<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
----------
Commission File Number: 000-22313
----------
AMERIPATH, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0642485
--------------------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7289 Garden Road, Suite 200
Riviera Beach, FL 33404
--------------------------------------------------
(Address, including zip code, of principal executive office)
(561) 845-1850
Registrant's telephone number, including area code
NOT APPLICABLE
(Former name, former address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X .
--- ---
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
Class Outstanding at December 4, 1997
- ------------------------------------- -------------------------------------
Common stock, $.01 par value 19,214,222 shares
<PAGE> 2
AMERIPATH, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets
as of December 31, 1996 and
September 30, 1997 (unaudited) 3 - 4
Condensed Consolidated Statements of Operations
For the Three and Nine month periods ended September 30,
1996 and 1997 (unaudited) 5
Condensed Consolidated Statements of Cash Flows
For the Nine month periods ended September 30,
1996 and 1997 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 17
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBITS 19
</TABLE>
2
<PAGE> 3
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, September 30,
ASSETS 1996 1997
---- ----
* (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 2,262 $ 424
Accounts receivable, net 14,691 23,301
Inventories 269 267
Other current assets 1,012 911
-------- --------
Total current assets 18,234 24,903
-------- --------
PROPERTY AND EQUIPMENT, NET 3,932 6,273
-------- --------
OTHER ASSETS:
Goodwill, net 57,385 100,583
Identifiable intangibles, net 74,099 118,607
Other 4,204 5,928
-------- --------
Total other assets 135,688 225,118
-------- --------
TOTAL ASSETS $157,854 $256,294
======== ========
* Condensed from audited financial statements
The accompanying notes are an integral part of
these financial statements
3
<PAGE> 4
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - (Continued)
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
---- ----
* (Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 9,890 $ 11,773
Current portion of long-term debt 1,762 2,165
Deferred tax liability 1,307 1,704
--------- ---------
Total current liabilities 12,959 15,642
LONG-TERM LIABILITIES:
Revolving loan 81,652 75,547
Senior term loan 64,350
Senior Notes due to common stockholders 3,500 3,500
Junior Notes due to preferred stockholders 7,500 7,500
Subordinated Notes 2,825 2,179
Deferred tax liability 18,298 32,372
--------- ---------
Total liabilities 126,734 201,090
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 2 and 6)
CONVERTIBLE PREFERRED STOCK 6,217 6,501
REDEEMABLE COMMON STOCK 12,210 12,210
COMMON STOCKHOLDERS' EQUITY:
Common stock 43 63
Additional paid in capital 9,898 29,958
Note receivable from officer (270) (270)
Retained earnings 3,022 6,742
--------- ---------
Total common stockholders' equity 12,693 36,493
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 157,854 $ 256,294
========= =========
</TABLE>
* Condensed from audited financial statements
The accompanying notes are an integral part of
these financial statements
4
<PAGE> 5
AMERIPATH, INC. AND SUBSIDARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amount)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue $ 11,150 $ 27,808 $ 20,840 $ 73,129
Operating costs:
Cost of services 5,771 12,912 10,479 33,468
Selling, general and administrative expense 2,020 4,990 3,842 13,577
Provision for doubtful accounts 1,010 2,917 1,655 7,244
Amortization expense 510 1,430 814 3,840
Loss on cessation of clinical lab operations -- -- 910 --
-------- -------- -------- --------
Income from operations 1,839 5,559 3,140 15,000
Other income (expense):
Interest expense (870) (2,510) (1,637) (6,567)
Nonrecurring charge -- -- -- (1,289)
Other income (expense), net 58 (63) (143) (120)
-------- -------- -------- --------
Income before income taxes 1,027 2,986 1,360 7,024
Provision for income taxes
392 1,284 521 3,020
-------- -------- -------- --------
Net income $ 635 $ 1,702 $ 839 $ 4,004
======== ======== ======== ========
Pro forma net income per share $ 0.07 $ 0.13 $ 0.10 $ 0.32
======== ======== ======== ========
Pro forma weighted average common and common
equivalent shares outstanding
9,504 12,856 8,582 12,344
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these financial statements
5
<PAGE> 6
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine months ended
September 30,
---------------------
1996 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES $ 2,253 $ 7,549
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (582) (2,679)
Purchase of subsidiaries, net of cash acquired (27,320) (60,008)
Payments of contingent notes -- (1,530)
-------- --------
Net cash used in investing activities (27,902) (64,217)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt issuance costs -- (973)
Deferred offering costs -- (2,198)
Principal payments on long-term debt (613) (894)
Net borrowings (payments) under revolving loan 26,698 (6,105)
Net borrowings under senior term loan -- 65,000
Note receivable from officer (270) --
Dividends paid to convertible preferred stockholders (31) --
-------- --------
Net cash provided by financing activities 25,784 54,830
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 135 (1,838)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 58 2,262
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 193 $ 424
======== ========
The accompanying notes are an integral part of
these financial statements
6
<PAGE> 7
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In thousands, except per share amounts)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements (the "Financial Statements")
include the accounts of AmeriPath, Inc. and Subsidiaries (the "Company") and
have been prepared in accordance with generally accepted accounting principles
for interim financial reporting and in accordance with Rule 10-01 of Regulation
S-X. Accordingly, the Financial Statements do not include all of the information
and notes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, the accompanying Financial Statements contain all
adjustments (consisting of normal recurring items) necessary for a fair
presentation of results for the interim periods presented. The results of
operations for any interim periods are not necessarily indicative of results for
a full year. The financial statements and footnote disclosures should be read in
conjunction with the Company's December 31, 1996 audited consolidated financial
statements and the notes thereto, which are included in the Company's prospectus
dated October 21, 1997 ("the Prospectus") which is incorporated by reference to
the Company's registration statement on Form 8-A, filed under the Securities
Exchange Act of 1934, as amended, (Commission number 000-22313).
