income taxes (Note 11).......................... 1,423,000 1,708,000 1,680,000
---------- ---------- ----------
Total current liabilities........................ 4,283,137 4,628,825 2,739,022
---------- ---------- ----------
LONG-TERM DEBT (Note 6).................................... 217,440
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY: (Note 8)
Common stock:
Class A common stock, $1.00 par value, 2,000 shares
authorized, 1,300 shares issued and outstanding at
December 31, 1994, 1,200 shares issued and
outstanding at December 31, 1995, and 1,300 shares
issued and outstanding at June 30, 1996............. 1,300 1,200 1,300
Class B non-voting common stock, $1.00 par value,
1,000 shares authorized, 30 shares issued and
outstanding at June 30, 1996........................ 30
Additional paid-in capital............................... 1,275,599 1,232,804 2,459,122
Retained earnings........................................ 1,742,130 2,004,477 1,987,043
---------- ---------- ----------
3,019,029 3,238,481 4,447,495
Less note receivable from shareholder.................... (52,654)
---------- ---------- ----------
Total shareholders' equity....................... 2,966,375 3,238,481 4,447,495
---------- ---------- ----------
TOTAL............................................ $7,249,512 $8,084,746 $7,186,517
========== ========== ==========
</TABLE>
See notes to financial statements.
F-43
<PAGE> 114
DERRICK AND ASSOCIATES PATHOLOGY, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------- ---------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUE (Note 9):
Hospital net revenue (net of allowances for
contractual, charity, and other adjustments
of $11,042,842, $11,739,344, $5,986,271, and
$7,554,196 for the years ended December 31,
1994 and 1995 and the six months ended June
30, 1995 (unaudited) and 1996,
respectively)............................... $11,714,580 $12,654,421 $ 6,352,212 $ 5,914,302
Histology net revenue (net of allowances for
contractual, charity, and other adjustments
of $1,319,158, $1,026,590, $514,088, and
$516,059 for the years ended December 31,
1994 and 1995 and the six months ended June
30, 1995 (unaudited) and 1996,
respectively)............................... 7,525,119 7,607,769 3,642,315 4,306,770
Cytology net revenue (net of allowances for
contractual, charity, and other adjustments
of $207,122, $71,340, $47,642, and $28,092
for the years ended December 31, 1994 and
1995 and the six months ended June 30, 1995
(unaudited) and 1996, respectively)......... 1,366,047 1,320,007 670,741 539,536
Other......................................... 88,019 124,127 114,157 42,183
----------- ----------- ----------- -----------
Total net revenue...................... 20,693,765 21,706,324 10,779,425 10,802,791
----------- ----------- ----------- -----------
COSTS AND EXPENSES (Notes 7 and 10):
Cost of services rendered..................... 15,361,591 13,854,132 7,691,438 7,381,725
Selling, billing, and administrative
expenses.................................... 3,204,069 3,473,635 1,384,846 1,929,293
Provision for uncollectible accounts (net of
recoveries of $553,531, $666,251, $369,816,
and $270,867 for the years ended December
31, 1994 and 1995 and the six months ended
June 30, 1995 (unaudited) and 1996,
respectively)............................... 2,405,646 3,618,851 1,758,610 1,504,914
Interest expense.............................. 32,081 36,091 34,217 12,493
----------- ----------- ----------- -----------
Total costs and expenses............... 21,003,387 20,982,709 10,869,111 10,828,425
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES......................................... (309,622) 723,615 (89,686) (25,634)
PROVISION (BENEFIT) FOR INCOME TAXES (Note
11)........................................... (132,534) 290,000 (4,500) (8,200)
----------- ----------- ----------- -----------
NET INCOME (LOSS)............................... $ (177,088) $ 433,615 $ (85,186) $ (17,434)
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-44
<PAGE> 115
DERRICK AND ASSOCIATES PATHOLOGY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
NOTE
RECEIVABLE
CLASS A CLASS B ADDITIONAL FROM
COMMON COMMON PAID-IN RETAINED SHAREHOLDER
STOCK STOCK CAPITAL EARNINGS (NOTE 8) TOTAL
------- ------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1994................ $1,300 $ $1,275,599 $1,919,218 $ (107,923) $3,088,194
Net loss..................... (177,088) (177,088)
Principal payments received
on note receivable from
shareholder............... 55,269 55,269
------ --- ---------- ---------- --------- ----------
DECEMBER 31, 1994.............. 1,300 1,275,599 1,742,130 (52,654) 2,966,375
Net income................... 433,615 433,615
Issuance of common stock
(Note 8).................. 100 193,848 193,948
Repurchase and retirement of
common stock (Note 8)..... (200) (236,643) (171,268) (408,111)
Principal payments received
on note receivable from
shareholder............... 52,654 52,654
------ --- ---------- ---------- --------- ----------
DECEMBER 31, 1995.............. 1,200 1,232,804 2,004,477 3,238,481
Net loss..................... (17,434) (17,434)
Issuance of Class A common
stock (Note 8)............ 100 193,848 193,948
Issuance of Class B non
voting common stock (Note
8)........................ 30 1,032,470 1,032,500
------ --- ---------- ---------- --------- ----------
JUNE 30, 1996.................. $1,300 $30 $2,459,122 $1,987,043 $ $4,447,495
====== === ========== ========== ========= ==========
</TABLE>
See notes to financial statements.
F-45
<PAGE> 116
DERRICK AND ASSOCIATES PATHOLOGY, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------- -------------------------
1994 1995 1995 1996
---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................................. $ (177,088) $ 433,615 $ (85,186) $ (17,434)
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation...................................................... 386,255 347,286 162,716 187,039
Deferred income taxes............................................. 8,000 290,000 (12,500) 3,000
(Gain) loss on disposition of fixed assets........................ (823) 13,906 3,161 9,570
Amortization of original issue discount........................... (7,374) (30,707) (21,053) (7,864)
Shareholders' compensation related to stock bonus................. 972,500
(Increase) decrease in:
Accounts receivable............................................. (271,512) (713,097) (333,383) 132,176
Amounts receivable from shareholders............................ (196,887)
Prepaid expenses and other current assets....................... (130,343) 68,628 47,792 (229,383)
Other assets.................................................... (288)
Increase (decrease) in:
Accounts payable................................................ (7) 27,343 661,218 162,263
Accrued liabilities............................................. (98,625) 12,025 1,991,261 14,125
Accrued profit sharing contribution............................. 545,163 (19,351) (253,507) (344,394)
---------- ---------- ----------- -----------
Net cash provided by operating activities................... 253,646 429,648 2,160,519 684,423
---------- ---------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities held to maturity........................... (749,870) (942,867) (508,179)
Proceeds from redemption of securities held to maturity........... 775,000 510,000 963,681
Proceeds from sale of equipment................................... 1,425 25,365 7,060 4,580
Purchases of property and equipment............................... (216,825) (462,424) (306,352) (376,735)
Increase in other assets.......................................... (13,860) (15,300)
---------- ---------- ----------- -----------
Net cash provided by (used in) investing activities......... (979,130) (620,226) (297,471) 591,526
---------- ---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.......................................... 193,948 253,948
Net (payments) proceeds from bank line of credit.................. 250,100 (150,000) (1,750,000) (1,600,100)
Note principal payments received from shareholders................ 55,269 52,654 32,011
Payments on long-term debt........................................ (311,137)
---------- ---------- ----------- -----------
Net cash (used in) provided by financing activities......... 305,369 96,602 (1,717,989) (1,657,289)
---------- ---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH..................................... (420,115) (93,976) 145,059 (381,340)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................... 1,619,232 1,199,117 1,199,117 1,105,141
---------- ---------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $1,199,117 $1,105,141 $1,344,176 $ 723,801
========== ========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments (receipts) during the period for:
Interest........................................................ $ 13,473 $ 24,951 $ 7,543 $ 22,181
========== ========== =========== ===========
Income taxes.................................................... $ 139,345 $ 4,740 $ (137,395) $
========== ========== =========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
The Company purchased and retired 200 shares of common stock through the
issuance of $408,111 of long-term debt during the year ended December 31, 1995.
The Company purchased and retired 100 shares of common stock through the
issuance of $193,948 of long-term debt during the six months ended June 30,
1995.
See notes to financial statements.
F-46
<PAGE> 117
DERRICK AND ASSOCIATES PATHOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1996
1. ORGANIZATION AND BUSINESS
Derrick and Associates Pathology, Inc. (the "Company") (f/k/a Derrick and
Associates Pathology, P.A.) is engaged in providing hospital-based
pathology services to various hospitals as well as pathology laboratory
services to hospitals, clinics, physicians, and others throughout Central
and South Florida. On May 23, 1996, the Company's shareholders executed an
agreement to sell their interests in the Company to AmeriPath Florida, Inc.
The transaction was completed as of June 26, 1996, with an effective date
of July 1, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies followed by the Company are as
follows:
Cash Equivalents -- The Company considers all cash and any highly liquid
debt instruments purchased with a maturity of three months or less at time
of purchase to be cash equivalents.
Investments -- Marketable debt securities are classified as held to
maturity, available for sale or trading depending upon the intent and
ability of the Company. Held to maturity investments are recorded at
amortized cost; trading securities are recorded at fair value with
unrealized gains and losses included in earnings; and available for sale
securities are recorded at fair value with unrealized gains and losses
included as a separate component of shareholders' equity. The Company has
classified all of its investments as held to maturity. Accordingly, all
such investments have been recorded at amortized cost.
Property and Equipment -- Property and equipment are recorded at cost and
depreciated over the estimated useful lives of the assets (ranging from 3
to 10 years) using accelerated methods.
Bank Line of Credit -- The Company had a $2,500,000 line of credit with a
bank which was due on demand, bore interest at the prime rate plus 0.5%.
The note was collateralized by accounts receivable and inventory. In May
1996, the line of credit agreement was terminated by the Company and the
assets encumbered thereunder were released by the bank.
Revenue Recognition -- The Company recognizes revenue at the time services
are performed. The Company provides services to certain patients covered by
various third-party payor programs including the federal Medicare program.
Revenue under certain third-party arrangements is subject to audit and
retroactive adjustment. Billings for services reimbursed by third-party
payors are included in revenue net of allowances for the estimated
differences between the amounts billed and the allowable program rates.
Adjustments to the estimated payment amounts are recorded based on the
final payment settlement with the third-party payors.
Unbilled receivables are recorded for services rendered during, but billed
subsequent, to the reporting period. Such receivables, net of allowances,
as of December 31, 1994 and 1995 and June 30, 1996 amounted to
approximately $859,000, $1,176,000 and $1,288,000, respectively.
Income Taxes -- Deferred income taxes are provided on elements of income
that are recognized for financial accounting purposes in periods different
than when such items are recognized for income tax purposes.
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributed to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
F-47
<PAGE> 118
DERRICK AND ASSOCIATES PATHOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments -- Regarding cash and cash equivalents,
accounts receivable, accounts payable, and note payable, the carrying
amounts approximate fair value.
Reclassifications -- Certain amounts shown in the 1994 and 1995 financial
statements have been reclassified to conform to the June 30, 1996
presentation.
Interim Financial Data -- The unaudited statements of operations and cash
flows for the six months ended June 30, 1995 include, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the Company's results of operations and cash
flows. Operating results for the six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
3. INVESTMENTS
The amortized cost of securities held to maturity approximates their fair
value at December 31, 1994 and 1995. Securities held to maturity consist of
the following at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
MATURITY AMORTIZED
RATE DATE COST
---- -------- ---------
<S> <C> <C> <C>
1994
Bankers Acceptance......................................... 5.25 02/13/95 $ 198,717
Federal Home Loan Bank note................................ 5.60 05/23/95 303,153
Federal Home Loan Bank note................................ 5.80 08/14/95 255,373
---------
$ 757,243
=========
1995
Bankers Acceptance......................................... 5.60 01/08/96 $ 399,558
Federal Home Loan Bank note................................ 6.42 04/24/96 263,620
Bankers Acceptance......................................... 5.20 06/17/96 292,639
---------
$ 955,817
=========
</TABLE>
F-48
<PAGE> 119
DERRICK AND ASSOCIATES PATHOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1994 and 1995 and June 30, 1996 was
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------- JUNE 30,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Laboratory and data processing equipment........ $ 1,707,159 $ 1,966,081 $ 2,148,099
Automotive vehicles............................. 260,708 322,624 343,554
Leasehold improvements.......................... 157,578 170,258 185,747
Furniture and fixtures.......................... 135,599 142,611 145,516
----------- ----------- -----------
2,261,044 2,601,574 2,822,916
Less accumulated depreciation................... (1,456,000) (1,720,663) (1,766,459)
----------- ----------- -----------
Property and equipment, net..................... $ 805,044 $ 880,911 $ 1,056,457
=========== =========== ===========
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1994 and 1995 and June 30, 1996 were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------- JUNE 30,
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Payroll................................................ $280,874 $286,171 $280,291
Group insurance........................................ 65,000 65,000 71,225
Other.................................................. 8,985 15,713 29,493
-------- -------- --------
$354,859 $366,884 $381,009
======== ======== ========
</TABLE>
6. LONG-TERM DEBT
Long-term debt at December 31, 1995 and June 30, 1996 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------- --------
<S> <C> <C>
Note payable to a former shareholder in annual instalments of
$96,974, including interest at 7.19%, matures March 1997.... $ 193,948 $ 96,974
Note payable to a former shareholder in annual instalments of
$40,156, including interest at 5.91%, fully repaid in
1996........................................................ 214,163
-------- --------
408,111 96,974
Less current portion.......................................... (190,671) (96,974)
-------- --------
Total long-term debt.......................................... $ 217,440 $
======== ========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Operating Leases -- The Company leases its principal facility under a
noncancelable agreement which expires in December 2002. The lease requires
monthly rental payments of $11,571, plus sales taxes, and the Company is
also obligated to pay insurance, utilities, and normal maintenance. The
rent is subject to an annual increase based upon the consumer price index.
The Company also leases other facilities from other unrelated parties. Rent
expense was approximately $147,000 and $153,000 for the years ended
December 31, 1994 and 1995, respectively, and $85,000 for the six months
ended June 30, 1996.
Future minimum rental payments required for the next five years and
thereafter under operating leases, that have initial or remaining
noncancelable lease terms in excess of one year as of June 30, 1996 amount
to $131,160 per year through December 2002.
F-49
<PAGE> 120
DERRICK AND ASSOCIATES PATHOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Employment Agreements -- The Company has entered into employment agreements
with each of its physicians and one other employee. These employment
agreements generally provide for certain annual base salaries and renew
annually unless written notice is given by either party.
Stock Purchase Agreement -- The Company was obligated under a Stock
Restriction and Purchase Agreement with its stockholders to purchase all of
the common stock owned by a shareholder upon his death, disability, normal
retirement, or withdrawal from the Company. The purchase price was
determined by an annual valuation. In connection with the sale of the
Company (see Note 1), these agreements were terminated.
Professional Liability Insurance Coverage -- The Company maintains
professional liability coverage for the Company and its physicians and
employees with a commercial insurance company on a claims-made basis. The
Company has procedures in place to monitor coverage and incidents of
significance. Management believes that an accrual for incurred but not
reported claims is not necessary at June 30, 1996.
Legal Proceedings -- The Company is subject to a number of lawsuits
relating to matters arising in the ordinary course of its business. The
claims are insured but subject to deductibles. The amount of liability, if
any, from the litigation cannot be determined with certainty; however,
management is of the opinion that the outcome of the litigation will not
have a material adverse impact 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 healthcare programs,
principally Medicare and Medicaid, and are subject to audit and adjustment
by applicable regulatory agencies. Failure to comply with any of these laws
or regulations, the results of regulatory audits and adjustments, or
changes in the amounts payable for the Company's services under these
programs could have a material adverse effect on the Company's financial
position or results of operations.
8. SHAREHOLDERS' EQUITY
At December 31, 1994, the Company had a note receivable from a shareholder
totaling $52,654. The note was classified as a reduction in shareholders'
equity, bore interest at 8.5% and matured on July 7, 1995.
During the year ended December 31, 1995, 200 shares of common stock were
repurchased by the Company for $408,011. As of December 31, 1995, these
shares were canceled and retired. In addition, 100 shares of common stock
were issued for $193,948.
During the six months ended June 30, 1996, the Company issued 100 shares of
Class A common stock for $193,948 and 30 shares of Class B non-voting
common stock valued at $1,032,500 were issued to six employees for cash
consideration of $60,000 with the remainder as a bonus.
9. NET REVENUE
Net revenue consists of gross charges, net of contractual, charity, and
other adjustments. Contractual adjustments are based on the difference
between charges at established rates and amounts estimated by management to
be reimbursable by Medicare and Medicaid programs, and public and private
insurance contracts under applicable laws, regulations, and program
instructions. Reimbursable amounts are generally less than the established
gross charges. Final determination of certain amounts earned for certain
patients is subject to review by appropriate program representatives.
Charity and other adjust-
F-50
<PAGE> 121
DERRICK AND ASSOCIATES PATHOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ments represent services provided to patients for which fees are not
expected to be collected at the time the service is provided.
Net revenue attributable to SmithKline Beecham PLC was $2,271,652,
$2,113,904, and $1,239,676 for the years ended December 31, 1994 and 1995
and the six months ended June 30, 1996, respectively.
10. EMPLOYEE BENEFIT PLAN
The Company maintains a qualified profit sharing plan (the "Plan") for all
of its eligible employees. The Plan includes a 401(k) feature, which allows
participants to make pretax contributions and provides for matching and
discretionary contributions by the Company. Contributions by the Company
for the years ended December 31, 1994 and 1995 and the six months ended
June 30, 1996 totaled approximately $564,000, $545,000, and $201,000,
respectively.
11. INCOME TAXES
The provision (benefit) for income taxes in the accompanying statements of
operations for the years ended December 31, 1994 and 1995 and the six
months ended June 30, 1996 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1994 1995 1996
--------- -------- --------
<S> <C> <C> <C>
Federal income taxes:
Current.......................................... $(140,534) $ $(11,200)
Deferred......................................... 8,000 290,000 3,000
--------- -------- --------
Total provision (benefit) for income
taxes.................................. $(132,534) $290,000 $ (8,200)
========= ======== ========
</TABLE>
The Company's effective tax (benefit) rate differs from the statutory
federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1994 1995 1996
----- ---- --------
<S> <C> <C> <C>
Statutory federal income tax (benefit) rate................. (34.0)% 34.0% (34.0)%
State income taxes, net of federal tax benefits............. (3.6) 3.6 (3.6)
Benefit of net operating loss carryforwards................. 5.7
Other....................................................... (5.2) 2.4
----- ---- -----
Effective tax (benefit) rate................................ (42.8)% 40.0% (31.9)%
===== ==== =====
</TABLE>
The sources and amounts of deferred income tax assets and liabilities at
December 31, 1994 and 1995 and June 30, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------
1994 1995 JUNE 30, 1996
--------------------------- --------------------------- ---------------------------
CURRENT ASSETS NONCURRENT CURRENT ASSETS NONCURRENT CURRENT ASSETS NONCURRENT
(LIABILITIES) ASSETS (LIABILITIES) ASSETS (LIABILITIES) ASSETS
-------------- ---------- -------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Use of cash basis
of accounting
for income tax
purposes........ $ (1,443,000) $ $ (1,725,000) $ $ (1,697,000) $
Net operating loss
carryforwards
and tax
credits......... 20,000 58,000 17,000 53,000 17,000 22,000
----------- ------- ----------- ------- ----------- -------
Total... $ (1,423,000) $ 58,000 $ (1,708,000) $ 53,000 $ (1,680,000) $ 22,000
=========== ======= =========== ======= =========== =======
</TABLE>
F-51
<PAGE> 122
DERRICK AND ASSOCIATES PATHOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of accounts receivable.
The Company grants credit without collateral to its patients, most of whom
are local residents and are insured under third-party payor agreements. The
mix of receivables from patients and third-party payors at December 31,
1994 and 1995 and June 30, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1994 1995 1996
---- ---- --------
<S> <C> <C> <C>
Medicare...................................................... 18% 15% 21%
Medicaid...................................................... 14 11 9
Humana........................................................ 8 5 3
Third-party payors and other managed care..................... 30 40 40
Private-pay patients.......................................... 24 23 19
Other......................................................... 6 6 8
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
F-52
<PAGE> 123
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
SkinPath, P.C.:
We have audited the accompanying balance sheets of SkinPath, P.C. (the
"Company") as of December 31, 1995 and July 31, 1996, and the related statements
of operations and retained earnings and of cash flows for the period January 5,
1995 (inception) through December 31, 1995 and the seven months ended July 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1995 and July
31, 1996, and the results of its operations and its cash flows for the period
January 5, 1995 (inception) through December 31, 1995 and the seven months ended
July 31, 1996, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Fort Lauderdale, Florida
October 15, 1996
F-53
<PAGE> 124
SKINPATH, P.C.
BALANCE SHEETS
DECEMBER 31, 1995 AND JULY 31, 1996
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1995 1996
------------ --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $257,509 $ 68,676
Accounts receivable (net of allowances for contractual adjustments
and doubtful accounts of $41,762 and $122,578 at December 31, 1995
and July 31, 1996, respectively).................................. 230,423 316,196
-------- --------
Total current assets......................................... 487,932 384,872
PROPERTY AND EQUIPMENT, NET (Note 3)................................. 432,180 433,522
-------- --------
TOTAL........................................................ $920,112 $818,394
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................... $ 41,540 $ 15,552
Accrued expenses..................................................... 208,802 97,394
Dividends payable.................................................... 59,282
Current portion of long-term debt (Note 4)........................... 278,818 119,837
-------- --------
Total current liabilities.................................... 588,442 232,783
-------- --------
Long-term debt (Note 4).............................................. 136,182 293,001
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 500 shares authorized, issued and
outstanding....................................................... 500 500
Additional paid in capital........................................... 4,500 4,500
Retained earnings.................................................... 190,488 287,610
-------- --------
Total stockholders' equity................................... 195,488 292,610
-------- --------
TOTAL........................................................ $920,112 $818,394
======== ========
</TABLE>
See accompanying notes to the financial statements.
F-54
<PAGE> 125
SKINPATH, P.C.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
PERIOD FROM JANUARY 5, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995 AND
SEVEN MONTHS ENDED JULY 31, 1996
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1995 1996
------------ ----------
<S> <C> <C>
NET REVENUE (Note 5)................................................. $1,846,939 $1,468,475
------------ ----------
COST OF SERVICES:
Physician compensation -- owner.................................... 473,376 497,465
Physician compensation -- other.................................... 254,855 308,803
Other.............................................................. 307,097 194,190
------------ ----------
Total cost of services..................................... 1,035,328 1,000,458
------------ ----------
GENERAL AND ADMINISTRATIVE EXPENSES:
Marketing.......................................................... 29,244 43,138
Administration..................................................... 132,010 107,226
Patient accounts................................................... 125,555 78,790
Bad debt expense................................................... 31,558 76,198
Depreciation and amortization...................................... 38,759 47,613
------------ ----------
Total general and administrative expenses.................. 357,126 352,965
------------ ----------
OPERATING INCOME..................................................... 454,485 115,052
INTEREST EXPENSE..................................................... 23,715 17,930
------------ ----------
NET INCOME........................................................... 430,770 97,122
DIVIDENDS............................................................ 240,282
RETAINED EARNINGS, BEGINNING OF PERIOD............................... 190,488
------------ ----------
RETAINED EARNINGS, END OF PERIOD..................................... $ 190,488 $ 287,610
============ ==========
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE> 126
SKINPATH, P.C.
STATEMENTS OF CASH FLOWS
PERIOD FROM JANUARY 5, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995 AND
SEVEN MONTHS ENDED JULY 31, 1996
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1995 1996
------------ ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 430,770 $ 97,122
Adjustments to reconcile net income to net cash flows provided by
operating activities:
Depreciation and amortization.................................. 38,759 47,613
Changes in assets and liabilities:
Increase in accounts receivable.............................. (230,423) (85,773)
Increase (decrease) in accounts payable and accrued
expenses.................................................... 250,342 (137,395)
-------- --------
Net cash flows provided by (used in) operating
activities.............................................. 489,448 (78,433)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment............................. (470,939) (48,956)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock............................ 5,000
Borrowings from banks............................................. 655,000 335,000
Re-payments of amounts borrowed from banks........................ (240,000) (337,162)
Dividends paid to stockholders.................................... (181,000) (59,282)
-------- --------
Net cash flows provided by (used in) financing
activities.............................................. 239,000 (61,444)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................................... 257,509 (188,833)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...................... 257,509
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................ $ 257,509 $ 68,676
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................................ $ 23,715 $ 17,930
======== ========
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE> 127
SKINPATH, P.C.
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JANUARY 5, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995 AND
SEVEN MONTHS ENDED JULY 31, 1996
1. ORGANIZATION AND BUSINESS
SkinPath, P.C. (the "Company") is a firm of licensed physicians in
Birmingham, Alabama organized in January 1995 as an Alabama Professional
Corporation to provide outpatient dermatopathology services. Operations
commenced in April 1995. The Company generates substantially all of its
revenue from patient referrals from referring dermatologists and other
physicians. Approximately 55% and 53% of gross revenues were from referrals
by 10 physicians for the period January 5, 1995 (inception) through
December 31, 1995 and the seven months ended July 31, 1996, respectively.
Approximately, 11% and 9% of gross revenues were from referrals by one
physician for the period January 5, 1995 (inception) through December 31,
1995 and the seven months ending July 31, 1996, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies followed by the Company are as
follows:
Cash Equivalents -- The Company considers all cash and any highly liquid
debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Property and Equipment -- Property and equipment are recorded at cost and
depreciated over the estimated useful lives of the assets, ranging from 3
to 7 years, using the straight line method. Leasehold improvements are
amortized over the term (9 years) of the lease, including renewal periods.
Revenue Recognition -- The Company recognizes revenue at the time services
are performed. The Company provides services to certain patients covered by
various third-party payor programs including the federal Medicare program.
Revenue under certain third-party arrangements is subject to audit and
retroactive adjustments. Billings for services reimbursed by third-party
payors are included in revenues net of allowances for the estimated
differences between the amounts billed and the allowable program rates.
Adjustments to the estimated payment amounts are recorded based on the
final payment settlement with the third-party payors.
Income Taxes -- The Company has elected Subchapter S corporation status
under the Internal Revenue Code. There is no provision for income taxes
since those taxes are the responsibility of the individual stockholders.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments -- The carrying amounts of cash and
cash equivalents, accounts receivable, accounts payable and notes payable
to bank approximate fair value due to their short-term maturity.
F-57
<PAGE> 128
SKINPATH, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and July 31, 1996 consists of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1995 1996
------------ --------
<S> <C> <C>
Furniture and fixtures......................................... $ 44,735 $ 49,000
Laboratory and data processing equipment....................... 247,042 280,270
Leasehold improvements......................................... 179,162 190,624
-------- --------
470,939 519,894
Less Accumulated Depreciation and Amortization................. (38,759) (86,372)
-------- --------
Property and equipment, net.......................... $432,180 $433,522
======== ========
</TABLE>
Depreciation expense was $38,759 and $47,613 for the period January 5, 1995
(inception) through December 31, 1995 and the seven months ended July 31,
1996, respectively.
4. LONG-TERM DEBT
Long-term debt at December 31, 1995 and July 31, 1996 consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1995 1996
------------ --------
<S> <C> <C>
Notes payable to bank.......................................... $415,000 $412,838
Less current portion........................................... (278,818) (119,837)
-------- --------
Long-term debt....................................... $136,182 $293,001
======== ========
</TABLE>
During 1995, the Company entered into three loan agreements with a bank. In
April 1995, the Company entered into a $240,000 line of credit bearing an
interest rate of 8.75% which was repaid December 1995. In December 1995,
the Company borrowed $240,000 bearing an interest rate of 7.60%, which was
repaid in July 1996. Additionally, in December of 1995 the Company borrowed
$175,000 bearing an interest rate of 7.75%. Principal and interest on this
loan are due in equal monthly payments for a term of 48 months. This loan
was subsequently repaid August 1996. The outstanding loans at December 31,
1995 were secured by all leasehold improvements, fixtures, equipment and
accounts receivable.
During 1996, the Company entered into two loan agreements with a bank. In
April 1996, the Company borrowed $75,000 bearing an interest rate of 8.25%
which was repaid July 1996. Additionally, in July 1996 the Company borrowed
$260,000 bearing an interest rate of 8.75%. Principal and interest on this
loan were due in equal monthly installments for a term of 36 months. This
loan was repaid in August 1996.
5. NET REVENUE
Net revenue consists of gross charges, net of contractual, charity, and
other adjustments. Contractual adjustments are based on the difference
between charges at established rates and amounts estimated by management to
be collected under Medicare and Medicaid programs, and public and private
insurance and managed care contracts under applicable laws, regulations,
and program instructions. Collectable amounts are generally less than the
established rates. Final determination of certain amounts earned for
certain patients is subject to review by appropriate program
representatives. Charity and other adjustments represent services provided
to patients for which fees are not expected to be collected at the time the
service is provided.
F-58
<PAGE> 129
SKINPATH, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Net revenue consists of the following for the period January 5, 1995
(inception) through December 31, 1995 and the seven months ended July 31,
1996:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
1995 1996
------------ ----------
<S> <C> <C>
Gross charges at established rates........................... $1,923,477 $1,523,710
Less allowances for contractual, charity and other
adjustments................................................ (76,538) (55,235)
---------- ----------
Net revenue........................................ $1,846,939 $1,468,475
========== ==========
</TABLE>
6. CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of accounts receivable.
The Company grants credit without collateral to its patients, most of whom
are local residents and are insured under third party payor agreements. The
mix of receivables from patients and third-party payors at December 31,
1995 and July 31, 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Medicare................................................................. 36% 15%
Blue Cross............................................................... 20 22
Managed Care............................................................. 8 11
Other third-party payors................................................. 17 16
Private pay patients..................................................... 19 36
--- ---
100% 100%
=== ===
</TABLE>
7. RELATED PARTY TRANSACTIONS
The Company has entered into certain transactions with J & R Leasing, Inc.,
a majority of whose common stock is owned by the Company's stockholders.
The Company leases certain equipment from J & R Leasing, Inc. The total
lease payments for the period January 5, 1995 (inception) through December
31, 1995 and the seven months ended July 31, 1996 were $8,700 and $13,550,
respectively (See Note 9).
8. EMPLOYEE BENEFIT PLANS
The Company established the Money Purchase Pension Plan (the "Plan"), a
defined contribution plan, which covers substantially all eligible
employees who have reached age 21 and have completed one year of service
(as defined in the Plan). The Company makes annual contributions to the
Plan according to a formula as defined in the Plan. Employees are fully
vested after 6 years of service. During the period January 5, 1995
(inception) through December 31, 1995 and the seven months ended July 31,
1996, the Company contributed approximately $52,000 and $47,000,
respectively, to the Plan.
F-59
<PAGE> 130
SKINPATH, P.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Operating Leases -- The Company leases office space, certain equipment and
an automobile under agreements expiring at various dates through 2003.
Approximate future minimum lease payments for operating leases at ended
July 31, 1996 are as follows:
<TABLE>
<CAPTION>
12 MONTHS FUTURE MINIMUM
ENDED JULY 31, LEASE PAYMENTS
--------------- --------------
<S> <C>
1997............................................................... $ 52,060
1998............................................................... 44,665
1999............................................................... 34,800
2000............................................................... 34,800
2001............................................................... 40,800
Thereafter......................................................... 81,600
--------
Total....................................................... $288,725
========
</TABLE>
The office lease is for 3 years with two 3 year renewal options.
Additionally, the Company has the option to purchase the building for a
fixed price until July 1, 1997.
Rental Expense -- Rental expense was approximately $49,600 and $39,100 for
the period January 5, 1995 (inception) through December 31, 1995 and the
seven months ended July 31, 1996, respectively. Included in rental expense
are amounts paid to related parties (see Note 5 -- Related Party
Transactions).
Liability Insurance -- The Company is insured with respect to general
liability and medical malpractice risks on a claims made basis. Management
is not aware of any claims against the Company. In addition, the Company
has not accrued a loss for unreported incidents or for losses in excess of
insurance coverage, as the amount, if any, cannot be reasonably estimated
and the probability of an adverse outcome cannot be determined at this
time. It is the opinion of management that the ultimate resolution of any
claims that may be asserted 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 healthcare programs,
principally Medicare and Medicaid, and are subject to audit and adjustments
by applicable regulatory agencies. Failure to comply with any of these laws
or regulations, the results of regulatory audits and adjustments, or
changes in the amounts payable for the Company's services under these
programs could have a material adverse effect on the Company's financial
position or results of operations.
10. SUBSEQUENT EVENT
Effective August 1, 1996, the Company's stockholders sold all of the
Company's issued and outstanding common stock to AmeriPath, Inc.
F-60
<PAGE> 131
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Pathology Associates, P.S.C. and Technical Pathology Services, Inc.:
We have audited the accompanying combined balance sheets of Pathology
Associates, P.S.C. and Technical Pathology Services, Inc. (collectively, the
"Company") as of December 31, 1994, 1995 and July 31, 1996, and the related
combined statements of operations, stockholders' equity, and cash flows for the
years ended December 31, 1994 and 1995 and the seven months ended July 31, 1996.
These combined financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such combined financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1994, 1995 and July 31, 1996, and the results of its operations and its cash
flows for the years ended December 31, 1994 and 1995 and the seven months ended
July 31, 1996, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Cincinnati, Ohio
October 2, 1996
F-61
<PAGE> 132
PATHOLOGY ASSOCIATES, P.S.C AND
TECHNICAL PATHOLOGY SERVICES, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND JULY 31, 1996
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JULY 31,
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash..................................................... $ 207,858 $ 159,558 $ 413,697
Marketable securities (Note 3)........................... 237,195 281,921 293,543
Accounts receivable (net of allowances for contractual
adjustments and doubtful accounts of $400,000 (1994)
and $350,000 (1995 and 1996).......................... 896,927 881,510 826,402
Income taxes receivable (Note 9)......................... 10,920 64,082
Prepaid expenses and other current assets................ 27,416 14,636 54,430
---------- ---------- ----------
Total current assets............................. 1,380,316 1,401,707 1,588,072
PROPERTY AND EQUIPMENT, NET (Note 4)....................... 154,790 104,709 84,019
DEFERRED TAX BENEFIT (Note 9).............................. 18,308
OTHER INVESTMENTS.......................................... 55,000 55,000 52,000
---------- ---------- ----------
TOTAL............................................ $1,608,414 $1,561,416 $1,724,091
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................... $ 41,882 $ 47,567 $ 27,385
Current portion of note payable (Note 5)................. 62,508
Accrued vacation......................................... 36,202 35,905 40,616
Income taxes payable (Note 9)............................ 91,515
Accrued liabilities...................................... 106,487 77,896 199,942
Accrued profit sharing contribution (Note 8)............. 35,480 28,246 14,000
Deferred tax liability (Note 9).......................... 315,712
---------- ---------- ----------
Total current liabilities........................ 535,763 189,614 435,966
---------- ---------- ----------
NOTE PAYABLE (Note 5)...................................... 65,000
---------- ---------- ----------
DEFERRED TAX LIABILITY (Note 9)............................ 296,188 198,588
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 6).....................
STOCKHOLDERS' EQUITY (Note 8):
Common stock (Note 10)................................... 48,327 48,327 48,327
Treasury stock, at cost (Note 10)........................ (605) (605) (605)
Unrealized gain on marketable securities (Note 3)........ 7,512 44,976 56,598
Retained earnings........................................ 1,017,417 917,916 985,217
---------- ---------- ----------
Total stockholders' equity....................... 1,072,651 1,010,614 1,089,537
---------- ---------- ----------
TOTAL............................................ $1,608,414 $1,561,416 $1,724,091
========== ========== ==========
</TABLE>
See notes to combined financial statements.
F-62
<PAGE> 133
PATHOLOGY ASSOCIATES, P.S.C. AND
TECHNICAL PATHOLOGY SERVICES, INC.
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
SEVEN MONTHS ENDED JULY 31, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, JULY 31,
----------------------- ------------------------
1994 1995 1995 1996
---------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUE (Note 7):
Net pathology revenue (net of allowance for
contractual, charity and other adjustments
of $1,320,327 (1994), $857,874 (1995) and
$646,109 (1996))........................... $4,193,719 $4,084,770 $ 2,370,833 $2,446,961
Medical director fees......................... 802,888 849,047 415,988 466,015
---------- ---------- ---------- ----------
Total net revenue..................... 4,996,607 4,933,817 2,786,821 2,912,976
---------- ---------- ---------- ----------
COSTS AND EXPENSES (Notes 6, 8):
Cost of services.............................. 1,706,280 1,822,165 997,664 960,068
Physician compensation -- owner............... 945,000 626,885 286,347 416,827
Physician compensation -- other............... 882,080 1,004,083 516,807 630,980
Selling, billing, and administrative
expenses................................... 1,549,744 1,319,147 712,681 718,991
Provision for uncollectible accounts (net of
recoveries of $88,341 (1994), $101,307
(1995) and $71,765 (1996).................. 156,371 232,403 147,479 127,325
---------- ---------- ---------- ----------
Total costs and expenses.............. 5,239,475 5,004,683 2,660,978 2,854,191
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS................... (242,868) (70,866) 125,843 58,785
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense.............................. (647) (8,342) (5,297)
Investment income............................. 477,805 118,142 25,436 5,072
Miscellaneous income, net..................... 9,664 1,804 2,612 19,422
---------- ---------- ---------- ----------
Total other income.................... 486,822 111,604 28,048 19,197
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES......................................... 243,954 40,738 153,891 77,982
PROVISION FOR INCOME TAXES (Note 9)............. 37,125 19,239 11,985 10,681
---------- ---------- ---------- ----------
NET INCOME............................ $ 206,829 $ 21,499 $ 141,906 $ 67,301
========== ========== ========== ==========
</TABLE>
See notes to combined financial statements.
F-63
<PAGE> 134
PATHOLOGY ASSOCIATES, P.S.C. AND
TECHNICAL PATHOLOGY SERVICES, INC.
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
SEVEN MONTHS ENDED JULY 31, 1996
<TABLE>
<CAPTION>
COMMON TREASURY UNREALIZED
STOCK STOCK GAIN ON
(NOTE (NOTE MARKETABLE RETAINED
10) 10) SECURITIES EARNINGS TOTAL
------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1993........................... $48,327 $ (605) $ 855,588 $ 903,310
Dividends................................. (45,000) (45,000)
Unrealized gain........................... $ 7,512 7,512
Net income................................ 206,829 206,829
------- ------ ------- -------- ----------
DECEMBER 31, 1994........................... 48,327 (605) 7,512 1,017,417 1,072,651
Dividends................................. (121,000) (121,000)
Unrealized gain........................... 37,464 37,464
Net income................................ 21,499 21,499
------- ------ ------- -------- ----------
DECEMBER 31, 1995........................... 48,327 (605) 44,976 917,916 1,010,614
Unrealized gain........................... 11,622 11,622
Net income................................ 67,301 67,301
------- ------ ------- -------- ----------
JULY 31, 1996............................... $48,327 $ (605) $ 56,598 $ 985,217 $1,089,537
======= ====== ======= ======== ==========
</TABLE>
See notes to combined financial statements.
F-64
<PAGE> 135
PATHOLOGY ASSOCIATES, P.S.C. AND
TECHNICAL PATHOLOGY SERVICES, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
SEVEN MONTHS ENDED JULY 31, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JULY 31, JULY 31,
1994 1995 1995 1996
------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 206,829 $ 21,499 $141,906 $ 67,301
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................. 63,049 77,194 27,238 28,766
Deferred income taxes........................ 5,143 (1,216) (97,600)
(Increase) decrease in:
Accounts receivable........................ 7,342 15,417 182,094 55,108
Prepaid expenses and other assets.......... 20,455 (40,382) (1,942) 24,288
Increase (decrease) in:
Accounts payable........................... 3,477 5,685 15,613 (20,182)
Accrued liabilities........................ (46,910) (28,888) (21,418) 218,272
Accrued profit sharing contribution........ 20,480 (7,234) (13,982) (14,246)
--------- --------- --------- ---------
Net cash provided by operating
activities............................ 279,865 42,075 329,509 261,707
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities.......................... (200,436) (7,262)
Proceeds from sale of other investments......... 3,000
Purchases of property and equipment............. (51,021) (27,113) (8,076)
--------- --------- --------- ---------
Net cash used in investing activities... (251,457) (34,375) (5,076)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of note payable.......... 200,000
Payments on notes payable....................... (42,605) (135,000) (2,492)
Dividends....................................... (45,000) (121,000)
--------- --------- --------- ---------
Net cash used in financing activities... (87,605) (56,000) (2,492)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH................... (59,197) (48,300) 329,509 254,139
CASH AT BEGINNING OF PERIOD....................... 267,055 207,858 207,858 159,558
--------- --------- --------- ---------
CASH AT END OF PERIOD............................. $ 207,858 $ 159,558 $537,367 $413,697
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments during the period for:
Interest..................................... $ 647 $ 8,342 $ 5,297
========= ========= ========= =========
Income taxes (net of refunds received)....... $ 95,815 $ 72,401 $(38,114)
========= ========= ========= =========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
A valuation adjustment, increasing the value of marketable securities to
market, of $7,512 was established in 1994. This amount represents the unrealized
gain on the securities in 1994. This valuation adjustment was increased in 1995
by $37,464 and in 1996 by $11,622.
See notes to combined financial statements.
F-65
<PAGE> 136
PATHOLOGY ASSOCIATES, P.S.C. AND
TECHNICAL PATHOLOGY SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE
SEVEN MONTHS ENDED JULY 31, 1996
1. ORGANIZATION AND BUSINESS
Pathology Associates, P.S.C. is a professional association of licensed
physicians engaged in providing hospital-based pathology services to
various hospitals as well as pathology laboratory services to hospitals,
clinics, physicians, and others throughout Kentucky. Combined with these
statements are the financial statements of Technical Pathology Services,
Inc., a company owned and controlled by the majority owner of Pathology
Associates, P.S.C. All significant intercompany balances and transactions
have been eliminated. Pathology Associates, P.S.C. and Technical Pathology
Services, Inc. are collectively referred to as the "Company" throughout
these financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies followed by the Company are as
follows:
Marketable Securities -- Marketable securities are to be classified as held
to maturity, available for sale or trading, based upon the intent and
ability of the Company to hold such investments. The Company has classified
all of its investments as available for sale. Accordingly, they are
recorded at fair value with unrealized gains and losses included as a
separate component of stockholders' equity. Cost of each investment is
determined on the specific identification method. See Note 3.
Property and Equipment -- Property and equipment are recorded at cost and
depreciated over the estimated useful lives of the assets using the
straight line method, generally over 5 years.
Revenue Recognition -- The Company recognizes revenue at the time services
are performed. The Company provides services to certain patients covered by
various third-party payor programs including the federal Medicare program.
Revenue under certain third-party arrangements is subject to audit and
retroactive adjustment. Billings for services reimbursed by third-party
payors are included in revenues net of allowances for the estimated
differences between the amounts billed and the allowable program rates.
Adjustments to the estimated payment amounts are recorded based on the
final payment settlement with the third-party payors.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments -- Regarding cash, accounts receivable,
accounts payable, and notes payable, the carrying amounts approximate fair
value.
Other Investments -- Other investments consist of units owned in several
companies related to the pathology industry which are accounted for at
historical cost, as there is not a readily determinable market value for
these units.
Interim Financial Data -- The unaudited combined statements of operations
and cash flows for the seven months ended July 31, 1995 include, in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the Company's combined results of
operations and cash flows. Operating results for the seven month period
ended July 31, 1996 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1996.
F-66
<PAGE> 137
PATHOLOGY ASSOCIATES, P.S.C. AND
TECHNICAL PATHOLOGY SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. MARKETABLE SECURITIES
The cost, market value and unrealized gains (losses) for the securities
available for sale at December 31, 1994, 1995 and July 31, 1996 are as
follows:
<TABLE>
<CAPTION>
UNREALIZED
MARKET GAIN
1994 COST VALUE (LOSS)
------------------------------------------------------- -------- -------- ----------
<S> <C> <C> <C>
Tax Free Mutual Fund................................... $200,000 $197,360 $ (2,640)
Equity securities...................................... 29,683 39,835 10,152
-------- -------- --------
Total........................................ $229,683 $237,195 $ 7,512
======== ======== ========
<CAPTION>
1995
-------------------------------------------------------
<S> <C> <C> <C>
Tax Free Mutual Fund................................... $207,262 $225,270 $ 18,008
Equity securities...................................... 29,683 56,651 26,968
-------- -------- --------
Total........................................ $236,945 $281,921 $ 44,976
======== ======== ========
<CAPTION>
1996
-------------------------------------------------------
<S> <C> <C> <C>
Tax Free Mutual Fund................................... $207,262 $237,206 $ 29,944
Equity securities...................................... 29,683 56,337 26,654
-------- -------- --------
Total........................................ $236,945 $293,543 $ 56,598
======== ======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1994, 1995 and July 31, 1996 is as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Laboratory and data processing equipment............... $423,195 $438,443 $446,519
Automotive vehicles.................................... 21,235 21,235 21,235
Leasehold improvements................................. 32,078 32,078 32,078
Computer software...................................... 4,850 12,815 12,815
Furniture and fixtures................................. 34,177 38,077 38,077
-------- -------- --------
515,535 542,648 550,724
Less accumulated depreciation.......................... (360,745) (437,939) (466,705)
-------- -------- --------
Property and equipment, net............................ $154,790 $104,709 $ 84,019
======== ======== ========
</TABLE>
5. NOTES PAYABLE
Notes payable at December 31, 1994, 1995 and July 31, 1996 consist of the
following:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Note payable to a bank, interest due monthly at the bank's prime
rate of interest (8.25% at July 31, 1996 and 8.5% at December 31,
1995), matures September 1996.................................... $65,000 $62,508
======= =======
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Operating Leases -- The Company leases office facilities under
noncancelable agreements which expire at various dates through January
1999. The leases require monthly rental payments of $5,574, plus sales
taxes, and the Company is also obligated to pay insurance, utilities, and
normal maintenance. One of the leases has annual rent increases based on
the increase in the Consumer Price Index or 5%, whichever is
F-67
<PAGE> 138
PATHOLOGY ASSOCIATES, P.S.C. AND
TECHNICAL PATHOLOGY SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
less. The Company also leases two automobiles under noncancelable
agreements which expire at various dates through October 1998. Rent paid
under these leases amounted to $75,412, $77,600 and $47,446 for the years
ended December 31, 1994 and 1995 and the seven months ended July 31, 1996,
respectively.
Future minimum rental payments required for the next five years under these
operating leases, that have initial or remaining noncancelable lease terms
in excess of one year as of December 31, 1995 are as follows:
1996 -- $80,286; 1997 -- $49,630, 1998 -- $33,254; and 1999 -- $2,542.
Employment Agreements -- The Company has entered into employment agreements
with each of its physicians and one other employee. These employment
agreements generally provide for certain annual base salaries and bonuses.
Liability Insurance -- The Company is insured with respect to general
liability and medical malpractice risks on a claims made basis. In
addition, the Company has not accrued a loss for unreported incidents or
for losses in excess of insurance coverage, as the amount, if any, cannot
be reasonably estimated and the probability of an adverse outcome cannot be
determined at this time. It is the opinion of management that the ultimate
resolution of any claims that may be asserted will not have a material
adverse effect on the Company's financial position or results of
operations.
Legal Proceedings -- The Company is subject to a number of lawsuits
relating to matters arising in the ordinary course of its business. The
claims are insured but subject to deductibles. The amount of liability, if
any, from the litigation cannot be determined with certainty; however,
management is of the opinion that the outcome of the litigation 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 healthcare programs,
principally Medicare and Medicaid, and are subject to audit and adjustment
by applicable regulatory agencies. Failure to comply with any of these laws
or regulations, the results of regulatory audits and adjustments, or
changes in the amounts payable for the Company's services under these
programs could have a material adverse effect on the Company's financial
position or results of operations.
7. NET REVENUE
Net revenue consists of gross charges, net of contractual, charity, and
other adjustments. Contractual adjustments are based on the difference
between charges at established rates and amounts estimated by management to
be reimbursable by Medicare and Medicaid programs, and public and private
insurance contracts under applicable laws, regulations, and program
instructions. Reimbursable amounts are generally less than the established
gross charges. Final determination of certain amounts earned for certain
patients is subject to review by appropriate program representatives.
Charity and other adjustments represent services provided to patients for
which fees are not expected to be collected at the time the service is
provided.
The Company also has contracts with certain laboratories to provide medical
director services.
8. EMPLOYEE BENEFIT PLAN
The Company maintains a qualified profit sharing plan (the "Plan") for all
of its eligible employees. The Plan includes a 401(k) feature, which allows
participants to make pretax contributions and provides for matching and
discretionary contributions by the Company. Contributions by the Company
for the years
F-68
<PAGE> 139
PATHOLOGY ASSOCIATES, P.S.C. AND
TECHNICAL PATHOLOGY SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31, 1994 and 1995 and for the seven months ended July 31,
1996 totaled $37,200, $27,800 and $14,000, respectively.
9. INCOME TAXES
As of January 1, 1995, the Company elected to be taxed as a Subchapter S
corporation for federal income tax purposes and consequently, is not liable
for federal and most state income taxes, but rather, the stockholders'
proportionate share of the Company's net income or loss is included in the
stockholders taxable income for those jurisdictions. However, at the date
of change, there were certain built in gains for which the Company remains
liable.
Deferred tax assets at December 31, 1994 of $18,308 result from temporary
differences arising from differing book and tax treatment for one of the
Company's other investments. Deferred tax liabilities at December 31, 1994
of $315,712 result from temporary differences as the Company is a cash
basis tax payor. As of January 1, 1995, deferred tax assets and liabilities
were reassessed as a result of the election to be taxed as a Subchapter S
corporation. The remaining deferred tax liability at December 31, 1995 and
at July 31, 1996 relates to the built in gains that existed at the date of
the election and will be paid out over a ten year period.
The provision for income taxes in the accompanying statements of operations
for the years ended December 31, 1994 and 1995 and the seven months ended
July 31, 1996 consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Federal:
Current................................................ $27,079 $19,524 $ 97,600
Deferred............................................... 5,143 (1,216) (97,600)
State.................................................... 4,903 931 10,681
------- ------- --------
Total.......................................... $37,125 $19,239 $ 10,681
======= ======= ========
</TABLE>
10. COMMON STOCK
Common stock of Pathology Associates, P.S.C. consists of two classes of
stock; Class A is no par, non-voting stock with 2,000 shares authorized and
none outstanding; Class B is no par, voting stock with 5,000 shares
authorized, 450 shares issued and outstanding.
Common stock of Technical Pathology Services, Inc. consists of no par value
stock, with 2,000 shares authorized, 1,000 issued and 960 shares
outstanding.
F-69
<PAGE> 140
PATHOLOGY ASSOCIATES, P.S.C. AND
TECHNICAL PATHOLOGY SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of accounts receivable.
The Company grants credit without collateral to its patients, most of whom
are local residents and are insured under third-party payor agreements. The
mix of receivables from patients and third-party payors at December 31,
1994, 1995 and July 31, 1996 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Medicare........................................................ 13% 12% 14%
Medicaid........................................................ 17 15 12
Third-party payors and other managed care....................... 67 68 70
Private pay patients............................................ 3 5 4
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
12. SUBSEQUENT EVENT
Effective August 1, 1996, the Company's stockholders sold all of the
Company's issued and outstanding common stock to AmeriPath, Inc.
F-70
<PAGE> 141
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Volusia Pathology Group, M.D., P.A.:
We have audited the accompanying balance sheets of Volusia Pathology Group,
M.D., P.A. (the "Company") as of December 31, 1994 and 1995 and September 30,
1996, and the related statements of operations, shareholders' equity, and cash
flows for the years ended December 31, 1994 and 1995 and the nine months ended
September 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1994 and 1995
and September 30, 1996, and the results of its operations and its cash flows for
the years ended December 31, 1994 and 1995 and the nine months ended September
30, 1996, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Orlando, Florida
November 1, 1996
F-71
<PAGE> 142
VOLUSIA PATHOLOGY GROUP, M.D., P.A.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
-------- ---------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $124,274 $ 272,904 $ 38,458
Accounts receivable (net of allowances for contractual
adjustments and doubtful accounts of $814,752,
$939,960, and $1,192,323, respectively)............... 576,242 678,924 757,452
Prepaid expenses and other current assets................ 21,082 20,205 24,379
-------- ---------- -------------
Total current assets............................. 721,598 972,033 820,289
PROPERTY AND EQUIPMENT, NET (Note 3)....................... 29,050 28,096 46,388
OTHER ASSETS............................................... 6,995 4,495 4,495
-------- ---------- -------------
TOTAL............................................ $757,643 $1,004,624 $ 871,172
======== ========== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................... $ 28,763 $ 28,892 $ 26,186
Accrued liabilities...................................... 283,496 420,771 475,612
Accrued profit sharing contribution...................... 48,289 40,005
Income tax payable....................................... 35,679 92,962 17,692
Deferred tax liability (Note 8).......................... 92,492 79,023 105,292
-------- ---------- -------------
Total current liabilities........................ 488,719 661,653 624,782
-------- ---------- -------------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY:
Class A common stock, voting, $1 par value, 400 shares
authorized; 244.16 issued............................. 244 244 244
Class B common stock, nonvoting, $1 par value, 600 shares
authorized; 555.84 issued............................. 556 556 556
Retained earnings........................................ 268,124 342,171 253,014
-------- ---------- -------------
268,924 342,971 253,814
Treasury stock, Class A common stock, voting, 132.16
shares and Class B common stock, nonvoting, 22.82
shares................................................ (7,424)
-------- ---------- -------------
Total shareholders' equity....................... 268,924 342,971 246,390
-------- ---------- -------------
TOTAL............................................ $757,643 $1,004,624 $ 871,172
======== ========== =============
</TABLE>
See notes to financial statements.
F-72
<PAGE> 143
VOLUSIA PATHOLOGY GROUP, M.D., P.A.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1995 1996
---------- ---------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUE (Note 6):
Hospital net revenue (net of allowances for
contractual, charity and other
adjustments of $1,374,656, $1,471,307,
$1,135,917 (unaudited) and $958,369,
respectively)............................ $4,722,295 $4,892,462 $ 3,675,355 $ 3,804,589
Histology net revenue (net of allowances for
contractual, charity, and other
adjustments of $229,208, $280,459,
$216,527 (unaudited) and $193,638,
respectively)............................ 787,387 932,599 690,747 768,713
---------- ---------- ---------- ----------
Total net revenue................... 5,509,682 5,825,061 4,366,102 4,573,302
COSTS AND EXPENSES (Notes 5 and 7):
Physicians' Compensation-Owner.............. 3,100,500 3,130,500 2,089,000 2,293,497
Cost of services rendered................... 829,066 955,271 762,677 865,747
Selling, billing, and administrative
expenses................................. 829,663 826,101 626,181 759,766
Provisions for uncollectible amounts (net of
recoveries of $40,679, $42,392, $30,238
(unaudited) and $32,180, respectively)... 709,947 793,876 609,431 792,450
---------- ---------- ---------- ----------
Total costs and expenses............ 5,469,176 5,705,748 4,087,289 4,711,460
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES....................................... 40,506 119,313 278,813 (138,158)
PROVISION (BENEFIT) FOR INCOME TAXES (Note
8).......................................... 14,950 45,266 107,081 (49,001)
---------- ---------- ---------- ----------
NET INCOME (LOSS)............................. $ 25,556 $ 74,047 $ 171,732 $ (89,157)
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-73
<PAGE> 144
VOLUSIA PATHOLOGY GROUP, M.D., P.A.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
CLASS CLASS
A B
COMMON COMMON RETAINED TREASURY
STOCK STOCK EARNINGS STOCK TOTAL
------ ------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
JANUARY 1, 1994................................. $244 $556 $242,568 $ $243,368
Net income.................................... 25,556 25,556
---- ---- -------- ------- --------
DECEMBER 31, 1994............................... 244 556 268,124 268,924
Net income.................................... 74,047 74,047
---- ---- -------- ------- --------
DECEMBER 31, 1995............................... 244 556 342,171 342,971
Repurchase of Class B common stock............ (1,093) (1,093)
Repurchase of Class A common stock............ (6,331) (6,331)
Net loss...................................... (89,157) (89,157)
---- ---- -------- ------- --------
SEPTEMBER 30, 1996.............................. $244 $556 $253,014 $ (7,424) $246,390
==== ==== ======== ======= ========
</TABLE>
See notes to financial statements.
F-74
<PAGE> 145
VOLUSIA PATHOLOGY GROUP, M.D., P.A.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1995 1996
-------- --------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 25,556 $ 74,047 $ 171,732 $ (89,157)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation........................... 11,080 6,744 5,058 6,708
Deferred income taxes.................. (11,562) (13,469) 54,392 26,269
(Increase) decrease in:
Accounts receivable.................. (75,993) (102,682) (58,147) (78,528)
Prepaid expenses..................... 5,771 877 (8,127) (4,174)
Increase (decrease) in:
Accounts payable..................... (26,432) 129 (3,763) (2,706)
Accrued liabilities.................. 151,911 137,275 (39,980) 54,841
Accrued profit sharing
contribution...................... (22,228) (8,284) (42,822) (40,005)
Income tax payable................... 26,512 57,283 51,237 (75,270)
-------- --------- --------- ---------
Net cash provided by (used in)
operating activities............ 84,615 151,920 129,580 (202,022)
-------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....... (25,333) (5,790) (5,790) (25,000)
Increase (decrease) in other assets....... (4,200) 2,500
-------- --------- --------- ---------
Net cash used in investing
activities...................... (29,533) (3,290) (5,790) (25,000)
-------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock................ (7,424)
-------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH............. 55,082 148,630 123,790 (234,446)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD.................................... 69,192 124,274 124,274 272,904
-------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD.................................... $124,274 $ 272,904 $ 248,064 $ 38,458
======== ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -- Income taxes paid.......... $ $ 1,452 $ 1,452 $
======== ========= ========= =========
</TABLE>
See notes to financial statements.
F-75
<PAGE> 146
VOLUSIA PATHOLOGY GROUP, M.D., P.A.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996
1. ORGANIZATION AND BUSINESS
Volusia Pathology Group, M.D., P.A. (the "Company") is a professional
association of licensed physicians engaged in providing hospital-based
pathology services to various hospitals as well as pathology laboratory
services to hospitals, clinics, physicians, and others in Volusia County,
Florida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies followed by the Company are as
follows:
Cash Equivalents -- The Company considers all cash and any highly liquid
debt instruments purchased with a maturity of three months or less at time
of purchase to be cash equivalents.
Property and Equipment -- Property and equipment are recorded at cost and
depreciated over the estimated useful lives of the assets, which range from
5 to 39 years, using accelerated methods.
Revenue Recognition -- The Company recognizes revenue at the time services
are performed. The Company provides services to certain patients covered by
various third-party payor programs including the federal Medicare program.
Revenue under certain third-party arrangements is subject to audit and
retroactive adjustment. Billings for services reimbursed by third-party
payors are included in revenues net of allowances for the estimated
differences between the amounts billed and the allowable program rates.
Adjustments to the estimated payment amounts are recorded based on the
final payment settlement with the third-party payors.
Income Taxes -- Deferred income taxes are provided on elements of income
that are recognized for financial accounting purposes in periods different
than when such items are recognized for income tax purposes.
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities
are recognized for the future tax consequences attributed to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
Concentrations of Credit Risk -- Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist principally
of cash and cash equivalents and accounts receivable. The Company places
its cash and cash equivalents with high credit quality institutions.
Concentrations of credit risk with respect to accounts receivable is
limited due to the large number and geographic distribution of patients,
third-party payors, and clients.
F-76
<PAGE> 147
VOLUSIA PATHOLOGY GROUP, M.D., P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The mix of receivables from patients and third-party payors at December 31,
1994 and 1995 and September 30, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1994 1995 1996
----- ----- -------------
<S> <C> <C> <C>
Medicare........................................... 15.2% 11.5% 9.7%
Medicaid........................................... 3.4 2.8 2.7
Third-party payors and other managed care.......... 49.7 56.3 54.7
Private pay patients............................... 31.7 29.4 32.9
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments -- Regarding cash and cash equivalents,
accounts receivable, and accounts payable, the carrying amounts approximate
fair value.
Interim Financial Data -- The unaudited statements of operations and cash
flows for the nine months ended September 30, 1995 include, in the opinion
of management, all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the Company's results of operations and cash
flows. Operating results for the nine months ended September 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1994 and 1995 and September 30, 1996
was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Laboratory and data processing equipment............. $126,188 $131,978 $ 156,978
Automotive vehicles.................................. 10,885 10,885 10,885
Leasehold improvements............................... 5,631 5,631 5,631
-------- -------- --------
142,704 148,494 173,494
Less accumulated depreciation........................ (113,654) (120,398) (127,106)
-------- -------- --------
Property and equipment, net.......................... $ 29,050 $ 28,096 $ 46,388
======== ======== ========
</TABLE>
4. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1994 and 1995 and September 30, 1996
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Accrued compensation................................. $124,589 $272,731 $ 86,170
Accrued vacation..................................... 158,760 147,794 240,922
Deferred compensation................................ 145,867
Other................................................ 147 246 2,653
-------- -------- --------
$283,496 $420,771 $ 475,612
======== ======== ========
</TABLE>
F-77
<PAGE> 148
VOLUSIA PATHOLOGY GROUP, M.D., P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
Operating Leases -- The Company leases its principal facility and other
equipment under noncancelable agreements which expire on dates ranging from
March 1998 to June 2001.
Future minimum rental payments required for the next five years and
thereafter under operating leases, that have initial or remaining
noncancelable lease terms in excess of one year as of September 30, 1996
are as follows: 1997 -- $60,719; 1998 -- $59,136; 1999 -- $20,384;
2000 -- $1,467; and 2001 -- $1,221.
Rent expense was approximately $56,000, $53,000 and $37,000 for the years
ended December 31, 1994 and 1995 and the nine months ended September 30,
1996, respectively.
Employment Agreements -- The Company has entered into employment agreements
with each of its physicians. These employment agreements generally provide
for certain annual base salaries and renew annually unless written notice
is given by either party.
In April 1996, the Company entered into an employment agreement obligating
the Company to pay approximately $4,400 per month for services through
October 1998. As part of the agreement, the Company has pledged 66.08
shares of the Class A voting common stock and 22.82 shares of the Class B
nonvoting common stock it owns as collateral for such payments.
In April 1996, the Company entered into an employment agreement obligating
the Company to pay approximately $5,500 per month through April 1998 for
services previously rendered. The balance payable as of September 30, 1996
is included in accrued liabilities. As part of the agreement, the Company
pledged 66.08 shares of the Class A voting common stock it owns as
collateral for such payments.
Professional Liability Insurance Coverage -- The Company is insured with
respect to general liability and medical malpractice risks on a claims made
basis. Management is not aware of any claims pending against the Company.
In addition, the Company has not accrued a loss for unreported incidents or
for losses in excess of insurance coverage, as the amount, if any, cannot
be reasonably estimated and the probability of an adverse outcome cannot be
determined at this time. It is the opinion of management that the ultimate
resolution of any claims that may be asserted 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 healthcare programs,
principally Medicare and Medicaid, and are subject to audit and adjustment
by applicable regulatory agencies. Failure to comply with any of these laws
or regulations, the results of regulatory audits and adjustments, or
changes in the amounts payable for the Company's services under these
programs could have a material adverse effect on the Company's financial
position or results of operations.
6. NET REVENUE
Net revenue consists of gross charges, net of contractual, charity, and
other adjustments. Contractual adjustments are based on the difference
between charges at established rates and amounts estimated by management to
be reimbursable by Medicare and Medicaid programs, and public and private
insurance contracts under applicable laws, regulations, and program
instructions. Reimbursable amounts are generally less than the established
gross charges. Final determination of certain amounts earned for certain
patients is subject to review by appropriate program representatives.
Charity and other adjustments represent services provided to patients for
which fees are not expected to be collected at the time the service is
provided.
F-78
<PAGE> 149
VOLUSIA PATHOLOGY GROUP, M.D., P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. EMPLOYEE BENEFIT PLAN
The Company sponsored a qualified profit sharing plan (the "Plan") for all
of its eligible employees. The Plan included a 401(k) feature, which
allowed participants to make pretax contributions and provided for matching
and discretionary contributions by the Company. Contributions by the
Company for the years ended December 31, 1994 and 1995 and the nine months
ended September 30, 1996 totaled approximately $152,000, $196,000, and
$141,000, respectively.
On September 18, 1996, the Board of Directors elected to terminate the Plan
as a result of the Company's pending acquisition by AmeriPath, Inc. In
accordance with the terms of the Plan, the account balances of all
participating employees became fully vested.
8. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Federal income taxes:
Current............................................ $ 26,512 $ 58,735 $ (75,270)
Deferred........................................... (11,562) (13,469) 26,269
-------- -------- --------
Total provision (benefit) for income
taxes.................................... $ 14,950 $ 45,266 $ (49,001)
======== ======== ========
</TABLE>
The Company's effective tax (benefit) rate differs from the statutory
federal income tax rate for the following reasons:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ SEPTEMBER 30,
1994 1995 1996
---- ---- -------------
<S> <C> <C> <C>
Statutory federal income tax (benefit) rate................ 34.0% 34.0% (34.0)%
State income taxes, net of federal tax benefits............ 3.6 3.6 (3.6)
Other...................................................... (.7) .3 2.1
---- ---- ----
Effective tax (benefit) rate..................... 36.9% 37.9% (35.5)%
==== ==== ====
</TABLE>
The only temporary difference which gives rise to deferred tax liabilities
is the use of the accrual basis of accounting for financial statement
purposes and the cash basis of accounting for income tax purposes.
9. SUBSEQUENT EVENT
On October 3, 1996, the Company was acquired by AmeriPath, Inc. for cash,
notes, and common stock aggregating $6,037,000 and other contingent
consideration to be determined over the next five years.
F-79
<PAGE> 150
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
David R. Barron, M.D., Inc.
d/b/a Richfield Laboratory of Dermatopathology:
We have audited the accompanying balance sheets of David R. Barron, M.D., Inc.
d/b/a Richfield Laboratory of Dermatopathology (the "Company") as of December
31, 1995 and September 30, 1996 and the related statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1995 and the
nine months ended September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1995 and
September 30, 1996 and the results of its operations and its cash flows for the
year ended December 31, 1995 and the nine months ended September 30, 1996, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Cincinnati, Ohio
November 8, 1996
F-80
<PAGE> 151
DAVID R. BARRON, M.D., INC.
D/B/A RICHFIELD LABORATORY OF DERMATOPATHOLOGY
BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $1,561,785 $ 1,788,977
Accounts receivable (net of allowance for doubtful accounts of
$232,852 and $194,977)........................................ 1,350,733 1,009,977
Prepaid expenses and other current assets........................ 28,778 21,490
------------ ------------
Total current assets..................................... 2,941,296 2,820,444
PROPERTY AND EQUIPMENT, NET (Note 3)............................... 177,960 216,967
------------ ------------
TOTAL.................................................... $3,119,256 $ 3,037,411
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................. $ 50,649 $ 12,280
Accrued payroll taxes............................................ 1,641,102
Accrued compensation............................................. 198,233 63,099
Accrued liabilities.............................................. 33,540
------------ ------------
Total current liabilities................................ 282,422 1,716,481
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 4).............................
STOCKHOLDERS' EQUITY:
Common stock (no par value, 500 shares authorized, 50 shares
issued and outstanding)....................................... 3,970 3,970
Retained earnings................................................ 2,852,864 1,336,960
------------ ------------
2,856,834 1,340,930
Less treasury stock.............................................. (20,000) (20,000)
------------ ------------
Total stockholders' equity............................... 2,836,834 1,320,930
------------ ------------
TOTAL.................................................... $3,119,256 $ 3,037,411
============ ============
</TABLE>
See notes to financial statements.
F-81
<PAGE> 152
DAVID R. BARRON, M.D., INC.
D/B/A RICHFIELD LABORATORY OF DERMATOPATHOLOGY
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
NET REVENUE (Note 5):
Pathology net revenue.................................. $6,202,016 $ 4,538,044 $ 4,396,487
Other.................................................. 15,761
---------- ---------- ----------
Total net revenue.............................. 6,202,016 4,538,044 4,412,248
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of services rendered.............................. 1,307,411 925,379 1,121,118
Physician compensation -- owners....................... 2,577,307 2,002,445 2,636,000
Physician compensation -- other........................ 42,308 21,154 163,847
Selling, general and administrative.................... 629,373 530,251 579,280
---------- ---------- ----------
Total costs and expenses....................... 4,556,399 3,479,229 4,500,245
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS............................ 1,645,617 1,058,815 (87,997)
Other income............................................. 32,449 28,714 2,140
---------- ---------- ----------
NET INCOME (LOSS).............................. $1,678,066 $ 1,087,529 $ (85,857)
========== ========== ==========
</TABLE>
See notes to financial statements.
F-82
<PAGE> 153
DAVID R. BARRON, M.D., INC.
D/B/A RICHFIELD LABORATORY OF DERMATOPATHOLOGY
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
COMMON TREASURY RETAINED
STOCK STOCK EARNINGS TOTAL
------ -------- ----------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994................................. $3,970 $(20,000) $ 2,854,117 $ 2,838,087
Distributions to stockholders................... (1,679,319) (1,679,319)
Net income...................................... 1,678,066 1,678,066
------ -------- ----------- -----------
DECEMBER 31, 1995................................. 3,970 (20,000) 2,852,864 2,836,834
Distributions to stockholders................... (1,430,047) (1,430,047)
Net loss........................................ (85,857) (85,857)
------ -------- ----------- -----------
SEPTEMBER 30, 1996................................ $3,970 $(20,000) $ 1,336,960 $ 1,320,930
====== ======== =========== ===========
</TABLE>
See notes to financial statements.
F-83
<PAGE> 154
DAVID R. BARRON, M.D., INC.
D/B/A RICHFIELD LABORATORY OF DERMATOPATHOLOGY
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ 1,678,066 $ 1,087,529 $ (85,857)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities...................
Depreciation....................................... 53,441 16,109 49,945
Decrease (increase) in:
Accounts receivable.............................. (80,234) (97,062) 340,756
Prepaid expenses and other assets................ 4,328 13,068 7,288
(Decrease) increase in:
Accounts payable................................. 29,122 3,848 (38,369)
Accrued liabilities.............................. (33,229) (65,142) 1,607,562
Accrued compensation............................. 137,539 1,615,334 (135,134)
----------- ----------- -----------
Net cash provided by operating activities..... 1,789,033 2,573,684 1,746,191
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment................... (54,405) (4,337) (88,952)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to stockholders......................... (1,679,319) (1,479,319) (1,430,047)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS............... 55,309 1,090,028 227,192
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........ 1,506,476 1,506,476 1,561,785
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............. $ 1,561,785 $ 2,596,504 $ 1,788,977
=========== =========== ===========
</TABLE>
See notes to the financial statements.
F-84
<PAGE> 155
DAVID R. BARRON, M.D., INC.
D/B/A RICHFIELD LABORATORY OF DERMATOPATHOLOGY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1996
1. ORGANIZATION AND BUSINESS
David R. Barron, M.D., Inc. d/b/a Richfield Laboratory of Dermatopathology
(the "Company") is a corporation engaged in providing dermatological
pathology services to various hospitals, clinics, physicians, and others
throughout the Midwest and Eastern United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies followed by the Company are as
follows:
Cash Equivalents -- The Company considers all cash and any highly liquid
debt instruments purchased with a maturity of three months or less at time
of purchase to be cash equivalents.
Property and Equipment -- Property and equipment are recorded at cost and
depreciated over the estimated useful lives of the assets using accelerated
methods. Estimated useful lives range between 5 and 7 years.
Revenue Recognition -- The Company recognizes revenue at the time services
are performed. The Company provides services to certain patients covered by
various third-party payor programs including the federal Medicare program.
Revenue under certain third-party arrangements is subject to audit and
retroactive adjustment. Billings for services reimbursed by third-party
payors are included in revenues net of allowances for the estimated
differences between the amounts billed and the allowable program rates.
Adjustments to the estimated payment amounts are recorded based on the
final payment settlement with the third-party payors.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments -- Regarding cash and cash equivalents,
accounts receivable and accounts payable, the carrying amounts approximate
fair value.
Income Taxes -- The Company elected to be taxed as a Subchapter S
corporation for federal income tax purposes. Upon election, the Company is
no longer liable for federal and state income taxes, but rather the
stockholders' proportionate share of the Company's net income or loss is
includable in the stockholders' taxable income for those jurisdictions.
Interim Financial Data -- The unaudited statements of operations and cash
flows for the nine months ended September 30, 1995 include, in the opinion
of management, all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the Company's results of operations and cash
flows. Operating results for the nine months ended September 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
F-85
<PAGE> 156
DAVID R. BARRON, M.D., INC.
