<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1997
REGISTRATION NO. 333-34265
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
AMERIPATH, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8099 65-0642485
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
---------------------
7289 GARDEN ROAD, SUITE 200
RIVIERA BEACH, FLORIDA 33404
(561) 845-1850
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
---------------------
JAMES C. NEW
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AMERIPATH, INC.
7289 GARDEN ROAD, SUITE 200
RIVIERA BEACH, FLORIDA 33404
(561) 845-1850
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<C> <C>
DANIEL H. ARONSON, ESQ. J. VAUGHAN CURTIS, ESQ.
GREENBERG TRAURIG HOFFMAN ALSTON & BIRD LLP
LIPOFF ROSEN & QUENTEL, P.A. ONE ATLANTIC CENTER
515 E. LAS OLAS BOULEVARD, SUITE 1500 1201 WEST PEACHTREE STREET
FORT LAUDERDALE, FLORIDA 33301 ATLANTA, GA 30309
(954) 765-0500 (404) 881-7000
</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 OCTOBER 1, 1997
PROSPECTUS
, 1997
5,000,000 SHARES
AMERIPATH (LOGO)
COMMON STOCK
------------------------
All of the 5,000,000 shares of Common Stock, $0.01 par value per share (the
"Common Stock"), offered hereby are being sold by the Company. An additional
539,770 shares may be sold by certain stockholders of the Company (the "Selling
Stockholders"), and an additional 210,230 shares may be sold by the Company, if
the Underwriters exercise their over-allotment option in full. See "Principal
Stockholders" and "Underwriting." The Company will not receive any of the
proceeds from the sale of shares by the Selling Stockholders. The net proceeds
received by the Company will be used to repay indebtedness, including amounts
due to stockholders. See "Use of Proceeds." Prior to this offering, there has
been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price per share will be between
$13.00 and $15.00. See "Underwriting" for a discussion of the factors considered
in determining the initial public offering price.
---------------------
The Company has applied to have the shares of Common Stock approved for
quotation on the Nasdaq National Market under the symbol "PATH."
---------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR 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>
- --------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share....................................... $ $ $
Total(3)........................................ $ $ $
- --------------------------------------------------------------------------------------------
</TABLE>
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(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 $2.1 million.
(3) The Company and the Selling Stockholders have granted the Underwriters an
option, exercisable within 30 days of the date hereof, to purchase up to an
aggregate of 750,000 additional shares of Common Stock, at the price to the
public less underwriting discounts and commissions, for the purpose of
covering over-allotments, if any. If the Underwriters exercise such option
in full, the total price to the public, underwriting discounts and
commissions, proceeds to the Company and proceeds to the Selling
Stockholders, will be $ , $ , $ and $ ,
respectively. See "Underwriting."
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain prior conditions including the right of the Underwriters to
reject orders in whole or in part. It is expected that delivery of such shares
will be made in New York, New York, on or about , 1997.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MORGAN STANLEY DEAN WITTER
SMITH BARNEY INC.
PIPER JAFFRAY INC.
<PAGE> 3
MAP AND IFC
2
<PAGE> 4
[Map of the United States showing the locations of Ameripath's operations, in
Florida, Ohio, Kentucky, Alabama, Texas, Mississippi and Indiana, including
summary information regarding the Company as of September 26, 1997: 15 Practices
in Seven States; 72 Hospital Contracts; 14 Outpatient Laboratories; 127
Pathologists; 951 Employees]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<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. AmeriPath, Inc. is structured and operates as a holding
company ("AmPath"), with AmPath currently as the parent of seven wholly-owned
subsidiaries, one of which is located in each state in which the Company
operates. Four wholly-owned subsidiaries (the "Direct Subsidiaries") own and
operate ten practices in Florida, Kentucky, Mississippi and Alabama, which
subsidiaries directly own the laboratory facilities, testing equipment and other
assets, and which subsidiaries directly employ 84 pathologists as well as
technical and other personnel, utilized in such practices. Three wholly-owned
subsidiaries (the "PA Contractor Subsidiaries" and, together with the Direct
Subsidiaries, the "Subsidiaries") are parties to long-term management agreements
with five separately organized professional associations, companies or
corporations (collectively, the "PA Contractors") in Ohio, Indiana and Texas.
The PA Contractors directly employ 42 pathologists and directly contract with
payors and providers, while the PA Contractor Subsidiaries directly employ all
technical and non-medical personnel, and directly own the laboratory facilities,
testing equipment and other assets, utilized in such practices. Unless the
context otherwise requires, references to: (a) the Company or AmeriPath include
AmPath, its predecessors and the Subsidiaries; (b) Affiliated Physicians mean
physicians employed by the Direct Subsidiaries or the PA Contractors; and (c)
the Practices mean the 15 physician practices, ten of which are owned and
operated by the Direct Subsidiaries and five of which are managed by the PA
Contractor Subsidiaries, with medical services provided by the Affiliated
Physicians employed by the PA Contractors.
AmeriPath believes it is the leading physician practice management company
focused on anatomic pathology services, based on an analysis of geographic
breadth, number of physicians, number of hospital contracts, number of practices
and net revenue. The Company owns or is affiliated with 15 Practices located in
seven states which employed, as of September 26, 1997, a total of 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. Of these
pathologists, 126 are board certified, one is board eligible and 61 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). See "The Company."
The Company manages and controls all of the non-medical functions of
the Practices, including: (i) recruiting, training, employing and managing the
technical and support staff of the Practices; (ii) developing, equipping and
staffing laboratory facilities; (iii) establishing and maintaining courier
services to transport specimens; (iv) negotiating and maintaining contracts
with hospitals, national clinical laboratories and managed care organizations
and other payors; (v) providing financial reporting and administration,
clerical, purchasing, payroll, billing and collection, information systems,
sales and marketing, risk management, employee benefits, legal, tax and
accounting services to the Practices; (vi) complying with applicable laws and
regulations; and (vii) with respect to the Company's ownership and operation of
anatomic pathology laboratories, providing slide preparation and other
technical services. The Company is not licensed to practice medicine. The
practice of medicine is conducted solely by Affiliated Physicians employed by
either the Direct Subsidiaries or the PA Contractors.
The practice of pathology involves the diagnosis of diseases through
examination of tissues and cells and the chemical testing and analysis of body
fluids, such as blood and urine. Clinical pathology involves an interpretation
of standardized laboratory test results, a process which is frequently
automated, while anatomic pathology typically requires the involvement of a
pathologist in making a specific diagnosis. Anatomic pathologists do not treat
patients but rather assist physicians by establishing a definitive diagnosis. In
addition, anatomic pathologists may consult with attending physicians regarding
treatment plans. In these capacities, the anatomic pathologist serves as the
"physician's physician," creating what is often a long-term relationship. Based
on information published by the American Medical Association, there are
approximately 14,000 practicing pathologists in the United States. According to
the American Society of Dermatopathology, in 1994, approximately 900 practicing
pathologists specialized in dermatopathology. The Company expects the
3
<PAGE> 6
provision of anatomic pathology services to continue to grow primarily due to
the aging of the United States population, increased incidence of cancer and
medical advancements that allow for earlier diagnosis and treatment of diseases.
During 1996, the Company acquired or affiliated with 11 anatomic pathology
Practices (the "1996 Acquisitions") in five states: six practices in Florida,
two practices in Ohio and one practice in each of Alabama, Kentucky and Texas.
During 1997, the Company acquired or affiliated with three additional anatomic
pathology practices (the "1997 Acquisitions"): one in a state where the Company
currently operates (Texas) and two in additional states (Indiana and
Mississippi).
The Company provides physician practice management services and the
Affiliated Physicians provide medical services in the Company's outpatient
laboratories and in inpatient laboratories owned by hospitals. As of September
26, 1997, 11 Practices had exclusive contracts with a total of 72 hospitals to
manage their inpatient laboratories and provide professional pathology services.
Six of these 11 Practices also have established outpatient laboratories that
focus on outpatient services. Generally, under a hospital contract the Practice
provides the medical director for the hospital's laboratory who is responsible
for certain supervisory responsibilities with respect to the laboratory's
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
toward more procedures being performed in an outpatient setting. Four of the
Practices (three of which are PA Contractors) operate exclusively in outpatient
laboratories and provide services to attending physicians, national clinical
laboratories and managed care organizations. The outpatient pathology services
provided by the Practices are focused primarily on dermatopathology, which
relates to the examination of skin biopsies.
The Company's objective is to enhance its position as the leading provider
of physician practice management services to anatomic pathology practices
through the following strategies:
- Focus on Anatomic Pathology. The Company believes that its focus on
providing management services to anatomic pathology practices provides it
with a competitive advantage in the acquisition of such practices. As a
result of this focus, Affiliated Physicians are able to form an internal
network for consultations and to offer specialized services to their
clients. The Company believes that this focus allows it to develop
expertise in managing both inpatient and outpatient pathology practices.
- Acquire Leading Practices. The Company expects to increase its presence
in existing markets and enter into new markets through acquisitions of,
affiliations with and strategic minority investments in leading
practices. The Company intends to continue to source acquisitions and
affiliations by capitalizing on the professional reputations of the
Practices and the Affiliated Physicians, the Company's management
experience and the benefits of being part of a public company, including
increased resources and improved access to capital.
- Expand Sales and Marketing Efforts. The Company focuses on generating
internal growth for the Practices by augmenting their existing physician
and contractual relationships with a professional sales and marketing
program. Since specimens can be transported, the Company's sales and
marketing efforts focus on expanding the geographic scope of the
Practices. The Company is seeking to extend existing local contracts with
national clinical laboratories that subcontract for anatomic pathology
services to include multiple Practices that cover a broader 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 access to
additional exclusive hospital contracts through the acquisition of or
affiliation with anatomic pathology practices that have such contracts,
as well as through expansion of existing relationships between the
Practices and 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
believes that providing inpatient laboratory services to multiple
hospitals within a geographic area facilitates the development
4
<PAGE> 7
of a successful outpatient services operation by creating market
presence, economies of scale and important physician relationships.
- Achieve Operational Efficiencies. The Company intends to achieve
operational efficiencies by centralizing certain functions, enhancing
Practice efficiency and utilizing its size to negotiate discounts on
equipment, supplies, insurance and services. While the Company has
integrated certain aspects of the billing, sales and marketing,
accounting and other functions of the Practices, the Company intends to
further integrate the operations of the Practices. The Company also plans
to introduce "bench-marking" programs to enhance the efficiency of the
Practices.
Through the implementation of these strategies, the Company intends to
develop integrated networks of anatomic pathology practices on a regional basis.
The Company has developed a regional business model in Florida, where it owns
and manages seven anatomic pathology practices that extend from Miami to Orlando
and from Fort Myers to Tampa. Together, as of September 26, 1997, these
Practices employed 68 Affiliated Physicians and provided medical services in
seven outpatient pathology laboratories and in inpatient laboratories for 29
hospitals and 15 outpatient surgery centers. The Company intends to leverage its
size and geographic coverage to expand contracts with national clinical
laboratories and managed care organizations from a local to a regional basis.
The Company's contract with a national clinical laboratory for the exclusive
provision of anatomic pathology services in five Florida counties was expanded
in November 1996 to include 59 of Florida's 67 counties. The Company has
centralized its marketing efforts to managed care organizations, multi-hospital
systems and national clinical laboratories. The Company recently installed a
management information system that is designed to expand and enhance the
financial reporting capabilities of the Practices.
Effective January 1, 1994, American Laboratory Associates, Inc., a
predecessor of the Company ("ALA"), acquired (the "1994 Acquisition") the net
assets of E.G. Poulos, M.D., M.J. Demaray, M.D., and A.P. Kowalczyk, M.D., P.A.