Reclassification - Certain amounts have been reclassified to conform to the
September 30, 1997 presentation.
NOTE 2 - ACQUISITIONS
In 1996 the Company acquired or affiliated with 11 anatomic pathology practices
(the "1996 Acquisitions"). The total consideration paid by the Company in
connection with these acquisitions included cash of $78,626, subordinated notes
in the aggregate principal amount of $4,511, and 3,870,741 shares of common
stock (aggregate value of $24,829). In addition, the Company issued additional
purchase price consideration to the sellers in the form of contingent notes.
Payments under these notes are contingent upon the achievement of stipulated
levels of cumulative operating earnings (as defined) of the acquired practice
over a period of three to five years. As of September 30, 1997, if the maximum
levels of cumulative operating earnings for each anatomic pathology practice
("the Practice") specified in the contingent notes were achieved, the Company
would be required to make aggregate maximum payments, including principal and
interest, of $36,413 over the next three to five years.
During the third quarter of 1997, the Company acquired or affiliated with three
anatomic pathology practices in Texas, Indiana and Mississippi, (the "1997
Acquisitions"). The total consideration paid by the Company in connection with
these acquisitions included cash of $58,932 and 1,910,808 shares of common stock
(aggregate value of $19,229). In addition, the Company issued additional
purchase price consideration in the form of contingent notes. Payments under
these notes are contingent upon the achievement of stipulated levels of
cumulative operating earnings (as defined) of the acquired practice over a five
year period. If the maximum levels of cumulative operating earnings for each
Practice specified in the contingent notes were achieved, the Company would be
required to make aggregate maximum payments, including principal and interest,
of $62,132 over the next five years.
The allocation of the purchase price of the 1997 Acquisitions is preliminary,
while the Company continues to obtain the information necessary to determine the
fair value of the assets acquired and liabilities assumed. When the Company
obtains final information, management believes that adjustments, if any, will
not be material in relation to the Financial Statements.
7
<PAGE> 8
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars In thousands, except per share amounts)
(Unaudited)
The accompanying Financial Statements include the results of operations of the
1996 Acquisitions and the 1997 Acquisitions from the date acquired through
September 30, 1997. The following unaudited pro forma information presents the
consolidated results of the Company's operations and the results of operations
of the 1996 Acquisitions and the 1997 Acquisitions for the year ended December
31, 1996 and the nine months ended September 30, 1997 after giving affect to
amortization of goodwill and identifiable intangible assets, interest expense on
long-term debt incurred in connection with these acquisitions, and the reduced
level of certain specific operating expenses (primarily compensation and related
expenses attributable to former owners) as if the acquisitions had been
consummated on January 1, 1996. Such unaudited pro forma information is based on
historical financial information with respect to the 1996 Acquisitions and the
1997 Acquisitions and does not include operational or other changes which might
have been effected by the Company.
The unaudited pro forma information for the year ended December 31, 1996 and the
nine months ended September 30, 1997 presented below is for illustrative
information purposes only and is not indicative of results which would have been
achieved or results which may be achieved in the future.
Pro Forma
-------------------------------
Nine Months
Year Ended Ended
December 31, September 30,
1996 1997
---- ----
Net revenue $ 122,066 $99,261
========== =======
Net income $ 9,212 $ 7,833
========== =======
Net income per share $ 0.65 $ 0.55
========== =======
Common and common equivalent shares used in calculating net income per share
include the effects of stock options and the conversion of the series A 6%
redeemable cumulative convertible preferred stock (the "Convertible Preferred
Stock"), discussed in Note 10.