D/B/A RICHFIELD LABORATORY OF DERMATOPATHOLOGY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1995 and September 30, 1996 is as
follows:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Laboratory and data processing equipment....................... $193,025 $ 221,493
Land improvements.............................................. 2,057 2,057
Leasehold improvements......................................... 13,525 13,525
Furniture and fixtures......................................... 144,108 204,592
-------- ---------
352,715 441,667
Less accumulated depreciation.................................. (174,755) (224,700)
-------- ---------
Property and equipment, net.................................... $177,960 $ 216,967
======== =========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Operating Leases -- The Company leases its principal facility from the
majority stockholder under a noncancelable agreement which expires in
December 2002. The lease requires monthly rental payments of $6,375 and the
Company is also obligated to pay insurance, utilities, and normal
maintenance. The rent is subject to an annual increase based upon the
consumer price index. Rent paid under this lease amounted to approximately
$82,000 and $64,000 for the year ended December 31, 1995 and the nine
months ended September 30, 1996, respectively.
Future minimum rental payments required for the next five years and
thereafter under operating leases, that have initial or remaining
noncancelable lease terms in excess of one year are as follows: 1996 --
$19,000; 1997 through 2002 -- $77,000 annually.
Employment Agreements -- The Company has entered into employment agreements
with four of its physicians. These employment agreements generally provide
for certain annual base salaries and renew annually.
Liability Insurance -- The Company is insured with respect to general
liability and medical malpractice risks on a claims made basis. In
addition, the Company has not accrued a loss for unreported incidents or
for losses in excess of insurance coverage as the amount, if any, cannot be
reasonably estimated and the probability of an adverse outcome cannot be
determined at this time. It is the opinion of management that the ultimate
resolution of any claims that may be asserted will not have a material
adverse effect on the Company's financial position or results of
operations.
Legal Proceedings -- The Company is subject to several lawsuits relating to
matters arising in the ordinary course of its business. The claims are
insured but subject to deductibles. The amount of liability, if any, from
the litigation cannot be determined with certainty; however, management is
of the opinion that the outcome of the litigation 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 healthcare programs,
principally Medicare and Medicaid, and are subject to audit and adjustment
by applicable regulatory agencies. Failure to comply with any of these laws
or regulations, the results of regulatory audits and adjustments, or
changes in the amounts payable for the Company's services under these
programs could have a material adverse effect on the Company's financial
position or results of operations.
F-86
<PAGE> 157
DAVID R. BARRON, M.D., INC.
D/B/A RICHFIELD LABORATORY OF DERMATOPATHOLOGY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. NET REVENUE
Net revenue consists of gross charges, net of contractual, charity, and
other adjustments. Contractual adjustments are based on the difference
between charges at established rates and amounts estimated by management to
be reimbursable by Medicare and Medicaid programs, and public and private
insurance contracts under applicable laws, regulations, and program
instructions. Reimbursable amounts are generally less than the established
gross charges. Final determination of certain amounts earned for certain
patients is subject to review by appropriate program representatives.
Charity and other adjustments represent services provided to patients for
which fees are not expected to be collected at the time the service is
provided.
Net revenue attributable to a major customer was approximately $1,066,000
and $750,000 for the year ended December 31, 1995 and the nine months ended
September 30, 1996, respectively.
6. EMPLOYEE BENEFIT PLAN
The Company maintains a qualified profit sharing plan for all of its
eligible employees. The plan includes a 401(k) feature, which allows
participants to make pretax contributions and provides for discretionary
contributions by the Company. Contributions by the Company were
approximately $60,000 and $55,000 for the year ended December 31, 1995 and
the nine months ended September 30, 1996, respectively.
7. CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and accounts
receivable. The Company grants credit without collateral to its patients,
most of whom are local residents and are insured under third party payor
agreements. The mix of receivables from patients and third-party payors at
September 30, 1996 is as follows:
<TABLE>
<S> <C>
Third-party payors and other managed care....................................... 38%
Private pay patients............................................................ 33%
Physicians...................................................................... 29%
</TABLE>
The December 31, 1995 mix of receivables is not presented herein as it was
not readily attainable due to the Company not retaining this information.
8. SUBSEQUENT EVENT
Effective October 1, 1996, the Company's stockholders executed an agreement
to sell their interests in the Company to AmeriPath, Inc.
F-87
<PAGE> 158
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Beno Michel, M.D., Inc.
d/b/a Cutaneous Pathology & Immunofluorescense Laboratory:
We have audited the accompanying balance sheets of Beno Michel, M.D., Inc. d/b/a
Cutaneous Pathology & Immunofluorescense Laboratory (the "Company") as of
December 31, 1994 and 1995 and September 30, 1996, and the related statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1994 and 1995 and the nine months ended September 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1994 and 1995
and September 30, 1996, and the results of its operations and its cash flows for
the years ended December 31, 1994 and 1995 and the nine months ended September
30, 1996, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Cincinnati, Ohio
November 1, 1996
F-88
<PAGE> 159
BENO MICHEL, M.D., INC.
D/B/A CUTANEOUS PATHOLOGY & IMMUNOFLUORESCENSE LABORATORY
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $102,517 $ 89,574 $ 270,999
Accounts receivable (net of allowances for contractual
adjustments and doubtful accounts of $154,452, $180,906
and $185,325 at 1994, 1995 and 1996, respectively)
(Notes 4 and 7)......................................... 568,330 740,699 767,513
Prepaid expenses and other current assets.................. 4,496 5,006 13,009
-------- -------- ----------
Total current assets............................... 675,343 835,279 1,051,521
PROPERTY AND EQUIPMENT, NET (Note 3)......................... 105,636 61,811 27,543
OTHER ASSETS................................................. 8,597 8,597 8,597
-------- -------- ----------
TOTAL.............................................. $789,576 $905,687 $ 1,087,661
-------- -------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................... $ 7,950 $ 8,251 $ 30,593
Current portion of long term debt (Note 6)................. 16,648
Accrued compensation....................................... 53,630 70,116 113,902
Other accrued liabilities.................................. 135,620 96,872 76,066
Deferred tax liability (Note 5)............................ 111,179
Income taxes payable (Note 5).............................. 1,500 127,679 4,642
-------- -------- ----------
Total current liabilities.......................... 326,527 302,918 225,203
-------- -------- ----------
COMMITMENTS AND CONTINGENCIES (Note 8).......................
STOCKHOLDERS' EQUITY (Note 9):
Common stock, (no par value, 500 shares authorized, 100
shares issued and outstanding).......................... 500 500 500
Retained earnings.......................................... 462,549 602,269 861,958
-------- -------- ----------
Total stockholders' equity......................... 463,049 602,769 862,458
-------- -------- ----------
TOTAL.............................................. $789,576 $905,687 $ 1,087,661
======== ======== ==========
</TABLE>
See notes to financial statements.
F-89
<PAGE> 160
BENO MICHEL, M.D., INC.
D/B/A CUTANEOUS PATHOLOGY & IMMUNOFLUORESCENSE LABORATORY
STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------- --------------------------
1994 1995 1995 1996
---------- ---------- ------------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUE (Note 4):
Practice net revenue......................... $ 919,391 $1,222,909 $ 902,906 $ 999,620
Laboratory net revenue....................... 2,321,272 2,575,105 1,852,390 2,033,002
---------- ---------- ---------- ----------
Total net revenue.................... 3,240,663 3,798,014 2,755,296 3,032,622
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Cost of services rendered.................... 584,564 687,082 489,358 618,313
Physician compensation -- owner.............. 1,645,000 960,000 720,000 540,000
Physician compensation -- other.............. 618,577 872,085 611,450 704,886
Selling, billing and administrative
expenses.................................. 267,284 267,421 211,869 279,000
Marketing expenses........................... 34,554 37,679 26,804 42,493
Interest (income) expense, net............... (69) 72 (211) 12,344
---------- ---------- ---------- ----------
Total costs and expenses............. 3,149,910 2,824,339 2,059,270 2,197,036
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES....... 90,753 973,675 696,026 835,586
PROVISION FOR INCOME TAXES (Note 5)............ 19,552 15,000 9,500 13,000
---------- ---------- ---------- ----------
NET INCOME........................... $ 71,201 $ 958,675 $ 686,526 $ 822,586
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-90
<PAGE> 161
BENO MICHEL, M.D., INC.
D/B/A CUTANEOUS PATHOLOGY & IMMUNOFLUORESCENSE LABORATORY
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS TOTAL
------ --------- ---------
<S> <C> <C> <C>
JANUARY 1, 1994................................................ $500 $ 391,348 $ 391,848
Net income................................................... 71,201 71,201
---- --------- ---------
DECEMBER 31, 1994.............................................. 500 462,549 463,049
Net income................................................... 958,675 958,675
Stockholder distribution..................................... (818,955) (818,955)
---- --------- ---------
DECEMBER 31, 1995.............................................. 500 602,269 602,769
Net income................................................... 822,586 822,586
Stockholder distribution..................................... (562,897) (562,897)
---- --------- ---------
SEPTEMBER 30, 1996............................................. $500 $ 861,958 $ 862,458
==== ========= =========
</TABLE>
See notes to financial statements.
F-91
<PAGE> 162
BENO MICHEL, M.D., INC.
D/B/A CUTANEOUS PATHOLOGY & IMMUNOFLUORESCENSE LABORATORY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------------------
1994 1995 1995 1996
------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 71,201 $ 958,675 $ 686,526 $ 822,586
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................. 60,465 57,469 48,596 41,422
Deferred income taxes.................... 18,052 (111,179)
(Increase) decrease in:
Accounts receivable.................... (106,188) (172,369) (92,684) (26,814)
Prepaid expenses and other assets...... 132 (510) (52,230) (8,003)
Increase (decrease) in:
Accounts payable....................... (5,680) 301 2,023 22,288
Accrued liabilities and income taxes
payable............................. 33,454 103,917 (69,208) (100,003)
--------- --------- --------- ---------
Net cash provided by operating
activities........................ 71,436 836,304 523,023 751,476
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......... (13,644) (7,154)
--------- --------- --------- ---------
Net cash used in investing
activities........................ (13,644) (7,154)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to stockholders............... (818,955) (552,740) (562,897)
Payments on long term debt.................. (52,347) (16,648) (16,648)
--------- --------- --------- ---------
Net cash provided by financing
activities........................ (52,347) (835,603) (569,388) (562,897)
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. 19,089 (12,943) (46,365) 181,425
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD...................................... 83,428 102,517 102,517 89,574
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.... $ 102,517 $ 89,574 $ 56,152 $ 270,999
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash payments during the period for:
Interest................................. $ 2,962 $ 283 $ $ 13,722
========= ========= ========= =========
Income taxes............................. $ $ $ $ 111,179
========= ========= ========= =========
</TABLE>
See notes to financial statements.
F-92
<PAGE> 163
BENO MICHEL, M.D., INC.
D/B/A CUTANEOUS PATHOLOGY & IMMUNOFLUORESCENSE LABORATORY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1996
1. ORGANIZATION AND BUSINESS
Beno Michel, M.D., Inc. d/b/a Cutaneous Pathology & Immunofluorescense
Laboratory (the "Company"), located in Beachwood, Ohio, a suburb of
Cleveland, is a professional association of licensed physicians engaged in
the practice of dermatology as well as serving as an independent laboratory
specializing in skin pathology and immunofluoresence testing. The
dermatology practice serves patients in the greater Cleveland area while
the laboratory serves the northern and southern Ohio, Connecticut,
Massachusetts and New York state markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies followed by the Company are as
follows:
Cash Equivalents -- The Company considers all cash and money market
accounts to be cash equivalents.
Property and Equipment -- Property and equipment are recorded at cost and
depreciated over the estimated useful lives of the assets using the
straight-line method, ranging from 4 to 10 years.
Revenue Recognition -- The Company recognizes revenue at the time services
are performed. The Company provides services to certain patients covered by
various third-party payor programs including the federal Medicare program.
Revenue under certain third-party arrangements is subject to audit and
retroactive adjustment. Billings for services reimbursed by third-party
payors are included in revenues net of allowances for the estimated
differences between the amounts billed and the allowable program rates.
Adjustments to the estimated payment amounts are recorded based on the
final payment settlement with the third-party payors.
Fair Value of Financial Instruments -- Regarding cash and cash equivalents,
accounts receivable, accounts payable, and notes payable, the carrying
amounts approximate fair value
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of net revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
Interim Financial Data -- The unaudited statements of operations and cash
flows for the nine months ended September 30, 1995 include, in the opinion
of management, all adjustment (consisting of normal recurring adjustments)
necessary to present fairly the Company's results of operations and cash
flows. Operating results for the nine months ended September 30, 1996 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
F-93
<PAGE> 164
BENO MICHEL, M.D., INC.
D/B/A CUTANEOUS PATHOLOGY & IMMUNOFLUORESCENSE LABORATORY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1994, 1995 and September 30, 1996 is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Laboratory and data processing equipment........... $ 215,123 $ 227,162 $ 234,316
Furniture and fixtures............................. 69,674 71,279 71,279
Leasehold improvements............................. 69,582 69,582 69,582
--------- --------- ---------
354,379 368,023 375,177
Less accumulated depreciation...................... (248,743) (306,212) (347,634)
--------- --------- ---------
Property and equipment, net........................ $ 105,636 $ 61,811 $ 27,543
========= ========= =========
</TABLE>
4. NET REVENUE
Net revenue consists of gross charges, net of contractual, charity, and
other adjustments. Contractual adjustments are based on the difference
between charges at established rates and amounts estimated by management to
be reimbursable by Medicare and Medicaid programs, and public and private
insurance contracts under applicable laws, regulations, and program
instructions. Reimbursable amounts are generally less than the established
gross charges. Final determination of certain amounts earned for certain
patients is subject to review by appropriate program representatives.
Charity and other adjustments represent services provided to patients for
which fees are not expected to be collected at the time the service is
provided.
5. INCOME TAXES
As of January 1, 1995 the Company elected to be taxed as a Subchapter S
corporation for federal income tax purposes and consequently, is not liable
for federal and most state income taxes, but rather, the stockholders'
proportionate share of the Company's net income or loss is included in the
stockholders' taxable income for those jurisdictions. However, at the date
of the change, there were certain built-in gains for which the Company
remains liable. The remaining tax liability at December 31, 1995 relates to
the built in gains that existed at the date of the election and were paid
in 1996.
Deferred tax liabilities at December 31, 1994 of $111,179 result from
temporary differences as the Company is a cash basis tax payor. As of
January 1, 1995, deferred tax liabilities were reassessed as a result of
the election to be taxed as a Subchapter S corporation.
The provision for income taxes for the years ended December 31, 1994 and
1995 and the nine months ended September 30, 1996 consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
------- --------- -------------
<S> <C> <C> <C>
Federal:
Current.......................................... $ 111,179
Deferred......................................... $18,052 (111,179)
Local.............................................. 1,500 15,000 $13,000
------- --------- -------
Total.................................... $19,552 $ 15,000 $13,000
======= ========= =======
</TABLE>
F-94
<PAGE> 165
BENO MICHEL, M.D., INC.
D/B/A CUTANEOUS PATHOLOGY & IMMUNOFLUORESCENSE LABORATORY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG TERM DEBT
At December 31, 1994, the Company had a balance remaining on a note payable
to a bank. The note originated in April, 1990 and was payable in monthly
installments of $4,167 over 5 years, with interest of 8.5%. The balance of
the note was paid in 1995.
7. CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of accounts receivable.
The Company grants credit without collateral to its patients, most of whom
are local residents and are insured under third-party payor agreements. The
major third-party payors are Medicare, Medicaid, and various commercial
insurance companies.
8. COMMITMENTS AND CONTINGENCIES
Operating Leases -- The Company leases its principal office facility under
a noncancelable agreement which expires in April, 1999. The lease requires
monthly rental payments of $8,597, plus sales taxes, and the Company is
also obligated to pay insurance, utilities, and normal maintenance. Rent
paid under this lease amounted to approximately $77,300, $103,100 and
$77,300 for the years ended December 31, 1994 and 1995 and the nine months
ended September 30, 1996, respectively.
Future minimum rental payments required under this operating lease are as
follows: 1996 -- $103,100; 1997 -- $103,100; 1998 -- $103,100, and
1999 -- $34,400.
Employment Agreements -- The Company has entered into employment agreements
with each of its physicians. These employment agreements generally provide
for certain annual base salaries and renew annually unless written notice
is given by either party.
Liability Insurance -- The Company is insured with respect to general
liability and medical malpractice risks on a claims made basis. In
addition, the Company has not accrued a loss for unreported incidents or
for losses in excess of insurance coverage, as the amount, if any, cannot
be reasonably estimated and the probability of an adverse outcome cannot be
determined at this time. It is the opinion of management that the ultimate
resolution of any claims that may be asserted will not have a material
adverse effect on the Company's financial position or results of
operations.
Legal Proceedings -- The Company is subject to one lawsuit relating to
matters arising in the ordinary course of its business. The claims are
insured but subject to deductibles. The amount of liability, if any, from
the litigation cannot be determined with certainty; however, management is
of the opinion that the outcome of the litigation 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 healthcare programs,
principally Medicare and Medicaid, and are subject to audit and adjustment
by applicable regulatory agencies. Failure to comply with any of these laws
or regulations, the results of regulatory audits and adjustments, or
changes in the amounts payable for the Company's services under these
programs could have a material adverse effect on the Company's financial
position or results of operations.
9. SUBSEQUENT EVENT
Effective October 1, 1996, the Company's stockholder executed an agreement
to sell its interest in the Company to AmeriPath, Inc.
F-95
<PAGE> 166
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Drs. Seidenstein, Levine and Associates, P.A.:
We have audited the accompanying balance sheets of Drs. Seidenstein, Levine and
Associates, P.A. (the "Company") as of December 31, 1994 and 1995 and September
30, 1996 and the related statements of operations and retained earnings and of
cash flows for the years ended December 31, 1994 and 1995 and the nine months
ended September 30, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1994 and 1995
and September 30, 1996 and the results of its operations and its cash flows for
the years ended December 31, 1994 and 1995 and the nine months ended September
30, 1996 in conformity with generally accepted accounting principles.
Deloitte & Touche, LLP
Certified Public Accountants
Fort Lauderdale, Florida
October 19, 1996
F-96
<PAGE> 167
DRS. SEIDENSTEIN, LEVINE AND ASSOCIATES, P.A.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 22,740 $ 479 $ 439,052
Investments (Note 3)................................. 11,000 11,000 72,875
Accounts receivable (net of allowance for contractual
adjustments and doubtful accounts of $2,822,682,
$2,337,359 and $2,747,338 at December 31, 1994,
1995, and September 30, 1996, respectively)....... 1,458,199 1,329,508 1,321,103
Prepaid expenses and other assets.................... 59,214 110,714 103,573
---------- ---------- ----------
Total current assets......................... 1,551,153 1,451,701 1,936,603
---------- ---------- ----------
PROPERTY AND EQUIPMENT, NET (Note 4)................... 40,285 130,789 180,657
---------- ---------- ----------
TOTAL........................................ $1,591,438 $1,582,490 $ 2,117,260
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued liabilities.................................. $ 68,965 $ 118,112 $ 581,299
Accrued profit sharing (Note 5)...................... 199,195 216,733 191,288
Income taxes payable (Note 9)........................ 185,911
Deferred tax liability (Note 9)...................... 429,719 405,000 236,330
---------- ---------- ----------
Total current liabilities.................... 697,879 739,845 1,194,828
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Common stock, $1.00 par value, 100 shares authorized,
issued and outstanding............................ 100 100 100
Retained earnings.................................... 893,459 842,545 860,457
Unrealized gain on available for sale securities..... 61,875
---------- ---------- ----------
Total shareholders' equity................... 893,559 842,645 922,432
---------- ---------- ----------
TOTAL........................................ $1,591,438 $1,582,490 $ 2,117,260
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-97
<PAGE> 168
DRS. SEIDENSTEIN, LEVINE AND ASSOCIATES, P.A.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1995 1996
---------- ---------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUE -- (Note 6)....................... $5,692,348 $6,181,074 $ 4,617,160 $ 5,480,005
---------- ---------- ---------- ----------
Costs and expenses:
Cost of services rendered................... 3,920,890 4,476,193 3,031,332 3,425,686
Selling, billing and administrative
expenses................................. 991,341 1,410,973 968,967 1,260,481
Provision for bad debts..................... 407,011 369,541 336,162 758,685
---------- ---------- ---------- ----------
Total costs and expenses............ 5,319,242 6,256,707 4,336,461 5,444,852
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES....................................... 373,106 (75,633) 280,699 35,153
PROVISION (BENEFIT) FOR INCOME TAXES.......... 142,696 (24,719) 169,100 17,241
---------- ---------- ---------- ----------
NET INCOME (LOSS)............................. 230,410 (50,914) 111,599 17,912
RETAINED EARNINGS, BEGINNING OF PERIOD........ 663,049 893,459 893,459 842,545
---------- ---------- ---------- ----------
RETAINED EARNINGS, ENDING OF PERIOD........... $ 893,459 $ 842,545 $ 1,005,058 $ 860,457
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-98
<PAGE> 169
DRS. SEIDENSTEIN, LEVINE AND ASSOCIATES, P.A.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------- ----------------------
1994 1995 1995 1996
--------- --------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ 230,410 $ (50,914) $ 111,599 $ 17,912
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................ 20,768 35,787 25,899 36,276
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable.............................. (446,049) 128,691 (39,758) 8,405
(Increase) decrease in prepaid expenses and
other assets............................ (10,012) (51,500) (28,621) 7,141
Increase (decrease) in accounts payable,
accrued liabilities, and accrued
profit-sharing.......................... 64,201 66,685 (41,567) 437,742
Increase (decrease) in deferred income
taxes................................... 142,696 (24,719) 80,100 (168,670)
Increase in income taxes payable........... 89,000 185,911
--------- --------- -------- ---------
Net cash provided by operating
activities............................ 2,014 104,030 196,652 524,717
CASH FLOWS FROM INVESTING ACTIVITY:
Acquisition of property and equipment........... (2,569) (126,291) (86,488) (86,144)
--------- --------- -------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS..................................... (555) (22,261) 110,164 438,573
CASH AND CASH EQUIVALENTS, BEGINNING.............. 23,295 22,740 22,740 479
--------- --------- -------- ---------
CASH AND CASH EQUIVALENTS, ENDING................. $ 22,740 $ 479 $ 132,904 $439,052
========= ========= ======== =========
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Unrealized gain on available for sale
securities................................... $ 61,875
=========
</TABLE>
See accompanying notes to financial statements.
F-99
<PAGE> 170
DRS. SEIDENSTEIN, LEVINE & ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1996
1. ORGANIZATION AND BUSINESS
Drs. Seidenstein, Levine and Associates, P.A. (the "Company") was
incorporated in Florida on January 4, 1984 for the purpose of providing
hospital-based pathology, diagnostic, and laboratory services. The Company
employs nine pathologists which staff five contracted hospitals and three
contracted surgery centers all of which are owned by Columbia/HCA
Healthcare Corporation ("Columbia"). The Company also provides managing and
billing services for the Columbia Hospital Outreach Program. All of the
Company's revenue is derived from the agreements with Columbia and its
affiliated hospitals, surgery and outreach centers. The contracts with the
hospitals and centers vary in length from 1 to 5 years. A number of the
contracts also contain cancellation clauses which allow either party to
terminate the agreement without cause with a 180-day notification period.
Termination of the agreements would have a material adverse effect on the
financial position or results of operations of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies followed by the Company are as
follows:
Cash and Cash Equivalents -- The Company considers all cash and any highly
liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
Investments -- Marketable equity securities are classified as available for
sale or trading depending upon the intent and ability of the Company.
Trading securities are recorded at fair value with unrealized gains and
losses included in earnings; and available for sale securities are recorded
at fair value with unrealized gains and losses included as a separate
component of shareholders' equity. The Company has classified all of its
investments as available for sale. Accordingly, all such investments have
been recorded at fair value with unrealized gains and losses included as a
separate component of stockholders' equity.
Property and Equipment -- Property and equipment is stated at cost less
accumulated depreciation. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets which
range from three to seven years. Expenditures for routine maintenance and
repairs are charged to expense as incurred.
Income Taxes -- The Company accounts for income taxes using the asset and
liability method. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax consequences attributed
to differences between the financial statement carrying amounts of assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Revenue Recognition -- The Company recognizes revenue at the time services
are performed. The Company provides services to certain patients covered by
various third-party payor programs including the federal Medicare program.
Revenue under certain third-party arrangements is subject to audit and
retroactive adjustments. Billings for services reimbursed by third-party
payors are included in revenues net of allowances for the estimated
differences between the amounts billed and the allowable program rates.
Adjustments to the estimated payment amounts are recorded based on the
final payment settlement with the third-party payors.
Unbilled receivables are recorded for services rendered during, but billed
subsequent to, the reporting period. Such receivables, net of allowances,
as of December 31, 1994 and 1995 and for the nine months ended September
30, 1996 amounted to $75,268, $127,230 and $79,006, respectively.
F-100
<PAGE> 171
DRS. SEIDENSTEIN, LEVINE & ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments -- The carrying amounts of cash and
cash equivalents, accounts receivable, accounts payable, and accrued
expenses approximate fair value.
Concentrations of Credit Risk -- Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist principally
of cash and cash equivalents and accounts receivable. The Company places
its cash and cash equivalents with high credit quality institutions. With
respect to accounts receivable, the Company grants credit without
collateral to its patients, most of whom are local residents and are
insured under third party-payor agreements. Concentrations of credit risk
with respect to accounts receivable is limited due to the large number and
geographic distribution of patients, third-party payors, and clients.
Interim Financial Data -- The unaudited statements of operations and
retained earnings and of cash flows for the nine months ended September 30,
1995 include, in the opinion of management, all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the Companies'
results of operations and cash flows. Operating results for the nine month
period ended September 30, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996.
3. INVESTMENTS
Investments securities consist of one stock that was classified as
available for sale for purposes of SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities. The security's cost is $11,000
and did not have a readily determinable market value until 1996. The
security's fair value as of September 30, 1996 is $72,875 with a unrealized
gain of $61,875 included in shareholders' equity.
4. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1994 and 1995, and September 30,
1996 of each year consisted of the following:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Furniture and fixtures................................. $119,710 $246,001 $332,145
Less accumulated depreciation.......................... (79,425) (115,212) (151,488)
-------- -------- --------
Property and equipment, net............................ $ 40,285 $130,789 $180,657
======== ======== ========
</TABLE>
Depreciation expense totaled $20,766, $35,787 and $36,276 for the years
ended December 31, 1994 and 1995, and the nine months ended September 30,
1996, respectively.
5. EMPLOYEE PROFIT SHARING PLAN
The Company has a profit sharing plan covering all full-time employees who
meet eligibility requirements. Employer contributions are made to the plan
at the discretion of the Company's Board of Directors. Contributions of
$199,195, $216,733 and $191,288 were made for the years ended December 31,
1994 and 1995, and the nine months ended September 30, 1996, respectively.
F-101
<PAGE> 172
DRS. SEIDENSTEIN, LEVINE & ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. NET REVENUE
Net revenue consists of gross charges, net of contractual, charity, and
other adjustments. Contractual adjustments are based on the difference
between charges at established rates and amounts estimated by management to
be reimbursable by Medicare and Medicaid programs, and public and private
insurance and managed care contracts under applicable laws, regulations,
and program instructions. Collectible amounts are generally less than the
established rates. Final determination of certain amounts earned for
certain patients is subject to review by appropriate program
representatives. Charity and other adjustments represent services provided
to patients for which fees are not expected to be collected at the time the
service is provided.
Net revenue consists of the following for the years ended December 31, 1994
and 1995, and the nine months ended September 30, 1996:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Gross charges at established rates................. $6,507,565 $7,416,632 $6,919,592
Less allowances for contractual, charity and other
adjustments...................................... (815,217) (1,235,558) (1,439,587)
---------- ---------- ----------
Net revenue.............................. $5,692,348 $6,181,074 $5,480,005
========== ========== ==========
</TABLE>
7. RELATED PARTY TRANSACTIONS
The Company's shareholders are employed by the Company as physicians and
accordingly, receive compensation for their services to the Company. The
compensation included in cost of services rendered for these individuals
was $2,736,999, $3,099,000 and $2,188,125 for the years ended December 31,
1994 and 1995, and for the nine months ended September 30, 1996,
respectively. Of this amount, $397,125 is included in accounts payable and
accrued liabilities as of September 30, 1996.
The Company leases part of its office facilities from a partnership whose
partners are the Company's shareholders. Rent expense for this lease was
$55,200 for the years ended December 31, 1994 and 1995 and $41,400 for the
nine months ended September 30, 1996, exclusive of any sales taxes.
8. COMMITMENTS AND CONTINGENCIES
Lease Commitments -- As discussed in Note 7, the Company leases part of its
office facilities from a partnership whose partners consist of the
Company's shareholders. The building is located adjacent to the South West
Florida Regional Medical Center and is organized as a professional
condominium. The Company also leases additional office space in the same
professional condominium from an unrelated party. The lease expires
February 28, 2003 and requires minimum monthly payments of $1,063. This
lease includes a provision allowing the lessee to cancel the lease after
December 31, 1996 with 60 days notice. Rent expense was $55,968, $69,775
and $54,021 for the years ended December 31, 1994 and 1995, and the nine
months ended September 30, 1996, respectively.
Contingency -- A former employee of the Company who resigned in May 1996
allegedly violated the terms of the restrictive covenant contained in her
employment agreement. The former employee has threatened litigation for
wrongful termination if a breach of contract action is pursued. The Company
has elected not to contest the breach of contract issue at this time. No
accrual for any liabilities that may result from this matter has been
included in the accompanying financial statements.
Liability Insurance -- The Company is insured with respect to general
liability and medical malpractice risks on a claims made basis. Management
is not aware of any claims against the Company. In addition, the Company
has not accrued a loss for unreported incidents or for losses in excess of
insurance coverage,
F-102
<PAGE> 173
DRS. SEIDENSTEIN, LEVINE & ASSOCIATES, P.A.
NOTES TO FINANCIAL STATEMENTS -- (CONCLUDED)
as the amounts, if any, cannot be reasonably estimated and the probability
of an adverse outcome cannot be determined at this time. It is the opinion
of management that the ultimate resolution of any claims that may be
asserted 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 healthcare programs,
principally Medicare and Medicaid, and are subject to audit and adjustments
by applicable regulatory agencies. Failure to comply with any of these laws
or regulations, the results of regulatory audits and adjustments, or
changes in the amounts payable for the Company's services under these
programs could have a material adverse effect on the Company's financial
position or results of operations.
9. INCOME TAXES
The provision for income taxes in the accompanying statements of operations
for the years ended December 31, 1994 and 1995 and for the nine months
ended September 30, 1996 consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Federal and state income taxes:
Current.............................................. $185,911
Deferred............................................. $142,696 $(24,719) (168,670)
------- ------- --------
$142,696 $(24,719) $ 17,241
======= ======= ========
</TABLE>
The Company's effective tax rate differs from the statutory federal income
tax rate for the following reasons:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate.............................. 34.0% 34.0% 34.0%
State income taxes, net of federal tax benefits................ 3.7 3.1 7.2
Other.......................................................... 0.6 (4.4) 7.8
---- ---- ----
Effective tax rate............................................. 38.3% 32.7% 49.0%
==== ==== ====
</TABLE>
The sources and amounts of deferred income tax assets and liabilities at
December 31, 1994 and 1995 and September 30, 1996 are as follows:
<TABLE>
<CAPTION>
1994 1995 1996
CURRENT ASSETS CURRENT ASSETS CURRENT
(LIABILITIES) (LIABILITIES) (LIABILITIES)
-------------- -------------- -------------
<S> <C> <C> <C>
Use of cash basis of accounting for income
tax purposes............................... $ (470,653) $ (415,954) $ (236,330)
Net operating loss carryforward and tax
credits.................................... 40,934 10,954
--------- --------- ---------
Total.............................. $ (429,719) $ (405,000) $ (236,330)
========= ========= =========
</TABLE>
10. SUBSEQUENT EVENT
Effective October 10, 1996, the Company's shareholders sold all of the
Company's issued and outstanding common stock to AmeriPath, Inc.
F-103
<PAGE> 174
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Clay J. Cockerell, M.D., P.A.
and Freeman-Cockerell Laboratories, Inc.:
We have audited the accompanying combined balance sheets of Clay J. Cockerell,
M.D., P.A. and Freeman-Cockerell Laboratories, Inc. (collectively, the
"Companies") as of December 31, 1994 and 1995 and September 30, 1996 and the
related combined statements of income and retained earnings and of cash flows
for the years ended December 31, 1994 and 1995 and the nine months ended
September 30, 1996. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, such combined financial statements present fairly, in all
material respects, the financial position of the Companies as of December 31,
1994 and 1995 and September 30, 1996 and the results of their operations and
their cash flows for the years ended December 31, 1994 and 1995 and the nine
months ended September 30, 1996 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Certified Public Accountants
Dallas, Texas
November 12, 1996
F-104
<PAGE> 175
CLAY J. COCKERELL, M.D., P.A. AND
FREEMAN-COCKERELL LABORATORIES, INC.
COMBINED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 23,503 $190,402 $ 288,988
Accounts receivable (net of allowances for contractual
adjustments and doubtful accounts of $180,000,
$195,000 and $235,000 at December 31, 1994 and 1995
and September 30, 1996, respectively)............... 340,935 374,879 448,000
Receivable from stockholder............................ 101,161 94,947
Other current assets................................... 1,017 10,772 6,997
-------- -------- ----------
Total current assets........................... 466,616 671,000 743,985
PROPERTY AND EQUIPMENT, NET (Note 3)..................... 297,039 214,163 277,535
OTHER ASSETS............................................. 1,693 44,084 44,085
-------- -------- ----------
TOTAL.......................................... $765,348 $929,247 $ 1,065,605
======== ======== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable (Note 4)................................. $580,844 $485,913 $ 396,908
Accounts payable and other............................. 42,607 16,479 99,481
Accrued payroll and benefits........................... 31,149 37,517 41,292
-------- -------- ----------
Total current liabilities...................... 654,600 539,909 537,681
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDER'S EQUITY:
Clay J. Cockerell, M.D., P.A.:
Common stock, $1 par value, 10,000 shares
authorized, 1,000 issued and outstanding.......... 1,000 1,000 1,000
Freeman-Cockerell Laboratories, Inc.:
Common stock, $.10 par value, 1,000,000 shares
authorized, 10,000 issued and outstanding......... 1,000 1,000 1,000
Retained earnings...................................... 108,748 387,338 525,924
-------- -------- ----------
Total stockholder's equity..................... 110,748 389,338 527,924
-------- -------- ----------
TOTAL.......................................... $765,348 $929,247 $ 1,065,605
======== ======== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-105
<PAGE> 176
CLAY J. COCKERELL, M.D., P.A. AND
FREEMAN-COCKERELL LABORATORIES, INC.
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -----------------------------
1994 1995 1995 1996
---------- ---------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUE................................... $2,613,165 $3,160,059 $ 2,388,589 $ 2,770,000
COST OF SERVICES (Note 7)..................... 1,007,226 1,220,086 878,686 1,061,425
---------- ---------- ---------- ----------
GROSS MARGIN.................................. 1,605,939 1,939,973 1,509,903 1,708,575
MARKETING AND ADMINISTRATION:
Marketing................................... 56,980 64,097 47,941 73,200
Administration.............................. 1,197,236 1,316,070 1,043,258 1,187,529
Bad debts................................... 85,000 14,925 11,163 40,000
---------- ---------- ---------- ----------
Total marketing and administration
expenses.......................... 1,339,216 1,395,092 1,102,362 1,300,729
---------- ---------- ---------- ----------
OPERATING PROFIT.............................. 266,723 544,881 407,541 407,846
INTEREST EXPENSE.............................. 69,285 55,841 41,765 22,699
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME
TAXES....................................... 197,438 489,040 365,776 385,147
PROVISION FOR CURRENT INCOME TAXES (Note 8)... 23,983 20,799 15,557 4,308
---------- ---------- ---------- ----------
NET INCOME.................................... 173,455 468,241 350,219 380,839
RETAINED EARNINGS (DEFICIT), BEGINNING OF
PERIOD...................................... (48,744) 108,748 108,748 387,338
DISTRIBUTIONS TO STOCKHOLDER.................. (15,963) (189,651) (141,848) (242,253)
---------- ---------- ---------- ----------
RETAINED EARNINGS, END OF PERIOD.............. $ 108,748 $ 387,338 $ 317,119 $ 525,924
========== ========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-106
<PAGE> 177
CLAY J. COCKERELL, M.D., P.A. AND
FREEMAN-COCKERELL LABORATORIES, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED
----------------------- SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1995 1996
--------- --------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 173,455 $ 468,241 $ 350,219 $ 380,839
Adjustments to reconcile net income to
net cash flows provided by operating
activities:
Depreciation.......................... 160,626 138,173 103,346 69,737
Changes in assets and liabilities:
Accounts receivable................. (65,362) (33,944) (70,231) (73,121)
Other current assets................ (5,332) (52,147) (12,000) (3,775)
Accounts payable and other.......... 27,252 (26,128) 146,162 33,619
Accrued payroll and benefits........ 6,408 50,819 53,158
--------- --------- --------- ---------
Net cash flows provided by
operating activities........... 290,639 500,603 568,315 460,457
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment.... (111,530) (55,338) (42,856) (125,560)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in receivable from
Shareholder........................... (65,114) 6,216 (7,302) 94,947
Payments on notes payable................ (60,299) (94,931) (84,323) (89,005)
Issuance of common stock................. 1,000
Cash distributions to Stockholder........ (15,963) (189,651) (141,848) (242,253)
--------- --------- --------- ---------
Net cash flows used in financing
activities..................... (140,376) (278,366) (233,473) (236,311)
--------- --------- --------- ---------
NET INCREASE IN CASH AND CASH
EQUIVALENTS.............................. 38,733 166,899 291,986 98,586
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................... (15,230) 23,503 23,503 190,402
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD... $ 23,503 $ 190,402 $ 315,489 $ 288,988
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
INFORMATION:
Cash paid during the period for:
Interest.............................. $ 69,285 $ 55,841 $ 42,030 $ 22,699
========= ========= ========= =========
Income taxes.......................... $ 23,982 $ 20,799 $ 15,557 $ 4,308
========= ========= ========= =========
</TABLE>
See accompanying notes to combined financial statements.
F-107
<PAGE> 178
CLAY J. COCKERELL, M.D., P.A. AND
FREEMAN-COCKERELL LABORATORIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
1. ORGANIZATION AND BUSINESS
Clay J. Cockerell, M.D., P.A. ("CJC") and Freeman-Cockerell Laboratories,
Inc. ("FCL") (collectively "the Companies") were organized in August 1993
and January 1994, respectively. The Companies provide outpatient anatomic
pathology services, principally dermatopathology services. The issued and
outstanding shares of the Companies are held by Clay J. Cockerell, M.D.
(the "Stockholder").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Combination and Basis of Presentation -- The combined financial statements
include the accounts of CJC and FCL. All significant intercompany
transactions have been eliminated in combination.
Cash and Cash Equivalents -- The Companies consider all highly liquid
instruments purchased with a maturity of three months or less to be cash
equivalents.
Property and Equipment -- Property and equipment is recorded at cost.
Depreciation is provided using accelerated methods for all assets over
their estimated lives as follows:
<TABLE>
<S> <C>
Leasehold improvements...................................................... 9 years
Furniture and fixtures...................................................... 7 years
Equipment................................................................... 5 years
</TABLE>
Revenue Recognition -- The Companies recognize revenue at the time services
are performed. Net 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.
Income Taxes -- The Stockholder has elected that CJC be taxed as a
Subchapter S corporation for federal income tax purposes. As a result,
income tax is not imposed at the corporate level and CJC's income or loss
is reportable by the Stockholder for federal income tax purposes.
FCL is taxed as a C corporation under the Internal Revenue Code. Deferred
income taxes represent the estimated future tax effects resulting from
temporary differences between the financial and tax reporting bases of
assets and liabilities of FCL. FCL has no significant temporary
differences.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
Financial Instruments -- The Companies believe that the carrying amounts of
cash, accounts receivable, accounts and notes payable are a reasonable
estimate of their fair value.
Interim Financial Data -- The unaudited statements of operations and
retained earnings and of cash flows for the nine months ended September 30,
1995 include, in the opinion of management, all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the Companies'
results of operations and cash flows. Operating results for the nine months
ended September 30, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996.
F-108
<PAGE> 179
CLAY J. COCKERELL, M.D., P.A. AND
FREEMAN-COCKERELL LABORATORIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Leasehold improvements........................... $ 51,014 $ 59,809 $ 59,809
Furniture and fixtures........................... 55,778 89,280 100,075
Equipment........................................ 329,329 342,328 464,642
-------- -------- --------
436,121 491,417 624,526
Less accumulated depreciation.................... (139,082) (277,254) (346,991)
-------- -------- --------
Property and equipment, net...................... $297,039 $214,163 $ 277,535
======== ======== ========
</TABLE>
4. NOTES PAYABLE
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
9.25% Bank note payable, paid in October 1996.... $414,825 $363,792 $ 312,812
8.75% Bank note payable, paid in October 1996.... 166,019 122,121 84,096
-------- -------- --------
$580,844 $485,913 $ 396,908
======== ======== ========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
Operating Leases -- The Companies lease the office and laboratory facility
and certain equipment under leases requiring future minimum rental payments
as follows:
<TABLE>
<S> <C>
1996................................................................... $ 26,162
1997................................................................... 86,973
1998................................................................... 73,549
1999................................................................... 64,488
2000................................................................... 58,908
2001................................................................... 59,552
Thereafter............................................................. 105,042
--------
Total........................................................ $ 474,674
========
</TABLE>
Lease expense was approximately $64,618, $123,234, and $69,139 for the
years ended December 31, 1994 and 1995, and the nine months ended September
30, 1996, respectively.
Liability Insurance -- CJC is insured with respect to general liability and
medical malpractice risks on a claims made basis. Management is not aware
of any claims against CJC or FCL. The Companies have not accrued losses for
unreported incidents or for losses in excess of insurance coverage, as the
amount, if any, cannot be determined at this time. It is the opinion of
management that the ultimate resolution of any unasserted claims will not
have a material adverse effect on the Companies' financial position or
results of operations.
Employment Agreement -- The stockholder has a five year employment
agreement with CJC, providing for a minimum annual salary of $250,000.
F-109
<PAGE> 180
CLAY J. COCKERELL, M.D., P.A. AND
FREEMAN-COCKERELL LABORATORIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Healthcare Regulatory Environment and Reliance on Government
Programs -- The healthcare industry in general, and the services that the
Companies provides are subject to extensive federal and state laws and
regulations. Additionally, a significant portion of the Companies' net
revenue is from payments by government-sponsored healthcare programs,
principally Medicare and Medicaid, and are subject to audit and adjustment
by applicable regulatory agencies. Failure to comply with any of these laws
or regulations, the results of regulatory audits and adjustments, or
changes in the amounts payable for the Companies' services under these
programs could have a material adverse effect on the Companies' financial
position or results of operations.
6. EMPLOYEE BENEFIT PLAN
The Companies have established a 401(k) retirement plan (the "Plan") which
covers substantially all eligible employees who have reached age 21 and
have completed one year of service (as defined in the Plan). Under the
terms of the Plan, employees may contribute up to the maximum percentage
allowable of their compensation, as defined. Employer contributions are
discretionary. During the years ended December 31, 1994 and 1995, and the
nine months ended September 30, 1996 the Companies made contributions to
the Plan of $0, $0 and $1,000, respectively.
7. RELATED PARTY TRANSACTIONS
The Companies utilize the courier services of an affiliate of the
stockholder. Total payments to the affiliate approximated $100,000 to
$200,000 for each of the years ended December 31, 1994 and 1995 and for the
nine months ended September 30, 1996, respectively.
8. INCOME TAXES
The effective tax rates on income before provision for income taxes are
reconciled to statutory federal income tax rates as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
------------- SEPTEMBER 30,
1994 1995 1996
---- ---- -------------
<S> <C> <C> <C>
Statutory federal income tax rate......................... 34% 34% 34%
Subchapter S corporation earnings attributable to
Stockholder............................................. (21) (28) (30)
Surtax rate............................................... (1) (2) (3)
--- --- ---
Effective rate............................................ 12% 4% 1%
=== === ===
</TABLE>
9. CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Companies to
concentration of credit risk, consist principally of accounts receivable.
The Company grants credit without collateral to its patients, most of whom
are Texas residents and are insured under third party payor agreements. The
mix of receivables
F-110
<PAGE> 181
CLAY J. COCKERELL, M.D., P.A. AND
FREEMAN-COCKERELL LABORATORIES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
from patients and third-party payors at December 31, 1994 and 1995 and
September 30, 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996
------------ ------------ -------------
<S> <C> <C> <C>
Medicare................................................. 30% 22% 20%
Managed care............................................. 4 6 4
Other third-party payor.................................. 41 51 60
Private pay patients..................................... 25 21 16
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
10. SUBSEQUENT EVENTS
On September 30, 1996, the Stockholder entered into an agreement to sell
the outstanding shares of FCL to AmeriPath, Inc. ("AmeriPath") and to enter
into a management agreement pursuant to which an affiliate of AmeriPath
will manage certain aspects of CJC.
F-111
<PAGE> 182
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Fernandez and Kalemeris, P.A. d/b/a
Gulf Coast Pathology Associates:
We have audited the accompanying balance sheets of Fernandez and Kalemeris, P.A.
d/b/a/ Gulf Coast Pathology Associates (the "Company"), as of December 31, 1995
and September 30, 1996, and the related statements of operations and retained
earnings and cash flows for the year ended December 31, 1995 and for the nine
months ended September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1995 and
September 30, 1996, and the results of its operations and its cash flows for the
year ended December 31, 1995 and the nine months ended September 30, 1996, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Fort Lauderdale, Florida
November 13, 1996
F-112
<PAGE> 183
FERNANDEZ AND KALEMERIS, P.A. D/B/A
GULF COAST PATHOLOGY ASSOCIATES
BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 178 $ 915,969
Accounts receivable (net of allowance for contractual adjustments
and doubtful accounts of $1,602,671 and $1,598,489 at December
31, 1995 and September 30, 1996, respectively).................. 1,147,703 1,134,276
Prepaid expenses and other assets.................................. 53,267 83,030
---------- ----------
Total current assets....................................... 1,201,148 2,133,275
---------- ----------
PROPERTY AND EQUIPMENT, NET (Note 3)................................. 203,530 138,370
OTHER ASSETS......................................................... 56,223 56,223
GOODWILL (Note 9).................................................... 365,090 345,089
---------- ----------
TOTAL...................................................... $1,825,991 $ 2,672,957
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 239,924 $ 187,951
Accrued liabilities................................................ 73,268 53,781
Accrued bonuses.................................................... 440,530
Accrued profit sharing (Note 5).................................... 61,945 123,890
Income taxes payable (Note 8)...................................... 329,613
Current portion of long term debt and capital lease obligation
(Notes 7 and 9)................................................. 115,847 124,573
Current portion of loans from shareholders (Note 6)................ 49,990 175,439
Deferred tax liability (Note 8).................................... 230,569 154,717
---------- ----------
Total current liabilities.................................. 771,543 1,590,494
---------- ----------
LONG-TERM DEBT AND CAPITAL LEASE (Notes 7 and 9)..................... 207,696 113,088
LOANS FROM SHAREHOLDERS (Note 6)..................................... 219,538
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Common stock, $1.00 par value, 7,500 shares authorized, 2,000
shares issued and outstanding................................... 2,000 2,000
Retained earnings.................................................. 625,214 967,375
---------- ----------
Total shareholders' equity................................. 627,214 969,375
---------- ----------
TOTAL...................................................... $1,825,991 $ 2,672,957
========== ==========
</TABLE>
See notes to financial statements.
F-113
<PAGE> 184
FERNANDEZ AND KALEMERIS, P.A. D/B/A
GULF COAST PATHOLOGY ASSOCIATES
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
NET REVENUE (Note 4)..................................... $8,786,149 $ 6,424,090 $ 6,253,588
Cost of services rendered:
Physicians' compensation -- owners (Note 6)............ 4,589,858 3,292,078 2,180,011
Physicians' compensation -- other...................... 919,938 683,824 729,354
Other.................................................. 1,673,592 1,163,031 1,702,168
---------- ---------- ----------
Total cost of services rendered................ 7,183,388 5,138,933 4,611,533
Selling, general, and administrative expenses............ 568,742 366,248 482,310
Provision for bad debt................................... 834,684 618,349 562,823
---------- ---------- ----------
Total expenses................................. 8,586,814 6,123,530 5,656,666
========== ========== ==========
INCOME BEFORE PROVISION FOR INCOME TAXES................. 199,335 300,560 596,922
PROVISION FOR INCOME TAXES............................... 76,047 123,464 253,761
---------- ---------- ----------
NET INCOME............................................... 123,288 177,096 343,161
DIVIDENDS................................................ 2,000 1,000 1,000
RETAINED EARNINGS, BEGINNING............................. 503,926 503,926 625,214
---------- ---------- ----------
RETAINED EARNINGS, ENDING................................ $ 625,214 $ 680,022 $ 967,375
========== ========== ==========
</TABLE>
See notes to financial statements.
F-114
<PAGE> 185
FERNANDEZ AND KALEMERIS, P.A. D/B/A
GULF COAST PATHOLOGY ASSOCIATES
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED) AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1995 1996
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 123,288 $ 177,096 $ 343,161
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 90,777 67,817 84,511
Loss on disposal of equipment..................... 4,065
Changes in assets and liabilities:
(Increase) decrease in accounts receivable...... (332,182) (118,938) 13,427
(Increase) in prepaid expenses and other
assets....................................... (12,658) (5,928) (29,763)
(Decrease) in accounts payable, accrued
liabilities, and accrued profit-sharing...... (75,434) (289,093) (9,515)
Increase in accrued bonuses..................... 655,762 440,530
Increase (decrease) in deferred income taxes.... 76,047 2,869 (75,852)
Increase in income taxes payable................ 363,400 329,613
--------- --------- ----------
Net cash provided by (used in) operating
activities................................. (130,162) 852,985 1,100,177
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment................ (88,243) (76,350) (3,415)
Acquisition of pathology practice.................... (80,000)
--------- --------- ----------
Net cash used in investing activities........ (168,243) (76,350) (3,415)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to shareholders....................... (2,000) (1,000) (1,000)
Payments on long-term debt and capital lease......... (12,499) (8,971) (85,882)
Payments on loans from shareholders.................. (62,273) (51,230) (94,089)
--------- --------- ----------
Net cash used in financing activities........ (76,772) (61,201) (180,971)
--------- --------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS... (375,177) 715,434 915,791
CASH AND CASH EQUIVALENTS, BEGINNING................... 375,355 375,355 178
--------- --------- ----------
CASH AND CASH EQUIVALENTS, ENDING...................... $ 178 $ 1,090,789 $ 915,969
========= ========= ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for
Interest.......................................... $ 32,663 $ 28,936 $ 21,872
========= ========= ==========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
As disclosed in Note 9, the Company purchased a pathology practice in 1995 for
$400,000, $80,000 of which was paid in cash and the remainder of which was
financed.
See notes to financial statements.
F-115
<PAGE> 186
FERNANDEZ AND KALEMERIS, P.A. D/B/A
GULF COAST PATHOLOGY ASSOCIATES
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 1996
1. ORGANIZATION AND BUSINESS
Fernandez and Kalemeris, P.A. d/b/a Gulf Coast Pathology Associates (the
"Company") is a firm of licensed physicians organized in July 1985 as a
Florida Professional Association to provide hospital-based and outpatient
pathology services. The Company generates approximately 60% of its net
revenue from a hospital contract with Lee Memorial Health Systems ("Lee").
This contract covers three hospitals in Southwest Florida. The Company
performs and bills for the professional component at the hospitals. The
hospital contract expires in December 1999 and contains clauses that allow
termination without cause by either party with sixty days notice. The
Company has had a relationship with Lee for approximately ten years;
however, the termination of this contract would have a material adverse
effect on the Company's financial position and results of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies followed by the Company are as
follows:
Cash and Cash Equivalents -- The Company considers all cash and any highly
liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
Property and Equipment -- Property and equipment is stated at cost less
accumulated depreciation. Depreciation is calculated using accelerated and
straight-line methods over the estimated useful lives of the assets which
range from five to ten years. Expenditures for routine maintenance and
repairs are charged to expense as incurred.
Income Taxes -- The Company accounts for income taxes using the asset and
liability method. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax consequences attributed
to differences between the financial statement carrying amounts of assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Revenue Recognition -- The Company recognizes revenue at the time services
are performed. The Company provides services to certain patients covered by
various third-party payor programs including the federal Medicare program.
Revenue under certain third-party arrangements is subject to audit and
retroactive adjustment. Billings for services reimbursed by third-party
payors are included in revenues net of allowances for the estimated
differences between the amounts billed and the allowable program rates.
Adjustments to the estimated payment amounts are recorded based on the
final payment settlement with the third-party payors.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments -- The carrying amounts of cash and
cash equivalents, accounts receivable, accounts payable, and accrued
expenses approximate fair value due to their short-term maturity. The
carrying amount of long-term debt approximates fair value. It is not
practical to determine the fair value of loans from shareholders.
F-116
<PAGE> 187
FERNANDEZ AND KALEMERIS, P.A. D/B/A
GULF COAST PATHOLOGY ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Concentrations of Credit Risk -- Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist principally
of accounts receivable. The Company grants credit without collateral to its
patients, most of whom are local residents and are insured under
third-party payor agreements. The major third-party payors are Medicare,
Medicaid, Blue Cross/Blue Shield and various commercial insurance
companies.
Interim Financial Data -- The unaudited statements of operations and
retained earnings and of cash flows for the nine months ended September 30,
1995 include, in the opinion of management, all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the Company's
results of operations and cash flows. Operating results for the nine months
ended September 30, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996.
3. PROPERTY AND EQUIPMENT, NET
Property and equipment at December 31, 1995 and September 30, 1996 was as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Transportation equipment..................................... $ 141,729 $ 141,729
Laboratory equipment......................................... 487,786 491,201
Leasehold improvements....................................... 71,228 65,450
Furniture, fixtures and other equipment...................... 22,983 22,983
------------ -------------
723,726 721,363
Accumulated depreciation..................................... (520,196) (582,993)
------------ -------------
Property and equipment, net.................................. $ 203,530 $ 138,370
========== ==========
</TABLE>
Depreciation expense totaled $88,555 and $64,510 for the year ended
December 31, 1995 and the nine months ended September 30, 1996,
respectively.
4. NET REVENUE
Net revenue consists of gross charges, net of contractual and other
adjustments. Contractual adjustments are based on the difference between
charges at established rates and amounts estimated by management to be
reimbursable by Medicare and Medicaid programs, and public and private
insurance and managed care contracts under applicable laws, regulations,
and program instructions. Collectable amounts are generally less than the
established rates. Final determination of certain amounts earned for
certain patients is subject to review by appropriate program
representatives. Other adjustments represent services provided to patients
for which fees are not expected to be collected at the time the service is
provided.
5. EMPLOYEE PROFIT SHARING PLAN
The Company has a profit sharing plan covering all full-time employees who
meet eligibility requirements. Employer contributions are made to the plan
at the discretion of the Company's Board of Directors. Contributions of
$132,198 and $123,890 were made for the year ended December 31, 1995 and
the nine months ended September 30, 1996, respectively.
6. RELATED PARTY TRANSACTIONS
The Company's shareholders are employed by the Company as physicians and,
accordingly, receive compensation for their services to the Company. The
compensation included in cost of services rendered
F-117
<PAGE> 188
FERNANDEZ AND KALEMERIS, P.A. D/B/A
GULF COAST PATHOLOGY ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
for these individuals was $4,589,858 and $2,180,011 for the year ended
December 31, 1995 and for the nine months ended September 30, 1996,
respectively.
The Company leases part of its office facilities from a partnership whose
partners are the Company's shareholders. Rent expense from this lease was
$151,584 for the year ended December 31, 1995 and $113,688 for the nine
months ended September 30, 1996, exclusive of any sales taxes.
The Company has loans from shareholders at stated interest rates ranging
from 8% to 12.5%. It is anticipated that these loans will be repaid within
the next twelve months.
7. COMMITMENTS AND CONTINGENCIES
Lease Commitments -- Future minimum lease payments under a capital lease
and noncancellable operating leases at September 30, 1996 were as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASE
--------- -------
<S> <C> <C>
1997............................................................ $19,461 $19,647
1998............................................................ 19,400 7,557
1999............................................................ 20,370
2000............................................................ 1,704
------- -------
$60,935 27,204
=======
Interest on capital lease....................................... (2,122)
-------
Present value of capital lease payments......................... 25,082
Current portion................................................. (17,718)
-------
Long-term portion............................................... $ 7,364
=======
</TABLE>
The Company leases two office sites and an automobile under operating
leases. In addition, the Company occupies four other sites but does not
have signed lease agreements for those sites. Two of those sites are rent
free. Rent expense was $161,733 and $117,162 for the year ended December
31, 1995 and the nine months ended September 30, 1996, respectively.
Liability Insurance -- The Company is insured with respect to general
liability and medical malpractice risks on a claims made basis. Management
is not aware of any claims against the Company. In addition, the Company
has not accrued a loss for unreported incidents or for losses in excess of
insurance coverage, as the amounts, if any, cannot be reasonably estimated
and the probability of an adverse outcome cannot be determined at this
time. It is the opinion of management that the ultimate resolution of any
claims that may be asserted 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 healthcare programs,
principally Medicare and Medicaid, and are subject to audit and adjustments
by applicable regulatory agencies. Failure to comply with any of these laws
or regulations, the results of regulatory audits and adjustments, or
changes in the amounts payable for the Company's services under these
programs could have a material adverse effect on the Company's financial
position or results of operations.
F-118
<PAGE> 189
FERNANDEZ AND KALEMERIS, P.A. D/B/A
GULF COAST PATHOLOGY ASSOCIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The provision for income taxes in the accompanying statements of operations
for the year ended December 31, 1995 and the nine months ended September
30, 1996 consists of the following:
<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
Federal and state income taxes:
Current......................................................... $329,613
Deferred........................................................ $76,047 (75,852)
------- --------
$76,047 $253,761
======= ========
</TABLE>
The Company's effective tax rate differs from the statutory federal income
tax rate for the following reasons:
<TABLE>
<CAPTION>
1995 1996
----- -----
<S> <C> <C>
Statutory federal income tax rate.................................... 34.0% 34.0%
State income taxes, net of federal tax benefits...................... 3.7 5.1
Other................................................................ .5 3.4
------ ------
Effective tax rate................................................... 38.2% 42.5%
====== ======
</TABLE>
The sources and amounts of deferred income tax assets and liabilities at
December 31, 1995 and September 30, 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
CURRENT ASSETS CURRENT
(LIABILITIES) (LIABILITIES)
-------------- -------------
<S> <C> <C>
Use of cash basis of accounting for income tax
purposes............................................... $ (320,230) $ (154,717)
Net operating loss carryforward and tax credits.......... 89,661
---------- --------
Total.......................................... $ (230,569) $ (154,717)
========== ========
</TABLE>
9. ACQUISITION
In November 1995, the Company purchased a pathology practice in Port
Charlotte, Florida ("Port Charlotte") for $400,000. The Company assumed
certain operating leases and responsibility for the laboratory licensure
and staffing. The entire purchase price was attributable to goodwill, which
is being amortized over 15 years. Amortization expense for the year ended
December 31, 1995 and for the nine months ended September 30, 1996 was
$2,222 and $20,001, respectively. The acquisition was financed with a
$320,000 note, which is non-interest bearing, and $80,000 in cash. The note
is being repaid in 32 monthly installments of $10,000. The note has been
discounted at 8%. The current portion of the note at December 31, 1995 and
September 30, 1996 was $100,653 and $106,855, respectively. Port
Charlotte's operations did not have a significant impact on the Company's
operations. Accordingly, the pro forma net revenue and results of
operations for the year ended December 31, 1995 and the nine months ended
September 30, 1996 are not materially different from the Company's results
of operations.
10. SUBSEQUENT EVENT
Effective November 1, 1996, the Company's shareholders sold all of the
Company's issued and outstanding common stock to AmeriPath, Inc.
F-119
<PAGE> 190
AmeriPath (LOGO)
6,200,000 SHARES
COMMON STOCK
PROSPECTUS
DEAN WITTER REYNOLDS INC.
HAMBRECHT & QUIST
PIPER JAFFRAY INC.
THE ROBINSON-HUMPHREY
COMPANY, INC.
, 1997
<PAGE> 191
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company estimates that expenses payable by it in connection with the
offering described in this registration statement (other than underwriting
discounts and commissions) will be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........................ $27,809
NASD filing fee............................................................ $10,482
Nasdaq National Market listing fee......................................... *
Printing expenses.......................................................... *
Accounting fees and expenses............................................... *
Legal fees and expenses.................................................... *
Fees and expenses (including legal fees) for qualifications under state
securities laws.......................................................... *
Registrar and Transfer Agent's fees and expenses........................... *
Miscellaneous.............................................................. *
-------
Total................................................................. $ *
=======
</TABLE>
- ---------------
* To be provided by amendment.
All amounts except the Securities and Exchange Commission registration fee,
the NASD filing fee and the Nasdaq National Market listing fee are estimated.
The Company intends to pay all expenses of registration with respect to shares
being sold by the Selling Stockholders hereunder, with the exception of
underwriting discounts and commissions.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has authority under Section 145 of the Delaware General
Corporations Law to indemnify its directors and officers to the extent provided
in such statute. The Company's Amended and Restated Certificate of
Incorporation, filed as Exhibit 3.2 to this Registration Statement, provides
that the Company shall indemnify its executive officers and directors to the
fullest extent permitted by law either now or hereafter.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought, nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any officer or director.
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriters have agreed to indemnify the directors,
officers and controlling persons of the Registrant against certain civil
liabilities that may be incurred in connection with this offering, including
certain liabilities under the Securities Act.
The Company intends to obtain prior to the closing of this offering
directors and officers liability insurance for the benefit of its directors and
certain of its officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Pursuant to the Recapitalization in February 1994: (i) Summit and Schroder
purchased 3,084,730 and 123,389 shares, respectively, of the Convertible
Preferred Stock for $5,288,250 million and $211,750 million, respectively; and
(ii) ALA issued 475,200 shares of common stock to each of Drs. Demaray, Poulos
and Kowalczyk, the owners of PDK, for an aggregate purchase price of $1.0
million.
In April 1996, the remaining obligations under the ALA Contingent Notes
were canceled in exchange for an aggregate of 194,400 shares of Common Stock
(64,800 shares to each of Drs. Demaray, Poulos and Kowalczyk).
II-1
<PAGE> 192
In connection with the Share Exchange and formation of AmPath in February
1996, each of Summit, Schroder and Dr. Demaray, Poulos and Kowalczyk exchanged
their respective holdings of Convertible Preferred Stock and Common Stock of ALA
for the same number and type of debt and equity securities of the Company. No
additional consideration was paid in connection with these transactions. Also in
February 1996, Summit and Schroder converted 115,388 and 4,616 shares,
respectively, of the Convertible Preferred Stock to 207,697 and 8,307 shares,
respectively, of Common Stock.
Summit and Schroder will convert their shares of Convertible Preferred
Stock into an aggregate of 5,558,609 shares of Common Stock prior to
consummation of this offering. The Company has reserved 5,558,609 shares of
Common Stock for the conversion of the Convertible Preferred Stock.
Effective June 30, 1996, the Company consummated the acquisition of Derrick
and in connection therewith issued an aggregate of 600,005 shares of Common
Stock to the 19 shareholders of Derrick. On October 13, 1996, the Company
consummated the acquisition of Seidenstein and in connection therewith issued an
aggregate of 75,834 shares of Common Stock to the three shareholders of
Seidenstein. On September 30, 1996, the Company consummated the acquisition of
Richfield Labs and in connection therewith issued an aggregate of 153,333 shares
of Common Stock to the two shareholders of Richfield Labs. On October 15, 1996,
the Company consummated the acquisition of CPI and in connection therewith
issued an aggregate of 96,000 shares of Common Stock to the shareholder of CPI.
On September 30, 1996, the Company consummated the acquisition of Volusia and in
connection therewith issued an aggregate of 6,666 shares of Common Stock to one
of the eight shareholders of Volusia. On November 4, 1996, the Company
consummated the acquisition of Gulf Coast and in connection therewith issued an
aggregate of 200,000 shares of Common Stock to the two shareholders of Gulf
Coast. On November 19, 1996, the Company entered into 21 separate agreements
with respect to the issuance of shares of Common Stock in exchange for the
surrender of contingent rights to receive Common Stock in the future. In
connection with such agreements, the following shares were issued: 44,444 to Les
B. Rosen, M.D.; 22,222 to Kip Amazon, M.D.; 28,750 to each of Robert E. Jones,
Jr., M.D. and James E. Elder, M.D.; 77,820 to David R. Barron, M.D.; 22,180 to
Ruth S. Kleier, M.D.; 50,000 to Beno Michel, M.D.; 12,525 to each of James
Arocho, M.D., Jane Chen, M.D., William Douglas, M.D., Thomas Greer, M.D., Steven
Popok, M.D., James Roberts, M.D. and Lori Shehi, M.D.; 50,000 to Clay J.
Cockerell, M.D.; 59,666 to James E. Dunnington, M.D.; 63,189 to each of Lawrence
Seidenstein, M.D., Steven E. Levine, M.D. and David M. Reardon, M.D.; and
150,000 to each of George C. Kalemeris, M.D. and Richard Fernandez, M.D.
Each of the above issuances of shares of Common Stock was exempt from
registration under the Securities Act pursuant to an exception provided by
Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ------------------------------------------------------------------------------------
<C> <S> <C>
1.1 -- Form of Underwriting Agreement*
3.1 -- AmeriPath's Amended and Restated Certificate of Incorporation*
3.2 -- AmeriPath's Amended and Restated Bylaws*
5.1 -- Opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. as to the
validity of the Common Stock being registered*
10.1 -- Amended and Restated 1996 Stock Option Plan**
10.2 -- Employment Agreement, dated as of October 24, 1995, between AmeriPath and James C.
New**
10.3 -- Employment Agreement, dated as of August 2, 1993, as amended, between ALA and Robert
P. Wynn.**
10.4 -- Employment Agreement, dated as of January 1, 1994, between AmeriPath and Michael J.
Demaray, M.D.**
10.5 -- Employment Agreement, dated June 30, 1996, between AmeriPath and Alan Levin, M.D.**
10.6 -- Employment Agreement, dated as of September 30, 1996, between AmeriPath Florida and
Alan Levin, M.D., as amended**
10.7 -- Employment Agreement, dated as of June 30, 1996, between AmeriPath Florida and
Timothy Kilpatrick, M.D.**
</TABLE>
II-2
<PAGE> 193
<TABLE>
<C> <S> <C>
10.8 -- Credit Agreement, dated as of May 29, 1996, among AmeriPath, Inc., the subsidiaries of AmeriPath, Inc.
from time to time party thereto, the lenders from time to time party thereto and The First National Bank
of Boston**
10.9 -- Amendment No. 1 to Credit Agreement, dated as of August 30, 1996, between AmeriPath, Inc., its
Subsidiaries and The First National Bank of Boston**
10.10 -- Amendment No. 2 to Credit Agreement, dated as of November 4, 1996, between AmeriPath, Inc., its
Subsidiaries and The First National Bank of Boston**
10.11 -- Lease dated as of April 8, 1988 by and between MLS Properties, Inc. and E.G. Poulos, M.D., M.J. Demaray,
M.D. & A.P. Kowalczyk, M.D., P.A., doing business as American Laboratory Associates**
10.12 -- Stock Purchase Agreement, dated as of May 23, 1996, among AmeriPath, Inc., Derrick & Associates and the
shareholders of Derrick & Associates**
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.**
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.**
10.15 -- Form of Stock Rights Surrender & Restricted Stock Grant Agreement**
10.16 -- 1996 Director Stock Option Plan**
10.17 -- American Laboratory Associates, Inc. Series A Preferred Stock, Common Stock and Junior Subordinated Note
Purchase Agreement, dated as of January 1, 1994**
10.18 -- Letter Agreement, dated September 18, 1996, between Acquisition Management Services, Inc. and AmeriPath,
Inc.**
10.19 -- AmeriPath Management Agreement by and between AmeriPath Cincinnati, Inc. and AmeriPath Ohio, Inc., dated
September 30, 1996**
10.20 -- Management Agreement by and between Beno Michel, M.D., Inc. and AmeriPath, Inc., dated October 15,
1996**
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**
10.22 -- Agreement for Professional Pathology Services between SmithKline Beecham Clinical Laboratories, Inc. and
Derrick and Associates Pathology, P.A., dated April 1, 1992**
10.23 -- Agreement for Medical Directorship between SmithKline Beecham Clinical Laboratories, Inc. and Derrick
and Associates Pathology, P.A., dated April 1, 1992**
10.24 -- Agreement for Professional Pathology Services between SmithKline Beecham Clinical Laboratories, Inc. and
AmeriPath Florida, Inc., dated November 1, 1996**
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.
10.26 -- Trust Agreement, dated as of October 15, 1996, between AmeriPath, Inc. and Beno Michel, as trustee
10.27 -- Trust Agreement, dated as of September 30, 1996, between AmeriPath, Inc. and David R. Barron, M.D. as
trustee
10.28 -- Form of Nonqualified Stock Option Agreement
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.
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.
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
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
10.33 -- Stock Issuance Agreement, dated as of November 4, 1996, among AmeriPath, Inc., The First National Bank
of Boston and FSC Corp.
21.1 -- Subsidiaries of AmeriPath**
23.1 -- Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. (to be included in its opinion to
be filed as Exhibit 5.1)*
23.2 -- Consent and Report on Schedules of Deloitte & Touche LLP
23.3 -- Consent of Deloitte & Touche LLP (Fort Lauderdale, Florida)
</TABLE>
II-3
<PAGE> 194
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S> <C>
23.4 -- Consent of Deloitte & Touche LLP (Orlando, Florida)
23.5 -- Consent of Deloitte & Touche LLP (Cincinnati, Ohio)
23.6 -- Consent of Deloitte & Touche LLP (Dallas, Texas)
23.7 -- Consent of Jenkins & Gilchrist*
23.8 -- Consent of Bricker & Eckler*
23.9 -- Consent of Wyatt, Tarrant & Combs*
24.1 -- Reference is made to the Signatures section of this Registration Statement for the Power of Attorney
contained therein**
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
(b) Financial Statement Schedules:
The following supplemental schedules can be found on the indicated
pages of this Registration Statement.
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C>
Schedule II -- Valuation and Qualifying Accounts............ S-1
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions or are not applicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule e and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 195
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Riviera Beach, State of
Florida, on January 30, 1997.
AMERIPATH, INC.
By: /s/ JAMES C. NEW
------------------------------------
James C. New
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES C. NEW President, Chief January 30, 1997
- -------------------------------------------------------- Executive Officer and
James C. New Director (principal
executive officer)
* Chief Operating Officer January 30, 1997
- -------------------------------------------------------- and Director
Alan Levin, M.D.
/s/ ROBERT P. WYNN Executive Vice President January 30, 1997
- -------------------------------------------------------- and Chief Financial
Robert P. Wynn Officer (principal
financial officer and
principal accounting
officer)
* Executive Vice January 30, 1997
- -------------------------------------------------------- President, Medical
Michael J. Demaray, M.D. Director and Director
* Chairman of the Board January 30, 1997
- -------------------------------------------------------- and Director
Thomas S. Roberts
* Director January 30, 1997
- --------------------------------------------------------
Timothy Kilpatrick, M.D.
* Director January 30, 1997
- --------------------------------------------------------
E. Roe Stamps, IV
*By: /s/ JAMES C. NEW
--------------------------------------------------
James C. New
Attorney-in-fact
</TABLE>
II-5
<PAGE> 196
AMERIPATH, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND NINE MONTHS ENDED SEPTEMBER 30,
1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED TO
BEGINNING STATEMENT OTHER WRITE-OFFS AND ENDING
DESCRIPTION BALANCE OF OPERATIONS INCREASES(1) OTHER ADJUSTMENTS BALANCE
- -------------------------------------- --------- ------------- ------------ ----------------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Allowances for contractual, other
adjustments and uncollectible
accounts............................ $ 796 $ 2,887 $ 0 $ (2,398) $ 1,285
====== ====== ====== ======== ======
Year ended December 31, 1994:
Allowances for contractual, other
adjustments and uncollectible
accounts............................ $ 1,285 $ 3,569 $ 0 $ (3,355) $ 1,499
====== ====== ====== ======== ======
Year ended December 31, 1995:
Allowances for contractual, other
adjustments and uncollectible
accounts............................ $ 1,499 $ 4,258 $ 0 $ (3,834) $ 1,923
====== ====== ====== ======== ======
Nine months ended September 30, 1996:
Allowances for contractual, other
adjustments and uncollectible
accounts............................ $ 1,923 $ 9,917 $7,368 $ (10,032) $ 9,176
====== ====== ====== ======== ======
</TABLE>
- ---------------
(1) Represents the allowances for contractual, other adjustments and
uncollectible accounts related to the recent acquisitions completed on or
before September 30, 1996.