("PDK"), a reference laboratory providing pathology services, principally
dermatopathology, and entered into related financing transactions. The 1994
Acquisition is further described in this Summary in Footnote 2 to Summary
Consolidated Financial Information as well as in "The Company," "Certain
Transactions -- 1994 Acquisition" and Note 1 to the Consolidated Financial
Statements. In February 1996, ALA became a wholly owned subsidiary of AmPath in
a share exchange transaction. This share exchange transaction, as well as the
Company's growth and development thereafter, is further described in "The
Company" and "Certain Transactions -- 1994 Acquisition."
5
<PAGE> 8
THE OFFERING
Common Stock Offered by the
Company............................. 5,000,000 shares(1)
Common Stock Outstanding After the
Offering............................ 18,356,365 shares(1)
Use of Proceeds..................... Estimated net proceeds of $63.0 million
to the Company will be used: (i) to
repay the outstanding principal amount
of the Company's 10% junior
subordinated notes due December 31,
2001 (the "Junior Notes"); (ii) to
repay the outstanding principal amount
of 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 this 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 on 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
5,558,607 shares of Common Stock immediately prior to the consummation of
this offering; (iii) excludes 2,200,000 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 1,172,211 shares of Common
Stock have been granted as of September 26, 1997 (at a weighted average
exercise price of $5.20 per share) (See "Management -- Option Plan"); and
(iv) 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 options to purchase 5,000 shares have been granted as of September 26,
1997 to a director of AmPath (at an exercise price of $10.00 per share). See
"Management -- Director Option Plan."
6
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL INFORMATION(1)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------- ------------------------------
PRO FORMA PRO FORMA
AS ADJUSTED ACTUAL AS ADJUSTED
1992 1993 1994(2) 1995 1996 1996(3) 1996 1997 1997(4)
------- ------- ------- ------- ------- ----------- ------ ------- -----------
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CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenue.................... $11,443 $13,419 $14,461 $16,024 $42,558 $122,066 $9,690 $44,844 $64,280
Operating costs:
Cost of services............. 8,791 10,803 7,026 8,517 20,106 53,341 4,708 20,313 27,362
Selling, general and
administrative expense..... 1,696 1,634 2,287 2,644 8,483 19,075 1,822 8,564 10,279
Provision for doubtful
accounts................... 787 953 1,003 1,161 3,576 11,089 645 4,116 5,904
Amortization expense......... -- -- 678 678 1,958 7,617 304 2,410 3,761
Loss on cessation of clinical
lab operations(5).......... -- -- -- -- 910 910 910 -- --
------- ------- ------- ------- ------- -------- ------ ------- -------
Total.................... 11,274 13,390 10,994 13,000 35,033 92,032 8,389 35,403 47,306
------- ------- ------- ------- ------- -------- ------ ------- -------
Income from operations......... 169 29 3,467 3,024 7,525 30,034 1,301 9,441 16,974
Interest expense............... (62) (48) (1,584) (1,504) (3,540) (7,766) (767) (4,057) (3,910)
Nonrecurring charge(6)......... -- -- -- -- -- -- -- (1,289) (1,289)
Other income (expense), net.... 10 9 (46) (46) (431) (318) (201) (57) (26)
------- ------- ------- ------- ------- -------- ------ ------- -------
Income (loss) before income
taxes........................ 117 (10) 1,837 1,474 3,554 21,950 333 4,038 11,749
Provision for income
taxes(7)..................... -- -- 692 572 1,528 9,523 127 1,736 5,008
------- ------- ------- ------- ------- -------- ------ ------- -------
Net income (loss).............. $ 117 $ (10) $ 1,145 $ 902 $ 2,026 $ 12,427 $ 206 $ 2,302 $ 6,741
======= ======= ======= ======= ======= ======== ====== ======= =======
Pro forma data(8):
Pro forma net income per
share...................... $ 0.22 $ 0.65 $ 0.19 $ 0.35
======= ======== ======= =======
Pro forma weighted average
shares outstanding......... 9,378 19,094 12,066 19,094
======= ======== ======= =======
OPERATING DATA(9):
Pathologists................... 5 5 6 6 81 12 75 115
Hospital contracts............. -- -- -- -- 46 3 47 71
Outpatient laboratories........ 1 1 1 1 12 1 12 14
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------------------
PRO PRO FORMA
ACTUAL FORMA(10) AS ADJUSTED(11)
-------- ------------ ---------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 1,035 $ 1,429 $ 1,429
Total assets.............................................. 161,331 256,818 255,118
Long term debt, including current portion................. 97,246 156,109 94,309
Redeemable equity securities(12).......................... 18,616 18,616 --
Stockholders' equity...................................... 15,627 34,855 113,571
</TABLE>
(footnotes on following page)
7
<PAGE> 10
(1) The summary consolidated financial data for the years ended December 31,
1992 and 1993 are that of PDK prior to the 1994 Acquisition. The summary
consolidated financial data for the years ended December 31, 1994, 1995 and
1996 and the six months ended June 30, 1996 and 1997 are for AmeriPath,
Inc. and its Subsidiaries after the 1994 Acquisition which was effective
January 1, 1994. See "The Company."
(2) In connection with the 1994 Acquisition, ALA was capitalized through the
issuance of 1,425,600 shares of common stock to Drs. Poulos, Demaray and
Kowalczyk (the "PDK shareholders"), in exchange for an aggregate of $1.0
million in cash, and ALA issued to Summit Ventures III, L.P., Summit
Subordinated Debt Fund, L.P. and Summit Investors II, L.P. (collectively,
"Summit") and Schroder Incorporated, Schroder Ventures Limited Partnership
and Schroder Ventures U.S. Trust (collectively, "Schroder") an aggregate of
(i) 3,208,120 shares of the Convertible Preferred Stock for $5.5 million,
and (ii) $7.5 million of Junior Notes. In the 1994 Acquisition, ALA
acquired the net assets of PDK for: (i) approximately $20.5 million in
cash, funded by the Summit and Schroder investment and financed partially
by borrowings of $7.5 million under a line of credit; (ii) the issuance of
$3.5 million of Senior Notes; and (iii) the issuance of 8% non-negotiable
subordinated contingent notes (the "ALA Contingent Notes") in the maximum
principal amount of $2.5 million. The 1994 Acquisition was accounted for
using the purchase method of accounting. Cost of services includes $3.1
million and $4.4 million in 1992 and 1993, respectively, representing
compensation paid to PDK shareholders in excess of the compensation of such
shareholders following the 1994 Acquisition. Net income for the years ended
December 31, 1994, 1995 and 1996 does not reflect dividends payable on the
Convertible Preferred Stock. See "The Company," "Certain
Transactions -- 1994 Acquisition" and Note 1 to the Consolidated Financial
Statements.
(3) Gives effect to the 1996 Acquisitions, the 1997 Acquisitions 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 all of such transactions had been effected on
January 1, 1996. The 1996 Acquisitions were financed in part by borrowings
of $78.6 million under the Credit Facility, the issuance of $4.5 million of
the Company's 7% and 8% subordinated notes and the issuance of 3,870,741
shares of Common Stock. The 1997 Acquisitions were financed in part by
borrowings of $58.9 million under the Credit Facility and resulted in the
issuance of 1,910,808 shares of Common Stock.
(4) Gives effect to the 1997 Acquisitions 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 all of such transactions had been effected on January 1, 1997.
(5) In connection with closing ALA's clinical operations in May 1996, the
Company recorded a non-recurring charge to operations aggregating $910,000,
which included severance payments, write-downs of property, equipment and
other assets to estimated realizable values, and the write-off of the
unamortized balances of intangible assets associated with the clinical
operations. See Note 17 to the Consolidated Financial Statements.
(6) In the six months ended June 30, 1997, the Company recorded a nonrecurring
charge of $1.3 million, primarily professional fees and printing costs, as
a result of the postponement of the Company's planned initial public
offering of Common Stock.
(7) Prior to the 1994 Acquisition, PDK 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 do not include a
provision for income taxes.
(8) 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 outstanding, 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; and (iii) shares of
Common Stock issuable pursuant to outstanding options, using the treasury
stock method and an assumed initial public offering price of $14.00 per
share.
(9) Operating data is measured as of the end of the period indicated.
(10) Gives effect to the 1997 Acquisitions as if all of such transactions had
been effected on June 30, 1997.
(11) As adjusted to reflect the conversion of the Convertible Preferred Stock,
the termination of the contingent obligation to repurchase 1,493,520 shares
of Common Stock (the "Redeemable Common Stock") as a result of the
consummation of this offering and the sale of the shares offered hereby at
an assumed initial public offering price of $14.00 per share, and the
application of the estimated net proceeds therefrom, as if all of such
transactions had been effected on June 30, 1997.
(12) Actual and pro forma amounts include Convertible Preferred Stock of $5.2
million plus accrued and unpaid dividends of $1.2 million at June 30, 1997
and $12.2 million of Redeemable Common Stock.
8
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RISK FACTORS
Prospective investors should carefully consider the factors set forth
below, as well as the other information contained in this Prospectus, in
evaluating an investment in the Common Stock offered hereby.
Reliance upon Government Programs. The Company derived 57.0%, 39.0% and
approximately 35.5% of collections for the years ended December 31, 1995 and
1996 and for the six months ended June 30, 1997, respectively, and approximately
28.6% for the six months ended June 30, 1997 on a pro forma basis giving effect
to the 1997 Acquisitions, from payments made by government sponsored healthcare
programs (principally Medicare and Medicaid). The recently enacted balanced
budget legislation includes revisions to existing payment rates for health care
services, including services performed by the Company. Although the payment
rates for most of the services provided by the Company have not been reduced
under such legislation, there can be no assurance that payment rates for such
services will not be reduced by future legislation or by the Department of
Health and Human Services pursuant to authority granted to it under the balanced
budget legislation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Introduction." The newly adopted
legislation also provides for an increase in state discretion over the funding
of Medicaid. Increased state discretion in Medicaid funding, coupled with the
fact that such expenditures comprise a substantial and growing share of state
budgets, could lead to significant reductions in reimbursement. Since these
programs generally reimburse on a fee schedule basis, rather than a
charge-related basis, the Company generally cannot increase net revenue by
increasing the amount charged for services provided. In addition, cost increases
may not be able to be recovered from government payors. Some states have
recently enacted legislation to require that all Medicaid patients be treated by
health maintenance organizations ("HMOs"), and similar legislation may be
enacted in other states, which could result in the redirection of certain
patients away from the Practices or reduce reimbursement for services provided
for 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 and penalties from these
programs may occur. Government sponsored healthcare program changes which result
in the inability to recover cost increases through price increases or otherwise,
could have a material adverse effect on the Company's financial condition and
results of operations. See "Business -- Government Regulation."
Risks Relating to Acquisition Strategy. The Company's strategy includes
growth through acquisitions of, affiliations with, and minority investments in
practices that provide anatomic pathology services. The 1996 Acquisitions and
the 1997 Acquisitions were the Company's first actions in implementing this
strategy as well as its first purchases of pathology practices. In implementing
its strategy, the Company will compete with other potential acquirors, some of
which may have greater financial resources than the Company. Competition for
acquisitions may intensify due to ongoing consolidation in the healthcare
industry, which may increase the costs of capitalizing on acquisition
opportunities. Several companies, both publicly traded and privately held, which
may have greater resources than the Company are pursuing the acquisition of
practices. In addition, companies in other healthcare segments, such as
hospitals and managed care organizations, many of which have greater financial
and other resources than the Company, may pursue the acquisition of practices.