NOTE 3 - INTANGIBLE ASSETS
Intangible assets and the related accumulated amortization and amortization
periods are as follows:
<TABLE>
<CAPTION>
Amortization Periods
(years)
-----------------------
December 31, September 30, Weighted
1996 1997 Range Average
---- ---- ----- -------
<S> <C> <C> <C> <C>
Hospital contracts $ 29,015 $ 75,825 35-40 35.6
Physician client lists 38,863 38,932 17-30 22.2
Management service agreement 6,429 6,473 25 25.0
Laboratory contracts 1,800 1,800 10 10.0
---------- ----------
76,107 123,030
Accumulated amortization (2,008) (4,423)
---------- ----------
Balance, net $ 74,099 $ 118,607
========== ==========
Goodwill $ 58,264 $ 102,843 15-35 34.3
Accumulated amortization (879) (2,260)
---------- ----------
Balance, net $ 57,385 $ 100,583
========== ==========
</TABLE>
8
<PAGE> 9
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Dollars In thousands, except per share amounts)
(Unaudited)
NOTE 4 - LONG-TERM DEBT
On June 26, 1997, the Company replaced its line of credit with a new revolving
line of credit and term loan agreement (the "Credit Facility") with a syndicate
of banks led by BankBoston N.A., as lender and agent (the "Agent"), which
provides for borrowings of up to $150,000 in the form of: (i) a term loan of
$65,000; and (ii) a revolving loan of up to $85,000 that may be used for working
capital purposes, in an amount limited to 80% of the Company's eligible
receivables, and to fund acquisitions if not otherwise used for working capital
purposes. Commencing July 1, 1998, the term loan requires annual principal
payments of $650 with the balance due and payable on June 30, 2004. All
outstanding advances under the revolving loan are due and payable on June 30,
2002. The Credit Facility bears interest at variable rates, based, at the
Company's option, on the Agent's base rate or the Eurodollar rate plus a premium
that is adjusted quarterly based on the Company's ratio of total debt to cash
flow. The Credit Facility also requires the quarterly payment of an annual
commitment fee equal to either 0.5% or 0.375%, based upon the Company's ratio of
total debt to cash flow, on the unused portion of the commitment. At September
30, 1997, $65,000 and $75,547, respectively, were outstanding under the term and
revolving loans.
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
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. All of the
Company's assets are pledged as collateral under the Credit Facility. The
Company believes that it is in compliance with all of its existing covenants at
September 30, 1997.
NOTE 5 - COMMON STOCKHOLDERS' EQUITY
On January 13, 1997, the Company effected a 1.8 for 1 stock split of its common
stock in the form of a stock dividend. The effect of such stock split is
reflected in all common share amounts.
On April 30, 1997, the authorized shares of common stock were increased to
30,000,000.
NOTE 6 - 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 of 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.
Healthcare Matters - The healthcare industry in general, and the services that
the Company provides are subject to extensive federal and state laws and
regulations. Additionally, a significant portion of the Company's net revenue is
from payments by government-sponsored health care programs, principally Medicare
and Medicaid, and is subject to audit and adjustments by applicable regulatory
agencies. Failure to comply with any of these laws or regulations, the results
of 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.
9
<PAGE> 10
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars In thousands, except per share amounts)
(Unaudited)
In addition, the Company has contracts to provide pathology services for 25
Columbia/HCA Healthcare Corporation ("Columbia") hospitals. Columbia is
currently under government investigation and is evaluating its operating
strategies including the sale, spin-off or closure of certain hospitals. The
government's investigation of Columbia and Columbia's re-evaluation of its
operating strategies may adversely effect the Company, including but not limited
to, through reduction of revenue, termination or non-renewal of existing
contracts, adverse publicity and/or difficulties obtaining new or expanded
contracts.
NOTE 7 - NONRECURRING CHARGE
In May 1997, the Company withdrew the registration statement it filed with the
Securities and Exchange Commission (the "Commission") and postponed its then
planned initial public offering of common stock. During the nine months ended
September 30, 1997, the Company recorded a nonrecurring charge of $1,289,
primarily professional fees and printing costs, which represented offering costs
incurred prior to the postponement that did not have continuing benefit after
the postponement.
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental information presents the non-cash impact on the
balance sheets of assets and liabilities assumed in the 1996 Acquisitions and
the 1997 Acquisitions.