S-1
<PAGE> 1
Exhibit 10.25
SHARE EXCHANGE AGREEMENT
THIS SHARE EXCHANGE AGREEMENT (the "Agreement"), is entered into as of
February 15, 1996, in accordance with the General Corporation Law of the State
of Delaware (the "DGCL"), by and among AMERICAN LABORATORY ASSOCIATES, INC., a
Delaware corporation ("ALA"), AMERIPATH, INC., a Delaware corporation
("Holding"), the holders of Common Stock, $.01 par value per share (the "ALA
Common Stock"), of ALA listed on SCHEDULE I attached hereto (the "ALA Common
Stockholders"), and the holders of Series A Convertible Preferred Stock, $.01
par value per share (the "ALA Preferred Stock"), of ALA listed on SCHEDULE II
attached hereto (the "ALA Preferred Stockholders" and, together with the ALA
Common Stockholders, the "ALA Stockholders").
WHEREAS, as of the date hereof, the authorized capital stock of ALA
consists of (i) 8,000,000 shares of ALA Common Stock, of which 912,004 shares
are presently issued and outstanding (as set forth in Schedule I hereto); and
(ii) 5,000,000 shares of ALA Preferred Stock, of which 3,088,116 shares are
presently issued and outstanding (as set forth in Schedule II hereto); and
WHEREAS, ALA and the ALA Stockholders are parties to a Shareholders'
Agreement dated as of January 1, 1994, as amended by a First Amendment to
Shareholders' Agreement dated as of August 1, 1994 (collectively, the "ALA
Shareholders' Agreement"), which ALA Shareholders' Agreement provides, among
other things, for certain rights and restrictions relating to the transfer of
capital stock of ALA owned by such ALA Stockholders;
WHEREAS, pursuant to the Amended and Restated American Laboratory
Associates, Inc. 1994 Stock Option Plan (the "ALA Option Plan"), options to
purchase up to 400,000 shares of ALA Common Stock are available for grant and
issuance to employees of ALA under the plan, with options to purchase a total
of 340,000 shares of ALA Common Stock (the "ALA Stock Options") having been
granted to the persons covering the aggregate number of shares indicated in
SCHEDULE III attached hereto, all pursuant to the ALA Option Plan;
WHEREAS, Holding is a newly formed Delaware corporation, with
authorized capital stock consisting of (i) 8,000,000 shares of Common Stock,
$.01 par value per share ("Holding Common Stock"), of which one (1) share is
presently issued and outstanding and owned of record by ALA; and (ii) 5,000,000
shares of Preferred Stock, $.01 par value per share, of which 3,500,000 shares
have been authorized and designated as the Series A Convertible Preferred Stock
("Holding Preferred Stock"), of which no shares are presently issued or
outstanding; and
<PAGE> 2
WHEREAS, pursuant to the AmeriPath, Inc. 1996 Stock Option Plan (the
"Holding Option Plan"), previously approved by the Board of Directors of
Holding, options to purchase up to 500,000 shares of Holding Common Stock are
available for grant and issuance to employees of Holding or its subsidiaries
under the plan, with no options having been granted under such plan as of the
date hereof; and
WHEREAS, the Board of Directors and stockholders of ALA believe that
it is in the best interests of ALA and its stockholders to reorganize ALA into
a holding company structure and to transfer and exchange the equity ownership
of ALA to Holding, such that, among other things, immediately following
consummation of the agreements and transactions contemplated by this Agreement
(the "Closing"): (i) ALA will become a wholly-owned subsidiary of Holding; (ii)
Holding will be owned by persons who, prior to the Closing, constituted the ALA
Stockholders, with such stockholders owning exactly the same type and amount of
equity securities of Holding following the Closing as such stockholders owned
in ALA immediately prior to the Closing; (iii) each holder of a stock option
under the ALA Option Plan will surrender his stock options in exchange for an
option to purchase a like number of shares of Holding Common Stock, all under
the Holding Option Plan and in accordance with the terms of certain new
non-qualified stock option agreements; and (iv) Holding will assume the rights
and obligations of ALA under various agreements; all in accordance with and
pursuant to the terms, provisions and conditions provided under this Agreement.
NOW, THEREFORE, for and in consideration of the premises and the
mutual representations, covenants and agreements set forth herein, and for
other good and valuable consideration the receipt and sufficiency of which is
hereby acknowledged by all parties, the parties hereto hereby agree as follows:
ARTICLE 1.
EXCHANGE OF SHARES
1.1 EFFECTIVE TIME. The exchange of shares and options, and the
other agreements and transactions contemplated hereunder, shall be and become
effective (the "Effective Time") upon the Closing, which shall take place (i)
immediately following the satisfaction of the conditions to closing set forth
in Article 5 hereof, and, assuming such satisfaction, (ii) on the date that (a)
the Secretary of each of ALA and Holding files a fully executed original of
this Agreement in the official stockholders' minute book of ALA and Holding,
respectively, and (b) certificates representing the shares of Holding Common
Stock and Holding Preferred Stock are issued, in exchange for certificates
representing ALA Common Stock and ALA Preferred Stock, in accordance with the
provisions of this
- 2 -
<PAGE> 3
Agreement, with such issuance and exchange being recorded and reflected in the
stock books of Holding.
1.2 MANNER AND BASIS OF EXCHANGING SHARES. At the Effective Time:
(a) each share of ALA Common Stock issued and
outstanding immediately prior to the Effective Time shall be exchanged
for one share of Holding Common Stock, which upon such issuance shall
be duly authorized, validly issued, fully paid and non-assessable;
(b) each share (and/or fraction of a share) of ALA
Preferred Stock issued and outstanding immediately prior to the
Effective Time shall be exchanged for one share (and/or like fraction
of a share) of Holding Preferred Stock, which upon such issuance shall
be duly authorized, validly issued, fully paid and non-assessable;
(c) The one (1) share of Holding Common Stock issued and
outstanding prior to the Effective Time, as owned and held by ALA,
shall be canceled and shall thereupon become an authorized and
unissued share of Holding Common Stock;
(d) each share (and/or fraction of a share) of ALA
Preferred Stock, upon surrender for exchange pursuant to Section
1.2(b) above, shall be contributed by Holding to ALA, shall no longer
be issued or outstanding, shall be canceled and retired and shall
thereupon become authorized but unissued shares of ALA (in accordance
with and subject to ALA's certificate of incorporation, as such may be
amended from time to time);
(e) each share of ALA Common Stock, upon surrender for
exchange pursuant to Section 1.2(a) above, shall be owned and held by
Holding, and shall remain issued and outstanding; provided, however,
that, to the extent the number of such shares of ALA Common Stock
exceeds One Hundred (100), all of such shares of ALA Common Stock in
excess of 100 shares shall be cancelled and retired and shall
thereupon become authorized but unissued shares of ALA (in accordance
with and subject to ALA's certificate of incorporation, as such may be
amended from time to time); and
(f) Holding shall become the owner and holder of all the
issued and outstanding shares of ALA Common Stock.
1.3 TREATMENT OF PREFERRED STOCK. In consideration of the
surrender and cancelation of the issued and outstanding ALA Preferred Stock by
the ALA Preferred Stockholders pursuant to Section 1.2(d) above, which ALA
Preferred Stock has accumulated dividends, which have remained unpaid, since
January 1, 1994, the
- 3 -
<PAGE> 4
parties hereto expressly acknowledge, understand and agree that (a) the Holding
Preferred Stock, as authorized and designated in Holding's restated certificate
of incorporation, provides for the accumulation of dividends on such ALA
Preferred Stock from January 1, 1994 (notwithstanding that Holding was not in
existence on that date), and (b) by virtue of such accumulation of dividends
provision(s), as of the Effective Time, Holding is assuming the dividend
obligation of ALA, as accumulated and unpaid through the Effective Time, in
connection with the issued and outstanding ALA Preferred Stock.
1.4 MANNER AND BASIS OF EXCHANGING OPTIONS. As a condition to
consummation of the transactions contemplated by this Agreement, pursuant to
Article 5 hereof, prior to the Effective Time, each holder of one or more
options to purchase ALA Common Stock granted under the ALA Option Plan (each,
an "ALA Option Holder") shall have entered into (i) a surrender and grant
letter agreement, and (ii) a Holding non-qualified stock option agreement, each
in the form set forth in EXHIBIT A attached hereto (the "Holding
Surrender/Option Agreements"). Accordingly, at the Effective Time, each ALA
Stock Option outstanding immediately prior to the Effective Time will be
surrendered in exchange for an option to purchase that number of shares of
Holding Common Stock (each, a "Holding Stock Option") equal to the number of
shares of ALA Common Stock subject to the ALA Stock Option immediately prior to
the surrender of such option, all in accordance with the Holding
Surrender/Option Agreements. From and after the Effective Time, all Holding
Stock Options shall be subject to adjustment in accordance with the terms and
provisions of the respective Holding Option Agreement and the Holding Option
Plan.
1.5 POST CLOSING MATTERS.
(a) Amendment of ALA Certificate of Incorporation. Immediately
following the Effective Time, Holding, as sole stockholder of ALA, shall cause
the ARTICLE FOURTH of the Certificate of Incorporation of ALA to be amended so
as to (i) reduce the authorized number of shares of common stock of ALA from
8,000,000 shares to 10,000 shares, and (ii) delete from such Article any
authorization with respect to shares of preferred stock of ALA.
(b) Termination of ALA Option Plan. Immediately following the
Effective Time, the ALA Option Plan shall be terminated.
ARTICLE 2.
ASSIGNMENT AND ASSUMPTION OF RIGHTS AND OBLIGATIONS
2.1 SHAREHOLDERS' AGREEMENTS. Effective immediately prior to the
Effective Time, the parties hereto (insofar as such parties are parties to the
ALA Shareholders' Agreement) hereby agree to
- 4 -
<PAGE> 5
terminate the ALA Shareholders' Agreement, such that at the Effective Time the
ALA Shareholders' Agreement shall be terminated, canceled, null, void and of no
further force or effect. As a condition to consummation of the transactions
contemplated by this Agreement, Holding and each person who, immediately prior
to the Effective Time, is a holder of ALA Common Stock or ALA Preferred Stock
shall have executed and delivered a counterpart signature page to the
AmeriPath, Inc. Shareholders' Agreement dated as of February 15, 1996, in the
form of EXHIBIT B attached hereto (the "Holding Shareholders' Agreement"). All
such parties agree to be bound by and comply with the terms and provisions of
the Holding Shareholders' Agreement.
2.2 SECURITIES PURCHASE AGREEMENT. Evangelos Poulos, M.D.,
Michael Demaray, M.D., Alexander Kowalczyk, M.D. (collectively, the "Original
ALA Common Stockholders"), the ALA Preferred Stockholders (together with the
Original ALA Common Stockholders, the "Original ALA Stockholders") and ALA are
parties to that certain Series A Preferred Stock, Common Stock and Junior
Subordinated Note Purchase Agreement dated as of January 1, 1994, a complete
copy of which is attached hereto as EXHIBIT C (the "ALA Purchase Agreement").
The parties to the ALA Purchase Agreement acknowledge, understand and agree
that various provisions of such agreement were intended to provide for certain
rights and obligations of the Original ALA Stockholders, as holders of issued
and outstanding capital stock of ALA, and for certain rights and obligations of
ALA, as the issuer of the issued and outstanding capital stock of ALA.
Following the Effective Time, the Original ALA Stockholders will become
stockholders of Holding, and not ALA, and Holding, and not ALA, will be the
issuer of the shares of capital stock held by such stockholders. Accordingly,
by executing this Agreement, Holding and each of the parties to the ALA
Purchase Agreement agree as follows:
(i) effective at the Effective Time, Holding hereby agrees to assume,
satisfy and perform when due all duties, obligations, responsibilities
and liabilities (the "duties") of ALA arising under or pursuant to the
ALA Purchase Agreement, and Holding shall be vested with all the
rights, privileges, powers and franchises (the "rights") of ALA under
the ALA Purchase Agreement, in each case as (and solely as) such
duties and rights relate to the common stock or preferred stock, and
the holders thereof, as set forth in Articles V, VI, VII and VIII of
the ALA Purchase Agreement (together with such related definitions and
other enabling provisions as may be contained in other sections of
such agreement) (the "Stock Provisions"), it being understood and
agreed that for purposes of effecting the agreement contained in this
clause (i) from and after the Effective Time, the term "Company" in
such ALA Purchase Agreement shall mean and refer to Holding, the term
"Common Stock" shall mean and refer to the Holding Common Stock and
- 5 -
<PAGE> 6
the term "Preferred Stock" shall mean and refer to the Holding
Preferred Stock;
(ii) from and after the Effective Time, the holders of Holding Common
Stock and Holding Preferred Stock shall (continue to) be vested with
and entitled to the rights, privileges, powers and franchises of the
holders of ALA Common Stock and ALA Preferred Stock under the Stock
Provisions of the ALA Purchase Agreement, it being understood and
agreed that for purposes of effecting the agreement contained in this
clause (ii) from and after the Effective Time, the term "Company" in
such ALA Purchase Agreement shall mean and refer to Holding, the term
"Common Stock" shall mean and refer to the Holding Common Stock and
the term "Preferred Stock" shall mean and refer to the Holding
Preferred Stock; and
(ii) from and after the Effective Time, ALA shall continue to be
responsible and liable for the duties, and vested in the rights,
contained in the ALA Purchase Agreement as (and solely as) such duties
and rights relate to the purchase and sale transactions contemplated
thereby and the Senior Notes, Contingent Notes and Junior Notes (as
such terms are defined in such agreement), and the holders thereof, as
set forth in Articles II, III and IV of the ALA Purchase Agreement
(together with such related definitions and other enabling provisions
as may be contained in other sections of such agreement).
2.3 REDEMPTION AGREEMENT. ALA and the ALA Preferred Stockholders
are parties to that certain Redemption Agreement dated as of January 1, 1994, a
complete copy of which is attached hereto as EXHIBIT D (the "ALA Redemption
Agreement"). The parties to the ALA Redemption Agreement acknowledge,
understand and agree that various provisions of such agreement were intended to
provide for certain redemption rights to the ALA Preferred Stockholders, as
holders of issued and outstanding ALA Preferred Stock (together with any ALA
Common Stock issued upon conversion thereof), and for certain obligations of
ALA, as the issuer of the issued and outstanding ALA Preferred Stock (together
with any ALA Common Stock issued upon conversion thereof). Following the
Effective Time, the ALA Preferred Stockholders will become holders of capital
stock of Holding, and not ALA. Accordingly, by executing this Agreement,
Holding and each of the ALA Preferred Stockholders agree that, effective at the
Effective Time, Holding hereby agrees to assume, satisfy and perform when due
all duties, obligations, responsibilities and liabilities of ALA arising under
or pursuant to the ALA Redemption Agreement, and the holders of Holding
Preferred Stock shall (continue to) be vested with and entitled to all the
rights, privileges, powers and franchises of the "Investors" under the ALA
Redemption Agreement.
- 6 -
<PAGE> 7
2.4 ALA DEBT SECURITIES; HOLDING GUARANTEE. (a) ALA is the
borrower and obligor under the following debt securities (each, a "Debt
Security"):
(i) 8% Non-Negotiable Senior Subordinated Notes Due December
31, 1998 in the aggregate principal amount of $3,500,000 (3 notes)
(the "Senior Notes");
(ii) 8% Non-Negotiable Subordinated Contingent Notes in the
aggregate principal amount of $2,500,000 (5 notes) (the "Contingent
Notes"); and
(iii) 10% Junior Subordinated Notes due December 31, 2001 in the
aggregate principal amount of $7,500,000 (5 notes) (the "Subordinated
Notes").
(b) From and after the Effective Time, each of the Senior
Notes, the Contingent Notes and the Subordinated Notes shall remain outstanding
and unaffected by the agreements and transactions consummated as a result of
the Closing. To the extent the agreements and transactions consummated as a
result of the Closing trigger or cause any default under any such Debt
Securities, such default is hereby waived.
(c) At the Effective Time, Holding shall execute and
deliver a guarantee agreement with respect to each Debt Security, and promptly
deliver such guarantee agreement to the holder of each such Debt Security,
under which guarantee agreement Holding shall guarantee the full, timely and
faithful payment and performance of the obligations of ALA under each such Debt
Security.
2.5 FURTHER ASSURANCES. From and after the Effective Time, ALA
and Holding agree to take all necessary action, including, without limitation,
preparing and executing instruments of transfer, assignment, guarantee and
assumption, and amendments, as may be necessary or appropriate in order to
effectuate the intent and purpose of this Article 2.
ARTICLE 3.
EFFECT OF EXCHANGE
3.1 STOCKHOLDER RIGHTS. At the Effective Time, the holders of ALA
Common Stock and ALA Preferred Stock shall cease to have any rights,
privileges, powers or franchises as stockholders of ALA (common stock or
preferred stock, as the case may be) and their sole rights, privileges, powers
and franchises shall be as holders of Holding Common Stock and Holding
Preferred Stock, respectively.
3.2 SURRENDER AND EXCHANGE OF STOCK CERTIFICATES. (a) Prior to
the Effective Time, each holder of an outstanding certificate or certificates
theretofore representing shares of ALA Common Stock
- 7 -
<PAGE> 8
(the "Old Certificate") shall surrender the same to Holding which, at the
Effective Time, shall cancel such Old Certificate and issue a new certificate
or certificates representing shares of Holding Common Stock (the "New
Certificate") in such holder's name, and each such holder shall be entitled to
receive one or more New Certificates representing the same number of shares of
Holding Common Stock as the number of shares of ALA Common Stock previously
represented by the Old Certificate(s) so surrendered. In the event any Old
Certificate is not surrendered to Holding prior to Closing, and the Closing
takes place, then until such time as such Old Certificate is surrendered to
Holding, such Old Certificate which, immediately prior to the Effective Time,
evidenced shares of ALA Common Stock, shall be deemed and treated for all
purposes to evidence solely the right to receive in exchange therefor one or
more New Certificates representing the same number of shares of Holding Common
Stock as the number of shares of ALA Common Stock previously represented by
such Old Certificate(s).
(b) Prior to the Effective Time, each holder of an outstanding
certificate or certificates theretofore representing shares (or fractions of a
share) of ALA Preferred Stock (the "Old Preferred Certificate") shall surrender
the same to Holding which, at the Effective Time, shall cancel such Old
Preferred Certificate and issue a new certificate or certificates representing
shares of Holding Preferred Stock (the "New Preferred Certificate") in such
holder's name, and each such holder shall be entitled to receive one or more
New Preferred Certificates representing the same number of shares (including
fractions of a share) of Holding Preferred Stock as the number of shares
(including fractions of a share) of ALA Preferred Stock previously represented
by the Old Preferred Certificate(s) so surrendered. In the event any Old
Preferred Certificate is not surrendered to Holding prior to Closing, and the
Closing takes place, then until such time as such Old Preferred Certificate is
surrendered to Holding, such Old Preferred Certificate which, immediately prior
to the Effective Time, evidenced shares of ALA Preferred Stock, shall be deemed
and treated for all purposes to evidence solely the right to receive in
exchange therefor one or more New Preferred Certificates representing the same
number of shares of Holding Preferred Stock as the number of shares of ALA
Preferred Stock previously represented by such Old Preferred Certificate(s).
ARTICLE 4.
OTHER AGREEMENTS AND REPRESENTATIONS
4.1 HOLDING CERTIFICATE OF INCORPORATION, BY-LAWS, OPTION PLAN AND
SHAREHOLDERS' AGREEMENT. Each of the ALA Stockholders (who, from and after the
Effective Time, shall become and be the stockholders of Holding) hereby
ratifies, confirms and approves each of the following instruments, plans and
agreements:
- 8 -
<PAGE> 9
(i) the Restated Certificate of Incorporation of Holding, as
initially filed with the Secretary of State of the State of Delaware
on February 13, 1996, and as amended and restated and filed with the
Secretary of State of the State of Delaware on February 15, 1996, a
complete copy of which is attached hereto as EXHIBIT E;
(ii) the By-Laws of Holding, a complete copy of which is
attached hereto as EXHIBIT F (the "Holding By- Laws");
(iii) the Holding Option Plan, a complete copy of which is
attached hereto as EXHIBIT G, and the reservation of 500,000 shares of
Holding Common Stock to be issued pursuant to the Holding Option Plan;
and
(iv) the form, terms and provisions of the Holding
Shareholders' Agreement, a complete copy of which is attached hereto
as EXHIBIT B.
4.2 HOLDING'S BOARD OF DIRECTORS. Effective at the Effective
Time, (i) the persons named below shall be elected as the members of the Board
of Directors of Holdings, to serve in accordance with the Holding By-Laws until
their successors are duly elected and qualified (or until their earlier death,
incapacity, resignation or removal) (each of such persons being initially
designated in accordance with and pursuant to Section 6 of the Holding
Shareholders' Agreement), and (ii) any person other than those persons named
below serving as a director of Holdings at the Effective Time shall be removed
as of the Effective Time:
Evangelos Poulos, M.D.
Michael Demaray, M.D.
Alexander Kowalczyk, M.D.
E. Roe Stamps, IV
Thomas S. Roberts
Barbara A. Piette
James C. New
4.3 ALA'S BOARD OF DIRECTORS. Effective at the Effective Time,
(i) the following persons shall be elected as the members of the Board of
Directors of ALA, to serve in accordance with the By-Laws of ALA until their
successors are duly elected and qualified (or until their earlier death,
incapacity, resignation or removal), and (ii) any person other than those
persons named below serving as a director of Holdings at the Effective Time
shall be removed as of the Effective Time:
Evangelos Poulos, M.D.
Michael Demaray, M.D.
Alexander Kowalczyk, M.D.
James C. New
- 9 -
<PAGE> 10
4.4 HOLDING'S ORGANIZATION AND OPERATIONS. Holding represents and
warrants that (i) Holding was organized solely for the purpose of effecting the
agreements and transactions contemplated by this Agreement, and (ii) prior to
the date hereof, Holding has conducted no operations, purchased no assets and
assumed no liabilities.
ARTICLE 5.
CONDITIONS TO CONSUMMATION
The obligations of ALA and Holding to cause the agreements and
transactions contemplated hereby to be consummated shall be, at each such
party's sole option and election, subject to the satisfaction of the following
conditions at or before the Effective Time, except as any such condition may be
waived in writing by ALA and Holding.
5.1 EXECUTION AND APPROVAL OF THIS AGREEMENT. Each of Holding,
ALA and the ALA Stockholders shall have executed and delivered a counterpart
signature page to this Agreement, and the Board of Directors of ALA and Holding
shall have duly authorized the execution and delivery of this Agreement.
5.2 EXECUTION OF HOLDING SURRENDER/OPTION AGREEMENTS . Each ALA
Option Holder shall have executed and delivered (i) a surrender and grant
letter agreement, and (ii) a Holding non-qualified stock option agreement, each
in the form set forth in Exhibit A attached hereto.
5.3 EXECUTION OF HOLDING SHAREHOLDERS' AGREEMENTS . Holding and
each person who, immediately prior to the Effective Time, is a holder of ALA
Common Stock or ALA Preferred Stock shall have executed and delivered a
counterpart signature page to the Holding Shareholders' Agreement in the form
of Exhibit B attached hereto.
5.4 REGULATORY APPROVALS. ALA shall have received such approvals
of regulatory authorities (including, without limitation, the State of Florida)
as the management of ALA, upon the advice of counsel, shall have determined are
necessary or appropriate in order properly to consummate the agreements and
transactions contemplated by this Agreement.
5.5 BANK WAIVER. ALA shall have received such consents and/or
waivers from ALA's senior lender, Bank of Boston, as the management of ALA,
upon the advice of counsel, shall have determined are necessary or appropriate
in order properly to consummate the agreements and transactions contemplated by
this Agreement. In connection with obtaining any such consent and/or waiver,
Holding is hereby expressly authorized to enter into a guarantee agreement with
Bank of Boston, under which guarantee agreement Holding shall guarantee the
full, timely and faithful
- 10 -
<PAGE> 11
payment and performance of the obligations of ALA under ALA's senior credit
facility.
ARTICLE 6.
MISCELLANEOUS
6.1 Expenses. All legal and other costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby,
regardless of whether the Closing is consummated, shall be borne by ALA.
6.2 Notices. Any notice or other communications required or
permitted hereunder shall be sufficiently given if delivered personally or sent
by a nationally-recognized courier service, all charges or postage prepaid,
return receipt requested, addressed as follows:
To Holding:
AmeriPath, Inc.
6061 N.E. 14th Avenue
Fort Lauderdale, FL 33334
Attention: James C. New
To ALA:
American Laboratory Associates, Inc.
6061 N.E. 14th Avenue
Fort Lauderdale, FL 33334
Attention: Robert P. Wynn
To Other Parties:
To their last known address as such appears
on the stockholder records of ALA;
or to such other address that shall be furnished in writing by any such party,
and any such notice or communication shall be deemed to have been given on the
earlier of the date of receipt thereof or the second business day after
mailing.
6.3 Binding Effect and Assignment. This Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and assigns, provided that this Agreement may not be
assigned by any party without the consent of the other parties.
6.4 Waiver and Amendment. Any party may, at any time prior to the
Effective Time, waive any of the terms or conditions of this Agreement that
operate in favor of such party, including any conditions to consummation set
forth in Article 5. This Agreement
- 11 -
<PAGE> 12
may only be amended or modified by written agreement of all the parties hereto.
6.5 Entire Agreement. This Agreement (and the schedules and
exhibits hereto) constitutes the entire agreement of the parties hereto with
respect to the subject matter hereof, and supersedes any and all previous or
contemporaneous oral or written communications, representations, promises,
assurances, agreements or arrangements between or among the parties hereto.
6.6 Limitation on Rights. Except as otherwise specifically
provided herein, nothing expressed or implied in this Agreement is intended or
shall be construed to confer upon or give any person, entity, firm or
corporation other than the parties to this Agreement any rights or remedies
under or by reason of this Agreement or any transaction contemplated hereby.
6.7 Captions. The headings and captions in this Agreement are for
convenience or reference only and shall not be considered a part of or affect
the construction or interpretation of any provision of this Agreement.
6.8 Deemed Written Consent. Any term or provision contained in
this Agreement which, in order to be effective, requires or would require
formal action or approval by the board of directors or stockholders of either
ALA or Holdings under the DGCL, shall be deemed to have been taken by such
board of directors or stockholders, respectively, pursuant to action taken by
written consent under Section 228 and 141(f), as the case may be, of the DGCL.
6.9 Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware.
6.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be an original and all of which shall be
considered one and the same agreement and shall become effective when one or
more counterparts have been signed by each of the parties and delivered to the
other parties.
- 12 -
<PAGE> 13
IN WITNESS WHEREOF, the parties to this Agreement have each executed
and delivered same, thereunto duly authorized, intending to be legally bound
hereby:
AMERIPATH, INC.
By: /s/ James C. New
--------------------------------------
James C. New
President
AMERICAN LABORATORY ASSOCIATES, INC.
By: /s/ Robert P. Wynn
--------------------------------------
Robert P. Wynn
Chief Operating Officer
ALA STOCKHOLDERS:
/s/ Evangelos G. Poulos, M.D.
--------------------------------------
EVANGELOS G. POULOS, M.D.
/s/ Michael J. Demaray, M.D.
--------------------------------------
MICHAEL J. DEMARAY, M.D.
/s/ Alexander P. Kowalczyk, M.D.
--------------------------------------
ALEXANDER P. KOWALCZYK, M.D.
- 13 -
<PAGE> 14
SUMMIT VENTURES III, L.P.
By: Summit Partners III,
L.P., its General Partner
By: Stamps, Woodsum & Co.,
III, its General Partner
By: /s/ E. Roe Stamps, IV
-------------------------------
General Partner
SUMMIT INVESTORS II, L.P.
By: /s/ E. Roe Stamps, IV
-----------------------------------
Authorized Signatory
Name:
---------------------------------
Title:
--------------------------------
SCHRODERS INCORPORATED
By: /s/ Jeffrey Gellman
-----------------------------------
Authorized Signatory
Name: Jeffrey Gellman
---------------------------------
Title: Attorney-in-Fact
--------------------------------
SCHRODER VENTURES LIMITED
PARTNERSHIP
By: Schroder Ventures Management L.P.,
its General Partner
By: Schroder Venture Managers Inc.,
its General Partner
By: /s/ Peter L. Everson
-----------------------------------
Authorized Signatory
Name: Peter L. Everson
---------------------------------
Title: Director & V.P.
--------------------------------
- 14 -
<PAGE> 15
SCHRODER VENTURES U.S. TRUST
By: Schroder International Trust
Company Limited, Trustee
By: /s/ Peter L. Everson
-----------------------------------
Authorized Signatory
Name: Peter L. Everson
---------------------------------
Title: Director & V.P.
--------------------------------
- 15 -
<PAGE> 1
Exhibit 10.26
TRUST AGREEMENT
This Trust Agreement ("Agreement") is made as of 15th day of October
1996 between Ameripath, Inc., a Delaware corporation (the "Settlor"), and Beno
Michel ("Michel") as trustee (in such capacity, the "Trustee").
WHEREAS, as of the date hereof, Michel owns one hundred percent (100%)
of the outstanding capital shares of Beno Michel, M.D., Inc., an Ohio
professional corporation (the "Ohio PC");
WHEREAS, promptly after the execution of this Agreement, the trust
created hereby (the "Trust") shall enter a certain Stock Purchase Agreement (the
"PC Purchase Agreement") with Michel pursuant to which Michell shall agree to
sell all of the outstanding Ohio PC shares to the Trust on the terms and
conditions set forth in the PC Purchase Agreement; and
WHEREAS, the Settlor seeks to create the Trust as provided herein and
seeks to appoint Michel as the initial Trustee of the Trust.
NOW, THEREFORE, in consideration of the promises and covenants
contained herein, the parties agree to be legally bound as follows:
1. CREATION OF THE TRUST; INITIAL TRUSTEE: SUCCESSOR TRUSTEE.
(a) Name. The Trust shall be named and referred to as the "AmeriPath
Ohio Trust."
(b) Initial Trustee. The Settlor hereby appoints Michel to act as the
initial Trustee in accordance with the terms of this Agreement. Michel hereby
accepts such appointment and agrees to act as the Trustee in accordance with the
terms of this Agreement.
(c) Successor Trustee. If Michel or any Successor Trustee ceases to
serve, is removed, or resigns as Trustee pursuant to Section 6 hereof, the
Successor Trustee (as defined below) shall be named pursuant to Section 6(a) and
6(b) of this Agreement, as appropriate. A Successor Trustee shall have all the
powers, obligations and discretions given to the original Trustee. Any person or
institution may rely upon the representations of a Successor
<PAGE> 2
Trustee, as to its authority and incumbency, until receiving written
instructions to the contrary from the Settlor.
2. PROPERTY IN TRUST.
(a) Initial Deposit in Trust. Concurrently with the execution of this
Agreement, the Settlor is delivering to the Trustee, on behalf of the Trust,
$6,500,000 (in immediately available funds), stock certificate evidencing 96,000
shares of Common Stock of the Settlor and a promissory note of the Settlor in
the stated principal amount of $1,500,000 (collectively, the "Initial Trust
Estate"). The Trustee acknowledges receipt of the Initial Trust Estate. Promptly
following the execution of this Agreement, Michel, acting in his individual
capacity, shall deliver all outstanding shares of the Ohio PC to the Trustee,
acting on behalf of the Trust, pursuant to the terms and conditions of the PC
Purchse Agreement. The Initial Trust Estate, Ohio PC shares and all other
property of any kind that becomes a part of the Trust in accordance with this
Agreement and the PC Purchase Agreement for the primary benefit of the Settlor.
(b) Other Additions To The Trust. At any time, the Settlor may add
property to the Trust. All such additions, however, shall be subject to the
Trustee's power to refuse to accept such property if, in its sole discretion, it
determines that such property would cause the Trustee to incur liability under
any federal, state, or local law or regulation. The Settlor agrees that it shall
add, and the Trustee agrees that it shall accept, hold, manage and distribute,
funds and securities issued by the Settlor in such amounts and at such times as
may be required to discharge the Trust's obligations under the PC Purchase
Agreement.
3. WITHDRAWAL, TERMINATION, AND MODIFICATION.
(a) Withdrawal. The Settlor reserves the right at any time without the
consent of the Trustee to withdraw any asset of the Trust or to terminate the
Trust by written instrument delivered personally or by certified mail, return
receipt requested, to the Trustee.
(b) Modification. The Settlor reserves the right at any time without
the consent of the Trustee to modify this Agreement in any respect by delivery
personally or by
2
<PAGE> 3
certified mail, return receipt requested, of a written modification to the
Trustee; provided, however, that any modification affecting the powers or
obligations of the Trustee shall be subject to the written approval of the
Trustee, who, upon disagreement with said modifications, shall be deemed to have
resigned its office as Trustee.
(c) Termination of Trust Agreement. This Agreement and the Trust
created hereunder shall continue until the earlier of (i) the date specified in
a written notice given to the Trustee by the Settlor, and (ii) 21 years after
the death of the last survivor of the descendants of the late King George V of
the United Kingdom of Great Britain and Northern Ireland who were living on the
date hereof, but if any rights, privileges or options hereunder shall be or
become valid under applicable law for a period subsequent to the 21st
anniversary of the death of such last survivor (or, without limiting the
generality of the foregoing, if legislation shall become effective providing for
the validity or permitting the effective grant of such rights, privileges and
options for a period in gross exceeding the period for which such rights,
privileges and options are hereinabove stared to extend and be valid), then such
right, privileges or options shall not terminate as aforesaid but shall extend
to and continue in effect, but only if such non-termination and extension shall
then be valid under applicable law, until such time as the same shall, under
applicable law, cease to be valid.
(d) Actions by the Trustee upon Termination. Upon termination of this
Agreement and the Trust created hereby, the Trustee shall take such action as
may be specified in writing by the Settlor to transfer the Assets to the
Settlor.
(e) Compliance with Laws. The Settlor agrees not to exercise any right
reserved in Section 3(a), 3(b) or 3(c) hereof in a manner that could foreseeably
result in a violation of any Laws (as hereinafter defined) by any one or more of
the Settlor, the Ohio PC, the Trustee or Michel.
4. DISTRIBUTIONS FROM TRUST.
(a) Distribution of Income. The Trustee shall distribute the net income
of the Trust, if any, to the Settlor at such times and in such amounts as the
Settlor directs in writing.
3
<PAGE> 4
(b) Distribution of Property or Principal. The Trustee shall pay or
distribute the property or principal of the Trust to the Settlor at such times
and in such amounts as the Settlor directs in writing. The Settlor agrees not to
direct the distribution of the Ohio PC shares in a manner that could foreseeably
result in a violation of any Laws (as hereinafter defined) by any one or more of
the Settlor, the Ohio PC, the Trustee or Michel.
5. POWERS AND OBLIGATIONS OF TRUSTEE.
(a) Powers. The Trustee, as a fiduciary, shall have, subject to the
restrictions set forth in this Section 5 and in addition to all other powers
granted to the Trustee by law, the powers set forth in this Section 5. The
Trustee shall have such powers without giving bond and without being supervised
by any court.
i) General Powers Over Trust Funds. The Trustee may not
distribute, sell, transfer, pledge or exchange any or all of the assets of the
Trust (the "Assets") without the prior written consent of the Settlor; but
otherwise has full power and authority to do everything in the management and
for the preservation of the Assets that it considers proper and for the best
interests of the Trust. The Settlor hereby authorizes and instructs the
Trustee to deliver such Assets, execute and deliver such documents, and take
such other actions as may be required, to discharge the Trust's obligations
under the PC Purchase Agreement, without further written consent or other
action by the Settlor, to the extent, but only to the extent, such obligations
are to be discharged at the Closing referred to in the PC Purchase Agreement.
ii) Fiduciary Responsibility. The Trustee shall not be held
responsible for any loss sustained by the Trust through any error of judgment
made in good faith, but shall be liable only for the Trustee's own willful
misconduct, gross negligence or breach of good faith. The Trustee shall not be
personally liable upon any debt of or claim against the Trust unless personal
liability has been expressly assumed in writing by the Trustee.
iii) Practice of Medicine. It is anticipated that the Assets shall
include shares of stock in one or more professional corporations. Nothing
contained in any provision of this Agreement shall be construed so as to
4
<PAGE> 5
constitute the practice of medicine by the Trust, the Trustee, or the Settlor.
iv) Indemnification. The Settlor shall indemnify the Trustee, in
the Trustee's individual capacity, from any liability, loss, claim, damage,
judgment, award or expense (including reasonable attorney's fees and
disbursements) arising out of the performance of the trustee's duties hereunder;
provided, however, that the Settlor shall have no obligation to indemnify the
Trustee for the Trustee' s own willful misconduct, gross negligence or breach of
good faith. The Settlor may provide insurance for the Trustee in such types and
amounts as the Settlor deems reasonably necessary. The Trustee's right to
indemnification hereunder shall survive any resignation or removal of the
Trustee, or and termination of the Trust, with respect to any claim or matter
arising out of any action taken or not taken by the Trustee, or any other
circumstance or event occurring or existing, on or before the date of any such
resignation, removal or termination.
(b) Records. The Trustee shall keep such records of Trust transactions
as may be requested in writing by the Settlor; and the Settlor, through any
executive officer, shall at all reasonable times have the right to inspect the
records of the Trust.
(c) Release of Trustee's Obligation to Examine Records. The Trustee or
Successor Trustee shall have no responsibility for inquiring into, reviewing or
auditing the administration of any Asset before such asset was accepted as Trust
property, and Successor Trustee shall have no liability for any act or omission
of any prior Trustee or prior Successor Trustee regarding the administration of
Assets; provided, however, that no Trustee or Successor Trustee shall be
relieved of responsibility with reference to its own acts or omissions in any
other capacity.
(d) Action Upon Instructions. Subject to the provisions of Section 8
hereof, upon the written instructions of the Settlor, the Trustee will: (i) give
such notice or direction or exercise such right, remedy or power hereunder or in
respect of all or any part of the Assets, as may be specified in such
instructions; (ii) take such action to hold, preserve, protect or otherwise deal
with the Assets as may be specified in such instructions; (iii) approve as
satisfactory all matters required by the terms of the PC
5
<PAGE> 6
Purchase Agreement to be satisfactory to the Trustee as may be specified in
such instructions; and (v) exercise the Trust's rights as holder of Ohio PC
shares in such manner as may be specified in such instructions (including
exercising rights to consent in writing, vote at meetings of stockholders (in
person or by proxy) or otherwise take such actions as under applicable law
shareholders are permitted or required to take (including election of
directors)). Except as provided in the last sentence of Section 5(a)(i), the
Trustee shall not be obligated to take any action in performance of its
convenants under the PC Purchase Agreement unless such actions is specified in
written instructions from the Settlor.
(e) No Duties Except as Specified in Trust Agreement or Instructions.
The Trustee shall not have any duty or obligation to manage, control, use, make
any payment in respect of, register, record, insure, inspect, sell, dispose of
or otherwise deal with the Assets, or to otherwise take or refrain from taking
any action under or in connection with the Assets, except as expressly provided
by the terms of this Agreement or in written instructions from the Settlor, and
no implied duties or obligations shall be read into this Agreement against the
Trustee.
(f) Absence of Duties. Except in accordance with written instructions
furnished pursuant to Section 5(d) and without limiting the generality of
Section 5(e), the Trustee shall have no duty to (i) file, record or deposit this
Agreement or any instrument or document described herein or in the PC Purchase
Agreement, or to maintain any such filing, recording or deposit or to refile,
rerecord or redeposit any such document, (ii) obtain insurance on Assets or
effect or maintain any such insurance, other than to receive and forward to the
Settlor any notices, policies, certificates or binders furnished to the Trustee
pursuant to the PC Purchase Agreement, (iii) maintain the Assets, (iv) pay or
discharge any tax or any lien owing with respect to or assessed or levied
against any part of the Assets, other than to forward notice of such tax or lien
received by the Trustee to the Settlor, or (vi) manage, control, use, sell,
dispose of or otherwise deal with any part of the Assets.
6
<PAGE> 7
(g) Reliance; Advice of Counsel. The Trustee shall not incur any
liability to any Person in acting upon any signature, instrument, notice,
resolution, request, consent, order, certificate, resort, opinion, bond or other
document or paper believed by him to be genuine and believed by him to be signed
by the proper party or parties. The Trustee may accept and rely upon a certified
copy of a resolution of the board of directors or other governing body of any
corporate party as conclusive evidence that such resolution has been duly
adopted by such body and that the same is in full force and effect. As to any
fact or matter the manner of ascertainment of which is not specifically
prescribed herein, the Trustee may for all purposes hereof rely on an officer's
certificate of the relevant party, as to such fact or matter, and such
certificate shall constitute full protection to the Trustee for any action taken
or omitted to be taken by him in good faith in reliance thereon. In the
administration of the trusts hereunder, the Trustee may execute any of the
trusts or powers hereof and perform his powers and duties hereunder directly or
through agents or attorneys and may, at the expense of the Trust, consult with
counsel, accountants and other skilled persons to be selected and employed by
him, and the Trustee shall not be liable for anything done, suffered or omitted
in good faith by it in accordance with the advice or opinion of any such
counsel, accountants or other skilled persons and not contrary to express
provisions of this Agreement, unless the selection of such counsel, accountants
or other persons shall have been made with negligence, willful misconduct or bad
faith.
6. SUCCESSOR TRUSTEE AND COMPENSATION.
(a) Removal of Trustee and Appointment of Successor. Any Trustee may be
removed at any time with or without cause by a document signed by the Settlor.
The Settlor shall designate and appoint a Successor Trustee or Trustees (a
"Successor Trustee") who, to the extent required by law shall be a doctor of
medicine duly licensed to practice medicine in the State of Ohio. Any such
Successor Trustee shall be appointed in accordance with the terms of this
Agreement, and the Settlor shall deliver by certified mail, return receipt
requested, a document making such appointment, accompanied by the documents
removing the Trustee, to the Trustee being removed and to such Successor
Trustee. The Successor Trustee appointed in accordance with the foregoing shall
promptly deliver a written acceptance thereof to the then acting Trustee. All of
the Trust
7
<PAGE> 8
property in the possession of the then acting Trustee shall be delivered to the
Successor Trustee, together with an accounting of Trust property, receipts and
disbursements (which accounting shall be conducted at the expense of the
Settlor); upon so doing, the then acting Trustee shall have no further
responsibility or right to administer the Trust. Thereupon, such Successor
Trustee shall become vested with all of the Trust property with the same effect
as if originally designated as Trustee.
(b) Resignation of Trustee. Michel, as Trustee, or any successor
Trustee acting hereunder may resign at any time by giving written notice to the
Settlor which resignation shall be effective immediately upon receipt of such
notice In that event, the Settlor shall select a Successor Trustee and the Trust
Assets shall be transferred in accordance with terms set forth in Section 6(a)
above.
(c) Compensation of Trustee. Any individual serving as the Trustee
hereunder shall serve without bond. As compensation for all services under this
Agreement, the Settlor shall pay to the Trustee, for his individual account,
$100 per year (or portion thereof) during the term of this Agreement, payable in
arrears on September 30 of each year (commencing September 30, 1997) or earlier
removal or resignation of the Trustee or termination of the Trust. The Trustee
will be entitled to reimbursement only for actual expenses as the Trustee
hereunder and the indemnification provided in Section 5 hereof.
(d) Situs of Trust. Except as otherwise expressly provided herein, the
validity, effect, and interpretation of this Agreement, and of the property
interests created herein, shall be controlled by the laws of the State of Ohio;
such laws shall also govern the administration of the Trust hereunder.
7. NOTICE. Any notice required or permitted to be given under this
Agreement shall be given by registered or certified mail, return receipt
requested in a pre-paid envelope, by overnight mail or courier, or by facsimile
transmission with receipt acknowledged addressed to the parties as follows (or
at other addresses as shall be given in writing by either party to the other):
8
<PAGE> 9
If to Settlor: AmeriPath, Inc.
800 Cypress Creek Road, Suite 200
Fort Lauderdale, Florida 33334
Attn: James C. New, President
If to Trustee: Beno Michel, M.D.
23200 Chagrin Building 5, Suite 350
Beechwood, OH 44122
8. NO VIOLATION OF LAW. Nothing in this Agreement shall be construed
to impose upon Michel any requirement if complying with such requirement could
foreseeably result in a violation of any law, rule, regulation, order,
judgment, award or determination of any court, arbitrator, governmental or
other authority, including the violation of any code of professional ethics or
other mandate of the medical profession (collectively, the "Laws"). The Settlor
shall not knowingly issue to Michel any direction or impose on him any
requirements, which if performed by Michel could foreseeably violate the Laws.
Without limiting the foregoing, the Settlor shall not interfere in any way with
the exercise by Michel of his professional judgment.
9. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
10. SALE OF THE ASSETS BY THE TRUSTEE IS BINDING. Any sale, transfer,
or other conveyance of the Assets or any part thereof by the Trustee made
pursuant to the terms of this Agreement or the PC Purchase Agreement shall bind
the Settlor and shall be effective to sell, transfer and convey all right, title
and interest of the Trustee and the Settlor in and to such Assets or any part
thereof. Michel, acting in his individual capacity as Seller under the PC
Purchase Agreement, shall not be required to inquire as to the authorization,
necessity, expediency or regularity of such sale, transfer or conveyance with
respect thereto by the Trustee or the Settlor.
11. SUCCESSORS AND ASSIGNS. All covenants and agreements contained
herein shall be binding upon, and inure to the benefit of, the Settlor and its
successors and assigns and the Trustee and his successors, representatives and
assigns, all as herein provided. Any request, notice, direction, consent, waiver
or other instrument or action by
9
<PAGE> 10
each of the parties hereto shall bind the successors and assigns of such party.
Upon the death of any individual acting as the Trustee hereunder, his estate or
other legal representative shall promptly resign as the Trustee pursuant to
Section 6(b) hereof.
10
<PAGE> 11
IN WITNESS WHEREOF, the parties have executed this document as of the
date first above written.
AMERIPATH, INC.
By: /s/ Robert P. Wynn
-------------------------------------
Its: Vice President
TRUSTEE:
/s/ Beno Michel, M.D.
----------------------------------------
11
<PAGE> 12
FIRST MODIFICATION TO THE TRUST AGREEMENT
TRUST AGREEMENT
This First Modification to the Trust Agreement ("Modification") is made
as of the 30th day of October, 1996 by AMERIPATH, INC., a Delaware corporation
(the "Settlor"), pursuant to that certain Trust Agreement dated as of October
15, 1996, by and between the Settlor and BENO MICHEL, M.D., as trustee (the
"Trustee").
WHEREAS, the Settlor and the Trustee entered into a Trust Agreement
dated October 15, 1996 (the "Trust Agreement"), a copy of which is attached
hereto; and
WHEREAS, Section 3(b) of the Trust Agreement provides that the Trust
Agreement may be modified by the Settlor without the consent of the Trustee by
delivering to the Trustee, by certified mail, return receipt requested, a
written modification.
WHEREAS, the Settlor desires to modify the Trust Agreement as provided
herein.
NOW, THEREFORE, in consideration of the promises and covenants
contained herein, the parties agree to be legally bound as follows:
1. The recitals set forth above are true and correct in all respects
and are incorporated herein and made a part hereof.
2. All capitalized terms used in this Modification without definition
shall have the meanings assigned thereto in the Trust Agreement.
3. Section 1(a) of the Trust Agreement is hereby amended by deleting
Section 1(a) in its entirety and replacing it with the following:
"(a) Name. The Trust shall be named and referred to as the
"AmeriPath Cleveland Trust."
4. All other terms and conditions of the Trust Agreement shall remain
unchanged.
IN WITNESS WHEREOF, the undersigned has executed this Modification as
of the date first above-written.
AMERIPATH, INC.
By: /s/ Robert P. Wynn
----------------------------------
Robert P. Wynn, Executive Vice
President and Chief Financial
Officer
<PAGE> 1
Exhibit 10.27
TRUST AGREEMENT
This Trust Agreement ("Agreement") is effective as of the 30th day of
September, 1996 between AMERIPATH, INC., a Delaware corporation (the
"Settlor"), and DAVID R. BARRON, M.D. ("Barron") as trustee (in such capacity,
the "Trustee").
WHEREAS, as of the date hereof, the Settlor owns one hundred percent
(100%) of the outstanding capital stock of AmeriPath Cincinnati, Inc., an Ohio
professional corporation (the "Cincinnati PC");
WHEREAS, prior to the execution of this Agreement, the Settlor entered
into a certain Stock Purchase Agreement (the "PC Purchase Agreement") with
Barron and Ruth Kleier, M.D. ("Kleier") pursuant to which Barron and Kleier
sold all of the outstanding Cincinnati PC shares to the Settlor on the terms
and conditions set forth in the PC Purchase Agreement; and
WHEREAS, the Settlor seeks to create the Trust as provided herein (the
"Trust") and seeks to appoint Barron as the initial Trustee of the Trust.
NOW, THEREFORE, in consideration of the promises and covenants
contained herein, the parties agree to be legally bound as follows:
1. CREATION OF THE TRUST; INITIAL TRUSTEE: SUCCESSOR TRUSTEE.
(a) Name. The Trust shall be named and referred to as
the "AmeriPath Cincinnati Trust."
(b) Initial Trustee. The Settlor hereby appoints Barron
to act as the initial Trustee in accordance with the terms of this Agreement.
Barron hereby accepts such appointment and agrees to act as the Trustee in
accordance with the terms of this Agreement.
(c) Successor Trustee. If Barron or any Successor
Trustee ceases to serve, is removed, or resigns as Trustee pursuant to Section
6 hereof, the Successor Trustee (as defined below) shall be named pursuant to
Section 6(a) and 6(b) of this Agreement, as appropriate. A Successor Trustee
shall have all the powers, obligations and discretions given to the original
Trustee. Any person or institution may rely upon the representations of a
Successor Trustee, as to its authority and incumbency, until receiving written
instructions to the contrary from the Settlor.
2. PROPERTY IN TRUST.
(a) Initial Deposit in Trust. Concurrently with the
execution of this Agreement, the Settlor is delivering to the Trustee, on
behalf of the Trust, a stock certificate evidencing 50 shares of capital stock
of the Cincinnati PC (the "Initial Trust Estate"). The Trustee acknowledges
receipt of the Initial Trust Estate. The Trustee agrees that it will hold,
manage and distribute the Initial Trust Estate, Cincinnati PC shares and all
other property of any
<PAGE> 2
kind that becomes a part of the Trust in accordance with this Agreement and the
PC Purchase Agreement for the primary benefit of the Settlor.
(b) Other Additions To The Trust. At any time, the
Settlor may add property to the Trust. All such additions, however, shall be
subject to the Trustee's power to refuse to accept such property if, in its
sole discretion, it determines that such property would cause the Trustee to
incur liability under any federal, state, or local law or regulation. The
Settlor agrees that it shall add, and the Trustee agrees that it shall accept,
hold, manage and distribute, funds and securities issued by the Settlor in such
amounts and at such times as may be required to discharge the Trust's
obligations under the PC Purchase Agreement.
3. WITHDRAWAL, TERMINATION, AND MODIFICATION.
(a) Withdrawal. The Settlor reserves the right at any
time without the consent of the Trustee to withdraw any asset of the Trust or
to terminate the Trust by written instrument delivered personally or by
certified mail, return receipt requested, to the Trustee.
(b) Modification. The Settlor reserves the right at any
time without the consent of the Trustee to modify this Agreement in any respect
by delivery personally or by certified mail, return receipt requested, of a
written modification to the Trustee; provided, however, that any modification
affecting the powers or obligations of the Trustee shall be subject to the
written approval of the Trustee, who, upon disagreement with said
modifications, shall be deemed to have resigned its office as Trustee.
(c) Termination of Trust Agreement. This Agreement and
the Trust created hereunder shall continue until the earlier of (i) the date
specified in a written notice given to the Trustee by the Settlor, and (ii) 21
years after the death of the last survivor of the descendants of the late King
George V of the United Kingdom of Great Britain and Northern Ireland who were
living on the date hereof, but if any rights, privileges or options hereunder
shall be or become valid under applicable law for a period subsequent to the
21st anniversary of the death of such last survivor (or, without limiting the
generality of the foregoing, if legislation shall become effective providing
for the validity or permitting the effective grant of such rights, privileges
and options for a period in gross exceeding the period for which such rights,
privileges and options are hereinabove stared to extend and be valid), then
such right, privileges or options shall not terminate as aforesaid but shall
extend to and continue in effect, but only if such non-termination and
extension shall then be valid under applicable law, until such time as the same
shall, under applicable law, cease to be valid.
(d) Actions by the Trustee upon Termination. Upon
termination of this Agreement and the Trust created hereby, the Trustee shall
take such action as may be specified in writing by the Settlor to transfer the
Assets to the Settlor.
(e) Compliance with Laws. The Settlor agrees not to
exercise any right reserved in Section 3(a), 3(b) or 3(c) hereof in a manner
that could foreseeably result in a
- 2 -
<PAGE> 3
violation of any Laws (as hereinafter defined) by any one or more of the
Settlor, the Cincinnati PC, the Trustee or Barron.
4. DISTRIBUTIONS FROM TRUST.
(a) Distribution of Income. The Trustee shall distribute
the net income of the Trust, if any, to the Settlor at such times and in such
amounts as the Settlor directs in writing.
(b) Distribution of Property or Principal. The Trustee
shall pay or distribute the property or principal of the Trust to the Settlor
at such times and in such amounts as the Settlor directs in writing. The
Settlor agrees not to direct the distribution of the Cincinnati PC shares in a
manner that could foreseeably result in a violation of any Laws (as hereinafter
defined) by any one or more of the Settlor, the Cincinnati PC, the Trustee or
Barron.
5. POWERS AND OBLIGATIONS OF TRUSTEE.
(a) Powers. The Trustee, as a fiduciary, shall have,
subject to the restrictions set forth in this Section 5 and in addition to all
other powers granted to the Trustee by law, the powers set forth in this
Section 5. The Trustee shall have such powers without giving bond and without
being supervised by any court.
i) General Powers Over Trust Funds. The Trustee
may not distribute, sell, transfer, pledge or exchange any or all of the assets
of the Trust (the "Assets") without the prior written consent of the Settlor;
but otherwise has full power and authority to do everything in the management
and for the preservation of the Assets that it considers proper and for the
best interests of the Trust.
ii) Fiduciary Responsibility. The Trustee shall
not be held responsible for any loss sustained by the Trust through any error
of judgment made in good faith, but shall be liable only for the Trustee's own
willful misconduct, gross negligence or breach of good faith. The Trustee
shall not be personally liable upon any debt of or claim against the Trust
unless personal liability has been expressly assumed in writing by the Trustee.
iii) Practice of Medicine. It is anticipated that
the Assets shall include shares of stock in one or more professional
corporations. Nothing contained in any provision of this Agreement shall be
construed so as to constitute the practice of medicine by the Trust, the
Trustee, or the Settlor.
iv) Indemnification. The Settlor shall indemnify
the Trustee, in the Trustee's individual capacity, from any liability, loss,
claim, damage, judgment, award or expense (including reasonable attorney's fees
and disbursements) arising out of the performance of the trustee's duties
hereunder; provided, however, that the Settlor shall have no obligation to
indemnify the Trustee for the Trustee' s own willful misconduct, gross
negligence or breach of good faith. The Settlor may provide insurance for the
Trustee in such types and amounts as
- 3 -
<PAGE> 4
the Settlor deems reasonably necessary. The Trustee's right to indemnification
hereunder shall survive any resignation or removal of the Trustee, or and
termination of the Trust, with respect to any claim or matter arising out of
any action taken or not taken by the Trustee, or any other circumstance or
event occurring or existing, on or before the date of any such resignation,
removal or termination.
(b) Records. The Trustee shall keep such records of
Trust transactions as may be requested in writing by the Settlor; and the
Settlor, through any executive officer, shall at all reasonable times have the
right to inspect the records of the Trust.
(c) Release of Trustee's Obligation to Examine Records.
The Trustee or Successor Trustee shall have no responsibility for inquiring
into, reviewing or auditing the administration of any Asset before such asset
was accepted as Trust property, and Successor Trustee shall have no liability
for any act or omission of any prior Trustee or prior Successor Trustee
regarding the administration of Assets; provided, however, that no Trustee or
Successor Trustee shall be relieved of responsibility with reference to its own
acts or omissions in any other capacity.
(d) Action Upon Instructions. Subject to the provisions
of Section 8 hereof, upon the written instructions of the Settlor, the Trustee
will: (i) give such notice or direction or exercise such right, remedy or
power hereunder or in respect of all or any part of the Assets, as may be
specified in such instructions; (ii) take such action to hold, preserve,
protect or otherwise deal with the Assets as may be specified in such
instructions; (iii) deliver certificates evidencing Cincinnati PC shares to
such person for safekeeping as may be specified in such instructions; and (iv)
exercise the Trust's rights as holder of Cincinnati PC shares in such manner as
may be specified in such instructions (including exercising rights to consent
in writing; vote at meetings of stockholders (in person or by proxy) or
otherwise take such actions as under applicable law shareholders are permitted
or required to take (including election of directors)).
(e) No Duties Except as Specified in Trust Agreement or
Instructions. The Trustee shall not have any duty or obligation to manage,
control, use, make any payment in respect of, register, record, insure,
inspect, sell, dispose of or otherwise deal with the Assets, or to otherwise
take or refrain from taking any action under or in connection with the Assets,
except as expressly provided by the terms of this Agreement or in written
instructions from the Settlor, and no implied duties or obligations shall be
read into this Agreement against the Trustee.
(f) Absence of Duties. Except in accordance with written
instructions furnished pursuant to Section 5(d) and without limiting the
generality of Section 5(e), the Trustee shall have no duty to (i) file, record
or deposit this Agreement or any instrument or document described herein, or to
maintain any such filing, recording or deposit or to refile, rerecord or
redeposit any such document, (ii) obtain insurance on Assets or effect or
maintain any such insurance, other than to receive and forward to the Settlor
any notices, policies, certificates or binders furnished to the Trustee, (iii)
pay or discharge any tax or any lien owing with respect
- 4 -
<PAGE> 5
to or assessed or levied against any part of the Assets, other than to forward
notice of such tax or lien received by the Trustee to the Settlor, or (iv)
manage, control, use, sell, dispose of or otherwise deal with any part of the
Assets.
(g) Reliance; Advice of Counsel. The Trustee shall not
incur any liability to any Person in acting upon any signature, instrument,
notice, resolution, request, consent, order, certificate, resort, opinion, bond
or other document or paper believed by him to be genuine and believed by him to
be signed by the proper party or parties. The Trustee may accept and rely upon
a certified copy of a resolution of the board of directors or other governing
body of any corporate party as conclusive evidence that such resolution has
been duly adopted by such body and that the same is in full force and effect.
As to any fact or matter the manner of ascertainment of which is not
specifically prescribed herein, the Trustee may for all purposes hereof rely on
an officer's certificate of the relevant party, as to such fact or matter, and
such certificate shall constitute full protection to the Trustee for any action
taken or omitted to be taken by him in good faith in reliance thereon. In the
administration of the trusts hereunder, the Trustee may execute any of the
trusts or powers hereof and perform his powers and duties hereunder directly or
through agents or attorneys and may, at the expense of the Trust, consult with
counsel, accountants and other skilled persons to be selected and employed by
him, and the Trustee shall not be liable for anything done, suffered or omitted
in good faith by it in accordance with the advice or opinion of any such
counsel, accountants or other skilled persons and not contrary to express
provisions of this Agreement, unless the selection of such counsel, accountants
or other persons shall have been made with negligence, willful misconduct or
bad faith.
6. SUCCESSOR TRUSTEE AND COMPENSATION.
(a) Removal of Trustee and Appointment of Successor. Any
Trustee may be removed at any time with or without cause by a document signed
by the Settlor. The Settlor shall designate and appoint a Successor Trustee or
Trustees (a "Successor Trustee") who, to the extent required by law shall be a
doctor of medicine duly licensed to practice medicine in the State of Ohio.
Any such Successor Trustee shall be appointed in accordance with the terms of
this Agreement, and the Settlor shall deliver by certified mail, return receipt
requested, a document making such appointment, accompanied by the documents
removing the Trustee, to the Trustee being removed and to such Successor
Trustee. The Successor Trustee appointed in accordance with the foregoing
shall promptly deliver a written acceptance thereof to the then acting Trustee.
All of the Trust property in the possession of the then acting Trustee shall be
delivered to the Successor Trustee, together with an accounting of Trust
property, receipts and disbursements (which accounting shall be conducted at
the expense of the Settlor); upon so doing, the then acting Trustee shall have
no further responsibility or right to administer the Trust. Thereupon, such
Successor Trustee shall become vested with all of the Trust property with the
same effect as if originally designated as Trustee.
(b) Resignation of Trustee. Barron, as Trustee, or any
successor Trustee acting hereunder may resign at any time by giving written
notice to the Settlor which resignation
- 5 -
<PAGE> 6
shall be effective immediately upon receipt of such notice In that event, the
Settlor shall select a Successor Trustee and the Trust Assets shall be
transferred in accordance with terms set forth in Section 6(a) above.
(c) Compensation of Trustee. Any individual serving as
the Trustee hereunder shall serve without bond. As compensation for all
services under this Agreement, the Settlor shall pay to the Trustee, for his
individual account, $100 per year (or portion thereof) during the term of this
Agreement, payable in arrears on September 30 of each year (commencing
September 30, 1997) or earlier removal or resignation of the Trustee or
termination of the Trust. The Trustee will be entitled to reimbursement only
for actual expenses as the Trustee hereunder and the indemnification provided
in Section 5 hereof.
(d) Situs of Trust. Except as otherwise expressly
provided herein, the validity, effect, and interpretation of this Agreement,
and of the property interests created herein, shall be controlled by the laws
of the State of Ohio; such laws shall also govern the administration of the
Trust hereunder.
7. NOTICE. Any notice required or permitted to be given under
this Agreement shall be given by registered or certified mail, return receipt
requested in a pre-paid envelope, by overnight mail or courier, or by facsimile
transmission with receipt acknowledged addressed to the parties as follows (or
at other addresses as shall be given in writing by either party to the other):
If to Settlor: AmeriPath, Inc.
800 Cross Creek Road, Suite 200
Fort Lauderdale, Florida 33334
Attn: James C. New, President
If to Trustee: David R. Barron, M.D., Inc.
9670 Kenwood Road
Cincinnati, OH 45242
Attn: David R. Barron, M.D.
8. NO VIOLATION OF LAW. Nothing in this Agreement shall be
construed to impose upon Barron any requirement if complying with such
requirement could foreseeably result in a violation of any law, rule,
regulation, order, judgment, award or determination of any court, arbitrator,
governmental or other authority, including the violation of any code of
professional ethics or other mandate of the medical profession (collectively,
the "Laws"). The Settlor shall not knowingly issue to Barron any direction or
impose on him any requirements, which if performed by Barron could foreseeably
violate the Laws. Without limiting the foregoing, the Settlor shall not
interfere in any way with the exercise by Barron of his professional judgment.
- 6 -
<PAGE> 7
9. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
10. SALE OF THE ASSETS BY THE TRUSTEE IS BINDING. Any sale,
transfer, or other conveyance of the Assets or any part thereof by the Trustee
made pursuant to the terms of this Agreement or the PC Purchase Agreement shall
bind the Settlor and shall be effective to sell, transfer and convey all right,
title and interest of the Trustee and the Settlor in and to such Assets or any
part thereof. Barron, acting in his individual capacity as Seller under the PC
Purchase Agreement, shall not be required to inquire as to the authorization,
necessity, expediency or regularity of such sale, transfer or conveyance with
respect thereto by the Trustee or the Settlor.
11. SUCCESSORS AND ASSIGNS. All covenants and agreements
contained herein shall be binding upon, and inure to the benefit of, the
Settlor and its successors and assigns and the Trustee and his successors,
representatives and assigns, all as herein provided. Any request, notice,
direction, consent, waiver or other instrument or action by each of the parties
hereto shall bind the successors and assigns of such party. Upon the death of
any individual acting as the Trustee hereunder, his estate or other legal
representative shall promptly resign as the Trustee pursuant to Section 6(b)
hereof.
- 7 -
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this document as of the
date first above written.
AMERIPATH, INC.
By: /s/ Robert P. Wynn
-----------------------------------
Its: Vice President
----------------------------------
TRUSTEE:
/s/ David R. Barron, M.D
--------------------------------------
David R. Barron, M.D.
- 8 -
<PAGE> 1
Exhibit 10.28
AMERIPATH, INC.
NONQUALIFIED STOCK OPTION AGREEMENT
-------------------------
AMERIPATH, INC., a Delaware corporation (the "Company"), as of this
____ day of ___________, 199__, hereby grants to _____________ (the
"Optionee"), an option ("Option") to purchase a total of ________________
(_________) shares (the "Shares") of Common Stock, par value $.01 per share
(the "Common Stock"), of the Company, at the price determined as provided
herein, pursuant to the AMERIPATH INC. 1996 Stock Option Plan (the "Plan")
adopted by the Company and its stockholders, which Plan is incorporated
herein by reference. The Optionee hereby acknowledges receipt of the Plan
and agrees to be bound by all of the terms and conditions hereof and
thereof. All capitalized terms which are defined in the Plan shall have the
meanings ascribed to such terms in the Plan.
1. NATURE OF THE OPTION. This Option is a Non-Statutory Stock
Option.
2. EXERCISE SCHEDULE. Except as otherwise provided in Sections
7, 8, 9 and 16 of the Plan, this Option shall be exercisable in whole or in
part and cumulatively according to the following schedule:
20% on or after the first anniversary of the date of grant
20% on or after the second anniversary of the date of grant
20% on or after the third anniversary of the date of grant
20% on or after the fourth anniversary of the date of grant
20% on or after the fifth anniversary of the date of grant
(with all share amounts subject to adjustment in accordance with this grant
agreement and the Plan); provided, however, that, notwithstanding any other
provision herein, each 2,000 Share increment of this Option set forth in the
schedule above shall vest and shall be and become exercisable by the Optionee
if and only if the Optionee is in the employ of the Company on the date
indicated.
This Option shall be exercised in the manner set forth in Section 7
of the Plan. In no event shall this Option be exercisable earlier than six
months after the date of this Agreement (which represents the date upon
which the Company's Board of Directors authorized and approved the grant
reflected herein).
3. EXERCISE PRICE. The exercise price of the Shares subject to
this Option is $_____ for each Share.
<PAGE> 2
4. TERMINATION OF OPTION PERIOD. The unexercised portion of
this Option that is or becomes exercisable shall automatically and without
notice terminate and become null and void (and no longer exercisable) at the
time set forth in Section 9 of the Plan.
5. TRANSFERABILITY OF OPTIONS; ISSUANCE OF SHARES; RESTRICTIVE
LEGEND. This Option is not transferable by the Optionee otherwise than by
will or by the laws of descent and distribution and the Option shall be
exercisable during the Optionee's lifetime only by the Optionee. Any Shares
purchased by the Optionee pursuant to the exercise of this Option shall be
subject to the Company's Shareholders' Agreement relating to the Shares and
related and other matters (the "Shareholders' Agreement"), including, but not
limited to, any restrictions on transferability, any rights of first refusal
and any option of the Company to "call" or purchase such Shares, so long as
the Shareholders' Agreement remains in effect. As a condition to the issuance
of such Shares, the Optionee shall execute and deliver to the Company a
counterpart to the Shareholders' Agreement, so long as the Shareholders'
Agreement remains in effect..
Each and every stock certificate representing shares of Common Stock
issued to the Optionee upon exercise of the Option shall bear the following
(or similar) restrictive legend ()to the extent applicable), together with such
other legend(s) as the Committee shall in its discretion deem appropriate:
"The shares represented by this certificate (the "Shares")
have been acquired from the Issuer pursuant to the Issuer's
1996 Stock Option Plan (the "Plan"). The Shares are subject
to each and every one of the terms, conditions and
restrictions set forth in the Plan. The Shares are also
subject to each and every one of the terms, conditions and
restrictions set forth in the Shareholders' Agreement
(the "Shareholders" Agreement"), as amended, including,
but not limited to, any restrictions on transferability, any
rights of first refusal and any option of the Company
to "call" or purchase such Shares, and may not, in whole
or in part, be sold, transferred, pledged, gifted,
hypothecated or otherwise disposed of in any manner other
than in accordance with the terms of the Shareholders'
Agreement, a copy of which is on file and available for
inspection at the principal offices of the Issuer presently
located at 7289 Garden Road, suite 200, Riviera Beach, Florida
33404."
6. OPTIONEE'S REPRESENTATIONS. In the event the Shares
purchasable pursuant to the exercise of this Option have not been registered
under the Securities Act of 1933, as amended ("Securities Act"), at the time
this Option is exercised, and such registration is required for the Optionee
to effect the sale or transfer of such Shares, the Optionee shall,
concurrently with the exercise of all or any portion of this Option, deliver
to the Company his or her Investment Representation Statement in the form
attached hereto as Annex "A".
7. RESTRICTIONS ON EXERCISE. This Option may not be exercised
if the issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would
- 2 -
<PAGE> 3
constitute a violation of any applicable federal or state securities or other
law or regulation, including any rule under Part 207 of Title 12 of the Code of
Federal Regulations ("Regulation G") as promulgated by the Federal Reserve
Board. As a condition to the exercise of this option, the Company may require
the Optionee to make any representation and warranty to the Company as may be
required by any applicable law or regulation.
8. DEATH OF OPTIONEE. Upon the death of Optionee this Option
may be exercised by Optionee's estate or by a person who acquired the right
to exercise this Option by bequest or inheritance, but only to the extent of
the right to exercise that had accrued at the date of termination and only for
such period of time as shall be permitted pursuant to Section 9(a) of the
Plan, and subject to all of the restrictions contained in this Option
Agreement.
9. TERM OF OPTION. Notwithstanding anything to the contrary
contained herein, this Option may not be exercised more than 10 years from
the date of grant of this Option, and may be exercised during such term
only in accordance with the terms of the Plan and this Option.
10. METHOD OF PAYMENT. Payment for the Shares upon exercise
of this Option shall be made in cash, by certified or official bank check,
by money order, with Shares (which may include Shares to be received upon the
exercise of an Option) having a Fair Market Value on the date of delivery
equal to the aggregate exercise price of the Shares as to which said Option
is being exercised, or by any combination of such methods of payment or by
any other method of payment as may be permitted under applicable law and as
may be authorized by the Committee, such as by personal check or promissory
note of the Optionee (subject to the provisions of Section 7 of the Plan).
11. EXERCISE OF OPTION. An Option, or any fraction thereof,
shall be deemed to be exercised when written notice of such exercise has been
given to the Company in accordance with the terms of this Option by the person
entitled to exercise the Option, full payment for the Shares with respect to
which the Option is exercised has been received by the Company, and the
withholding provided for in Section 13 of this Agreement have been
satisfactorily provided for. Full payment may consist of any form of
consideration and method of payment allowable under Section 10 hereof. With
regard to any Shares issued upon the exercise of an Option, the Optionee,
after receipt of such Shares, shall have the right upon such exercise to
vote, receive dividends and exercise all rights as a stockholder with
respect to such Shares.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER.
Subject to any required action by the stockholders of the Company, the
number of Shares covered by this Option, and the aggregate number of Shares
which have been authorized for issuance hereunder, as well as the exercise
price per share of Common Stock, covered by this Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock dividend or through any
recapitalization, reclassification, stock split-up, combination or Company
exchange of Shares (other than any such exchange or issuance of Shares
through which Shares are issued to effect an acquisition of another business
or entity). Such adjustment shall be made by the Committee, whose
determination in that respect shall be final, binding and conclusive. Except
as expressly provided herein, no issuance by the Company of shares of stock
of any class, or securities convertible into shares of stock of any class,
shall
- 3 -
<PAGE> 4
affect, and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock subject to this Option.
Unless otherwise expressly provided herein, in the event of (A)
the initial underwritten public offering of equity securities of the
Company pursuant to a registration statement filed under the Securities
Act of 1933, as amended, (B) the sale of all or substantially all of the
stock or assets of the Company, or (C) the merger or consolidation of
the Company as a result of which those persons who hold 100% of the
voting stock of the Company immediately prior to such transaction own less
than 50% of the voting stock of the surviving resulting entity, this Option
may, in the Committee's sole discretion, terminate immediately prior to the
consummation of such proposed action, provided that if the Option is then
exercisable, the Optionee shall have received written notice within a
reasonable time prior to the consummation of such action advising the
Optionee of (i) any of the foregoing and (ii) that the Optionee has the
opportunity to exercise his Option during such period. The Committee may, in
the exercise of its sole discretion, in such instances declare that any
Option shall terminate as of a date fixed by the Board and give each
Optionee the right to exercise his or her Option.