Particularly in an environment of reduced reimbursement rates, there can be no
assurance that new competitors will not enter the market, that the Company will
be able to identify and complete future acquisitions or that competitors will
not make it more difficult for the Company to complete acquisitions on favorable
terms. In pursuing its strategy, the Company intends to expand in areas where
the Practices currently operate as well as in new markets. Although the Company
believes that it is in compliance with applicable anti-trust laws, there can be
no assurance that governmental authorities would not view the Company as being
dominant in a particular market and, therefore, prevent the Company from making
certain acquisitions or affiliations or cause the Company to divest itself of
any particular practice. Acquisitions and affiliations involve numerous short
and long term risks, including diversion of management's attention, failure to
retain key personnel and contracts of the acquired practices, government
investigations of the activities of practices prior to being acquired, inability
to integrate 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 Company's
recent acquisitions or any future acquisition or affiliation will be
successfully integrated into the Company's operations or that practices, once
acquired by or
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affiliated with the Company, will grow. Consummation of acquisitions or
affiliations could result in the incurrence or assumption by the Company of
additional liabilities, including contingent liabilities, or the issuance of
additional equity. The issuance of shares of Common Stock to make acquisitions
or affiliations may result in dilution to the Company's stockholders. To achieve
its growth through acquisitions strategy, the Company will need to obtain
additional funding. There can be no assurance that adequate funding will be
available as needed or on terms acceptable to the Company. A lack of funds may
require the Company to delay or eliminate all or some of its acquisition plans.
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."
Recent Government Investigations of Hospitals and Hospital
Laboratories. Significant media and public attention has recently been focused
on the health care industry due to ongoing federal and state investigations
reportedly related to certain referral and billing practices, laboratory and
home healthcare services and physician ownership and joint ventures involving
hospitals. Most notably, Columbia/HCA Healthcare Corporation ("Columbia") is
under investigation with respect to such practices. The Company operates
laboratories on behalf of and has numerous contractual arrangements with
hospitals, including, as of September 26, 1997, 25 pathology services contracts
with Columbia. The government's investigation of Columbia could result in a
governmental investigation of one or more of the Company's operations which have
arrangements with Columbia. In addition, the Office of the Inspector General and
the Department of Justice have initiated hospital laboratory billing review
projects in certain states and are expected to extend such projects to
additional states, including states in which the Company operates hospital
laboratories. These projects increase the likelihood of governmental
investigations of hospital laboratories operated by the Company. Although the
Company monitors its billing practices and hospital arrangements to ensure
compliance with prevailing industry practices under applicable laws, such laws
are complex and constantly evolving and there can be no assurance that
governmental investigators will not take positions that are inconsistent with
industry practices, including the Company's practices. The government's
investigation of Columbia may have other effects which could adversely affect
the Company, including the termination or amendment of one or more of the
Company's contracts with Columbia or the sale of hospitals potentially
disrupting the performance of services under such contracts. The investigation
of Columbia or other hospital operators with whom the Company does business
could also result in adverse publicity concerning the Company, which could limit
the Company's ability to acquire or affiliate with additional practices or to
obtain new or expanded hospital contracts, or could result in termination or
non-renewal of the Company's existing hospital contracts. In addition, in
certain instances indemnity insurers and other non-governmental payors have
sought repayment from providers, including laboratories, for alleged
overpayments.
Risks Relating to Growth. In addition to acquisitions of and affiliations
with practices, the Company intends to continue to grow through internal
expansion. The Company derives its net revenue from the net revenue of the
Practices. The Company's growth strategy requires: (i) capital investment; (ii)
compliance with present or future laws and regulations that may differ from
those to which the Company is currently subject; (iii) further development of
the Company's corporate management and operational, financial and accounting
resources to accommodate and manage growth; and (iv) the ability to expand the
Affiliated Physician and employee base and to train, motivate and manage
employees of the Subsidiaries. Failure to meet these requirements could limit
the Company's growth potential and may have a material adverse effect on the
Company's financial condition and results of operations. The Company is in the
process of integrating the marketing activities, courier networks, management
information systems and other operational aspects of the Practices and of
implementing consistent billing systems, accounting policies and internal
control procedures in the Practices. Delays in completing, or the inability to
successfully complete, such process could have a material adverse effect on the
Company's financial condition and results of operations. Although the Company is
taking steps to manage rapid growth, there can be no assurance that the Company
will be able to do so efficiently or that the Company's growth rate will
continue in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business -- Physician, PA Contractor and
Other Contractual Relationships" and "Business -- Government Regulation."
Dependence on Pathologists. The Company's business is dependent upon the
Practices' recruiting and retaining pathologists, particularly those with
subspecialities, such as dermatopathology. While the Practices
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have been able to recruit and retain the Affiliated Physicians, no assurance can
be given that the Company or the Practices will be able to continue to do so on
terms similar to its current arrangements. The relationship between the
pathologists and their respective local medical communities is important to the
profitability of the Practices. In the event that a number of Affiliated
Physicians were to terminate their relationships with the Direct Subsidiaries or
the PA Contractors or become unable or unwilling to continue their employment,
or in the event non-compete agreements with a number of Affiliated Physicians
were terminated or determined to be invalid or unenforceable, the Company's
business could be materially adversely affected. See "Business -- Physician, PA
Contractor and Other Contractual Relationships" and "Business -- Affiliation
Structure."
Assumption of Liabilities of Acquired Practices. The Company has acquired
and affiliated with and will continue to acquire and affiliate with practices
with prior operating histories. The Company has from time to time identified
certain past practices of acquired physician groups that do not conform to the
Company's standards. Although the Company institutes certain policies and
procedures designed to conform such practices to its standards following closing
of acquisitions, there can be no assurance that the Company will not become
liable for the past operations, including billing and reimbursement practices
which may be later asserted to be improper, of such acquired or affiliated
practices. Although the Company performs certain due diligence investigations
with respect to potential liabilities of acquired and affiliated practices and
obtains indemnification with respect to certain liabilities from the sellers of
such practices, there can be no assurance that any liabilities for which the
Company becomes responsible will not be material or will not exceed either the
limitations of any applicable indemnification provisions or the financial
resources of the indemnifying parties.
Payment and Reimbursement Risks. Virtually all of the Company's net
revenue in 1995, 1996, the six months ended June 30, 1997 and on a pro forma
basis giving effect to the 1997 Acquisitions for the six months ended June 30,
1997 was derived from the Practices' charging for services on a fee-for-service
basis. Accordingly, the Company assumes the financial risk related to
collection, including the potential uncollectability of accounts, long
collection cycles for accounts receivable and delays attendant to reimbursement
by third party payors, such as governmental programs, private insurance plans
and managed care organizations. Increases in write-offs of doubtful accounts,
delays in receiving payments or potential retroactive adjustments and penalties
resulting from audits by payors may require the Company to borrow funds to meet
its current obligations or may otherwise have a material adverse effect on the
Company's financial condition and results of operations. See
"Business -- Government Regulation."
Cancellation or Non-renewal of Hospital Contracts; Dependence on Hospital
Contracts. Hospital contracts maintained by the Direct Subsidiaries generally
have terms of one to five years and are cancelable by the hospital upon notice
of 30 to 180 days. No assurance can be given that such contracts with hospitals
will not be canceled or will be renewed in the future. Loss of any particular
hospital contract would result in a loss of net revenue to the Practice, and
therefore to the Company, from that contract as well as from outpatient net
revenue that may be derived from the relationship with a hospital and its
medical staff. In addition, consolidation in the hospital industry may result in
fewer hospitals or fewer laboratories as hospitals move to combine their
operations. At September 26, 1997, the Practices had 72 hospital contracts, 25
of which were with hospitals owned by Columbia. For the year ended December 31,
1996, the six months ended June 30, 1997 and on a pro forma basis giving effect
to the 1997 Acquisitions for the six months ended June 30, 1997, 19.0%, 22.0%
and approximately 23.7%, respectively, of net revenue was generated directly
from contracts with hospitals owned by Columbia. Columbia has recently been the
subject of federal and state regulatory investigations. There can be no
assurance that an outcome adverse to Columbia would not have a material adverse
effect on the Company's relationship with Columbia or on the Company's results
of operations. If 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 1996
Acquisitions and the 1997 Acquisitions, the Company has agreed to pay to sellers
of 13 Practices additional consideration in the form of debt obligations (the
"Contingent Notes"), payment of which is contingent upon the Practice achieving
certain specified profitability criteria over periods ranging from three to five
years from the date of acquisition. The principal amount and accrued interest of
Contingent Notes to be paid cannot be determined until the
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contingency periods terminate and achievement of the profitability criteria is
determined. For the six months ended June 30, 1997, the Company paid an
aggregate of $1.4 million pursuant to the Contingent Notes. If the maximum
criteria for the contingency payments with respect to each 1996 Acquisition and
each 1997 Acquisition were achieved, the Company would be obligated to make
payments, including principal and interest, of approximately $98.6 million
between June 30, 1997 and September 30, 2002. Lesser amounts of cash would be
paid if the maximum financial criteria are not met. Payments pursuant to the
Contingent Notes will result in an increase in the purchase price for such
Practice and additional 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 a Practice's
operations should exceed the cash required to satisfy the Company's contingent
obligations with respect to that Practice 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 were
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. The Company expects to continue to use
Contingent Notes as partial consideration for acquisitions and affiliations.
While the Company believes that the Contingent Notes do not violate federal or
state "anti-kickback" or "self-referral" statutes, there can be no assurance
that such arrangements will not be challenged by regulatory authorities seeking
to enforce such laws. See "Business -- Government Regulation," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 3 to the Consolidated Financial Statements.
Risks Related to Intangible Assets. The Company's acquisitions have
resulted in significant increases in net identifiable intangible assets and
goodwill. Net identifiable intangible assets, which include hospital contracts,
physician client lists, a management service agreement and laboratory contracts
acquired in the acquisitions were approximately $74.1 million, $72.5 million and
$119.5 million at December 31, 1996, June 30, 1997, and on a pro forma basis,
after giving effect to the 1997 Acquisitions, at June 30, 1997, respectively,
representing approximately 46.9%, 45.0%, and 46.5%, 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 27.6 years as of June 30, 1997.
Goodwill, which relates to the excess of cost over the fair value of net assets
of businesses acquired, was approximately $57.4 million, $60.1 million and
$101.5 million, at December 31, 1996, June 30, 1997, and on a pro forma basis,
after giving effect to the 1997 Acquisitions, at June 30, 1997, respectively,
representing approximately 36.4%, 37.3% and 39.5%, 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 33.8 years as
of June 30, 1997. 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, to determine whether events and
circumstances indicate that all or a portion of the carrying value of intangible
assets may no longer be recoverable, in which case an additional charge to
earnings may be necessary. Although at June 30, 1997 the unamortized 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
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considered will be adopted. There can be no assurance that the healthcare
regulatory environment will not change so as to restrict the existing operations
of, impose additional requirements on or limit the expansion of the Company and
the PA Contractors. Costs of compliance with changes in government regulations
may not be subject to recovery by the Company through price increases. Some of
the proposals under consideration, or others which may be introduced, could, if
adopted, have a material adverse effect on the Company's financial condition and
results of operations. See "Business -- Government Regulation."
Competition. The healthcare industry generally, and physician practice
management specifically, is highly competitive and has been subject to continual
changes in the method in which healthcare services are provided and the manner
in which healthcare providers are selected and compensated. The Company believes
that private and public reforms in the healthcare industry emphasizing cost
containment and accountability have resulted in increased competition and will
result in an increasing shift by hospital and related medical facilities from
individual or small practices to large practices and physician practice
management companies. The Company competes with other physician practice
management companies that are focused on owning or providing management services
to anatomic pathology practices. In addition, the Practices compete in local
markets with other anatomic pathology practices, national clinical laboratories,
hospitals and clinics which provide anatomic pathology medical services. The
Company competes with several other companies for the acquisition of or
affiliation with anatomic pathology practices. In addition, companies in other
healthcare industry segments, such as hospitals, HMOs and large physician
practices, many of which have financial and other resources greater than those
of the Company, may become competitors in acquiring, or providing physician
practice management services to, anatomic pathology practices. There can be no
assurance that the Company will be able to compete effectively or that
additional competitors will not enter the Company's markets or make it more
difficult for the Company to acquire or affiliate with practices on favorable
terms. See "Business -- Competition."