Nine Months Nine Months
Ended Ended
September 30, September 30,
1996 1997
--------------- -------------
Assets acquired $ 47,886 $ 94,619
Liabilities assumed (14,729) (16,428)
Debt issued (2,975) --
Common stock issued (1,344) (19,259)
-------- --------
Cash paid 28,838 58,932
Less cash acquired (1,518) (199)
-------- --------
Net cash paid $ 27,320 $ 58,733
======== ========
During the nine months ended September 30, 1997, the Company issued an
additional 91,201 shares of common stock, valued at $821, and made other
purchase price adjustments of $1,275 in connection with certain post-closing
adjustments. Additionally, the Company made payments on its outstanding
contingent notes amounting to $1,530 relating to the 1996 Acquisitions.
NOTE 9 - SUBSEQUENT EVENTS
Effective October 21, 1997, the Company completed a public offering of 5,835,457
shares of common stock at a price of $16 per share resulting in net proceeds to
the Company, net of underwriting commissions and discounts, and offering costs,
of approximately $84,700. The Company used the proceeds from the offering to
repay: $11,077 of outstanding principal and interest on 10% Junior Subordinated
Notes due in 2001 to purchasers of the Convertible Preferred Stock (the "Junior
Notes") and 8% Senior Subordinated Notes due in 1998 to certain common
stockholders (the "Senior Notes"); $1,330 of accrued dividends on the
Convertible Preferred Stock; and $72,325 of the outstanding indebtedness under
the Credit Facility.
10
<PAGE> 11
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars In thousands, except per share amounts)
(Unaudited)
In addition, immediately prior to the consummation of the initial public
offering, all of the outstanding shares of the Convertible Preferred Stock were
converted into 5,558,607 shares of common stock. The consummation of the initial
public offering terminated the Company's contingent obligation to repurchase
1,493,520 shares of common stock from certain stockholders who were sellers in
connection with completed acquisitions.
NOTE 10 - PRO FORMA NET INCOME PER SHARE INFORMATION
In view of the conversion of the Convertible Preferred Stock, as discussed in
Note 9, historical net income per share information is not presented. Pro forma
net income per common share is presented giving effect to the conversion of the
Convertible Preferred Stock. In accordance with the requirements of the
Commission, common stock issued by the Company during the 12 months immediately
preceding the initial filing of the registration statement, plus the effects of
common stock equivalents relating to the grant of options during the same period
using the treasury stock method, and the initial public offering price of $16.00
per share, have been included in the calculation of the pro forma number of
common shares and common stock equivalents outstanding for all periods
presented. Shares issued in the 1996 Acquisitions and 1997 Acquisitions are
included in the weighted average share calculation from the date of acquisition.
The following table presents the calculation of the pro forma weighted average
common shares and common equivalent shares outstanding for each period (in
thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- --------------------
1996 1997 1996 1997
--------- ------- ------- -------
<S> <C> <C> <C> <C>
Shares outstanding for all periods presented 1,426 1,426 1,426 1,426
Effects of shares subsequently issued:
Conversion of Convertible Preferred Stock in
January 1996 216 216 216 216
Settlement of ALA Contingent Notes in April 1996 194 194 194 194
Shares issued in connection with 1996 Acquisitions 1,384 4,049 462 4,007
Shares issued in connection with 1997 Acquisitions - 687 - 217
Effects of stock options 725 725 725 725
-------- ------- ------- -------
3,945 7,297 3,023 6,785
Conversion of Convertible Preferred Stock 5,559 5,559 5,559 5,559
-------- ------- ------- -------
Pro forma weighted average common and common
Equivalent shares outstanding 9,504 12,856 8,582 12,344
======== ======= ======= =======
</TABLE>
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS 128
establishes new standards for computing and presenting earnings per share.
Implementation of SFAS 128 is required for financial statements issued for
periods ending after December 15, 1997.
The pro forma net income per share information as disclosed in the Financial
Statements is not materially different from the diluted pro forma earnings per
share information as calculated under SFAS 128.
11
<PAGE> 12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
QUALIFICATION OF FORWARD-LOOKING STATEMENTS
The statements contained in this Report that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
without limitation statements regarding the Company's expectations, beliefs,
intentions or strategies regarding the future. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. The forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause actual results,
experience and effects and the performance or achievements of the Company to be
materially different from those anticipated, expressed or implied by the
forward-looking statements (including, without limitation, those risks,
uncertainties and other factors identified under "RISK FACTORS" in the Company's
Prospectus). In evaluating the Company's business, the following factors, in
addition to the other information set forth herein, should be carefully
considered: competition; success of the Company's operating initiatives and
growth strategy; healthcare regulation; payment and reimbursement rates under
government sponsored healthcare programs; dependence upon pathologists; labor
and technology costs; general economic conditions; advertising and promotional
efforts; availability, locations and terms of additional practices for
acquisition and/or development and the success of the Company's acquisition
strategy. In addition, the Company's strategy to penetrate and develop new
markets involves a number of risks and challenges and there can be no assurance
that the healthcare regulations of the new states in which the Company enters
and other factors will not have a material adverse effect on the Company. The
factors which may influence the Company's success in each targeted market in
connection with this strategy include: the selection of appropriate qualified
practices; negotiation and execution of definitive acquisition and/or management
agreements; the economic stability of each targeted market; compliance with the
healthcare and/or other laws and regulations in each targeted market, including
the regulation of the healthcare industry in each targeted market on a national,
regional and local basis (including health, safety, waste disposal and zoning
laws); compliance with applicable licensing approval procedures; restrictions on
labor and employment laws, especially non-competition covenants; access to
affordable capital; governmental reimbursement and assistance programs; tax laws
and the availability of appropriate media for marketing efforts.
