<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 1997
REGISTRATION NO. 333-17065
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
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>
<S> <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 14, 1997
6,200,000 SHARES
AMERIPATH, INC.
[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." 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 $14.00 per share. See
"Underwriting." The Company has applied to have the Shares approved for
quotation on the Nasdaq National Market under the symbol "PATH."
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 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 and the Selling 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 160,000 shares, 450,000 shares and 320,000 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 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
[PICTURES, DIAGRAM AND CORRESPONDING TEXT DESCRIBING THE STEPS LEADING TO AN
ANATOMIC PATHOLOGY TEST AND REVIEW]
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.
i
<PAGE> 4
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..................... 1
Risk Factors........................... 6
The Company............................ 13
Use of Proceeds........................ 15
Dividend Policy........................ 15
Dilution............................... 16
Capitalization......................... 17
Selected Consolidated Financial Data... 19
Unaudited Pro Forma Consolidated
Financial Data....................... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 26
<CAPTION>
PAGE
-----
<S> <C>
Business............................... 36
Management............................. 48
Certain Transactions................... 54
Principal and Selling Stockholders..... 56
Description of Capital Stock........... 57
Shares Eligible for Future Sale........ 59
Underwriting........................... 61
Legal Matters.......................... 62
Experts................................ 62
Additional Information................. 63
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.
ii
<PAGE> 5
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. Unless the context otherwise requires, references to: (a) the
Company or AmeriPath include AmeriPath, Inc., its predecessor, its subsidiaries
and the professional association and professional corporations (collectively,
the "PA Contractors") which are separate legal entities that contract with the
Company to provide pathology services in certain states; (b) AmPath mean only
AmeriPath, Inc.; (c) Affiliated Physicians mean physicians employed by
subsidiaries of AmPath or by the PA Contractors; and (d) the Practices mean
AmPath's subsidiaries and the PA Contractors, collectively.
AmeriPath is the leading physician practice management company focused on
anatomic pathology services. AmeriPath provides practice management services to
pathologists in both outpatient and hospital inpatient laboratories, enabling
the pathologists to concentrate on the practice of medicine. Through its 12
Practices, the Company, as of December 31, 1996, had 81 pathologists and
employed a total of 585 people. The pathologists provide services in 12
outpatient pathology laboratories, 46 hospital inpatient laboratories and 17
outpatient surgery centers in five states. Of these pathologists, 77 are board
certified and four 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 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. 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.
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 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 and
its Affiliated Physicians provide management and physician services in the
Company's outpatient laboratories and in inpatient laboratories owned by
hospitals. Eight Practices 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. Since a Practice's profitability is largely based upon test
volume, increased outpatient test volume enhances the productivity of the
Affiliated Physicians and leverages the existing fixed cost structure of the
inpatient laboratories. The four other Practices 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. In February 1994, the
Company's predecessor consummated a 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. AmPath is a holding company that
manages pathology practices through five wholly-owned subsidiaries, two of which
have long-term management contracts with the three PA contractors. See "The
Company."
1
<PAGE> 6
The Company's objective is to enhance its position as the leading provider
of anatomic pathology practice management services through the following
strategies:
- Focus on Anatomic Pathology. The Company believes that its focus on
anatomic pathology provides it with a competitive advantage in the
acquisition of anatomic pathology practices and that a significant
opportunity exists to acquire anatomic pathology practices that are
seeking to affiliate with a physician practice management company with
experienced management and access to capital. As a result of the
Company's focus on anatomic pathology, the 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 share in
existing markets and enter into new markets through acquisitions. The
Company's acquisition criteria include market demographics, size,
profitability, local prominence, payor relationships 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, add new
services, such as dermatopathology, and provide operational efficiencies
for the Practices in that market. In new markets, the Company seeks to
acquire 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. 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 its existing contracts with
national clinical laboratories 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 through acquisitions of 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 Company's outpatient services in the same region.
- Achieve Operational Efficiencies. The Company intends to achieve
operational efficiencies by centralizing certain functions, enhancing
Practice efficiency and utilization and using 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. In certain markets,
the Company intends to develop a regional business model with centralized
administrative functions, common marketing plans and integrated courier
systems.
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 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's Vice President of Sales
supervises ten professional sales personnel who focus their efforts on sales to
direct referral sources at the local level. The Company has centralized its
marketing efforts for managed care organizations, multi-hospital systems and
national clinical laboratories. The Company intends to leverage its size and
geographic coverage to expand its contracts with national clinical laboratories
and managed care organizations from a local to 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.
2
<PAGE> 7
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."
Proposed 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."
3
<PAGE> 8
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:
Net revenue............... $11,443 $13,419 $14,461 $16,024 $ 82,281 $12,176 $20,840 $ 63,316
Operating costs:
Cost of services........ 8,791 10,803 6,780 8,271 37,760 6,147 10,234 28,952
Selling, general and
administrative
expense............... 1,696 1,634 2,287 2,644 12,733 1,931 4,026 10,657
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 62,731 8,988 16,272 48,799
-------- -------- -------- -------- --------- -------- -------- ---------
Income from operations.... 169 29 4,391 3,948 19,550 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 16,928 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 $ 9,806 $ 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 15 1 9 15
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------
PRO PRO FORMA
ACTUAL FORMA(6) AS ADJUSTED(7)
-------- --------- --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents....................................................... $ 193 $ 4,008 $ 4,008
Total assets.................................................................... 50,793 143,147 143,147
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>
4
<PAGE> 9
(1) In connection with a recapitalization consummated on February 14, 1994 (the
"Recapitalization"), the Company: (i) issued 3,208,120 shares of
Convertible Preferred Stock for $5.5 million; (ii) issued to the purchasers
of Convertible Preferred Stock $7.5 million principal amount of the Junior
Notes; (iii) issued 1,425,600 shares of Common Stock for $1.0 million; (iv)
issued to the purchasers of Common Stock (a) $3.5 million principal amount
of the Senior Notes and (b) $2.5 million principal amount of 8%
non-negotiable subordinated contingent notes (the "ALA Contingent Notes");
and (v) made cash distributions to the purchasers of Common Stock of
approximately $20.5 million, financed partially by borrowings under the
Company's line of credit with the First National Bank of Boston. 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 "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.