Growth of Managed Care. The number of individuals covered under managed
care contracts or other similar arrangements has grown over the past several
years and may continue to grow in the future. Entities providing managed care
coverage have been successful in reducing payments for medical services in
numerous ways, including entering into arrangements under which payments to a
service provider are capitated, limiting testing to specified procedures,
denying payment for specified services unless prior authorization for such
services has been obtained and refusing to increase fees for specified services.
The continued growth of the managed care industry and its continued success in
reducing payments to medical service providers could have a material adverse
effect on the Company's financial condition and results of operation. See
"Business -- Government Regulation."
State Laws Regarding Prohibition of Corporate Practice of Medicine. The
laws of many states prohibit business corporations, such as AmPath and its
Subsidiaries, from exercising control over the medical judgments or decisions of
physicians and from engaging in certain financial arrangements, such as fee
splitting with physicians. These laws and their interpretations vary from state
to state and are enforced by both the courts and regulatory authorities, each
with broad discretion. Expansion into certain jurisdictions may require
structural and organizational modifications of the Company's form of
relationship with practices. Wherever permissible, AmPath has established, and
will continue to establish, wholly-owned subsidiaries incorporated in the
respective state that will own, control and operate practices and employ
pathologists in that state. In states with laws that prohibit such structure,
AmPath establishes affiliations and related arrangements that achieve the
substance of such ownership, control and operation, to the maximum extent
practicable in accordance with applicable state law, including the use of
long-term management agreements with professional associations and corporations.
The Company currently provides physician practice management services to 15
Practices in seven states, including Florida, Alabama, Indiana, Kentucky,
Mississippi, Ohio and Texas. In Florida, Alabama, Kentucky and Mississippi,
states that do not prohibit business corporations from directly employing
physicians, Direct Subsidiaries employ physicians to provide medical services.
In Indiana, Ohio and Texas, AmeriPath's wholly owned subsidiaries (i.e., the PA
Contractor Subsidiaries) have long-term management agreements with controlled
entities (i.e., the PA Contractors) which, in turn, employ physicians to provide
medical services. In Texas, AmPath is the sole member of a controlled non-profit
corporate subsidiary that employs the Affiliated Physicians of one of the
Company's Dallas-based Practices and is the sole member of
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another controlled non-profit corporate subsidiary that, effective on or before
October 10, 1997, will employ the Affiliated Physicians of the Company's other
Dallas-based Practice. In Ohio and Indiana, the entities employing physicians
are owned by a trust of which AmPath is the sole beneficiary. In Texas, Ohio and
Indiana, a wholly-owned subsidiary performs only laboratory, technical and
non-medical administrative services and does not exercise influence or control
over the practice of medicine by physicians nor does the subsidiary practice
medicine or represent such to the public or to clients. Although the Company
believes, based upon the advice of counsel, that it is in compliance 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 unlawful corporate
practice of medicine in such states or that the management and administration
fees paid to the Company by the PA Contractors constitute unlawful fee splitting
or the unlawful corporate practice of medicine. If such a claim were
successfully asserted, the Company and the Affiliated Physicians could be
subject to civil and criminal penalties and the Company or the PA Contractor
Subsidiaries could be required to restructure their contractual arrangements.
Such penalties or the inability of the Company or the PA Contractor Subsidiaries
to successfully restructure their relationships to comply with such laws could
have a material adverse effect on the Company's financial condition and results
of operations. See "Business -- Affiliation Structure" and
"Business -- Physician, PA Contractor and Other Contractual Relationships."
Effect of Government Regulation. The business of the Company and the PA
Contractors is subject to extensive and increasing regulation by federal and
state governments. Laws and regulations governing the Company's activities
include anti-kickback and self-referral laws, fraud and abuse statutes and
licensing requirements. These laws and regulations are enforced by various
federal and state regulatory agencies, including the Office of the Inspector
General ("OIG") of the Department of Health and Human Services ("HHS"). The
Health Insurance Portability and Accountability Act of 1996 and Operation
Restore Trust, initiated in 1995, have strengthened the powers of the OIG and
increased the funding for Medicare and Medicaid audits and investigations. As a
result, the OIG is currently expanding the scope of its healthcare audits and
investigations. Federal and state audits and inspections, whether on a scheduled
or unannounced basis, are conducted from time to time at the Company's
facilities. An inspection was conducted in April 1997 at ALA's laboratory
facility by representatives of federal and state agencies under Operation
Restore Trust. A report to the Department of Justice with respect to this
inspection was expected prior to October 1, 1997. The Company has received a
preliminary report from the Agency for Health Care Administration ("AHCA")
relating to Medicaid which cites limited alleged non-compliances the effects of
which are immaterial to the Company's operations as a whole. The Company has not
received a report from the agency representing Medicare, and there can be no
assurance that the findings of such a report relating to Medicare will not have
an adverse effect on the Company. Further, 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, and enforcement actions
against, healthcare providers. Federal anti-kickback laws and regulations
prohibit any knowing and willful offer, payment, solicitation or receipt of any
form of remuneration, either directly or indirectly, in return for, or to
induce: (i) the referral of an individual for a service for which payment may be
made by Medicare and Medicaid or certain other federal healthcare programs; or
(ii) the purchasing, leasing, ordering or arranging for, or recommending the
purchase, lease or order of, any service or item for which payment may be made
by Medicare, Medicaid or certain other federal healthcare programs. Violations
of federal anti-kickback rules are punishable by monetary fines, civil and
criminal penalties and exclusion from participation in Medicare and Medicaid
programs. The Practices rely upon referrals of patient tissue samples and
specimens from physicians. Subject to certain exceptions, laws known as "Stark
I" and "Stark II" prohibit Medicare or Medicaid payments for certain services
furnished by an entity pursuant to referrals by a physician who has a financial
relationship with the entity through ownership, investment or a compensation
arrangement. This prohibition is broad and extends to immediate family members
of the physician and to the other physicians in a group practice. See
"Business -- Government Regulation." Possible sanctions against the Company, the
PA Contractors and the Affiliated Physicians for violation of these laws include
civil monetary penalties, exclusion from Medicare and Medicaid programs and
forfeiture of amounts collected in
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violation of such prohibitions. The Company will notify physicians of the
restrictions on referrals by physicians who own capital stock of the Company and
will seek a certification of compliance from all physicians who refer tests to
the Practices. Each of the states in which the Subsidiaries and the PA
Contractors currently do business, except Alabama and Mississippi, has similar
anti-kickback, anti-fee splitting and/or self-referral laws, some of which apply
to all payors. These laws 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 and as a
result of the grant of stock options. These interests include Contingent Notes
and Common Stock which have been used by AmPath to purchase at fair market value
the assets or stock of the Practices. While the Company believes that the
current operations and transactions of the Company and the PA Contractors comply
with existing laws and regulations, the federal and state self-referral and
fraud and abuse laws and regulations are broadly written, and the possibility
exists that such current operations or transactions 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 1996
Acquisitions and the 1997 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 such operations, if reviewed, would be found to be in
full compliance with such laws and regulations, as such laws may be ultimately
interpreted. A violation of such laws and regulations by a Practice prior to its
acquisition could result in civil and criminal penalties, exclusion from
participation in Medicare and Medicaid programs and/or loss of a physician's
license to practice medicine. To the extent the Practices were found not to be
in compliance with such laws and regulations, the Company's financial condition
and results of operations could be materially adversely affected. The
relationships, including fee payments, among the PA Contractors, hospital
clients and physicians have not been examined by federal or state authorities
under these laws and regulations. The Medicare and Medicaid fraud and abuse
provisions apply to laboratories participating in such programs. These
provisions include prohibitions of improper and unnecessary billing for tests
under these programs. Penalties for violations of these federal laws include
exclusion from participation in Medicare and Medicaid programs, asset
forfeitures and civil and criminal penalties. Although the Company believes that
the Company and the PA Contractors are in compliance with these laws and
regulations, there can be no assurance that federal or state regulatory
authorities will not challenge the past, current or future activities of the
Company or the PA Contractors under these laws. See "Business -- Government
Regulation."
The Company is subject to various federal, state and local statutes and
ordinances regulating the generation, storage, treatment and disposal of medical
specimens, infectious and hazardous waste and radioactive materials. If any
environmental regulatory agency finds the Company's facilities to be in
violation of such laws, penalties and fines may be imposed for each day of
violation and the affected facility could be forced to cease operations, which,
in turn, could have a material adverse effect on the Company's financial
condition and results of operations.
Professional Liability and Insurance. The business of the Company and the
PA Contractors entails an inherent risk of claims of liability for acts of
Affiliated Physicians and laboratory personnel. The Company, the PA Contractors
and the Affiliated Physicians periodically become involved as defendants in
medical malpractice lawsuits, some of which are currently ongoing, and are
subject to the attendant risk of substantial damage awards. See
"Business -- Legal Proceedings." Certain of the Practices' contracts with
hospitals require the Practices to indemnify certain parties for losses
resulting from the negligence of Affiliated Physicians. The Company maintains
malpractice insurance coverage for the Affiliated Physicians, including coverage
for prior acts, with per physician primary limits of $1.0 million per occurrence
and $5.0 million in the annual aggregate, as well as surplus coverage shared
with the Company for up to $16.0 million per occurrence and $20.0 million in the
aggregate. While the Company believes it has adequate professional liability
insurance coverage for itself, the PA Contractors and each Affiliated Physician,
there can be no assurance that a future claim or claims will not be successful
or if successful will not exceed the limits of available insurance coverage or
that such coverage will continue to be available at acceptable costs and on
favorable terms. In
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addition, the Company's insurance does not cover all potential liabilities,
including liabilities arising from governmental fines and penalties,
indemnification agreements and certain other uninsurable losses. See
"Business -- Insurance." A malpractice claim asserted against the Company, a PA
Contractor or an Affiliated Physician could, in the event of an adverse outcome
exceeding the limits of available insurance coverage, have a material adverse
effect on the Company's financial condition and results of operations.
Dependence on Key Personnel. The success of the Company is dependent upon
the efforts and abilities of its key management personnel, particularly the
President and Chief Executive Officer, James C. New, and Executive Vice
President and Chief Financial Officer, Robert P. Wynn. The loss of service of
one or both of these persons could have a material adverse effect on the
Company's financial condition and results of operations. See
"Management -- Employment Agreements."
Control by Current Stockholders. Upon completion of this offering, Summit
will beneficially own an aggregate of approximately 29.1% 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 42.5% of the outstanding shares of Common Stock. Accordingly,
Summit, such executive officers and Affiliated Physicians will be able, if
acting together, to elect all of the Company's directors, to 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 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, lower revenues or earnings than those
anticipated by securities analysts, 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 per
share of Common Stock of approximately $18.12. See "Dilution."
Shares Eligible for Future Sale. After consummation of this offering,
13,356,365 shares, representing 72.8% 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 Amended 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. Such provisions cannot be amended without the
affirmative vote of at least 80% of the
16
<PAGE> 19
combined voting power of the outstanding shares of capital stock. 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 Company's Certificate of Incorporation and Bylaws."
17
<PAGE> 20
THE COMPANY
AmeriPath believes it is the leading physician practice management company
focused on anatomic pathology services, based on an analysis of geographic
breadth, number of physicians, number of hospital contracts, number of practices
and net revenue. The Company owns or is affiliated with 15 Practices located in
seven states which employed, as of September 26, 1997, a total of 127
pathologists. The pathologists provide medical services in 14 outpatient
laboratories owned and operated by the Company and in inpatient laboratories for
72 hospitals and 24 outpatient surgery centers. Of these pathologists, 126 are
board certified, one is board eligible and 61 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).