OVERVIEW
The Company is the leading physician practice management company focused on
anatomic pathology services, based on an analysis of geographic breadth, number
of physicians, number of hospital contracts, number of practices and net
revenue. As of September 30, 1997, the Company owned or was affiliated with 15
anatomic pathology practices (the "Practices") located in seven states which
employed 127 pathologists. The pathologists provide medical services in 14
outpatient pathology laboratories owned and operated by the Company and in
inpatient laboratories for 72 hospitals and 24 outpatient surgery centers.
The Company manages and controls all of the non-medical functions of the
Practices, including: (i) recruiting, training, employing and managing the
technical and support staff of the Practices; (ii) developing, equipping and
staffing laboratory facilities; (iii) establishing and maintaining courier
services to transport specimens; (iv) negotiating and maintaining contracts with
hospitals, national clinical laboratories and managed care organizations and
other payors; (v) providing financial reporting and administration, clerical,
purchasing, payroll, billing and collection, information systems, sales and
marketing, risk management, employee benefits, legal, tax and accounting
services to the Practices; (vi) complying with applicable laws and regulations;
and (vii) with respect to the Company's ownership and operation of anatomic
pathology laboratories, providing slide preparation and other technical
services. The Company is not licensed to practice medicine.
12
<PAGE> 13
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AS COMPARED TO THE THREE MONTH
PERIOD ENDED SEPTEMBER 30, 1996
During 1996 and the third quarter of 1997, the Company completed the 1996
Acquisitions and the 1997 Acquisitions, respectively, the results of which are
included in the Company's operating results from the date of acquisition.
Changes in operations between the three month periods ended September 30, 1996
and 1997 were primarily due to six of the 1996 Acquisitions and the three 1997
Acquisitions which were completed during or subsequent to the third quarter
ended September 30, 1996. References to "same practice" means those practices
whose results of operations were included in the Company's consolidated results
of operations for the entire three month periods ended September 30, 1996 and
1997.
Net revenue increased to $27.8 million for the three months ended September 30,
1997, as compared with $11.2 million for the same period in 1996, an increase of
$16.6 million, or 149.4%. Of this increase, $2.6 million, or 26.5%, was
attributable to same practice growth and $14.0 million from the completion of
the 1996 Acquisitions and the 1997 Acquisitions, which occurred during, or
subsequent to, the third quarter ended September 30, 1996. The increase in same
practice net revenue resulted primarily from a $1.6 million increase in
outpatient revenue, including the expansion of a national lab contract which
increased same practice outpatient net revenue by $1.3 million. Same practice
hospital based net revenue increased $1.0 million. The Company increased the
number of hospital contracts from 16 to 17 on a same practice basis. The average
net revenue per hospital contract increased to $258,000 per contract for the
third quarter ended September 30, 1997 as compared to $212,000 for the same
period of 1996.
Cost of services increased by $7.1 million, or 123.7%, to $12.9 million for the
three months ended September 30, 1997 from $5.8 million for the same period in
1996. Of the increase, $1.7 million was attributable to same practice growth and
$5.4 million from the completion of the 1996 Acquisitions and the 1997
Acquisitions which occurred during, or subsequent to, the third quarter ended
September 30, 1996. Gross profit margins from same practice operations decreased
from 47.9% to 42.7% primarily due to the lower pricing structure for the
expanded national lab contract and a decrease of 5.3% in Medicare reimbursement
rates during 1997.
Selling, general and administrative expense increased by $3.0 million, or
147.0%, to $5.0 million for the three months ended September 30, 1997 from $2.0
million for the same period in 1996. Of this increase, $1.1 million was
attributable to same practice growth and $1.9 million from the completion of the
1996 Acquisitions and the 1997 Acquisitions which occurred during, or subsequent
to, the third quarter ended September 30, 1996. The same practice increase is
attributable to increased staffing levels in marketing, billing, human resources
and accounting and costs incurred to expand the Company's administrative support
infrastructure and complete the conversion to an upgraded billing system.