13. WITHHOLDING. In order to enable the Company to meet any
applicable federal, state or local withholding tax requirements arising as a
result of the exercise of this Option, and as a condition to the issuance
of Shares hereunder, the Optionee shall pay the Company cash for the amount of
tax to be withheld.
14. INTERPRETATION.
(a) If any provision of this agreement should be held invalid
for the granting of Options or illegal for any reason, such determination
shall not affect the remaining provisions hereof, but instead this agreement
shall be construed and enforced as if such provision had never been included
in this Agreement.
(b) This Agreement shall be governed by and construed and
enforced in accordance with the internal laws of the State of Delaware.
(c) Headings contained in this agreement are for convenience
only and shall in no manner be construed as part of this Agreement.
(d) Any reference to the masculine, feminine, or neuter gender
shall be a reference to such other gender as is appropriate.
(e) This agreement shall not confer upon the Optionee any
right with respect to continuation of employment by, or consulting
relationship with, the Company, nor shall it interfere in any way with his or
her right to terminate his or her employment or consulting relationship at any
time.
- 4 -
<PAGE> 5
15. ACKNOWLEDGMENT. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Committee upon any questions arising under the Plan or this Agreement.
DATE OF GRANT:
AMERIPATH, INC.
(The Company)
By:
------------------------------------
Robert P. Wynn, Chief Financial
Officer
Accepted and Agreed to this
___ day of ___________, 1996.
OPTIONEE
- ------------------------------
Name:
- 5 -
<PAGE> 6
ANNEX "A"
INVESTMENT REPRESENTATION STATEMENT
PURCHASER:
SELLER: AmeriPath, Inc.
COMPANY: AmeriPath, Inc.
SECURITY: _________ Shares of Common Stock
DATE: _____________, 199_
In connection with the purchase of the above-listed Securities, I, the
Purchaser, represent to the Seller and to the Company, the following:
(a) I am aware of the Company's business affairs and
financial condition, and have acquired all such information about the
Company as I deem necessary and appropriate to enable me to reach an informed
and knowledgeable decision to acquire the Securities. I am purchasing these
Securities for my own account for investment and not with a view to, or for
the resale in connection with, any "distribution" thereof for purposes of the
Securities Act of 1933, as amended ("Securities Act").
(b) I understand that the Securities have not been registered
under the Securities Act in reliance upon a specific exemption therefrom,
which exemption depends upon, among other things, the bona fide nature of my
investment intent as expressed herein.
(c) I further understand that the Securities may not be sold
publicly and must be held indefinitely unless they are subsequently
registered under the Securities Act or unless an exemption from registration
is available. I am able, without impairing my financial condition, to hold
the Securities for an indefinite period of time and to suffer a complete loss
on my investment. I understand that the Company is under no obligation to
register the Securities. In addition, I understand that the certificate
evidencing the Securities will be imprinted with a legend which prohibits the
transfer of the Securities unless they are registered or such registration is
not required in the opinion of counsel for the Company.
(d) I am familiar with the provisions of Rule 144,
promulgated under the Securities Act, which, in substance, permits limited
public resale of "restricted securities" acquired, directly or indirectly,
from the issuer thereof (or from an affiliate of such issuer), in a
non-public offering subject to the satisfaction of certain conditions,
including, among other things: (1) the availability of certain public
information about the Company; (2) the resale occurring not less than two
years after the party has purchased, and made full payment for, within the
meaning of Rule 144, the securities to be sold; and, in the case of an
affiliate, or of a non-affiliate who has held the securities less than three
years (3) the sale being made through a broker in an unsolicited "broker's
transaction" or in transactions directly with a market maker (as said term is
defined under the Securities Exchange Act of 1934) and the amount of
securities being sold during any three month period not exceeding the specified
limitations stated therein, if applicable.
A-1
<PAGE> 7
(e) I further understand that at the time I wish to sell the
Securities there may be no public market upon which to make such a sale, and
that, even if such a public market then exists, the Company may not be
satisfying the current public information requirements of Rule 144, and
that, in such event, I would be precluded from selling the Securities under
Rule 144 even if the two-year minimum holding period had been satisfied. I
understand that the Company is under no obligation to make Rule 144 available.
(f) I further understand that in the event all of the
applicable requirements of Rule 144 are not satisfied, registration under
the Securities Act, or some other registration exemption will be required;
and that, notwithstanding the fact that Rule 144 is not exclusive, the
Staff of the Securities and Exchange Commission has expressed its opinion
that persons proposing to sell private placement securities other than in a
registered offering and otherwise than pursuant to Rule 144 will have a
substantial burden of proof in establishing that an exemption from
registration is available for such offers or sales, and that such persons and
their respective brokers who participate in such transactions do so at their
own risk.
(g) I further understand that in addition to the
restrictions set forth above the transfer of the Securities is restricted
under the terms of my Option Agreement and such other agreements that I may
be required to execute pursuant to my Option Agreement and may not be
transferred without complying with the provisions of the Plan or such other
agreements.
SIGNATURE OF PURCHASER:
---------------------------------------
Date: ____________, 199__
A-2
<PAGE> 1
Exhibit 10.29
- --------------------------------------------------------------------------------
STOCK PURCHASE AGREEMENT
BY AND AMONG
AMERIPATH, INC.,
BENO MICHEL, M.D., INC.
AND
BENO MICHEL, M.D.
EFFECTIVE AS OF OCTOBER 15, 1996
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
ARTICLE I
PURCHASE OF CAPITAL STOCK
<S> <C>
1.1 Purchase and Sale of Capital Stock....................................................................... 1
1.2 The Contingent Note...................................................................................... 4
1.3 Contingent Issuance of AmeriPath Stock................................................................... 9
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE SELLER AND CP&I
2.1 Corporate Organization, Qualification, etc............................................................... 15
2.2 Subsidiaries............................................................................................. 16
2.3 Capital Stock............................................................................................ 16
2.4 Corporate Record Books................................................................................... 16
2.5 Title to Stock........................................................................................... 16
2.6 Options and Rights....................................................................................... 16
2.7 Authorization, Etc....................................................................................... 16
2.8 No Violation............................................................................................. 17
2.9 Financial Statements..................................................................................... 17
2.10 Employees................................................................................................ 18
2.11 Absence of Certain Changes............................................................................... 18
2.12 Contracts................................................................................................ 19
2.13 True and Complete Copies................................................................................. 21
2.14 Title and Related Matters................................................................................ 21
2.15 Litigation............................................................................................... 22
2.16 Tax Matters.............................................................................................. 22
2.17 Compliance with Law and Applicable Government Regulations................................................ 23
2.18 ERISA and Related Matters................................................................................ 24
2.19 Intellectual Property.................................................................................... 25
2.20 Environmental Matters.................................................................................... 26
2.21 Dealings with Affiliates................................................................................. 27
2.22 Banking Arrangements..................................................................................... 27
2.23 Insurance................................................................................................ 27
2.24 Consents................................................................................................. 28
2.25 Investment Representations............................................................................... 28
2.26 Accounts Receivable; Inventories......................................................................... 29
2.27 Brokerage................................................................................................ 30
2.28 Improper and Other Payments.............................................................................. 30
</TABLE>
- i -
<PAGE> 3
<TABLE>
<S> <C>
2.29 Participation in Audits.................................................................................. 30
2.30 Health Care Laws......................................................................................... 30
2.31 Financial Condition at Closing........................................................................... 32
2.32 Disclosure............................................................................................... 32
2.33 Limitation............................................................................................... 32
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
3.1 Corporate Organization, etc.............................................................................. 32
3.2 Subsidiaries............................................................................................. 33
3.3 Authorization, Etc....................................................................................... 33
3.4 No Violation............................................................................................. 33
3.5 Governmental Authorities................................................................................. 33
3.6 Issuance of AmeriPath Stock.............................................................................. 34
3.7 Financial Statements..................................................................................... 34
3.8 Capitalization; Options.................................................................................. 34
3.9 Compliance with Material Laws and Regulations............................................................ 35
3.10 Litigation............................................................................................... 35
3.11 Insurance................................................................................................ 35
3.12 Disclosure............................................................................................... 35
ARTICLE IV
COVENANTS OF THE SELLER
4.1 Regular Course of Business............................................................................... 35
4.2 Amendments............................................................................................... 36
4.3 Capital Changes; Pledges................................................................................. 36
4.4 Dividends................................................................................................ 36
4.5 Capital and Other Expenditures........................................................................... 36
4.6 Cash and Cash Equivalents................................................................................ 36
4.7 Borrowing................................................................................................ 36
4.8 Other Commitments........................................................................................ 36
4.9 Transfer of Business..................................................................................... 37
4.10 Interim Financial Information............................................................................ 37
4.11 Full Access and Disclosure............................................................................... 37
4.12 Confidentiality.......................................................................................... 37
4.13 Fulfillment of Conditions Precedent...................................................................... 37
</TABLE>
- ii -
<PAGE> 4
<TABLE>
<CAPTION>
ARTICLE V
COVENANTS OF THE PURCHASER
<S> <C>
5.1 Confidentiality.......................................................................................... 38
5.2 Full Access and Disclosure............................................................................... 38
5.3 Fulfillment of Conditions Precedent...................................................................... 38
ARTICLE VI
OTHER AGREEMENTS
6.1 Further Assurances....................................................................................... 39
6.2 Agreement to Defend...................................................................................... 39
6.3 Consents................................................................................................. 39
6.4 No Solicitation or Negotiation........................................................................... 39
6.5 Public Announcements..................................................................................... 39
6.6 Employment Agreements.................................................................................... 40
6.7 --DELETED--.............................................................................................. 40
6.8 Observer Rights.......................................................................................... 40
6.9 Certain Tax Matters...................................................................................... 40
6.10 Non-Competition Covenant................................................................................. 41
6.11 Non-disclosure; Confidentiality.......................................................................... 43
6.12 Rule 144 Best Efforts.................................................................................... 44
6.13 Exclusive Territory...................................................................................... 44
6.14 First Rights............................................................................................. 44
6.15 Unpaid Tax Liability..................................................................................... 44
6.16 Trade Names.............................................................................................. 45
6.17 Access to Books.......................................................................................... 45
6.18 Deliveries After Closing................................................................................. 45
6.19 Post Closing Operations.................................................................................. 45
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER
7.1 Representations and Warranties; Covenants and Agreements................................................. 46
7.2 No Injunction............................................................................................ 46
7.3 --DELETED--.............................................................................................. 46
7.4 --DELETED--.............................................................................................. 46
7.5 No Material Adverse Change............................................................................... 46
7.6 Opinion of Seller's Counsel.............................................................................. 46
7.7 Employment Agreement..................................................................................... 46
7.8 Delivery of CP&I Share Certificates...................................................................... 47
</TABLE>
- iii -
<PAGE> 5
<TABLE>
<S> <C>
7.9 Shareholders' Agreement.................................................................................. 47
7.10 Subordination Agreement.................................................................................. 47
7.11 Other Agreements......................................................................................... 47
7.12 Transfer of Business..................................................................................... 47
7.13 Acquisition Agreement.................................................................................... 47
7.14 Escrow Agreement......................................................................................... 47
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF THE SELLER
8.1 Representations and Warranties; Performance.............................................................. 48
8.2 No Injunction............................................................................................ 48
8.3 Purchase Consideration................................................................................... 48
8.4 Other Agreements......................................................................................... 48
8.5 Acquisition Agreement.................................................................................... 48
8.6 Opinion of Counsel....................................................................................... 48
8.7 Approval Certificate..................................................................................... 48
8.8 Escrow Agreement......................................................................................... 48
ARTICLE IX
CLOSING
9.1 Closing.................................................................................................. 48
9.2 Closing Deliveries....................................................................................... 49
ARTICLE X
TERMINATION AND ABANDONMENT
10.1 Methods of Termination................................................................................... 50
10.2 Procedure Upon Termination............................................................................... 51
ARTICLE XI
SURVIVAL; INDEMNIFICATION
11.1 Survival................................................................................................. 51
11.2 Indemnification by the Seller............................................................................ 52
11.3 Indemnification by the Purchaser......................................................................... 53
11.4 Third-Party Claims....................................................................................... 53
</TABLE>
- iv -
<PAGE> 6
<TABLE>
<S> <C>
11.5 Deductible............................................................................................... 54
11.6 Benefits................................................................................................. 55
11.7 Maximum Liability........................................................................................ 55
11.8 Insurance................................................................................................ 55
11.9 Notice of Claims......................................................................................... 55
11.10 Time Bar................................................................................................. 55
11.11 Exclusive Remedy......................................................................................... 55
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.1 Amendment and Modification............................................................................... 56
12.2 Entire Agreement......................................................................................... 56
12.3 Certain Definitions...................................................................................... 56
12.4 Notices.................................................................................................. 59
12.5 Waiver of Compliance; Consents........................................................................... 60
12.6 Assignment............................................................................................... 60
12.7 Governing Law............................................................................................ 60
12.8 Consent to Jurisdiction; Service of Process.............................................................. 60
12.9 Injunctive Relief........................................................................................ 61
12.10 Counterparts............................................................................................. 61
12.11 Headings................................................................................................. 61
12.12 Binding Effect........................................................................................... 61
12.13 Severability............................................................................................. 61
12.14 Expenses................................................................................................. 61
12.15 Attorneys' Fees.......................................................................................... 61
</TABLE>
- v -
<PAGE> 7
SCHEDULES
1.3 Contingent Stock
2.1 Jurisdictions of Qualification
2.2 Subsidiaries; Investments; Interests
2.8 Violations
2.9(a) Liabilities
2.9(b) Liabilities covered by Insurance
2.9(c) Accounts Payable
2.11 Certain Changes
2.12 Contracts
2.14 Real and Personal Property
2.15 Litigation
2.17(a) Permits and Licenses
2.17(b) Jurisdictions Licensed to Provide Health Care; Status
2.18 ERISA, Benefit Plans and Other Matters
2.19 Intellectual Property
2.19(d) Software
2.20 Environmental Matters
2.21 Affiliated Transactions
2.22 Banking Arrangements
2.23 Insurance
2.24 Consents
2.26 Accounts Receivable
2.28 Improper Payments
2.29 Participation in Audits
2.30(a) Fraud and Abuse
2.30(b) Third-Party Payors
2.30(c) Medicare and Medicaid Compliance
2.30(d) Rate Limitations and Rates
3.2 Subsidiaries of AmeriPath
3.8 Options, Rights
3.10 Litigation - AmeriPath
3.11 Insurance - AmeriPath
4.9 Assets and Liabilities of Medical Practices
- vi -
<PAGE> 8
EXHIBITS
1.2 Form of 7% Non-Negotiable Subordinated Contingent Promissory Note
1.2(k) Escrow Agreement
1.3 Approval Certificate
2.1 CP&I's Articles of Incorporation, as amended, and By-laws
2.9 CP&I's Financial Statements
3.1 AmeriPath Certificate of Incorporation, as amended, and By-laws
3.7 AmeriPath Financial Statements
6.6 Form of Employment Agreement for the Seller
7.6 Opinion of Seller's Counsel
7.9 Signature Page to Shareholders' Agreement
7.10 Subordination Agreement
7.13 Acquisition Agreement
8.6 Opinion of Purchaser's Counsel
- vii -
<PAGE> 9
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") dated as of October 15,
1996, by and among AMERIPATH, INC., a Delaware corporation, or its permitted
assigns ("AmeriPath" or the "Purchaser"), BENO MICHEL, M.D., INC. (d/b/a
Cutaneous Pathology & Immunofluorescence Laboratory), an Ohio corporation
("CP&I"), and BENO MICHEL, M.D., who is the holder of One Hundred (100) common
shares, no par value per share, of CP&I (Dr. Michel shall be referred to herein
as the "Seller").
WHEREAS, the Seller owns all of the issued and outstanding shares of
capital stock of CP&I, organized as a professional service corporation under
Section 1785.01 of the Revised Code of Ohio;
WHEREAS, AmeriPath desires to purchase and acquire from the Seller, and
the Seller desires to sell, transfer and deliver to AmeriPath, all of the issued
and outstanding shares of capital stock of CP&I, upon the terms and subject to
the conditions set forth herein;
WHEREAS, in order to comply with applicable federal and Ohio State
Health Care Laws, a grantor trust, a permitted assign hereunder (the "Trust"),
with AmeriPath as its sole beneficiary and with the Seller as the trustee, shall
acquire all of the issued and outstanding shares of stock of CP&I pursuant to
the terms and conditions set forth herein; and
WHEREAS, although the parties hereto have agreed as to the minimum
value of CP&I, they are not able to agree as to the total value of CP&I, and
thus the parties hereto have agreed to certain additional contingent purchase
price consideration based upon the results of operations of CP&I as more fully
set forth herein.
NOW, THEREFORE, for and in consideration of the mutual benefits to be
derived hereby and the premises, representations, warranties, covenants and
agreements herein contained, AmeriPath, the Seller and CP&I hereby agree,
intending to be legally bound, as follows:
ARTICLE I
PURCHASE OF CAPITAL STOCK
1.1 Purchase and Sale of Capital Stock.
(a) Subject to the terms and conditions of this Agreement, the
Seller agrees to sell, transfer and deliver to the Purchaser, and the
Purchaser agrees to purchase, acquire and accept delivery from the
Seller, all of the issued and outstanding capital stock of CP&I (the
"CP&I Shares").
- 1 -
<PAGE> 10
(b) Upon the sale, transfer and delivery to the Purchaser by
the Seller of the CP&I Shares at the Closing (as such term is defined
in Section 9.1 hereof), and in consideration therefor, AmeriPath shall
deliver to the Seller the following consideration in the aggregate (the
"Purchase Price"):
(i) SIX MILLION FIVE HUNDRED THOUSAND DOLLARS
($6,500,000.00), by wire transfer to such bank account as the
Seller may designate in a written notice delivered to the
Purchaser no later than five business days prior to the
Closing Date (as defined in Section 9.1);
(ii) Certificates evidencing 96,000 shares of Common
Stock, par value $.01 per share, of AmeriPath Inc., a Delaware
corporation (the "AmeriPath Stock");
(iii) 7% Non-Negotiable Subordinated Contingent
Promissory Note, in the form attached hereto as Exhibit 1.2
(the "Contingent Note"), in the aggregate maximum principal
amount of ONE MILLION FIVE HUNDRED THOUSAND DOLLARS
($1,500,000.00), the issuance and certain terms and conditions
of which Contingent Note are set forth in Section 1.2 below;
and
(iv) Up to 100,000 shares of AmeriPath Stock,
issuable over three years subject to the satisfaction of
certain contingencies, subject to and in accordance with
Section 1.3 hereof.
The consideration referred to in Sections 1.1(b) (i) through
(iii) shall be delivered to the Seller at the Closing, and the
consideration referred to in Section 1.1(b)(iv) shall be delivered to
the Seller as provided in Section 1.3(a).
(c) Purchase Price Adjustments.
(i) Within sixty (60) days of the Closing Date, the
Purchaser shall determine (in accordance with Section 1.2(b)
hereof) and advise the Seller by written notice (the
"Adjustment Notice") of the Operating Earnings (as defined
below) of CP&I for the twelve month period ended September 30,
1996 (the "Adjustment Earnings"); provided, however, the
Adjustment Earnings shall include pro forma adjustments
including setting the Seller's salary at the annual rate set
forth in his Employment Agreement, excluding non-recurring
charges and expenses and proportional charges with respect to
entertainment and continuing education expenses attributable
to the Seller's medical practice. In the event either party
believes there is a basis for a purchase price adjustment as
described herein (an "Adjustment"), such party shall notify
the other of such Adjustment within ten (10) days of receipt
by the Seller of the Adjustment Notice, and the other party
shall have the right to dispute such Adjustment. AmeriPath and
the Seller shall negotiate in good faith to resolve any such
dispute. In the event AmeriPath and the Seller cannot resolve
such dispute within thirty (30) days, the independent
<PAGE> 11
certified public accounting firm which then audits
AmeriPath's financial statements shall resolve the dispute,
with such firm's opinion being final and binding on all
parties; provided, however, the Seller, at his own expense,
may refer the matter to another independent public accounting
firm, and the average of the decisions of the two firms shall
be the final and binding resolution of the matter. If neither
party has requested an Adjustment pursuant this Section
1.1(c)(i) within ten (10) days of the receipt by the Seller of
the Adjustment Notice (the Adjustment Notice will be deemed to
have been received by the Seller two business days after it
was sent by the Purchaser if it was delivered by overnight
delivery with a reputable national courier), then AmeriPath
shall issue and deliver to the Seller certificates
representing 50,667 shares of AmeriPath Stock and no further
Adjustment shall be made hereunder. If the parties agree that
an Adjustment is necessary and they have agreed on the
Adjustment Earnings, then the Adjustment shall be determined
as follows:
a. In the event that the Adjustment Earnings
are greater than $1,500,000.00, the Purchaser shall
issue and deliver additional shares of AmeriPath
Stock to the Seller. The number of additional shares
shall be equal to 50,667 plus a fraction (x) the
numerator of which is the product of (a) 3.8 and (b)
the amount by which the Adjustment Earnings exceed
$1,500,000.00 and (y) the denominator of which is
$15.00.
b. In the event that the Adjustment Earnings
are greater than or equal to $1,300,000.00, but less
than $1,500,000.00, the Purchaser shall issue and
deliver certificates to the Seller representing the
number of shares of AmeriPath Stock as determined in
the following sentence. The number of shares to be
issued and delivered by AmeriPath to the Seller shall
be equal to a fraction (x) the numerator of which is
the amount by which the product of the Adjustment
Earnings and 3.8 exceeds $5,000,000.00 and (y) the
denominator of which is $15.00.
c. In the event that the Adjustment Earnings
are less than $1,300,000.00, the Seller shall refund
to AmeriPath $3.80 for every $1.00 for which the
Adjustment Earnings are below $1,300,000.
(ii) Upon the consummation of the first to occur of
(a) an underwritten offering of AmeriPath Stock pursuant to a
registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), as declared effective by the
Securities and Exchange Commission (the "SEC") resulting in
gross proceeds to AmeriPath of at least $20,000,000.00 (a
"Qualified IPO") or (b) a Sale of Control (as defined in
Section 12.3 hereof), and the value of the AmeriPath Stock
(the price at which the AmeriPath Stock is sold to the public
in connection with the Qualified IPO or, with respect to a
Sale of Control, the purchase price paid, consideration
exchanged or value received for the shares, in either case,
the "Per
-3-
<PAGE> 12
Share Value") is determined to be less than $15.00
per share, then AmeriPath shall issue additional shares of
AmeriPath Stock to the Seller. The number of shares to be
issued and delivered to the Seller shall equal the amount by
which (x) $2,200,000.00 divided by the Per Share Value
(provided, however, if the Per Share Value is less than $10.00
per share, the denominator shall be $10.00) exceeds (y)
146,667. Such number of shares shall be issued and delivered
to the Seller within sixty (60) days of the consummation of
such determination transaction.
(iii) The parties hereto agree to adjust the Purchase
Price (the "Working Capital Adjustment"), within one hundred
fifty (150) days from the Closing Date such that (x) the
amount by which CP&I's Positive Working Capital (as defined in
Section 2.31 hereof) exceeds $141,000 shall be additional
Purchase Price and the amount of the Working Capital
Adjustment shall be paid to the Seller and (y) the amount by
which CP&I's Positive Working Capital is below $141,000 shall
be a reduction to the Purchase Price and the Seller shall, and
hereby agrees to, remit or pay to the Purchaser the amount of
the Working Capital Adjustment.
1.2 The Contingent Note.
(a) Principal Amounts; Issuance. The Contingent Note shall be
due and payable in the applicable principal amount specified in or
calculated pursuant to the Contingent Note and the Annexes to such
Contingent Note (the "Appropriate Principal Amount") corresponding to a
target range of Operating Earnings (as defined below) or Cumulative
Operating Earnings (as defined below), as the case may be, specified in
the Contingent Note and the Annexes thereto, with respect to each of
the three (3) twelve month periods ending September 30, 1997 through
September 30, 1999, if, and only if, (i) with respect to the twelve
month period ending September 30, 1997, Operating Earnings for such
year equal or exceed the specified minimum target amount of $750,000.00
(the "Year-1 Minimum Target") or, (ii) with respect to the 24 month
period ending September 30, 1998 and the 36 month period ending
September 30, 1999, Cumulative Operating Earnings for such periods
equal or exceed $1,500,000.00 and $2,250,000.00, respectively (together
with the Year-1 Minimum Target, as relevant to the applicable year, the
"Minimum Targets"). For each of the periods for which Operating
Earnings or Cumulative Operating Earnings, as the case may be, are less
than the applicable Minimum Target, no principal payment(s) shall be
required, due or made under the Contingent Note, with respect to that
period, and any and all interest with respect thereto or accrued
thereon, which otherwise would have become due or payable had the
applicable Minimum Target been achieved for such period, shall be
canceled and voided.
(b) "Operating Earnings"; "Cumulative Operating
Earnings".
(i) Definition of "Operating Earnings". For purposes
hereof (and Section 1.3 and the Contingent Note), the term
"Operating Earnings", with respect
- 4 -
<PAGE> 13
to any twelve-month period, shall mean the income of
or attributable to CP&I, which following the Closing shall be
a wholly-owned subsidiary of AmeriPath, for such twelve-month
period (i.e., October 1 through September 30), before
deduction for (in each case, with respect to CP&I) (i)
interest paid in such year, (ii) income tax payable for such
year, (iii) charges for amortization of goodwill, including
without limitation any amortization of goodwill recorded in
connection with this transaction or amortization of any
payments made under the Contingent Notes, (iv) any fees or
expenses incurred by CP&I in connection with the transactions
contemplated by this Agreement, (v) the effect of any change
after the Closing Date in the accounting principles or
policies of CP&I (including reserves, expenses or accounting
charges), and (vii) costs, expenses and charges relating to
management, billing or other services provided by AmeriPath or
its Affiliates (as defined in Section 12.3) not requested or
approved by the Seller; provided, however that any invoice for
charges, costs or expenses for less than $5,000 may only be
renegotiated (and shall not otherwise be deemed approved by
the Seller) if the Seller objects to the charge by sending a
notification to the Company within sixty (60) days of
receiving the invoice. All such calculations shall be
determined in accordance with GAAP (as defined in Section 12.3
hereof) requested or approved by the Seller (or for which the
Seller failed to timely object) and any such changes in GAAP
adopted by the Financial Accounting Standards Board; provided
that (A) revenues shall be calculated on a cash basis and
expenses shall be calculated on an accrual basis and (B)
revenues and expenses attributable to the practice of
dermatology shall be excluded from CP&I revenues and expenses
for purposes of determining Operating Earnings hereunder.
(ii) Calculation of Operating Earnings. A statement
of the Operating Earnings, prepared by AmeriPath senior
management, will be delivered to the Seller as soon as
practicable following the end of each year, but in all events
within 80 days after the end of each such period. If the
Seller wishes to challenge the calculation of Operating
Earnings, he may do so by giving written notice of such
objection (the "Objection Notice") to AmeriPath, signed by the
Seller, within 30 days after receipt of such statement of
Operating Earnings. The Objection Notice shall set forth in
reasonable detail the Seller's calculation of Operating
Earnings (or Cumulative Operating Earnings, as the case may
be). If an Objection Notice is so timely delivered to
AmeriPath, AmeriPath and the Seller shall use their best
efforts to resolve as soon as practicable any difference of
opinion. If they are unable to resolve such difference within
20 days after receipt by AmeriPath of the Objection Notice
from the Seller, the matter shall be referred to the
independent public accounting firm who then audits the annual
financial statements of AmeriPath, whose decision shall be
final and binding on all parties; provided, however, the
Seller, at his own expense, may refer the matter to another
independent public accounting firm, and the average of the
decisions of the two firms shall be the final and binding
resolution of the matter. If an Objection Notice is not timely
delivered to AmeriPath, and if the statement of Operating
- 5 -
<PAGE> 14
Earnings prepared by AmeriPath senior management indicates
that the Minimum Target has been met for a given period, then
the Appropriate Principal Amount (together with accrued and
unpaid interest thereon) of the Contingent Note with respect
to such period shall be paid within five (5) days after the
earlier of the end of the 30-day period within which the
Seller is entitled to deliver an Objection Notice, or receipt
by AmeriPath of notice from the Seller that he accepts the
calculation of Operating Earnings. If the Seller objects to
the calculation of Operating Earnings for the purpose of
determining compliance with this Section, the Appropriate
Principal Amount of the Contingent Note for such period shall
be paid within five (5) days after resolution of the dispute
with respect to such calculation to the extent, and solely to
the extent, that such resolution indicates that the Minimum
Target has been exceeded for such period.
(iii) Cumulative Operating Earnings. For purposes
hereof, the term "Cumulative Operating Earnings" shall mean
and include, with respect to the 24 month period ending
September 30, 1998 and the 36 month period ending September
30, 1999, the Operating Earnings of CP&I, on a cumulative
basis, from October 1, 1996 through the end of such period
(e.g., the Cumulative Operating Earnings for the period ending
September 30, 1998 shall equal the Operating Earnings, on a
cumulative basis, from October 1, 1996 through September 30,
1998 (i.e., twenty four full months of Operating Earnings
would be included)).
(iv) Limitations--Termination. If the Seller's
employment is terminated by CP&I for any reason prior to the
fourth anniversary of the Closing Date, or if CP&I is sold,
liquidated or closed or its operations suspended or terminated
(in whole or in part) without the Seller's consent (in each
case, a "CP&I Termination"), then Operating Earnings with
respect to the twelve month period in which such CP&I
Termination occurred, and Operating Earnings for each
subsequent period, shall in no event be less than the
Operating Earnings for the four fiscal quarters prior to such
CP&I Termination; provided, however, if the CP&I Termination
occurs after (A) the end of the first fiscal quarter in any
fiscal year, the annualized Operating Earnings for the twelve
month period in which the CP&I Termination occurs shall be
twice the Operating Earnings for the last fiscal quarter of
the prior year and the first fiscal quarter of the year in
question; and (B) the end of the second fiscal quarter in any
fiscal year, the annualized Operating Earnings for the period
in which the CP&I Termination occurs shall be 4/3 times the
Operating Earnings for the last fiscal quarter of the prior
year and the first two fiscal quarters of the year in
question.
(v) Limitations--Services. For purposes of
calculating Operating Earnings (and, as relevant, Cumulative
Operating Earnings) hereunder, the expenses associated with
CP&I may include costs, expenses and charges relating to
management, billing or other services provided by AmeriPath or
its Affiliates requested or approved by the Seller (or for
which the Seller failed to timely
- 6 -
<PAGE> 15
object) to the extent the price or amount charged or
allocated with respect to such services is based upon the fair
market value thereof and is competitive with the price or
amount that would be charged by a Person (as such term is
defined in Section 12.3 hereof) not affiliated with AmeriPath
on an arms'-length, negotiated basis.
(c) Effect of Sale on Contingent Note. Should any Person
acquire AmeriPath, whether by means of a merger with or into AmeriPath
in which AmeriPath does not survive or the acquisition of all or
substantially all of the stock or assets of AmeriPath (an "AmeriPath
Acquisition"), then, with respect to the Contingent Note, as a
condition to consummation of the AmeriPath Acquisition, the acquiring
Person shall be required either to acknowledge and guarantee
AmeriPath's on-going obligations under the Contingent Note or to assume
the obligations under the Contingent Note.
(d) Effect of Acquisitions on Contingent Note. In the event
that AmeriPath acquires one or more Persons or businesses after the
Closing Date, Operating Earnings will be calculated without including
(i) the income generated by, or expenses incurred in connection with,
the acquisition or the acquired Person or business, and (ii) any
selling, general or administrative expenses which do not relate to CP&I
or its business.
(e) Maturity and Redemption. For each year for which Operating
Earnings or Cumulative Operating Earnings equal or exceed the
applicable Minimum Target, the Appropriate Principal Amount of the
Contingent Note, together with interest accrued on such Appropriate
Principal Amount, shall become due and payable and shall be paid as
provided in subparagraph (a) above and (g) below. If, in the judgment
of a majority of the full Board of Directors of AmeriPath (which
judgment is made based upon the written advice of independent counsel),
it is determined that the Contingent Note, or the holding of the
Contingent Note by the Seller, may violate any Regulation or Order of
any Authority (as such terms are defined in Section 12.3), then, at
AmeriPath's sole discretion (as recommended by such counsel), the
Contingent Note may be canceled and voided and the Board of Directors
of AmeriPath, acting in good faith, shall provide the Seller a
reasonably equivalent economic and financial substitute consideration
therefor.
(f) Payments. Except as set forth in Section 1.2(l) below, all
payments of principal (including any prepayments or redemptions), and
interest under the Contingent Note shall be made by AmeriPath in lawful
money of the United States of America in immediately available funds
(or at the written request of the holders thereof, by cashier's or bank
check) not later than twelve o'clock noon, Miami, Florida time, on the
date each such payment is due. To the extent calculation of any payment
amounts (whether principal, interest or otherwise) results in fractions
of a cent, the amount shall be rounded down to the nearest whole cent.
- 7 -
<PAGE> 16
(g) Option to take Principal Payments in AmeriPath Stock. The
Seller, at his sole option and election, exercisable by delivering a
signed notice to AmeriPath at least five (5) days prior to any payment
date with respect to the Contingent Note, and subject to Section 1.2(l)
below, may elect to receive AmeriPath Stock instead of the Appropriate
Principal Amount to which he is entitled, if, and only if, Operating
Earnings with respect to the year for which the Seller has delivered
notice to AmeriPath exceed $1,500,000.00, and so long as AmeriPath
Stock, if publicly traded, has not had a closing price during the five
trading day period prior to the election of less than $10.00 per share.
The number of shares of AmeriPath Stock which the Seller is entitled to
receive pursuant hereto is equal to a fraction, (x) the numerator of
which is the Appropriate Principal Amount for such twelve month period,
less $600,000.00, and (y) the denominator of which is $15.00, or if
AmeriPath Stock is publicly traded, the lower of $15.00 or the current
market price of the AmeriPath Stock (not to be less than $10.00).
(h) Subordination; Subordination Agreement. The Contingent
Note shall be subordinate and junior in right of payment to certain
senior indebtedness pursuant to the attached subordination agreement
attached hereto as Exhibit 7.10 (the "Subordination Agreement"), by and
among AmeriPath's senior lenders and each of the holders of promissory
notes of AmeriPath. As a condition to AmeriPath's obligations under the
Contingent Note, the Seller agrees to execute and deliver appropriate
documents and agreements evidencing the subordination of the Contingent
Note to such senior indebtedness of AmeriPath.
(i) Notes Non-negotiable. The Contingent Note shall be
non-transferable and non-negotiable other than in connection with
estate planning, by will or pursuant to the laws of descent and
distribution.
(j) Right of Set-Off on Seller's Contingent Note. With respect
to the Contingent Note, AmeriPath shall have the right, following prior
written notice to the Seller, to set-off against principal or interest
payable under the Contingent Note the amount of any indemnification
payment owed under Article XI hereof. Such notice shall state with
reasonable specificity the good faith basis for AmeriPath's right to
such indemnification payment, and a copy of such notice shall also be
sent to each director of AmeriPath. The Seller shall have the right to
respond to such notice, and if the Seller requests that the exercise of
such right of set-off be considered and approved by the Board of
Directors, then such right shall not be exercised unless considered and
approved by a majority of the full Board of Directors. If within 10
days after receipt of such notice of set-off, the Seller contests in
writing (sent to AmeriPath) AmeriPath's claim that of indemnification
under Article XI hereof, then the amount which AmeriPath would
otherwise have paid to the Seller but for the exercise of such right of
set-off shall be paid into an interest bearing escrow account
maintained by a bank selected by AmeriPath, to be held in such account
until AmeriPath and the Seller have reached agreement as to the amount,
if any, of such indemnification payment and set-off, or until there has
been a judicial resolution of such matter, at which time the amount
held in such segregated
- 8 -
<PAGE> 17
account, together with any interest accrued thereon, shall be
released to the prevailing party, as appropriate and/or instructed.
AmeriPath and the Seller agree that they will use their best efforts to
resolve any such dispute within 30 days of receipt of notice by
AmeriPath of the Seller's objection to the set-off.
(k) Escrow. Notwithstanding anything contained herein or in
the Contingent Note to the contrary, to the extent that principal
and/or interest is due and payable under the Contingent Note, the first
$100,000 for each of the three payment periods (on an aggregate basis
such that after 36 months, the escrow account shall have $300,000
unless less than $300,000 had been earned in the aggregate under the
Contingent Note in which case the total amount earned under the
Contingent Note shall be held in escrow) shall be held, subject to the
Escrow Agreement attached hereto as Exhibit 1.2(k) (the "Escrow
Agreement").
(l) Defaults. The Seller shall be entitled to the benefit of
the Events of Default set forth in the applicable form of Contingent
Note.
(m) Conflict. To the extent there is any conflict or
inconsistency between the terms of this Agreement and the terms
specified in the Contingent Note, the terms specified in the Contingent
Note shall govern and prevail.
1.3 Contingent Issuance of AmeriPath Stock. As additional purchase
price consideration, the Purchaser shall issue to the Seller, subject to the
conditions and restrictions set forth in this Section 1.3 (the "Stock Rights"),
up to an aggregate maximum of 100,000 shares of AmeriPath Stock. Upon achieving
the range (the "Applicable Range") of Operating Earnings or Cumulative Operating
Earnings, as the case may be, set forth on Schedule 1.3 hereto, with respect to
each period commencing the twelve month period ending September 30, 1997 through
the 36 month period ending September 30, 1999, AmeriPath shall deliver, in the
aggregate, certificates evidencing the corresponding number of shares of
AmeriPath Stock indicated on Schedule 1.3 hereto (the "Applicable Stock Amount")
to the Seller as so indicated, which shares shall be subject to the terms,
conditions and restrictions set forth in this Section 1.3.
(a) Delivery; Right to Contingent Issuance Subject to
Cancellation. Certificates for shares representing the Applicable Stock
Amount shall be delivered on or before each December 31 following each
period that the Applicable Range of Operating Earnings or Cumulative
Operating Earnings, as the case may be, has been achieved, if, and only
if, (i) with respect to the twelve months ending September 30, 1997,
Operating Earnings equal or exceed a minimum target amount of
$750,000.00 (the "First Year Minimum Stock Target") or, (ii) with
respect to the 24 month period ending September 30, 1998 and the 36
month period ending September 30, 1999, Cumulative Operating Earnings
for such periods equal or exceed $1,500,000.00 and $2,250,000.00,
respectively (together with the First Year Minimum Stock Target, as
relevant to the applicable period, the "Minimum Stock Targets").
- 9 -
<PAGE> 18
(b) Effect of Sale on Stock Rights. In the event of an
AmeriPath Acquisition (as such term is defined in Section 1.2(c)),
then, with respect to such Stock Rights that have not theretofore been
canceled or voided because the Minimum Stock Target was not or has not
been met for the period in question, as a condition to consummation of
the AmeriPath Acquisition, the acquiring Person shall be required
either to (i) acknowledge and guarantee AmeriPath's on-going
obligations under the Stock Rights, (ii) assume the obligations under
the Stock Rights or (iii) convert the rights to receive AmeriPath Stock
into rights to receive stock in the acquiring Person (of substantially
equivalent value, based upon the acquisition value, as reasonably
determined in good faith by the Board of Directors of AmeriPath,
provided, however, the Seller, at his own expense, may refer the matter
to an independent public accounting or investment banking firm which
firm's decision shall be final and binding unless the Purchaser refers
the matter to its independent public accounting firm, in which case,
the average of the decisions of the two firms shall be the final and
binding resolution of the matter).
(c) Effect of Acquisitions on Stock Rights. In the event that
AmeriPath acquires one or more Persons or businesses after the Closing
Date, Operating Earnings will be calculated without including (i) the
income generated by, or expenses incurred in connection with, the
acquisition or the acquired Person or business, and (ii) any selling,
general or administrative expenses which do not relate to CP&I or its
business.
(d) Termination of Stock Rights; Call on AmeriPath Stock. If,
in the judgment of a majority of the full Board of Directors of
AmeriPath (based upon the written legal opinion of independent counsel,
a copy of which shall be delivered to the Seller), it is determined
that the Stock Rights, or the holding of the AmeriPath Stock by the
Seller, violates any Regulation or Order of any Authority and
divestiture of such Stock Rights and AmeriPath Stock is required by
such Regulation or Order, then, at AmeriPath's sole discretion and
option, (i) the Stock Rights may be canceled and voided (and the
parties shall endeavor in good faith to arrive at a reasonably
equivalent substitute consideration therefor, including, if
permissible, contingent cash payments) and (ii) all outstanding shares
of AmeriPath Stock issued to or held by the Seller may be redeemed or
purchased by AmeriPath (the "Call"), and the Seller hereby irrevocably
and unconditionally agrees to sell such stock to AmeriPath upon any
such Call, at its then fair market value (as determined in good faith
by AmeriPath's Board of Directors, provided, however, the Seller, at
his own expense, may refer the matter to an independent public
accounting or investment banking firm which firm's decision shall be
final and binding unless the Purchaser refers the matter to its
independent public accounting firm, in which case, the average of the
decisions of the two firms shall be the final and binding resolution of
the matter). AmeriPath shall give the Seller irrevocable written notice
of any cancellation of the Stock Rights and any Call of the AmeriPath
Stock permitted hereunder not less than five (5) business days prior to
the date of such event, specifying such termination and/or Call and the
amount to be paid for the AmeriPath Stock on the closing date specified
therein, whereupon such amount specified in such notice, upon receipt
by AmeriPath of the certificates therefor at the closing thereof, shall
be paid to the Seller.
- 10 -
<PAGE> 19
(e) Payments; Certificates. All payments for AmeriPath Stock
which is "called" by AmeriPath pursuant to Section 1.3(d) shall be made
by AmeriPath in lawful money of the United States of America in
immediately available funds (or at the written request of the Seller,
by bank check) after proper tender by the Seller of certificates
representing all of the AmeriPath Stock owned by the Seller, duly
endorsed for transfer to the Purchaser, together with stock powers duly
executed in blank. Any and all Liens, Claims, encumbrances or other
restrictions with respect to the AmeriPath Stock so called (other than
Permitted Liens and transfer restrictions under the Shareholders'
Agreement (as defined in Section 7.9) or under any applicable federal
or state securities laws) shall be satisfied and released, to the
satisfaction of AmeriPath, prior to closing on the purchase thereof. To
the extent calculation of any payment amounts results in fractions of a
cent, the amount shall be rounded down to the nearest whole cent.
(f) Transferability; Shareholders' Agreement. The Stock Right
is not transferable by the Seller other than in connection with estate
planning, by will or pursuant to the laws of descent and distribution.
Any shares of AmeriPath Stock issued pursuant to this Agreement or
pursuant to the Stock Right shall be subject to the Purchaser's
Shareholders' Agreement (as defined in Section 7.9) relating to the
AmeriPath Stock other than Sections 9 and 10 thereof. As a condition to
the issuance of shares of AmeriPath Stock in connection with any Stock
Right (and at AmeriPath's option, at each issuance), the Seller shall
execute and deliver to the Purchaser a counterpart to the Shareholders'
Agreement, in the form of Exhibit 7.9 hereto, and the Seller shall make
such representations and execute such certificates as AmeriPath may
reasonably require, including representations similar to those made in
Section 2.25 hereof.
(g) Legend. Each and every stock certificate representing
shares of AmeriPath Stock issued to the Seller shall bear the following
(or similar) restrictive legend, together with such other legend(s) as
the Purchaser shall in its discretion deem appropriate:
"The shares represented by this certificate (the
"Shares") are subject to each and every one of the terms,
conditions and restrictions set forth in the Shareholders'
Agreement dated as of February 29, 1996 (the "Shareholders'
Agreement"), as amended, including, but not limited to, any
restrictions on transferability, any rights of first refusal
and any option of the Purchaser to "call" or purchase such
Shares, and may not, in whole or in part, be sold,
transferred, pledged, gifted, hypothecated or otherwise
disposed of in any manner other than in accordance with the
terms of the Shareholders' Agreement, a copy of which is on
file and available for inspection at the principal offices of
the Issuer presently located at 800 Cypress Creek Road, Suite
200, Fort Lauderdale, Florida 33334."
(h) Representations. In the event any shares of AmeriPath
Stock issued pursuant to the Stock Right have not been registered for
resale under the Securities Act, and such registration is required for
the Seller to effect the sale or transfer of such shares, the Seller
shall, prior to each issuance by AmeriPath to the Seller of the
AmeriPath Stock,
- 11 -
<PAGE> 20
deliver to the Purchaser a letter of representation, if requested
by the Purchaser, making the statements set forth in Section
2.25 hereof.
(i) Antidilution; Adjustments Upon Changes in Capitalization
or Merger. Subject to any required action by the stockholders of the
Purchaser, the number of shares of AmeriPath Stock covered by the Stock
Right, and the aggregate number of shares which have been authorized
for issuance hereunder, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of AmeriPath Stock
resulting from a stock dividend or through any recapitalization,
reclassification, stock split-up, combination or exchange of shares
(other than any such combination or exchange of AmeriPath Stock through
which shares are issued to effect an acquisition of another Person).
Such adjustment shall be made by the Board of Directors of AmeriPath,
whose reasonable good faith determination in that respect shall be
final, binding and conclusive. Except as expressly provided herein, no
issuance by the Purchaser of shares of stock of any class, or
securities convertible into shares of stock of any class (whether in
connection with an acquisition, employee benefit, stock or stock option
plan, private or public offering of securities or otherwise), shall
affect, and no adjustment by reason thereof shall be made with respect
to, the number of shares of AmeriPath Stock subject to this Stock
Right. Price per share calculations used in this Agreement shall also
be adjusted to reflect changes in the capitalization of the Purchaser
such that the value of such shares before such adjustment event shall
equal the value of such shares after the adjustment event.
(j) Reservation of Shares. The Purchaser will at all times
reserve for issuance and delivery all shares of AmeriPath Stock from
time to time issuable hereunder. All such shares shall be duly
authorized and, when issued, shall be validly issued, fully paid and
non-assessable and free of all preemptive rights.
(k) Fractional Shares. No fractional shares or scrip
representing fractional shares shall be issued hereunder, but the
Purchaser shall round down to the nearest whole number the number of
shares of AmeriPath Stock required to be issued and delivered in
accordance herewith.
(l) Failure to Deliver. If the Seller becomes obligated to
sell any AmeriPath Stock to the Purchaser as a result of a Call under
this Agreement, and fails to deliver such stock (or the certificates
evidencing such stock) in accordance with the terms of this Agreement,
the Purchaser may, at the sole and absolute discretion of the Board of
Directors of AmeriPath, in addition to all other remedies available to
the Purchaser, tender to the Seller the purchase price for such shares
as is herein specified. Upon tender of the purchase price to the
Seller, the Purchaser, upon written notice to the Seller, may cancel on
its books the certificate or certificates evidencing the shares of
AmeriPath Stock so called, and thereupon all of the Seller's rights in
and to such AmeriPath Stock shall terminate.
- 12 -
<PAGE> 21
(m) Put Option of Seller. Notwithstanding anything to the
contrary set forth in this Agreement, the Seller shall have an
exclusive and irrevocable option, exercisable by notice to the
Purchaser given within ten (10) days of the fifth anniversary of the
Closing Date, to sell to the Purchaser for $15.00 per share (and thus
to require the Purchaser to purchase) all the AmeriPath Stock owned or
held by the Seller, if, and only if, the Purchaser has not, prior to
such date, consummated a Qualified IPO. The Purchaser hereby
irrevocably agrees to purchase and acquire such AmeriPath Stock on the
terms and subject to the conditions set forth in this Section 1.3(m),
provided, however, if the Purchaser is legally prohibited from
purchasing all of the Seller's AmeriPath Stock at a purchase price of
$15.00 per share, then (i) the Non-Competition Covenant of Section 6.10
hereof and the restrictions and agreements set forth therein, shall
immediately terminate and expire and be of no further force and effect,
and (ii) the rights of the Purchaser to the trade names "CPI" and
"Cutaneous Pathology & Immunofluorescence Laboratory" shall be
immediately transferred to the Seller and the Purchaser's rights
thereto and therein shall immediately cease, terminate and expire.
(n) Bring-Along Provision. Until a Qualified IPO, if there is
a Sale of Control, the Purchaser shall, not less than forty (40) days
prior to the scheduled date of consummation of the proposed Sale of
Control, deliver a notice (the "Sale Participation Notice") to the
Seller containing the following information:
a. the aggregate number of shares of
AmeriPath Stock or other AmeriPath securities
proposed to be so sold and the scheduled date of
closing;
b. the terms and conditions of the proposed
sale, including the identity (i.e., name, occupation
and address) of the proposed purchaser(s) and the per
share price to be paid for the shares of AmeriPath
Stock or other AmeriPath securities to be sold and
the amount, type and nature of the consideration to
be paid therefor; and
c. the total number of shares of AmeriPath
Stock held by all stockholders prior to the
consummation of the Sale of Control on a fully
diluted basis (including the exercise of all
outstanding options to purchase AmeriPath Stock and
the conversion of all securities convertible into
AmeriPath Stock).
Subject to compliance with subsections (ii) and (iii) hereof,
the Seller shall have the right and option (but not the
obligation) to elect to participate in any such Sale of
Control, and if properly effected the Purchaser shall arrange
for such participation in such Sale of Control (other than a
Qualified IPO), on the same terms and conditions as the other
stockholders and pro rata according to the following formula:
-13 -
<PAGE> 22
Total number of shares owned by the Seller
before the sale
Total number of shares to be X
purchased ------------------------------------------
Total number of shares owned before
the Sale of Control by all stockholders
participating in such Sale of Control on a
fully diluted basis (assuming exercise of
all outstanding options and conversion of
all convertible securities that are to be
exercised, converted or sold in connection
with such Sale of Control)
To the extent such formula yields a fractional number of
shares, then the number of shares the Seller may sell in a
Sale of Control shall be rounded down to the nearest whole
number of shares. The maximum number of shares which the
Seller shall be entitled to elect to include and sell in a
Sale of Control, in accordance with the foregoing formula, is
referred to herein as the "Maximum Share". To the extent that
AmeriPath Preferred Stock is sold in connection with any such
Sale of Control without conversion into AmeriPath Stock, the
price per share paid for AmeriPath Stock to other stockholders
participating in such Sale of Control shall be determined by
dividing the aggregate consideration paid to holders of such
Preferred Stock, less any amount attributable to any accrued
but unpaid dividends, by the number of shares of AmeriPath
Stock into which such Preferred Stock could then be converted.
(i) In order to effect an election to participate in
a Sale of Control, the Seller shall provide and deliver
written notice (an "Election Notice") to AmeriPath, not later
than ten (10) days after delivery of the Sale Participation
Notice to the Seller. Such Election Notice shall contain the
irrevocable agreement of the Seller to sell a specified number
of shares of AmeriPath Stock, which shall be not less than 100
shares and not more than the Seller's Maximum Share, in the
Sale of Control (such number of shares elected to be sold in
the Sale of Control by the Seller being referred to herein as
the "Elected Share"), in accordance with the terms and
conditions of the Sale of Control. The Seller's failure to
deliver an Election Notice, in proper form, within such ten
(10) day period shall conclusively constitute an election not
to participate in the Sale of Control. The Seller may elect to
sell and transfer in a Sale of Control less than his Maximum
Share (but not less than 100 shares), in which case the
Purchaser shall have the right to sell the balance of the
Seller's Maximum Share (as aggregated with the balance of all
other Maximum Shares not exercised in whole or in part by
other stockholders).
(ii) The Seller shall cooperate, fully, promptly and
in good faith, with all reasonable requests of the Purchaser
in connection with the documentation and closing of the Sale
of Control. This includes (i) entering into a purchase and
sale agreement (or counterpart thereto) in form provided by
the Purchaser (and making any required representations and
warranties, customary for a minority shareholder, therein),
and (ii) at the closing of a Sale of Control (or earlier if
requested by the Purchaser), the Seller shall present to the
Purchaser, for delivery to the purchaser(s) at closing, all
share certificates for AmeriPath Stock included in the
- 14 -
<PAGE> 23
Elected Share and to be sold in the Sale of Control,
in proper form for transfer. Such AmeriPath Stock shall be
transferred at closing free and clear of all Liens, security
interests and encumbrances or adverse Claims of any kind or
character, other than any applicable transfer restrictions
under the Shareholders' Agreement, securities laws, this
Agreement or as otherwise noted on the certificates of the
AmeriPath Stock included in the Elected Share. All reasonable
fees and expenses incurred by the Purchaser in connection with
the Sale of Control (including the reasonable fees and
expenses of counsel) shall be shared by each participating
stockholder and the Seller (based upon the proportionate share
the Elected Share bears to the total number of shares sold in
the Sale of Control), and the Purchaser may withhold and
deduct the Seller's proportionate share of such fees and
expenses from the purchase price delivered at closing, and the
Seller's purchase price to be received in exchange for the
sale of his Elected Share shall be net of such proportionate
amount of fees and expenses.
(iii) Summit Ventures III, L.P. and Summit Investors,
II, L.P. shall evidence their agreement to comply with this
Section 1.3(n) by executing an approval certificate (the
"Approval Certificate") in the form of Exhibit 1.3 hereto.
(o) Subscription Rights. In the event that the Purchaser
issues additional securities to its stockholders, other than in
connection with a public offering, an acquisition, an employee benefit,
stock or stock option plan, or in connection with a stock split, stock
dividend, recapitalization, reclassification, stock split-up,
combination, merger or exchange of shares or a similar transaction, the
Seller shall have the right to subscribe for additional shares of
AmeriPath Stock, on the same terms as other stockholders, so as to keep
his proportionate ownership of the AmeriPath Stock the same after the
issuance as it was immediately prior to such issuance.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE SELLER AND CP&I
The Seller hereby makes the following representations and warranties to
the Purchaser, each of which shall be deemed material (and the Purchaser, in
executing, delivering and consummating this Agreement, has relied and will rely
upon the correctness and completeness of each of such representations and
warranties notwithstanding any independent investigation):
2.1 Corporate Organization, Qualification, etc. CP&I is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Ohio with full corporate power and authority to carry on its business
as it is now being conducted and proposed to be conducted, and to own, operate
and lease its properties and assets. CP&I is duly qualified or licensed to do
business in good standing in the jurisdictions set forth on Schedule 2.1
attached hereto, those being every jurisdiction in which the conduct of CP&I's
business, the ownership
- 15 -
<PAGE> 24
or lease of its properties, the proposed conduct of its business or ownership or
lease of its properties, require it to be so qualified or licensed and the
failure to be so qualified or licensed would have a Material Adverse Effect (as
defined in Section 12.3). CP&I's articles of incorporation have not been amended
or supplemented since April 15, 1976, and are in full force and effect as of the
date hereof. True, complete and correct copies of CP&I's articles of
incorporation and by-laws, as presently in effect, are attached hereto as
Exhibit 2.1.
2.2 Subsidiaries. Except as set forth on Schedule 2.2, CP&I has no
Subsidiaries (as defined in Section 12.3) nor any investment or other interest
in, or any outstanding loan or advance to or from, any Person, including any
officer, director or shareholder, other than cash or cash equivalent
investments.
2.3 Capital Stock. As of the date hereof, the authorized capital stock
of CP&I consists of FIVE HUNDRED (500) Common shares, without par value. The
stock record book of CP&I has been delivered to the Purchaser for inspection
prior to the date hereof and is complete and correct, and all requisite Federal
and State documentary stamps have been affixed thereon and canceled. The CP&I
Shares constitute all of the issued and outstanding shares of capital stock of
CP&I, and all of the CP&I Shares are owned beneficially and of record by the
Seller.
2.4 Corporate Record Books. The corporate minute books of CP&I have
been made available to the Purchaser, are complete and correct and contain all
of the proceedings of the shareholders and directors of CP&I.
2.5 Title to Stock. All of the issued and outstanding shares of the
capital stock of CP&I that are, and at the Closing will be, owned by the Seller
are duly authorized, validly issued, fully paid and nonassessable, and are free
of all Liens (as defined in Section 12.3). Upon delivery of the Purchase Price
to the Seller at the Closing, assuming the Purchaser buys in good faith without
notice of any adverse claim (as defined in Section 8-302 of the Uniform
Commercial Code), the Seller will convey and the Purchaser will acquire good
title to the CP&I Shares, free and clear of all Liens or contractual
restrictions or limitations whatsoever, other than any created by the Purchaser
or arising under applicable federal and state securities laws.
2.6 Options and Rights. There are no outstanding subscriptions,
options, warrants, rights, securities, contracts, commitments, understandings or
arrangements under which CP&I is bound or obligated to issue any additional
shares of its capital stock or rights to purchase shares of its capital stock.
There are no agreements, arrangements or understandings between the Seller
and/or CP&I and any other Person (other than the Purchaser) regarding the CP&I
Shares (or the transfer, disposition, holding or voting thereof).
2.7 Authorization, Etc. CP&I has full power and authority and the
Seller has full capacity to enter into this Agreement, the Employment Agreement,
the Escrow Agreement, the Management Agreement, the Trust Agreement, the Option
Agreement and the agreements and documents contemplated hereby to which CP&I or
the Seller is a party, and perform their respective obligations hereunder and
thereunder. The execution, delivery and performance of this
- 16 -
<PAGE> 25
Agreement, the Employment Agreement, the Escrow Agreement, the Management
Agreement, the Trust Agreement, the Option Agreement and all other agreements
and transactions contemplated hereby have been duly authorized by the Board of
Directors of CP&I and no other corporate proceedings on its part are necessary
to authorize this Agreement and the other agreements and transactions
contemplated hereby. The Seller is entering into this Agreement, the Employment
Agreement, the Escrow Agreement, the Trust Agreement, the Acquisition Agreement
and the Option Agreement on the Seller's own volition, free from any undue
influence or coercion. Upon execution and delivery of this Agreement, the
Employment Agreement, the Escrow Agreement, the Management Agreement, the Trust
Agreement, the Option Agreement and the Acquisition Agreement by the parties
hereto this Agreement, the Employment Agreement, the Escrow Agreement, the
Management Agreement, the Trust Agreement, the Option Agreement, the Acquisition
Agreement and all other agreements contemplated hereby shall constitute the
legal, valid and binding obligation of each of CP&I and the Seller party hereto,
enforceable against each such party in accordance with their respective terms,
except to the extent that the enforcement thereof may be limited by applicable
(i) bankruptcy, reorganization, insolvency, and similar laws affecting the
enforcement of creditors' rights and (ii) equitable principles.
2.8 No Violation. The execution and delivery by CP&I and the Seller of
this Agreement, the Employment Agreement, the Escrow Agreement, the Management
Agreement, the Trust Agreement, the Option Agreement, the Acquisition Agreement
and any and all other agreements contemplated hereby to which CP&I or the Seller
is a party, and the fulfillment of and compliance with the respective terms
hereof and thereof by CP&I and the Seller do not and will not, except as set
forth on Schedule 2.8 attached hereto, (a) conflict with or result in a breach
of the terms, conditions or provisions of, (b) constitute a default or event of
default under (with due notice, lapse of time or both), (c) result in the
creation of any Lien upon the capital stock or assets of CP&I pursuant to, (d)
give any third party the right to accelerate any obligation under, (e) result in
a violation of, or (f) require any authorization, consent, approval, exemption
or other action by or notice to any court or Authority pursuant to, the articles
of incorporation or by-laws of CP&I or any Regulation, Order or Contract (as
defined in Section 12.3) to which CP&I or the Seller is subject. CP&I and the
Seller will comply with all applicable Regulations and Orders in connection with
the execution, delivery and performance of this Agreement, the Employment
Agreement, the Escrow Agreement, the Management Agreement, the Trust Agreement,
the Option Agreement, the Acquisition Agreement and the transactions
contemplated hereby.
2.9 Financial Statements. Attached as Exhibit 2.9 hereto are the
following financial statements of CP&I: (i) balance sheets (prepared on a cash
basis) for the fiscal years ended December 31, 1994 and December 31, 1995 (the
"Balance Sheets"), (ii) income statements (prepared on a cash basis) for the
fiscal years ended December 31, 1994 and December 31, 1995 (the "Income
Statements"), and (iii) balance sheet and income statement (prepared on a cash
basis) for the six months ended June 30, 1996 (collectively, together with the
Balance Sheets and the Income Statements, the "Financial Statements"). The
balance sheets included in the Financial Statements fairly present the financial
position of CP&I on a cash basis as at the respective dates thereof, and the
income statements included in the Financial Statements (x) fairly present the
- 17 -
<PAGE> 26
results of operations for the periods therein referred to, on a cash basis
(except as stated therein or in the notes or schedules thereto) applied on a
consistent basis, and (y) fairly present the financial condition of CP&I at the
respective date of on a cash basis, and for the period covered by, such
statements; provided, however, that such Financial Statements are compilations
which have not been prepared in accordance with GAAP. Except as set forth on
Schedule 2.9(a) attached hereto, CP&I has no liability, whether accrued,
absolute or contingent, of a type required to be reflected on a balance sheet or
described in the notes thereto in accordance with GAAP, other than (i)
liabilities incurred since December 31, 1995, in the ordinary course of business
consistent with past practice, (ii) liabilities reflected in the June 30, 1996
balance sheet, (iii) liabilities covered by insurance or reinsurance (a complete
and detailed description of which is provided in Schedule 2.9(b)) and (iv)
liabilities that would typically be reflected in footnotes of financial
statements prepared in accordance with GAAP. Schedule 2.9(c) contains a complete
list of the accounts payable of CP&I at September 30, 1996.
2.10 Employees. CP&I has been for the past four years, and currently
is, in compliance with all Federal, State and local Regulations and Orders
affecting employment and employment practices of CP&I (including those
Regulations promulgated by the Equal Employment Opportunity Commission),
including terms and conditions of employment and wages and hours. Except as set
forth on Schedule 2.18, CP&I does not maintain any "pension" and "welfare"
benefit plans within the respective meanings of sections 3(2) and 3(1) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
2.11 Absence of Certain Changes. Since December 31, 1995, there has not
been (a) any Material Adverse Change (as defined in Section 12.3) in respect of
CP&I; (b) any damage, destruction or loss, whether covered by insurance or not,
having a Material Adverse Effect, with regard to CP&I's properties and business;
(c) any payment by CP&I to, or any notice to or acknowledgment by CP&I of any
amount due or owing to, CP&I's self-insured carrier, if any, in connection with
any self-insured amounts or liabilities under health insurance covering
employees of CP&I, in each case, in excess of a reserve therefor on the balance
sheet for the fiscal year ended December 31, 1995 included in the Financial
Statements; (d) any declaration, setting aside or payment of any dividend or
distribution (whether in cash, stock or property) in respect of CP&I's capital
stock (other than distributions made in accordance with past practices), or any
redemption or other acquisition of such capital stock by CP&I; (e) except as set
forth in Schedule 2.11, any increase in the rate of compensation or in the
benefits payable or to become payable by CP&I to its directors, officers,
employees or consultants (other than fees of professionals in connection with
the transactions contemplated hereby); (f) any amendment, modification or
termination of any existing, or entering into any new, contract, agreement,
arrangement or plan relating to any salary, bonus, insurance, pension, health or
other employee welfare or benefit plan for or with any directors, officers,
employees or consultants of CP&I other than in the ordinary course of business
consistent with past practice; (g) any entry into any material Contract not in
the ordinary course of business, including without limitation relating to any
borrowing or capital expenditure other than in the ordinary course of business
consistent with past practice; (h) any disposition by CP&I of any asset other
than in the ordinary course of
- 18 -
<PAGE> 27
business consistent with past practice; or (i) any change by CP&I in accounting
methods or principles (except as noted in Schedule 2.11).
2.12 Contracts.
(a) Except as set forth in Schedule 2.12 hereto, CP&I is
neither a party to nor subject to any written or oral:
(i) pension, profit sharing, bonus, retirement, stock
option, stock purchase or other plan providing for deferred or
other compensation to employees or any other employee benefit
plan (other than as set forth in Schedule 2.18 hereto), or any
Contract with any labor union;
(ii) employment or consultation agreement, or other
compensation Contract, commitment or arrangement, which is not
terminable on notice of 30 days' or less by CP&I without
penalty or other financial obligation (and, except as set
forth on Schedule 2.12, no officer or employee of CP&I
receives total salary, bonus and other compensation from CP&I
of $30,000.00 or more per annum).
(iii) Contract containing covenants or agreements
limiting the freedom of CP&I or any of its employees to
compete in any line of business presently conducted by CP&I
with any Person or to compete in any such line of business in
any area;
(iv) Contract with the Seller or with any affiliate
or relative of the Seller (except for any Contract disclosed
in Schedule 2.12 pursuant to clauses (ii) or (iii) of this
Section 2.12(a));
(v) Contract relating to or providing for loans to
officers, directors, employees or Affiliates;
(vi) Contract under which CP&I has advanced or
loaned, or is obligated to advance or loan, funds to any
Person;
(vii) Contract relating to the incurrence, assumption
or guarantee of any indebtedness, obligation or liability (in
respect of money or funds borrowed), or otherwise pledging,
granting a security interest in or placing a Lien on any asset
of CP&I;
(viii) guarantee or endorsement of any obligation
other than endorsements of instruments in the ordinary course
of business consistent with past practice;
- 19 -
<PAGE> 28
(ix) Contract under which CP&I is lessee of or holds
or operates any property, real or personal, owned by any other
party, except for any lease of real or personal property under
which the aggregate annual rental payments do not exceed
$7,500.00;
(x) Contract pursuant to which CP&I is lessor of or
permits any third party to hold or operate any property, real
or personal, owned or controlled by CP&I;
(xi) assignment, license, indemnification or Contract
with respect to any intangible property (including, without
limitation, any Proprietary Rights (as defined in Section
12.3));
(xii) warranty Contract with respect to its services
rendered (or to be rendered) or its products sold or leased;
(xiii) Contract which prohibits, restricts or limits
in any way the payment of dividends or distributions by CP&I;
(xiv) Contract under which it has granted any Person
any registration rights (including piggyback rights) with
respect to any securities;
(xv) Contract for the purchase, acquisition or supply
of inventory and other property and assets, whether for resale
or otherwise in excess of $7,500.00;
(xvi) Contracts with independent agents, brokers,
dealers or distributors other than Contracts terminable by
CP&I without penalty;
(xvii) sales, commissions, advertising or marketing
Contracts;
(xviii) Contracts providing for "take or pay" or
similar unconditional purchase or payment obligations;
(xix) Contracts with Persons with which, directly or
indirectly, the Seller also has a Contract;
(xx) Contract with a hospital, physician or other
health care provider or Person pursuant to which the cost of
providing health care services to the patients covered by such
Contract is assumed in whole or in part by such provider; or
(xxi) any other Contract which is material to CP&I's
operations or business prospects, except those which (x) were
made in the ordinary course of business, (y) are terminable on
30 days' or less notice by CP&I without penalty
- 20 -
<PAGE> 29
or other financial obligation, and (z) in each case,
involve aggregate payments by or to CP&I of $7,500.00 or less.
(b) Except as set forth on Schedule 2.8, no consent of any
party to any Contract is required in connection with the execution,
delivery or performance of this Agreement, or the consummation of the
transactions contemplated hereby.
(c) CP&I has performed in all material respects all
obligations required to be performed by it and is not in default in any
respect under or in breach of nor in receipt of any claim of default or
breach under any material Contract to which CP&I is subject (including
without limitation all performance bonds, warranty obligations or
otherwise); no event has occurred which with the passage of time or the
giving of notice or both would result in a default, breach or event of
non-compliance under any material Contract to which CP&I is subject
(including without limitation all performance bonds, warranty
obligations or otherwise); CP&I does not have any present expectation
or intention of not fully performing all such obligations; CP&I does
not have any knowledge of any breach or anticipated breach by the other
parties to any such Contract to which it is a party.
2.13 True and Complete Copies. Copies of all written Contracts and
documents delivered and to be delivered hereunder by the Seller or CP&I are and
will be true and complete copies of such agreements, contracts and documents.
2.14 Title and Related Matters.
(a) CP&I has good title to all of the properties and assets
reflected as owned by it in the balance sheet for the fiscal year ended
December 31, 1995 included in the Financial Statements or acquired
after the date thereof and except for properties sold or otherwise
disposed of since the date thereof in the ordinary course of business,
free and clear of all Liens, except Permitted Liens (as defined in
Section 12.3).
(b) CP&I will on the Closing Date own, good title to all the
personal property and assets, tangible or intangible, used in its
laboratory business except as to those assets leased or licensed, all
of which leases or licenses are in good standing and no party is in
default thereunder. Except as set forth on Schedule 2.14, none of the
assets belonging to or held by CP&I will be, on the Closing Date,
subject to any (i) Contracts of sale or lease, or (ii) Liens other than
Permitted Liens. Except for normal breakdowns and servicing
requirements, all machinery and equipment regularly used by CP&I in the
conduct of its laboratory business is in good operating condition and
repair, ordinary wear and tear excepted.
(c) There has not been since December 31, 1995, and will not
be prior to the Closing Date, any sale, lease, or any other disposition
or distribution by CP&I of any of its assets or properties and any
other assets now or hereafter owned by it, except (i) transactions in
the ordinary and regular course of business, (ii) the transactions
- 21 -
<PAGE> 30
contemplated by Section 4.9, and (iii) as otherwise consented to by the
Purchaser. At the Closing, CP&I will own, or have the right to use, all
properties and assets that are currently used in connection with the
non-medical practice business of the Seller.
(d) Schedule 2.14 attached hereto also sets forth a
description of all real and personal property in excess of $1,000 owned
or leased by CP&I (as it relates to its laboratory business).
2.15 Litigation. Except as set forth in Schedule 2.15, there is no
Claim (as defined in Section 12.3) pending or, to the best knowledge of the
Seller and CP&I, threatened against either of the Seller or CP&I which, if
adversely determined, would have a Material Adverse Effect on CP&I. Nor is there
any Order outstanding against either the Seller or CP&I having, or which,
insofar as can reasonably be foreseen, in the future may have, a Material
Adverse Effect on CP&I. The Seller agrees to indemnify and hold the Purchaser
harmless from any loss, charge, expense, Claim or liability with respect to the
litigation set forth on Schedule 2.15.
2.16 Tax Matters.
(a) CP&I has filed all federal, state, and local tax reports,
returns, information returns and other documents (collectively, the
"Tax Returns") required to be filed with any federal, state, local or
other taxing authorities (each a "Taxing Authority", collectively, the
"Taxing Authorities") in respect of all relevant taxes, including
without limitation income, premium, gross receipts, net proceeds,
alternative or add-on minimum, ad valorem, value added, turnover,
sales, use, property, personal property (tangible and intangible),
stamp, leasing, lease, user, excise, duty, franchise, transfer,
license, withholding, payroll, employment, fuel, excess profits,
occupational and interest equalization, windfall profits, severance
(including interest and penalties) (collectively, the "Taxes") and in
accordance with all tax sharing agreements to which the Seller or CP&I
may be a party. Except as provided in Section 6.15, all Taxes required
to be paid on or prior to the Closing Date have been paid, including
any of CP&I's Taxes due as a result of the consummation of the
transactions contemplated by this Agreement. All Taxes which are
required to be withheld or collected by CP&I have been duly withheld or
collected and, to the extent required, have been paid to the proper
Taxing Authority or properly segregated or deposited as required by
applicable laws. There are no Liens for Taxes upon any property or
assets of CP&I except for liens for Taxes not yet due and payable.
Neither the Seller nor CP&I has executed a waiver of the statute of
limitations on the right of the Internal Revenue Service or any other
Taxing Authority to assess additional Taxes or to contest the income or
loss with respect to any Tax Return. The basis of any depreciable
assets, and the methods used in determining allowable depreciation
(including cost recovery), is correct and in compliance with the
Internal Revenue Code of 1986, as amended and the regulations
thereunder (the "Code").
(b) No audit of CP&I or CP&I's Tax Returns by any Taxing
Authority is currently pending or threatened, and no issues have been
raised by any Taxing Authority
- 22 -
<PAGE> 31
in connection with any Tax Returns. No material issues have
been raised in any examination by any Taxing Authority with respect to
CP&I which reasonably could be expected to result in a proposed
deficiency for any other period not so examined, and there are no
unresolved issues or unpaid deficiencies relating to such examinations.
The items relating to the business, properties or operations of CP&I on
the Tax Returns filed by or on behalf of CP&I for all taxable years
(including the supporting schedules filed therewith), available copies
of which have been supplied to the Purchaser, state accurately the
information requested with respect to CP&I and such information was
derived from the books and records of CP&I, except for the Tax
Liability referred to in Section 6.15.