As a result of the 1994 Acquisition and the investment by Summit and
Schroder, ALA, the Company's predecessor, acquired the net assets of PDK, a
reference laboratory providing pathology services, formed in 1982 in Fort
Lauderdale, Florida. In February 1996, AmPath was formed as a holding company
and ALA became a wholly-owned subsidiary of AmPath in a share exchange
transaction (the "Share Exchange"). Also, in the first quarter of 1996, the
Company 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 -- 1994 Acquisition."
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.
1996 ACQUISITIONS
In January 1996, with the appointment of James C. New as the Company's
President and Chief Executive Officer, the Company accelerated its acquisition
program. Beginning June 1996, the Company acquired or affiliated with ten
anatomic pathology practices in five states by the end of the year: five
practices in Florida, one practice in Alabama, one practice in Kentucky, two
practices in Ohio and one practice in Texas. The Company believes that the 1996
Acquisitions, which include the ten Practices referred to above as well as D&P,
established the Company -- in terms of geographic breadth, number of physicians,
number of hospital contracts, number of practices and net revenue -- as the
leading physician practice management company focused on anatomic pathology.
Since the 1996 Acquisitions, the Company has integrated certain aspects of the
billing, sales and marketing, accounting and certain other functions of the
Practices. Integration of such functions has resulted in certain cost
efficiencies and more effective marketing efforts. The Company is consolidating
the financial reporting systems of and implementing uniform internal control
procedures for the acquired Practices.
In acquiring or affiliating with an anatomic pathology practice, the
Company generally (to the extent permitted by applicable state law): (i)
purchases all of the assets of that practice, including its fixed assets
(including laboratory facilities and testing equipment), customer lists,
contract rights, accounts receivable and goodwill and other identifiable
intangibles; and (ii) through a wholly-owned subsidiary, (a) directly employs
all technical and other personnel utilized in such practice and (b) except in
Ohio and Texas (where the PA Contractor employs the physicians), directly
employs the pathologists who conduct the practice of medicine. The 1996
Acquisitions in Ohio and Texas were effected (in addition to the foregoing)
through (i) long-term management agreements between the PA Contractor
Subsidiaries and each PA Contractor in such states, and (ii) in the case of the
two Practices in Ohio, contribution of the stock of each PA Contractor organized
in Ohio to trusts, of which AmeriPath is the sole beneficiary, and, in the case
of the Practice in Texas, an agreement by the Affiliated Physician who owned all
of the stock in the Texas PA Contractor to transfer such business to a
corporation controlled by AmeriPath (without further consideration to or action
on the part of such Affiliated Physician), which transfer will take place on or
before October 10, 1997. The 1996 Acquisitions were funded with various
combinations of cash, Common Stock, debt and Contingent Notes. The aggregate
non-contingent purchase price paid for the 1996 Acquisitions was approximately
$108.0 million. For additional information regarding the consideration paid in
the 1996 Acquisitions, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- 1996 Acquisitions" and Note 3
18
<PAGE> 21
to the Consolidated Financial Statements. All references below to numbers of
facilities, contracts and employees, including pathologists, are as of September
26, 1997.
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 262 people,
including 29 pathologists, and provides a broad range of pathology
subspecialties, including dermatopathology and cytopathology. Derrick's
physicians provide anatomic pathology services for 14 hospitals and 14
outpatient surgery centers throughout Central and Southern Florida and Derrick
operates one of the largest outpatient anatomic pathology laboratories in
Florida. The acquisition of Derrick established the Company's presence in
Central Florida.
Amazon and Rosen, M.D., Inc. d/b/a Florida Pathology Associates ("FPA") was
also acquired in June 1996. Based in Miami and founded in 1988, FPA employs 14
people, including two pathologists, and operates the pathology laboratory in the
Columbia Miami Heart Institute, a Columbia 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 contracts with three hospitals 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 48 people, including ten pathologists who provide anatomic pathology
services for five hospitals and three outpatient surgery centers owned by
Columbia. Seidenstein also manages an outpatient anatomic pathology laboratory
and an outpatient clinical laboratory owned by Columbia.
Gulf Coast Pathology Associates, Inc. ("Gulf Coast") was acquired in
November 1996. Based in Cape Coral and founded in 1986, Gulf Coast employs 30
people, including five pathologists, and has contracts with three hospitals and
four outpatient surgery centers. Gulf Coast also operates two outpatient
clinical laboratories, which laboratories the Company intends to sell. Together
with the acquisition of Seidenstein, Gulf Coast established the Company's
presence, and provides the Company strategic, marketing and other operational
synergies, on the West Coast of Florida.
ALABAMA
SkinPath, P.C. ("SkinPath") was acquired in August 1996. Based in
Birmingham and founded in 1995, SkinPath employs 27 people, including two
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 62 people,
including nine pathologists. Pathology Associates operates two outpatient
cytology laboratories and an outpatient histology laboratory and has contracts
with 18 hospitals. The acquisition of Pathology Associates represented the
Company's initial acquisition in the Midwest and established the Company's
presence in Kentucky.
OHIO
Beno Michel, M.D., Inc. d/b/a Cutaneous Pathology & Immunofluorescense
Laboratory ("CPI") became affiliated with the Company in October 1996. Based in
Cleveland and founded in 1976, CPI employs
19
<PAGE> 22
27 people, including three pathologists who each specialize in dermatopathology.
CPI operates an outpatient dermatopathology laboratory and a dermatology
practice.
David R. Barron, M.D., Inc. d/b/a Richfield Laboratory of Dermatopathology
("Richfield Labs") also became affiliated with the Company in October 1996.
Richfield Labs, founded in 1968, employs 42 people, including three
pathologists, and operates the largest outpatient dermatopathology laboratory in
Cincinnati. Together with CPI, Richfield Labs established the Company's presence
in Ohio.
Under separate long-term management agreements between a PA Contractor
Subsidiary and each Ohio PA Contractor, the Company has control over all
non-medical functions of the PA Contractors, including all administrative,
management, billing and support functions. The PA Contractors and the physicians
they employ have control over all functions relating to the provision of medical
services. The PA Contractor Subsidiary receives a management fee from each Ohio
PA Contractor equal to the net revenue (less practice expenses) of the pathology
practice. The Company does not receive the net revenue from the dermatology
practice of CPI, which net revenue is paid to the Affiliated Physicians in this
Practice as compensation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- 1996 Acquisitions" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Practices."
TEXAS
Freeman-Cockerell Laboratories, Inc. ("Freeman") was acquired, and Clay J.
Cockerell, M.D., P.A. became affiliated with the Company through a long-term
management service agreement, in October 1996. Based in Dallas and founded in
1994 as a successor to a practice originally founded in 1977, Freeman (i.e., the
Company's PA Contractor Subsidiary now known as AmeriPath Texas, Inc.) employs
58 people associated with this Practice and Clay J. Cockerell, M.D., P.A. (i.e.,
currently the Company's PA Contractor with respect to this Practice), also based
in Dallas, employs two pathologists who operate an outpatient dermatopathology
laboratory. The acquisition of Freeman and the affiliation with Clay J.
Cockerell, M.D., P.A. established the Company's presence in Texas. Effective on
or before October 10, 1997, the business of Clay J. Cockerell, M.D., P.A.,
including the management service agreement, will be transferred to a non-profit
corporation of which AmPath will be the sole member, and such non-profit
corporation will become the Company's PA Contractor with respect to this
Practice.
20
<PAGE> 23
1997 ACQUISITIONS
To date in 1997, the Company has acquired or affiliated with three
additional anatomic pathology practices (the "1997 Acquisitions") in three
states (one in each of Texas, Indiana and Mississippi). The Company believes
that the 1997 Acquisitions enhance the Company's market position and further
implement the Company's strategies. See "Risk Factors -- Risks Relating to
Acquisition Strategy." All references below to numbers of facilities, contracts
and employees, including pathologists, are as of September 26, 1997.
TEXAS
Unipath Ltd. and related companies ("Unipath") became affiliated with the
Company in September 1997. Based in Dallas, Unipath was formed in June 1995 in
order to consolidate the administrative and technical support functions of three
independent inpatient pathology practices. Unipath operates an outpatient
pathology laboratory and employs 122 people, including 21 pathologists who
provide pathology services for ten hospitals and three outpatient surgery
centers. The Company believes that Unipath is the largest anatomic pathology
practice in Dallas and, taken together with the Company's existing Texas
Practice, represents the largest anatomic pathology practice in Texas.
INDIANA
CoLab Incorporated Professional Corporation and related companies ("CoLab")
became affiliated with the Company in September 1997. Based in Indianapolis,
CoLab was formed in November 1994 and began operations in January 1996 following
the combination of two outpatient pathology practices. CoLab employs 17 people,
including 13 pathologists who provide pathology services for eight hospitals.
CoLab is also a provider of anatomic pathology services to a joint venture
comprised of CoLab, two hospital healthcare systems and SmithKline. The
affiliation with CoLab is the Company's first entry into the Indiana market. The
Company believes that CoLab is the largest anatomic pathology practice in
Indiana.
MISSISSIPPI
Sturgis, Henderson & Proctor Pathology Laboratory, P.A. ("Sturgis") was
acquired by the Company in September 1997. Based in Jackson and founded in 1971,
Sturgis operates an outpatient pathology laboratory and employs 17 people,
including five pathologists who provide anatomic pathology services for six
hospitals. The acquisition of Sturgis is the Company's first entry into the
Mississippi market.
21
<PAGE> 24
DILUTION
The net tangible book value (deficit) of the Company at June 30, 1997, was
approximately $(98.6) million, or $(22.46) 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 identifiable intangible assets
recognized in purchase business combinations); and (iii) Convertible Preferred
Stock and Redeemable Common Stock, divided by the number of outstanding shares
of Common Stock. The increase in net tangible book value (deficit) per share of
$2.03 attributable to the 1997 Acquisitions assumes those transactions were
completed as of June 30, 1997. The decrease in net tangible book value (deficit)
per share of $14.24 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 and the termination of the contingent
obligation to repurchase the Redeemable Common Stock as a result of the
consummation of this offering. After giving effect to the sale of 5,000,000
shares offered to new investors by the Company hereby at an assumed initial
public offering price of $14.00 per share, and the application of estimated net
proceeds therefrom, less $1.7 million in previously deferred offering costs, the
pro forma net tangible book value (deficit) of the Company at June 30, 1997
would have been approximately $(75.7) million, or $(4.12) per share. This
represents an immediate decrease in net tangible book value (deficit) of $20.37
per share to existing stockholders, including $6.13 attributable to the new
investors, and an immediate dilution of $18.12 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 June 30,
1997...................................................... $(22.46)
Pro forma (increase) decrease in net tangible book value
(deficit)
per share attributable to:
1997 Acquisitions......................................... (2.03)
Conversion of Convertible Preferred Stock and termination
of contingent obligation to repurchase the Redeemable
Common Stock............................................ 14.24
New investors............................................. 6.13
-------
Pro forma net tangible book value (deficit) per share after
the offering.............................................. (4.12)
-------
Dilution per share to new investors......................... $ 18.12
=======
</TABLE>
The pro forma net tangible book deficit of $(4.12) per share after this
offering would be further increased by $1.74, in the event the deferred income
tax liabilities related to the 1996 Acquisitions and 1997 Acquisitions were
deducted from total assets, resulting in an immediate dilution of $19.86 per
share to new investors.
The following table sets forth, on a pro forma basis, at June 30, 1997, 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)................. 13,356,365 72.8% $ 51,889,109 42.6% $ 3.88
New investors............................ 5,000,000 27.2 70,000,000 57.4 14.00
---------- ----- ------------ -----
Total........................... 18,356,365 100.0% $121,889,109 100.0%
========== ===== ============ =====
</TABLE>
- ---------------
(1) Includes 5,558,607 shares of Common Stock that will be issued upon
conversion of the Convertible Preferred Stock and 1,910,808 shares of Common
Stock issued in connection with the 1997 Acquisitions.