5
<PAGE> 10
RISK FACTORS
Reliance upon Government Programs. The Company derived 55.9%, 55.8% and
34.9% of its net 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 its revenue by increasing the amount it
charges for services provided. To the extent the Company's costs increase, the
Company may not be able to recover such cost increases from government payors.
In addition, 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, such as the Company. 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 Company
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 Company being unable to recover cost increases
through price increases or otherwise, could have a material adverse effect on
the Company's financial condition and results of operations. See
"Business -- Government Regulation."
Risks Relating to Acquisition Strategy. The Company's strategy includes
growth through acquisitions of 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 acquisition 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 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. In pursuing its acquisition strategy, the Company intends to expand
its presence in areas where the Company currently operates 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
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investigations of the activities of practices prior to being acquired, inability
to integrate acquired businesses 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 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 an acquisition
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, the Company intends
to continue to grow through internal expansion. 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 its employees. 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 each
Practice, 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
recruiting and retaining pathologists, particularly those with subspecialties,
such as dermatopathology. While the Company has been able to recruit and retain
the Affiliated Physicians, no assurance can be given that the Company 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 terminate their relationships
with the Company 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 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 Company's subsidiaries and the
PA Contractors 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 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 combine their operations.
At
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December 31, 1996, the Company's subsidiaries and the PA Contractors 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, 15.9% and 22.1%,
respectively, of net revenue was generated directly from contracts with
hospitals owned by Columbia/HCA. If the Company's 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 $30.4 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. 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 and laboratory contracts acquired in the Recent Acquisitions were
approximately $26.7 million at September 30, 1996 and $59.9 million on a pro
forma basis at September 30, 1996 representing approximately 52.6% and 41.9%,
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 27.0 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 $58.5 million on a pro forma basis at September 30, 1996 representing
approximately 19.8% and 40.9%, 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 34.2 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 cash flows,
whether events and circumstances indicate that all or a portion
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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 Company's existing operations, impose
additional requirements on the Company or limit the expansion of the Company's
business. 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 also competes and will continue to compete
with independent and national clinical laboratories and anatomic pathology
practices. In addition, some hospitals, clinics, healthcare companies, managed
care organizations and insurance companies provide services similar to those
provided by the Company. Companies in other healthcare industry segments, such
as managers of other hospital-based specialties or large physician practices,
some of which have financial and other resources greater than those of the
Company, may become competitors in providing pathology services. There can be no
assurance that the Company will be able to compete effectively or that
additional competitors will not enter the market. 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 of the operations of the Company to 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 and operate practices in that state. In states
with laws that prohibit such structure, AmPath will establish its relationships
through long term management services agreements with professional corporations.
In Texas and Ohio, a subsidiary of AmPath contracts 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 or contract with physicians to
provide necessary physician services to facilities for which the Company
provides practice management services. AmPath plans to organize a controlled
non-profit corporate subsidiary in Texas by June 1997 which will assume the
management contract from the PA Contractor organized in Texas (the "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 that it is in
compliance and that the Texas non-profit corporate subsidiary will comply 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, AmPath could be
subject to civil and criminal penalties and could be required to restructure its
contractual arrangements. Such results or the inability of AmPath to
successfully restructure its relationships
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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 Company's business 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 Company
relies 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 and the physician 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 Company. Each of the states in which the Company does
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 it has structured its
current operations and transactions to 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 the Company's
current operations or transactions 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, as such laws may be ultimately interpreted. A
violation of such laws by a Practice prior to its acquisition could result in
civil penalties and criminal penalties, exclusion from participation in Medicare
and Medicaid programs and/or loss of a physician's license to practice medicine.
The Company's 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
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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 it is in compliance with these laws and
regulations, there can be no assurance that federal or state regulatory
authorities will not challenge the Company's current or future activities under
these laws. See "Business -- Government Regulation."
Professional Liability and Insurance. The Company's business entails an
inherent risk of claims of liability for acts of Affiliated Physicians and
laboratory technicians. The Company periodically becomes involved as a defendant
in medical malpractice lawsuits, some of which are currently ongoing, and is
subject to the attendant risk of substantial damage awards. See
"Business -- Legal Proceedings." Certain of the Company's contracts with
hospitals require the Company 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 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 and each of the Affiliated Physicians, 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 could,
if the outcome were adverse to the Company, 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
Ventures III, L.P., Summit Subordinated Debt Fund, L.P. and Summit Investors II,
L.P. (collectively, "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 33.8% of the outstanding shares
of Common Stock. Accordingly, Summit, Schroder, 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."
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."
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<PAGE> 16
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."
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THE COMPANY
AmeriPath is the leading physician practice management company focused on
anatomic pathology services. AmeriPath provides practice management services to
pathologists in both outpatient and hospital inpatient laboratories, enabling
the pathologists to concentrate on the practice of medicine. Through the
Practices, the Company, as of December 31, 1996, employed or had contracts with
PA Contractors that employed 81 pathologists and employed 585 people. The
Affiliated Physicians provide services in 12 outpatient laboratories owned and
operated by the Company, 46 hospital inpatient laboratories and 17 outpatient
surgery centers in five states. Of these pathologists, 77 are board certified
and four are board eligible in anatomic pathology. Thirty-nine of the Affiliated
Physicians are also board certified in a subspecialty of anatomic pathology,
including dermatopathology, hematopathology and cytopathology.
The Company completed the Recapitalization in 1994 pursuant to which the
Company's predecessor, 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"), an outpatient pathology
practice formed in 1982 in Ft. 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 completed ten
acquisitions of anatomic pathology practices in the following five states: five
practices in Florida, one practice in Alabama, one practice in Kentucky, two
practices in Ohio and one practice in Texas. The Recent Acquisitions, which
include the ten acquisitions and the acquisition of D&P, established the Company
as the leading physician practice management company focused on anatomic
pathology.