(c) CP&I has not made nor has become obligated to make, nor
will as a result of any event connected with the Closing become
obligated to make, any "excess parachute payment" as defined in Section
280G of the Code (without regard to subsection (b)(4) thereof).
2.17 Compliance with Law and Applicable Government Regulations. CP&I is
presently complying in respect of its operations, equipment, practices, real
property, plants, laboratories, structures, and other property, and all other
aspects of its business and operations, with all applicable Regulations and
Orders, including, but not limited to, Health Care Laws (as defined in Section
12.3), all Regulations relating to the safe conduct of business, environmental
protection, quality and labeling, antitrust, Taxes, consumer protection, equal
opportunity, discrimination, health, sanitation, fire, zoning, building and
occupational safety where such failure or failures would individually or in the
aggregate have a Material Adverse Effect. There are no Claims pending, nor to
the best knowledge of CP&I are there any Claims threatened, nor has the Seller
received any written notice, regarding any violations of any Regulations and
Orders enforced by any Authority claiming jurisdiction over CP&I, including any
requirement of OSHA or any pollution and environmental control agency (including
air and water).
(a) Schedule 2.17(a) attached hereto sets forth all permits,
licenses, provider numbers, orders, franchises and approvals
(collectively, "Permits") from all Federal, state, local and foreign
governmental regulatory bodies held by CP&I for its laboratory
business. The Permits listed on Schedule 2.17(a) are the only Permits
that are required for CP&I to conduct its laboratory business as
presently conducted, except for those the absence of which would not
have any Material Adverse Effect in respect of CP&I. Each such Permit
is in full force and effect and, to the best of the knowledge of CP&I,
no suspension or cancellation of any such Permit is threatened and
there is no basis for believing that such Permit will not be renewable
upon expiration.
(b) CP&I has licenses to provide health care services in the
jurisdictions set forth in Schedule 2.17(b) hereto, which such licenses
are all those necessary to conduct the laboratory business of CP&I in
the jurisdictions in which CP&I presently operates. Except as set forth
on Schedule 2.17(b), neither the Seller nor CP&I is aware of any event,
transaction, correspondence or circumstance (other than lapse of time)
which would
- 23 -
<PAGE> 32
have, or could foreseeably have, a Material Adverse Effect on one or
more of such licenses.
2.18 ERISA and Related Matters.
(a) Benefit Plans; Obligations to Employees. Except as set
forth in Schedule 2.18 hereto, neither CP&I, nor any ERISA Affiliate of
CP&I, is a party to or participates in or has any liability or
contingent liability with respect to:
(i) any "employee welfare benefit plan" or "employee
pension benefit plan" or "multi-employer plan" (as those terms
are respectively defined in Sections 3(1), 3(2) and 3(37) of
ERISA);
(ii) any retirement or deferred compensation plan,
incentive compensation plan, stock plan, unemployment
compensation plan, vacation pay, severance pay, bonus or
benefit arrangement, insurance or hospitalization program or
any other fringe benefit arrangements for any employee,
director, consultant or agent, whether pursuant to contract,
arrangement, custom or informal understanding, which does not
constitute an "employee benefit plan" (as defined in Section
3(3) of ERISA); or
(iii) any employment agreement not terminable on 30
days' or less written notice, without further liability.
For purposes of this Section, the term "ERISA
Affiliate" shall mean any trade or business, whether or not
incorporated, that together with CP&I would be deemed a "single
employer" within the meaning of Section 4001(b)(i) of ERISA.
(b) Plan Documents and Reports. A true and correct copy of
each of the Benefit Plans listed on Schedule 2.18, and all contracts
relating thereto, or to the funding thereof, including, without
limitation, all trust agreements, insurance contracts, investment
management agreements, subscription and participation agreements and
record keeping agreements, each as in effect on the date hereof, has
been supplied to the Purchaser. In the case of any Benefit Plan that is
not in written form, the Purchaser has been supplied with an accurate
description of such Benefit Plan as in effect on the date hereof. A
true and correct copy of the three most recent annual reports and
accompanying schedules, the three most recent actuarial reports, and
the most recent summary plan description and Internal Revenue Service
determination letter with respect to each such Benefit Plan, to the
extent applicable, and a current schedule of assets (and the fair
market value thereof assuming liquidation of any asset which is not
readily tradeable) held with respect to any funded Benefit Plan has
been supplied to the Purchaser by CP&I, and there have been no material
changes in the financial condition in the respective Plans from that
stated in the annual reports and actuarial reports supplied.
- 24 -
<PAGE> 33
(c) Compliance with Laws; Liabilities. As to all Benefit
Plans, except as otherwise specified on Schedule 2.18, CP&I is in
compliance in all material respects with the terms of all Benefit plans
and every Benefit Plan is in compliance with all of the requirements
and provisions of ERISA and all other laws and regulations applicable
thereto, including without limitation the timely filing of all annual
reports or other filings required with respect to such Benefit Plans.
None of the assets of any Benefit Plan are invested in employer
securities or employer real property, as those terms are defined in
Section 407(d) of ERISA. There have been no "prohibited transactions"
(as described in Section 406 of ERISA or Section 4975 of the Code) with
respect to any Benefit Plan and neither CP&I nor any ERISA Affiliate of
CP&I has otherwise engaged in any prohibited transaction. There has
been no "accumulated funding deficiency" as defined in Section 302 of
ERISA, nor has any reportable event as defined in Section 4043(b) of
ERISA occurred with respect to any Benefit Plan. Actuarially adequate
accruals for all obligations or contingent obligations under the
Benefit Plans are reflected in CP&I's balance sheet for the fiscal year
ended December 31, 1995 included in Financial Statements provided to
the Purchaser and such obligations include a pro rata amount of the
contributions which would otherwise have been made in accordance with
past practices for the plan years which include the closing date.
2.19 Intellectual Property.
(a) Except as set forth on Schedule 2.19, CP&I has no trade
name, service mark, patent, copyright or trademark related to its
business.
(b) CP&I has the right to use each Proprietary Right listed in
Schedule 2.19, and except as otherwise set forth therein, each of such
Proprietary Rights is, and will be on the Closing Date, free and clear
of all royalty obligations and Liens. There are no Claims pending, or
to the best knowledge of the Seller, threatened, against the Seller
that its use of any of the Proprietary Rights listed on Schedule 2.19
infringes the rights of any Person. The Seller has no knowledge of any
conflicting use of any of such Proprietary Rights.
(c) CP&I is not a party in any capacity to any franchise,
license or royalty agreement respecting any Proprietary Right and there
is no conflict known to the Seller with the rights of others in respect
to any Proprietary Right now used in the conduct of its business.
(d) Internal Software Applications.
(i) Owned Software. The current software applications
used by CP&I in the operation of its business, as set forth
and described on Schedule 2.19(d) hereto (the "Software"), to
the extent it has been designed or developed by CP&I's
management information or development staff or by consultants
on CP&I's behalf, is original and capable of copyright
protection in the United States, and CP&I has
- 25 -
<PAGE> 34
complete rights to and ownership of such Software. To
the Seller's knowledge, no part of any such Software is an
imitation or copy of, or infringes upon, the software of any
other Person or violates or infringes upon any common law or
statutory rights of any other Person, including, without
limitation, contractual rights, copyrights and trade secrets.
CP&I has not sold, assigned, licensed, distributed or in any
other way disposed of or encumbered the Software.
(ii) Licensed Software. The Software, to the extent
it is licensed from any third party licensor or constitutes
"off-the-shelf" or "tailored" software, is held by CP&I
legitimately and is fully useable by the Purchaser without any
third party consent. All of CP&I's computer hardware regularly
used by CP&I in its business has legitimately-licensed
software installed therein.
(iii) No Errors; Nonconformity. The Seller and CP&I,
to the best of their respective knowledge, after due inquiry
of employees and agents of CP&I who work with or are
knowledgeable about CP&I's computers and software, warrant
that the Software is free from any significant software defect
or programming or documentation error, operates and runs in a
reasonable and efficient business manner.
2.20 Environmental Matters. Except as disclosed in Schedule 2.20: (a)
neither CP&I's business nor the operation thereof violates any applicable
Environmental Law (as defined in Section 12.3) in effect as of the date hereof
and no condition or occurrence (any accident, happening or event which occurs or
has occurred at any time prior to the Closing Date, which results in or could
result in a Claim against CP&I or the Purchaser or creates or could create a
liability or loss for CP&I or the Purchaser) which, with notice or the passage
of time or both, would constitute a violation of any Environmental Law; (b) CP&I
is in possession of all Environmental Permits (as defined in Section 12.3)
required under any applicable Environmental Law for the conduct or operation of
CP&I's laboratory business, and CP&I is in full compliance with all of the
requirements and limitations included in such Environmental Permits; (c) CP&I
has not stored or used and is not storing or using any pollutants, contaminants
or hazardous or toxic wastes, substances or materials on or at any of its
property or facilities except for inventories of chemicals which are used or to
be used in the ordinary course of CP&I's business (which inventories have been
sorted or used in accordance with all applicable Environmental Permits and all
Environmental Laws, including all so-called "Right to Know" laws); (d) CP&I has
not received any notice from any Authority or any private Person that CP&I's
business or the operation of any of its facilities is in violation of any
Environmental Law or any Environmental Permit or that it is responsible (or
potentially responsible) for the cleanup of any pollutants, contaminants, or
hazardous or toxic wastes, substances or materials at, on or beneath any of
CP&I's property, or at, on or beneath any land adjacent thereto or in connection
with any waste or contamination site; (e) To the knowledge of CP&I or the
Seller, CP&I is not the subject of any Federal, state, local, or private Claim
involving a demand for damages or other potential liability with respect to a
violation of Environmental Laws or under any common law theories relating to
operations or the condition of any facilities or property (including underlying
- 26 -
<PAGE> 35
groundwater) owned, leased, or operated by CP&I; (f) CP&I has not buried,
dumped, disposed, spilled or released any pollutants, contaminants or hazardous
or wastes, substances or materials on, beneath or adjacent to any of its
property or any property adjacent thereto in violation of any applicable
Environmental Law; (g) no by-products of any manufacturing process employed in
the operation of CP&I's business which may constitute pollutants, contaminants
or hazardous or toxic wastes, substances or materials under any Environmental
Law are currently stored or otherwise located on any of CP&I's property in a
manner that violates any applicable Environmental Law; (h) no property now or
previously owned, leased or operated by CP&I, is listed or proposed for listing
on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any
other federal or state list of sites requiring investigation or clean-up; (i)
there are no underground storage tanks, active or abandoned, including petroleum
storage tanks, on or under any property now or previously owned, leased or
operated by CP&I that would subject CP&I to Claims for violation of any
applicable Environmental Law; (j) CP&I has not directly transported or directly
arranged for the transportation of any Hazardous Material to any location which
is listed on the National Priorities List pursuant to CERCLA, on the CERCLIS or
on any federal or state list or which is the subject of federal, state or local
enforcement actions or other investigations which may lead to material Claims
against CP&I for any remedial work, damage to natural resources or personal
injury, including Claims under CERCLA; and (k) there are no polychlorinated
biphenyls, radioactive materials or friable asbestos present at any property now
or previously owned or leased by CP&I that would subject CP&I to Claims for
violation of any applicable Environmental Law. CP&I has timely filed all reports
required to be filed with respect to all of its property and facilities and has
generated and maintained all required data, documentation and records under all
applicable Environmental Laws.
2.21 Dealings with Affiliates. Schedule 2.21 hereto sets forth a
complete list, including the parties, of all oral or written agreements and
arrangements to which CP&I is, will be or has been a party, at any time from
January 1, 1994 to the Closing Date, and to which any one or more Affiliates is
also a party, to the extent that either CP&I or any of such Affiliates will have
any rights or obligations or any liabilities thereunder after the Closing Date,
other than the Employment Agreement, this Agreement, the Contingent Note and the
Lease.
2.22 Banking Arrangements. Schedule 2.22 attached hereto sets forth the
name of each bank in or with which CP&I has an account, credit line or safety
deposit box, and a brief description of each such account, credit line or safety
deposit box, including the names of all Persons currently authorized to draw
thereon or having access thereto. CP&I has no liability or obligation relating
to funds or money borrowed by or loaned to CP&I (whether under any credit
facility, line of credit, loan, indenture, advance, pledge or otherwise), other
than accounts payable in the ordinary course of business consistent with past
practice.
2.23 Insurance. Schedule 2.23 attached hereto sets forth a list and
brief description, including dollar amounts of coverage, of all policies of
fire, liability, professional liability and other forms of insurance held by
CP&I as of the date hereof. Such policies are valid, outstanding and enforceable
policies, as to which premiums have been paid currently. Except as set forth in
Section 2.15, neither CP&I nor the Seller know of any event that has occurred
which might
- 27 -
<PAGE> 36
reasonably (a) form the basis for any Claim against CP&I not fully covered by
insurance for liability on account of any express or implied warranty or
tortious omission or commission, or (b) result in material increase in insurance
premiums of CP&I.
2.24 Consents. Schedule 2.24, annexed hereto, sets forth a complete
list of consents of Authorities required to be received by or on the part of
CP&I and the Seller to enable CP&I or the Seller to enter into and carry out
this Agreement in all material respects. All such requisite consents have been,
or prior to the Closing will have been, obtained.
2.25 Investment Representations. In the event, in connection with this
Agreement or any agreement or transaction contemplated hereby, AmeriPath offers
or sells, or is deemed to offer or sell, any securities of AmeriPath to the
Seller (including AmeriPath Stock pursuant to Section 1.3), then the Seller
hereby represents and warrants to AmeriPath as follows:
(a) The Seller has been offered, and up to the Closing Date
and the time(s) of issuance of the AmeriPath Stock shall be offered,
the opportunity to ask questions of, and receive answers from,
AmeriPath and its Subsidiaries, and the Seller has been given full and
complete access to all available information and data relating to the
business and assets of AmeriPath and its Subsidiaries, has obtained
such additional information about AmeriPath and its Subsidiaries which
the Seller has deemed necessary in order to evaluate the opportunities,
both financial and otherwise, with respect to AmeriPath and, except as
set forth herein, has not relied on any representation, warranty or
other statement concerning the Purchaser and its Subsidiaries in his
evaluation of the decision to consummate the transactions contemplated
herein. On the basis of the foregoing, the Seller is familiar with the
operations, business plans and financial condition of AmeriPath.
(b) The Seller understands, agrees and acknowledges that the
AmeriPath Stock has not been registered under the Securities Act or the
Securities Act of Ohio in reliance upon exemption provisions contained
therein which AmeriPath believes are available based upon
representations made herein by the Seller.
(c) The Seller understands that he must bear the economic risk
of the AmeriPath Stock, if and when issued to the Seller, for an
indefinite period of time because, except as provided in this
Agreement, (i) the Seller understands that AmeriPath proposes to issue
and deliver the shares of AmeriPath Stock issuable in accordance with
this Agreement, without compliance with the registration requirements
of the Securities Act, that for such purpose AmeriPath will rely upon
the representations, warranties, covenants and agreements contained
herein; and that such noncompliance with registration is not
permissible unless such representations and warranties are correct and
such covenants and agreements are performed at and as of the time of
issuance; (ii) the Seller understands that, under existing rules of the
SEC, there are substantial restrictions in the transferability of his
shares of AmeriPath Stock; his shares of AmeriPath Stock may be
transferred only if registered under the Securities Act or if an
exemption from such registration is available; the Seller may not be
able to avail himself of the provisions of
- 28 -
<PAGE> 37
Rule 144 promulgated by the SEC under the Securities Act with
respect to the transfer of such shares; (iii) the AmeriPath Stock may
not be sold, transferred, pledged, or otherwise disposed of without an
opinion of counsel for or reasonably satisfactory to AmeriPath that
registration under the Securities Act or any applicable state
securities laws is not required; and (iv) AmeriPath neither has an
obligation to register a sale of the AmeriPath Stock held by the Seller
nor has it agreed to do so in the future.
(d) The Seller is an "accredited investor", as such term is
defined in Rule 501 of Regulation D promulgated under the Securities
Act in that, as of the date of this Agreement, he either (a) (either
individually or jointly with his spouse) has a net worth in excess of
$1,000,000; or (b) had an individual income in excess of $200,000 in
each of the two most recent years or joint income with his spouse in
excess of $300,000 in each of those years, and reasonably expects
reaching the same income level in the current year.
(e) The Seller is a sophisticated investor familiar with the
type of risks inherent in the acquisition of securities such as the
shares of AmeriPath Stock and the Seller's financial position is such
that the Seller can afford to retain his shares of AmeriPath Stock for
an indefinite period of time without realizing any direct or indirect
cash return on the Seller's investment.
(f) The Seller is acquiring his shares of AmeriPath Stock for
the Seller's own account and not with a view to, or for sale in
connection with, the distribution thereof within the meaning of the
Securities Act.
(g) The Seller understands that the certificates evidencing
his shares of AmeriPath Stock, when and if issued, will bear
appropriate restrictive legends.
2.26 Accounts Receivable; Inventories. The accounts receivable of CP&I
reflected on Schedule 2.26 attached hereto on the date hereof are good, valid,
genuine and subsisting, arise out of bona fide sales and deliveries of goods,
performance of services or other business transactions and, to the best of the
Seller's knowledge, are collectible, subject to allowances, adjustments and
write-offs in the ordinary course of business consistent with past practice. The
inventories reflected on the balance sheets included in the Financial
Statements, and the inventories held by CP&I on the date hereof, (i) do not
include any items which are not usable or saleable in the ordinary course of
business of CP&I, and (ii) have been reflected on such balance sheets at the
lower of cost or market value (taking into account the usability or salability
thereof), in accordance with GAAP. All such inventories are owned free and clear
and are not subject to any Lien except to the extent reserved against or
reflected in the Financial Statements. Since December 31, 1995, inventories of
raw materials and supplies have been purchased by CP&I in the ordinary course of
business, consistent with anticipated seasonal requirements, and the volumes of
purchases thereof and orders therefor have not been reduced or otherwise changed
in anticipation of the transactions contemplated by this Agreement. CP&I is not
aware of any material adverse conditions affecting the supply of materials
available to CP&I, and, to the best
- 29 -
<PAGE> 38
knowledge of CP&I, the consummation of the transactions contemplated hereby will
not adversely affect any such supply.
2.27 Brokerage. Neither CP&I nor the Seller has employed any broker,
finder, advisor, consultant or other intermediary in connection with this
Agreement or the transactions contemplated by this Agreement who is or might be
entitled to any fee, commission or other compensation from CP&I or the Seller,
or from the Purchaser or its Affiliates, upon or as a result of the execution of
this Agreement or the consummation of the transactions contemplated hereby;
provided, however, that the Seller has engaged Haverford Healthcare Advisors
(the "Haverford"), to act as broker and financial consultant in connection with
the transactions contemplated by this Agreement, and in the event the
transactions contemplated by this Agreement are consummated, Haverford shall be
entitled to a specified fee to be paid by the Seller. The Seller is solely
responsible for paying the fees and expenses of Haverford.
2.28 Improper and Other Payments. Except as set forth on Schedule 2.28
hereto, (a) neither CP&I, any director, officer, employee thereof, nor, to
CP&I's knowledge, any agent or representative of CP&I nor any Person acting on
behalf of any of them, has made, paid or received any unlawful bribes, kickbacks
or other similar payments to or from any Person or Authority, (b) no improper
foreign payment (as defined in the Foreign Corrupt Practices Act) has been made,
and (c) the internal accounting controls of CP&I are believed by CP&I's
management to be adequate to detect any of the foregoing under current
circumstances.
2.29 Participation in Audits. Except as set forth in Schedule 2.29,
CP&I has not been informed of any Recoupment Claims (as hereinafter defined)
arising in connection with audits or reviews conducted by Medicaid, Medicare or
private insurance companies. To the best of the knowledge of CP&I and the Seller
there is no basis for any Recoupment Claims based upon cost reports, claims or
bills submitted or to be submitted in connection with services rendered by CP&I.
For purposes of this Section 2.29 the term "Recoupment Claim" shall mean any
recoupment or overpayment, set-off, penalty or fine, pending or to the knowledge
of CP&I and the Seller threatened by any third-party payor or governmental
authority having jurisdiction over CP&I for amounts arising from or related to
payments to CP&I for services rendered prior to the Closing.
2.30 Health Care Laws & Regulations.
(a) Fraud and Abuse. Except as set forth on Schedule 2.30(a),
to the best of the Seller's and CP&I's knowledge, CP&I and its
officers, directors, employees, shareholders and providers, have not
engaged in any activities which are prohibited under federal Medicaid
statues, 42 U.S.C. Section 1320a-7a and 7b, or the regulations
promulgated pursuant to such statutes or related state or local
statutes or regulations or which are prohibited by rules of
professional conduct or which otherwise could constitute fraud,
including but not limited to the following: (i) making or causing to be
made a false statement or representation of a material fact in any
application for any benefit or payment; (ii) making or causing to be
made any false statement or representation of a
- 30 -
<PAGE> 39
material fact for use in determining rights to any benefit or
payment; (iii) failing to disclose knowledge by a claimant of the
occurrence of any event affecting the initial or continued right to any
benefit or payment on its behalf or on behalf of another, with intent
to secure such benefit or payment fraudulently; and (iv) soliciting,
paying or receiving any remuneration (including any kickback, bribe, or
rebate), directly or indirectly, overtly or covertly, in cash or in
kind or offering to pay such enumeration (a) in return for referring an
individual to a Person for the furnishing or arranging for the
furnishing of any item or service for which payment may be made in
whole or in part by Medicare or Medicaid, or (b) in return for
purchasing, leasing, or ordering or arranging for or recommending
purchasing, leasing, or ordering any good, facility, service, or item
for which payment may be made in whole or in part by Medicaid; subject,
in the case of (iv) to the lack of clarity in the law relating to the
marketing of Medicare risk products by brokers.
(b) Third-Party Payors. All Contracts with third-party payors
were entered into by CP&I in the ordinary course of business. CP&I will
have made available to the Purchaser, as of the Closing Date, an
accurate and complete list of all third-party payors which have
agreements with CP&I (as set forth on Schedule 2.30(b)), together with
accurate and complete copies of all such Contracts. Except as set forth
on Schedule 2.30(b), CP&I is in compliance with each third-party
payor's Contract, and CP&I has properly charged and billed in
accordance with the terms of those Contracts, including, where
applicable, billing and collection of all deductibles and co-payments.
(c) Compliance with Medicare and Medicaid Programs. CP&I has
timely and accurately filed all requisite claims and other reports
required to be filed in connection with all state and federal Medicare
and Medicaid programs in which CP&I participates due on or before the
Closing Date except to the extent that the failure to file such claims
and reports would not result in a Material Adverse Effect on CP&I.
Except as set forth on Schedule 2.30(c) hereto, there are no Claims
pending or, to CP&I's knowledge, threatened or scheduled before any
Authority, including without limitation, any intermediary, carrier, the
Administrator of the Health Care Financing Administration, the
Department of Health and Rehabilitative Services, the Agency for Health
Care Administration or any other state or federal agency with respect
to any Medicare and Medicaid claim filed by CP&I on or before the
Closing Date, or program compliance matters, which would have a
Material Adverse Effect on CP&I, or its assets, the operations or
utility thereof, or the consummation of the transactions contemplated
hereby. CP&I has delivered to the Purchaser accurate and complete
copies of any Claims, actions or appeals listed on Schedule 2.30(c).
Except for routinely scheduled reviews pursuant to CP&I's Medicare and
Medicaid Contracts, no valid review or program integrity review related
to CP&I has been conducted by any Authority in connection with the
Medicare or Medicaid programs and no such review is scheduled, or to
CP&I's knowledge, pending or threatened against or affecting CP&I, its
business, assets, or the consummation of the transactions contemplated
hereby.
- 31 -
<PAGE> 40
(d) Rate Limitations and Rates. Each facility currently
operated by CP&I charges rates and accordingly bills for services which
are legal and proper, and CP&I's standard and Medicare rates are set
forth on Schedule 2.30(d). Certain reimbursement rates established by
third-party payors are subject to retrospective adjustment, which
adjustments are set forth on said Schedule 2.30(d).
(e) Reimbursement Documentation. CP&I has filed when due any
and all cost reports and other documentation and reports, if any,
required to be filed by third-party payors and governmental agencies in
compliance with applicable contractual provisions and/or laws,
regulations and rules.
(f) Patient Referrals. No Person having a "financial
relationship" with CP&I, as that term is defined in 42 U.S.C. Section
1395nn, has referred patients or services directly or indirectly to
CP&I, other than referrals which comply with the requirements of 42
U.S.C. Section 1395nn and the regulations promulgated pursuant thereto.
2.31 Financial Condition at Closing. At and as of Closing, CP&I shall
have current assets less liabilities ("Positive Working Capital") of not less
than $141,000.00.
2.32 Disclosure. Neither this Agreement nor any of the exhibits,
attachments, or schedules hereto supplied to the Purchaser by or on behalf of
the Seller or CP&I with respect to the transactions contemplated hereby contains
any untrue statement of a material fact or omits a material fact necessary to
make each statement contained herein or therein not misleading in light of the
circumstances in which made.
2.33 Limitation. The Seller and CP&I make no representations or
warranties of any kind, express or implied, concerning the Management Agreement
(as hereinafter defined), notwithstanding anything to the contrary in this
Article II.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Seller as follows:
3.1 Corporate Organization, etc. The Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation with full corporate power and authority to carry
on its business as it is now being conducted and to own, operate and lease its
properties and assets. The Purchaser is duly qualified or licensed to do
business in good standing in every jurisdiction in which the conduct of its
business, the ownership or lease of its properties, the proposed conduct of its
business or ownership or lease of its properties, require it to be so qualified
or licensed and the failure to be so qualified or licensed would have a Material
Adverse Effect on its business. True, complete and correct copies of the
- 32 -
<PAGE> 41
Purchaser's certificate of incorporation and by-laws, as presently in effect,
are attached hereto as Exhibit 3.1.
3.2 Subsidiaries. As of September 25, 1996, other than the subsidiaries
of the Purchaser listed in Schedule 3.2 hereto, the Purchaser has no
Subsidiaries.
3.3 Authorization, Etc. The Purchaser has full corporate power and
authority to enter into this Agreement, the Management Agreement, the Trust
Agreement, the Escrow Agreement and the Contingent Notes and to carry out the
transactions contemplated hereby and thereby. The Board of Directors of the
Purchaser has duly authorized the execution, delivery and performance of this
Agreement, the Employment Agreement, the Contingent Notes, the Management
Agreement, the Trust Agreement, the Escrow Agreement and the other agreements
and transactions contemplated hereby, and no other corporate proceedings on its
part are necessary to authorize this Agreement and the transactions
contemplated hereby and thereby. Upon execution and delivery of this Agreement,
the Employment Agreement, the Trust Agreement, the Management Agreement and the
Escrow Agreement by the parties hereto and thereto this Agreement, the
Employment Agreement, the Trust Agreement, the Management Agreement and the
Escrow Agreement shall, and upon issuance of the Contingent Notes in accordance
with the provisions hereof the Contingent Notes shall, constitute legal, valid
and binding obligations of the Purchaser, enforceable against the Purchaser in
accordance with their respective terms, except to the extent that the
enforcement thereof may be limited by applicable (i) bankruptcy, reorganization,
insolvency, and similar laws affecting the enforcement of creditors' rights and
(ii) equitable principles.
3.4 No Violation. The execution, delivery and performance by the
Purchaser of this Agreement, the Management Agreement, the Trust Agreement, the
Escrow Agreement, the Contingent Notes and all other agreements contemplated
hereby, and the fulfillment of and compliance with the respective terms hereof
and thereof by the Purchaser, do not (a) conflict with or result in a breach of
the terms, conditions or provisions of, (b) result in a violation of, or (c)
require any authorization, consent, approval, exemption or other action by or
notice to any Authority pursuant to, the certificate of incorporation or by-laws
of the Purchaser, or any Regulation to which the Purchaser is subject, or any
Contract or Order to which the Purchaser or its properties are subject. The
Purchaser will comply with all applicable Regulations and Orders in connection
with the execution, delivery and performance of this Agreement, the Employment
Agreement, the Management Agreement, the Trust Agreement, the Escrow Agreement,
the Contingent Notes, as applicable, and the transactions contemplated hereby
and thereby.
3.5 Governmental Authorities. The Purchaser has complied in all
material respects with all applicable Regulations and Orders in connection with
its execution, delivery and performance of this Agreement, the Trust Agreement,
the Management Agreement, the Contingent Notes and the agreements and
transactions contemplated hereby and thereby. The Purchaser is not required to
submit any notice, report, or other filing with any governmental authority in
connection with its execution or delivery of this Agreement, the Management
- 33 -
<PAGE> 42
Agreement, the Trust Agreement, the Contingent Notes or the consummation of the
transactions contemplated hereby and thereby. No authorization, consent,
approval, exemption or notice is required to be obtained by the Purchaser in
connection with its execution, delivery, and performance of this Agreement, the
Management Agreement, the Trust Agreement, the Contingent Notes and the
agreements and transactions contemplated hereby and thereby.
3.6 Issuance of AmeriPath Stock. All shares of AmeriPath Stock required
to be issued by AmeriPath to the Seller, in accordance with the terms and
subject to the conditions set forth in this Agreement, shall, upon issuance and
delivery, be duly authorized, validly issued, fully paid and non-assessable,
free and clear of all Liens and adverse Claims, except as provided in this
Agreement.
3.7 Financial Statements. Attached as Exhibit 3.7 hereto are the
following financial statements of AmeriPath ("American Laboratory Associates,
Inc.," the predecessor company): audited balance sheet, income statement, and
statement of cash flows and related notes thereto, for the fiscal years ended
December 31, 1995 and 1994 (the "Audited Financial Statements"), and (ii)
AmeriPath's consolidated balance sheet (unaudited), consolidated income
statement (unaudited) and statement of cash flows (unaudited), for the six month
period ended June 30, 1996 (collectively, together with the Audited Financial
Statements, the "AmeriPath Financial Statements"). The balance sheets included
in the AmeriPath Financial Statements fairly present the financial position of
AmeriPath in accordance with GAAP, as at the respective dates thereof, and the
income statements included in the Financial Statements (x) fairly present the
results of operations for the periods therein referred to, all in accordance
with GAAP applied on a consistent basis, and (y) fairly present the financial
condition of AmeriPath as of the respective dates and for the periods covered
by, such statements. As used in this Section 3.7, "AmeriPath" means and refers
to the predecessor business and operations of AmeriPath, before AmeriPath and
its subsidiaries were reorganized into a holding company structure (which took
place effective February 29, 1996).
3.8 Capitalization; Options. As of the date hereof, the authorized
capital stock of AmeriPath consists of (i) 8,000,000 shares of Common Stock and
(ii) 5,000,000 shares of Preferred Stock, $.01 par vale per share. The stock
record book of AmeriPath has been made available to CP&I for inspection prior to
the date hereof and is complete and correct, and all requisite Federal and State
documentary stamps have been affixed thereon and canceled. Except as set forth
on Schedule 3.8 hereof and other than securities issuable or to be issuable in
connection with acquisitions of pathology practices or the Purchaser's
predecessor there are no outstanding subscriptions, options, warrants, rights,
securities, contracts, commitments, understandings or arrangements under which
AmeriPath is bound or obligated to issue any additional shares of its capital
stock or rights to purchase shares of its capital stock. Except as set forth on
Schedule 3.8, other than the Shareholders' Agreement, agreements related to
acquisitions of pathology practices or the Purchaser's predecessor and the
Purchaser's credit facility, there are no agreements, arrangements or
understandings between the Purchaser and any other Person regarding the
AmeriPath Stock (or the transfer, disposition, holding or voting thereof). True,
correct and complete copies of the Shareholders' Agreement, the Purchaser's
- 34 -
<PAGE> 43
credit facility and each of the agreements referred to in Schedule 3.8 have been
furnished to the Seller.
3.9 Compliance with Material Laws and Regulations. AmeriPath is
presently complying in respect of its operations, equipment, practices, real
property, plants, laboratories, structures, and other property, and all other
aspects of its business and operations, with all applicable Regulations and
Orders, including, but not limited to, Health Care Laws, all Regulations
relating to the safe conduct of business, environmental protection, quality and
labeling, antitrust, Taxes, consumer protection, equal opportunity,
discrimination, health, sanitation, fire, zoning, building and occupational
safety where such failure or failures would individually or in the aggregate
have a Material Adverse Effect. There are no Claims pending, nor to the best
knowledge of AmeriPath are there any Claims threatened, nor has the Company
received any written notice, regarding any violations of any Regulations and
Orders enforced by any Authority claiming jurisdiction over AmeriPath,
including any requirement of OSHA or any pollution and environmental control
agency (including air and water). AmeriPath has licenses to provide health care
services in each jurisdiction in which it currently operates.
3.10 Litigation. Except as set forth in Schedule 3.10, there is no
Claim pending or, to the best knowledge of the Purchaser, threatened against the
Purchaser which, if adversely determined, would have a Material Adverse Effect
on the Purchaser. Nor is there any Order outstanding against the Purchaser
having, or which, insofar as can reasonably be foreseen, in the future may have,
a Material Adverse Effect on the Purchaser.
3.11 Insurance. Schedule 3.11 attached hereto sets forth a list and
brief description, including dollar amounts of coverage, of all policies of
fire, liability, professional liability and other forms of insurance held by
AmeriPath. Such policies are valid, outstanding and enforceable policies, as to
which premiums have been paid currently.
3.12 Disclosure. Neither this Agreement nor any of the exhibits,
attachments, or schedules supplied to the Seller by or on behalf of the
Purchaser with respect to the transactions contemplated hereby contains any
untrue statement of a material fact or omits a material fact necessary to make
each statement contained herein or therein not misleading.
ARTICLE IV
COVENANTS OF THE SELLER
From the date hereof until the Closing, except as otherwise consented
to or approved by the Purchaser in writing, CP&I covenants and agrees that it
shall act, and the Seller shall cause CP&I to so act or refrain from acting
where required hereinafter, to comply with the following:
4.1 Regular Course of Business. CP&I shall operate its business
diligently and in good faith and in the ordinary and usual course, consistent
with past management practices; shall
- 35 -
<PAGE> 44
maintain its properties in good order and condition consistent with past
practice, shall maintain (except for expiration due to lapse of time) all
material leases and Contracts in effect without change except as expressly
provided herein; shall comply with the provisions of all Regulations and Orders
applicable to CP&I and the conduct of its respective business; shall not cancel,
release, waive or compromise any debt, Claim or right in its favor except in the
ordinary course of business; shall not alter the rate or basis of compensation
of any of its officers, directors or employees; shall maintain insurance
coverage as in effect on the date hereof up to the Closing Date; and shall
preserve the business of CP&I intact except as provided in Section 4.9, and use
its reasonable efforts to keep available for CP&I and the Purchaser the services
of the officers and employees of CP&I, and to preserve the good will of clients,
patients, suppliers and others having business relations with CP&I.
4.2 Amendments. No change or amendment shall be made in the articles of
incorporation or by-laws of CP&I. CP&I shall not merge with or into or
consolidate with any other corporation or Person, acquire substantially all of
the assets of any Person or change, except as provided in Section 4.9, the
character of its business.
4.3 Capital Changes; Pledges. Except as contemplated under this
Agreement, CP&I shall not issue or sell any shares of its capital stock of any
class or issue or sell any securities convertible into, or options, warrants to
purchase or rights to subscribe to, any shares of its capital stock and CP&I
shall not pledge or otherwise encumber any shares of its capital stock.
4.4 Dividends. CP&I shall not declare, pay or set aside for payment any
dividend or other distribution in respect of its capital stock to the extent
that any such distribution would result in a breach of Section 2.31, nor shall
CP&I, directly or indirectly, redeem, purchase or otherwise acquire any shares
of its capital stock.
4.5 Capital and Other Expenditures. CP&I shall not make any capital
expenditures, or commitments with respect thereto, except in the ordinary course
of business consistent with past practice.
4.6 Cash and Cash Equivalents. Cash and cash equivalents shall not be
expended to the extent such expenditure would result in a breach of Section
2.31.
4.7 Borrowing. CP&I shall not incur, assume or guarantee any
indebtedness, obligations or liabilities not reflected on the Financial
Statements (or the balance sheets included therein) except in the ordinary
course of business consistent with past practice or for purposes of consummation
of the transactions contemplated by this Agreement.
4.8 Other Commitments. Except as set forth in this Agreement or
incurred or transacted in the ordinary course of business, or permitted in
writing by the Purchaser, CP&I shall not enter into any transaction or make any
commitment or incur any obligation (including entering into any real property
leases).
- 36 -
<PAGE> 45
4.9 Transfer of Business. Prior to the Closing, CP&I shall transfer to
another Person certain of the assets and cause such person to assume all of the
liabilities relating to the medical practices of Drs. Michel, Petroff and
Wieselthier, other than those assets and liabilities of the laboratory business
as set forth on Schedule 4.9 hereto, which Schedule sets forth all the material
assets and liabilities to be retained by CP&I.
4.10 Interim Financial Information. To the extent prepared and
available, CP&I shall supply the Purchaser with unaudited financial statements
(including, without limitation, balance sheets and statements of revenues and
expenses) and information for each calendar month, promptly following the
conclusion of such month, and as the Purchaser may otherwise reasonably request.
4.11 Full Access and Disclosure.
(a) CP&I shall afford to the Purchaser and its counsel,
accountants and other authorized representatives reasonable access
during business hours to CP&I's facilities, properties, books and
records in order that the Purchaser may have full opportunity to make
such reasonable investigations as it shall desire to make of the
affairs of CP&I; and the Seller shall cause CP&I's officers, employees
and auditors to furnish such additional financial and operating data
and other information as the Purchaser shall from time to time
reasonably request including, without limitation, any internal control
recommendations applicable to CP&I made by CP&I's independent auditors
in connection with any examination of CP&I's Financial Statements and
books and records.
(b) From time to time prior to the Closing Date, CP&I shall
promptly supplement or amend information previously delivered to the
Purchaser with respect to any matter hereafter arising which, if
existing or occurring at the date of this Agreement, would have been
required to be set forth herein or disclosed.
(c) The Seller shall fully cooperate with any "due diligence"
examination performed by the Purchaser with respect to the business of
CP&I.
4.12 Confidentiality. The Seller and CP&I shall, and shall cause its
principals, officers and other personnel and authorized representatives to, hold
in confidence, and not disclose to any other party without the Purchaser's prior
consent, all written and oral information furnished or disclosed by or received
from the Purchaser or its officers, directors, employees, agents, counsel and
auditors in connection with the transactions contemplated hereby except as may
be required by applicable law or as otherwise contemplated herein.
4.13 Fulfillment of Conditions Precedent. CP&I and the Seller shall use
their reasonable efforts to obtain at their expense, on or prior to the Closing
Date, all such waivers, Permits, consents, approvals or other authorizations
from third parties and Authorities, and to do all things as may be necessary or
desirable in connection with the transactions contemplated by this
- 37 -
<PAGE> 46
Agreement in order to fully and expeditiously consummate the transactions
contemplated by this Agreement.
ARTICLE V
COVENANTS OF THE PURCHASER
The Purchaser hereby covenants and agrees with CP&I and the Seller that
prior to the Closing or the termination of this Agreement:
5.1 Confidentiality. The Purchaser shall, and shall cause its
principals, officers and other personnel and authorized representatives to, hold
in confidence, and not disclose to any other party without the Seller's prior
consent, all information received by it from the Seller or CP&I's officers,
directors, employees, agents, counsel and auditors in connection with the
transactions contemplated hereby except as may be required by applicable law or
as otherwise contemplated herein.
5.2 Full Access and Disclosure.
(a) The Purchaser shall afford to CP&I and the Seller, and
their counsel, accountants and other authorized representatives
reasonable access during business hours to the Purchaser's facilities,
properties, books and records in order that the Seller may have full
opportunity to make such reasonable investigations as they shall desire
to make of the affairs of the Purchaser; and the Purchaser shall cause
its officers, employees and auditors to furnish such additional
financial and operating data and other information as the Seller shall
from time to time reasonably request including, without limitation, any
internal control recommendations applicable to the Purchaser made by
the Purchaser's independent auditors in connection with any examination
of the Purchaser's financial statements and books and records.
(b) From time to time prior to the Closing Date, the Purchaser
shall promptly supplement or amend information previously delivered to
CP&I and/or the Seller with respect to any matter hereafter arising
which, if existing or occurring at the date of this Agreement, would
have been required to be set forth herein or disclosed.
(c) The Purchaser shall fully cooperate with any "due
diligence" examination performed by CP&I or the Seller with respect to
the business of the Purchaser. For purposes of this Section 5.2,
"Purchaser" shall mean and include AmeriPath and its Subsidiaries.
5.3 Fulfillment of Conditions Precedent. The Purchaser shall use its
reasonable efforts to obtain at its expense, on or prior to the Closing Date,
all such waivers, Permits, consents, approvals or other authorizations from
third parties and Authorities, and to do all things as may
- 38 -
<PAGE> 47
be necessary or desirable in connection with the transactions contemplated by
this Agreement in order to fully and expeditiously consummate the transactions
contemplated by this Agreement.
ARTICLE VI
OTHER AGREEMENTS
The parties hereto further agree, on or before the Closing Date, as
follows:
6.1 Further Assurances. Subject to the terms and conditions of this
Agreement, each of the parties hereto shall use reasonable efforts to take, or
cause to be taken, all action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable Regulations to consummate and
make effective the transactions contemplated by this Agreement. In furtherance
and not in limitation of the preceding sentence, the parties hereto shall use
reasonable efforts to cause the Closing to take place on or before October 30,
1996.
6.2 Agreement to Defend. In the event any action, suit, proceeding or
investigation of the nature specified in Sections 7.2 or 8.2 is commenced before
the Closing Date, all the parties hereto agree to cooperate and use reasonable
efforts to defend against and respond thereto.
6.3 Consents. Without limiting the generality of Section 6.1, each of
the parties hereto shall use reasonable efforts to obtain all permits,
authorizations, consents and approvals of all Persons and governmental
authorities necessary, proper or advisable in connection with the consummation
of the transactions contemplated by this Agreement prior to the Closing Date.
6.4 No Solicitation or Negotiation. Unless and until this Agreement is
terminated, except as may otherwise be required by Regulation or Order, neither
the Seller nor CP&I through its directors, officers, employees, representatives,
agents, advisors, accountants and attorneys shall initiate, solicit or
encourage, directly or indirectly, any inquiries or the making of any proposal
with respect to, or engage in negotiations concerning, or provide any
confidential information or data to any Person with respect to, or have any
discussions with any Persons relating to, any acquisition, business combination
or purchase of all or any significant asset of, or any equity interest in, CP&I,
or otherwise facilitate any effort or attempt to do or seek any of the
foregoing, and shall immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing. Should CP&I or the Seller be contacted
with respect to any offer, inquiry or proposal, CP&I and the Seller shall
immediately advise the Purchaser in writing of the name, address and phone
number of the contact and the nature of the inquiry.
6.5 Public Announcements. Neither party hereto nor any Affiliate,
representative or shareholder of such Persons, shall disclose any of the terms
of this Agreement to any third party (other than the Purchaser's advisors and
senior lending group and the Seller's advisors) without the other party's prior
written consent unless required by any applicable law. The form, content
- 39 -
<PAGE> 48
and timing of any and all press releases, public announcements or publicity
statements (except for any disclosures under or pursuant to Federal or State
securities laws in connection with the registration of AmeriPath's securities or
otherwise) with respect to this Agreement or the transactions contemplated
hereby shall be subject to the prior approval of each party hereto. No press
releases, public announcements or publicity statements shall be released by
either party without prior mutual agreement.
6.6 Employment Agreements. The Seller shall enter into an employment
agreement in the form of Exhibit 6.6 hereto (the "Employment Agreement"). The
Purchaser hereby assumes and agrees to perform in accordance with their terms
(by or through CP&I), effective the Closing Date, the employment agreements with
Nina Petroff, M.D. and Janet S. Wieselthier, M.D.
The parties hereto further agree, from and after the Closing Date, as
follows:
6.7 --DELETED--
6.8 Observer Rights. So long as the Seller is employed by an Affiliate
of AmeriPath and the Contingent Notes have not matured or been paid in full
(solely to the extent required to be paid under the Contingent Note), the Seller
shall have the right, at his expense, to attend all meetings of the Board of
Directors of AmeriPath as an observer. The Seller shall receive notices of all
meetings of the Board of Directors of AmeriPath, shall receive copies of all
materials supplied to the Directors of AmeriPath, and shall be entitled to
attend and participate in all meetings of the Board of Directors of AmeriPath;
provided, that the Seller shall have no right to vote on any matters submitted
to the Board of Directors (or any committee thereof). Nothing in this section
shall be deemed to prohibit AmeriPath from taking action by written consent of
the Board of Directors without notice to, or participation by, the Seller.
Furthermore, if the Directors of AmeriPath elect to convene a meeting without
notice, they shall use their best efforts to advise the Seller of such meeting,
but the failure or inability to advise the Seller of such meeting shall not
vitiate any action taken at such meeting. The Seller may be a member of the
physician's committee of AmeriPath, if and when such committee is constituted
from time to time.
6.9 Certain Tax Matters.
(a) The Seller shall cause CP&I to file all Tax Returns and
reports with respect to Taxes which are required to be filed prior to
the Closing date (a "Pre-Closing Tax Return"), and CP&I shall pay all
Taxes due in respect of, and all costs associated with the preparation
of, such Pre-Closing Tax Returns to the appropriate Taxing Authority.
In addition, the Seller shall cause CP&I to file all S corporation
income tax returns (federal form 1120S and comparable state and local
forms, where applicable) required to be filed after the Closing Date in
respect of a period beginning prior to the Closing Date. The Buyer
shall file, or cause CP&I to file, all other Tax Returns and reports
with respect to Taxes which are required to be filed on or after the
Closing Date, and Buyer and CP&I shall pay all Taxes due and costs
associated with such returns.
- 40 -
<PAGE> 49
(b) The parties hereto agree that there shall not be made any
election for the Company pursuant to Section 338(g) or 338(h)(10) of
the Code.
(c) CP&I shall elect, and the Purchaser and the Seller shall
each consent, pursuant to Section 1362(e)(3) of the Code, to allocate
tax items to CP&I's S short year and C short year (as defined in
Section 1362(e)(1) of the Code) pursuant to normal tax accounting rules
(i.e., using the closing of the books method) rather than by the pro
rata allocation method contained in Section 1362(e)2) of the Code.
(d) The Purchaser and CP&I agree to pay to the Seller the
amount of any federal, state and local income tax savings realized by
them (including with respect to the payment made pursuant to this
paragraph and any interest received by them) based on a final
determination of an adjustment (by reason of an amended return, claim
for refund, audit or other action) involving a decrease in CP&I's
taxable income for a taxable period ending after the Closing Date and a
corresponding increase in the federal, state or local, taxable income
of the Seller in respect of a taxable period ending on or before the
Closing Date.
(e) The Seller and CP&I agree to pay to the Purchaser the
amount of any federal, state and local income tax savings realized by
them (including with respect to the payment made pursuant to this
paragraph and any interest received by them) based on a final
determination of an adjustment (by reason of an amended return, claim
for refund, audit or other action) involving an increase in CP&I's
taxable income for a taxable period ending after the Closing Date and a
corresponding decrease in the federal, state or local, taxable income
of the Seller in respect of a taxable period ending on or before the
Closing Date.
6.10 Non-Competition Covenant.
(a) As a material and valuable inducement for the Purchaser to
enter into this Agreement, pay and deliver the Purchase Price
consideration and consummate the transactions provided for herein,
during the "Restricted Period" (as hereinafter defined), the Seller
agrees that he shall not, directly or indirectly, alone or as a
partner, officer, director, employee, consultant, agent, independent
contractor, member or stockholder of any Person:
(i) engage in the practice of pathology within any
County within the State of Ohio in which AmeriPath or an
AmeriPath Affiliate is then doing business (the "Restricted
Territory"); or
(ii) from any facility or location, whether within or
without the Restricted Territory, (x) perform pathology
services for any patient, laboratory or health care provider
located in the Restricted Territory or (y) perform pathology
services for any patient, laboratory or health care provider
who was or is a
- 41 -
<PAGE> 50
customer, client or patient of an AmeriPath Affiliate,
except that it shall not be a violation of this
Section 6.10 for the Seller to perform pathology services in
the Restricted Territory during the Restricted Period (a) as
an employee of a local, federal or state government or agency;
(b) in performing the Seller's duties as a member of the
United States military services or the National Guard; (c) on
a locum tenens basis or (d) for the Purchaser or any Affiliate
of the Purchaser. The Seller shall also be permitted to
perform medical services as a dermatologist on a part-time
basis for his own medical practice, and engage in any other
activities permitted by Section 3 of his Employment Agreement.
(b) As used in this Agreement, the term "Restricted Period"
shall mean and include the longer of (x) a period of five (5) years,
from the Closing to the fifth (5th) anniversary of the Closing, and (y)
during such time as the Seller is employed by an AmeriPath Affiliate
and so long as Seller is employed with CP&I or any AmeriPath Affiliate,
provided, however, should (i) AmeriPath fail to purchase Seller's
AmeriPath Stock in accordance with Section 1.3(m), or fail to make a
payment with respect to the Contingent Notes, and such failure
continues for more than ninety (90) days after notice from the Seller,
or (ii) there is a Loan Default (as defined in Section 12.3), upon
notice by the Seller, the Restricted Period shall equal zero (0) days.
(c) The Seller further agrees that during the Restricted
Period, the Seller will not knowingly, directly or indirectly, (a)
solicit the employment of any employee, agent or consultant of any
AmeriPath Affiliate who was such at any time during the twelve (12)
months preceding the Seller's termination of employment with the
AmeriPath Affiliate, or (b) induce any employee of an AmeriPath
Affiliate to leave the employ of any such AmeriPath Affiliate, unless
in each case the Seller obtains the prior written consent of AmeriPath.
(d) The Seller covenants and agrees that the restrictions set
forth in this Section 6.10 are fair, reasonable and necessary to
protect the interests of AmeriPath and its Affiliates, such
restrictions were negotiated and bargained for and the consideration
delivered in connection with this Agreement reflects and assumes the
Seller's strict compliance with, and the enforceability by the
Purchaser of, these restrictions.
(e) The Seller acknowledges and agrees that the provisions of
Section 6.10 and Section 6.11 are material and of the essence to this
Agreement. In addition, if the scope of any restriction or covenant
contained in either such Section should be or become too broad or
extensive to permit enforcement thereof to its fullest extent, then
such restriction or covenant shall be enforced to the maximum extent
permitted by law, and the Seller hereby consents and agrees that (a) it
is the parties intention and agreement that the covenants and
restrictions contained herein be enforced as written, and (b) in the
event a court of competent jurisdiction should determine that any
restriction or covenant contained herein is too broad or extensive to
permit enforcement thereof to its fullest extent, the scope of any such
restriction or covenant may be modified accordingly in any
- 42 -
<PAGE> 51
judicial proceeding brought to enforce such restriction or covenant,
but should be modified to permit enforcement of the restrictions
and covenants contained herein to the maximum extent the
court, in its judgment, will permit.
6.11 Non-disclosure; Confidentiality.
(a) Confidential Information. By virtue of the Seller's
employment, association or involvement with an AmeriPath Affiliate, the
Seller may obtain confidential or proprietary information developed, or
to be developed, by an AmeriPath Affiliate. "Confidential Information"
means all proprietary or business sensitive information, whether in
oral, written, graphic, machine-readable or tangible form, and whether
or not registered, and including all notes, plans, records, documents
and other evidence thereof, including but not limited to all: patents,
patent applications, copyrights, trademarks, trade names, service
marks, service names, "know-how," client lists, details of client or
consulting contracts, pricing policies, operational methods, marketing
plans or strategies, product development techniques or plans,
procurement and sales activities, promotion and pricing techniques,
credit and financial data concerning customers, business acquisition
plans or any portion or phase of any scientific or technical
information, discoveries, computer software or programs used or
developed in whole or in part by any AmeriPath Affiliate (including
source or object codes), processes, procedures, formulas or
improvements of any AmeriPath Affiliate; algorithms; computer
processing systems and techniques; price lists; customer lists;
procedures; improvements, concepts and ideas; business plans and
proposals; technical plans and proposals; research and development;
budgets and projections; technical memoranda, research reports, designs
and specifications; new product and service developments; comparative
analyses of competitive products, services and operating procedures;
and other information, data and documents now existing or later
acquired by an AmeriPath Affiliate, regardless of whether any of such
information, data or documents qualify as a "trade secret" under
applicable Federal or State law. "Confidential Information" shall not
include (a) any information which is in the public domain during the
period of service by the Seller or becomes public thereafter, provided
such information is not in the public domain as a consequence of
disclosure by the Seller in violation of this Agreement, and (b) any
information not considered confidential information by similar
enterprises operating in the anatomical laboratory industry or
otherwise in the ordinary course.
(b) Non-Disclosure. The Seller agrees that, except as directed
by the Seller's employer (which employer is an AmeriPath Affiliate), as
required or otherwise contemplated under this Agreement or the
Employment Agreement or as otherwise required by law, court order,
subpoena or other legal process or as may be required to enforce his
rights under this Agreement or the Employment Agreement, he will not at
any time (during the term of the Seller's employment by an AmeriPath
Affiliate or at any time thereafter), except as may be expressly
authorized by the AmeriPath Affiliate, disclose to any Person or use
any Confidential Information whatsoever for any purpose whatsoever, or
permit any Person whatsoever to examine and/or make copies of any
Confidential
- 43 -
<PAGE> 52
Information prepared by him or that may come into his possession
or under his control by reason of his employment by an
AmeriPath Affiliate or by reason of any consulting services he has
performed or may in the future perform for an AmeriPath Affiliate. The
Seller further agrees that while employed at an AmeriPath Affiliate, no
Confidential Information shall be removed from the AmeriPath
Affiliate's business premises, without the prior written consent of
such AmeriPath Affiliate, except in connection with performing his
duties under the Employment Agreement.
6.12 Rule 144 Best Efforts. Following such time, if any, that AmeriPath
is or may become, and solely while AmeriPath is, a public company with its
securities registered under the Securities Act, and listed or quoted for trading
by a national securities exchange or inter-dealer quotation system, AmeriPath
will use its best efforts to see that AmeriPath is in compliance with the
requirements of Rule 144 under the Securities Act applicable to the issuer of
securities, so as to facilitate non-registered sales of AmeriPath Stock by the
Seller who then own AmeriPath Stock consistent with the requirements and
limitations of Rule 144. Nothing in this Section 6.12 shall be deemed as either
(i) any representation or warranty that Ameripath will become or remain a public
company with securities registered under the Securities Act, or (ii) any
covenant or agreement by AmeriPath to register, under federal or state
securities laws or otherwise, any AmeriPath securities issued to, or held by,
the Seller.
6.13 Exclusive Territory. Without the prior written consent of the
Seller (which shall not be unreasonably withheld), so long as the Seller is
employed by CP&I and the Contingent Note has not matured or been paid in full
(solely to the extent required under the Contingent Note), the Purchaser shall
not, directly or indirectly, alone or as a partner or shareholder of, lender to
or investor in another Person engage in, or acquire businesses or practices
within 150 miles of 23200 Chagrin Building 5, Suite 350, Beachwood, Ohio, which
engage in the practice of pathology or any anatomical laboratory business that
competes with the business then conducted by CP&I; provided, however, that this
Section shall not apply to the acquisition of the practice of David R. Barron,
M.D. solely to the extent of any clients, referrals, hospitals, medical
facilities or customers of such practice located within such 150 mile area on
the Closing Date.
6.14 First Rights. Upon (i) a Loan Default or (ii) the sale,
liquidation, closure, suspension or termination (in whole or in part) of the
business or operations of CP&I, the Seller shall be entitled to purchase all
(but not less than all) of the capital stock or assets of CP&I, upon the same
terms and conditions as either the Purchaser, or the Purchaser's senior lenders,
would sell to any other Person. The Seller's first purchase rights shall
terminate 120 days after the Purchaser has delivered notice to the Seller of the
proposed sale or transaction and the terms thereof, including the nature and
amount of consideration proposed to be paid.
6.15 Unpaid Tax Liability. Prior to the Closing, the Seller shall have
paid, settled or otherwise resolved to the satisfaction of AmeriPath, the unpaid
tax liability associated with the Seller's Subchapter S election and 1994
accounts receivable, other than any interest, penalties or other charges that
have not been assessed prior to the Closing (all of which shall be the sole
responsibility of the Seller).
- 44 -
<PAGE> 53
6.16 Trade Names. The Seller hereby agrees to lease to the Purchaser
for $10.00 per year the trade names "Cutaneous Pathology & Immunofluorescence
Laboratory" and "CPI". The term of the lease shall be the earlier of (i) such
time as the Contingent Note has been paid in full (solely to the extent required
under such note) or (ii) five years from the Closing Date. At the end of the
lease term, the Purchaser shall have the option to purchase the trade names for
$10.00 each. During the term of the tradename lease, AmeriPath shall use the
tradenames with respect to the business and operations of CP&I. Upon the
occurrence of (i) a Loan Default or (ii) a CP&I Termination, the lease of the
trade names shall terminate and expire and the trade names shall immediately and
automatically revert to the Seller and the Purchaser shall have no further
rights or interests in such names.
6.17 Access to Books. Following the Closing and until all contingent
consideration has been paid to the Seller, the Seller shall have reasonable
access to the books and records of CP&I and AmeriPath to verify the Operating
Earnings. AmeriPath shall cause CP&I to maintain such books and records as the
Seller may reasonably request in order to compute, verify and audit Operating
Earnings.
6.18 Deliveries After Closing. From time to time after the Closing, at
the Purchaser's request and without expense to CP&I and without further
consideration from the Purchaser or CP&I, the Seller shall execute and deliver
such other instruments of conveyance and transfer and take such other action as
the Purchaser reasonably may require to convey, transfer to and vest in the
Purchaser, and to put the Purchaser in possession of, any rights or property to
be sold, conveyed, transferred or delivered hereunder.
6.19 Post Closing Operations. Following the Closing, until all amounts
due under this Agreement (including Sections 1.2 and 1.3 hereof) and the
Contingent Note have been paid in full (only to the extent applicable targets
have been achieved), AmeriPath shall cause the business and operations of CP&I
to be conducted in the ordinary course, consistent with past practice, as a
stand-alone cost-center separate and distinct from AmeriPath and its other
Affiliates. Without limiting the generality of the foregoing, except as
contemplated in this Agreement, without the prior written consent of the Seller
(which consent may not be unreasonably withheld), AmeriPath shall not:
(a) cause or permit CP&I to convey, transfer, lease or otherwise
dispose of, in one or any series of transactions, all or any material
part of its assets, properties or business, dissolve, liquidate or
reorganize, engage in business with unreasonably small capital,
suspend, terminate or discontinue all or any material portion of its
business operations, seek relief under any bankruptcy, reorganization,
insolvency or other law for the relief of debtors, issue any securities
to any Person other than AmeriPath or otherwise engage in any
transaction that might adversely affect Operating Earnings of CP&I; or
(b) sell, assign, exchange, transfer or otherwise dispose of any
capital stock or other securities of CP&I held at any time by
AmeriPath.
- 45 -
<PAGE> 54
(c) cause or permit CP&I to merge or consolidate with or into
any other Person other than AmeriPath or an Affiliate of AmeriPath
controlled by AmeriPath, provided in each case that such Person
expressly assumes in writing CP&I's obligations under the Employment
Agreement with the Seller.
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER
Each and every obligation of the Purchaser under this Agreement shall
be subject to the satisfaction, on or before the Closing Date, of each of the
following conditions, unless waived in writing by the Purchaser:
7.1 Representations and Warranties; Covenants and Agreements. The
representations and warranties of the Seller contained in Article II and
elsewhere in this Agreement and all information contained in any exhibit,
certificate, schedule or attachment hereto or in any writing delivered by, or on
behalf of, the Seller or CP&I to the Purchaser, shall be true and correct when
made and shall be true and correct in all material respects on the Closing Date
as though then made, except as expressly provided herein. The Seller and CP&I
shall have performed and complied with all agreements, covenants and conditions
and shall have made all deliveries required by this Agreement to be performed,
delivered and complied with by them prior to the Closing Date. The Seller and
the president of CP&I shall have executed and delivered to the Purchaser a
certificate, dated the Closing Date, certifying to the foregoing.
7.2 No Injunction. No preliminary or permanent injunction or other
Order, decree or ruling issued by any Authority, or any Regulation promulgated
or enacted by any Authority shall be in effect, which would prevent the
consummation of the transactions contemplated hereby.
7.3 --DELETED--
7.4 --DELETED--
7.5 No Material Adverse Change. There shall have been no Material
Adverse Change since the date of this Agreement. The Purchaser shall have
received a certificate (which shall be addressed to the Purchaser), dated the
Closing Date, of the president and chief financial officer of CP&I, certifying
to the foregoing.
7.6 Opinion of Seller's Counsel. The Purchaser shall have received an
opinion of counsel to the Seller and CP&I (which will be addressed to the
Purchaser and its senior lenders), dated the Closing Date, in the form of
Exhibit 7.6 hereto.
7.7 Employment Agreements. The Seller shall have executed and delivered
to the Purchaser an Employment Agreement with CP&I in the form of Exhibit 6.6.
- 46 -
<PAGE> 55
7.8 Delivery of CP&I Share Certificates. The Seller shall have executed
and delivered to AmeriPath this Agreement, or a counterpart hereof,
and shall have delivered at the Closing stock certificates representing all of
the CP&I Shares, duly endorsed for transfer to the Purchaser, together with
stock powers duly executed in blank.
7.9 Shareholders' Agreement. At the Closing, the Seller shall have
executed and delivered to AmeriPath a counterpart signature page to that certain
Shareholders' Agreement, dated as of February 29, 1996, by and among AmeriPath
and each of the stockholders of AmeriPath (the "Shareholders' Agreement"),
pursuant to which the Seller agrees to be bound by the provisions of the
Shareholders' Agreement, in accordance with their terms, to the same extent as
if he had been an original signatory thereto (except as specifically set forth
in such counterpart).
7.10 Subordination Agreement. At the Closing, the Seller shall have
executed and delivered to the Purchaser the Subordination Agreement.
7.11 Other Agreements. The Seller shall have executed and delivered the
Trust Agreement, pursuant to which AmeriPath shall be the beneficiary of the
Trust and the Seller shall be the trustee (the "Trust Agreement"), Beno Michel
and Associates, M.D., Inc. shall have executed and delivered the Option
Agreement pursuant to which Beno Michel and Associates, M.D., Inc. has the
option to purchase the assets of the medical practice from CP&I (the "Option
Agreement"), and CP&I shall have executed and delivered the Management Agreement
pursuant to which AmeriPath shall provide certain management services to CP&I
(the "Management Agreement").
7.12 Transfer of Business. The Purchaser shall receive adequate proof
that certain of the assets and liabilities of the medical practices of Drs.
Michel, Petroff and Wieselthier had been properly transferred out of CP&I to
another Person.
7.13 Acquisition Agreement. The Seller shall have executed and
delivered to the Purchaser the Broker Fee Agreement between AmeriPath and the
Seller in the form of Exhibit 7.13 attached hereto the ("Acquisition
Agreement").
7.14 Escrow Agreement. The Seller shall have executed and delivered to
the Purchaser the Escrow Agreement.
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF THE SELLER
Each and every obligation of the Seller under this Agreement shall be
subject to the satisfaction, on or before the Closing Date, of each of the
following conditions unless waived in writing by the Seller:
- 47 -
<PAGE> 56
8.1 Representations and Warranties; Performance. The representations
and warranties of the Purchaser contained in Article III and elsewhere in this
Agreement and all information contained in any exhibit, schedule or attachment
hereto, delivered by or on behalf of the Purchaser to the Seller, shall be
true and correct in all material respects when made and shall be true and
correct in all material respects on the Closing Date as though then made, except
as expressly provided herein. The Purchaser shall have performed and complied in
all material respects with all agreements, covenants and conditions required by
this Agreement to be performed and complied with by them prior to the Closing
Date. The Chief Operating Officer of the Purchaser shall have delivered to the
Seller a certificate, dated the Closing Date, certifying to the foregoing.
8.2 No Injunction. No preliminary or permanent injunction or other
Order, decree or ruling issued by any Authority, or any Regulation promulgated
or enacted by any Authority shall be in effect, which would prevent the
consummation of the transactions contemplated hereby.
8.3 Purchase Consideration. The Seller shall have received the
consideration (in the form of cash, AmeriPath Stock and Contingent Notes)
required to be delivered at Closing and to which the Seller is entitled pursuant
to Section 1.1 hereof.
8.4 Other Agreements. AmeriPath shall have executed and delivered to
the Seller the Management Agreement and the Trust Agreement.
8.5 Acquisition Agreement. AmeriPath shall have executed and delivered
to the Seller the Acquisition Agreement between AmeriPath and the Seller in the
form of Exhibit 7.14 attached hereto.
8.6 Opinion of Counsel. The Seller shall have received an opinion of
counsel to the Purchaser, dated the Closing Date, in the form of Exhibit 8.6
hereto.
8.7 Approval Certificate. The Seller shall have received the Approval
Certificate evidencing the agreement of Summit Investors, II, L.P. and Summit
Ventures III, L.P. to comply with Section 1.3(n) hereto.
8.8 Escrow Agreement. The Purchaser shall have executed and delivered
to the Seller the Escrow Agreement.
ARTICLE IX
CLOSING
9.1 Closing. Unless this Agreement shall have been terminated or
abandoned pursuant to the provisions of Article X hereof, a closing of the
transactions contemplated by this Agreement (the "Closing") shall be held on
October 15, 1996, or on such other date which is mutually
- 48 -
<PAGE> 57
agreed upon in writing following the satisfaction or waiver of the conditions to
closing set forth in Article VII and Article VIII hereof (the "Closing Date").
9.2 Closing Deliveries. At the Closing,
(a) the Seller and CP&I shall deliver or cause to be
delivered to the Purchaser:
(i) a certificate or certificates evidencing all of
the CP&I Shares, duly endorsed for transfer with all necessary
transfer stamps affixed;
(ii) copies of all consents and approvals required
7.12;
(iii) the Opinion of Counsel required by Section 7.6;
(iv) the Officer's Certificates required by Sections
7.1 and 7.5;
(v) the Employment Agreement required by Section 7.7;
(vi) the counterpart signature page to the
Shareholders' Agreement required by Section 7.9;
(vii) the Subordination Agreement required by Section
7.10;
(viii) the Management Agreement, Option Agreement and
Trust Agreement required by Section 7.11;
(ix) the Acquisition Agreement required by Section
7.13;
(x) the Escrow Agreement required by Section 7.14;
(xi) a certificate, signed by the secretary of CP&I,
as to the articles of incorporation and by-laws of CP&I, the
resolutions adopted by the board of directors and shareholders
of CP&I in connection with this Agreement and the incumbency
of certain officers of CP&I, in form acceptable to the
Purchaser;
(xii) certificates issued by the appropriate
governmental authorities evidencing the good standing, with
respect to both the conduct of business and the payment of all
franchise taxes, of CP&I as of a date not more than ten (10)
days prior to the Closing Date, as a corporation organized
under the laws of the State of Ohio and as a foreign
corporation authorized to do business under the laws of the
various jurisdictions where it is so qualified.
- 49 -
<PAGE> 58
(xiii) such other certified resolutions, documents
and certificates as are required to be delivered by the Seller
or CP&I pursuant to the provisions of this Agreement.
(b) The Purchaser shall deliver to the Seller:
(i) the consideration (in the form of cash, AmeriPath
Stock and Contingent Notes) required to be paid or delivered
to the Seller at Closing in accordance with Section 1.1.
(ii) the Officer's Certificate required by Section
8.1; and
(iii) the Management Agreement and Trust Agreement
required by Section 8.4;
(iv) the Acquisition Agreement required by Section
8.5;
(v) the Opinion of Counsel required by Section 8.6;
(vi) the Approval Certificate required by Section
8.7;
(vii) the Escrow Agreement required by Section 8.8;
(viii) a certificate, signed by the secretary of
AmeriPath, as to the resolutions adopted by the board of
directors of AmeriPath in connection with this Agreement and
the incumbency of certain officers of AmeriPath;
(ix) such other certified resolutions, documents and
certificates as are required to be delivered by the Purchaser
pursuant to the provisions of this Agreement.
ARTICLE X
TERMINATION AND ABANDONMENT
10.1 Methods of Termination. This Agreement may be terminated and the
transactions herein contemplated may be abandoned at any time:
(a) by mutual consent of the Purchaser and the Seller;
(b) by the Purchaser or the Seller if the Closing has not
occurred on or before October 30, 1996; provided, however, that if any
party has breached or defaulted with respect to its respective
obligations under this Agreement on or before such date, such
- 50 -
<PAGE> 59
breaching or defaulting party may not terminate this Agreement
pursuant to this Section 10.1(b), 10.1(c) or 10.1(d), as applicable,
and the non-breaching or non-defaulting party to this Agreement shall
at its option enforce its rights against such breaching or defaulting
party and seek any remedies against such party, in either case as
provided hereunder and by applicable law; or
(c) by the Purchaser if as of the Closing Date (including any
extensions) any of the conditions specified in Article VII hereof shall
not have been satisfied or if CP&I or the Seller is otherwise in
default under this Agreement; or
(d) by the Seller if as of the Closing Date (including any
extensions) any of the conditions specified in Article VIII hereof
shall not have been satisfied or if the Purchaser is otherwise in
default under this Agreement.
10.2 Procedure Upon Termination. In the event of termination and
abandonment pursuant to Section 10.1 hereof, and subject to the proviso
contained in Section 10.1(b), this Agreement shall terminate and shall be
abandoned, without further action by any of the parties hereto. If this
Agreement is terminated as provided herein:
(a) each party shall redeliver all documents and other
material of any other party relating to the transactions contemplated
hereby, whether obtained before or after the execution hereof, to the
party furnishing the same;
(b) all information received by any party hereto with respect
to the business of any other party or CP&I (other than information
which is a matter of public knowledge or which has heretofore been or
is hereafter published in any publication for public distribution or
filed as public information with any governmental authority) shall not
at any time be used for the advantage of, or disclosed to third parties
by, such party to the detriment of the party furnishing such
information; and
(c) no party hereto shall have any further liability or
obligation to any other party under or in connection with this
Agreement; provided, however, the non-breaching or non-defaulting party
shall not be foreclosed from bringing a Claim or cause of action or
otherwise recovering from the breaching or defaulting party.
ARTICLE XI
SURVIVAL; INDEMNIFICATION
11.1 Survival. All of the representations and warranties contained
herein or in any instrument or document delivered or to be delivered pursuant to
this Agreement, shall survive the execution of this Agreement and the Closing
until:
- 51 -
<PAGE> 60
(1) with respect to the representations and
warranties in Sections 2.16 (tax matters), 2.18 (ERISA
matters), 2.20 (environmental matters) and 2.30 (health care
regulatory matters), until sixty (60) days following the
expiration of the applicable statute of limitations;
(2) with respect to the representations and
warranties in Sections 2.3 (capitalization), 2.4 (title to the
CP&I Shares) and 2.6 (options and rights on capital stock),
these representations shall survive and continue forever and
without limitation; and
(3) with respect to all other representations and
warranties, March 31, 1998, except for representations,
warranties and indemnities for which an indemnification Claim
shall be pending as of March 31, 1998, in which event such
indemnities shall survive with respect to such Claim until the
final disposition thereof.
11.2 Indemnification by the Seller. Subject to this Article XI, the
Purchaser shall be indemnified and held harmless by the Seller, at all times
after the date of this Agreement, against and in respect of any and all damage,
loss, deficiency, liability, obligation, commitment, cost or expense (including
the reasonable fees and expenses of counsel) resulting from, or in respect of,
any of the following:
(a) Any misrepresentation, breach of warranty, or
non-fulfillment of any obligation on the part of the Seller or CP&I
under this Agreement, or contained in any schedule or exhibit to this
Agreement or any certificate, schedule or other instrument required to
be provided by the Seller or CP&I hereunder;
(b) Any and all liabilities of CP&I of any nature whether
accrued, absolute, contingent or otherwise, and whether known or
unknown, existing at the Closing Date to the extent that:
(i) such liabilities are not reflected in the
balance sheet for the quarter ended June 30,
1996 included in the Financial Statements
and such liabilities should have been, in
accordance with GAAP, reflected in, reserved
for, or disclosed in footnotes to such
balance sheet;
(ii) such liabilities were not disclosed in this
Agreement (or the schedules or exhibits
hereto) and, taking into account any
materiality, knowledge, dollar amount,
timing or other limitations set forth
herein, should have been disclosed in this
Agreement (or the schedules exhibits hereto)
in accordance with the terms hereof;
(iii) such liabilities (x) did not arise in the
ordinary course of business consistent with
past practice of CP&I after June 30, 1996
and (y)
- 52 -
<PAGE> 61
were not required to be disclosed in
this Agreement (or the schedules or exhibits
hereto) in accordance with the terms hereof.