The foregoing tables assume no exercise of outstanding options. At
September 26, 1997, there were outstanding options to purchase 1,172,211 shares
of Common Stock at a weighted average exercise price of $5.20 per share under
the Option Plan and options to purchase 5,000 shares of Common Stock with an
exercise price of $10.00 under the Director Option Plan. Options to purchase
265,682 shares were exercisable under the Option Plan at September 26, 1997. See
"Management -- Option Plan" and Note 11 to the Consolidated Financial
Statements.
22
<PAGE> 25
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of 5,000,000
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 $63.0 million (approximately $65.7 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 the Junior Notes; (ii) approximately $3.5 million to repay the
outstanding principal amount of the Senior Notes; (iii) approximately $1.3
million to pay the accrued and unpaid dividends on the Convertible Preferred
Stock; and (iv) to repay approximately $50.7 million ($22.0 million of the term
loan and $28.7 million of the revolving loan) of the approximately $83.2 million
balance of indebtedness under the Credit Facility outstanding at August 31,
1997, which indebtedness was used almost exclusively for acquisitions. The
Credit Facility provides that the net proceeds of the offering be applied pro
rata based on the aggregate amounts available under the term loan and revolving
loans. The lenders may elect, however, to have the net proceeds applied to the
revolving loan. If all of the lenders make such an election, the Company will
apply the net proceeds against the revolving loan.
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 a $150.0 million Credit Facility for
acquisition and working capital purposes with a syndicate of banks (the "Banks")
led by BankBoston, N.A., as agent (the "Agent"). The Credit Facility provides
for borrowings of up to $150.0 million in the form of: (i) a term loan of $65.0
million; and (ii) a revolving loan of up to $85.0 million that may be used for
working capital in an amount limited to 80% of the Company's eligible accounts
receivable and 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 either 0.5% or 0.375%, based upon the Company's ratio of
total debt to cash flow, of the unused portion of the commitment. Commencing
July 1, 1998, the term loan requires annual principal payments of $650,000, and
all outstanding advances under the term loan are due and payable on June 30,
2004; all outstanding advances under the revolving loan are due and payable on
June 30, 2002. 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 a premium that is adjusted quarterly based upon the
Company's ratio of total debt to cash flow. At August 31, 1997, $65.0 million
and $18.2 million principal amount were outstanding under the term loan and
revolving loan, respectively, of the Credit Facility at annual effective
interest rates of 8.6% and 8.3%, respectively. The Credit Facility provides that
the Company may reborrow funds under the revolving loan which it has previously
borrowed and repaid; the term loan may not be reborrowed. 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 further reduce the
balance outstanding under the Credit Facility.
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. In addition,
the Credit Facility prohibits the payment of dividends by the Company without
the consent of the majority of the Banks. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Prior to the 1994 Acquisition, PDK 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.
23
<PAGE> 26
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of June 30, 1997: (i) on an actual basis; (ii) on a pro forma basis
assuming the 1997 Acquisitions were consummated on June 30, 1997; and (iii) on a
pro forma basis as adjusted to give effect to the conversion of the Convertible
Preferred Stock, the termination of the contingent obligation to repurchase the
Redeemable Common Stock as a result of the consummation of this offering 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>
JUNE 30, 1997
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Credit Facility:
Revolving loan............................................ $ 17,308 $ 76,171 $ 47,384
Term loan................................................. 65,000 65,000 42,987
Senior Notes................................................ 3,500 3,500 --
Junior Notes................................................ 7,500 7,500 --
Subordinated Notes(1)....................................... 3,938 3,938 3,938
Convertible Preferred Stock:
Series A 6% redeemable cumulative convertible preferred
stock, $.01 par value, 5,000,000 shares authorized;
3,088,116, 3,088,116 and -0- issued and outstanding
actual, pro forma and pro forma as adjusted,
respectively(2)........................................ 6,406 6,406 --
Redeemable Common Stock:
1,493,520, 1,493,520 and -0- shares issued and outstanding
actual, pro forma and pro forma as adjusted,
respectively.............................................. 12,210 12,210 --
Common stockholders' equity:
Common stock, $.01 par value, 30,000,000 shares
authorized; 4,390,430, 6,304,238 and 18,356,365 issued
and outstanding actual, pro forma and pro forma as
adjusted, respectively(3).............................. 44 63 184
Additional paid-in capital................................ 10,718 29,927 108,522
Note receivable from officer(4)........................... (270) (270) (270)
Retained earnings......................................... 5,135 5,135 5,135
-------- -------- --------
Total common stockholders' equity................. 15,627 34,855 113,571
-------- -------- --------
Total capitalization............................ $131,489 $209,580 $207,880
======== ======== ========
</TABLE>
- ---------------
(1) Includes current maturities of $1.6 million for the Company's 7% and 8%
subordinated notes with maturities varying from 1997 to 2001 (the
"Subordinated Notes").
(2) Prior to the consummation of this offering, the holders of the Convertible
Preferred Stock will convert the shares of Convertible Preferred Stock into
5,558,607 shares of Common Stock. See "Principal and Selling Stockholders"
and "Certain Transactions -- 1994 Acquisition."
(3) Excludes: (i) 2,200,000 shares of Common Stock reserved for issuance under
the Option Plan, of which, as of September 26, 1997, options to purchase
1,172,211 shares of Common Stock have been granted (at a weighted average
exercise price of $5.20 per share); and (ii) 180,000 shares of Common Stock
reserved for issuance under the Director Option Plan, of which, as of
September 26, 1997, options to purchase 5,000 shares of Common Stock have
been granted (at an exercise price of $10.00 per share) (See
"Management -- Option Plan" and "Management -- Director Option Plan").
(4) Represents a loan to the Company's President and Chief Executive Officer in
connection with his purchase of Common Stock. See "Certain Transactions."
24
<PAGE> 27
SELECTED CONSOLIDATED FINANCIAL DATA
The Selected Consolidated Financial Data set forth below as of and for each
of the five years in the period ended December 31, 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 for the six months ended June 30,
1996 and 1997, and as of June 30, 1997, have been derived from the unaudited
consolidated financial statements of the Company which, in the Company's
opinion, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information set forth
therein. The results of operations for the six months ended June 30, 1997 are
not necessarily indicative of the results for the 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>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31,(1) JUNE 30,(1)
----------------------------------------------- -----------------
1992 1993 1994(2) 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue.......................................... $11,443 $13,419 $14,461 $16,024 $42,558 $ 9,690 $44,844
Operating costs:
Cost of services................................... 8,791 10,803 7,026 8,517 20,106 4,708 20,313
Selling, general and administrative expense........ 1,696 1,634 2,287 2,644 8,483 1,822 8,564
Provision for doubtful accounts.................... 787 953 1,003 1,161 3,576 645 4,116
Amortization expense............................... -- -- 678 678 1,958 304 2,410
Loss on cessation of clinical lab operations(3).... -- -- -- -- 910 910 --
------- ------- ------- ------- ------- ------- -------
Total.......................................... 11,274 13,390 10,994 13,000 35,033 8,389 35,403
------- ------- ------- ------- ------- ------- -------
Income from operations............................... 169 29 3,467 3,024 7,525 1,301 9,441
Interest expense..................................... (62) (48) (1,584) (1,504) (3,540) (767) (4,057)
Non-recurring charge(4).............................. (1,289)
Other income (expense), net.......................... 10 9 (46) (46) (431) (201) (57)
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes.................... 117 (10) 1,837 1,474 3,554 333 4,038
Provision for income taxes(5)........................ -- -- 692 572 1,528 127 1,736
------- ------- ------- ------- ------- ------- -------
Net income (loss).................................... $ 117 $ (10) $ 1,145 $ 902 $ 2,026 $ 206 $ 2,302
======= ======= ======= ======= ======= ======= =======
Pro forma data(6):
Pro forma net income per share..................... $ 0.14 $ 0.11 $ 0.22 $ 0.03 $ 0.19
======= ======= ======= ======= =======
Pro forma weighted average shares outstanding...... 8,082 8,082 9,378 8,082 12,066
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31,(1) JUNE 30,(1)
----------------------------------------------- -----------
1992 1993 1994(2) 1995 1996 1997
------- ------- ------- ------- ------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 113 $ 322 $ 103 $ 58 $ 2,262 $ 1,035
Total assets............................................. 2,437 2,676 20,836 20,034 157,854 161,331
Long term debt, including current portion................ 752 513 17,005 15,146 97,239 97,246
Redeemable equity securities(7).......................... -- -- 5,735 6,085 18,427 18,616
Stockholders' equity (deficit)(2)........................ 1,169 913 (2,776) (2,224) 12,693 15,627
</TABLE>
(footnotes on following page)
25
<PAGE> 28
(1) The selected consolidated financial data as of and for the years ended
December 31, 1992 and 1993 are that of PDK prior to the 1994 Acquisition.
The selected consolidated financial data as of and for the years ended
December 31, 1994, 1995 and 1996 and the six months ended June 30, 1996 and
1997 are for AmeriPath, Inc. and its Subsidiaries after the 1994
Acquisition. See "The Company."
(2) In connection with the 1994 Acquisition, ALA was capitalized through the
issuance of 1,425,600 shares of common stock to the PDK shareholders in
exchange for an aggregate of $1.0 million in cash, and ALA issued to Summit
and Schroder an aggregate of: (i) 3,208,120 shares of Convertible Preferred
Stock for $5.5 million, and (ii) $7.5 million of Junior Notes. In the 1994
Acquisition, ALA acquired the net assets of PDK, for: (i) approximately
$20.5 million in cash, funded by the Summit and Schroder investment and
financed partially by borrowings of $7.5 million under a line of credit;
(ii) the issuance of $3.5 million of Senior Notes; and (iii) the issuance of
ALA Contingent Notes in the maximum principal amount of $2.5 million. The
1994 Acquisition was accounted for using the purchase method of accounting.
The purchase price was allocated to the net assets acquired based on the
fair values at the date of acquisition. The shareholders of PDK held
approximately 20% of the voting interests and served as the management group
of the Company following the acquisition. Accordingly, 20% of the purchase
price in excess of the carryover basis of the PDK shareholders, or
approximately $4.6 million, was deemed to be a distribution to the PDK
shareholders. Such amount was not allocated to the net assets acquired and
was charged to additional paid in capital in accordance with Emerging Issues
Task Force ("EITF") No. 88-16. Cost of services includes $3.1 million and
$4.4 million in 1992 and 1993, respectively, representing compensation paid
to PDK's shareholders in excess of the compensation of such shareholders
following the 1994 Acquisition. Net income for the years ended December 31,
1994, 1995 and 1996 does not reflect dividends payable on the Convertible
Preferred Stock. See "The Company," "Certain Transactions -- 1994
Acquisition" and Note 1 to the Consolidated Financial Statements.
(3) In connection with closing ALA's clinical operations in May 1996, the
Company recorded a nonrecurring charge to operations aggregating $910,000,
which included severance payments, write-downs of property, equipment and
other assets to estimated realizable values, and the write-off of the
unamortized balances of intangible assets associated with the clinical
operations. See Note 17 to the Consolidated Financial Statements.
(4) In the six months ended June 30, 1997, the Company recorded a nonrecurring
charge of $1.3 million, primarily professional fees and printing costs, as a
result of the postponement of the Company's planned initial public offering
of Common Stock.
(5) Prior to the 1994 Acquisition, PDK 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 do not include a
provision for income taxes.
(6) 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; and (iii) shares of Common Stock 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.
(7) Includes Convertible Preferred Stock of $5.2 million plus accrued and unpaid
dividends of $1.2 million at June 30, 1997 and $12.2 million of Redeemable
Common Stock.