Provision for doubtful accounts increased by $1.9 million, or 188.8%, to $2.9
million for the three months ended September 30, 1997 from $1.0 million for the
same period in 1996. The dollar increase is primarily due to the completion of
the 1996 Acquisitions and the 1997 Acquisitions which occurred during, or
subsequent to, the third quarter ended September 30, 1996. The provision for
doubtful accounts as a percentage of net revenue was 10.5% and 9.1% for the
three month periods ended September 30, 1997 and 1996, respectively. The
increase in the provision for doubtful accounts as a percentage of net revenue
is due primarily to the increase in hospital based net which generally has a
higher provision as a percent of net revenue due to a larger concentration of
indigent and private pay patients, more difficulties gathering complete and
accurate billing information and longer billing and collection cycles for
inpatient based services.
Amortization expense increased by $920,000, or 180.3%, to $1.4 million for the
three months ended September 30, 1997 from $510,000 for the same period in 1996.
This increase is attributable to the amortization of goodwill and net
identifiable intangible assets as a result of the 1996 Acquisitions and the
13
<PAGE> 14
1997 Acquisitions which occurred during, or subsequent to, the third quarter
ended September 30, 1996. Amortization expense is expected to increase in the
future as a result of identifiable intangible assets and goodwill arising from
future acquisitions, and any contingent payments required to be made pursuant to
the contingent notes issued in connection with the 1996 Acquisitions and the
1997 Acquisitions. Additionally, the Company evaluates the carrying values
attributable to identifiable intangible assets and goodwill on an ongoing basis.
In the event of an impairment of the values attributable 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 position and results
of operations.
Income from operations increased by $3.7 million, or 202.3%, to $5.6 million for
the three months ended September 30, 1997 from $1.9 million for the same period
in 1996. Of this increase $4.4 million was attributable to the completion of the
1996 Acquisitions and the 1997 Acquisitions during, or subsequent to, the third
quarter ended September 30, 1996, offset by a decrease in same practice income
from operations, including expenses related to increased staffing levels in
marketing, billing, human resources and accounting, and costs incurred to expand
the Company's administrative support infrastructure and complete the conversion
to an upgraded billing system. Income from operations as a percent of net
revenue increased to 20.0% for the three months ended September 30, 1997 as
compared 16.5% for the same period in 1996.
Interest expense increased by $1.6 million, or 188.5%, to $2.5 million for the
three months ended September 30, 1997 from $870,000 for the same period in 1996.
The majority of this increase resulted from borrowings of approximately $116.1
million under the Company's credit facility and the issuance of $3.0 million of
subordinated notes in connection with the 1996 Acquisitions and the 1997
Acquisitions which occurred during, or subsequent to, the third quarter ended
September 30, 1996. These borrowings resulted in an increase in the average debt
outstanding to approximately $117 million during the third quarter ended
September 30, 1997 as compared to approximately $43 million for the same period
in 1996.
The effective income tax rate was approximately 43% for the three month period
ended September 30, 1997 as compared to approximately 38% for three month period
ended September 30, 1996. The increase in the Company's effective tax rate was
primarily due to the non-deductibility of amortization expense relating to
intangible assets from certain of its acquisitions.
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AS COMPARED TO THE NINE MONTH PERIOD
ENDED SEPTEMBER 30, 1996
During 1996 and the third quarter of 1997, the Company completed the 1996
Acquisitions and the 1997 Acquisitions, respectively, the results of which are
included in the Company's operating results from the date of acquisition.
Changes in operations between the nine month periods ended September 30, 1996
and 1997 were primarily due to ten of the 1996 Acquisitions and the three 1997
Acquisitions which were completed during, or subsequent to, the nine months
ended September 30, 1996. References to "same practice" means those practices
whose results of operations were included in the Company's consolidated results
of operations for the entire nine month periods ended September 30, 1996 and
1997.
Net revenue increased to $73.1 million for the nine months ended September 30,
1997, as compared to $20.8 million for the same period in 1996, an increase of
$52.3 million, or 250.9%. Same practice revenues decreased $1.0 million due to
the cessation of American Laboratory Associates' clinical laboratory operations
during May 1996, offset by an increase in same practice net revenues of
$100,000. Same practice net revenues, excluding clinical laboratory revenues,
increased 6% due to increases in test volume which were partially offset by a
5.3% decrease in Medicare reimbursement for surgical biopsies which was
effective January 1, 1997. The remaining increase of $53.2 million related to
the completion of the 1996 Acquisitions and the 1997 Acquisitions, which
occurred during, or subsequent to, the nine months ended September 30, 1996.