In acquiring an anatomic pathology practice, the Company generally acquires
(to the extent permitted by applicable state law) all of the assets of that
practice, including, but not limited to, its fixed assets (including laboratory
and testing equipment), referral base, customer lists, contract rights, accounts
receivable and goodwill and other identified intangibles. 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
detail regarding the consideration paid in the Recent Acquisitions, see
"Management's Discussion and Analysis of Financial Condition and 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 provides anatomic pathology
services at 14 hospitals and 13 outpatient surgery centers throughout Central
and Southern Florida and operates one of the
13
<PAGE> 18
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
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") was acquired in October 1996. Based in Cleveland and founded
in 1976, CPI employs 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") was also acquired 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 as the leading provider of practice
management services for outpatient anatomic pathology services in Ohio.
TEXAS
Freeman-Cockerell Laboratories, Inc. ("Freeman") was acquired and entered
into a long-term management agreement with the Texas PA 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 one pathologist who operates an
outpatient dermatopathology laboratory. The acquisition of Freeman and the
affiliation with the Texas PA established the Company's presence in Texas.
14
<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 ($73.9 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 outstanding balance at December 31, 1996 of approximately
$81.7 million of indebtedness under the Credit Facility.
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."
15
<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.
16
<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
17
<PAGE> 22
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.
18
<PAGE> 23
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>
19
<PAGE> 24
(1) In connection with the Recapitalization, the Company: (i) issued 3,208,120
shares of Convertible Preferred Stock for $5.5 million; (ii) issued to the
purchasers of Convertible Preferred Stock $7.5 million principal amount of
the Junior Notes; (iii) issued 1,425,600 shares of Common Stock for $1.0
million; (iv) issued to the purchasers of Common Stock (a) $3.5 million
principal amount of the Senior Notes and (b) $2.5 million principal amount
of ALA Contingent Notes; and (v) made cash distributions to the purchasers
of Common Stock of approximately $20.5 million financed partially by
borrowings under the line of credit with the First National Bank of Boston.
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 "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.
20
<PAGE> 25
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 Cost, 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.
Three Recent Acquisitions are PA Contractors. The financial statements of
these Practices will be consolidated with the Company because AmeriPath has
unilateral control over the assets and operations of the PA Contractors.
Notwithstanding the lack of voting control by AmeriPath, consolidation is
necessary to present fairly the financial position and results of operations of
the Company because of the existence of a parent-subsidiary relationship by
means other than record ownership of the PA Contractors' voting stock. Control
of the PA Contractors is permanent, rather than temporary, under the terms of
purchase agreements, management agreements, trust agreements and other
agreements executed in connection with the acquisition transactions. See Note 2
to the Consolidated Financial Statements.
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.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOURTH ACQUISITION
QUARTER 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 48,084 58,497 -- 58,497
Identifiable intangibles, net..... 26,726 -- 33,200 59,926 -- 59,926
Other............................. 1,825 113 220(d) 2,158 -- 2,158
------- ------- ------- -------- -------- --------
Total assets.............. $ 50,793 $10,850 $ 81,504 $143,147 $ -- $ 143,147
======= ======= ======= ======== ======== ========
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 -- 9,586 13,321 -- 13,321
------- ------- ------- -------- -------- --------
Total long-term
liabilities............. 47,637 510 60,123 108,270 (70,789) 37,481
------- ------- ------- -------- -------- --------
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 $ 81,504 $143,147 $ -- $ 143,147
======= ======= ======= ======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial data.
21
<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.............. $ 16,024 $68,042 $ (1,785) $82,281 $ -- $82,281
Operating costs:
Cost of services....... 8,271 46,011 (16,522) 37,760 -- 37,760
Selling, general and
administrative
expense.............. 2,644 10,773 (684) 12,733 -- 12,733
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 (12,763) 62,731 -- 62,731
------- ------- -------- ------- ------ -------
Income from operations... 3,948 4,624 10,978 19,550 -- 19,550
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 3,716 10,797 6,131 16,928
Provision for income
taxes.................. 900 476 3,355(j) 4,731 2,391(j) 7,122
------- ------- -------- ------- ------ -------
Net income............... $ 1,498 $ 4,207 $ 361 $ 6,066 $ 3,740 $ 9,806
======= ======= ======== ======= ====== =======
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.............. $ 20,840 $43,487 $ (1,011) $63,316 $ -- $63,316
Operating costs:
Cost of services....... 10,234 29,683 (10,965) 28,952 -- 28,952
Selling, general and
administrative
expense.............. 4,026 7,772 (1,141) 10,657 -- 10,657
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 (9,097) 48,799 -- 48,799
------- ------- -------- ------- ------ -------
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.
22
<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 based on
reports of independent consultants. 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 $48.4 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
intangibles............................................. 9,586
--------
Total intangible assets................................... 81,629
Less identifiable intangible assets....................... 33,200
--------
Estimated goodwill........................................ 48,429
Less: goodwill recorded in the historical financial
statements of Fourth Quarter Recent Acquisitions........ 345
--------
Adjustment to increase goodwill........................... $ 48,084
========
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.................... $ --
========
(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."
</TABLE>
23
<PAGE> 28
<TABLE>
<S> <C>
(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 for the five Recent Acquisitions completed prior to
September 30, 1996 and through September 30, 1996 for the Fourth Quarter Recent
Acquisitions.
(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) eliminate the net revenue and related expenses attributable
to the dermatology practice of Beno Michel, M.D. (the "Derm Practice") that were
included in the historical financial statements of CPI, but will not be included in the
operations of the Company; (3) eliminate certain non recurring expenses directly
related to the Recent Acquisitions and related transactions ("Non Recurring"); and (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"). The following table summarizes
these adjustments:
</TABLE>
<TABLE>
<CAPTION>
CLOSED PHYSICIAN
DECEMBER 31, 1995 HOSPITAL DERM PRACTICE NON RECURRING COMPENSATION TOTAL
-------------------------------------------- -------- ------------- ------------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenue................................. $ (551) $(1,234) $ -- $ -- $ (1,785)
Cost of services............................ -- (906) -- (15,616) (16,522)
Selling, general and administrative
expense................................... (41) (151) (492) -- (684)
Provision for doubtful accounts............. (93) -- -- -- (93)
SEPTEMBER 30, 1996
Net revenue................................. $ -- $(1,011) $ -- $ -- $ (1,011)
Cost of services............................ -- (775) -- (10,190) (10,965)
Selling, general and administrative
expense................................... -- (125) (1,016) -- (1,141)
(g) Represents the amortization expense for both net identifiable intangible assets and
goodwill. The net identifiable intangible assets total approximately $59.9 million and
are being amortized over periods ranging from 10 to 40 years. The amortization periods
of identifiable intangible assets were estimated by the Company based on reports of
independent consultants. 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 $58.5 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. The following table summarizes the values
assigned to each of the identifiable intangible assets and goodwill and the related
weighted average amortization periods.