(c) All demands, assessments, judgments, costs and reasonable
legal and other expenses arising from, or in connection with any Claim
incident to any of the foregoing.
11.3 Indemnification by the Purchaser. Subject to this Article XI, the
Seller and their heirs, assigns, representatives and agents shall be indemnified
and held harmless by the Purchaser, at all times after the date of this
Agreement, against and in respect of any and all damage, loss, deficiency,
liability, obligation, commitment, cost or expense (including the reasonable
fees and expenses of counsel) resulting from, or in respect of, any
misrepresentation, breach of warranty, or non-fulfillment of any obligation on
the part of the Purchaser under this Agreement, the Contingent Note or the
Employment Agreement, any document relating thereto or contained in any schedule
or exhibit to this Agreement, the Contingent Note or the Employment Agreement or
from any misrepresentation in or omission from any certificate, schedule, other
agreement or instrument by the Purchaser hereunder or thereunder. The Purchaser
shall also indemnify the Seller and Drs. Petroff and Wieselthier with respect to
any damages, losses, deficiencies, liabilities, obligations, commitments, costs
or expenses (including the reasonable fees and expenses of counsel) incurred by
the Seller, Dr. Petroff or Dr. Wieselthier, as the case may be, in connection
with the structure of the transaction contemplated by this Agreement resulting
from the employment of such Person by CP&I or any AmeriPath Affiliate and the
violation or alleged violation (only if alleged by a Person not affiliated with
the Seller, Dr. Petroff or Dr. Wieselthier) of any Health Care Laws due to the
structure of this transaction; provided, however, that AmeriPath shall have the
right to assume and control the defense of any such actions with counsel of
reputable standing (subject to the limitations set forth in (x) the fourth
sentence of the first paragraph of Section 11.4 and (y) the third paragraph of
Section 11.4).
11.4 Third-Party Claims. Except as otherwise provided in this
Agreement, the following procedures shall be applicable with respect to
indemnification for third-party Claims. Promptly after receipt by the party
seeking indemnification hereunder (hereinafter referred to as the "indemnitee")
of notice of the commencement of any (a) Tax audit or proceeding for the
assessment of Tax by any taxing authority or any other proceeding likely to
result in the imposition of a Tax liability or obligation or (b) any action or
the assertion of any Claim, liability or obligation by a third party (whether by
legal process or otherwise), against which Claim, liability or obligation the
other party to this Agreement (hereinafter the "indemnitor") is, or may be,
required under this Agreement to indemnify such indemnitee, the indemnitee will,
if a Claim thereon is to be, or may be, made against the indemnitor, notify the
indemnitor in writing of the commencement or assertion thereof and give the
indemnitor a copy of such Claim, process and all legal pleadings. The indemnitor
shall have the right to participate in the defense of such action with counsel
of reputable standing. The indemnitor shall have the right to assume and control
the defense of such action unless such action (i) is reasonably likely to result
in injunctions or other equitable remedies in respect of the indemnitee or its
business; (ii) is reasonably likely to result in liabilities of a substantial
nature (in relation to liabilities indemnified hereunder) which, taken with
other then existing Claims under this Article XI, would not be fully indemnified
hereunder; or (iii) is reasonably likely to have adverse impact on the business
or
- 53 -
<PAGE> 62
financial condition of the indemnitee after the Closing Date (including an
effect on the Tax liabilities, earnings or ongoing business relationships of the
indemnitee); provided, that nothing herein shall affect the Seller's rights,
under Section 1.1(k) to control all aspects of the defense or settlement of
Claims subject to the Escrow Agreement with respect to Section 2.30 hereof. The
indemnitor and the indemnitee shall cooperate in the defense of such Claims. In
the case that the indemnitor shall assume or participate in the defense of such
audit, assessment or other proceeding as provided herein, the indemnitee shall
make available to the indemnitor all relevant records and take such other action
and sign such documents as are necessary to defend such audit, assessment or
other proceeding in a timely manner. If the indemnitee shall be required by
judgment or a settlement agreement to pay any amount in respect of any
obligation or liability against which the indemnitor has agreed to indemnify the
indemnitee under this Agreement, the indemnitor shall promptly reimburse the
indemnitee in an amount equal to the amount of such payment plus all reasonable
expenses (including legal fees and expenses) incurred by such indemnitee in
connection with such obligation or liability subject to this Article XI.
Prior to paying or settling any Claim against which an indemnitor is,
or may be, obligated under this Agreement to indemnify an indemnitee, the
indemnitee must first supply the indemnitor with a copy of a final court
judgment or decree holding the indemnitee liable on such claim or failing such
judgment or decree, and must first receive the written approval of the terms and
conditions of such settlement from the indemnitor. An indemnitor shall have the
right to settle any Claim against it, subject to the prior written approval of
the indemnitee, which approval shall not be unreasonably withheld; provided,
that nothing herein shall affect the Seller's rights to control all inspects of
the defense or settlement of Claims subject to the Escrow Agreement.
An indemnitee shall have the right to employ its own counsel in any
case, but the fees and expenses of such counsel shall be at the expense of the
indemnitee unless (a) the employment of such counsel shall have been authorized
in writing by the indemnitor in connection with the defense of such action or
Claim, (b) the indemnitor shall not have employed, or is prohibited under this
Section 11.4 from employing, counsel in the defense of such action or Claim, or
(c) such indemnitee shall have reasonably concluded that there may be defenses
available to it which are contrary to, or inconsistent with, those available to
the indemnitor, in any of which events such fees and expenses of not more than
one additional counsel for the indemnified parties shall be borne by the
indemnitor.
11.5 Deductible. Notwithstanding the foregoing provisions of this
Article XI, except for the next succeeding sentence of this Section 11.5, no
indemnification pursuant to this Article XI shall be required of an indemnifying
party hereunder unless and until the aggregate amount due the indemnified party
for all Claims under this Article XI shall exceed $125,000.00 (the
"Deductible"), and then only to the extent in excess of the Deductible.
Notwithstanding the foregoing, (i) no Claim (regardless of amount) that arises
out of a breach of any of the representations or warranties contained in
Sections 2.3 (capitalization), 2.5 (title to CP&I Shares), 2.6 (options and
rights on capital stock), 2.31 (Positive Working Capital as of Closing), 6.15
(tax liability) or Claims arising under common law fraud shall at any time be
subject to the Deductible or Section 11.7 hereof.
- 54 -
<PAGE> 63
11.6 Benefits. In the event either party is required to make one or
more payments (an "Indemnification Payment") with respect to any indemnification
obligation provided hereunder, and such payment results in the realization of a
net reduction in the other party's federal, state, local or foreign income or
franchise tax liability (a "Net Tax Benefit"), then the amount of the
Indemnification Payment shall be adjusted, on a fair and equitable basis, to
reflect the amount of the Net Tax Benefit.
11.7 Maximum Liability. Notwithstanding the foregoing provisions of
this Article XI, except as provided in the last sentence of Section 11.5 above,
the maximum liability in connection with any and all Claims for indemnification
or breach or violation of representations or warranties under this Agreement
shall be $4,000,000.00.
11.8 Insurance. The Purchaser shall be entitled to indemnification
under this Agreement, only to the extent that the aggregate amount of its claims
exceeds the amount of any payment received by CP&I or the Purchaser under any
insurance policy that may be maintained by CP&I or the Purchaser to cover losses
relating to such claim.
11.9 Notice of Claims. Any person seeking indemnification under this
Agreement shall give to the indemnitor prompt written notice of any claim or
potential claim hereunder. Such notice shall contain a description of any claim,
event or facts known to the indemnitee which do or may give rise to a claim by
the indemnitee against the indemnitor based on this Agreement, stating the
nature and basis of said claims or events and the amounts thereof, to the extent
know.
11.10 Time Bar. No claim for indemnification may be made by the
Purchaser for breach of representations and warranties on any matter after the
expiration of that period of time which, under Section 11.1, is the period that
the representation and warranty for that matter "survives."
11.11 Exclusive Remedy. Except for actions to enforce specific
performance of rights or obligations hereunder, the right to make a claim for
indemnification pursuant to this Article XI shall be the sole and exclusive
remedy of the Purchaser with respect to any matter referred to in Section 11.2
and of the Seller with respect to any matter referred to in Section 11.3, and no
other claim, action, suit or proceeding shall be initiated or maintained against
the Seller or his assets or the Purchaser or its assets, as the case may be, in
respect of any matter referred to in Section 11.2 or 11.3 respectively,
notwithstanding that a remedy may not be available under this Article by virtue
of the lapse of time, limitation on the amounts that may be claimed, the
Deductible or otherwise.
- 55 -
<PAGE> 64
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.1 Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified and supplemented only by a written agreement
signed by CP&I, the Purchaser and the Seller.
12.2 Entire Agreement. This Agreement, including the schedules and
exhibits hereto and the documents, annexes, attachments, certificates and
instruments referred to herein and therein, embodies the entire agreement and
understanding of the parties hereto in respect of the agreements and
transactions contemplated by this Agreement and supersedes all prior agreements,
representations, warranties, promises, covenants, arrangements, communications
and understandings, oral or written, express or implied, between the parties
with respect to such transactions. There are no agreements, representations,
warranties, promises, covenants, arrangements or understandings between the
parties with respect to such transactions, other than those expressly set forth
or referred to herein.
12.3 Certain Definitions.
"Affiliate" means, with regard to any Person, (a) any Person,
directly or indirectly, controlled by, under common control of, or
controlling such Person, (b) any Person, directly or indirectly, in
which such Person holds, of record or beneficially, five percent or
more of the equity or voting securities, (c) any Person that holds, of
record or beneficially, five percent or more of the equity or voting
securities of such Person, (d) any Person that, through Contract,
relationship or otherwise, exerts a substantial influence on the
management of such Person's affairs, (e) any Person that, through
Contract, relationship or otherwise, is influenced substantially in the
management of their affairs by such Person, or (f) any director,
officer, partner or individual holding a similar position in respect of
such Person.
"Authority" means any governmental, regulatory or
administrative body, agency, arbitrator or authority, any court or
judicial authority, any public, private or industry regulatory agency,
arbitrator authority, whether international, national, federal, state
or local.
"Claim" means any action, claim, obligation, liability,
expense, lawsuit, demand, suit, inquiry, hearing, investigation, notice
of a violation, litigation, proceeding, arbitration, or other dispute,
whether civil, criminal, administrative or otherwise, whether pursuant
to contractual obligations or otherwise.
"Contract" means any agreement, contract, commitment,
instrument or other binding arrangement or understanding, whether
written or oral.
- 56 -
<PAGE> 65
"Environmental Law" means any Regulation, Order, or
governmental requirement, which relates to or otherwise imposes
liability or standards of conduct concerning mining or reclamation of
mined land, discharges, emissions, releases or threatened releases of
noises, odors or any pollutants, contaminants or hazardous or toxic
wastes, substances or materials, whether as matter or energy, into
ambient air, water, or land, or otherwise relating to the manufacture,
processing, generation, distribution, use, treatment, storage,
disposal, cleanup, transport or handling of pollutants, contaminants,
or hazardous wastes, substances or materials, including (but not
limited to) the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, the Superfund Amendments and Reauthorization Act
of 1986, as amended, the Resource Conservation and Recovery Act of
1976, as amended, the Toxic Substances Control Act of 1976, as amended,
the Federal Water Pollution Control Act Amendments of 1972, the Clean
Water Act of 1977, as amended, any so-called "Superlien" law, and any
other similar Federal, state or local statutes.
"Environmental Permit" shall mean Permits, certificates,
approvals, licenses and other authorizations relating to or required by
Environmental Law and necessary or desirable for the Corporation's
business.
"GAAP" means generally accepted accounting principles, applied
on a consistent basis as practiced in the United States.
"Health Care Laws" means any Federal, state, or local
Regulation or Order, of any Authority, which relates to or otherwise
imposes liability or standards of conduct concerning the licensure,
certification, qualification, or operation of a health maintenance
organization, pharmacy, home health agency or other aspect of a
Corporation's business subject to such Health Care Laws, including but
not limited to statutes governing home health agencies; The Health
Maintenance Organization Act; the Ohio Pharmacy Act; the Ohio Drug and
Cosmetic Act; the Ohio Comprehensive Drug Abuse Prevention and Control
Act; the Patient Self-Referral Act; the Employee Health Care Access
Act; 21 U.S.C. Section 301-392, the Federal Food Drug and Cosmetic Act;
21 U.S.C. Section 821 et seq., the Federal Drug Abuse Act; Section
1128B of the Social Security Act; The Clinical Laboratory Improvement
Amendments of 1988; 42 U.S.C. Section 1320a-7b, 42 C.F.R. Part 1001, 42
CFR Chapter IV, Subchapter C; Sections 1876 or 1903 of the Social
Security Act; 45 CFR, Part 74; 45 CFR, Part 92; 42 CFR 455.109 Section
306 of the Clean Air Act; 42 U.S.C. Section 1857(h) et seq., Section
508 of the Clean Water Act; 33 U.S.C. Section 1368 et seq., Executive
Order 11738 and Environmental Protection Agency regulations; 40 CFR
Part 15, Title VI of the Civil Rights Act of 1964; 42 U.S.C. Section
2000 d et seq., Section 504 of the Rehabilitation Act of 1933; 29
U.S.C. Section 7940; Title IX of the Education Amendments of 1972, 20
U.S.C. Section 1681 et seq., the Age Discrimination Act of 1975; 42
U.S.C. Section 6101 et seq., Section 654 of OBRA '81; 42 U.S.C. Section
9849 and the Americans with Disabilities Act of 1990; P.L. 101-336,
OBRAs 1986 through 1993, as amended, and any other similar Federal,
state or local Regulations.
- 57 -
<PAGE> 66
"Lien" means any security interest, lien, mortgage, pledge,
hypothecation, encumbrance, Claim, easement, restriction or interest of
another Person of any kind or nature in respect of property.
"Loan Default" means (i) the Purchaser failed to make a
payment under the Contingent Notes within sixty days of such payment
being due and payable, (ii) the Purchaser failed to make a payment when
due under its senior lending facility and such payment default remained
uncured for 60 days or (iii) any default followed by the acceleration
of the indebtedness under the Purchaser's senior lending facility.
"Material Adverse Change" means any development or change
which has, had or would have a Material Adverse Effect.
"Material Adverse Effect" means, with respect to any Person,
any circumstances, state of facts or matters which has, or might
reasonably be expected to have, a material adverse effect in respect of
such Person's business, operations, properties, assets, condition
(financial or otherwise), financial results.
"Order" means any decree, judgment, award, order, injunction,
rule, consent of or by an Authority.
"Permitted Liens" means (i) statutory Liens (including in
respect of Taxes) not yet delinquent or being contested in good faith
(subject to the establishment of adequate reserves therefor), (ii) such
imperfections or irregularities of title, Liens, easements, charges or
encumbrances as do not detract from or interfere with the present use
of the properties or assets subject thereto or affected thereby,
otherwise impair in any material respect present business operations at
such properties; or do not detract in any material respect from the
value of such properties and assets, taken as a whole, or (iii) as
reflected in the balance sheet for the fiscal year ended December 31,
1995 included in Financial Statements or the notes thereto.
"Person" means any corporation, partnership, joint venture,
company, syndicate, organization, association, trust, entity, Authority
or natural person.
"Proprietary Rights" means any patent, patent application,
copyright, trademark, trade name, service mark, service name, trade
secret, know-how, confidential information or other intellectual
property or proprietary rights.
"Regulation" means any law, statute, rule, regulation,
ordinance, requirement, announcement or other binding action of or by
an Authority, other than an Order.
"Sale of Control" means any merger, share exchange,
recapitalization, sale, issue, exchange or other disposition of
AmeriPath Stock (or any securities convertible into or exchangeable or
exercisable for AmeriPath Stock) in any transaction, that results in
any
- 58 -
<PAGE> 67
Person (other than a Preferred Shareholder (as defined in the
Shareholders' Agreement) or James C. New, each an "Excluded Person") or
any "group" of Persons (within the meaning of Section 13(d)(3) of the
Securities Exchange Act) (other than a group consisting entirely of
Excluded Persons) beneficially owning 40% or more of the issued and
outstanding AmeriPath Stock (or any securities convertible into or
exchangeable or exercisable for AmeriPath Stock) on a fully diluted
basis.
"Subsidiary" means any Person which the Purchaser or CP&I, as
the case may be, owns, directly or indirectly, 50% or more of the
outstanding stock or other equity interests.
12.4 Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand or by overnight receipted courier
service:
(a) If to the Seller or CP&I, to:
Beno Michel, M.D., Inc.
23200 Chagrin Building 5, Suite 350
Beachwood, OH 44122
Attn: Beno Michel, M.D., President
with a copy to:
Chadbourne & Parke LLP
30 Rockefeller Plaza
New York, NY 10112
Attn: Charles E. Hord, III, Esq.
or to such other person or address as the Seller or
CP&I shall furnish by notice to the Purchaser in writing.
(b) If to the Purchaser to:
AmeriPath, Inc.
800 Cypress Creek Road, Suite 200
Fort Lauderdale, Florida 33334
Attn: James C. New, President
- 59 -
<PAGE> 68
with a copy to:
Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel, P.A.
515 E. Las Olas Boulevard, Suite 1500
Fort Lauderdale, Florida 33301
Attn: Daniel H. Aronson, Esq.
or to such other person or address as the Purchaser shall
furnish by notice to the Seller in writing.
12.5 Waiver of Compliance; Consents. Any failure of any party hereto to
comply with any obligation, covenant, agreement or condition herein may be
waived in writing by the other parties hereto, but such waiver or failure to
insist upon strict compliance with such obligation, covenant, agreement or
condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure. Whenever this Agreement requires or permits consent
by or on behalf of any party hereto, such consent shall be given in writing.
12.6 Assignment. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties,
except that the Purchaser may grant security interests in respect of its rights
hereunder, without the prior approval of the Seller. It is specifically
understood and agreed that AmeriPath may assign its rights hereunder to purchase
the CP&I Shares to the trust created pursuant to the Trust Agreement for the
purpose of acquiring such CP&I Shares; provided, however, that, in any such
event, (i) all agreements herein with respect to AmeriPath Stock shall continue
to relate to AmeriPath Stock, and not to the capital stock of any such trust,
and (ii) in any such event, AmeriPath shall remain obligated with respect to and
liable for, and shall be the guarantor of, the performance of each and every
obligation of AmeriPath hereunder (notwithstanding that its rights hereunder to
purchase the CP&I Shares have been assigned to such trust), including without
limitation Article XI hereof, and (iii) each representation and warranty
hereunder shall be deemed made (x) as to both AmeriPath and, to the extent
applicable, such trust and (y) jointly and severally by both AmeriPath and, to
the extent applicable, such trust.
12.7 Governing Law. The Agreement shall be governed by the internal
laws of the State of Florida as to all matters, including but not limited to
matters of validity, construction, effect and performance.
12.8 Consent to Jurisdiction; Service of Process. CP&I and the Seller
hereby irrevocably submit to the jurisdiction of the state or federal courts
located in Broward County, Florida in connection with any suit, action or other
proceeding arising out of or relating to this Agreement and the transactions
contemplated hereby, and hereby agree not to assert, by way of motion, as a
defense, or otherwise in any such suit, action or proceeding that the suit,
action or
- 60 -
<PAGE> 69
proceeding is brought in an inconvenient forum, that the venue of the suit,
action or proceeding is improper or that this Agreement or the subject matter
hereof may not be enforced by such courts.
12.9 Injunctive Relief. The parties hereto agree that in the event of a
breach of any provision of this Agreement, the aggrieved party or parties may be
without an adequate remedy at law. The parties therefore agree that in the event
of a breach of any provision of this Agreement, the aggrieved party or parties
may elect to institute and prosecute proceedings in any court of competent
jurisdiction to enforce specific performance or to enjoin the continuing breach
of such provision, as well as to obtain damages for breach of this Agreement. By
seeking or obtaining any such relief, the aggrieved party shall not be precluded
from seeking or obtaining any other relief to which it may be entitled.
12.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.11 Headings. The article, section and subsection headings contained
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement (or any provision hereof).
12.12 Binding Effect. This Agreement shall not be construed so as to
confer any right or benefit upon any Person other than the signatories to this
Agreement and each of their respective successors and permitted assigns.
12.13 Severability. Unless otherwise provided herein, if any provision
of this Agreement shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
12.14 Expenses. All fees, costs and expenses (including, without
limitation, legal, auditing and accounting fees, costs and expenses) incurred in
connection with considering, pursuing, negotiating, documenting or consummating
this Agreement and the transactions contemplated hereby shall be borne and paid
solely by the party incurring such fees, costs and expenses.
12.15 Attorneys' Fees. If any party to this Agreement seeks to enforce
the terms and provisions of this Agreement, then the prevailing party in such
action shall be entitled to recover from the losing party all costs in
connection with such action, including without limitation reasonable attorneys'
fees, expenses and costs incurred at the trial court and all appellate levels.
- 61 -
<PAGE> 70
IN WITNESS WHEREOF, the parties hereto have made and entered into this
Agreement the date first hereinabove set forth.
PURCHASER:
AMERIPATH, INC.,
By: /s/ Robert P. Wynn
------------------------------------------
Robert P. Wynn, Chief Financial Officer
SELLER:
/s/ Beno Michel
-----------------------------------------------
BENO MICHEL, M.D.
BENO MICHEL, M.D., INC.
By: /s/ Beno Michel
--------------------------------------------
Beno Michel, M.D., President
-64-
<PAGE> 71
FIRST AMENDMENT TO THE
STOCK PURCHASE AGREEMENT
THIS FIRST AMENDMENT to the Stock Purchase Agreement (the "Amendment")
is entered into as of January 13, 1997, by and among AMERIPATH, INC., a Delaware
corporation, ("AmeriPath"), AMERIPATH CLEVELAND, INC. f/k/a Beno Michel, M.D.,
Inc. (d/b/a Cutaneous Pathology & Immunofluorescence Laboratory), an Ohio
corporation ("CP&I"), and BENO MICHEL, M.D.
R E C I T A L S
A. The parties hereto entered into a Stock Purchase Agreement (the
"Agreement") dated as of October 15, 1996.
B. Section 12.1 of the Agreement provides that the Agreement may be
amended by a written instrument executed by each of the parties thereto.
C. AmeriPath has filed a registration statement with the Securities and
Exchange Commission with respect to the underwritten public offering of the
Common Stock of AmeriPath.
D. In connection with AmeriPath's under written public offering of its
Common Stock, the parties hereto desire to clarify the rights and obligations of
the parties under the Agreement and amend the terms of the Agreement in the
manner set forth in this Amendment.
A G R E E M E N T
In consideration of the foregoing premises and the mutual promises
hereinafter set forth and other good and valuable consideration, the receipt and
sufficiency of which is acknowledged hereby, the parties hereto, intending to be
bound legally, hereby agree as follows:
1. The recitals set forth above are true and correct in all respects
and are incorporated herein and made a part hereof.
2. All capitalized terms used in this Amendment without definition
shall have the meanings assigned thereto in the Agreement.
3. Section 6.19 of the Agreement is hereby deleted in its entirety and
replaced with the following language:
<PAGE> 72
"6.19Post Closing Operations. Following the Closing, until all
amounts due under this Agreement (including Sections 1.2 and 1.3
hereof) and the Contingent Note have been paid in full (only to the
extent applicable targets have been achieved), AmeriPath shall cause
the business and operations of CP&I to be conducted in the ordinary
course, consistent with past practice, as a stand-alone cost-center
separate and distinct from AmeriPath and its other Affiliates."
4. The rights of Dr. Michel and the obligations of AmeriPath
under the former Section 6.19 are terminated by this Amendment and there
shall be no continuing rights or obligations under former Section 6.19 except
as it is hereby amended above. All other terms and conditions of the Agreement
shall remain unchanged.
IN WITNESS WHEREOF, the undersigned have each executed this Amendment
as of the date first above-written.
PURCHASER:
AMERIPATH, INC.
By: /s/ ROBERT P. WYNN
------------------------------------------
Robert P. Wynn, Chief Financial Officer
SELLER:
/s/ BENO MICHEL, M.D.
----------------------------------------------
BENO MICHEL, M.D.
AMERIPATH CLEVELAND, INC. F/K/A BENO
MICHEL, M.D., INC.
By: /s/ BENO MICHEL, M.D.
------------------------------------------
Beno Michel, M.D., Managing Director
Attest: /s/ ROBERT P. WYNN
---------------------------------------
By: Robert P. Wynn, Secretary
<PAGE> 1
Exhibit 10.30
- --------------------------------------------------------------------------------
STOCK PURCHASE AGREEMENT
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.
DATED AS OF OCTOBER 10, 1996
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
ARTICLE I
PURCHASE OF CAPITAL STOCK
<S> <C>
1.1 Purchase and Sale of Capital Stock............................................................ 1
1.2 The Contingent Notes.......................................................................... 3
1.3 Contingent Issuance of AmeriPath Stock........................................................ 12
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE SELLERS AND SLA
2.1 Corporate Organization, Qualification, etc.................................................... 18
2.2 Subsidiaries.................................................................................. 18
2.3 Capital Stock................................................................................. 18
2.4 Corporate Record Books........................................................................ 18
2.5 Title to Stock................................................................................ 18
2.6 Options and Rights............................................................................ 19
2.7 Authorization, Etc............................................................................ 19
2.8 No Violation.................................................................................. 19
2.9 Financial Statements.......................................................................... 19
2.10 Employees..................................................................................... 20
2.11 Absence of Certain Changes.................................................................... 20
2.12 Contracts..................................................................................... 21
2.13 True and Complete Copies...................................................................... 23
2.14 Title and Related Matters..................................................................... 23
2.15 Litigation.................................................................................... 24
2.16 Tax Matters................................................................................... 24
2.17 Compliance with Law and Applicable Government Regulations..................................... 25
2.18 ERISA and Related Matters..................................................................... 26
2.19 Intellectual Property......................................................................... 27
2.20 Environmental Matters......................................................................... 28
2.21 Dealings with Affiliates...................................................................... 29
2.22 Banking Arrangements.......................................................................... 29
2.23 Insurance..................................................................................... 29
2.24 Consents...................................................................................... 29
2.25 Investment Representations.................................................................... 30
2.26 Accounts Receivable; Inventories.............................................................. 31
2.27 Brokerage..................................................................................... 32
2.28 Improper and Other Payments................................................................... 32
2.29 Participation in Audits....................................................................... 32
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
2.30 Health Care Laws.............................................................................. 32
2.31 Financial Condition at Closing................................................................ 34
2.32 Disclosure.................................................................................... 34
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
3.1 Corporate Organization, etc................................................................... 35
3.2 Subsidiaries.................................................................................. 35
3.3 Authorization, Etc............................................................................ 35
3.4 No Violation.................................................................................. 35
3.5 Governmental Authorities; Consents............................................................ 36
3.6 Issuance of AmeriPath Stock................................................................... 36
3.7 Additional Purchaser Representations: Books and Records; Financial
Statements.................................................................................... 36
3.8 Compliance.................................................................................... 36
3.9 Capitalization................................................................................ 36
3.10 Litigation.................................................................................... 36
3.11 No Additional Seller Representations.......................................................... 37
3.12 Tax Matters................................................................................... 37
3.13 Dealing with Affiliates....................................................................... 37
3.14 Disclosure.................................................................................... 38
ARTICLE IV
COVENANTS OF THE SELLERS
4.1 Regular Course of Business.................................................................... 38
4.2 Amendments.................................................................................... 38
4.3 Capital Changes; Pledges...................................................................... 38
4.4 Dividends..................................................................................... 38
4.5 Capital and Other Expenditures................................................................ 39
4.6 Cash and Cash Equivalents..................................................................... 39
4.7 Borrowing..................................................................................... 39
4.8 Other Commitments............................................................................. 39
4.9 Amendments to Charter......................................................................... 39
4.10 Full Access and Disclosure.................................................................... 39
4.11 Confidentiality............................................................................... 40
4.12 Breach of Agreement........................................................................... 40
4.13 Fulfillment of Conditions Precedent........................................................... 40
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
ARTICLE V
COVENANTS OF THE PURCHASER
<S> <C>
5.1 Confidentiality............................................................................... 40
5.2 Full Access and Disclosure.................................................................... 40
5.3 Breach of Agreement........................................................................... 41
5.4 Fulfillment of Conditions Precedent........................................................... 41
ARTICLE VI
OTHER AGREEMENTS
6.1 Further Assurances............................................................................ 41
6.2 Agreement to Defend........................................................................... 42
6.3 Consents...................................................................................... 42
6.4 No Solicitation or Negotiation................................................................ 42
6.5 No Termination of Sellers' Obligations by Subsequent Incapacity, Etc.......................... 42
6.6 Employment Agreements......................................................................... 42
6.7 Public Announcements.......................................................................... 42
6.8 Deliveries After Closing...................................................................... 43
6.9 Non-Competition Covenant...................................................................... 43
6.10 Non-disclosure; Confidentiality............................................................... 44
6.11 Rule 144 Best Efforts......................................................................... 46
6.12 Real Estate................................................................................... 46
6.13 Delivery of Purchaser Statements.............................................................. 46
6.14 Stock Options................................................................................. 47
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER
7.1 Representations and Warranties; Covenants and Agreements...................................... 47
7.2 No Injunction................................................................................. 48
7.3 Third Party Consents.......................................................................... 48
7.4 No Material Adverse Change.................................................................... 48
7.5 Employment Agreement.......................................................................... 48
7.7 Delivery of SLA Share Certificates............................................................ 48
7.8 Shareholders' Agreement....................................................................... 48
7.9 Subordination Agreement....................................................................... 48
7.10 SLA Charter Amendments........................................................................ 49
7.11 Creditors..................................................................................... 49
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF THE SELLERS
<S> <C>
8.1 Representations and Warranties; Performance................................................... 49
8.2 No Injunction................................................................................. 49
8.3 Material Adverse Change....................................................................... 49
8.4 Third Party Consents.......................................................................... 49
8.5 Purchase Consideration........................................................................ 50
8.6 Employment Agreements......................................................................... 50
ARTICLE IX
CLOSING
9.1 Closing....................................................................................... 50
9.2 Closing Deliveries............................................................................ 50
ARTICLE X
TERMINATION AND ABANDONMENT
10.1 Methods of Termination........................................................................ 52
10.2 Procedure Upon Termination.................................................................... 53
ARTICLE XI
SURVIVAL OF TERMS; INDEMNIFICATION
11.1 Survival...................................................................................... 53
11.2 Indemnification by the Sellers................................................................ 54
11.3 Indemnification by the Purchaser.............................................................. 55
11.4 Third-Party Claims............................................................................ 55
11.5 Indemnification Basket; Maximum Liability..................................................... 56
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.1 Amendment and Modification.................................................................... 57
12.2 Entire Agreement.............................................................................. 57
12.3 Certain Definitions........................................................................... 57
12.4 Notices....................................................................................... 59
12.5 Assignment.................................................................................... 61
12.6 Governing Law................................................................................. 61
12.7 Consent to Jurisdiction; Service of Process................................................... 61
</TABLE>
<PAGE> 6
<TABLE>
<S> <C>
12.8 Injunctive Relief............................................................................. 61
12.9 Counterparts.................................................................................. 61
12.10 Headings...................................................................................... 61
12.11 Binding Effect................................................................................ 61
12.12 Delays or Omissions........................................................................... 61
12.13 Severability.................................................................................. 62
12.14 Expenses...................................................................................... 62
12.15 Arbitration................................................................................... 62
</TABLE>
<PAGE> 7
SCHEDULES
1.1 Sellers
1.2(b)(i) Accounts Existing at Closing
1.3 Conditions & Restrictions on Shares
2.1 Jurisdictions of Qualification
2.2 SLA's Subsidiaries
2.6 Agreements Regarding SLA's Shares
2.9(a) Additional Liabilities
2.9(b) Liabilities covered by Insurance
2.9(c) Accounts Payable
2.12 Contracts
2.14 Real and Personal Property
2.15 Claims
2.17(a) Permits and Licenses
2.17(b) Jurisdictions Licensed to Provide Health Care
2.18 ERISA, Benefit Plans and Other Matters
2.19 Intellectual Property
2.20 Environmental Matters
2.21 Affiliated Transactions
2.22 Banking Arrangements
2.23 Insurance
2.24 Consents
2.26 Accounts Receivable
2.28 Improper Payments
2.29 Participation in Audits
2.30(a) Fraud and Abuse
2.30(b) Third-Party Payors
2.30(c) Medicare and Medicaid Compliance
2.30(d) Rate Limitations and Rates
3.2 Subsidiaries of AmeriPath
3.7 Books and Records
3.9 Capitalization
3.10 Litigation
3.13 Agreements and Arrangements with Affiliates
7.3 Third Party Consents
7.11 Creditor Consents
EXHIBITS
1.2 Form of 7% Non-Negotiable Subordinated Contingent Promissory Note
2.1 SLA's Articles of Incorporation, as amended, and By-laws
2.9 Financial Statements
3.1 AmeriPath Florida's Charters and Bylaws
<PAGE> 8
6.6 Form of Employment Agreement
6.12 Lease
7.6 Opinion of Seller's Counsel
7.8 Subordination Agreement
8.7 Opinion of Purchaser's Counsel
<PAGE> 9
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is dated as of October
10, 1996, by and among AMERIPATH, INC., a Delaware corporation, ("AmeriPath" or
the "Purchaser"), DRS. SEIDENSTEIN, LEVINE AND ASSOCIATES, INC., a Florida
professional service corporation ("SLA"), all of the shareholders of SLA (set
forth on Schedule 1.1 hereto) who collectively hold One Hundred (100) shares,
par value $1.00 per share, of SLA (each shareholder shall be referred to herein
as the "Seller" and collectively, the "Sellers") and SEIDENSTEIN, LEVINE REAL
ESTATE PARTNERSHIP, a Florida general partnership.
.
WHEREAS, the Sellers own all of the issued and outstanding shares of
capital stock of SLA; SLA, although initially organized as a professional
service corporation under Chapter 621 of the Florida Statutes, has, prior to the
closing of the transactions contemplated by this Agreement, upon the terms and
subject to the conditions set forth herein, converted itself to and is presently
organized as, a regular business corporation organized under Chapter 607 of the
Florida Statutes;
WHEREAS, AmeriPath desires to purchase and acquire from the Sellers,
and the Sellers desire to sell, transfer and deliver to AmeriPath, all of the
issued and outstanding shares of capital stock of SLA, upon the terms and
subject to the conditions set forth herein;
WHEREAS, although the parties hereto have agreed as to the minimum
value of SLA, they are not able to agree as to the total value of SLA, and thus
the parties hereto have agreed to certain additional contingent purchase price
consideration based upon the results of operations of SLA, as more fully set
forth herein; and
WHEREAS, upon the closing of the transactions contemplated by this
Agreement, (i) SLA shall be and become a wholly-owned subsidiary of AmeriPath,
and (ii) such wholly-owned subsidiary may be merged with and into another
wholly-owned subsidiary of AmeriPath, AmeriPath Florida, Inc. ("AmeriPath
Florida"), with AmeriPath Florida surviving such merger.
NOW, THEREFORE, for and in consideration of the mutual benefits to be
derived hereby and the premises, representations, warranties, covenants and
agreements herein contained, AmeriPath, the Sellers and SLA hereby agree,
intending to be legally bound, as follows:
ARTICLE I
PURCHASE OF CAPITAL STOCK
1.1 Purchase and Sale of Capital Stock and Certain Assets.
(a) Subject to the terms and conditions of this Agreement, the
Sellers agree to sell, transfer and deliver to the Purchaser, and the
Purchaser agrees to purchase, acquire
<PAGE> 10
and accept delivery from the Sellers, all of the issued and outstanding
capital stock of SLA (the "SLA Shares") owned or held by such Sellers,
which number of SLA Shares to be sold and purchased hereunder is set
forth opposite each such Seller's respective name on Schedule 1.1
attached hereto.
(b) Upon the sale, transfer and delivery to the Purchaser by
the Sellers of the SLA Shares at the Closing (as such term is defined
in Section 9.1 hereof), and in consideration therefor, AmeriPath shall
deliver to the Sellers the following consideration in the aggregate
(which aggregate consideration shall be divided between the Sellers in
the amounts and as indicated on Schedule 1.1 attached hereto) (the
"Purchase Price"):
(i) TEN MILLION TWO HUNDRED THIRTY SEVEN THOUSAND
FIVE HUNDRED DOLLARS ($10,237,500.00), by cashier's check or
by wire transfer;
(ii) Certificates evidencing 75,834 shares of Common
Stock, par value $.01 per share, of AmeriPath (the "AmeriPath
Stock");
(iii) Three (3) 7% Non-Negotiable Subordinated
Contingent Promissory Notes, in the form attached hereto as
Exhibit 1.1(C) (the "Contingent Notes"), in the aggregate
maximum principal amount of FIVE MILLION SIX HUNDRED
EIGHTY-SEVEN THOUSAND FIVE HUNDRED DOLLARS
($5,687,500.00)($1,895,833.33 for each Seller), the issuance
and certain terms and conditions of which Contingent Notes are
set forth in Section 1.2 below;
(iv) Up to 379,166 shares of AmeriPath Stock,
issuable over five years subject to the satisfaction of
certain contingencies set forth in Section 1.3 hereof; and
(v) In accordance with the terms of this Section
1.1(b)(vi), the net proceeds (1/3 of such net amount to each
Seller delivered by cashier's check or by wire transfer) of
the sale of 5,500 shares of Florida Physicians Insurance
Company ("the FPIC Shares") stock currently owned by SLA.
Purchaser shall cause SLA to execute an order to sell the FPIC
Shares within three (3) trading days of the date on which all
restrictions on the transferability of such FPIC Shares are
terminated, provided that such shares are listed for trading
on a national exchange or quotation system at such time. In
the event that the FPIC shares are freely tradeable by SLA and
are listed for trading on a national exchange or quotation
system but are not sold by December 20, 1996, then Purchaser
shall pay to Sellers an amount equal to the Closing price per
share of the FPIC Shares on the first trading day on which the
FPIC Shares become freely tradeable by SLA, multiplied by
5,500, less applicable sales commissions, such amount to be
paid one-third to each Seller.
<PAGE> 11
(c) Upon the sale, transfer and delivery to the Purchaser by
the Seidenstein, Levine Real Estate Partnership (the "Partnership") of
all of the assets of the Partnership, other than the condominium unit
with a common address 3949 Evans Avenue, Unit 403, Ft. Myers, Florida,
relating to or utilized in the operation of (i) the hospital billing
company and (ii) SLA (the "Assets"), Purchaser shall purchase and
acquire the Assets from the Partnership at the Closing (as such term is
defined in Section 9.1 hereof), and in consideration therefor,
AmeriPath shall deliver to the Partnership cash equal to FOUR HUNDRED
FIFTEEN DOLLARS ($415,000.00). The Partnership, by executing and
delivering this Agreement, agrees to sell, transfer and convey the
Assets to the Purchaser on the terms and conditions set forth in this
Section 1.1(c), in Section 6.12 or elsewhere in this Agreement.
Further, the Partnership agrees that promptly following the Closing it
will deliver to Purchaser a complete schedule of the Assets.
(d) Documentary Stamp Taxes. The Purchaser hereby acknowledges
that it is its belief that Florida law does not require the payment of
documentary stamp taxes in connection with the execution and delivery
of the Contingent Notes due to the contingent nature of the obligation.
Notwithstanding the foregoing, the Purchaser agrees to pay any and all
such documentary stamp taxes, or other similar taxes, if any, that may
become due or payable in connection with the execution and delivery of
the Contingent Notes or this Agreement, and the Purchaser agrees to
indemnify and hold harmless the Sellers and SLA from and against any
and all such taxes. The Purchaser shall also be responsible for and
shall pay all Florida documentary stamp taxes due and payable and
required to be affixed with respect to the contingent issuance of
AmeriPath Stock. Notwithstanding anything else to the contrary in this
Agreement, these obligations of the Purchaser shall survive for so long
as there are any remaining obligations under the Contingent Notes and
the contingent rights to receive AmeriPath Stock.
1.2 The Contingent Notes.
(a) Principal Amounts; Issuance. The aggregate maximum
principal amount of the Contingent Notes to be issued and delivered by
the Purchaser to the Sellers pursuant to Section 1.1(b)(iii) hereof at
the Closing shall be FIVE MILLION SIX HUNDRED EIGHTY-SEVEN THOUSAND
FIVE HUNDRED DOLLARS ($5,687,500.00) ($1,895,833.33 for each Seller).
At the Closing, the Purchaser shall deliver to each Seller a Contingent
Note, with the final payment thereon, if applicable, due on December
31, 2001, which Contingent Note shall be in the form of Exhibit 1.2
hereto. The Contingent Notes shall be due and payable in the applicable
principal amount (with applicable interest) specified in or calculated
pursuant to this Agreement, the Contingent Notes and the Annexes to
such Contingent Notes (the "Appropriate Principal Amount")
corresponding to a target range of Operating Earnings (as defined
below) or Cumulative Operating Earnings (as defined below), as the case
may be, specified in the Contingent Notes and the Annexes thereto, with
respect to each of the five 12-calendar month periods ending September
30, from 1997 through 2001, if, and only if, (i) with respect to the
twelve months ending September 30, 1997, Operating Earnings for such
year equal or exceed the specified minimum target amount of
$1,820,001.00 (the "Year-1
<PAGE> 12
Minimum Target") subject to Section 1.2(b)(iv) and (d) hereof, or, (ii)
with respect to the 24 month period ending September 30, 1998, the 36
month period ending September 30, 1999, the 48 month period ending
September 30, 2000 and the 60 month period ending September 30, 2001,
Cumulative Operating Earnings for such periods equal or exceed
$3,640,002.00, $5,460,003.00, $7,280,004.00 and $9,100,005.00,
respectively (together with the Year-1 Minimum Target, as relevant to
the applicable period, the "Minimum Targets") subject to Section
1.2(b)(iv) and (d) hereof. For each of the five 12-calendar month
periods ending September 30, from 1997 through 2001 for which Operating
Earnings or Cumulative Operating Earnings, as the case may be, are less
than the applicable Minimum Target (subject to Section 1.2(b)(iv) and
(d) hereof, no principal payment(s) shall be required, due or made
under the Contingent Notes, with respect to that period, and any and
all interest with respect thereto or accrued thereon, which otherwise
would have become due or payable had the applicable Minimum Target been
achieved for such period, shall be canceled and voided. Notwithstanding
anything to the contrary herein or in the Contingent Notes, the
aggregate maximum principal amount due or payable under the Contingent
Notes shall not exceed $5,687,500.00.
(b) "Operating Earnings"; "Cumulative Operating
Earnings".
(i) Definition of "Operating Earnings". For purposes
hereof (and Section 1.3 and the Contingent Notes), the term
"Operating Earnings", with respect to any period, shall mean
the income of or attributable to SLA, which following the
Closing shall become a division of AmeriPath, or AmeriPath
Florida, named the Southwest Florida Division (as defined
below), for such full twelve month period (i.e., October 1
through September 30), before deduction for (in each case,
with respect to SLA or the Southwest Florida Division (as
defined below)) (i) interest paid in such year, (ii) income
tax payable for such year, (iii) charges for amortization of
goodwill, including without limitation any amortization of
goodwill recorded in connection with this transaction or
amortization of any payments made under the Contingent Notes,
(iv) severance pay, if any, that is payable to a Seller as a
result of a termination of such Seller pursuant to his
Employment Agreement with AmeriPath Florida or its permitted
assign, and (v) any fees or expenses incurred by SLA in
connection with the transactions contemplated by this
Agreement. With respect to the first twelve month period, such
period shall be deemed to have started on October 1, 1996
(despite the date of this Agreement or the Closing Date).
Purchaser agrees that certain non-recurring expenses that were
not incurred in the ordinary course of business and are listed
on Schedule 1.2(b) hereof have been incurred by SLA since
October 1, 1996 and prior to the date hereof and such expenses
will not be excluded for purposes of calculating Operating
Earnings and the Profitability Percentage (defined below) for
such initial 12-month period. All such calculations shall be
determined in accordance with GAAP (as defined in Section 12.3
hereof) applied by the Purchaser on a consistent basis. For
purposes hereof (and Section 1.3 and the Contingent Notes),
the term "SLA," with respect to Operating Earnings or
Cumulative Operating Earnings, shall mean and include the
business, operations,
<PAGE> 13
contracts, assets and liabilities of SLA (as such is
constituted immediately prior to the Closing), which following
the Closing shall consist of the business, operations,
contracts, assets and liabilities of, and the results of
operations, revenues and expenses associated with, (i) the
contracts with hospitals, medical facilities and other parties
within the SLA Territory (defined below) in effect from time
to time, to which SLA, prior to the Closing, and AmeriPath
Florida, following the Closing, is a party, and which are
serviced by the employees who from time to time are employed
by AmeriPath Florida and who work within the Southwest Florida
Division (as defined below) (collectively, such employees
being referred to herein as the "SLA-Based Employees"), or
(ii) AmeriPath Florida's (or such other applicable AmeriPath
Affiliates) employment of, and employment agreements with, any
and all SLA-Based Employees. For purposes hereof (and Section
1.3 and the Contingent Notes), the term "Southwest Florida
Division" shall mean and include that portion of the business
and operations of AmeriPath Florida (or such other applicable
AmeriPath Affiliate) which, prior to consummation of the
transactions contemplated by this Agreement, constituted the
business and operations of Drs. Seidenstein, Levine and
Associates, Inc. within the SLA Territory, as same may change
and increase from time to time subsequent to the Closing.
Steven E. Levine, M.D., shall be the Managing Director of the
Southwest Florida Division for the later of (i) the duration
of the Contingent Notes, or (ii) his employment term with
AmeriPath or AmeriPath Florida.
(ii) Calculation of Operating Earnings. A statement
of the Operating Earnings, Cumulative Operating Earnings, as
well as Sellers' entitlement to any payments under the
Contingent Notes or AmeriPath Stock under the Stock Rights,
prepared by AmeriPath senior management, will be delivered to
the Sellers as soon as practicable following the end of each
applicable 12-month period, but in all events within 90 days
after the end of each such period. If AmeriPath's computation
provides that Sellers are entitled to payments under the
Contingent Notes, then the Appropriate Principal Amount
(together with accrued and unpaid interest thereon) that each
Seller is entitled to under the Contingent Notes shall be paid
within five (5) days of delivery of this statement. If any
Seller wishes to challenge the calculation of Operating
Earnings as set forth in the statement, he may do so by giving
written notice of such objection (the "Objection Notice") to
AmeriPath, signed by the Seller, within 40 days after receipt
of such statement of Operating Earnings. The Objection Notice
shall set forth in reasonable detail the Seller's calculation
of Operating Earnings (or Cumulative Operating Earnings, as
the case may be). If an Objection Notice is so timely
delivered to AmeriPath, AmeriPath and the objecting Seller
shall use their best efforts to resolve as soon as practicable
any difference of opinion. If they are unable to resolve such
difference within 20 days after receipt by AmeriPath of the
Objection Notice from the Sellers, the matter shall be
referred to the independent public accounting firm who then
audits the annual financial statements of AmeriPath, whose
decision shall be rendered within 30 days and shall be binding
on all parties, unless either party decides to dispute the
computation through arbitration pursuant to Section 12.15
<PAGE> 14
of this Agreement. If none of the Sellers timely deliver an
Objection Notice to AmeriPath, then AmeriPath's statement of
Operating Earnings and Cumulative Operating Earnings shall be
binding upon the Sellers. If any Seller fails to deliver an
Objection Notice, then AmeriPath's statement of Operating
Earnings shall be binding with respect to such Seller,
regardless of the outcome of a dispute, if any, between
another Seller and the Purchaser. If the Sellers object to the
calculation of Operating Earnings or Cumulative Operating
Earnings for the purpose of determining compliance with this
Section, the difference between the Appropriate Principal
Amount of the Contingent Notes for such period and the amount,
if any, actually paid and accompanying the AmeriPath
statement, shall be paid within ten (10) days after resolution
of the dispute with respect to such calculation to the extent,
and solely to the extent, that such resolution indicates that
any such amount remains unpaid.
(iii) Cumulative Operating Earnings. For purposes
hereof, the term "Cumulative Operating Earnings" shall mean
and include, with respect to the 24 month period ending
September 30, 1998, the 36 month period ending September 30,
1999, the 48 month period ending September 30, 2000 and the 60
month period ending September 30, 2001, the Operating Earnings
of SLA, on a cumulative basis, from October 1, 1996 through
the end of such period (e.g., the Cumulative Operating
Earnings for the period ending September 30, 1998 shall equal
the Operating Earnings, on a cumulative basis, from October 1,
1996 through and including September 30, 1998 (i.e., twenty
four full months of Operating Earnings would be included)).
(iv) Minimum Target Adjustments. For purposes of
calculating Operating Earnings, or Cumulative Operating
Earnings, as the case may be, in the event that AmeriPath
intentionally (and without the consent of the Sellers)
terminates, or fails to negotiate in good faith and allows to
expire, any profitable SLA hospital or medical facility
Contract in Lee, Charlotte, Collier or Sarasota Counties,
Florida (the "SLA Territory"), and AmeriPath does not replace
that Contract with a Contract of substantially similar or
greater value within 60 days, or if AmeriPath benefits from a
contract amendment affecting its operations outside of the
Southwest Florida Division in return for an unfavorable
amendment to a contract in the SLA Territory, the Minimum
Targets (but not the Appropriate Principal Amounts) shall be
reduced to reflect the lost earnings from such Contract; and
should AmeriPath assign a hospital Contract existing between
AmeriPath or an AmeriPath Affiliate and a facility as of the
Closing Date within the SLA Territory to the Southwest Florida
Division, the Minimum Targets shall be increased to reflect
additional earnings from the new Contract to neutralize the
effect of such termination, expiration, amendment or
assignment. The Minimum Targets may also be adjusted as set
forth in Section 1.2(d) below. Notwithstanding or in any way
limiting the definition set forth above in Section 1.2(b)(i),
the income attributable to SLA for purposes of computing
Operating Earnings and Cumulative Operating Earnings shall
include all revenues derived
<PAGE> 15
from services performed or originated within the SLA
Territory, other than revenues derived from AmeriPath accounts
(the "Existing AmeriPath Accounts") existing on the Closing
Date (which accounts are all listed on Schedule 1.2(b)(i)),
and the hospital contracts held by the Other Practice (as
defined in Section 1.2(b)(v) below) on the Closing Date,
provided that services performed on such Existing AmeriPath
Accounts or hospital contracts are not performed by the
SLA-Based Employees. If services are performed on Existing
Ameripath Accounts by SLA-Based Employees, revenue from such
service shall be attributed to the Southwest Florida Division.
Costs, charges and expenses associated with revenues
attributable to the Southwest Florida Division, including
inter-company charges for the technical/processing fee, if the
originating work is not processed by the Southwest Florida
Division, at the best available price, shall also be
attributed to SLA. For purposes hereof, services shall be
deemed to have been "performed" or "originated" within the SLA
Territory if the address or zip code of the referring
physician's office, the performing or referring facility is
within the SLA Territory. Sellers shall have access to
Purchaser's information or other available systems or records
with respect to data on referring physicians. In the event
that Purchaser controls the billing and collection process for
the Southwest Florida Division, Purchaser shall use its best
efforts to maintain a collection ratio consistent with that of
SLA during the 12 months prior to the Closing Date, allowing
for future negotiated contractual adjustments and consistent
with AmeriPath's policies. AmeriPath shall make its books and
records available, upon reasonable notice, so that the Sellers
can verify the proper calculation of Operating Earnings during
any time that the Contingent Notes remain outstanding. Sellers
shall have the right to audit the records of AmeriPath. As
prepared by AmeriPath in the normal course of business, or
upon the request of the Managing Director of the Southwest
Florida Division, Sellers shall be entitled to receive any
AmeriPath reports with respect to services performed on behalf
of referring physicians and the entities that perform such
services. In addition, the Managing Physician may download
available information from AmeriPath for purpose of extracting
information and preparing reports on other systems.
(v) Anatomic Pathology Reference Lab and Office-Based
Revenues. To align the incentives of all AmeriPath
Pathologists operating within the SLA Territory, if AmeriPath
closes on its acquisition of another pathology practice in the
SLA Territory (the "Other Practice"), the Southwest Florida
Division shall be credited with 45% (the "SFD Percentage") of
the gross revenues derived by AmeriPath for all anatomic
pathology reference lab and office-based services performed
in, or originating out of, the SLA Territory (the
"Reference-Office Revenues"), and the Other Practice shall be
credited with 55% of the Reference-Office Revenues. After the
closing, AmeriPath will provide Sellers with documentation
substantiating the 45%/55% allocation described herein. If
Sellers do not agree that such 45%/55% allocation is fair and
accurate or, alternatively, agree upon another allocation of
the Reference-Office Revenues, then this provision shall be
void and each of the Southwest Florida Division and the Other
<PAGE> 16
Practice will be credited with their own respective
Reference-Office Revenues. If, however, the percentages are
set in accordance with this Section 1.2(b)(v), and the
Southwest Florida Division is ever, during any 12-consecutive
month period commencing on October 1, and ending on the
following September 30th (a "Period"), responsible for
actually generating Reference-Office Revenues in an amount
equal to 20 percentage points less than, or 20 percentage
points more than, the SFD Percentage, then the "SFD
Percentage" shall, for such Period and all subsequent Periods
(unless another adjustment is effectuated hereunder), become
such higher or lower percentage, and the lower and upper
ranges of such new SFD Percentage for purposes of any
subsequent adjustments shall be equal to the new SFD
Percentage, less 20 percentage points, and the new SFD
Percentage plus 20 percentage points, respectively. By way of
illustration and not of limitation, if the Southwest Florida
Division actually generated 66% of the Reference-Office
Revenues for any given applicable Period, the SFD Percentage
shall, for such Period and all subsequent Periods (unless
another adjustment is effectuated hereunder) become 66%. For
subsequent adjustments thereafter, if any, the lower range
will be 46% (i.e. 66% - 20%) and the upper range will be 86%
(i.e. 66% + 20%). Notwithstanding the definition of Operating
Earnings in this Section 1.2 and elsewhere in this Agreement,
if AmeriPath acquires the Other Practice, and a percentage
allocation of Reference-Office Revenues is set pursuant to
this Section 1.2(b)(4), then the "Operating Earnings" for any
Period (or portion thereof) commencing after the allocation is
implemented shall be equal to the Adjusted Gross Revenues,
defined below, multiplied by the Profitability Percentage,
defined below. The "Adjusted Gross Revenues" shall mean the
sum of (i) the Reference-Office Revenues allocated to the
Southwest Florida Division hereunder, and (ii) all other gross
revenues of the Southwest Florida Division, excluding all
Reference-Office Revenues of the Southwest Florida Division.
The "Profitability Percentage" shall be equal to one minus a
fraction, the numerator of which is all of the expenses
attributable to the Southwest Florida Division (as described
in this Agreement), and the denominator of which will be the
actual gross revenues of the Southwest Florida Division
without any reallocation. If, during any twelve month period,
the Reference-Office Revenues allocated to the Southwest
Florida Division fall within the applicable ranges so that
there is no adjustment to the SFD Percentage, but either the
Other Practice or the Southwest Florida Division believe that
there should be a reallocation of the expenses incurred by the
Southwest Florida Division and the Other Practice in
generating the Reference-Office Revenues, because the
allocation of such revenues utilizing the SFD Percentage was
materially different from the actual performance of the two
divisions, then the Sellers, on the one hand, or the Other
Practice, on the other hand, may, by sending written notice to
AmeriPath, cause a representative of the selling shareholders
of the Other Practice a representative of the Sellers to meet
and discuss the disproportionately incurred expenses. The
parties may by mutual agreement, but are not in any way
obligated to, decide to reallocate between the Other Practice
and the Southwest Florida Division, the expenses incurred in
generating their respective Reference-Office Revenues, prior
to performing the
<PAGE> 17
computation of Operating Earnings as described herein.
"Reference-Office Revenues" shall be defined as gross revenues
derived from all anatomic pathology professional and/or
technical services including surgical pathology, gynecologic
and non-gynecologic cytology, bone marrow biopsies, aspirates
and peripheral smear studies, special stains and procedures
including but not limited to immunoperoxidase,
immunofluorescence, and decalcification that are performed on
any patient, specimen or sample referred or originating from
any physician's office, regardless of the physician's employer
(e.g. an independently practicing physician, or a physician
employee of an insurance company, or managed care plan, or
hospital), any free-standing ambulatory surgery center, or by
way of a reference lab service contract (e.g. Smith Kline,
Labcorp). Reference-Office Revenues shall not include services
provided for patients, on specimens or samples referred or
originating from a hospital in-patient or out-patient facility
or ambulatory surgery facility that has a majority ownership
interest held by a hospital, or subsidiary or other affiliate
of a hospital. In addition, Reference-Office Revenues shall
not include revenues derived from clinical laboratory
services. The parties hereto agree that subsequent to the
closing of the acquisition of the Other Practice, they shall
mutually agree on adjustments to the fee schedules of the
respective practices in order to develop a substantially
similar fee schedule for purposes of the calculations set
forth in this Section 1.2(b)(v).
(c) Effect of Sale on Contingent Notes. Should any Person (as
such term is defined in Section 12.3 hereof) acquire AmeriPath, whether
by means of a merger with or into AmeriPath or the acquisition of all
or substantially all of the stock or assets of AmeriPath (an "AmeriPath
Acquisition"), then, with respect to the Contingent Notes, as a
condition to consummation of the AmeriPath Acquisition, the acquiring
Person shall be required to either (i) acknowledge and guarantee
AmeriPath's ongoing obligations under the Contingent Notes or (ii)
assume the obligations under the Contingent Notes, with AmeriPath
remaining liable if it survives the transaction.
(d) Effect of Acquisitions on Contingent Notes. In the event
that AmeriPath acquires one or more Persons or businesses, Operating
Earnings will be calculated without including (i) the income generated
by, or expenses incurred in connection with, the acquisition or the
acquired Person or business (except the anatomic pathology and
reference laboratory and office-based revenues pursuant to Section
1.2(b)(v)), and (ii) any selling, general administrative, or other
expenses which do not relate to SLA or its business (except to the
anatomic pathology and reference laboratory and office-based revenues
pursuant to Section 1.2(b)(v)). Notwithstanding anything to the
contrary herein, in the event AmeriPath or an AmeriPath Affiliate so
acquires one or more Persons or businesses within the SLA Territory,
the Minimum Targets shall be decreased by 12% of the net revenues of
such acquired Person or business (i) during the applicable 12-month
period utilized to compute the valuation of such acquired Person, or
(ii) if no such computation was utilized, then during the 12-calendar
months preceding the calendar month on which AmeriPath entered into a
binding agreement with such acquiree. However, in no event shall
Minimum Target be reduced pursuant to this Section 1.2(d)
<PAGE> 18
to less than $1,365,001, $2,730,002, $4,095,003, $5,460,004, and
$6,825,005 for periods ending September 30, 1997, September 30, 1998,
September 30, 1999, September 30, 2000, and September 30, 2001,
respectively. Any such reduction shall be calculated within 30 days
after the closing date of the acquisition to which it applies. If such
an acquisition occurs during a 12-month period, then the reduction
shall be applicable to the Minimum Target for that portion of the
12-month period that remains after the acquisition and all subsequent
12-month periods. The Applicable Stock Amount for Operating Earnings or
Cumulative Operating Earnings, as applicable, that fall within such
reduced range utilizing the new Minimum Target shall be equal to the
lowest Applicable Stock Amount for such period as set forth on Schedule
1.3, less 5.55 x ([the difference between (i) the lowest stated
Operating Earnings or Cumulative Operating Earnings, as applicable, on
the appropriate Annex to the Contingent Notes, and (ii) the actual
amount of Operating Earnings or Cumulative Operating Earnings, as
applicable, for such period]/100).
(e) Interest. The Contingent Notes shall bear interest from
the date of issuance until maturity, computed on the basis of a 360-day
year and the actual number of days elapsed, on the unpaid Appropriate
Principal Amount thereof at the rate of seven percent (7.0%) per annum.
Interest shall accrue and compound annually, and shall be payable only
upon payment of principal, if any. In the event Operating Earnings or
Cumulative Operating Earnings are less than the applicable Minimum
Target for any given year, interest on the principal amount of the
Contingent Notes for such year shall be canceled and voided.
(f) Maturity, Redemption and Prepayments. For each period for
which Operating Earnings or Cumulative Operating Earnings equal or
exceed the applicable Minimum Target, the Appropriate Principal Amount
of the Contingent Notes, together with interest accrued on such
Appropriate Principal Amount, shall become due and payable and shall be
paid as provided in subparagraph (a) above. If, in the reasonable
judgment of a majority of the full Board of Directors of AmeriPath
(which judgment is made based upon the advice of counsel), it is
determined that the Contingent Notes, or the holding of the Contingent
Notes by the Sellers, may violate any Regulation or Order of any
Authority (as such terms are defined in Section 12.3), then, at
AmeriPath's sole discretion (as recommended by counsel to Ameripath),
the Contingent Notes may be immediately converted into non-contingent
promissory notes, payable in the amounts and at the time intervals that
would be applicable pursuant to the Contingent Notes if the Operating
Earnings for the then current 12-month period, and each of the
subsequent 12- month periods, of the Contingent Notes were equal to the
average of the Operating Earnings for all prior full 12-month periods
of the Contingent Notes, provided if such decision occurs during the
first two 12-month periods (i.e. prior to September 30, 1998), then the
Operating Earnings for each 12-month period for purposes of computing
future payments under this Section 1.2(f) shall be deemed to be
$2,275,000. If AmeriPath in good faith deems there to be a legal
problem with Sellers holding any promissory notes of AmeriPath, even
non-contingent notes, then AmeriPath will pay the Sellers in one lump
sum the total principal amounts that would be payable over time
pursuant to the preceding sentence along with interest computed through
the date of such payment. AmeriPath shall
<PAGE> 19
indemnify the Sellers from any and all costs, damage, losses, or
expenses, that may arise as a result of the Contingent Notes violating
any Regulation or Order of any Authority. In its sole and absolute
discretion, AmeriPath may prepay the Contingent Notes by paying, in the
aggregate, $568,750.00 for each year (or portion thereof) remaining
under the Contingent Notes, along with applicable interest as of the
date of prepayment. AmeriPath shall give the Sellers irrevocable
written notice of any prepayment permitted hereunder not less than
three (3) business days prior to the prepayment date, specifying such
prepayment and the amount of the Contingent Notes proposed to be
prepaid on such date, whereupon such principal amount of the Contingent
Note specified in such notice, together with accrued interest thereon,
shall become due and payable on the prepayment date. The aggregate
amount of each partial prepayment shall be allocated among each of the
holders of the Contingent Notes at the time outstanding pro rata in
proportion to the unpaid principal amounts of the Contingent Notes held
by each of such holders.
(g) Payments. All payments of principal (including any
prepayments or redemptions), and interest under the Contingent Notes
shall be made by AmeriPath in lawful money of the United States of
America in immediately available funds (or at the written request of
the holders thereof, by cashier's or bank check) not later than twelve
o'clock noon, Miami, Florida time, on the date each such payment is
due. To the extent calculation of any payment amounts (whether
principal, interest or otherwise) results in fractions of a cent, the
amount shall be rounded down to the nearest whole cent.
(h) Subordination; Subordination Agreement. The Contingent
Notes shall be subordinate and junior in right of payment to certain
senior indebtedness pursuant to a subordination agreement (the
"Subordination Agreement"), by and among AmeriPath's senior lenders and
each of the holders of promissory notes of AmeriPath. As a condition to
AmeriPath's obligations under the Contingent Notes, the Sellers agree
to execute and deliver appropriate documents and agreements evidencing
the subordination of the Contingent Notes to such senior indebtedness
of AmeriPath.
(i) Notes Non-negotiable. The Contingent Notes shall be
non-transferable and non-negotiable other than by will or the laws of
intestate succession.
(j) Right of Set-Off on Sellers' Contingent Notes. With
respect to the Contingent Notes, AmeriPath shall have the right,
following prior written notice to any Seller, to set-off against
principal or interest payable under the Contingent Notes the amount of
any indemnification payment owed under Article XI hereof. Such notice
shall state with reasonable specificity the good faith basis for
AmeriPath's right to such indemnification payment, and a copy of such
notice shall also be sent to each director of AmeriPath. Each Seller
shall have the right to respond to such notice, and if any Seller
requests that the exercise of such right of set-off be considered and
approved by the Board of Directors, then such right shall not be
exercised unless considered and approved by a majority of the full
Board of Directors. If within 21 days after receipt of such notice of
set-off, the Seller contests in writing (sent to AmeriPath) AmeriPath's
claim of indemnification under Article XI hereof, then the amount which
AmeriPath would
<PAGE> 20
otherwise have paid to the Seller but for the exercise of such right of
set-off shall be paid into an interest bearing escrow account
maintained by a bank selected by AmeriPath, to be held in such account
until AmeriPath and the Seller have reached agreement as to the amount,
if any, of such indemnification payment and set-off, or until there has
been a binding resolution of such matter in an arbitration held
pursuant to Section 12.16 below, at which time the amount held in such
segregated account, together with any interest accrued thereon, shall
be released to the prevailing party and possibly with a portion
distributed to the non-prevailing party, as and to the extent agreed
upon or instructed by the arbitrator. AmeriPath and the Seller agree
that they will use their best efforts to resolve any such dispute
within 30 days of receipt of notice by AmeriPath of the Seller's
objection to the set-off.
(k) Defaults. The Sellers shall be entitled to the benefit of
the Events of Default set forth in the form of Contingent Notes.
(l) Conflict. To the extent there is any conflict or
inconsistency between the terms of this Agreement and the terms
specified in the Contingent Notes, the terms specified in the
Contingent Notes shall govern and prevail, provided, however, much of
the text of this Agreement, and in particular this Section 1.2, expands
upon, but does not expressly conflict with, the terms of the Contingent
Notes, and such expansive language herein shall not be deemed a
conflict.
1.3 Contingent Issuance of AmeriPath Stock. As additional purchase
price consideration, the Purchaser shall issue to the Sellers, subject to the
conditions and restrictions set forth in this Section 1.3 (the "Stock Rights"),
up to an aggregate maximum of 379,166 shares of AmeriPath Stock (to be divided
among the Sellers as set forth on Schedule 1.1 hereof). Upon achieving the range
(the "Applicable Range") of Operating Earnings or Cumulative Operating Earnings,
as the case may be, set forth on Schedule 1.3 hereto and as addressed in this
Section 1.3, with respect to each period commencing with the twelve month period
ending September 30, 1997 through the sixty month period ending September 30,
2001, AmeriPath shall deliver, in the aggregate, certificates evidencing the
corresponding number of shares of AmeriPath Stock indicated on Schedule 1.3
hereto (the "Aggregate Stock Amount") to the Sellers (and to each Seller (the
"Applicable Stock Amount")) as so indicated, which shares shall be subject to
the terms, conditions and restrictions set forth in this Section 1.3 and on such
Schedule 1.3.
(a) Delivery; Right to Contingent Issuance Subject to
Cancellation. Certificates for shares representing the Applicable Stock
Amount shall be delivered on or before each January 15 following each
12-month period that the Applicable Range of Operating Earnings or
Cumulative Operating Earnings, as the case may be, has been achieved,
if, and only if, (i) with respect to the twelve months ending September
30, 1997, Operating Earnings equal or exceed a minimum target amount of
$1,820,001.00 (the "First Year Minimum Stock Target") or, (ii) with
respect to the 24 month period ending September 30, 1998, the 36 month
period ending September 30, 1999, the 48 month period ending September
30, 2000 and the 60 month period ending September 30, 2001, Cumulative
Operating Earnings for such periods equal or exceed $3,640,002.00,
$5,460,003.00,
<PAGE> 21
$7,280,004.00 and $9,100,005.00, respectively (together with the First
Year Minimum Stock Target, as relevant to the applicable period, the
"Minimum Stock Targets"), subject to the same adjustments as those to
the Minimum Targets, set forth in Sections 1.2(b)(iv) and (d),
substituting "Minimum Stock Target" for "Minimum Target" therein. If
any Seller contests the amount of AmeriPath Stock paid to the Seller
pursuant to this Section 1.3, the contest and resolution of same shall
be initiated and resolved in the same manner described in Section
1.2(b)(ii) above, with payment of the AmeriPath Stock, if any after any
such dispute paid within 10 days after such resolution in the same
manner as payment under the Contingent Notes.
(b) Effect of Sale on Stock Rights. In the event of an
AmeriPath Acquisition (as such term is defined in Section 1.2(c)),
then, with respect to such Stock Rights that have not theretofore been
canceled or voided because the Minimum Stock Target was not or has not
been met for the period in question, as a condition to consummation of
the AmeriPath Acquisition, each Seller shall have the option to either
(i) require that the acquiring Person assume the obligations under the
Stock Rights by converting the rights to receive AmeriPath Stock into
rights to receive stock in the acquiring Person (of substantially
equivalent value, based upon acquisition value, as determined in good
faith by the Board of Directors of AmeriPath) or (ii) convert the Stock
Rights into a subordinated promissory note payable with interest at
prime plus two percent in a principal amount equal to the "stated
value" (as defined below) of the Stock Rights remaining outstanding at
the time of such acquisition. For purposes of this Section 1.3(b), the
"stated value" of the Stock Rights shall be $15.00 multiplied by the
number of shares that would be due and owing in the future if the
Operating Earnings for the current 12- month period and each of the
subsequent 12-month periods of the Stock Rights are equal to the
average of the Operating Earnings for all prior full 12-month periods
of the Stock Rights, provided, if such AmeriPath Acquisition occurs
during the first two 12-month periods, (i.e.occurs before September 30,
1998), then the annual Operating Earnings for purposes of computing the
payment hereunder shall be deemed to be $2,275,000.
(c) Effect of Acquisitions on Stock Rights. In the event that
AmeriPath acquires one or more Persons or businesses, Operating
Earnings will be calculated without including (i) the income generated
by, or expenses incurred in connection with, the acquisition of the
acquired Person or business (except the anatomic pathology and
reference laboratory and office-based revenues pursuant to Section
1.2(b)(v)), and (ii) any selling, general administrative or other
expenses which do not relate to SLA or its business (except the
anatomic pathology and reference laboratory and office-based revenues
pursuant to Section 1.2(b)(v)). Notwithstanding anything to the
contrary herein, in the event AmeriPath or an AmeriPath Affiliate so
acquires one or more Persons or businesses within the SLA Territory,
the Minimum Stock Target shall be decreased in the same manner as the
Minimum Targets pursuant to Section 1.2(d), substituting "Minimum Stock
Targets" for "Minimum Targets." The Applicable Stock Amount for
Operating Earnings or Cumulative Operating Earnings, as applicable,
that fall within such reduced range utilizing the new Minimum Stock
Target shall be equal to the lowest Applicable Stock Amount for such
period as set forth on Schedule 1.3, less 5.55 shares x the
<PAGE> 22
difference between (i) the lowest stated Operating Earnings or
Cumulative Operating Earnings, as applicable, on the appropriate chart
to Schedule 1.3 and (ii) the actual amount of Operating Earnings or
Cumulative Operating Earnings, as applicable, for such period.
(d) Termination of Stock Rights; Call on AmeriPath Stock. For
each period for which SLA's Operating Earnings, or Cumulative Earnings,
as the case may be, exceed the Minimum Stock Target, the corresponding
Applicable Stock Amount shall become earned and shall be delivered as
provided in subparagraph (a) above. If, in the reasonable judgment of a
majority of the full Board of Directors of AmeriPath (which judgment is
based upon the advice of counsel), it is determined that the Stock
Rights, or the holding of the AmeriPath Stock by the Sellers, may
violate any Regulation or Order of any Authority, then, at AmeriPath's
sole discretion and option (as recommended by counsel to Ameripath),
(i) the Stock Rights may be canceled upon the issuance to Sellers of
the number of shares of AmeriPath Stock that Sellers would be entitled
to pursuant to this Section 1.3 if the Operating Earnings for the
current 12-month period and each of the subsequent 12-month periods
through September 30, 2001 were equal to the average of the Operating
Earnings for all prior full 12-month periods, provided if such a
determination is made during the first two 12-month periods (i.e.
before September 30, 1998) then the Operating Earnings for each
12-month period, for purposes of computing the amount of shares of
AmeriPath Stock payable to the Seller(s) hereunder, shall be deemed to
be $2,275,000, or (ii) if it is determined that ownership of AmeriPath
Stock by Sellers could violate a Regulation or Order, then the Stock
Rights may be canceled and all outstanding shares of AmeriPath Stock
issued to or held by the Sellers (and all AmeriPath Stock that would
have been issued to Sellers if AmeriPath had elected to proceed under
"(i)" of this Section 1.3(d)) may be redeemed or purchased by AmeriPath
(the "Call"), and the Sellers hereby irrevocably and unconditionally
agree to sell such stock to AmeriPath upon any such Call, at the
greater of (i) $15 per share of AmeriPath Stock, or (ii) if AmeriPath
Stock is publicly traded on a national exchange, the average closing
price for AmeriPath Stock on the applicable exchange for the ten
consecutive trading days immediately preceding the date of AmeriPath's
determination to call the AmeriPath Stock and Stock Rights. AmeriPath
shall give the Sellers written notice of any such election not less
than three (3) business days prior to the closing date of such event,
specifying such termination and/or Call and the amount to be paid for
the AmeriPath Stock on the closing date specified therein, whereupon
such amount specified in such notice, upon receipt by AmeriPath of the
certificates therefor at the closing thereof, shall be paid to the
Sellers.