14
<PAGE> 15
Cost of services increased by $23.0 million, or 219.4%, to $33.5 million for the
nine month period ended September 30, 1997 from $10.5 million for the same
period in 1996. The increase was primarily due to the completion of the 1996
Acquisitions and the 1997 Acquisitions which occurred during, or subsequent to,
the nine months ended September 30, 1996. Gross profit margins from same
practice operations, excluding clinical laboratory operations, remained constant
at approximately 54.0%.
Selling, general and administrative expense increased by $9.8 million, or
253.4%, to $13.6 million for the nine months ended September 30, 1997 from $3.8
million for the same period in 1996. Of this increase $2.8 million was
attributable to same practice operations and $7.0 million from the completion of
the 1996 Acquisitions and the 1997 Acquisitions which occurred during, or
subsequent to, the nine month period ended September 30, 1996.
Provision for doubtful accounts increased by $5.5 million, or 337.7%, to $7.2
million for the nine months ended September 30, 1997 from $1.7 million for the
same period in 1996. The increase is primarily due to the completion of the 1996
Acquisitions and the 1997 Acquisitions which occurred during, or subsequent to,
the third quarter ended September 30, 1996. The provision for doubtful accounts
as a percentage of net revenue was 9.9% and 7.9% for the nine month periods
ended September 30, 1997 and 1996, respectively. The increase in the provision
for doubtful accounts as a percentage of net revenue is due primarily to the
increase in hospital based net revenue which generally has a higher provision as
a percent of net revenue due to a larger concentration of indigent and private
pay patients, more difficulties gathering complete and accurate billing
information and longer billing and collection cycles for inpatient based
services.
In connection with the cessation of American Laboratory Associates' clinical
laboratory operations during the second quarter of 1996, the Company recorded a
nonrecurring charge to operations of $910,000, which included severance
payments, write downs of property, equipment and other assets to estimated net
realizable value and the write-off of the unamortized balances of intangible
assets associated with the clinical laboratory operations.
Amortization expense increased by $3.0 million, or 371.7% to $3.8 million for
the nine months ended September 30, 1997 from $814,000 for the same period in
1996. This increase is attributable to the amortization of goodwill and net
identifiable intangible assets from the 1996 Acquisitions and the 1997
Acquisitions. Amortization expense is expected to increase in the future as the
result of identifiable intangible assets and goodwill arising from future
acquisitions, and any contingent payments required to be made pursuant to the
contingent notes issued in connection with the 1996 Acquisitions and the 1997
Acquisitions. Additionally, the Company evaluates the carrying values
attributable to identifiable intangible assets and goodwill on an ongoing basis.
In the event of an impairment of the values attributable 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 position and results
of operations.
Income from operations increased by $11.9 million, or 377.7%, to $15.0 million
for the nine months ended September 30, 1997, from $3.1 million for the same
period in 1996. Of this increase, $13.6 million was attributable to the
completion of the 1996 Acquisitions and the 1997 Acquisitions during, or
subsequent to, the nine months ended September 30, 1996, offset by a decrease in
same practice income from operations of $2.5 million primarily due to additional
costs related to increased staffing levels in marketing, billing, human
resources and accounting, and costs incurred to expand the Company's
administrative support infrastructure and complete the conversion to an upgraded
billing system. Income from operations, excluding the loss on cessation of
clinical laboratory operations, as a percent of net revenue, increased to 20.5%
for the nine month period ended September 30, 1997 as compared to 19.4% for the
same period in 1996.
Interest expense increased by $5.0 million, or 301.2%, to $6.6 million for the
nine month period ended September 30, 1997 from $1.6 million for the same period
in 1996. The majority of this increase resulted from borrowings of approximately
$135.8 million under the Company's credit facility and the issuance of
approximately $4.5 million of subordinated notes in connection with the 1996
Acquisitions and the 1997
15
<PAGE> 16
Acquisitions which occurred during, or subsequent to, the nine months ended
September 30, 1996. These borrowings resulted in an increase in the average debt
outstanding to approximately $104 million during the nine months ended September
30, 1997 as compared to approximately $24 million for the same period in 1996.
During the nine months ended September 30, 1997, the Company wrote-off certain
deferred offering costs of approximately $1.3 million, primarily professional
fees and printing costs, related to the registration statement filed by the
Company with the Securities and Exchange Commission that was withdrawn in May
1997.
The effective income tax rate was approximately 43% for the nine month period
ended September 30, 1997 compared to approximately 38% for nine month period
ended September 30, 1996. The increase in the Company's effective tax rate was
primarily due to the non-deductibility of amortization expense relating to
intangible assets from certain of its acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had working capital of approximately $9.3
million, an increase of $4.0 million from the working capital of $5.3 million
available at December 31, 1996. The increase in working capital was due
primarily to an increase in net accounts receivable of $8.6 million, offset by a
decrease in cash of $1.8 million and an increase in accounts payable and accrued
expenses of $1.9 million. The majority of these changes resulted from the
completion of the 1997 Acquisitions during the third quarter of 1997.