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
AMORTIZATION
VALUE PERIOD
-------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Hospital contracts................................. $ 28,950 36.5
Physician referral lists........................... 28,931 18.7
Laboratory contracts............................... 2,300 10.0
Goodwill........................................... 58,575 34.2
--------------
Total.................................... $118,756
==============
</TABLE>
24
<PAGE> 29
<TABLE>
<S> <C>
(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>
25
<PAGE> 30
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. With the Recent Acquisitions, the Company acquired three
Practices that provide exclusively outpatient anatomic pathology services and
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 inpatient and outpatient
anatomic pathology practices.
The Company provides 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.
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
bills 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 Company is 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 typically bills government programs (principally Medicare and
Medicaid), indemnity insurance companies, managed care organizations, national
clinical laboratories, physicians and patients. Net revenue differs from amounts
billed for services due to: (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 national clinical laboratories, many of whom contract with
managed care organizations to provide anatomic pathology services. The Company
has contracts with managed care organizations and national clinical laboratories
and is attempting to increase the number of such contracts in an attempt to
increase test volume. Since the majority of the Company's operating costs 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."
26
<PAGE> 31
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
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 $12.2 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 $30.4 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 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.
27
<PAGE> 32
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. 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. 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 represented the purchase of all of the outstanding capital stock of
the acquired entity. See "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 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
$59.9 million represents net identifiable intangible assets and $58.5 million
represents goodwill. Net identifiable intangible assets include hospital
contracts, physician referral lists 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 September 30, 1996, amortization of net
identifiable intangible assets on a pro forma basis for the Recent Acquisitions
was $2.6 million and $2.0 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 $1.9 million and $1.4 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."
To date, the Company has integrated certain aspects of the billing, sales
and marketing, accounting, purchasing, insurance and courier functions of
certain of the Practices. Integration of such functions has resulted in, among
other things, 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."
28
<PAGE> 33
PRACTICES
As of December 31, 1996, the Company provides pathology services through 12
Practices:
<TABLE>
<CAPTION>
AFFILIATED HOSPITAL OUTPATIENT 1995
PRACTICE LOCATION PHYSICIANS PERSONNEL 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(1)
D&P Pathology Fort Lauderdale, FL 9 9 3 $ 2,548
Derrick and Associates Orlando, FL 24 148 14 X $21,706
Pathology
Florida Pathology Miami Beach, FL 2 14 1 $ 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 $ 4,934
Richfield Laboratory of Cincinnati, OH 3 32 -- X $ 6,202
Dermatopathology
Drs. Seidenstein, Levine & Fort Myers, FL 9 40 5 $ 6,181
Associates
SkinPath Birmingham, AL 3 22 1 X $ 1,847
Volusia Pathology Group Ormond Beach, FL 7 34 3 X $ 5,825
-- --- -- -----------
Totals 81 563 (2) 46 $84,066
======= ======= ======= =========
</TABLE>
- ---------------
(1) The net revenue of the dermatology practice ($1.2 million for 1995) less
operating expenses is paid to the seller of this Practice.
(2) Does not include 22 administrative and executive personnel of AmPath.
29
<PAGE> 34
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.
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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, $800,000 was due to the addition of two Affiliated
Physicians, additional non-physician personnel and increased variable operating
costs for anatomic pathology services and $700,000 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.
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<PAGE> 36
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.
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.
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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 and
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<PAGE> 38
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 $4.2 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
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<PAGE> 39
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
plans to integrate its laboratory information, billing and collections systems,
which may result in an increase in the percentage of capital expenditures to net
revenues. 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.
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<PAGE> 40
BUSINESS
GENERAL
AmeriPath is the leading physician practice management company focused on
anatomic pathology services. AmeriPath provides practice management services to
pathologists in both outpatient and hospital inpatient laboratories, enabling
the pathologists to concentrate on the practice of medicine. Through its 12
Practices, the Company, as of December 31, 1996, had 81 pathologists and
employed a total of 585 people. The pathologists provide services in 12
outpatient pathology laboratories owned and operated by the Company, 46 hospital
inpatient laboratories and 17 outpatient surgery centers in five states. Of
these pathologists, 77 are board certified and four are board eligible in
anatomic pathology. Thirty-nine of the pathologists are also board certified in
a subspecialty of anatomic pathology, including dermatopathology,
hematopathology and cytopathology.
The Company and its Affiliated Physicians provide practice management and
physician services in outpatient laboratories, owned by the Company, and in
inpatient laboratories, owned by a hospital. Eight practices 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 these contracts, the Company provides the medical director for
the hospital laboratory, who is responsible for the laboratory's operations,
including anatomic and clinical pathology, as well as the hospital's blood bank
and microbiology services. These Practices capitalize on their relationships
with the medical staff of the hospitals and the local medical community to
expand their provision of anatomic pathology services to office based
physicians. By offering services to office based physicians, the Practices
capitalize on the trend towards more procedures being performed in an outpatient
setting. Since a Practice's profitability is largely based upon test volume,
increased outpatient test volumes enhance the productivity of the Physicians and
leverage the existing fixed cost structure of the inpatient laboratories. The
four other Practices 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.
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<PAGE> 41
Based on information published by the American Medical Association, the
number of practicing pathologists in the United States is approximately 14,000.
According to the American Society of Dermatopathology, approximately 900
practicing pathologists specialized in dermatopathology in 1994. 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. As an example 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.