(e) Payments; Certificates. All payments for AmeriPath Stock
or Stock Rights which is "called" by AmeriPath pursuant to Section
1.3(d) shall be made by AmeriPath in lawful money of the United States
of America in immediately available funds (or at the written request of
the Sellers, by certified or bank check) after proper tender by each
Seller of certificates representing all of the AmeriPath Stock owned by
such Seller, duly endorsed for transfer to the Purchaser, together with
stock powers duly executed in blank. Any and all liens, claims,
encumbrances or other restrictions with respect to the
<PAGE> 23
AmeriPath Stock so called shall be satisfied and released, to the
reasonable satisfaction of AmeriPath, prior to closing on the purchase
thereof. To the extent calculation of any payment amounts results in
fractions of a cent, the amount shall be rounded down to the nearest
whole cent.
(f) Transferability; Shareholders' Agreement. The AmeriPath
Stock and the Stock Right are not transferable by the Sellers other
than by will or the laws of intestate succession, in accordance with
Purchaser's Shareholders' Agreement, or in accordance with applicable
securities laws including but not limited to Rule 144. All shares of
AmeriPath Stock issued at Closing or pursuant to the Stock Right shall
be subject to the Purchaser's Shareholders' Agreement (as defined in
Section 7.9) relating to the AmeriPath Stock and related and other
matters, including, but not limited to, any restrictions on
transferability, any rights of first refusal and any option of the
Purchaser to purchase such shares. Sellers shall have the rights and
obligations of a Common Shareholder pursuant to the Shareholders'
Agreement. As a condition to the issuance of shares of AmeriPath Stock
in connection with any Stock Rights (and at AmeriPath's option, at each
issuance), the Sellers shall execute and deliver to the Purchaser a
counterpart to the Shareholders' Agreement, in form and substance
reasonably satisfactory to AmeriPath and Sellers, and the Sellers shall
make such commercially reasonable representations and execute such
certificates as AmeriPath may reasonably require, including
representations similar to those made in Section 2.25 hereof.
(g) Legend. Each and every stock certificate representing
shares of AmeriPath Stock issued to the Sellers pursuant to the Stock
Right shall bear the following (or similar) restrictive legend,
together with such other legend(s) as the Purchaser shall in its
discretion deem appropriate, provided such additional legends may not
contain any restrictions on Sellers, unless imposed by this Agreement,
the Purchasers' Shareholders' Agreement, or applicable law:
"The shares represented by this certificate (the "Shares") are
subject to each and every one of the terms, conditions and
restrictions set forth in the Shareholders' Agreement of
AmeriPath, Inc. dated February 29, 1996 (the "Shareholders'
Agreement"), as amended, including, but not limited to, any
restrictions on transferability, any rights of first refusal
and any option of AmeriPath, Inc. to "call" or purchase such
Shares, and may not, in whole or in part, be sold,
transferred, pledged, gifted, hypothecated or otherwise
disposed of in any manner other than in accordance with the
terms of the Shareholders' Agreement, a copy of which is on
file and available for inspection at the principal offices of
AmeriPath, Inc. presently located at 800 Cypress Creek Road,
Suite 200, Fort Lauderdale, Florida 33334."
(h) Antidilution; Adjustments Upon Changes in Capitalization
or Merger. Subject to any required action by the stockholders of the
Purchaser, the number of shares
<PAGE> 24
of AmeriPath Stock covered by the Stock Right, the price per share and
the aggregate number of shares which have been authorized for issuance
hereunder, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of AmeriPath Stock resulting
from a stock dividend or through any recapitalization,
reclassification, stock split-up, combination or exchange of shares
(other than any such combination or exchange of AmeriPath Stock through
which shares are issued to effect an acquisition of another Person.
Such adjustment shall be reasonably made by the Board of Directors of
AmeriPath, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issuance by the
Purchaser of shares of stock of any class, or securities convertible
into shares of stock of any class (whether in connection with an
acquisition, employee benefit, stock or stock option plan, private or
public offering of securities, or otherwise), shall affect, and no
adjustment by reason thereof shall be made with respect to, the number
of shares of AmeriPath Stock subject to this Stock Right. Price per
share calculations used in this Agreement shall also be adjusted to
reflect changes in the capitalization of the Purchaser such that (on an
aggregate basis) the value of such shares before the adjustment event
shall equal the value of such shares immediately after such adjustment
event.
(i) Reservation of Shares. The Purchaser will at all times
reserve for issuance and delivery all shares of AmeriPath Stock from
time to time receivable by Sellers hereunder. All such shares shall be
duly authorized and, when issued, shall be validly issued, fully paid
and non-assessable and free of all preemptive rights.
(j) Fractional Shares. No fractional shares or scrip
representing fractional shares shall be issued hereunder, but the
Purchaser shall round down to the nearest whole number the number of
shares of AmeriPath Stock required to be issued and delivered in
accordance with Schedule 1.3.
(k) Rights of the Sellers. The Sellers shall not, solely by
virtue of the Stock Rights, be entitled to any rights of a stockholder
in the Company, either at law or in equity, until AmeriPath Stock is
issued and delivered to the Sellers and the rights of the Sellers are
limited as expressed in this Agreement.
(l) Failure to Deliver. If the Sellers become obligated to
sell any AmeriPath Stock to the Purchaser as a result of the exercise
of a Call under this Agreement or otherwise, and a Seller fails to
deliver such stock (or the certificates evidencing such stock) in
accordance with the terms of this Agreement, the Purchaser may, at the
sole and absolute discretion of the Board of Directors of AmeriPath, in
addition to all other remedies available to the Purchaser, tender to
such Seller the purchase price for such shares as is herein specified.
Upon tender of such purchase price to such Seller, the Purchaser, upon
written notice to such Seller, may cancel on its books the certificate
or certificates evidencing the shares of AmeriPath Stock so called, and
thereupon all of the Seller's rights in and to such AmeriPath Stock
shall terminate.
<PAGE> 25
(m) Put Option of Sellers. Notwithstanding anything to the
contrary set forth in this Agreement, each Seller shall have an
exclusive and irrevocable option, exercisable by notice to the
Purchaser given no later than February 15, 2002 (or, with respect to
disputed amounts only, if any, within thirty (30) days after the
resolution of a dispute with respect to the final contingent payments),
to sell to the Purchaser for $15.00 per share (and thus to require the
Purchaser to purchase) all, but not less than all, of the AmeriPath
Stock owned or held by such Seller(s), if, and only if, the AmeriPath
Stock is not, on such date, traded on the American Stock Exchange, New
York Stock Exchange, or quoted on the Nasdaq National Market. The
Purchaser hereby irrevocably agrees to purchase and acquire such
AmeriPath Stock on the terms and subject to the conditions set forth
herein.
(n) All Cash Option of Sellers. Notwithstanding anything to
the contrary set forth in this Agreement, if, and only if prior to the
second anniversary of the Closing Date, AmeriPath Stock is not traded
on the American Stock Exchange, New York Stock Exchange, or quoted on
the Nasdaq National Market, each Seller shall have an exclusive and
irrevocable option, exercisable by notice to the Purchaser given 30
days prior to any issuance of AmeriPath Stock under the Stock Rights,
to receive from the Purchaser, instead of all, but not less than all,
the AmeriPath Stock that such Seller(s)s is/are entitled to receive
under this Section 1.3, the value of such AmeriPath Stock that the
Seller(s) is/are entitled to receive as set forth on Schedule 1.3 (and
thus to require the Purchaser to make the contingent purchase price
payment in cash and not in AmeriPath Stock). For purposes of the
preceding sentence "value" shall be deemed to mean $15 per share.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE SELLERS AND SLA
The Sellers, hereby make the following representations and warranties
to the Purchaser, each of which shall be deemed material (and the Purchaser, in
executing, delivering and consummating this Agreement, has relied and will rely
upon the material correctness and completeness of each of such representations
and warranties notwithstanding any independent investigation):
2.1 Corporate Organization, Qualification, etc. SLA is a professional
service corporation duly organized, validly existing and in good standing under
the laws of the State of Florida with full corporate power and authority to
carry on its business as it is now being conducted and to own, operate and lease
its properties and assets as they are currently owned, operated, and leased. SLA
is duly qualified or licensed to do business in good standing in the
jurisdictions set forth on Schedule 2.1 attached hereto, those being every
jurisdiction in which the conduct of SLA's business, the ownership or lease of
its properties, or the transactions contemplated by this Agreement, require it
to be so qualified or licensed and the failure to be so qualified or licensed
would have a Material Adverse Effect (as defined in Section 12.3). SLA's
articles of incorporation have not been amended or supplemented since January 1,
1984 other than as required pursuant to Section 4.9 below, and are in full force
and effect as of the date hereof.
<PAGE> 26
True, complete and correct copies of SLA's articles of incorporation and
by-laws, as presently in effect, are attached hereto as Exhibit 2.1.
2.2 Subsidiaries. Except as listed on Schedule 2.2, SLA has no
Subsidiaries (as defined in Section 12.3) nor any investment or other interest
in, or any outstanding loan or advance to or from, any Person, including any
officer, director or shareholder.
2.3 Capital Stock. As of the date hereof, the authorized capital stock
of SLA consists of ONE HUNDRED (100) shares, $1.00 per share par value. The
stock record book of SLA has been delivered to the Purchaser for inspection
prior to the date hereof and is complete and correct and all requisite Federal
and State documentary stamps have been affixed thereon and canceled. The SLA
Shares constitute all of the issued and outstanding shares of capital stock of
SLA, and all of the SLA Shares are owned beneficially and of record by the
Sellers.
2.4 Corporate Record Books. The corporate minute books of SLA have been
made available to the Purchaser, are complete and correct in all material
respects and contain all of the documented and material proceedings of the
shareholders and directors of SLA.
2.5 Title to Stock. All of the issued and outstanding shares of the
capital stock of SLA that are, and at the Closing will be, owned by the Sellers
are duly authorized, validly issued, fully paid and nonassessable, and are free
of all Liens (as defined in Section 12.3). Upon delivery of the Purchase Price
to the Sellers at the Closing, the Sellers will convey, and the Purchaser will
own and hold, good and marketable title to the SLA Shares, free and clear of all
Liens or contractual restrictions or limitations whatsoever.
2.6 Options and Rights. Except as set forth in Schedule 2.6, there are
no outstanding subscriptions, options, warrants, rights, securities, contracts,
commitments, understandings or arrangements under which SLA is bound or
obligated to issue any additional shares of its capital stock or rights to
purchase shares of its capital stock. Except as set forth on Schedule 2.6, other
than the Shareholders' Agreement (which will be canceled prior to the Closing),
there are no agreements, arrangements or understandings between the Sellers
and/or SLA and any other Person regarding the SLA Shares (or the transfer,
disposition, holding or voting thereof).
2.7 Authorization, Etc. SLA has full power and authority and the
Sellers have full capacity to enter into this Agreement and the agreements and
documents contemplated hereby and perform their respective obligations hereunder
and thereunder. The execution, delivery and performance of this Agreement and
all other agreements and transactions contemplated hereby have been duly
authorized by the Board of Directors of SLA and no other corporate proceedings
on its part are necessary to authorize this Agreement and the transactions
contemplated hereby. The Sellers are entering into this Agreement on their own
volition, free from any undue influence or coercion. Upon execution and delivery
of this Agreement by the parties hereto this Agreement and all other agreements
contemplated hereby shall constitute the legal, valid and binding obligation of
each of SLA and the Sellers, enforceable against each such party in accordance
with their respective terms, except as may otherwise be limited under any
applicable state or federal bankruptcy laws or laws affecting creditors rights
generally.
<PAGE> 27
2.8 No Violation. The execution and delivery by SLA and the Sellers of
this Agreement, and any and all other agreements contemplated hereby, and the
fulfillment of and compliance with the respective terms hereof and thereof by
SLA and the Sellers do not and will not, (a) conflict with or result in a
material breach of the terms, conditions or provisions of, (b) constitute a
material default or event of default under (with due notice, lapse of time or
both), (c) result in the creation of any Lien upon the capital stock or assets
of SLA pursuant to, (d) give any third party the right to accelerate any
material obligation under, (e) result in a material violation of, or (f) require
any authorization, consent, approval, exemption or other action by or notice to
any court or Authority pursuant to, the articles of incorporation or by-laws of
SLA or any Regulation, Order or Contract (as defined in Section 12.3) to which
SLA or the Sellers are subject. SLA and the Sellers will comply with all
applicable Regulations and Orders imposed upon them in connection with the
execution, delivery and performance of this Agreement and the transactions
contemplated hereby.
2.9 Financial Statements. Attached as Exhibit 2.9 hereto are the
following financial statements of SLA: (i) Balance sheets (prepared on a
modified cash basis) for the fiscal years ended December 31, 1994 and 1995, and
the six months ended June 30, 1996 (the "Balance Sheets"), and (ii) statements
of revenues and expenses (prepared on a modified cash basis) for the fiscal
years ended December 31, 1995 and 1996 and the six months ended June 30, 1996
(the "Statements of Revenues and Expenses" and, collectively with the Balance
Sheets and the Statements of Revenues and Expenses, the "Financial Statements").
To the best of the Sellers' knowledge, the balance sheets included in the
Financial Statements fairly present the financial position of SLA on a modified
cash basis as at the respective dates thereof, and the statements of revenues
and expenses included in the Financial Statements (x) fairly present in all
material respects the results of operations for the periods therein referred to,
on a modified cash basis applied on a consistent basis, and (y) fairly present
in all material respects the financial condition of SLA at the respective date
of on a modified cash basis, and for the period covered by, such statements. To
the best of the Sellers' knowledge SLA has no material liability, whether
accrued, absolute or contingent, of a type required to be reflected on a balance
sheet or described in the notes thereto in accordance with GAAP, other than (i)
liabilities incurred since June 30, 1996, disclosed on Schedule 2.9(a) attached
hereto, (ii) liabilities covered by insurance or reinsurance (a complete and
detailed description of which is provided in Schedule 2.9(b)), and (iii) any
liabilities of SLA disclosed to Purchaser throughout this Agreement or in the
Schedules and Exhibits hereto. Schedule 2.9(c) contains a complete list of the
accounts payable of SLA.
2.10 Employees. To the best of the Sellers' knowledge, SLA has been for
the past four years, and currently is, in material compliance with all
applicable Federal, State and local Regulations and Orders affecting and
applicable to the employment and employment practices of SLA (including those
Regulations promulgated by the Equal Employment Opportunity Commission),
including terms and conditions of employment and wages and hours. SLA does
maintain "pension" and "welfare" benefit plans within the respective meanings of
sections 3(2) and 3(1) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA").
2.11 Absence of Certain Changes. Since June 30, 1996, there has
not been (a) any Material Adverse Change (as defined in Section 12.3) in the
business, prospects, financial
<PAGE> 28
condition, revenues, expenses, accounts receivable, accounts payable or
operations of SLA; (b) any damage, destruction or loss, whether covered by
insurance or not, having a Material Adverse Effect, with regard to SLA's
properties and business; (c) any payment by SLA to, or any notice to or
acknowledgment by SLA of any amount due or owing to, SLA's self-insured carrier,
if any, in connection with any self-insured amounts or liabilities under health
insurance covering employees of SLA, in each case, in excess of a reserve
therefor on the balance sheet for the fiscal year ended December 31, 1995
included in the Financial Statements; (d) any declaration, setting aside or
payment of any dividend or distribution of tangible property in respect of SLA's
capital stock; (e) any material increase other than the ordinary course of
business in the rate of compensation or in the benefits payable or to become
payable by SLA to its directors, officers, employees or consultants; (f) any
amendment, modification or termination of any existing, or entering into any
new, contract, agreement, arrangement or plan relating to any salary, bonus,
insurance, pension, health or other employee welfare or benefit plan for or with
any directors, officers, employees or consultants of SLA; (g) any entry into any
material Contract not in the ordinary course of business, other than at the
recision of Mark Mangano, M.D.'s arrangement including without limitation
relating to any borrowing or capital expenditure; (h) any disposition by SLA of
any asset; or (h) any change by SLA in accounting methods or principles. Nothing
in this Section 2.11 shall be violated by SLA reimbursing its employees for
business expenses and paying discretionary bonuses to its employees, provided
there is cash on hand on the closing, as required pursuant to Section 2.31.
2.12 Contracts.
(a) Except as listed in Schedule 2.12 hereto, SLA is neither a
party to nor subject to any written:
(i) pension, profit sharing, bonus, retirement, stock
option, stock purchase or other plan providing for deferred or
other compensation to employees or any other employee benefit
plan (other than as set forth in Schedule 2.18 hereto), or any
Contract with any labor union;
(ii) employment or consultation agreement, or other
compensation Contract, commitment or arrangement, which is not
terminable on notice of 30 days' or less by SLA without
penalty or other financial obligation (and, except for
contracts listed on Schedule 2.12, no officer or employee of
SLA receives total salary, bonus and other compensation from
SLA of $30,000.00 or more per annum).
(iii) Contract containing covenants or agreements
limiting the freedom of SLA or any of its employees to compete
in any line of business presently conducted by SLA with any
Person or to compete in any such line of business in any area;
<PAGE> 29
(iv) Contract with the Sellers or with any affiliate
or relative of the Sellers (except for any Contract disclosed
in Schedule 2.12 pursuant to clauses (ii) or (iii) of this
Section 2.12(a);
(v) Contract relating to or providing for loans to
officers, directors, employees or Affiliates of SLA;
(vi) Contract under which SLA has advanced or loaned,
or is obligated to advance or loan, funds to any Person;
(vii) Contract relating to the incurrence, assumption
or guarantee of any indebtedness, obligation or liability (in
respect of money or funds borrowed), or otherwise pledging,
granting a security interest in or placing a Lien on any asset
of SLA;
(viii) guarantee or endorsement of any obligation;
(ix) Contract under which SLA is a lessee of or holds
or operates any property, real or Personal, owned by any other
party, except for any lease of real or Personal property under
which the aggregate annual rental payments do not exceed
$7,500.00;
(x) Contract pursuant to which SLA is lessor of or
permits any third party to hold or operate any property, real
or Personal, owned or controlled by SLA;
(xi) assignment, license, indemnification or Contract
with respect to any intangible property (including, without
limitation, any Proprietary Rights (as defined in Section
12.3));
(xii) warranty Contract with respect to its services
rendered (or to be rendered) or its products sold or leased;
(xiii) Contract which prohibits, restricts or limits
in any way the payment of dividends or distributions by SLA;
(xiv) Contract under which it has granted any Person
any registration rights (including piggyback rights) with
respect to any securities;
(xv) Contract for the purchase, acquisition or supply
of inventory and other property and assets, whether for resale
or otherwise in excess of $7,500.00;
(xvi) Contracts with independent agents, brokers,
dealers or distributors;
(xvii) sales, commissions, advertising or marketing
Contracts;
<PAGE> 30
(xviii) Contracts providing for "take or pay" or
similar unconditional purchase or payment obligations;
(xix) Contracts with Persons with which, directly or
indirectly, a Seller also has a Contract;
(xx) Contract with a hospital, physician or other
health care provider or Person pursuant to which the cost of
providing health care services to the patients covered by such
Contract is assumed in whole or in part by such provider; or
(xxi) any other Contract which is material to SLA's
operations or business prospects, except those which (x) were
made in the ordinary course of business, (y) are terminable on
30 days' or less notice by SLA without penalty or other
financial obligation, and (z) in each case, involve aggregate
payments by or to SLA of $7,500.00 or less.
(b) To the best of the Seller's knowledge no consent of any
party to any Contract is required in connection with the execution,
delivery or performance of this Agreement, or the consummation of the
transactions contemplated hereby.
(c) To the best of the Sellers' knowledge, SLA has performed
in all material respects all obligations required to be performed by it
and is not in default in any respect under or in breach of nor in
receipt of any claim of default or breach under any Contract to which
SLA is subject (including without limitation all performance bonds,
warranty obligations or otherwise); no event has occurred which with
the passage of time or the giving of notice or both would result in a
default, breach or event of non-compliance under any material Contract
to which SLA is subject (including without limitation all performance
bonds, warranty obligations or otherwise); SLA does not have any
present expectation or intention of not fully performing all such
obligations; and SLA does not have any knowledge of any breach or
anticipated breach by the other parties to any such Contract to which
it is a party.
(d) Oral Arrangements. Other than as set forth on Schedule
2.12 and the supplement provided thereto, there are no material oral
arrangements of SLA known to Sellers.
2.13 True and Complete Copies. Copies of all Contracts and documents
delivered and to be delivered hereunder by the Sellers or SLA, to the best of
the Sellers' knowledge, are and will be true and complete copies of such
agreements, contracts and documents.
2.14 Title and Related Matters.
(a) To the best of the Sellers' knowledge, SLA has good and
marketable title to all of the properties and assets reflected in the
balance sheet for the fiscal year ended July 31, 1996 included in the
Financial Statements or acquired after the date thereof, free
<PAGE> 31
and clear of all Liens, except (i) statutory Liens not yet delinquent,
(ii) such imperfections or irregularities of title, Liens, easements,
charges or encumbrances as do not detract from or interfere with the
present use of the properties or assets subject thereto or affected
thereby, otherwise impair present business operations at such
properties; or do not detract from the value of such properties and
assets, taken as a whole, or (iii) as reflected in the balance sheet
for the fiscal year ended July 31, 1996 included in Financial
Statements.
(b) SLA owns, and will on the Closing Date own, good and
marketable title to all the material personal property and assets,
tangible or intangible, used in its business, except as to those assets
leased all of which leases are in good standing and no party is in
material default thereunder. To the Sellers' best knowledge, except as
disclosed in this Agreement, none of the assets belonging to or held by
SLA is or will be on the Closing Date subject to any (i) Contracts of
sale or lease, or (ii) Liens. All machinery and equipment currently
used by SLA in the conduct of its business is in operating condition
and repair, ordinary wear and tear expected.
(c) Except as disclosed herein, there has not been since July
31, 1996, and will not be prior to the Closing Date, any sale, lease,
or any other disposition or distribution by SLA of any of its assets or
properties and any other assets now owned by it, except transactions in
the ordinary and regular course of business or as otherwise consented
to by the Purchaser. To the best of the Sellers' knowledge, after the
Closing, SLA, as the wholly-owned subsidiary of the Purchaser, will
own, or have the right to use, all properties and assets that are
currently used in connection with the business of the Sellers, with the
same rights and in the same manner that they were used prior to the
Closing Date.
(d) Schedule 2.14 attached hereto sets forth a description of
all real and material personal property owned or leased by SLA.
2.15 Litigation. Except as set forth on Schedule 2.15, there is no
Claim (as defined in Section 12.3) pending or, to the best knowledge of the
Sellers and SLA, threatened against either the Sellers or SLA which, if
adversely determined, would have a Material Adverse Effect on SLA. Nor is there
any Order outstanding against either the Sellers or SLA having, or which,
insofar as can reasonably be foreseen, in the future may have, a Material
Adverse Effect on SLA.
2.16 Tax Matters.
(a) SLA has filed all federal, state, and local tax reports,
returns, information returns and other documents (collectively, the
"Tax Returns") required to be filed with any federal, state, local or
other taxing authorities (each a "Taxing Authority", collectively, the
"Taxing Authorities") in respect of all relevant taxes, including
without limitation income, premium, gross receipts, net proceeds,
alternative or add-on minimum, ad valorem, value added, turnover,
sales, use, property, personal property (tangible and intangible),
stamp, leasing, lease, user, excise, duty, franchise, transfer,
license, withholding, payroll, employment, fuel, excess profits,
occupational and interest
<PAGE> 32
equalization, windfall profits, severance, and other charges (including
interest and penalties) (collectively, the "Taxes") and in accordance
with all tax sharing agreements to which any Seller or SLA may be a
party. All Taxes required to be paid for all periods prior to and
including the Closing Date have been paid, including any of SLA's Taxes
that may be due or claimed to be due as a result of the consummation of
the transactions contemplated by this Agreement. All Taxes which are
required to be withheld or collected by SLA have been duly withheld or
collected and, to the extent required, have been paid to the proper
Taxing Authority or properly segregated or deposited as required by
applicable laws. There are no Liens for Taxes upon any property or
assets of SLA except for liens for Taxes not yet due and payable.
Neither the Sellers nor SLA has executed a waiver of the statute of
limitations on the right of the Internal Revenue Service or any other
Taxing Authority to assess additional Taxes or to contest the income or
loss with respect to any Tax Return. The basis of any depreciable
assets, and the methods used in determining allowable depreciation
(including cost recovery), is correct and in compliance with the
Internal Revenue Code of 1986, as amended and the regulations
thereunder (the "Code").
(b) No audit of SLA or SLA's Tax Returns by any Taxing
Authority is currently pending or to the best of the Sellers' knowledge
threatened, and no issues have been raised by any Taxing Authority in
connection with any Tax Returns. No material issues have been raised in
any examination by any Taxing Authority with respect to SLA which
reasonably could be expected to result in a proposed deficiency for any
other period not so examined, and there are no unresolved issues or
unpaid deficiencies relating to such examinations. The items relating
to the business, properties or operations of SLA on the Tax Returns
filed by or on behalf of SLA for all taxable years (including the
supporting schedules filed therewith), available copies of which have
been supplied to the Purchaser, in all material respects state
accurately the information requested with respect to SLA and such
information was derived from the books and records of SLA.
(c) SLA has not made nor has become obligated to make, nor
will, as a result of any event connected with the Closing, become
obligated to make, any "excess parachute payment" as defined in Section
280G of the Code (without regard to subsection (b)(4) thereof).
(d) The Sellers shall cause SLA to file all Tax Returns and
reports with respect to Taxes which are required to be filed for Tax
periods ending on or before the Closing Date (a "Pre-Closing Tax
Return"), and SLA shall pay all Taxes due in respect of such
Pre-closing Tax Returns to the appropriate Taxing Authority; and SLA
shall pay all costs associated with the preparation thereof.
2.17 Compliance with Law and Applicable Government Regulations. To the
best of the Sellers' knowledge, SLA is presently complying in respect of its
operations, equipment, practices, real property, plants, laboratories,
structures, and other property, and all other aspects of its business and
operations, with all applicable Regulations and Orders, including, but not
limited to, applicable Health Care Laws (as defined in Section 12.3), all
applicable Regulations relating
<PAGE> 33
to the safe conduct of business, environmental protection, quality and labeling,
antitrust, Taxes, consumer protection, equal opportunity, discrimination,
health, sanitation, fire, zoning, building and occupational safety, where such
failure or failures would individually or in the aggregate have a Material
Adverse Effect. There are no Claims pending, nor to the best knowledge of SLA
are there any Claims threatened, nor have the Sellers received any written
notice, regarding any violations of any Regulations and Orders enforced by any
Authority claiming jurisdiction over SLA, including any requirement of OSHA or
any pollution and environmental control agency (including air and water).
(a) Schedule 2.17(a) attached hereto sets forth all required
permits, licenses, provider numbers, orders, franchises and approvals
(collectively, "Permits") from all Federal, state, local and foreign
governmental regulatory bodies held by SLA. The Permits listed on
Schedule 2.17(a) are the only Permits that are required for SLA to
conduct its business as presently conducted, except for those the
absence of which would not have any Material Adverse Effect on the
assets, financial condition, results of operations or future prospects
of SLA. To the best of the Sellers' knowledge, each such Permit is in
full force and effect and, to the best of the knowledge of SLA, no
suspension or cancellation of any such Permit is threatened and there
is no basis for believing that such Permit will not be renewable upon
expiration.
(b) SLA has all required licenses to provide health care
services in the jurisdictions set forth in Schedule 2.17(b) hereto,
which such licenses are all those necessary to conduct the business of
SLA in the jurisdictions in which SLA presently operates. Schedule
2.17(b) also sets forth a true and complete description of the status
of each such license. Except as set forth on Schedule 2.17(b), neither
any Seller nor SLA is aware of any event, transaction, correspondence
or circumstance which would have, or could foreseeably have, a Material
Adverse Effect on one or more of such licenses.
2.18 ERISA and Related Matters.
(a) Benefit Plans; Obligations to Employees. Except as set
forth in Schedule 2.18 hereto, neither SLA, nor any ERISA Affiliate of
SLA, is a party to or participates in or has any liability or
contingent liability with respect to:
(i) any "employee welfare benefit plan" or "employee
pension benefit plan" or "multi-employer plan" (as those terms
are respectively defined in Sections 3(1), 3(2) and 3(37) of
ERISA); or
(ii) any retirement or deferred compensation plan,
incentive compensation plan, stock plan, unemployment
compensation plan, vacation pay, severance pay, bonus or
benefit arrangement, insurance or hospitalization program or
any other fringe benefit arrangements for any employee,
director, consultant or agent, whether pursuant to contract,
arrangement, custom or informal understanding, which does not
constitute an "employee benefit plan" (as defined in Section
3(3) of ERISA).
<PAGE> 34
For purposes of this Section, the term "ERISA
Affiliate" shall mean any trade or business, whether or not
incorporated, that together with SLA would be deemed a "single
employer" within the meaning of Section 4001(b)(i) of ERISA.
(b) Plan Documents and Reports. A true and correct copy of
each of the Benefit Plans listed on Schedule 2.18, and all contracts
relating thereto, or to the funding thereof, including, without
limitation, all trust agreements, insurance contracts, investment
management agreements, subscription and participation agreements and
record keeping agreements, each as in effect on the date hereof, has
been supplied to the Purchaser. In the case of any Benefit Plan that is
not in written form, the Purchaser has been supplied with an accurate
description of such Benefit Plan as in effect on the date hereof. A
true and correct copy of the three most recent annual reports and
accompanying schedules, the three most recent actuarial reports, and
the most recent summary plan description and Internal Revenue Service
determination letter with respect to each such Benefit Plan, to the
extent applicable, and a current schedule of assets (and the fair
market value thereof assuming liquidation of any asset which is not
readily tradeable) held with respect to any funded Benefit Plan has
been supplied to the Purchaser by SLA, and there have been no material
changes in the financial condition in the respective Plans from that
stated in the annual reports and actuarial reports supplied.
(c) Compliance with Laws; Liabilities. As to all Benefit
Plans, except as otherwise specified on Schedule 2.18, SLA is in
compliance in all material respects with the terms of all Benefit plans
and every Benefit Plan is in compliance with all of the requirements
and provisions of ERISA and all other laws and regulations applicable
thereto, including without limitation the timely filing of all annual
reports or other filings required with respect to such Benefit Plans.
None of the assets of any Benefit Plan are invested in employer
securities or employer real property, as those terms are defined in
Section 407(d) of ERISA. There have been no "prohibited transactions"
(as described in Section 406 of ERISA or Section 4975 of the Code) with
respect to any Benefit Plan and neither SLA nor any ERISA Affiliate of
SLA has otherwise engaged in any prohibited transaction. There has been
no "accumulated funding deficiency" as defined in Section 302 of ERISA,
nor has any reportable event as defined in Section 4043(b) of ERISA
occurred with respect to any Benefit Plan. Actuarially adequate
accruals for all obligations or contingent obligations under the
Benefit Plans are reflected in SLA's balance sheet for the fiscal year
ended December 31, 1995 included in Financial Statements provided to
the Purchaser and such obligations include a pro rata amount of the
contributions which would otherwise have been made in accordance with
past practices for the plan years which include the Closing Date.
(d) Prior to the Closing Date, SLA shall take the necessary
steps to approve termination of SLA's Pension Benefit Plan. After the Closing
Date, the Sellers, who are the Trustees of the Pension Benefit Plan, will
commence winding up and terminating such plan upon Internal Revenue Service
approval of paying out all plan account balances to the participants (or to the
participants IRA's). Neither Purchaser, nor SLA after the Closing Date, shall
have any
<PAGE> 35
rights in the SLA's Pension Benefit Plan, trust accounts, or proceeds therefrom,
which accounts shall belong solely to the applicable employee.
2.19 Intellectual Property.
(a) Except as set forth on Schedule 2.19, SLA has no trade
name, service mark, patent, copyright or trademark related to its
business.
(b) SLA has the right to use each Proprietary Right listed in
Schedule 2.19, and except as otherwise set forth therein, each of such
Proprietary Right is, and will be on the Closing Date, free and clear
of all royalty obligations and Liens. There are no Claims pending, or
to the best knowledge of the Sellers, threatened, against the Sellers
and their use of any of the Proprietary Rights listed on Schedule 2.19
infringes the rights of any Person. The Sellers have no knowledge of
any conflicting use of any of such Proprietary Rights.
(c) SLA is not a party in any capacity to any franchise,
license or royalty agreement respecting any Proprietary Right and there
is no conflict with the rights of others in respect to any Proprietary
Right now used in the conduct of its business.
(d) Internal Software Applications.
(i) Licensed Software. To the best of the Sellers'
knowledge, the current software applications used by SLA in
the operation of its business (the "Software") to the extent
it is licensed from any third party licensor or constitutes
"off-the-shelf" software, is held by SLA legitimately. To the
best of the Sellers' knowledge, all of SLA's computer hardware
has legitimately-licensed software installed therein, to the
extent licensing is required.
2.20 Environmental Matters. Except as disclosed in Schedule 2.20: To
the Sellers' best knowledge, (a) neither SLA's business nor the operation
thereof violates any applicable Environmental Law (as defined in Section 12.3)
in effect as of the date hereof and no condition or occurrence which, with
notice or the passage of time or both, would constitute a violation of any
Environmental Law; (b) SLA is in possession of all Environmental Permits (as
defined in Section 12.3) required under any applicable Environmental Law for the
conduct or operation of SLA's business (or any part thereof), and SLA is in full
compliance with all of the requirements and limitations included in such
Environmental Permits; (c) SLA has not stored or used any pollutants,
contaminants or hazardous or toxic wastes, substances or materials on or at any
of its property or facilities except for inventories which are used or to be
used in the ordinary course of SLA's business (which inventories have been
sorted or used in accordance with all applicable Environmental Permits and all
Environmental Laws, including all so-called "Right to Know" laws); (d) SLA has
not received any notice from any Authority or any private Person that SLA's
business or the operation of any of its facilities is in violation of any
Environmental Law or any Environmental Permit or that it is responsible (or
potentially responsible) for the cleanup of any pollutants, contaminants, or
hazardous or toxic wastes, substances or materials at, on or beneath
<PAGE> 36
any of SLA's property, or at, on or beneath any land adjacent thereto or in
connection with any waste or contamination site; (e) SLA is not the subject of
any Federal, state, local, or private Claim involving a demand for damages or
other potential liability with respect to a violation of Environmental Laws or
under any common law theories relating to operations or the condition of any
facilities or property (including underlying groundwater) owned, leased, or
operated by SLA; (f) SLA has not buried, dumped, disposed, spilled or released
any pollutants, contaminants or hazardous or wastes, substances or materials on,
beneath or adjacent to any of its property or any property adjacent thereto; (g)
no by-products of any manufacturing or mining process employed in the operation
of SLA's business which may constitute pollutants, contaminants or hazardous or
toxic wastes, substances or materials under any Environmental Law are currently
stored or otherwise located on any of SLA's property; (h) no property now or
previously owned, leased or operated by SLA, is listed or proposed for listing
on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any
other federal or state list of sites requiring investigation or clean-up; (i)
there are no underground storage tanks, active or abandoned, including petroleum
storage tanks, on or under any property now or previously owned, leased or
operated by SLA; (j) SLA has not directly transported or directly arranged for
the transportation of any Hazardous Material to any location which is listed or
proposed for listing on the National Priories List pursuant to CERCLA, on the
CERCLIS or on any for listing or on any federal or state list or which is the
subject of federal, state or local enforcement actions or other investigations
which may lead to material against SLA for any remedial work, damage to natural
resources or personal injury, including Claims under CERCLA; and (k) there are
no polychlorinated biphenyls, radioactive materials or friable asbestos present
at any property now or previously owned or leased by SLA. To the Sellers' best
knowledge, SLA has timely filed all reports required to be filed with respect to
all of its property and facilities and has generated and maintained all required
data, documentation and records under all applicable Environmental Laws.
2.21 Dealings with Affiliates. Schedule 2.21 hereto sets forth a
complete list, including the parties, of all existing written agreements and
arrangements between SLA and any one or more Affiliates of SLA.
2.22 Banking Arrangements. Schedule 2.22 attached hereto sets forth the
name of each bank in or with which SLA, as of the Closing Date, has an account,
credit line or safety deposit box, and a brief description of each such account,
credit line or safety deposit box, including the names of all Persons currently
authorized as of the Closing Date, to draw thereon or having access thereto. SLA
has no material liability or obligation relating to funds or money borrowed by
or loaned to SLA (whether under any credit facility, line of credit, loan,
indenture, advance, pledge or otherwise).
2.23 Insurance. Schedule 2.23 attached hereto sets forth a list and
brief description, including dollar amounts of coverage, of all policies of
fire, liability, professional liability and other forms of insurance held by SLA
as of the date hereof. To the best of the Sellers' knowledge, such policies are
valid, outstanding and enforceable policies, as to which premiums have been paid
currently. Neither SLA nor any of the Sellers know of any state of facts, or of
the occurrence of any event which might reasonably (a) form the basis for any
Claim against
<PAGE> 37
SLA not fully covered by insurance for liability on account of any express or
implied warranty or tortious omission or commission, or (b) result in material
increase in insurance premiums of SLA.
2.24 Consents. Schedule 2.24, annexed hereto, sets forth a complete
list of consents of governmental and other regulatory agencies or authorities,
foreign or domestic, of which Sellers are aware are required to be received by
or on the part of SLA and the Sellers to enable SLA or the Sellers to enter into
and carry out this Agreement in all material respects. All such requisite
consents have been, or prior to the Closing will have been, obtained.
2.25 Investment Representations. In the event, in connection with this
Agreement or any agreement or transaction contemplated hereby, AmeriPath offers
or sells, or is deemed to offer or sell, any securities of AmeriPath to a Seller
(including AmeriPath Stock pursuant to Section 1.3), then each Seller hereby
represents and warrants to AmeriPath as follows:
(a) Each Seller has been offered, and up to the Closing Date
and the time(s) of issuance of the AmeriPath Stock shall be offered,
the opportunity to ask questions of, and receive answers from,
AmeriPath and its Subsidiaries, and the Sellers have been given full
and complete access to all available information and data relating to
the business and assets of AmeriPath and its Subsidiaries, have
obtained such additional information about AmeriPath and its
Subsidiaries which the Sellers have deemed necessary in order to
evaluate the opportunities, both financial and otherwise, with respect
to AmeriPath and, except as set forth herein, have not relied on any
representation, warranty or other statement concerning the Purchaser
and its Subsidiaries in their evaluation of the decision to consummate
the transactions contemplated herein. On the basis of the foregoing,
each Seller is familiar with the operations, business plans and
financial condition of AmeriPath.
(b) Each Seller understands that he must bear the economic
risk of the AmeriPath Stock, if and when issued to such Seller, for an
indefinite period of time because, except as provided in this
Agreement, (i) each Seller understands that AmeriPath proposes to issue
and deliver the shares of AmeriPath Stock issuable in accordance with
this Agreement, without compliance with the registration requirements
of the Securities Act, that for such purpose AmeriPath will rely upon
the representations, warranties, covenants and agreements contained
herein, as well as any additional representations, warranties,
covenants, agreements and certifications reasonably requested by
AmeriPath to be delivered by the Sellers at such time(s) of issuance of
the AmeriPath Stock; and that such noncompliance with registration is
not permissible unless such representations and warranties are correct
and such covenants and agreements are performed at and as of the time
of issuance; (ii) each Seller understands that, under existing rules of
the SEC, there are substantial restrictions in the transferability of
his shares of AmeriPath Stock; his shares of AmeriPath Stock may be
transferred only if registered under the Securities Act or if an
exemption from such registration is available; it is possible that
Sellers may not be able to avail themselves of the provisions of Rule
144 promulgated by the SEC under the Securities Act with respect to the
transfer of such shares; (iii) the AmeriPath Stock may not be sold,
transferred, pledged, or otherwise disposed of except pursuant to
<PAGE> 38
Purchaser's Shareholders Agreement (for so long as same remains in
effect), and may not be sold without an opinion of counsel delivered
and reasonably satisfactory to AmeriPath that registration under the
Securities Act or any applicable state securities law is not required;
and (iv) AmeriPath neither has an obligation to register a sale of the
AmeriPath Stock held by any Seller nor has it agreed to do so in the
future.
(c) Each Seller is an "accredited investor", as such term is
defined in Rule 501 of Regulation D promulgated under the Securities
Act in that each Seller, as of the date of this Agreement, either (a)
(either individually or jointly with such Seller's spouse) has a net
worth in excess of $1,000,000; or (b) had an individual income in
excess of $200,000 in each of the two most recent years or joint income
with such Seller's spouse in excess of $300,000 in each of those years,
and reasonably expects reaching the same income level in the current
year.
(d) Each Seller is a sophisticated investor familiar with the
type of risks inherent in the acquisition of securities such as the
shares of AmeriPath Stock and such Seller's financial position is such
that such Seller can afford to retain his shares of AmeriPath Stock for
an indefinite period of time without realizing any direct or indirect
cash return on such Seller's investment.
(e) Each Seller received this Agreement and first learned of
the transactions contemplated hereby in Florida. Each Seller executed
and will execute all documents contemplated hereby in Florida, and
intends that the laws of Florida govern this transaction. Each Seller
is a resident of Florida.
(f) Each Seller understands, agrees and acknowledges that the
AmeriPath Stock has not been registered under the Florida Securities
Act or the Securities Act in reliance upon exemption provisions
contained therein which AmeriPath believes are available. Any sale made
pursuant to such exemption provisions is voidable by the purchaser
within three business days after the first tender of consideration is
made by the purchaser to the issuer, an agent of the issuer or an
escrow agent. A withdrawal within such three-day period will be without
any further liability to any Person (except that the Purchase Price
attributable to such withdrawal must be returned to the Purchaser). To
accomplish this withdrawal, a purchaser need only send a letter or
telegram to AmeriPath at the address set forth herein, indicating his
or her intention to withdraw. Such letter or telegram should be sent
and postmarked prior to the end of the aforementioned third business
day. It is advisable to send such letter by certified mail, return
receipt requested, to ensure that it is received and also to evidence
the date it was mailed. If the request is made orally, in Person or by
telephone, to a representative of AmeriPath, a written confirmation
that the request has been received should be requested.
(g) Each Seller is acquiring his shares of AmeriPath Stock for
such Seller's own account and not with a view to, or for sale in
connection with, the distribution thereof within the meaning of the
Securities Act.
<PAGE> 39
(h) Each Seller understands that the certificates evidencing
his shares of AmeriPath Stock, when and if issued, will bear
appropriate restrictive legends.
2.26 Accounts Receivable; Inventories. The accounts receivable of SLA
reflected on Schedule 2.26 attached hereto on the date hereof are valid, genuine
and subsisting, arise out of bona fide sales and deliveries of goods,
performance of services or other business transactions and are not subject to
defenses, set-offs or counterclaims. Since December 31, 1995, supplies have been
purchased by SLA in the ordinary course of business, consistent with anticipated
seasonal requirements, and the volumes of purchases thereof and orders therefor
have not been reduced or otherwise changed in anticipation of the transactions
contemplated by this Agreement. SLA is not aware of any material adverse
conditions affecting the supply of materials available to SLA, and, to the best
knowledge of SLA, the consummation of the transactions contemplated hereby will
not adversely affect any such supply.
2.27 Brokerage. Neither SLA nor any Seller has employed any broker,
finder, advisor, consultant or other intermediary in connection with this
Agreement or the transactions contemplated by this Agreement who is or might be
entitled to any fee, commission or other compensation from SLA or any Seller, or
from the Purchaser or its Affiliates, upon or as a result of the execution of
this Agreement or the consummation of the transactions contemplated hereby.
2.28 Improper and Other Payments. Except as set forth on Schedule 2.28
hereto, to the Sellers' best knowledge, (a) neither SLA, any director, officer,
employee thereof, nor, to SLA's knowledge, any agent or representative of SLA
nor any Person acting on behalf of any of them, has made, paid or received any
unlawful bribes, kickbacks or other similar payments to or from any Person or
Authority, (b) no improper foreign payment (as defined in the Foreign Corrupt
Practices Act) has been made, and (c) the internal accounting controls of SLA
are believed by SLA's management to be adequate to detect any of the foregoing
acts by SLA under current circumstances.
2.29 Participation in Audits. Except as set forth in Schedule 2.29, SLA
has not been informed of any Recoupment Claims (as hereinafter defined) arising
in connection with audits or reviews conducted by Medicaid, Medicare or private
insurance companies. To the best knowledge of SLA and the Sellers there is no
basis for any Recoupment Claims based upon cost reports, claims or bills
submitted or to be submitted in connection with services rendered by SLA prior
to the Closing Date. For purposes of this Section 2.29 the term "Recoupment
Claim" shall mean any recoupment or overpayment, set-off, penalty or fine,
pending or to the knowledge of SLA and the Sellers threatened by any third-party
payor or governmental authority having jurisdiction over SLA for amounts arising
from or related to payments to SLA for services rendered prior to the Closing.
2.30 Health Care Laws & Regulations.
(a) Fraud and Abuse. Except as set forth on Schedule 2.30(a),
to the best of the Sellers' and SLA's knowledge, SLA and its officers,
directors, employees, shareholders and providers, have not
intentionally engaged in any activities which are
<PAGE> 40
prohibited under federal Medicaid statues, 42 U.S.C. Section 1320a-7a
and 7b, or the regulations promulgated pursuant to such statutes or
related state or local statutes or regulations or which are prohibited
by rules of professional conduct or which otherwise could constitute
fraud, including but not limited to the following: (i) making or
causing to be made a false statement or representation of a material
fact in any application for any benefit or payment; (ii) making or
causing to be made any false statement or representation of a material
fact for use in determining rights to any benefit or payment; (iii)
failing to disclose knowledge by a claimant of the occurrence of any
event materially affecting the initial or continued right to any
benefit or payment on its behalf or on behalf of another, with intent
to secure such benefit or payment fraudulently; and (iv) soliciting,
paying or receiving any remuneration (including any kickback, bribe, or
rebate), directly or indirectly, overtly or covertly, in cash or in
kind or offering to pay such enumeration (a) in return for referring an
individual to a Person for the furnishing or arranging for the
furnishing of any item or service for which payment may be made in
whole or in part by Medicare or Medicaid, or (b) in return for
purchasing, leasing, or ordering or arranging for or recommending
purchasing, leasing, or ordering any good, facility, service, or item
for which payment may be made in whole or in part by Medicaid; subject,
in the case of (iv) to the lack of clarity in the law relating to the
marketing of Medicare risk products by brokers.
(b) Third-Party Payors. To the best of the Sellers' knowledge,
all Contracts with third-party payors were entered into by SLA in the
ordinary course of business. To the best of the Sellers' knowledge, SLA
will have made available to the Purchaser, as of the Closing Date, an
accurate and complete list of all third-party payors which have
agreements with SLA (as set forth on Schedule 2.30(b)), together with
accurate and complete copies of all such Contracts. Except as set forth
on Schedule 2.30(b), to the best of the Sellers' knowledge, SLA is in
compliance with each third-party payor's Contract, and SLA has properly
charged and billed in accordance with the terms of those Contracts,
including, where applicable, billing and collection of all deductibles
and co-payments.
(c) Compliance with Medicare and Medicaid Programs. To the
best of the Sellers' actual knowledge, SLA has timely and accurately
filed all requisite claims and other reports required to be filed in
connection with all state and federal Medicare and Medicaid programs in
which SLA participates due on or before the Closing Date except to the
extent that the failure to file such claims and reports would not
result in a Material Adverse Effect on SLA. Except as set forth on
Schedule 2.30(c) hereto, there are no Claims pending or, to SLA's
knowledge, threatened or scheduled before any Authority, including
without limitation, any intermediary, carrier, the Administrator of the
Health Care Financing Administration, the Florida Department of Health
and Rehabilitative Services, the Agency for Health Care Administration
or any other state or federal agency with respect to any Medicare and
Medicaid claim filed by SLA on or before the Closing Date, or program
compliance matters, which would have a Material Adverse Effect on SLA,
or its assets, the operations or utility thereof, or the consummation
of the transactions contemplated hereby. SLA has delivered to the
Purchaser accurate and
<PAGE> 41
complete copies of any Claims, actions or appeals listed on Schedule
2.30(c). Except for routinely scheduled reviews pursuant to SLA's
Medicare and Medicaid Contracts, no valid review or program integrity
review related to SLA has been conducted by any Authority in connection
with the Medicare or Medicaid programs and no such review is scheduled,
or to SLA's knowledge, pending or threatened against or affecting SLA,
its business, assets, or the consummation of the transactions
contemplated hereby.
(d) Rate Limitations and Rates. To the best of the Sellers'
knowledge, each facility currently operated by SLA charges rates and
accordingly bills for services which are legal and proper, and SLA's
standard and Medicare rates are set forth on Schedule 2.30(d). Certain
reimbursement rates established by third-party payors are subject to
retrospective adjustment, which adjustments to the best of the Sellers'
knowledge, are set forth on said Schedule 2.30(d).
(e) Reimbursement Documentation. To the best of the Sellers'
knowledge, SLA has filed when due any and all cost reports and other
documentation and reports, if any, required to be filed by third-party
payors and governmental agencies in material compliance with applicable
contractual provisions and/or laws, regulations and rules.
(f) Patient Referrals. No Person having a "financial
relationship" with SLA, as that term is defined in 42 U.S.C. Section
1395nn, is in a position, directly or indirectly, to refer patients or
services to SLA, other than referrals which comply with, or fall within
an exception of, the requirements of 42 U.S.C. Section 1395nn and the
regulations promulgated pursuant thereto.
2.31 Financial Condition at Closing. At and as of Closing, SLA shall
have cash on hand equal to $50,000.00.
2.32 Disclosure. Neither this Agreement nor any of the exhibits,
attachments, written statements, documents, certificates or other items prepared
for or supplied to the Purchaser by or on behalf of the Sellers or SLA with
respect to the transactions contemplated hereby contains any untrue statement of
a material fact or omits a material fact necessary to make each statement
contained herein or therein not misleading. Any document or item disclosed by
Sellers to Purchaser in this Agreement, or in a Schedule or Exhibit hereto,
shall be deemed disclosed for all purposes including other sections of the
Agreement which may require disclosure of such document or item. Each Seller
makes the representations and warranties in this Article II as to himself and
SLA. Accordingly each Seller is only individually responsible for the
representations made as they relate to each such Seller(s) and is jointly and
severally responsible for the representations made as they relate to SLA, but is
not responsible for any inaccuracy of the representations and warranties made by
the other Seller(s), but rather solely such other Seller(s) shall be responsible
for the inaccurate representation or warranty that related to him (them).
<PAGE> 42
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to the Sellers as follows:
3.1 Corporate Organization, etc. The Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware with full corporate power and authority to carry on its business as it
is now being conducted and to own, operate and lease its properties and assets.
The Purchaser is duly qualified or licensed to do business in good standing in
every jurisdiction in which the conduct of its business, and the ownership or
lease of its properties, require it to be so qualified or licensed, and the
failure to be so qualified or licensed would have a material adverse effect on
its business. True, complete and correct copies of Purchaser's and AmeriPath
Florida's charters and by-laws, as presently in effect, are attached as Exhibit
3.1.
3.2 Subsidiaries. Other than the Subsidiaries of the Purchaser listed
in Schedule 3.2 hereto, the Purchaser has no Subsidiaries.
3.3 Authorization, Etc. The Purchaser has full corporate power and
authority to enter into this Agreement and to carry out the transactions
contemplated hereby. The Board of Directors of the Purchaser has duly authorized
the execution, delivery and performance of this Agreement, the Contingent Notes
and the other agreements and transactions contemplated hereby, and no other
corporate proceedings on its part are necessary to authorize this Agreement and
the transactions contemplated hereby. Upon execution and delivery of this
Agreement by the parties hereto this Agreement shall, and upon issuance of the
Contingent Notes in accordance with the provisions hereof the Contingent Notes
shall, constitute legal, valid and binding obligations of the Purchaser,
enforceable against the Purchaser in accordance with their respective terms
except as may otherwise be limited under any applicable state or federal
bankruptcy laws or laws affecting creditors rights generally.
3.4 No Violation. The execution, delivery and performance by the
Purchaser of this Agreement, and all other agreements contemplated hereby, and
the fulfillment of and compliance with the respective terms hereof and thereof
by the Purchaser, do not and will not (a) conflict with or result in a material
breach of the terms, conditions or provisions of, (b) constitute a material
default or event of default under (with due notice, lapse of time or both), (c)
give any third party the right to accelerate any material obligation under, (d)
result in a material violation of, or (e) require any authorization, consent,
approval, exemption or other action by or notice to any Authority pursuant to,
the certificate of incorporation or by-laws of the Purchaser, or any Regulation
to which the Purchaser is subject, or any Contract or Order to which the
Purchaser or its properties are subject. The Purchaser will comply with all
applicable Regulations and Orders imposed upon it in connection with its
execution, delivery and performance of this Agreement and the transactions
contemplated hereby.
<PAGE> 43
3.5 Governmental Authorities; Consents. The Purchaser has complied in
all material respects with all applicable Regulations in connection with its
execution, delivery and performance of this Agreement and the agreements and
transactions contemplated hereby. The Purchaser is not required to submit any
notice, report, or other filing with, or obtain any consent from, any Authority
in connection with its execution or delivery of this Agreement or the
consummation of the transactions contemplated hereby. To Purchaser's knowledge,
no authorization, consent, approval, exemption or notice is required to be
obtained by the Purchaser from any Authority or from any other party in
connection with the execution, delivery, and performance of this Agreement and
the agreements and transactions contemplated hereby.
3.6 Issuance of AmeriPath Stock. All shares of AmeriPath Stock required
to be issued by AmeriPath to the Sellers, in accordance with the terms and
subject to the conditions set forth in this Agreement, shall, upon issuance and
delivery, be duly authorized, validly issued, fully paid and non-assessable and
free from all Liens or contractual restrictions or limitations whatsoever,
except as set forth in this Agreement and Purchaser's Shareholders' Agreement or
as otherwise created by a Seller.
3.7 Additional Purchaser Representations: Books and Records; Financial
Statements. To the best of Purchaser's knowledge, the Purchaser Financial
Statements (as defined below) fairly present its financial position, business
and operations, and are maintained in accordance with reasonable business
standards and do not fail to reflect any material activity, charge, expense,
income or other action or attribute of the Purchaser. True and complete copies
of the Purchaser's financial statements for the year ended December 31, 1995,
and the six (6) months ended June 30, 1996 (collectively, the "Purchaser
Financial Statements") have been delivered to the Sellers. Such financial
statements have been prepared in accordance with generally accepted accounting
principles consistently applied (except for purchase accounting adjustments that
may be required by GAAP) and accurately reflect the Purchaser's business,
operations, financial results, financial position, expenses, incomes, assets and
liabilities and are complete in all material respects as of their respective
dates. There has been no material adverse change to Purchaser's financial
position since the financial statements dated June 30, 1996.
3.8 Compliance. To the best of Purchaser's knowledge, Purchaser has not
failed to comply with any applicable Regulation or Order which could result in a
material adverse effect to its business, operations or financial position.
3.9 Capitalization. Schedule 3.9 hereto sets forth the Purchaser's
authorized, issued and outstanding securities, as well as its outstanding
options with respect to its securities pursuant to Purchaser's stock option
plan, and securities reserved for issuance pursuant to completed acquisitions
each as of the date hereof.
3.10 Litigation. Other than as described in Schedule 3.10, there is no
Claim (as defined in Section 12.3) pending or, to the best knowledge of the
Purchaser, threatened against the Purchaser which, if adversely determined,
would have a material adverse effect on Purchaser. Nor is there any Order
outstanding against the Purchaser having, or which, insofar as can reasonably be
foreseen, in the future may have, a material adverse effect on Purchaser.
<PAGE> 44
3.11 No Additional Seller Representations. Purchaser has been offered
the opportunity to ask questions of, and receive answers from, the Sellers, and
the Purchaser has been given access to available information and data relating
to the business and assets of SLA, has obtained such additional information
about SLA which the Purchaser has deemed necessary in order to evaluate the
opportunities, both financial and otherwise, with respect to SLA and, other than
statements made in the Agreement, has not relied on any representation, warranty
or other statement of Sellers or SLA concerning SLA or the SLA Shares, in its
evaluation of the decision to consummate the transactions contemplated herein.
Purchaser has had an opportunity to review and is familiar with the Contracts of
SLA which SLA and Sellers have provided to Purchaser prior to the Closing Date.
On the basis of the foregoing, to Purchaser's knowledge, it is familiar with the
operations, business, and financial condition of SLA.
3.12 Tax Matters.
(a) Purchaser has filed all Tax Returns required to be filed
with any Taxing Authority in respect of all relevant Taxes and in
accordance with all tax sharing agreements to which any Purchaser may
be a party. There are no Liens for Taxes upon any property or assets of
Purchaser except for liens for Taxes not yet due and payable. The
Purchaser has not executed a waiver of the statute of limitations on
the right of the Internal Revenue Service or any other Taxing Authority
to assess additional Taxes or to contest the income or loss with
respect to any Tax Return.
(b) No audit of Purchaser's Tax Returns by any Taxing
Authority is currently pending or to the best of Purchaser's knowledge
threatened, and no issues have been raised by any Taxing Authority in
connection with any Tax Returns. No material issues have been raised in
any examination by any Taxing Authority with respect to Purchaser which
reasonably could be expected to result in a proposed deficiency for any
other period not so examined, and there are no unresolved issues or
unpaid deficiencies relating to such examinations.
3.13 Dealing with Affiliates. Schedule 3.13 hereto sets forth a
complete list, including the parties, of all current material written agreements
and arrangements between Purchaser and any of its executive officers, directors
or holders of 5% or more of Purchaser's outstanding securities.
<PAGE> 45
3.14 Disclosure. Neither this Agreement nor any of the exhibits,
attachments, written statements, documents, certificates or other items prepared
for or supplied to the Sellers by or on behalf of the Purchaser with respect to
the transactions contemplated hereby contains any untrue statement of a material
fact or omits a material fact necessary to make each statement contained herein
or therein not misleading.
ARTICLE IV
COVENANTS OF THE SELLERS
From the date hereof until the Closing, except in the ordinary course
of business, or as otherwise consented to or approved by the Purchaser in
writing, which consent shall not be unreasonably withheld, SLA covenants and
agrees that it shall act, and the Sellers shall cause SLA to so act or refrain
from acting where required hereinafter, to comply with the following:
4.1 Regular Course of Business. SLA shall operate its business
diligently and in good faith and in the ordinary and usual course, materially
consistent with past management practices; shall maintain all of its respective
material properties in the same order and condition as of the date hereof, shall
maintain (except for expiration due to lapse of time) all material leases and
Contracts in effect without change except as expressly provided herein; shall
materially comply with the provisions of all Regulations and Orders applicable
to SLA and the conduct of its business; shall not cancel, release, waive or
compromise any debt, Claim or right in its favor; shall not alter the rate or
basis of compensation of any of its officers, directors, employees or
consultants; shall maintain insurance and reinsurance coverage as in effect on
the date hereof up to the Closing Date; and shall materially preserve the
business of SLA intact, and use its reasonable best efforts to keep available
for SLA and the Purchaser the services of the officers and employees of SLA, and
to preserve the good will of clients, patients, suppliers and others having
business relations with SLA.
4.2 Amendments. Except as provided in Section 4.9 of this Agreement, no
change or amendment shall be made in the articles of incorporation or by-laws of
SLA. SLA shall not merge with or into or consolidate with any other corporation
or Person, acquire substantially all of the assets of any Person or change the
character of its business.
4.3 Capital Changes; Pledges. Except as contemplated under this
Agreement, SLA shall not issue or sell any shares of its capital stock of any
class or issue or sell any securities convertible into, or options, warrants to
purchase or rights to subscribe to, any shares of its capital stock and SLA
shall not pledge or otherwise encumber any shares of its capital stock.
4.4 Dividends. SLA shall not declare, pay or set aside for payment any
dividend or other distribution in respect of its capital stock, nor shall SLA,
directly or indirectly, redeem, purchase or otherwise acquire any shares of its
capital stock, other than clarifying and documenting the lack of any equity
interest of Mark Mangano, M.D. in SLA.
<PAGE> 46
4.5 Capital and Other Expenditures. SLA shall not make any material
capital expenditures, or commitments with respect thereto.
4.6 Cash and Cash Equivalents. Cash and cash equivalents shall be
preserved, and expended, solely in the ordinary and usual course of business.
4.7 Borrowing. SLA shall not incur, assume or guarantee any
indebtedness, obligations or liabilities not reflected on the Financial
Statements (or the balance sheets included therein), except in the ordinary
course of business or for purposes of consummation of the transactions
contemplated by this Agreement and in such case only after consultation with the
Purchaser.
4.8 Other Commitments. Except as set forth in this Agreement, incurred
or transacted in the ordinary course of business, or permitted in writing by the
Purchaser, SLA shall not enter into any material transaction or make any
commitment or incur any material obligation (including entering into any real
property leases).
4.9 Amendments to Charter. Prior to the Closing, the Sellers shall
cause SLA's articles of incorporation to be amended, among other things, to (i)
change the company's name (by dropping the "P.A." designation and adding
"Inc."); (ii) provide that the company is subject to Section 607 of the Florida
Statutes (the Florida Business Corporation Act), and not Section 621 of the
Florida Statutes (the Professional Service Corporation Act), and delete any
inconsistent references, and (iii) provide that the company may operate for any
lawful purpose, and to allow Persons other than those licensed to practice
pathology in the State of Florida to own shares of SLA's capital stock. All of
such amendments (together, the "SLA Charter Amendments") shall be in form and
substance reasonably satisfactory to AmeriPath.
4.10 Full Access and Disclosure.
(a) SLA shall afford to the Purchaser and its counsel,
accountants and other authorized representatives reasonable access
during business hours to SLA's facilities, properties, books and
records, subject to all applicable confidentiality agreements, in order
that the Purchaser may have full opportunity to make such reasonable
investigations as it shall desire to make of the affairs of SLA,
provided such investigations do not interfere with the ordinary course
of SLA's business; and the Sellers shall cause SLA's officers,
employees and auditors to furnish such additional financial and
operating data and other information as the Purchaser shall from time
to time reasonably request including, without limitation, any internal
control recommendations applicable to SLA made by SLA's independent
auditors in connection with any examination of SLA's Financial
Statements and books and records.
(b) From time to time prior to the Closing Date, SLA shall
promptly supplement or amend information previously delivered to the
Purchaser with respect to any matter hereafter arising which, if
existing or occurring at the date of this Agreement, would have been
required to be set forth herein or disclosed.
<PAGE> 47
(c) In connection with any "due diligence" examination
performed by the Purchaser with respect to the business of SLA, the
Sellers shall fully cooperate with the Purchaser.
4.11 Confidentiality. Commencing on the date hereof through and
including the Closing Date or termination of this Agreement, the Sellers and SLA
shall, and shall cause its principals, officers and other personnel and
authorized representatives to, hold in confidence, and not disclose to any other
party without the Purchaser's prior consent, all written and oral information
furnished or disclosed by or received from the Purchaser or its officers,
directors, employees, agents, counsel and auditors in connection with the
transactions contemplated hereby, except as may be required by applicable law or
as otherwise contemplated herein.
4.12 Breach of Agreement. Neither the Sellers nor SLA shall
intentionally take any action which, if taken on or prior to the Closing Date,
would constitute a material breach of this Agreement.
4.13 Fulfillment of Conditions Precedent. SLA and the Sellers shall use
their best efforts to obtain at their expense, on or prior to the Closing Date,
all such waivers, Permits, consents, approvals or other authorizations from
third parties and Authorities, and to do all things as may be necessary in
connection with the transactions contemplated by this Agreement in order to
fully and expeditiously consummate the transactions contemplated by this
Agreement.
ARTICLE V
COVENANTS OF THE PURCHASER
The Purchaser hereby covenants and agrees with SLA and the Sellers that
prior to the Closing or the termination of this Agreement:
5.1 Confidentiality. The Purchaser shall, and shall cause its
principals, officers and other Personnel and authorized representatives to, hold
in confidence, and not disclose to any other party without the Sellers' prior
consent, all information received by it from the Sellers or SLA's officers,
directors, employees, agents, counsel and auditors in connection with the
transactions contemplated hereby except as may be required by applicable law or
as otherwise contemplated herein.
5.2 Full Access and Disclosure.
(a) The Purchaser shall afford to SLA and the Sellers, and
their counsel, accountants and other authorized representatives
reasonable access during business hours to the Purchaser's facilities,
properties, books and records, subject to applicable confidentiality
agreements, in order that the Sellers may have full opportunity to make
such reasonable investigations as they shall desire to make of the
affairs of the Purchaser, provided such investigations do not interfere
with the ordinary course of Purchaser's
<PAGE> 48
business; and the Purchaser shall cause its officers, employees and
auditors to furnish such additional financial and operating data and
other information as the Sellers shall from time to time reasonably
request including, without limitation, any internal control
recommendations applicable to the Purchaser made by the Purchaser's
independent auditors in connection with any examination of the
Purchaser's financial statements and books and records.
(b) From time to time prior to the Closing Date, the Purchaser
shall promptly supplement or amend information previously delivered to
SLA and/or the Sellers with respect to any matter hereafter arising
which, if existing or occurring at the date of this Agreement, would
have been required to be set forth herein or disclosed.
(c) The Purchaser shall fully cooperate in connection with any
"due diligence" examination performed by SLA or the Sellers with
respect to the business of the Purchaser. For purposes of this Section
5.2, "Purchaser" shall mean and include AmeriPath and its Subsidiaries.
5.3 Breach of Agreement. Purchaser shall not intentionally take any
action which, if taken on or prior to the Closing Date, would constitute a
material breach of this Agreement.
5.4 Fulfillment of Conditions Precedent. Purchaser shall use its best
efforts to obtain at its expense, on or prior to the Closing Date, all such
waivers, Permits, consents, approvals or other authorizations from third parties
and Authorities, and to do all things as may be necessary in connection with the
transactions contemplated by this Agreement in order to fully and expeditiously
consummate the transactions contemplated by this Agreement.
ARTICLE VI
OTHER AGREEMENTS
The parties hereto further agree, on or before the Closing Date, as
follows:
6.1 Further Assurances. Subject to the terms and conditions of this
Agreement, each of the parties hereto shall use its best efforts to take, or
cause to be taken, all action, and to do, or cause to be done, all things
reasonably necessary, proper or advisable under applicable Regulations to
consummate and make effective the transactions contemplated by this Agreement.
In furtherance and not in limitation of the preceding sentence, the parties
hereto shall use their best efforts to cause the Closing to take place on or
before September 30, 1996. If at any time after the Closing Date the Purchaser
shall consider or be advised that any further deeds, assignments or assurances
in law or in any other things are reasonably necessary, desirable or proper to
vest, perfect or confirm, of record or otherwise, in the Purchaser (or SLA, as
appropriate), the title to any property or rights of the Sellers acquired or to
be acquired by reason of, or as a result of, the acquisition, the Sellers agree
that the Sellers shall execute and deliver all such proper deeds, assignments
and assurances in law and do all things necessary, desirable
<PAGE> 49
or proper to vest, perfect or confirm title to such property or rights in SLA
and otherwise to carry out the purpose of this Agreement. Likewise, at any
Sellers' request, after the Closing Date, Purchaser shall perform such
reasonable acts that are necessary to fully perform all obligations of Purchaser
hereunder and to otherwise carry out the purposes of this Agreement.
6.2 Agreement to Defend. In the event any action, suit, proceeding or
investigation of the nature specified in Sections 7.2 or 8.2 is commenced,
whether before or after the Closing Date, all the parties hereto agree to
cooperate and use their best efforts to reasonably defend against and respond
thereto.
6.3 Consents. Without limiting the generality of Section 6.1, each of
the parties hereto shall use their best efforts to obtain all permits,
authorizations, consents and approvals of all Persons and governmental
authorities necessary, proper or advisable in connection with the consummation
of the transactions contemplated by this Agreement prior to the Closing Date.
6.4 No Solicitation or Negotiation. Unless and until this Agreement is
terminated, neither any Seller nor SLA through its directors, officers,
employees, representatives, agents, advisors, accountants and attorneys shall
initiate, solicit or encourage, directly or indirectly, any inquiries or the
making of any proposal with respect to, or engage in negotiations concerning, or
provide any confidential information or data to any Person with respect to, or
have any discussions with any Persons relating to, any acquisition, business
combination or purchase of all or any significant asset of, or any equity
interest in, SLA (other than terminating any interest that Dr. Mangano may have
in SLA), or otherwise facilitate any effort or attempt to do or seek any of the
foregoing, and shall immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any of the foregoing.
6.5 No Termination of Sellers' Obligations by Subsequent Incapacity,
Etc. The Sellers specifically agree that the obligations of the Sellers
hereunder, including, without limitation, obligations pursuant to Article XI and
Section 6.4 shall not be terminated by their death or incapacity.
6.6 Employment Agreements. SLA and the Sellers shall, at or prior to
the Closing, terminate the existing employment agreements between SLA and each
of the Sellers, and each Seller shall enter into an Employment Agreement with
AmeriPath Florida in the form of Exhibit 6.6 attached hereto (the "Employment
Agreements").
6.7 Public Announcements. Neither Purchaser, the Sellers nor SLA nor
any Affiliate, representative or shareholder of any such Persons, shall disclose
any of the terms of this Agreement to any third party (other than the
Purchaser's advisors and senior lending group and the Sellers' advisors) without
the other party's prior written consent, unless required by any applicable law.
The form, content and timing of any and all press releases, public announcements
or publicity statements (except for any disclosures under or pursuant to Federal
or State securities laws in connection with the registration of AmeriPath's
securities or otherwise) with respect to this Agreement or the transactions
contemplated hereby shall be subject to the prior mutual
<PAGE> 50
approval of the Purchaser and the Sellers. No press releases, public
announcements or publicity statements shall be released by either party without
prior mutual agreement.
The parties hereto further agree, from and after the Closing Date, as
follows:
6.8 Deliveries After Closing. From time to time after the Closing, at
the Purchaser's and the Sellers' request and without expense to SLA or the
Sellers, respectively, and without further consideration from the requesting
party, the Sellers and the Purchaser shall execute and deliver such other
instruments of conveyance and transfer and take such other action as the
Purchaser or the Sellers reasonably may require to convey, transfer to and vest
in the Purchaser, and to put the Purchaser in possession of, any rights or
property to be sold, conveyed, transferred or delivered hereunder, and to
effectuate all of the Sellers' entitlement to the Purchase Price hereunder.
6.9 Non-Competition Covenant.
(a) As a material and valuable inducement for the Purchaser to
enter into this Agreement, pay and deliver the Purchase Price
consideration and consummate the transactions provided for herein,
during the "Restricted Period" (as hereinafter defined), each Seller
agrees that he shall not, directly or indirectly, alone or as a
partner, officer, director, employee, consultant, agent, independent
contractor, member or stockholder of any Person:
(i) engage in the practice of pathology within 30
miles from any facility in which DSLA operated as of the date
of the Closing Date; provided, however, that such radius shall
not be less than the SLA Territory (the "Restricted
Territory"); or
(ii) from any facility or location, whether within or
without the Restricted Territory, (x) perform pathology
services for any patient, laboratory or health care provider
located in the Restricted Territory or (y) perform pathology
services for any patient, laboratory or health care provider
who was or is a customer, client or patient of an AmeriPath
Affiliate or who is known to Seller to be a prospective
customer, client or patient of an AmeriPath Affiliate with
whom such AmeriPath Affiliate is engaged in discussions;
except that it shall not be a violation of this Section 6.9
for the Sellers to perform pathology services in the
Restricted Territory during the Restricted Period (a) as an
employee of a local, federal or state government or agency;
(b) in performing the Sellers's duties as a member of the
United States military services or the National Guard; or (c)
on a locum tenens basis.
(b) As used in this Agreement, the term "Restricted Period"
for each Seller, shall mean and include a period of five (5) years,
from the Closing to the fifth (5th) anniversary of the Closing;
provided, however, should the Purchaser (i) fail to make any payments
of money or AmeriPath Stock required under this Agreement, the Secured
<PAGE> 51
Notes, the Contingent Notes or such Seller's Employment Agreement, and
such failure shall continue for a period of 45 days following notice of
such non-payment or (ii) terminate such Seller's Employment Agreement
without cause, the Restricted Period for such Seller shall equal zero
(0) days.