For the nine month periods ended September 30, 1997 and 1996, cash provided by
operations was $7.5 million and $2.3 million, respectively. For the nine month
period ended September 30, 1997, the cash flow from operations and borrowings
under the Company's credit facility were used to: (i) purchase $2.7 million of
property and equipment, primarily for the expansion of the Orlando facility to
accommodate the expansion of its contract to provide anatomic pathology services
with SmithKline Beecham Clinical Laboratories, Inc., a national provider of
clinical laboratory services, which commenced in May 1997, and the conversion
and upgrade of the Company's billing system; (ii) fund the $58.9 million cash
portion of the 1997 Acquisitions; (iii) make additional payments of $2.6 million
in connection with the 1996 Acquisitions, including contingent note payments of
$1.5 million; (iv) fund $2.2 million of offering costs incurred in connection
with the Company's initial public offering; (v) pay $1.0 million of refinancing
costs incurred in connection with the Company's new Credit Facility; and (vi)
make principal payments on long term debt.
The Company has a Credit Facility, under which it can borrow up to $150 million,
which consists of a term loan facility of up to $65 million and a revolving loan
facility of up to $85 million. At September 30, 1997, of the $150 million
available under the Credit Facility, $65 million and $75.5 million was
outstanding under the term and revolving loan facilities, respectively. See Note
4 to the Condensed Consolidated Financial Statements.
Subsequent to September 30, 1997, the Company completed an initial public
offering and issued 5,835,457 shares of common stock at $16 per share resulting
in proceeds, net of underwriter commissions and offering costs, of approximately
$84.7 million. The Company used the proceeds from the offering to repay: $11.1
million of outstanding principal and interest on Junior Notes and Senior Notes,
$1.3 million of accrued dividends on the Convertible Preferred Stock, and $72.3
million of indebtedness outstanding under the Credit Facility.
The Company anticipates that its cash flows from operations along with cash on
hand, proceeds of the initial public offering, and funds available under the
Credit Facility, will be sufficient to meet its working capital requirements and
finance any required capital expenditures for at least the next twelve months.
In connection with implementing the Company's growth strategy over the long
term, the Company may be
16
<PAGE> 17
required to seek additional financing through increases to the Credit Facility,
negotiation of credit facilities with other banks or public or private
placements of equity or debt securities. No assurances can be given that the
Company will be able to extend or increase the Credit Facility, secure
additional bank borrowings or complete additional debt or equity financing on
terms favorable to the Company.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, the Company has become a party to and may in
the future be subject to pending and threatened legal actions and proceedings.
The majority of the pending legal proceedings involve claims of medical
malpractice, particularly cytology, which are generally covered by insurance.
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,
notwithstanding any possible insurance recovery.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 27, 1997, the Company consummated its initial public offering of its
common stock, pursuant to Registration Statement Nos. 333-34265 (covering
5,750,000 shares, 539,770 of which were sold by certain selling stockholders of
the Company) and 333-38429 (covering an additional 690,000 shares, 64,773 of
which were sold by certain selling stockholders of the Company), filed with and
declared effective by the Securities and Exchange Commission on October 21,
1997. The managing underwriters were Donaldson, Lufkin & Jenrette Securities
Corporation, Morgan Stanley & Co. Incorporated, Smith Barney Inc. and Piper
Jaffray Inc. At the initial offering price of $16 per share, the Company's
5,835,457 shares and the selling stockholders' 604,543 shares were sold for an
aggregate offering price of $103.0 million with underwriting discounts and
commissions of $7.2 million and estimated offering costs of $2.1 million. Net
proceeds to the Company, after deducting the underwriters' discount and
commissions and other costs and expenses of the offering, were $84.7 million. Of
such net proceeds to the Company, $11.1 million was used to repay outstanding
principal and interest on the Junior Notes and the Senior Notes, including $7.3
million to Summit Partners and its affiliates, a greater than 10% stockholder of
the Company ("Summit"); $1.3 million was used to repay accrued dividends on the
Convertible Preferred Stock, including $1.3 million to Summit; and $72.3 million
was used to repay outstanding indebtedness under the Credit Facility.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY-HOLDERS
None
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(a) Reports on Form 8-K
None
17
<PAGE> 18
SIGNATURES
Date: December 5, 1997 By: /a/ JAMES C. NEW
---------------------------------------
James C. New
President, Chief Executive Officer
and Director (principal executive
officer)
Date: December 5, 1997 By: /a/ ROBERT P. WYNN
---------------------------------------
Robert P. Wynn
Executive Vice President and Chief
Financial Officer (principal
financial officer and principal
accounting officer)
18
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