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 national clinical
laboratories, marketing of professional services, providing continuing education
and career advancement
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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 anatomic pathology practice management services by implementing the following
strategies:
Focus on Anatomic Pathology. The Company believes that its focus on
anatomic pathology provides it with a competitive advantage in the
acquisition of anatomic pathology practices and that a significant
opportunity exists to acquire pathology practices that are seeking to
affiliate with a physician practice management company with experienced
management and access to capital. As a result of the Company's focus on
anatomic pathology, the 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 share
in existing markets and enter additional markets through acquisitions. The
Company's acquisition criteria include market demographics, size,
profitability, local prominence, payor relationships 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, add new
services, such as dermatopathology, and provide operational efficiencies
for the Practices in that market. In new markets, the Company seeks to
acquire prominent practices to serve as a platform for expansion.
Expand Sales and Marketing Efforts. The Company focuses on generating
internal growth by augmenting the Practices' 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, 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 its 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 a
convenient single source alternative 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 through acquisitions of anatomic
pathology practices, as well as through the expansion of the Company's
existing relationships with multi-hospital systems. The Company believes
that multi-hospital systems will benefit from contracting with a single
provider of pathology services in a geographic region. The Company's
management of inpatient laboratories also facilitates the growth of the
Company's 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 oversight, centralize reporting and other
administrative functions. The Company intends to achieve operational
efficiencies by centralizing certain functions, enhancing Practice
efficiency and utilizing its
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size to negotiate discounts on laboratory equipment, other medical supplies
and health and malpractice insurance. The Company intends to centralize
financial reporting, payroll and benefits administration, and regulatory
compliance. Prior to being acquired by the Company, 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 of the Company's hospital contracts, 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
of the acquired 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 seven 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 16 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.
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AFFILIATION STRUCTURE
AmPath is a holding company that manages pathology practices through five
wholly-owned subsidiaries and long-term contracts with the three PA Contractors.
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 AmPath subsidiaries. The subsidiaries and PA
Contractors 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 subsidiary of the Company has entered into a 40 year management contract with
each PA Contractor. Pursuant to the terms of these contracts, the Company
provides laboratory support services and 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 contracts with PA Contractors who
employ, 81 pathologists, 77 of whom are board certified and four 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 owns and operates 12 outpatient laboratories that provide
pathology services for dermatologists, gynecologists, gastroenterologists,
hematologists and surgeons, among other medical specialists. The Company is
responsible for (i) recruiting, training, employing and managing the technical
and support staff of the Practices; (ii) establishing and maintaining courier
services to transport specimens; (iii) negotiating and maintaining leases for
the outpatient facilities; (iv) providing clerical, accounting, purchasing,
payroll, legal and bookkeeping and computer services and personnel of the
Practices; and (v) complying with applicable laws and regulations. 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. 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.
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The Practices contract with hospitals to provide pathology services. The
Company staffs 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 Company is 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 Company. In three Practices, the
Company has a centralized histology laboratories 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 Physician Services
Corporation ("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 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 its volume of business by also directing its marketing
efforts to other medical specialists, including gynecologists, urologists and
gastroenterologists. Since
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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 Company has 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 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 enter into flexible arrangements 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 Company provides 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 Company's 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. The Company's hospital contracts grant it 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. The
Company's contracts with national clinical laboratories provide for the
exclusive subcontracting of anatomic pathology services for clients of the
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.
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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 Company's operations and relationships are subject to a variety of
governmental and regulatory requirements relating to the conduct of its
business. The Company is also subject to laws and regulations which relate to
business corporations in general. The Company believes that it exercises care in
an effort to structure its practices and arrangements with hospitals and
physicians to comply with relevant federal and state law and believes that such
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 penalties and criminal
penalties, exclusion from participation in Medicare and Medicaid programs and/or
loss of a physician's license to practice medicine.
The Company derived 55.9%, 55.8% and 34.9% of its net 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
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(principally Medicare and Medicaid). The decrease in the percentage of net
revenue is attributable to government sponsored healthcare programs resulting
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."
Business corporations are generally not permitted under state law to
practice medicine, exercise control over the medical judgments or decisions of
physicians, or engage in certain practices such as fee-splitting with
physicians. In states where the Company is not permitted to practice medicine,
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.
Accordingly, the Company believes it is not in violation of applicable state
laws relating to the practice of medicine. In states where judicial or
governmental interpretations exist that may prohibit the corporate practice of
medicine, the Company contracts with the PA
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Contractors (which are owned by a licensed physician employed by the respective
PA Contractor), which in turn employ or contract with physicians to provide
necessary physician services. There can be no assurance that regulatory
authorities or other parties will not assert that the Company is engaged in the
corporate practice of medicine. If such a claim were successfully asserted in
any jurisdiction, AmeriPath 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.
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 Company's business. 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
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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 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 Company is under competitive pressures for the acquisition of pathology
practices. Several companies, both publicly traded and privately held and 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 HMOs, many of which have greater financial and other resources
than the Company, may pursue the acquisition of practices. There can be no
assurance that new competitors will not enter the market, or that such
competition will not make it more difficult for the Company to acquire practices
on favorable terms. The Company competes for acquisitions on the basis of the
reputation of the Practices, its management experience and its focus on anatomic
pathology.
The Company also competes and will continue to compete with independent
national clinical laboratories and anatomic pathology practices. In addition,
some hospitals, clinics, healthcare companies, managed care organizations and
insurance companies provide services similar to those provided by the Company.
Companies
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<PAGE> 51
in other healthcare industry segments such as managers of other hospital-based
specialties or large physician group practices, some of which have financial and
other resources greater than those of the Company, may become competitors in
providing pathology services. The Company believes that the professional
reputation of the pathologist, the price charged for pathology services, the
scope of services offered, the ability to operate laboratories and geographic
coverage are the principal competitive factors in selecting a provider of
pathology services. In several markets, the Company believes it has a
competitive advantage due to its size and ability to provide services over a
broad geographic area.
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 585 persons, including 81 Affiliated
Physicians, employed by or under contract 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, 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."