(c) Each Seller further agrees that during the Restricted
Period, the Seller will not knowingly, directly or indirectly, (a)
solicit the employment of any employee, agent or consultant of any
AmeriPath Affiliate who was such at any time during the twelve (12)
months preceding the Sellers's termination of employment with the
AmeriPath Affiliate, or (b) induce any employee of an AmeriPath
Affiliate to leave the employ of any such AmeriPath Affiliate, unless
in each case the Seller obtains the prior written consent of AmeriPath.
(d) Each Seller covenants and agrees that the restrictions set
forth in this Section 6.9 are fair, reasonable and necessary to protect
the interests of AmeriPath and its Affiliates, such restrictions were
negotiated and bargained for and the consideration delivered in
connection with this Agreement reflects and assumes the Seller's strict
compliance with, and the enforceability by the Purchaser of, these
restrictions.
(e) Each Seller acknowledges and agrees that the provisions of
Section 6.9 and Section 6.10 are material and of the essence to this
Agreement. In addition, if the scope of any restriction or covenant
contained in either such Section should be or become too broad or
extensive to permit enforcement thereof to its fullest extent, then
such restriction or covenant shall be enforced to the maximum extent
permitted by law, and the Sellers hereby consent and agree that (a) it
is the parties intention and agreement that the covenants and
restrictions contained herein be enforced as written, and (b) in the
event a court of competent jurisdiction should determine that any
restriction or covenant contained herein is too broad or extensive to
permit enforcement thereof to its fullest extent, the scope of any such
restriction or covenant may be modified accordingly in any judicial
proceeding brought to enforce such restriction or covenant, but should
be modified to permit enforcement of the restrictions and covenants
contained herein to the maximum extent the court, in its judgment, will
permit.
6.10 Non-disclosure; Confidentiality.
(a) Confidential Information. By virtue of each Seller's
employment, association or involvement with an AmeriPath Affiliate, the
Sellers may obtain confidential or proprietary information developed,
or to be developed, by an AmeriPath Affiliate. "Confidential
Information" means all proprietary or business-sensitive information,
whether in oral, written, graphic, machine-readable or tangible form,
and whether or not registered, and including all notes, plans, records,
documents and other evidence thereof, including but not limited to all:
patents, patent applications, copyrights, trademarks, trade names,
service marks, service names, "know-how," patient lists, details of
client or consulting contracts, pricing policies, operational methods,
marketing plans or strategies, product development techniques or plans,
procurement and sales activities,
<PAGE> 52
promotion and pricing techniques, credit and financial data concerning
customers, business acquisition plans or any portion or phase of any
scientific or technical information, discoveries, computer software or
programs used or developed in whole or in part by any AmeriPath
Affiliate (including source or object codes), processes, procedures,
formulas or improvements of any AmeriPath Affiliate; algorithms;
computer processing systems and techniques; price lists; customer
lists; procedures; improvements, concepts and ideas; business plans and
proposals; technical plans and proposals; research and development;
budgets and projections; technical memoranda, research reports, designs
and specifications; new product and service developments; comparative
analyses of competitive products, services and operating procedures;
and other information, data and documents now existing or later
acquired by an AmeriPath Affiliate, regardless of whether any of such
information, data or documents qualify as a "trade secret" under
applicable Federal or State law. "Confidential Information" shall not
include (a) any information which is in the public domain during the
period of service by the Sellers or becomes public thereafter, provided
such information is not in the public domain as a consequence of
disclosure by a Seller in violation of this Agreement, (b) any
information obtained by Sellers separate and apart from their
association or involvement with an AmeriPath Affiliate and (c) any
information not considered confidential information by similar
enterprises operating in the clinical or anatomical laboratory industry
or otherwise in the ordinary course.
(b) Non-Disclosure. Each Seller agrees that, except as
directed by the Seller's employer (which employer is an AmeriPath
Affiliate), as required or otherwise contemplated under this Agreement
or the Employment Agreement or as otherwise required by law, he will
not at any time (during the term of the Seller's employment by an
AmeriPath Affiliate or at any time thereafter), except as may be
expressly authorized by the AmeriPath Affiliate in writing, disclose to
any Person or use any Confidential Information whatsoever for any
purpose whatsoever, or permit any Person whatsoever to examine and/or
make copies of any reports or any documents or software (whether in
written form or stored on magnetic, optical or other mass storage
media) prepared by him or that come into his possession or under his
control by reason of his employment by an AmeriPath Affiliate or by
reason of any consulting or software development services he has
performed or may in the future perform for an AmeriPath Affiliate which
contain or are derived from Confidential Information, other than in the
ordinary course of business as needed to perform the Seller's normal
functions for the AmeriPath Affiliate. Each Seller further agrees that
while employed at an AmeriPath Affiliate, no Confidential Information
shall be removed from the AmeriPath Affiliate's business premises,
other than in the ordinary course of business and as needed to perform
the Seller's normal functions for the AmeriPath Affiliate, without the
prior written consent of such AmeriPath Affiliate.
(c) AmeriPath Group Property. As used in this Agreement, the
term "AmeriPath Group Property" means all documents, papers, computer
printouts and disks, records, customer or patient lists, files,
manuals, supplies, computer hardware and software, equipment, inventory
and other materials that have been created, used or obtained by any
AmeriPath Affiliate, or otherwise belonging to any AmeriPath Affiliate,
<PAGE> 53
as well as any other materials containing Confidential Information
as defined above. Each Seller recognizes and agrees that:
(i) All the AmeriPath Group Property shall be and
remain the property of the AmeriPath Affiliate to which such
belongs;
(ii) The Sellers will preserve, use and hold the
AmeriPath Group Property only for the benefit of AmeriPath and
its Affiliates and to carry out the business of the AmeriPath
Affiliate, AmeriPath and its Affiliates; and
(iii) When the Seller's employment is terminated, the
Seller will immediately deliver and surrender to the AmeriPath
Affiliate all the AmeriPath Group Property, including all
copies, extracts or any other types of reproductions, which
the Seller has in his possession or control.
6.11 Rule 144 Best Efforts. Following such time, if any, that AmeriPath
is or may become, and solely while AmeriPath is, a public company with its
securities registered under the Securities Exchange Act of 1934, as amended, and
listed or quoted for trading by a national securities exchange or inter-dealer
quotation system, AmeriPath will ensure that AmeriPath is in compliance with the
requirements of Rule 144 under the Securities Exchange Act of 1934, as amended,
applicable to the issuer of securities, so as to facilitate non-registered sales
of AmeriPath Stock by the Sellers who then own AmeriPath Stock consistent with
the requirements and limitations of Rule 144. Nothing in this Section 6.11 shall
be deemed as either (i) any representation or warranty that Ameripath will
become or remain a public company with securities registered under the
Securities Act, or (ii) any covenant or agreement by AmeriPath to register,
under federal or state securities laws or otherwise, any AmeriPath securities
issued to, or held by, the Sellers.
6.12 Real Estate. The Purchaser, at the Closing, shall purchase and
acquire from the Partnership, the Assets of the Partnership. The Partnership, by
executing and delivering this Agreement, agrees to sell, transfer and convey the
Assets to the Purchaser on the terms of this Section 6.12, subject to the
conditions of this Agreement. The Partnership and AmeriPath Florida shall enter
into a seven (7) year lease (the "Lease"), a form of which is attached as
Exhibit 6.12 hereto, to lease the facility SLA is presently utilizing for a fair
market value rent of $10/square foot, plus all real estate taxes and condominium
assessment fees. An appropriate Bill of Sale shall be executed and delivered by
the Partnership to the Purchaser to transfer the Assets.
6.13 Delivery of Purchaser Statements. Purchaser covenants that,
commencing on the Closing Date through and including March 31, 2002, Purchaser
shall deliver to each Seller (without the need for each Seller to request such
delivery) copies of Purchaser's monthly, quarterly and annual financial
statements and all amendments thereto, the annual financial statement to be
audited by independent public accountants, at such times as such financial
statements are finalized. Purchaser covenants that such financial statements
shall be prepared in accordance with general accepted accounting principles and
will fully and fairly reflect the Purchaser's financial position and financial
results as of their dates. Purchaser further covenants
<PAGE> 54
to provide to each Seller from time to time, after Closing Date and until March
31, 2002, such other information about the Purchaser's business, operations,
financial position and capitalization as each such Seller shall reasonably
request in connection with such Seller's acquisition of AmeriPath Stock pursuant
to Section 1.3 hereof.
6.14 Stock Options. Subject to the approval of the Board of Directors
of AmeriPath, AmeriPath shall grant non-statutory options (the "Options") to
purchase an aggregate of 15,000 shares of AmeriPath Stock to the persons
designated by the Managing Director of the Southwest Florida Division in his
discretion, such designation to made promptly after the Closing. As a condition
to such grant and issuance, each Optionee shall be required to enter into a
Non-Qualified Stock Option Agreement in the form of Exhibit 6.5 hereto (the
"Grant Agreement"). The Options shall be granted pursuant to and in accordance
with the AmeriPath Stock Option Plan and each Grant Agreement and shall be
subject to the terms and conditions of such plan and agreement.
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER
Each and every material obligation of the Purchaser under this
Agreement shall be subject to the satisfaction in all material respects, on or
before the Closing Date, of each of the following conditions, unless waived in
writing by the Purchaser:
7.1 Representations and Warranties; Covenants and Agreements. The
representations and warranties of the Sellers contained in Article II and
elsewhere in this Agreement and all information contained in any exhibit,
certificate, schedule or attachment hereto or in any writing delivered by, or on
behalf of, the Sellers or SLA to the Purchaser, shall be true and correct in all
material respects when made and shall be true and correct in all material
respects on the Closing Date as though then made, except as expressly provided
herein. The Sellers and SLA shall have performed and complied in all material
respects with all agreements, covenants and conditions and shall have made all
deliveries required by this Agreement to be performed, delivered and complied
with by them prior to the Closing Date. The Sellers and the president of SLA
shall have executed and delivered to the Purchaser a certificate, dated the
Closing Date, certifying to the foregoing.
7.2 No Injunction. No preliminary or permanent injunction or other
Order, decree or ruling issued by any Authority, or any Regulation promulgated
or enacted by any Authority shall be in effect, which would prevent the
consummation of the transactions contemplated hereby.
7.3 Third Party Consents. The Sellers and SLA shall have obtained all
required consents, approvals, waivers or other authorizations with respect to
the execution, delivery and performance of this Agreement by Sellers and SLA and
the consummation of the transactions contemplated hereby, such that the
contracts and leases listed in Schedule 7.3 hereto shall remain in effect
(without default, acceleration, termination, assignment, right of termination or
<PAGE> 55
assignment, payment, increase in rates or compensation payable, penalty,
interest or other adverse effect) from and after the Closing Date in materially
the same manner as such contracts and leases operated and were in effect before
the Closing Date.
7.4 No Material Adverse Change. There shall have been no Material
Adverse Change since the date of this Agreement. The Purchaser shall have
received a certificate (which shall be addressed to the Purchaser), dated the
Closing Date, of the president of SLA, certifying to the foregoing.
7.5 Employment Agreements. The Sellers shall have terminated their
existing employment agreements with SLA and each of the Sellers shall have
executed and delivered to the Purchaser an Employment Agreement with AmeriPath
Florida in the form of Exhibit 6.6 attached hereto.
7.6 Opinion of Seller's Counsel. The Purchaser shall have received an
opinion of counsel to the Sellers and SLA (which will be addressed to the
Purchaser and its senior lenders), dated the Closing Date, in the form of
Exhibit 7.6 hereto.
7.7 Delivery of SLA Share Certificates. The Sellers shall have executed
and delivered to AmeriPath this Agreement, or a counterpart hereof, and shall
have delivered at the Closing stock certificates representing all of the SLA
Shares, duly endorsed for transfer to the Purchaser, together with stock powers
duly executed in blank.
7.8 Shareholders' Agreement. At the Closing, the Sellers shall have
executed and delivered to AmeriPath a counterpart signature page to that certain
Shareholders' Agreement, dated as of February 29, 1996, by and among AmeriPath
and each of the stockholders of AmeriPath (the "Shareholders' Agreement"),
pursuant to which each Seller agrees to be bound by all of the provisions and
entitled to all of the rights of the Shareholders' Agreement, in accordance with
their terms, to the same extent as if he had been an original signatory thereto,
for so long as such agreement is valid.
7.9 Subordination Agreement. At the Closing, the Sellers shall have
executed and delivered the Subordination Agreement, attached hereto as Exhibit
7.8, pursuant to which each Seller agrees to be bound by all of the provisions
of the Subordination Agreement in accordance with their terms.
7.10 SLA Charter Amendments. SLA, which as of the date hereof is
organized as a professional service corporation under Chapter 621 of the Florida
Statutes, shall have taken all appropriate and required board of director and
shareholder action to approve, and shall have filed with the Florida Department
of State in form acceptable for filing, an amendment to SLA's articles of
incorporation, which amendment (i) shall be in form and substance reasonably
satisfactory to AmeriPath, and (ii) shall include the SLA Charter Amendments (as
such term is defined in Section 4.9 hereof).
<PAGE> 56
7.11 Creditors. The creditors and amounts set forth on Schedule 7.11
hereto are the correct amounts owed in order for such creditors to have been
paid in full and release all Liens, if any, in favor of such creditors.
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF THE SELLERS
Each and every material obligation of the Sellers under this Agreement
shall be subject to the satisfaction in all material respects, on or before the
Closing Date, of each of the following conditions unless waived in writing by
the Sellers:
8.1 Representations and Warranties; Performance. The representations
and warranties of the Purchaser contained in Article III and elsewhere in this
Agreement and all information contained in any exhibit, schedule or attachment
hereto, delivered by or on behalf of the Purchaser to the Sellers, shall be true
and correct in all material respects when made and shall be true and correct in
all material respects on the Closing Date as though then made, except as
expressly provided herein. The Purchaser shall have performed and complied in
all material respects with all agreements, covenants and conditions required by
this Agreement to be performed and complied with by them prior to the Closing
Date. The Chief Operating Officer of the Purchaser shall have executed and
delivered to the Sellers a certificate, dated the Closing Date, certifying to
the foregoing.
8.2 No Injunction. No preliminary or permanent injunction or other
Order, decree or ruling issued by any Authority, or any Regulation promulgated
or enacted by any Authority shall be in effect, which would prevent the
consummation of the transactions contemplated hereby.
8.3 Material Adverse Change. There shall have been no material adverse
change since the date of this Agreement. The Sellers shall have received a
certificate (which shall be addressed to the Sellers), dated the Closing Date,
of the president of SLA, certifying to the foregoing.
8.4 Third Party Consents. The Purchaser shall have obtained all
required consents, approvals, waivers or other authorizations with respect to
the execution, delivery and performance of this Agreement by Purchaser and the
consummation of the transactions contemplated hereby.
8.5 Purchase Consideration. The Sellers shall have received from the
Purchaser the consideration (in the form of cash, AmeriPath Stock and Contingent
Notes) required to be delivered at Closing and to which the Sellers are entitled
pursuant to Section 1.1 (and as set forth on Schedule 1.1.) hereof.
8.6 Employment Agreements. AmeriPath Florida shall have executed and
delivered to each of the Sellers the Employment Agreements.
<PAGE> 57
8.7 Opinion of Purchaser's Counsel. The Sellers shall have received an
opinion of counsel to the Purchaser, dated the Closing Date, in the form of
Exhibit 8.7 hereto.
ARTICLE IX
CLOSING
9.1 Closing. Unless this Agreement shall have been terminated or
abandoned pursuant to the provisions of Article X hereof, a closing of the
transactions contemplated by this Agreement (the "Closing") shall be held on
October 11, 1996, or on such other date which is mutually agreed upon in writing
following the satisfaction or waiver of the conditions to closing set forth in
Article VII and Article VIII hereof (the "Closing Date").
9.2 Closing Deliveries. At the Closing,
(a) the Sellers and SLA shall deliver or cause to be
delivered to the Purchaser:
(i) a certificate or certificates (or affidavits of
lost certificates) evidencing all of the SLA Shares, duly
endorsed for transfer with all necessary transfer stamps
affixed;
(ii) the Officer's Certificates required by Sections
7.1 and 7.4;
(iii) copies of all consents and approvals required
by Sections 7.3, and 7.10;
(iv) the Opinion of Counsel required by Section 7.6;
(v) the Employment Agreements required by Section
7.5;
(vi) the counterpart signature pages to the
Shareholders' Agreement required by Section 7.7;
(vii) the Subordination Agreement required by Section
7.8;
(viii) a certificate, signed by the secretary of SLA,
as to the articles of incorporation and by-laws of SLA, the
resolutions adopted by the board of directors and shareholders
of SLA in connection with this Agreement, the incumbency of
certain officers of SLA and the jurisdictions in which SLA is
qualified to conduct business, in form reasonably acceptable
to the Purchaser;
(ix) certificates issued by the appropriate
governmental authorities evidencing the good standing, with
respect to both the conduct of business and the payment of all
franchise taxes, of SLA as of a date not more than ten (10)
days prior to the Closing Date, as a corporation organized
under the laws of the State
<PAGE> 58
of Florida and as a foreign corporation authorized to do
business under the laws of the various jurisdictions where it
is so qualified.
(x) such other certified resolutions, documents and
certificates as are required to be delivered by the Sellers or
SLA pursuant to the provisions of this Agreement.
(b) The Purchaser shall deliver to the Sellers:
(i) the consideration (in the form of cash,
AmeriPath Stock, and the Contingent Notes) required to be
paid or delivered to the Sellers at Closing in accordance
with Section 1.1 (to be distributed to the Sellers in
accordance with Schedule 1.1).
(ii) copies of all consents and approvals required
by Section 8.4;
(iii) the Officer's Certificate required by Section
8.1;
(iv) the Employment Agreements required by Section
8.6;
(v) the Opinion of Counsel required by Section
8.7;
(vi) a certificate, signed by the secretary of
Purchaser, as to the articles of incorporation and by-laws of
Purchaser, the resolutions adopted by the board of directors
and shareholders of Purchaser in connection with this
Agreement, the incumbency of certain officers of Purchaser and
the jurisdictions in which Purchaser is qualified to conduct
business, in form acceptable to SLA.
(vii) certificates issued by the appropriate
governmental authorities evidencing the good standing, with
respect to both the conduct of business and the payment of all
franchise taxes, of Purchaser and AmeriPath Florida as of a
date not more than ten (10) days prior to the Closing Date, as
a corporation organized under the laws of the State of
Delaware and Florida, respectively, and as a foreign
corporation authorized to do business under the laws of the
various jurisdictions where it is so qualified; and
(viii) such other certified resolutions, documents
and certificates as are required to be delivered by the
Purchaser pursuant to the provisions of this Agreement.
(c) The Partnership shall deliver to the Purchaser:
(i) the Assets
(ii) the Bill of Sale; and
<PAGE> 59
(iii) the Lease
(d) The Purchaser shall deliver to the Partnership:
(i) the cash consideration for the Assets; and
(ii) the Lease
ARTICLE X
TERMINATION AND ABANDONMENT
10.1 Methods of Termination. This Agreement may be terminated and the
transactions herein contemplated may be abandoned at any time:
(a) by the unanimous consent of the Purchaser, the Sellers and
SLA;
(b) by the Purchaser or all of the Sellers and SLA if the
Closing does not occur on or before September 30, 1996; provided,
however, that if any party has materially breached or defaulted with
respect to its respective material obligations under this Agreement on
or before such date, such party may not terminate this Agreement
pursuant to this Section 10.1(b), and each other party to this
Agreement shall at its option enforce its rights against such breaching
or defaulting party and seek any remedies against such party, in either
case as provided hereunder and by applicable law;
(c) by the Purchaser if as of the Closing Date (including any
extensions) any of the conditions specified in Article VII hereof shall
not have been materially satisfied or if SLA or any of the Sellers is
otherwise in material default under this Agreement; or
(d) by all, but not less than all, of the Sellers, if as of
the Closing Date (including any extensions) any of the conditions
specified in Article VIII hereof shall not have been materially
satisfied or if Purchaser is otherwise in material default under this
Agreement.
10.2 Procedure Upon Termination. In the event of termination and
abandonment pursuant to Section 10.1 hereof, and subject to the proviso
contained in Section 10.1(b), this Agreement shall terminate and shall be
abandoned, without further action by any of the parties hereto. If this
Agreement is terminated as provided herein:
(a) each party shall redeliver all documents and other
material of any other party relating to the transactions contemplated
hereby, whether obtained before or after the execution hereof, to the
party furnishing the same;
<PAGE> 60
(b) all information received by any party hereto with respect
to the business of any other party or SLA (other than information which
is a matter of public knowledge or which has heretofore been or is
hereafter published in any publication for public distribution or filed
as public information with any governmental authority) shall not at any
time be used for the advantage of, or disclosed to third parties by,
such party to the detriment of the party furnishing such information;
and
(c) no party hereto shall have any further liability or
obligation to any other party under or in connection with this
Agreement; provided, however, the non-breaching or non-defaulting party
shall not be foreclosed from bringing a Claim or cause of action or
otherwise recovering from the breaching or defaulting party.
ARTICLE XI
SURVIVAL OF TERMS; INDEMNIFICATION
11.1 Survival. All of the terms and conditions of this Agreement,
together with the representations, warranties and covenants contained herein or
in any instrument or document delivered or to be delivered pursuant to this
Agreement, shall survive the execution of this Agreement and the Closing
notwithstanding any investigation heretofore or hereafter made by or on behalf
of any party hereto; provided, however, that (a) the agreements and covenants
set forth in this Agreement shall survive and continue until all obligations set
forth therein shall have been performed and satisfied; and (b) all
representations and warranties shall survive and continue until:
(1) with respect to the representations and
warranties in Sections 2.16 (tax matters), 2.18 (ERISA
matters), 2.20 (environmental matters) and 2.30 (health care
regulatory matters), until sixty (60) days following the
expiration of the applicable statute of limitations;
(2) with respect to the representations and
warranties in Sections 2.3 and 3.9 (capitalization), 2.5
(title to the SLA Shares), 3.6 (Issuance of AmeriPath Stock)
and 2.6 (options and rights on capital stock), these
representations shall survive and continue forever and without
limitation; and
(3) with respect to all other representations and
warranties, the earlier of (i) date upon which AmeriPath
receives from its outside auditors the audited financial
statements for AmeriPath's fiscal year ending December 31,
1998 (the "1998 Audit Date"), except for representations,
warranties and indemnities for which an indemnification Claim
shall be pending as of the 1998 Audit Date, in which event
such indemnities shall survive with respect to such Claim
until the final disposition thereof, or (ii) April 30, 1999.
<PAGE> 61
11.2 Indemnification by the Sellers. Subject to this Article XI, the
Purchaser and its officers, directors, employees, shareholders, representatives
and agents shall be indemnified and held harmless by the Sellers, at all times
after the date of this Agreement, against and in respect of any and all damage,
loss, deficiency, liability, obligation, commitment, cost or expense (including
the fees and expenses of counsel) resulting from, or in respect of, any of the
following:
(a) Any misrepresentation, breach of warranty, or
non-fulfillment of any obligation on the part of the Sellers or SLA
under this Agreement, any document relating thereto or contained in any
schedule or exhibit to this Agreement or from any misrepresentation in
or omission from any certificate, schedule, other agreement or
instrument by the Sellers or SLA hereunder;
(b) Any and all liabilities of SLA of any nature whether
accrued, absolute, contingent or otherwise, and whether known or
unknown, existing at the Closing Date to the extent not reflected and
reserved against in the statement of assets and liabilities for the
quarter ended March 31, 1996 included in the Financial Statements or
not otherwise adequately disclosed in this Agreement or the schedules
or exhibits thereto, including, without limitation:
(i) All Tax liabilities of SLA, together with any
interest or penalties thereon or related thereto, through the
Closing Date and any Tax liability of SLA arising in
connection with the transactions contemplated hereby. Any
Taxes, penalties or interest attributable to the operations of
SLA prior to the Closing Date, payable as a result of an audit
of any tax return, shall be deemed to have accrued in the
period to which such Taxes, penalties or interest are
attributable;
(ii) All environmental liabilities relating to any of
SLA's properties, including federal, state and local
environmental liability, together with any interest or
penalties thereon or related thereto, that arose through the
Closing Date, but excluding any amount for which there is an
adequate accrual and reserve on the statement of assets and
liabilities for the quarter ended March 31, 1996 included in
the Financial Statements;
(iii) All claims by Medicare, Medicaid, or any other
third party payor relating to reimbursement for services
provided by SLA prior to the Closing Date ("Reimbursement
Claims"). Indemnification by Sellers for Reimbursement Claims
shall include all costs incurred by Purchaser for such claims,
including, but not limited to, applicable investigative and
audit expenses, attorneys fees, reimbursement costs, and any
fines and penalties levied against SLA; and
(c) All demands, assessments, judgments, costs and reasonable
legal and other expenses arising from, or in connection with any Claim
incident to any of the foregoing.
<PAGE> 62
(d) All Claims of the Purchaser shall be resolved in
accordance with Section 11.4.
11.3 Indemnification by the Purchaser. Subject to this Article XI, the
Sellers and their heirs, assigns, representatives and agents shall be
indemnified and held harmless by the Purchaser, at all times after the date of
this Agreement, against and in respect of any and all damage, loss, deficiency,
liability, obligation, commitment, cost or expense (including the fees and
expenses of counsel) resulting from, or in respect of, any misrepresentation,
breach of warranty, or non-fulfillment of any obligation on the part of the
Purchaser under this Agreement, any document relating thereto or contained in
any schedule or exhibit to this Agreement or from any misrepresentation in or
omission from any certificate, schedule, other agreement or instrument by the
Purchaser hereunder.
11.4 Third-Party Claims. Except as otherwise provided in this
Agreement, the following procedures shall be applicable with respect to
indemnification for third-party Claims. Promptly after receipt by the party
seeking indemnification hereunder (hereinafter referred to as the "indemnitee")
of notice of the commencement of any (a) Tax audit or proceeding for the
assessment of Tax by any taxing authority or any other proceeding likely to
result in the imposition of a Tax liability or obligation, or (b) any action or
the assertion of any Claim, liability or obligation by a third party (whether by
legal process or otherwise), against which Claim, liability or obligation the
other party to this Agreement (hereinafter the "indemnitor") is, or may be,
required under this Agreement to indemnify such indemnitee, the indemnitee will,
if a Claim thereon is to be, or may be, made against the indemnitor, notify the
indemnitor in writing of the commencement or assertion thereof and give the
indemnitor a copy of such Claim, process and all legal pleadings. The indemnitor
shall have the right to assume the defense of such action with counsel of
reputable standing unless such action: (i) is likely to result in injunctions or
other equitable remedies in respect of the indemnitee or its business; or (ii)
is likely to result in liabilities which, taken with other than existing Claims
under this Article XI, would not be fully indemnified hereunder. The indemnitor
and the indemnitee shall cooperate in the defense of such Claims. In the case
that the indemnitor shall assume or participate in the defense of such audit,
assessment or other proceeding as provided herein, the indemnitee shall make
available to the indemnitor all relevant records and take such other action and
sign such documents as are necessary to defend such audit, assessment or other
proceeding in a timely manner. If the indemnitee shall be required by judgment
or a settlement agreement to pay any amount in respect of any obligation or
liability against which the indemnitor has agreed to indemnify the indemnitee
under this Agreement, the indemnitor shall promptly reimburse the indemnitee in
an amount equal to the amount of such payment plus all reasonable expenses
(including legal fees and expenses) incurred by such indemnitee in connection
with such obligation or liability subject to this Article XI. Upon an indemnitor
making payment hereunder, the indemnitor shall be subrogated to the rights of
the indemnitee.
Prior to paying or settling any Claim against which an indemnitor is,
or may be, obligated under this Agreement to indemnify an indemnitee, the
indemnitee must first supply the indemnitor with a copy of the claim and an
opportunity to defend against or settle same as set forth herein and must first
receive the written approval of the terms and conditions of any
<PAGE> 63
settlement from the indemnitor prior to settling any claims. An indemnitor shall
have the right to settle any Claim against the indemnitee, subject to the prior
written approval of the indemnitee, which approval shall not be unreasonably
withheld and may not be withheld at all if the settlement includes the complete
release of the indemnitee.
An indemnitee shall have the right to employ its own counsel
in any case, but the fees and expenses of such counsel shall be at the expense
of the indemnitee unless (a) the employment of such counsel shall have been
authorized in writing by the indemnitor in connection with the defense of such
action or Claim, or (b) the indemnitor shall not have employed, or is prohibited
under this Section 11.4 from employing, counsel in the defense of such action or
Claim.
11.5 Indemnification Basket; Maximum Liability. Neither the Sellers, on
the one hand, or the Purchaser, on the other hand, shall be entitled to
indemnification under this Article XI, unless and until their or its,
respectively, total damage exceeds $50,000, and then only to the extent of
aggregate damages in excess of $50,000; provided, however, that such threshold
shall not apply to actions against Purchaser for failure to make payments of
cash or stock due pursuant to this Agreement. In the event that such threshold
amount is exceeded with respect to a claim by Purchaser against SLA, then the
threshold shall be deemed to also be met with respect to each Seller. The
maximum liability under this Agreement for each Seller with respect to such
Seller's personal obligations shall be the total value of the Purchase Price
that such Seller has received. Each Seller shall be severally liable with
respect to matters personal to such Seller and jointly and severally liable with
respect to matters affecting SLA.
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.1 Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified and supplemented only by a written agreement
signed by SLA, the Purchaser and the Sellers.
12.2 Entire Agreement. This Agreement, including the schedules and
exhibits hereto and the documents, annexes, attachments, certificates and
instruments referred to herein and therein, embodies the entire agreement and
understanding of the parties hereto in respect of the agreements and
transactions contemplated by this Agreement and supersedes all prior agreements,
representations, warranties, promises, covenants, arrangements, communications
and understandings, oral or written, express or implied, between the parties
with respect to such transactions. There are no agreements, representations,
warranties, promises, covenants, arrangements or understandings between the
parties with respect to such transactions, other than those expressly set forth
or referred to herein.
12.3 Certain Definitions.
<PAGE> 64
"Affiliate" means, with regard to any Person, (a) any other
Person, directly or indirectly, controlled by, under common control of,
or controlling such first Person, (b) any other Person, directly or
indirectly, in which such first Person holds, of record or
beneficially, five percent or more of the equity or voting securities,
(c) any other Person that holds, of record or beneficially, five
percent or more of the equity or voting securities of such first
Person, (d) any other Person that, through Contract, relationship or
otherwise, exerts a substantial influence on the management of such
first Person's affairs, (e) any other Person that, through Contract,
relationship or otherwise, is influenced substantially in the
management of their affairs by such first Person, or (f) any director,
officer, partner or individual holding a similar position in respect of
such first Person.
"Authority" means any governmental, regulatory or
administrative body, agency, arbitrator, any court or judicial
authority, any public, private or industry regulatory agency,
arbitrator authority, whether international, national, federal, state
or local.
"Claim" means any action, claim, lawsuit, demand, suit,
inquiry, hearing, investigation, notice of a violation, litigation,
proceeding, arbitration, or other dispute, whether civil, criminal,
administrative or otherwise, whether pursuant to contractual
obligations or otherwise.
"Contract" means any written agreement, contract, commitment,
instrument or other binding arrangement or understanding.
"Environmental Law" means any Regulation, Order, settlement
agreement or governmental requirement, which relates to or otherwise
imposes liability or standards of conduct concerning mining or
reclamation of mined land, discharges, emissions, releases or
threatened releases of noises, odors or any pollutants, contaminants or
hazardous or toxic wastes, substances or materials, whether as matter
or energy, into ambient air, water, or land, or otherwise relating to
the manufacture, processing, generation, distribution, use, treatment,
storage, disposal, cleanup, transport or handling of pollutants,
contaminants, or hazardous wastes, substances or materials, including
(but not limited to) the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, as amended, the Resource Conservation and
Recovery Act of 1976, as amended, the Toxic Substances Control Act of
1976, as amended, the Federal Water Pollution Control Act Amendments of
1972, the Clean Water Act of 1977, as amended, any so-called
"Superlien" law, and any other similar Federal, state or local
statutes.
"Environmental Permit" shall mean Permits, certificates,
approvals, licenses and other authorizations required by Environmental
Law and necessary or desirable for the Corporation's business.
"GAAP" means generally accepted accounting principles, applied
on a consistent basis.
<PAGE> 65
"Health Care Laws" means any Federal, state, or local
Regulation or Order, of any Authority, which relates to or otherwise
imposes liability or standards of conduct concerning the licensure,
certification, qualification, operation, of a health maintenance
organization, pharmacy, home health agency or other aspect of a
corporation's business subject to such Health Care Laws, including but
not limited to Chapter 400, Florida Statutes, governing home health
agencies; Chapter 641, Florida Statues, The Health Maintenance
Organization Act; Chapter 465, Florida Statutes, the Florida Pharmacy
Act; Sections 499.001 to .081, Florida Statutes, the Florida Drug and
Cosmetic Act; Chapter 893, Florida Statutes, the Florida Comprehensive
Drug Abuse Prevention and Control Act; Sections 455.236 to .239,
Florida Statutes, the Patient Self-Referral Act; Section 627.6699,
Florida Statutes, the Employee Health Care Access Act; Sections 409.026
and 409.912, Florida Statutes, 21 U.S.C. Section 301-392, the Federal
Food Drug and Cosmetic Act; 21 U.S.C. Section 821 et seq., the Federal
Drug Abuse Act; Section 1128B of the Social Security Act; The Clinical
Laboratory Improvement Amendments of 1988; 42 U.S.C. Section 1320a-7b,
42 C.F.R. Part 1001, 42 CFR Chapter IV, Subchapter C; Sections 1876 or
1903 of the Social Security Act; 45 CFR, Part 74; 45 CFR, Part 92; 42
CFR 455.109 Section 306 of the Clean Air Act; 42 U.S.C. Section
1857(h) et seq., Section 508 of the Clean Water Act; 33 U.S.C. Section
1368 et seq., Executive Order 11738 and Environmental Protection
Agency regulations; 40 CFR Part 15, Title VI of the Civil Rights Act
of 1964; 42 U.S.C. Section 2000 d et seq., Section 504 of the
Rehabilitation Act of 1933; 29 U.S.C. Section 7940; Title IX of the
Education Amendments of 1972, 20 U.S.C. Section 1681 et seq., the
Age Discrimination Act of 1975; 42 U.S.C. Section 6101 et seq.,
Section 654 of OBRA '81; 42 U.S.C. Section 9849 and the Americans with
Disabilities Act of 1990; P.L. 101-336, OBRAs 1986 through 1993, as
amended, and any other similar Federal, state or local Regulations.
"Lien" means any security interest, lien, mortgage, pledge,
hypothecation, encumbrance, Claim, easement, restriction or interest of
another Person of any kind or nature.
"Material Adverse Change" means any development or change
which has, had or would have a Material Adverse Effect.
"Material Adverse Effect" means any circumstances, state of
facts or matters which has, or might reasonably be expected to have, a
material adverse effect in respect of SLA's business, operations,
properties, assets, condition (financial or otherwise), results, plans,
strategies or prospects.
"Order" means any decree, judgment, award, order, injunction,
rule, consent of or by an Authority.
"Person" means any corporation, partnership, joint venture,
company, syndicate, organization, association, trust, entity, Authority
or natural person.
<PAGE> 66
"Proprietary Rights" means any patent, patent application,
copyright, trademark, trade name, service mark, service name, trade
secret, know-how, confidential information or other intellectual
property or proprietary rights.
"Regulation" means any law, statute, rule, regulation,
ordinance, requirement, announcement or other binding action of or by
an Authority.
"Subsidiary" means any Person which the Purchaser or SLA, as
the case may be, owns, directly or indirectly, 50% or more of the
outstanding stock or other equity interests.
12.4 Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given (i) when delivered if delivered by hand, (ii) three days after
mailing if mailed, first class certified mail with postage paid, or (iii) the
next business day if sent by overnight receipted courier service:
(a) If to SLA, to:
Drs. Seidenstein, Levine and Associates, P.A.
3949 Evans Avenue
Suite 403
Ft. Myers, Florida 33901
Attn: David M. Reardon, M.D., President
If to a Seller, to:
Lawrence Seidenstein, M.D.
1225 Caloosa Drive
Fort Myers, Florida 33901
Steven E. Levine, M.D.
4105 West Riverside Drive
Ft. Myers, Florida 33901
David M. Reardon, M.D.
1383 Coconut Drive
Ft. Myers, Florida 33901
<PAGE> 67
in each case with a copy to:
McDermott Will & Emery
201 S. Biscayne Blvd., 22nd Floor
Miami, Florida 33131-4336
Attn: Jerry J. Sokol, Esq.
or to such other person or address as the Sellers or
SLA shall furnish by notice to the Purchaser in writing.
(b) If to the Purchaser to:
AmeriPath, Inc.
800 Cypress Creek Road, Suite 200
Fort Lauderdale, Florida 33334
Attn: James C. New, President
with a copy to:
Greenberg, Traurig, Hoffman,
Lipoff, Rosen & Quentel, P.A.
515 E. Las Olas Boulevard, Suite 1500
Fort Lauderdale, Florida 33301
Attn: Daniel H. Aronson, Esq.
or to such other person or address as the Purchaser
shall furnish by notice to Sellers in writing.
12.5 Assignment. This Agreement and all of the provisions hereof shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties.
12.6 Governing Law. The Agreement shall be governed by the laws of the
State of Florida as to all matters, including but not limited to matters of
validity, construction, effect and performance.
12.7 Consent to Jurisdiction; Service of Process. SLA and the Sellers
hereby irrevocably submit to the jurisdiction of the state or federal courts
located in Broward, Dade, County, Florida in connection with any suit, action or
other proceeding arising out of or relating to this Agreement and the
transactions contemplated hereby, and hereby agree not to assert, by way of
motion, as a defense, or otherwise in any such suit, action or proceeding that
the suit, action or proceeding is brought in an inconvenient forum, that the
venue of the suit, action or proceeding is improper or that this Agreement or
the subject matter hereof may not be enforced by such courts.
<PAGE> 68
12.8 Injunctive Relief. The parties hereto agree that in the event of a
breach of any provision of this Agreement, the aggrieved party or parties may be
without an adequate remedy at law. The parties therefore agree that in the event
of a breach of any provision of this Agreement, the aggrieved party or parties
may elect to institute and prosecute proceedings in any court of competent
jurisdiction to enforce specific performance or to enjoin the continuing breach
of such provision, as well as to obtain damages for breach of this Agreement. By
seeking or obtaining any such relief, the aggrieved party shall not be precluded
from seeking or obtaining any other relief to which it may be entitled.
12.9 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.10 Headings. The article, section and subsection headings contained
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement (or any provision hereof).
12.11 Binding Effect. This Agreement shall not be construed so as to
confer any right or benefit upon any Person other than the signatories to this
Agreement and each of their respective successors and permitted assigns.
12.12 Delays or Omissions; Waiver. No delay or omission to exercise any
right, power or remedy accruing to any party hereto, upon any breach or default
of any other party under this Agreement, shall impair any such right, power or
remedy of such party nor shall it be construed to be a waiver of, or estoppel
with respect to, any such breach or default, or an acquiescence therein, or of
or in any similar breach or default thereafter occurring; nor shall any waiver
of any single breach or default be deemed a waiver of any other breach or
default theretofore or thereafter occurring. Any waiver, permit, consent or
approval of any kind or character on the part of any party hereto of any breach
or default under this Agreement, or any waiver on the part of any party of any
provisions, obligations, covenants, agreements or conditions of this Agreement
must be made in writing and shall be effective only to the extent specifically
set forth in such writing. All remedies, either under this Agreement or by law
or otherwise afforded to any party, shall be cumulative and not alternative.
Whenever this Agreement requires or permits consent by or on behalf of any party
hereto, such consent shall be given in writing.
12.13 Severability. Unless otherwise provided herein, if any provision
of this Agreement shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
12.14 Expenses. All fees, costs and expenses (including, without
limitation, legal, auditing and accounting fees, costs and expenses) incurred in
connection with considering, pursuing, negotiating, documenting or consummating
this Agreement and the transactions contemplated hereby shall be borne and paid
solely by the party incurring such fees, costs and expenses, and Purchaser shall
be deemed the party who incurred the expense of SLA's audit.
<PAGE> 69
12.15 Arbitration. If any dispute arises with respect to this Agreement
between two or more of the parties to it, each party to the dispute shall use
its best efforts to resolve the dispute amicably. If after 20 days the dispute
has not been resolved, any of the parties may elect to submit the dispute to
mediation by an independent certified circuit civil mediator selected jointly by
the parties by giving notice, in accordance with Section 12.4, to the other
parties of its election to mediate ("Mediation Notice"). If a party elects to
mediate a dispute, the other parties must mediate the dispute, although the
result of the mediation will not be binding on either party. If the parties fail
to jointly select a mediator within 15 days after the effective date of the
Mediation Notice, each party shall submit to the other party a proposed list of
not less than eight certified circuit civil mediators to mediate the dispute
within 25 days after the effective date of the Mediation Notice. A party who
fails to submit a proposed list of mediators within the prescribed 25-day period
waives the right to select a mediator and the other party may select the
mediator. If both paries timely submit their proposed lists of mediators, each
party shall select two mediators from the other party's list and Purchaser's
regular legal counsel shall blindly select the mediator from a box containing
the names of each mediator so selected on a "3 x 5" card. The mediator shall
convene a meeting of the parties to the dispute within 21 days after his or her
appointment.
Any party to a dispute that arises with respect to this Agreement may,
prior to receipt of Mediation Notice or after an attempted resolution throughout
the mediation process described in the paragraph above, elect to submit the
dispute to binding non-appealable arbitration before a panel of arbitrators in
accordance with the rules of the American Arbitration Association by giving the
other party a notice of arbitration, in accordance with Section 12.4, (the
"Arbitration Notice"). If the parties do not resolve the dispute through
mediation, arbitration will be the sole and exclusive method of resolving the
dispute. All parties must arbitrate the dispute, and each party will be barred
from filing a lawsuit concerning the subject matter of the dispute, except to
obtain an equitable remedy.
The parties shall make every effort to select a mutually acceptable
Florida corporate lawyer who is rated "AV" by Martindale-Hubbell law directory
to arbitrate the dispute. If within 10 days after the effective date of the
Arbitration Notice the parties are unable to select such an arbitrator, an
arbitration panel will be selected. The arbitration panel will consist of three
arbitrators. At least one of the arbitrators must be a Florida corporate lawyer
who is rated "AV" by Martindale-Hubbell law directory. Each party shall select
an arbitrator within 20 days after the effective date of the Arbitration Notice
and the two selected arbitrators shall select the third. A party who fails to
select an arbitrator within the prescribed 20-day period waives the right to
select an arbitrator, and two arbitrators chosen by the other party will select
the third arbitrator.
Every mediator or arbitrator must be independent (not a lawyer or
relative of a party to this Agreement or an officer, director, employee, or
shareholder of AmeriPath) without any economic or financial interest of any kind
in the outcome of the mediation or arbitration. Each arbitrator's conduct will
be governed by the Code of Ethics for Arbitrators in Commercial Disputes (1986)
(as amended or any successor thereto) that has been approved and recommended by
the American Bar Association or the American Arbitration Association.
<PAGE> 70
Within 45 days after the date of the election or appointment of the
last arbitrator, the arbitration panel shall convene a hearing for the dispute
to be held on such date and at such time and place in Dade County, Florida, as
the arbitration panel designates upon 21 days' advance notice to the parties to
the dispute. The arbitration panel shall render its decision within 30 days
after the conclusion of the hearing. The decision of the arbitration panel will
be binding and conclusive as to all the parties to the dispute and, upon the
pleading of any party to the dispute, any court having jurisdiction may enter a
judgment of any award rendered in the arbitration, which may include an award of
any damages. The arbitration panel shall hear and decide the dispute based on
the evidence produced, notwithstanding the failure or refusal to appear by a
party who has been duly notified of the date, time, and place of the hearing.
The parties agree that the cost of the arbitrators or mediators in any mediation
or arbitration shall be shared equally by the parties to the dispute.
12.16 Attorneys' Fees. Subject to required arbitration pursuant to
Section 12.16 if any party to this Agreement seeks to enforce the terms and
provisions of this Agreement, then the prevailing party in such action,
including arbitration, shall be entitled to recover from the losing party all
costs in connection with such action, including without limitation reasonable
attorneys' fees, expenses and costs incurred at arbitration or the trial court
and all appellate levels (for equitable relief).
<PAGE> 71
IN WITNESS WHEREOF, the parties hereto have made and entered into this
Agreement the date first hereinabove set forth.
PURCHASER:
AMERIPATH, INC.,
By: /s/ Robert P. Wynn
----------------------------------------
Robert P. Wynn, Chief Financial Officer
SELLERS:
/s/ Lawrence Seidenstein, M.D.
-------------------------------------------
Lawrence Seidenstein, M.D.
/s/ Steven E. Levine, M.D.
-------------------------------------------
Steven E. Levine, M.D.
/s/ David M. Reardon, M.D.
-------------------------------------------
David M. Reardon, M.D.
DRS. SEIDENSTEIN, LEVINE AND
ASSOCIATES, INC.
By: /s/ David M. Reardon, M.D.
-------------------------------------------
David M. Reardon, M.D., President
SEIDENSTEIN, LEVINE REAL ESTATE
PARTNERSHIP
By: /s/ Steven E. Levine, M.D.
-------------------------------------------
Steven E. Levine, M.D., General Partner
<PAGE> 1
Exhibit 10.31
STOCK ISSUANCE AGREEMENT
This STOCK ISSUANCE AGREEMENT is made as of June 26, 1996 among
Ameripath, Inc., a Delaware corporation (the "Company"), The First National
Bank of Boston ("FNBB"), FSC Corp., a Massachusetts corporation and an
affiliate of FNBB, NationsBank, N.A. (South) ("NationsBank") and Atlantic
Equity Corporation, a North Carolina corporation and an affiliate of
(NationsBank).
RECITALS
The Company and FNBB and NationsBank (the "Banks") are party to a
Credit Agreement dated as of May 29, 1996 as amended and as in effect on the
date hereof (the "Credit Agreement") in which the Company agreed to pay to the
Banks in accordance with their respective Percentage Interests a closing fee of
$200,000 (the "Closing Fee").
FNBB and NationsBank are willing to assign their respective rights to
the Closing Fee to FSC Corp. and Atlantic Equity Corporation (the "Holders"),
respectively, and the Company is willing to issue and sell to such Holders as
satisfaction of the Closing Fee owed to the Banks, the number of shares of
Common Stock set forth opposite the name of the Holders on Schedule 1 hereto,
all on the terms and conditions set forth herein.
AGREEMENT
In consideration of the foregoing, and the representations, warranties,
covenants and conditions set forth below, the parties hereto, intending to be
legally bound, hereby agree as follows:
1. Definitions. Capitalized terms defined in the Credit Agreement and
used but not otherwise defined in this Agreement are used herein as so defined.
2. Assignment. FNBB and NationsBank hereby assign to FSC Corp. and
Atlantic Equity Corporation, respectively, and FSC Corp. and Atlantic Equity
Corporation hereby assume, all of the FNBB's and NationsBank's respective
rights to the Closing Fee.
3. Sale and Purchase of Subscription Securities. On the terms and
subject to the conditions hereof, the Company hereby agrees to sell to each
Holder, and by its execution of this Agreement such Holder agrees to accept
from the Company as payment by the Company of the Closing Fee the number of
shares of Common Stock set forth opposite the name of such Holder on Schedule 1
hereto. The shares of Common Stock being purchased by the Holders hereunder
are referred to herein as the "Securities." The Company agrees to deliver
<PAGE> 2
certificates for the Securities to each Holder, registered in the name of such
Holder, immediately following the execution of this Agreement.
4. Representations and Warranties of the Company. The Company
represents and warrants to each of the Banks and Holders that"
4.1 Each of the Company and its Subsidiaries is duly organized and
validly existing and in good standing under the laws of the
jurisdiction of its incorporation, with all power and authority,
corporate or otherwise, necessary to enter into and perform this
Agreement and own its properties and carry on the business now conducted
or proposed to be conducted by it. The Company has made available to
the Holders true and complete copies of the Company's certificate of
incorporation and the by-laws as in effect on the date hereof.
4.2 The Company has taken all corporate action required to
authorize the execution and delivery of this Agreement and the issuance
of the Securities.
4.3 The Securities, when issued, will be duly authorized,
validly issued, fully paid and non-assessable.
4.4 This Agreement is a legal, valid and binding obligation of the
Company, enforceable in accordance with terms.
5. Incidental ("Piggy-Back") Registration Rights. In the event the
Company effects any registration of shares of its capital stock under the
Securities Act of 1933, as amended, for its own account or for the account of
any other Person subsequent to the initial registration by the Company of
shares of its capital stock, then the Holders shall have the right to include
the Securities in such registration if and to the extent of the most favorable
rights of any other holder of any other shares of capital stock of the Company
to include shares in such registration. Notwithstanding the foregoing
provisions of this Section 5, in the event such registration relates to an
underwritten offering (whether or not on a firm commitment basis), if the
managing underwriter of such underwritten offering shall determine that the
shares to be included in such registration should be limited due to market
conditions or otherwise, all of the Securities shall be excluded prior to the
exclusion of any other shares not held by officers or employees of the Company
and shall be included prior to the inclusion of any shares held by officers or
employees of the Company.
6. Indemnities. The Company agrees to indemnify and hold harmless
each Holder, from and against all losses, damages, liabilities and expenses
(including without limitation reasonable attorneys fees and charges) resulting
from any breach of any representation, warranty or agreement of such
indemnifying party or any misrepresentation by such indemnifying party in this
Agreement.
-2-
<PAGE> 3
7. Restrictions on Transfer.
7.1 Restrictive Legend. All certificates representing Securities shall
bear a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A PRIVATE
PLACEMENT, WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), AND MAY NOT BE SOLD, ASSIGNED, PLEDGED OR OTHERWISE TRANSFERRED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE ACT COVERING THE TRANSFER OR
A LEGAL OPINION OF COUNSEL ACCEPTABLE TO THE ISSUER THAT REGISTRATION UNDER THE
ACT IS NOT REQUIRED."
7.2 Termination of Restrictions. The restrictions imposed by Section 7.1
hereof upon the transferability of Securities shall cease and terminate as to
any particular Securities when, in the written opinion of Ropes & Gray or other
counsel reasonably acceptable to the Company, which opinion shall also be
delivered and reasonably acceptable to the Company's transfer agent, (i) such
restrictions are no longer required in order to assure compliance with the
Securities Act or (ii) such Securities shall have been registered under the
Securities Act or transferred in compliance with Rule 144 thereunder. Whenever
such restrictions shall cease and terminate as to any Securities or such
Securities shall be transferable in compliance with paragraph (k) of Rule 144,
the holder thereof shall be entitled to receive from the Issuer, without
expense, new certificates not bearing the legend set forth in Section 7.1
hereof.
8. Miscellaneous.
8.1 This Agreement shall be considered a Credit Document.
8.2 This Agreement and the other agreements referred to herein set forth
the entire understanding among the parties with respect to the subject matter
thereof.
8.3 This Agreement can be changed only by an instrument in writing signed
by the party against whom enforcement of such change is sought.
8.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors, assigns, heirs and representatives;
provided, however, that no Holder may assign any of such Holder's rights
hereunder except in connection with a transfer of the Securities in compliance
with the terms and conditions of Section 7 of this Agreement.
8.5 All covenants, agreements, representations and warranties made herein
shall survive the execution and delivery hereof and transfer of any Securities.
-3-
<PAGE> 4
8.6. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original but all of which shall together constitute
one and the same instrument.
8.7. All notices, requests, consents and demands will be in writing and will
be personally delivered, mailed, postage prepaid, telecopied or telegraphed, if
to the company to it at its address set forth in Exhibit 1.7 of the Credit
Agreement or if to the Holders as follows:
If to FSC Corp., at
100 Federal Street
Boston, MA 02110
Telecopy: (617) 434-1153
Attention: Mary Reilly
if to Atlantic Equity Corporation
c/o NationsBank, N.A. (South)
One Financial Plaza, 10th Floor
Fort Lauderdale, FL 33394
Telecopy: (954) 765-2026
Attention: Alexander Rody
8.8. The Company recognizes that the rights of the Holders under this
Agreement are unique, and, accordingly, the Holders will, in addition to such
other remedies as may be available to them at law or in equity, have the right
to enforce their rights hereunder by actions for injunctive relief and specific
performance to the extent permitted by law. This Agreement is not intended to
limit or abridge any rights of the Holders which may exist apart from this
Agreement.
8.9. The Company agrees that so long as any Securities purchased hereunder
remain outstanding the Company will furnish to each of the Holders all of the
information and reports required to be furnished to the Lenders pursuant to
Section 6.4 of the Credit Agreement as in effect on the date hereof.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
by the terms hereof, have caused this Agreement to be executed, under seal, as
of the date first above written by their officers or other representatives
thereunto duly authorized.
THE COMPANY AMERIPATH, INC.
By /s/ Robert P. Wynn
------------------------------------
Title: EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
THE BANKS: THE FIRST NATIONAL BANK OF BOSTON
By /s/ Randy J. Wehling
------------------------------------
Title: Vice President
NATIONSBANK, N.A. (SOUTH)
By: /s/ Steven I. Rody
------------------------------------
Title: Vice President
THE HOLDERS: FSC CORP.
By: /s/ Mary Joseph Reilly
------------------------------------
Title: Vice President
-----------------------------
ATLANTIC EQUITY CORPORATION
By: /s/ John E. Mack
------------------------------------
Title: President
<PAGE> 1
Exhibit 10.32
STOCK ISSUANCE AGREEMENT
This STOCK ISSUANCE AGREEMENT is made as of August 29, 1996 among
Ameripath, Inc., a Delaware corporation (the "Company"), The First National
Bank of Boston ("FNBB"), FSC Corp., a Massachusetts corporation and an
affiliate of FNBB, NationsBank, N.A. (South) ("NationsBank") and Atlantic
Equity Corporation, a North Carolina corporation and an affiliate of
(NationsBank).
Recitals
The Company and FNBB and NationsBank (the "Banks") entered into an
Amendment No. 1 dated August 29, 1996 to the Credit Agreement dated as of May
29, 1996, as amended and as in effect on the date hereof (the "Credit
Agreement"), for which the Company agreed to pay to the Banks an amendment fee
in accordance with their respective interests in the increase in the Maximum
Amount of Credit made effective by such Amendment (the "Amendment Fee").
Each of FNBB and NationsBank has elected to receive $125,000 of the
Amendment Fee in Common Stock of the Company (the "Common Stock Payment"),
Each of FNBB and NationsBank is willing to assign its right to the
Common Stock Payment to FSC Corp. and Atlantic Equity Corporation (the
"Holders"), respectively, and the Company is willing to issue and sell to such
Holders as full satisfaction of the Amendment Fee owed to NationsBank and as
partial satisfaction of the Amendment Fee owed to FNBB, the number of shares of
Common Stock set forth opposite the name of the Holders on Schedule 1 hereto,
all on the terms and conditions set forth herein.
Agreement
In consideration of the foregoing, and the representations, warranties,
covenants and conditions set forth below, the parties hereto, intending to be
legally bound, hereby agree as follows:
1. Definitions. Capitalized terms defined in the Credit
Agreement and used but not otherwise defined in this Agreement are used herein
as so defined.
2. Assignment. FNBB and NationsBank hereby assign to FSC Corp,
and Atlantic Equity Corporation, respectively, and FSC Corp. and Atlantic
Equity Corporation hereby assume, all of the FNBB's and NationsBank's
respective rights to the Common Stock Payment.
<PAGE> 2
3. Sale and Purchase of Securities. On the terms and subject to
the conditions hereof, the Company hereby agrees to sell to each Holder, and by
its execution of this Agreement such Holder agrees to accept from the Company
as payment by the Company of the Common Stock Payment the number of shares of
Common Stock set forth opposite the name of such Holder on Schedule 1 hereto.
The shares of Common Stock being purchased by the Holders hereunder are
referred to herein as the "Securities". The Company agrees to deliver
certificates for the Securities to each Holder, registered in the name of such
Holder, immediately following the execution of this Agreement.
4. Representations and Warranties of the Company. The Company
represents and warrants to each of the Banks and Holders that:
4.1. Each of the Company and its Subsidiaries is duly
organized and validly existing and in good standing under the laws of
the jurisdiction of its incorporation, with all power and authority,
corporate or otherwise, necessary to enter into and perform this
Agreement and own its properties and carry on the business now
conducted or proposed to be conducted by it. The Company has made
available to the Holders true and complete copies of the Company's
certificate of incorporation and the by-laws as in effect on the date
hereof.
4.2. The Company has taken all corporate action required
to authorize the execution and delivery of this Agreement and the
issuance of the Securities.
4.3. The Securities, when issued, will be duly authorized,
validly issued, fully paid and non-assessable.
4.4. This Agreement is a legal, valid and binding
obligation of the Company, enforceable in accordance with terms.
5. Incidental ("Piggy-Back") Registration Rights. In the event the
Company effects any registration of shares of its capital stock under the
Securities Act of 1933, as amended, for its own account or for the account of
any other Person subsequent to the initial registration by the Company of
shares of its capital stock, then the Holders shall have the right to include
the Securities in such registration if and to the extent of the most favorable
rights of any other holder of any other shares of capital stock of the Company
to include shares in such registration. Notwithstanding the foregoing
provisions of this Section 5, in the event such registration relates to an
underwritten offering (whether or not on a firm commitment basis), if the
managing underwriter of such underwritten offering shall determine that the
shares to be included in such registration should be limited due to market
conditions or otherwise, all of the Securities shall be excluded prior to the
exclusion of any other shares not held by officers or employees of the Company
and shall be included prior to the inclusion of any shares held by officers or
employees of the Company.
-2-
<PAGE> 3
6. Indemnities. The Company agrees to indemnify and hold
harmless each Holder, from and against all losses, damages, liabilities and
expenses (including without limitation reasonable attorneys fees and charges)
resulting from any breach of any representation, warranty or agreement of such
indemnifying party or any misrepresentation by such indemnifying party in this
Agreement.
7. Restrictions on Transfer.
7.1. Restrictive Legend. All Certificates representing
Securities shall bear a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
PRIVATE PLACEMENT, WITHOUT REGISTRATION UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD, ASSIGNED,
PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION UNDER THE ACT COVERING THE TRANSFER OR A LEGAL OPINION
OF COUNSEL ACCEPTABLE TO THE ISSUER THAT REGISTRATION UNDER THE ACT
IS NOT REQUIRED."
7.2. Termination of Restrictions. The restrictions imposed
by Section 7.1 hereof upon the transferability of Securities
shall cease and terminate as to any particular Securities when, in
the written opinion of Ropes & Gray or other counsel reasonably
acceptable to the Company which opinion shall also be delivered and
reasonably acceptable to the Company's transfer agent, (i) such
restrictions are no longer required in order to assure compliance
with the Securities Act or (ii) such Securities shall have been
registered under the Securities Act or transferred in compliance with
Rule 144 thereunder. Whenever such restrictions shall cease and
terminate as to any Securities or such Securities shall be
transferable in compliance with paragraph (k) of Rule 144, the holder
thereof shall be entitled to receive from the Issuer, without
expense, new certificates not bearing the legend set forth in Section
7.1 hereof.
8. Miscellaneous,
8.1. This Agreement shall be considered a Credit Document.
8.2. This Agreement and the other agreements referred to
herein set forth the entire understanding among the parties with
respect to the subject matter thereof.
8.3. This Agreement can be changed only by an instrument in
writing signed by the party against whom enforcement of such change
is sought.
8.4. This Agreement shall bind and inure to the benefit of
the parties hereto and their respective successors, assigns, heirs and
representatives; provided, however, that
-3-
<PAGE> 4
no Holder may assign any of such Holder's rights hereunder
except in connection with a transfer of the Securities in compliance
with the terms and conditions of Section 7 of this Agreement.
8.5. All covenants, agreements, representations and
warranties made herein shall survive the execution and delivery
hereof and transfer of any Securities.
8.6. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of
which shall together constitute one and the same instrument.
8.7. All notices, requests, consents and demands will be in
writing and will be personally delivered, mailed, postage prepaid,
telecopied or telegraphed, if to the Company to it at its address
set forth in Exhibit 1.7 of the Credit Agreement or if to the
Holders as follows:
If to FSC Corp., at
100 Federal Street
Boston, MA 02110
Telecopy: (617) 434-1153
Attention: Mary Reilly
if to Atlantic Equity Corporation,
c/o NationsBank, N.A. (South)
One Financial Plaza, 10th Floor
Fort Lauderdale, FL 33394
Telecopy: (954) 765-2026
Attention: Alexander Rody
8.8. The Company recognizes that the rights of the Holders
under this Agreement are unique, and, accordingly, the Holders will,
in addition to such other remedies as may be available to them
at law or in equity, have the right to enforce their rights hereunder
by actions for injunctive relief and specific performance to the
extent permitted by law. This Agreement is not intended to limit or
abridge any rights of the Holders which may exist apart from this
Agreement.
8.9. The Company agrees that so long as any Securities
purchased hereunder remain outstanding the Company will furnish to
each of the Holders all of the information and reports required to
be furnished to the Lenders pursuant to Section 6.4 of the Credit
Agreement as in effect on the date hereof.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound by
the terms hereof, have caused this Agreement to be executed, under seal, as of
the date first above written by their officers or other representatives
thereunto duly authorized.
THE COMPANY: AMERIPATH, INC.
By /s/ Robert P. Wynn
------------------------------------
Title: Executive Vice President and
Chief Financial Officer
THE BANKS: THE FIRST NATIONAL BANK OF
BOSTON
By /s/ Randy J. Wehling
------------------------------------
Title: Vice President
NATIONSBANK, N.A. (SOUTH)
By: /s/ Steven I. Rody
-----------------------------------
Title: Vice President
THE HOLDERS: FSC CORP.
By: /s/ Mary Joseph Reilly
-----------------------------------
Title: Vice President
-----------------------------
ATLANTIC EQUITY CORPORATION
By: /s/ John E. Mack
-----------------------------------
Title: President
<PAGE> 6
Schedule 1 - to Stock
Issuance Agreement
------------------
<TABLE>
<CAPTION>
Securities
----------
Name-of Holder Common Purchase Price
- -------------- ------ --------------
<S> <C> <C>
FSC Corp. 12,500 $125,000
Atlantic Equity Corporation 7,500 $ 75,000
------ --------
TOTAL 20,000 $200,000
</TABLE>
<PAGE> 1
Exhibit 10.33
STOCK ISSUANCE AGREEMENT
This STOCK ISSUANCE AGREEMENT is made as of November 4, 1996 among
Ameripath, Inc., a Delaware corporation (the "Company"), The First National
Bank of Boston ("FNBB") and FSC Corp., a Massachusetts corporation and an
affiliate of FNBB.
Recitals
The Company, FNBB and NationsBank, N.A. (South) entered into an
Amendment No. 2 dated as of November 4, 1996 to the Credit Agreement dated as
of May 29, 1996, as amended and as in effect on the date hereof (the "Credit
Agreement"), for which the Company agreed to pay to FNBB an amendment fee
consisting of cash and 11,111 shares of Common Stock, $.01 par value per
share, of the Company (the "Common Stock Payment"), as described in the letter
agreement between FNBB and the Company dated as of the date hereof and attached
hereto.
FNBB is willing to assign its right to the Common Stock Payment to
to FSC Corp ("FSC") and the Company is willing to issue and sell to FSC 11,111
shares of Common Stock, all on the terms and conditions set forth herein,
Agreement
In consideration of the foregoing, and the representations,
warranties, covenants and conditions set forth below, the parties hereto,
intending to be legally bound, hereby agree as follows:
1. Definitions. Capitalized terms defined in the Credit
Agreement and used but not otherwise defined in this Agreement are used herein
as so defined.
2. Assignment. FNBB hereby assigns to FSC, and FSC hereby
assumes, all of FNBB's rights to the Common Stock Payment.
3. Sale, and purchase Securities. On the terms and subject to the
conditions hereof, the Company hereby agrees to sell to FSC, and by its
execution of this Agreement FSC agrees to accept from the Company as payment by
the Company of the Common Stock Payment, 11,111 shares of the Company's
Common Stock. The shares of Common Stock being purchased by FSC hereunder are
referred to herein as the "Securities". The Company agrees to deliver
certificates for the Securities to FSC, registered in the name of FSC,
immediately following the execution of this Agreement.
<PAGE> 2
4. Representations and Warranties of the Company. The Company
represents and warrants to FNBB and FSC that;
4.1. Each of the Company and its Subsidiaries is duly
organized and validly existing and in good standing under the
laws of the jurisdiction of its incorporation, with all power and
authority, corporate or otherwise, necessary to enter into and
perform this Agreement and own its properties and carry on the
business now conducted or proposed to be conducted by it. The
Company has made available to FNBB and FSC true and complete copies
of the Company's certificate of incorporation and the by-laws as in
effect on the date hereof.
4.2. The Company has taken all corporate action required to
authorize the execution and delivery of this Agreement and the
issuance of the Securities.
4.3. The Securities, when issued, will be duly authorized,
validly issued, fully paid and non-assessable.
4.4. This Agreement is a legal, valid and binding obligation
of the Company, enforceable in accordance with terms.
5. Incidental ("Piggy-Back") Registration Rights. In the event
the Company effects any registration of shares of its capital stock under the
Securities Act of 1933, as amended, for its own account or for the account of
any other Person subsequent to the initial registration by the Company of
shares of its capital stock, then FSC shall have the right to include the
Securities in such registration if and to the extent of the most favorable
rights of any other holder of any other shares of capital stock of the Company
to include shares in such registration. Notwithstanding the foregoing
provisions of this Section 5, in the event such registration relates to an
underwritten offering (whether or not on a from commitment basis), if the
managing underwriter of such underwritten offering shall determine that the
shares to be included in such registration should be limited due to market
conditions or otherwise, all of the Securities shall be excluded prior to the
exclusion of any other shares not held by officers or employees of the Company
and shall be included prior to the Inclusion of any shares held by officers or
employees of the Company.
6. Indeminities. The Company agrees to indemnify and hold
harmless FSC and FNBB, from and against all losses, damages, liabilities and
expenses (including without limitation reasonable attorneys fees and charges)
resulting from any breach of any representation, warranty or agreement of such
indemnifying party or any misrepresentation by such indemnifying party in this
Agreement.
-2-
<PAGE> 3
7. Restrictions on Transfer,
7.1. Restrictive Legend. All certificates representing
Securities shall bear a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN
A PRIVATE PLACEMENT, WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD, ASSIGNED, PLEDGED
OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
UNDER THE ACT COVERING THE TRANSFER OR A LEGAL OPINION OF COUNSEL
ACCEPTABLE TO THE ISSUER THAT REGISTRATION UNDER THE ACT IS NOT
REQUIRED."
7.2. Termination of Restrictions. The restrictions imposed
by Section 7.1 hereof upon the transferability of Securities
shall cease and terminate as to any particular Securities when, in
the written opinion of Ropes & Gray or other counsel reasonably
acceptable to the Company, which opinion shall also be delivered and
reasonably acceptable to the Company's transfer agent, (i) such
restrictions are no longer required in order to assure compliance
with the Securities Act or (ii) such Securities shall have been
registered under the Securities Act or transferred in compliance with
Rule 144 thereunder. Whenever such restrictions shall cease and
terminate as to any Securities or such Securities shall be
transferable in compliance with paragraph (k) of Rule 144, the holder
thereof shall be entitled to receive from the Issuer, without
expense, new certificates not bearing the legend set forth in Section
7.1 hereof.
8. Miscellaneous.
8.1. This Agreement shall be considered a Credit Document.
8.2. This Agreement and the other agreements referred to
herein set forth the entire understanding among the parties with
respect to the subject matter thereof.
8.3. This Agreement can be changed only by an instrument in
writing signed by the party against whom enforcement of such change
is sought.
8.4. This Agreement shall bind and inure to the benefit of
the parties hereto and their respective successors, assigns, heirs
and representatives; provided, however, that FSC may not assign any
of its rights hereunder except in connection with a transfer of the
Securities in compliance with the terms and conditions of Section 7
of this Agreement.
8.5. All covenants, agreements, representations and
warranties made herein shall survive the execution and delivery
hereof and transfer of any Securities.
-3-
<PAGE> 4
8.6. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original but all of
which shall together constitute one and the same instrument.
8.7. All notices, requests, consents and demands will be in
writing and will be personally delivered, mailed, postage prepaid,
telecopied or telegraphed, if to the Company to it at its address
set forth in Exhibit 1.7 of the Credit Agreement or if to FSC as
follows:
If to FSC Corp., at
100 Federal Street
Boston, MA 02110
Telecopy: (617) 434-1153
Attention: Mary Reilly
8.8. The Company recognizes that the rights of FSC under
this Agreement are unique, and; accordingly, FSC will, in
addition to such other remedies as may be available to it at law or
in equity, have the right to enforce its rights hereunder by actions
for inactive relief and specific performance to the extent permitted
by law. This Agreement is not intended to limit or abridge any
rights of FSC or FNBB which may exist apart from this Agreement.
8.9. The Company agrees that so long as any Securities
purchased hereunder remain outstanding the Company will furnish to
FSC all of the information and reports required to be furnished
to the Lenders pursuant to Section 6.4 of the Credit Agreement as in
effect on the date hereof.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
by the terms hereof, have caused this Agreement to be executed, under seal, as
of the date first above written by their officers or other representatives
thereunto duly authorized.
AMERIPATH, INC.
By /s/ Robert P. Wynn
------------------------------------
Title: Executive Vice President and
Chief Financial Officer
THE FIRST NATIONAL BANK OF
BOSTON
By /s/ Randy J. Wehling
------------------------------------
Title: Vice President
FSC CORP.
By: /s/ Mary Joseph Reilly
-----------------------------------
Title: Vice President
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS'S CONSENT AND REPORT ON SCHEDULES
To the Board of Directors and Stockholders of AmeriPath, Inc.:
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-17065 of AmeriPath, Inc. on Form S-1 of our report dated November 19, 1996
(January 13, 1997, as to the effects of the 1.8 for 1 stock split discussed in
Note 1), appearing in the Prospectus, which is part of this Registration
Statement. We also consent to the references to us under the headings "Selected
Consolidated Financial Data" and "Experts" in such Prospectus.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the consolidated financial statement
schedule of AmeriPath, Inc., listed in Item 16(b). This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
We have also previously audited, in accordance with generally accepted auditing
standards, the balance sheets as of December 31, 1992 and 1993, and the related
statements of income, stockholders' equity, and cash flows for the year ended
December 31, 1992 (none of which are presented herein); and we expressed an
unqualified opinion on those financial statements. In our opinion, the
information as of December 31, 1992 and 1993 and for the year ended December
31, 1992, set forth under the heading "Selected Consolidated Financial Data" in
the Prospectus, is fairly stated in all material respects in relation to the
financial statements from which it has been derived.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Fort Lauderdale, Florida
January 30, 1997
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-17065 of AmeriPath, Inc. on Form S-1 of our reports appearing in the
Prospectus, which is part of this Registration Statement, as follows: dated
September 27, 1996 on the financial statements of Demaray and Poulos, P.A.;
dated September 27, 1996 on the financial statements of Amazon and Rosen, M.D.,
P.A.; dated October 15, 1996 on the financial statements of SkinPath, P.C.;
dated October 19, 1996 on the financial statements of Drs. Seidenstein, Levine &
Associates, P.A.; and dated November 13, 1996 on the financial statements of
Fernandez and Kalemeris, P.A. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Fort Lauderdale, Florida
January 30, 1997
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-17065 of AmeriPath, Inc. on Form S-1 of our reports appearing in the
Prospectus, which is part of this Registration Statement as follows: dated
October 1, 1996 on the financial statements of Derrick and Associates Pathology,
Inc.; and dated November 1, 1996 on the financial statements of Volusia
Pathology Group, M.D., P.A. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Orlando, Florida
January 30, 1997
<PAGE> 1
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No 3 to Registration Statement No.
333-17065 of AmeriPath, Inc. on Form S-1 of our reports appearing in the
Prospectus, which is part of this Registration Statement, as follows: dated
October 2, 1996 on the combined financial statements of Pathology Associates
P.S.C. and Technical Pathology Services, Inc.; dated November 1, 1996 on the
financial statements of Beno Michel, M.D., Inc.; and dated November 8, 1996 on
the financial statements of David R. Barron, M.D., Inc. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Cincinnati, Ohio
January 30, 1997
<PAGE> 1
EXHIBIT 23.6
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-17065 of AmeriPath, Inc. on Form S-1 of our report dated November 12, 1996
on the combined financial statements of Clay J. Cockerell, M.D., P.A. and
Freeman-Cockerell Laboratories, Inc. appearing in the Prospectus, which is part
of this Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Dallas, Texas
January 30, 1997