26
<PAGE> 29
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following Unaudited Pro Forma Consolidated Balance Sheet at June 30,
1997 and the Unaudited Pro Forma Consolidated Statement of Operations for the
six months ended June 30, 1997 and the year ended December 31, 1996 give effect
to the 1997 Acquisitions and the consummation of this offering and the
application of the estimated net proceeds therefrom, as if all such transactions
had occurred at January 1, 1996. In addition, the Unaudited Pro Forma
Consolidated Statement of Operations for the year ended December 31, 1996 also
gives effect to the 1996 Acquisitions as if all such transactions had occurred
at January 1, 1996. See "The Company -- 1996 Acquisitions," "The Company -- 1997
Acquisitions," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- 1996 Acquisitions" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- 1997 Acquisitions."
The Unaudited Pro Forma Consolidated Financial Data should be read in
conjunction with the Consolidated Financial Statements and related Notes
thereto.
The Unaudited Pro Forma Consolidated Financial Data has been prepared by
the Company based, in part, on the financial statements of the practices
included in the 1996 Acquisitions and the 1997 Acquisitions, which financial
statements are included elsewhere in the Prospectus, adjusted where necessary to
the Company's accounting policies used in the Consolidated Financial Statements.
The Unaudited Pro Forma Consolidated Financial Data are not necessarily
indicative of the results that would have occurred if such transactions had
occurred on January 1, 1996, or which may be realized in the future.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
1997 ACQUISITION 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....... $ 1,035 $1,281 $ (887) $ 1,429 $ -- $ 1,429
Accounts receivable, net........ 16,213 6,117 -- 22,330 -- 22,330
Inventories..................... 290 -- -- 290 -- 290
Other current assets............ 1,082 39 -- 1,121 -- 1,121
-------- ------ ------- -------- -------- --------
Total current assets...... 18,620 7,437 (887) 25,170 -- 25,170
Property and equipment, net....... 5,337 533 -- 5,870 -- 5,870
Goodwill, net..................... 60,134 -- 41,414 101,548 -- 101,548
Identifiable intangibles, net..... 72,533 -- 46,990 119,523 -- 119,523
Other............................. 4,707 235 (235) 4,707 (1,700) 3,007
-------- ------ ------- -------- -------- --------
Total assets.............. $161,331 $8,205 $87,282 $256,818 $ (1,700) $255,118
======== ====== ======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Accounts payable and accrued
expenses...................... $ 10,667 $2,096 $ 600 $ 13,363 $ -- $ 13,363
Current portion of long-term
debt.......................... 1,604 -- -- 1,604 -- 1,604
Deferred tax liability.......... 1,277 611 339 2,227 -- 2,227
-------- ------ ------- -------- -------- --------
Total current
liabilities............. 13,548 2,707 939 17,194 -- 17,194
-------- ------ ------- -------- -------- --------
Credit Facility:
Revolving loan.................. 17,308 -- 58,863 76,171 (28,787) 47,384
Senior term loan................ 65,000 -- -- 65,000 (22,013) 42,987
Senior Notes...................... 3,500 -- -- 3,500 (3,500) --
Junior Notes...................... 7,500 -- -- 7,500 (7,500) --
Subordinated Notes................ 2,334 -- -- 2,334 -- 2,334
Deferred tax liability............ 17,898 -- 13,750 31,648 -- 31,648
-------- ------ ------- -------- -------- --------
Total long-term
liabilities............. 113,540 -- 72,613 186,153 (61,800) 124,353
-------- ------ ------- -------- -------- --------
Convertible Preferred Stock....... 6,406 -- -- 6,406 (6,406) --
Redeemable Common Stock........... 12,210 -- -- 12,210 (12,210) --
Total common stockholders'
equity.......................... 15,627 5,498 13,730 34,855 78,716 113,571
-------- ------ ------- -------- -------- --------
Total liabilities and
stockholders' equity.... $161,331 $8,205 $87,282 $256,818 $ (1,700) $255,118
======== ====== ======= ======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial data.
27
<PAGE> 30
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------
PRO FORMA
1996 1997 ACQUISITION
HISTORICAL ACQUISITIONS(D) ACQUISITIONS(D) ADJUSTMENTS(E)
---------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net revenue:
Patient services......... $41,516 $44,556 $37,024 $ (4,512)
Management service
agreement.............. 1,042 -- -- -- 2,440
------- ------- ------- --------
Total.............. 42,558 44,556 37,024 (2,072)
------- ------- ------- --------
Operating costs:
Cost of services......... 20,106 30,377 17,098 (14,240)
Selling, general and
administrative
expense................ 8,483 7,872 4,217 (1,497)
Provision for doubtful
accounts............... 3,576 4,379 3,134 --
Amortization expense..... 1,958 -- -- 5,659(f)
Loss on cessation of
clinical lab
operations............. 910 -- -- --
------- ------- ------- --------
Total.............. 35,033 42,628 24,449 (10,078)
------- ------- ------- --------
Income from operations..... 7,525 1,928 12,575 8,006
Interest expense........... (3,540) (71) -- (9,426)(g)
Other income (expense),
net...................... (431) (9) -- 122(h)
------- ------- ------- --------
Income before income
taxes.................... 3,554 1,848 12,575 (1,298)
Provision for income
taxes.................... 1,528 289 519 5,131(i)
------- ------- ------- --------
Net income................. $ 2,026 $ 1,559 $12,056 $ (6,429)
======= ======= ======= ========
Supplemental pro forma
data:
Pro forma net income per
share.................. $ 0.22
=======
Pro forma weighted
average shares
outstanding(k)......... 9,378
=======
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------
PRO FORMA
PRO FORMA OFFERING PRO FORMA
TOTAL ADJUSTMENTS AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
Net revenue:
Patient services......... $118,584 $ -- $118,584
Management service
agreement.............. 3,482 -- 3,482
-------- ------ --------
Total.............. 122,066 -- 122,066
-------- ------ --------
Operating costs:
Cost of services......... 53,341 -- 53,341
Selling, general and
administrative
expense................ 19,075 -- 19,075
Provision for doubtful
accounts............... 11,089 -- 11,089
Amortization expense..... 7,617 -- 7,617
Loss on cessation of
clinical lab
operations............. 910 -- 910
-------- ------ --------
Total.............. 92,032 -- 92,032
-------- ------ --------
Income from operations..... 30,034 -- 30,034
Interest expense........... (13,037) 5,271(j) (7,766)
Other income (expense),
net...................... (318) -- (318)
-------- ------ --------
Income before income
taxes.................... 16,679 5,271 21,950
Provision for income
taxes.................... 7,467 2,056(i) 9,523
-------- ------ --------
Net income................. $ 9,212 $3,215 $ 12,427
======== ====== ========
Supplemental pro forma
data:
Pro forma net income per
share.................. $ 0.65 $ 0.65
======== ========
Pro forma weighted
average shares
outstanding(k)......... 14,094 19,094
======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
------------------------------------------------------------------------------------------
PRO FORMA PRO FORMA
1997 ACQUISITION PRO FORMA OFFERING PRO FORMA
HISTORICAL ACQUISITIONS(D) ADJUSTMENTS(E) TOTAL ADJUSTMENTS AS ADJUSTED
---------- --------------- -------------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
Patient services................... $42,830 $20,079 $ (643) $ 62,266 $ -- $ 62,266
Management service agreement....... 2,014 -- -- 2,014 -- 2,014
------- ------- -------- -------- ------ --------
Total........................ 44,844 20,079 (643) 64,280 -- 64,280
------- ------- -------- -------- ------ --------
Operating costs:
Cost of services................... 20,313 9,133 (2,084) 27,362 -- 27,362
Selling, general and administrative
expense.......................... 8,564 2,119 (404) 10,279 -- 10,279
Provision for doubtful accounts.... 4,116 1,788 -- 5,904 -- 5,904
Amortization expense............... 2,410 -- 1,351(f) 3,761 -- 3,761
------- ------- -------- -------- ------ --------
Total........................ 35,403 13,040 (1,137) 47,306 -- 47,306
------- ------- -------- -------- ------ --------
Income from operations............... 9,441 7,039 (494) 16,974 -- 16,974
Interest expense..................... (4,057) -- (2,527)(g) (6,584) 2,674(j) (3,910)
Nonrecurring charge(l)............... (1,289) -- -- (1,289) -- (1,289)
Other income (expense), net.......... (57) (4) 35(h) (26) -- (26)
------- ------- -------- -------- ------ --------
Income before income taxes........... 4,038 7,035 (1,998) 9,075 2,674 11,749
Provision for income taxes........... 1,736 92 2,137(i) 3,965 1,043(i) 5,008
------- ------- -------- -------- ------ --------
Net income........................... $ 2,302 $ 6,943 $ (4,135) $ 5,110 $1,631 $ 6,741
======= ======= ======== ======== ====== ========
Supplemental pro forma data:
Pro forma net income per share..... $ 0.19 $ 0.36 $ 0.35
======= ======== ========
Pro forma weighted average shares
outstanding(k)................... 12,066 14,094 19,094
======= ======== ========
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial data.
28
<PAGE> 31
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(a) Represents the historical balance sheets as of June 30, 1997 of the
Practices included in the 1997 Acquisitions as if such transactions had been
consummated as of June 30, 1997. The following is a summary of the historical
balance sheets of the Practices included in the 1997 Acquisitions (in
thousands):
<TABLE>
<CAPTION>
UNIPATH COLAB STURGIS TOTAL
ASSETS ------- ------ ------- ------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents.......................... $ 341 $ 887 $ 53 $1,281
Accounts receivable, net........................... 3,531 1,806 780 6,117
Other current assets............................... 18 21 -- 39
------ ------ ------ ------
Total current assets............................. 3,890 2,714 833 7,437
Property and equipment, net............................ 424 3 106 533
Other.................................................. 100 -- 135 235
------ ------ ------ ------
Total assets..................................... $4,414 $2,717 $1,074 $8,205
====== ====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses.............. $ 724 $1,032 $ 340 $2,096
Deferred tax liability............................. -- 611 -- 611
------ ------ ------ ------
Total current liabilities........................ 724 1,643 340 2,707
------ ------ ------ ------
Total common stockholders' equity...................... 3,690 1,074 734 5,498
------ ------ ------ ------
Total liabilities and stockholders' equity....... $4,414 $2,717 $1,074 $8,205
====== ====== ====== ======
</TABLE>
(b) Reflects the total estimated costs of $78.7 million for the 1997
Acquisitions consisting of: (i) $58.9 million in cash; (ii) $19.2 million
of Common Stock (1,910,808 shares) and (iii) $600,000 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. 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 estimated
identifiable intangible assets relate primarily to hospital contracts
acquired in the 1997 Acquisitions. The remaining $41.4 million of the
unallocated purchase price has been recorded as goodwill. The Company will
perform a final determination and allocation of the purchase price. The
following summarizes the pro forma acquisition adjustments, as of June 30,
1997, related to the above transactions, by entity (in thousands):
<TABLE>
<CAPTION>
UNIPATH COLAB STURGIS TOTAL
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total estimated cost for the 1997 Acquisitions...... $42,700 $32,741 $ 3,250 $78,691
------- ------- ------- -------
Net assets of 1997 Acquisitions..................... 3,690 1,074 734 5,498
Net assets distributable to former owners........... (100) (887) (135) (1,122)
------- ------- ------- -------
Net tangible assets acquired........................ 3,590 187 599 4,376
------- ------- ------- -------
Net intangible assets acquired...................... 39,110 32,554 2,651 74,315
Add deferred tax liability recorded in 1997
Acquisitions...................................... 8,500 5,589 -- 14,089
------- ------- ------- -------
Total intangible assets....................... 47,610 38,143 2,651 88,404
Less identifiable intangible assets................. 25,032 20,454 1,504 46,990
------- ------- ------- -------
Estimated goodwill.................................. $22,578 $17,689 $ 1,147 $41,414
======= ======= ======= =======
</TABLE>
In connection with certain of the 1997 Acquisitions, net assets of $1.1
million included in the historical financial statements of those practices
are distributable to the sellers of such practices, in accordance with the
acquisition agreements. The net assets distributable to former owners
include $887,000 of cash, $100,000 in investments and $135,000 cash
surrender value of life insurance. The deferred tax liability of $14,089
recorded in the 1997 Acquisitions represents deferred taxes on identified
intangible assets which are not deductible for tax purposes and the
estimated deferred tax liability related to the change from the cash to
accrual basis for income taxes.