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<PAGE> 52
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
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<PAGE> 53
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
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<PAGE> 54
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 $5.5 million. Additionally, the Company issued an aggregate $7.5
million principal amount of Junior Notes to Summit. A financing fee of $190,000
was paid to Summit in connection with these transactions. Summit will convert
its shares of Convertible Preferred Stock into 2,969,342 shares of Common Stock
prior to consummation of this offering. 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 120,004
shares of the Convertible Preferred Stock into 216,007 shares of Common Stock
and then sold such shares to Mr. New for consideration of $450,000 pursuant to
the terms of Mr. New's employment agreement. The consideration paid approximated
the fair value of such shares.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the total
compensation paid or accrued by the Company, for services rendered during 1996,
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....................................................... 1996 $ 213,942 $ 50,000
President and Chief Executive Officer
Alan Levin, M.D.(2)................................................ 1996 127,500 100,000
Chief Operating Officer
Michael J. Demaray, M.D.(3)........................................ 1996 349,820
Executive Vice President and Medical Director
Robert P. Wynn..................................................... 1996 138,993
Executive Vice President and Chief Financial Officer
Annette L. Bell(4)................................................. 1996 110,028 10,423
Vice President of Sales
</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) Dr. Levin was employed by Derrick during 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. See "-- Employment Agreements" for a
description of Dr. Levin's current compensation.
(3) Dr. Demaray is currently employed as an Affiliated Physician and is also
employed by AmPath as its Medical Director.
(4) Bonus amounts paid to Ms. Bell include commissions.
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<PAGE> 55
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
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 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
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<PAGE> 56
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.
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 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.
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<PAGE> 57
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 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
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<PAGE> 58
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.
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 Contingent Notes; (ii) Summit and Schroder Incorporated,
Schroder Ventures Limited Partnership and Schroder Ventures U.S. Trust
(collectively, "Schroder") purchased 3,088,116 shares of the Convertible
Preferred Stock for $5.5 million; and (iii) ALA issued an aggregate of 1,425,600
shares of common stock to Drs. Demaray, Poulos and Kowalczyk, the owners of PDK,
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. 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 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)
Contingent Notes in the principal amounts of $833,000. The 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
Contingent Notes for each such year and related accrued interest were canceled.
In April 1996, the remaining obligations under the 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 the Company.
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
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<PAGE> 59
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 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.
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<PAGE> 60
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)................................... 288,009 2.5 -- 288,009 1.7
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........................ 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)............................ 6,417,075 55.8 5,936,073 34.5
</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 208,011 shares, or 1.2%, after
the offering.
(7) 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.
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<PAGE> 61
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. 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
57
<PAGE> 62
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.
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<PAGE> 63
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
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<PAGE> 64
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.
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<PAGE> 65
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.
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<PAGE> 66
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.
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 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.
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<PAGE> 67
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.
63
<PAGE> 68
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-26
Balance Sheets as of December 31, 1994 and 1995...................................... F-27
Statements of Operations and Retained Earnings for the years ended December 31, 1994
and 1995........................................................................... F-28
Statements of Cash Flows for the years ended December 31, 1994 and 1995.............. F-29
Notes to Financial Statements........................................................ F-30
AMAZON AND ROSEN, M.D., P.A. D/B/A FLORIDA PATHOLOGY ASSOCIATES
Independent Auditors' Report......................................................... F-33
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996.................... F-34
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-35
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-36
Notes to Financial Statements........................................................ F-37
DERRICK AND ASSOCIATES PATHOLOGY, INC.
Independent Auditors' Report......................................................... F-41
Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996.................... F-42
Statements of Operations for the years ended December 31, 1994 and 1995 and the Six
Months Ended June 30, 1995 (Unaudited) and 1996.................................... F-43
Statements of Shareholders' Equity for the years ended December 31, 1994 and 1995 and
the Six Months Ended June 30, 1996................................................. F-44
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-45
Notes to Financial Statements........................................................ F-46
SKINPATH, P.C.
Independent Auditors' Report......................................................... F-52
Balance Sheets as of December 31, 1995 and July 31, 1996............................. F-53
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-54
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-55
Notes to Financial Statements........................................................ F-56
</TABLE>
F-1
<PAGE> 69
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
PATHOLOGY ASSOCIATES, P.S.C. AND TECHNICAL PATHOLOGY SERVICES, INC.
Independent Auditors' Report......................................................... F-60
Combined Balance Sheets as of December 31, 1994 and 1995 and July 31, 1996........... F-61
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-62
Combined Statements of Stockholders' Equity for the year ended December 31, 1994 and
1995 and the Seven Months Ended July 31, 1996...................................... F-63
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-64
Notes to Combined Financial Statements............................................... F-65
VOLUSIA PATHOLOGY GROUP, M.D., P.A.
Independent Auditors' Report......................................................... F-70
Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996............... F-71
Statements of Operations for the years ended December 31, 1994 and 1995 and the Nine
Months Ended September 30, 1995 (Unaudited) and 1996............................... F-72
Statements of Shareholders' Equity for the years ended December 31, 1994 and 1995 and
the Nine Months Ended September 30, 1996........................................... F-73
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-74
Notes to Financial Statements........................................................ F-75
DAVID R. BARRON, M.D., INC. D/B/A RICHFIELD LABORATORY OF DERMATOPATHOLOGY
Independent Auditors' Report......................................................... F-79
Balance Sheets as of December 31, 1995 and September 30, 1996........................ F-80
Statements of Operations for the year ended December 31, 1995 and the Nine Months
Ended September 30, 1995 (Unaudited) and 1996...................................... F-81
Statements of Stockholders' Equity for the year ended December 31, 1995 and the Nine
Months Ended September 30, 1996.................................................... F-82
Statements of Cash Flows for the year ended December 31, 1995 and the Nine Months
Ended September 30, 1995 (Unaudited) and 1996...................................... F-83
Notes to Financial Statements........................................................ F-84
BENO MICHEL, M.D., INC. D/B/A CUTANEOUS PATHOLOGY & IMMUNOFLUORESCENSE LABORATORY
Independent Auditors' Report......................................................... F-87
Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996............... F-88
Statements of Operations for the years ended December 31, 1994 and 1995 and the Nine
Months Ended September 30, 1995 (Unaudited) and 1996............................... F-89
Statements of Stockholders' Equity for the years ended December 31, 1994 and 1995 and
the Nine Months Ended September 30, 1996........................................... F-90
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-91
Notes to Financial Statements........................................................ F-92
DRS. SEIDENSTEIN, LEVINE & ASSOCIATES, P.A.
Independent Auditors' Report......................................................... F-95
Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996............... F-96
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-97
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-98
Notes to Financial Statements........................................................ F-99
</TABLE>
F-2
<PAGE> 70
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
CLAY J. COCKERELL, M.D., P.A. AND FREEMAN-COCKERELL LABORATORIES, INC.
Independent Auditors' Report......................................................... F-103
Combined Balance Sheets as of December 31, 1994 and 1995 and September 30, 1996...... F-104
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-105
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-106
Notes to Combined Financial Statements............................................... F-107
FERNANDEZ AND KALEMERIS, P.A. D/B/A GULF COAST PATHOLOGY ASSOCIATES
Independent Auditors' Report......................................................... F-111
Balance Sheets as of December 31, 1995 and September 30, 1996........................ F-112
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-113
Statements of Cash Flows for the year ended December 31, 1995 and the Nine Months
Ended September 30, 1995 (Unaudited) and 1996...................................... F-114
Notes to Financial Statements........................................................ F-115
</TABLE>
F-3
<PAGE> 71
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> 72
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,
792, 792, 2,916 and 8,475 shares issued and
outstanding at December 31, 1994 and 1995, September
30, 1996 and pro forma (unaudited), respectively..... 8 8 29 85
Additional paid-in capital -- Accumulated deficit
remaining from conversion from Subchapter S
corporation tax status............................... (15,024) (15,024) (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> 73
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> 74
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.................. 20 $ 1,000
Issuance of Convertible
Preferred Stock........ 80 $ 1 $ 5,499 $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
Stock split -- 40 for 1
....................... 3,128 31 (31) 772 $ 8 (8)
Accrued dividends on
Convertible Preferred
Stock.................. 330 330 (330)
Net income............... 2,065
----- --- ------ ------ ----- --- ------ -------
BALANCES, DECEMBER 31,
1994..................... 3,208 32 5,703 5,735 792 8 (15,024) 1,735
Accrued dividends on
Convertible Preferred
Stock.................. 350 350 (350)
Net income............... 1,498
----- --- ------ ------ ----- --- ------ -------
BALANCES, DECEMBER 31,
1995..................... 3,208 32 6,053 6,085 792 8 (15,024) 2,883
Stock split--1.8 for 1... 634 6 (6)
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> 75
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> 76
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 management company focused on providing anatomic pathology
services. The Company provides 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 predecessors, American Laboratory
Associates ("ALA"), its subsidiaries and the professional association and
professional corporations which are separate legal entities that contract
with the Company to provide pathology services in certain states
(collectively, the "PA Contractors").
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 laboratory companies 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 19,800 shares of common stock (1,425,600 shares after the
January 13, 1997 and the August 1, 1994 stock splits) to the owners of PDK
for $1,000 in cash and 80,203 shares of voting Series A 6% Redeemable
Cumulative Convertible Preferred Stock (the "Convertible Preferred Stock")
(3,208,120 shares after August 1, 1994 stock split) 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.
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> 77
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.
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 1996 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 are
listed in Note 3. Three of the companies acquired subsequent to September
30, 1996 are PA Contractors. The financial statements of the PA Contractors
will be consolidated with the Company because AmeriPath has unilateral
control over the assets and operations, and has substantially all of the
risks and rewards of ownership of the PA Contractors. Notwithstanding that
actual majority ownership is not held by AmeriPath, consolidation is
necessary to present fairly the financial position and results of
operations of the Company because of the existence of a parent-subsidiary
relationship by means other than record ownership of PA Contractors' voting
common stock of these acquired practices. Control of the PA Contractors is
permanent, rather than temporary, under the terms of purchase agreements,
management agreements, trust agreements and other agreements executed in
connection with the acquisition transactions.
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> 78
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 and laboratory contracts acquired in connection with
acquisitions. Such assets are recorded at fair value on the date of
acquisition as determined by management based on independent consultants'
reports and are being amortized over the estimated periods to be benefited,
ranging from 10 to 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, based on undiscounted cash flows,
if there has been a permanent impairment in the carrying value of its
intangible assets and, if so, the amount of any such impairment would be
determined by comparing anticipated discounted future operating income from
acquired businesses with the carrying value of the related intangible
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> 79
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> 80
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 has completed eleven acquisitions (the "Recent
Acquisitions") of 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 an 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
$30,392 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> 81
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 acquired, the total consideration paid, excluding the contingent
payments, if any, 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:
Clay J. Cockerell, M.D.,
P.A. and
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 3,650
Drs. Seidenstein, Levine &
Associates, P.A.......... October 10 15,657 136,501 341,220 5 4,551
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 actual majority ownership of the common stock of
Clay J. Cockerell, M.D., P.A., David R. Barron, M.D., Inc. and Beno Michel,
M.D., Inc. (the "PA Contractors"). These acquisitions are accounted for as
business combinations and the financial statements of such acquired
practices will be included in the Company's consolidated financial
statements because the Company has unilateral control over, and has
substantially all of the risks and rewards of ownership of, these acquired
practices. Notwithstanding that actual majority ownership is not held by
the Company, consolidation is necessary to present fairly the financial
position and results of operations of the Company because of the existence
of a parent-subsidiary relationship by means other than record ownership of
the voting common stock of these acquired practices. Control of these
acquired practices is permanent rather than temporary under the terms of
the purchase agreements, management agreements and other agreements
executed in connection with the acquisition transactions.
F-14
<PAGE> 82
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
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>
Net revenue................................................ $ 82,281 $63,316
========== ==========
Net income................................................. $ 6,066 $ 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 and the planned stock split 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 for services without collateral. Management
believes that the risk relating to accounts receivable is limited by the
diversity and number of contracting hospitals, physician practices,
patients, payors, and the geographic dispersion of the Company's
operations. On December 31, 1995 and September 30, 1996, accounts
receivable are for services in the states of Florida, Alabama and Kentucky.
F-15
<PAGE> 83
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-16
<PAGE> 84
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 17,500 17-19 18.7
Laboratory contracts......................... 500 1,800 10 10.0
------- -------
26,981 $ 33,200
=======
Accumulated amortization..................... (255)
-------
Balance, net................................. $26,726
=======
Goodwill..................................... $10,145 $ 48,430 15-35 34.2
Accumulated amortization..................... (77)
-------
Balance, net................................. $10,068
=======
</TABLE>
The amortization periods for the identifiable intangible assets were
determined by the Company based on reports of independent consultants. 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 30.5 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-17
<PAGE> 85
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-18
<PAGE> 86
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-19
<PAGE> 87
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-20
<PAGE> 88
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-21
<PAGE> 89
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-22
<PAGE> 90
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-23
<PAGE> 91
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-24
<PAGE> 92
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 effected
for the 1.8 for 1 stock split.................... 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-25
<PAGE> 93
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-26
<PAGE> 94
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-27
<PAGE> 95
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-28
<PAGE> 96
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-29
<PAGE> 97
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-30
<PAGE> 98
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-31
<PAGE> 99
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-32
<PAGE> 100
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-33
<PAGE> 101
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-34
<PAGE> 102
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-35
<PAGE> 103
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-36
<PAGE> 104
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-37
<PAGE> 105
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-38
<PAGE> 106
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-39
<PAGE> 107
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-40
<PAGE> 108
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-41
<PAGE> 109
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-42
<PAGE> 110
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-43
<PAGE> 111
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
CLASS CLASS RECEIVABLE
A 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-44
<PAGE> 112
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-45
<PAGE> 113
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-46
<PAGE> 114
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-47
<PAGE> 115
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-48
<PAGE> 116
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-49
<PAGE> 117
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-50
<PAGE> 118
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-51
<PAGE> 119
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-52
<PAGE> 120
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-53
<PAGE> 121
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-54
<PAGE> 122
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-55
<PAGE> 123
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-56
<PAGE> 124
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-57
<PAGE> 125
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-58
<PAGE> 126
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-59
<PAGE> 127
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-60
<PAGE> 128
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-61
<PAGE> 129
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-62
<PAGE> 130
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-63
<PAGE> 131
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-64
<PAGE> 132
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-65
<PAGE> 133
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-66
<PAGE> 134
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-67
<PAGE> 135
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-68
<PAGE> 136
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-69
<PAGE> 137
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-70
<PAGE> 138
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-71
<PAGE> 139
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-72
<PAGE> 140
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-73
<PAGE> 141
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-74
<PAGE> 142
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-75
<PAGE> 143
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-76
<PAGE> 144
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-77
<PAGE> 145
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-78
<PAGE> 146
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-79
<PAGE> 147
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-80
<PAGE> 148
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-81
<PAGE> 149
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-82
<PAGE> 150
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-83
<PAGE> 151
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-84
<PAGE> 152
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-85
<PAGE> 153
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-86
<PAGE> 154
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-87
<PAGE> 155
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-88
<PAGE> 156
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-89
<PAGE> 157
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-90
<PAGE> 158
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-91
<PAGE> 159
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-92
<PAGE> 160
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-93
<PAGE> 161
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-94
<PAGE> 162
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-95
<PAGE> 163
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-96
<PAGE> 164
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-97
<PAGE> 165
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-98
<PAGE> 166
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-99
<PAGE> 167
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-100
<PAGE> 168
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-101
<PAGE> 169
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-102
<PAGE> 170
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-103
<PAGE> 171
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-104
<PAGE> 172
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-105
<PAGE> 173
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-106
<PAGE> 174
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-107
<PAGE> 175
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-108
<PAGE> 176
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-109
<PAGE> 177
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-110
<PAGE> 178
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-111
<PAGE> 179
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-112
<PAGE> 180
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-113
<PAGE> 181
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-114
<PAGE> 182
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-115
<PAGE> 183
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-116
<PAGE> 184
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-117
<PAGE> 185
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-118
<PAGE> 186
AMERIPATH, INC.
[LOGO]
6,200,000 SHARES
COMMON STOCK
PROSPECTUS
DEAN WITTER REYNOLDS INC.
HAMBRECHT & QUIST
PIPER JAFFRAY INC.
THE ROBINSON-HUMPHREY
COMPANY, INC.
, 1997
<PAGE> 187
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> 188
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> 189
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ------------------------------------------------------------------------------------
<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 -- Office Lease dated as of June 1, 1995 by and between American Laboratory Associates,
Inc. and Haile Plantation Corporation*
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*
22.1 -- 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)
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)
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.
II-3
<PAGE> 190
(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> 191
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 Fort Lauderdale, State of
Florida, on January 13, 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 13, 1997
- ------------------------------------------------ Executive Officer and
James C. New Director (principal
executive officer)
* Chief Operating Officer January 13, 1997
- ------------------------------------------------ and Director
Alan Levin, M.D.
/s/ ROBERT P. WYNN Executive Vice President January 13, 1997
- ------------------------------------------------ and Chief Financial
Robert P. Wynn Officer (principal
financial officer and
principal accounting
officer)
* Executive Vice January 13, 1997
- ------------------------------------------------ President, Medical
Michael J. Demaray, M.D. Director and Director
* Chairman of the Board January 13, 1997
- ------------------------------------------------ and Director
Thomas S. Roberts
* Director January 13, 1997
- ------------------------------------------------
Timothy Kilpatrick, M.D.
* Director January 13, 1997
- ------------------------------------------------
E. Roe Stamps, IV
*By: /s/ JAMES C. NEW
- ------------------------------------------------
James C. New
Attorney-in-fact
</TABLE>
II-5
<PAGE> 192
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 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 Registration Statement 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 14, 1997
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement 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 14, 1997
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement 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 14, 1997
<PAGE> 1
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement 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 14, 1997
<PAGE> 1
EXHIBIT 23.6
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement 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 14, 1997