In connection with the 1997 Acquisitions, the Company has agreed to pay
additional purchase price consideration in the form of payments under
contingent notes. Payments under such contingent notes, if any, will be
recorded as additional purchase price upon the achievement of stipulated
levels of cumulative operating earnings for each practice, over a five
year period.
29
<PAGE> 32
(c) Reflects the conversion of the Convertible Preferred Stock, the
termination of the contingent obligation to repurchase the Redeemable Common
Stock as a result of the consummation of this offering 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 June 30, 1997.
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Gross proceeds from this offering........................... $ 70,000
Underwriting discounts and commissions...................... (4,900)
Estimated expenses of this offering......................... (2,100)
--------
Net proceeds....................................... 63,000
Repayment of Junior Notes................................... (7,500)
Repayment of Senior Notes................................... (3,500)
Payment of Convertible Preferred Stock cumulative
dividends................................................. (1,200)
Partial repayment of Credit Facility........................ (50,800)
--------
Net increase in cash and cash equivalents.......... $ --
========
</TABLE>
In addition, the offering adjustments include an adjustment to reduce
other assets and additional paid-in capital for previously paid deferred
offering costs of $1.7 million.
The Credit Facility provides that the net proceeds of the offering,
after repayment of Junior and Senior Notes and cumulative dividends, must
be applied pro rata based on the aggregate amounts available under the
term loan and revolving loan. The lenders may elect, however, to have the
net proceeds applied solely to the revolving loan. For purposes of the pro
forma balance sheet, the partial repayment was applied, pro rata, to the
revolving loan ($28.8 million) and term loan ($22.0 million).
(d) For the year ended December 31, 1996, the 1996 Acquisitions column
represents the historical results of operations of the Practices included
in the 1996 Acquisitions (other than D&P which was acquired effective
January 1, 1996) from January 1, 1996 to the date of acquisition. For the
year ended December 31, 1996 and the six months ended June 30, 1997, the
1997 Acquisitions column represents the historical results of operations
of the Practices included in the 1997 Acquisitions from January 1, 1996.
The following is a summary of the historical statements of operations for
each of the Practices included in the 1997 Acquisitions.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 UNIPATH COLAB STURGIS TOTAL
- ---------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue:
Patient services..................................... $21,894 $11,789 $ 3,341 $37,024
------- ------- ------- -------
Operating costs:
Cost of services..................................... 7,707 7,028 2,363 17,098
Selling, general and administrative expense.......... 1,952 1,967 298 4,217
Provision for doubtful accounts...................... 1,422 1,427 285 3,134
------- ------- ------- -------
Total......................................... 11,081 10,422 2,946 24,449
------- ------- ------- -------
Income from operations................................. 10,813 1,367 395 12,575
Provision for income taxes............................. -- 519 -- 519
------- ------- ------- -------
Income from continuing operations...................... $10,813 $ 848 $ 395 $12,056
======= ======= ======= =======
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
Net revenue:
Patient services..................................... $12,715 $ 5,586 $ 1,778 $20,079
------- ------- ------- -------
Operating costs:
Cost of services..................................... 4,255 3,739 1,139 9,133
Selling, general and administrative expense.......... 920 1,078 121 2,119
Provision for doubtful accounts...................... 956 528 304 1,788
------- ------- ------- -------
Total......................................... 6,131 5,345 1,564 13,040
------- ------- ------- -------
Income from operations................................. 6,584 241 214 7,039
Other income (expense), net............................ -- -- (4) (4)
------- ------- ------- -------
Income before income taxes............................. 6,584 241 210 7,035
Provision for income taxes............................. -- 92 -- 92
------- ------- ------- -------
Income from continuing operations...................... $6,584 $ 149 $ 210 $ 6,943
======= ======= ======= =======
</TABLE>
30
<PAGE> 33
<TABLE>
<S> <C>
The summary of the historical statements of operations for
Unipath above was derived from the June 30, 1996 and 1997
audited financial statements included elsewhere in this
Prospectus. The physician partners who owned two of the
Unipath entities, which were partnerships at the time of
acquisition, did not receive salaries for their services,
but received distributions from those partnerships based
upon their ownership interests. Accordingly, the historical
cost of services did not include the fair value of the costs
of the medical services provided by these physicians. The
following table summarizes the pro forma adjustments to
Unipath's historical statements of operations including: (i)
an allocation of compensation for the services of the
physicians in accordance with their employment agreements
which became effective post acquisition and (ii) a provision
for income taxes using a blended state and federal rate of
38%, as if Unipath had been a C-corporation for the periods
presented.
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
Income from continuing operations........................... $10,813 $6,584
Pro forma additional cost of services....................... 1,248 503
------- ------
Pro forma income from continuing operations before income
taxes..................................................... 9,565 6,081
Pro forma provision for income taxes........................ 3,635 2,310
------- ------
Pro forma net income........................................ $ 5,930 $3,771
======= ======
The 1997 acquisitions of CoLab and Unipath involved
affiliations with PA Contractors in Indiana and Texas,
respectively. In the case of CoLab, all of the common stock
of the PA Contractor is held in trust. AmPath is the sole
beneficiary of the trust and receives all income from the
trust. The Company, at its sole discretion, is able to
replace the trustee, withdraw any asset from the trust,
modify the terms of the trust agreement, or terminate the
trust, and direct the trustee to distribute the income and
any asset from the trust. No assets of the trust can be sold
or otherwise disposed of without the Company's consent.
Additionally, a wholly-owned PA Contractor Subsidiary of the
Company entered into a 40-year management agreement with
CoLab, under which such subsidiary provides all management
and other non-medical services for CoLab for a fee equal to
the practice's net revenue less practice expenses, including
physician salaries, which are fixed by employment
agreements, and related professional expenses. Therefore,
the Company is entitled to all of the net income of this
Practice. Based on the provisions of the purchase
agreements, trust agreements and management agreements,
consolidation of CoLab will be required to present the
Company's financial position and results of operations in
conformity with generally accepted accounting principles
because the Company has the controlling financial interest
in CoLab by means other than direct record ownership of
voting stock. Accordingly, this acquisition is accounted for
as a purchase business combination and is consolidated in
the Unaudited Pro Forma Consolidated Financial Statements.
In the case of Unipath, the PA Contractor is a Texas 5.01(a)
non-profit corporation of which AmPath is the sole member.
The wholly-owned PA Contractor Subsidiary and such PA
Contractor entered into a 40-year management service
agreement under which the PA Contractor Subsidiary provides,
on an exclusive basis, the technical laboratory services,
management and all other non-medical practice services for
such PA Contractor. The PA Contractor Subsidiary employs all
of the technical employees and owns all of the laboratory
facilities, testing equipment and other assets used in
connection with the pathology services performed by the PA
Contractor's physicians. The PA Contractor's payments to the
PA Contractor Subsidiary under the management service
agreement are comprised of the reimbursement of the costs
and expenses for providing the technical laboratory
services, a base fee and a performance fee. The
performance-based fee is determined on an annual basis and
is based on the achievement of discretionary performance
criteria as set forth in the annual operating plan for the
PA Contractor. Assuming the PA Contractor Subsidiary
achieves its goals and objectives, such fees result in the
PA Contractor Subsidiary receiving substantially all net
revenue less practice expenses of the PA Contractor.
Practice expenses include physician salaries, which are
fixed by employment agreement, and related professional
expenses. Therefore, the Company is the direct beneficiary
of substantially all of the net income of the PA Contractor.
Accordingly, this acquisition is consolidated in the
Unaudited Pro Forma Consolidated Financial Statements.
</TABLE>
31
<PAGE> 34
In connection with the acquisition of Freeman and affiliation with the
associated PA Contractor, a wholly-owned PA Contractor Subsidiary and such PA
Contractor have entered into a 40-year management service agreement under which
the PA Contractor Subsidiary provides, on an exclusive basis, the technical
laboratory services, management and all other non-medical practice services for
the PA Contractor. The PA Contractor Subsidiary employs all of the technical
employees and owns all of the laboratory facilities, testing equipment and other
assets used in connection with the pathology services performed by the PA
Contractor's physicians. The PA Contractor's payments to the PA Contractor
Subsidiary under this management service agreement are comprised of the
reimbursement of the costs and expenses for providing the technical laboratory
services, a base fee and a performance fee. The performance- based fee is
determined on an annual basis and is based on the achievement of discretionary
performance criteria as set forth in the annual operating plan for the PA
Contractor. The performance fee and the criteria therefore may vary from year to
year based on the goals and objectives of the PA Contractor Subsidiary and may
include, among other things, identifying, recruiting and retaining physicians,
expanding the business of the PA Contractor and providing the PA Contractor with
certain operational efficiencies. Assuming the PA Contractor Subsidiary achieves
its goals and objectives, such fees will result in the PA Contractor Subsidiary
receiving substantially all net revenue less practice expenses of the PA
Contractor. Practice expenses include physician salaries, which are fixed by
employment agreement, and related professional expenses. Therefore, the Company
is the direct beneficiary of substantially all of the net income of the PA
Contractor. For purposes of the Unaudited Pro Forma Consolidated Statement of
Operations, the annual base fee is equal to the current base fee of $400,000 and
the performance fee assumes that the PA Contractor Subsidiary will achieve all
of the goals and objectives relating thereto. The following displays the PA
Contractor's pro forma net revenue and practice expenses, and the fees to the PA
Contractor Subsidiary for management and other services:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------
HISTORICAL PRO FORMA
---------- ---------
<S> <C> <C>
PA Contractor:
Net revenue............................................... $1,143 $3,913
Practice expenses......................................... 101 431
------ ------
Management service agreement revenue...................... $1,042 $3,482
====== ======
Components of management service agreement revenue:
Reimbursement of expenses and overhead.................... $ 878 $2,837
Base management fee....................................... 100 400
Performance fee........................................... 64 245
------ ------
Total.............................................. $1,042 $3,482
====== ======
</TABLE>
Effective on or before October 10, 1997, the business of this PA Contractor will
be transferred to a Texas 5.01(a) non-profit corporation which the Company
organized and of which the Company is the sole member. Members of the board of
directors of such non-profit corporation may be appointed by, and may be removed
by, the sole member, which is the Company. The Company has direct voting control
over such non-profit corporation and will consolidate its operations in the
Company's consolidated financial statements for periods following the transfer
to the non-profit corporation.
The Company will consolidate any future acquisitions or affiliations in which it
acquires the controlling financial interest through the acquisition of direct
ownership of voting stock or other appropriate means. For any future
affiliations through management service or other agreements in which the Company
does not obtain the controlling financial interest, but does have a net profits
interest, the Company will separately display management service agreement
revenue (at least, until such time that the Company gains a controlling
financial interest).
The EITF is addressing accounting and reporting issues relating to physician
practice management company affiliations with medical practices in EITF No.
97-2. Any consensus reached in EITF No. 97-2 could affect the presentation in
the Company's consolidated financial statements of the assets, liabilities, net
revenue or costs related to pathology practices affiliated with the Company and
the ability of a physician practice management company to account for business
combinations as purchases of assets or poolings-of-interests.
32
<PAGE> 35
(e) Represents the pro forma acquisition adjustments to net revenue, cost of
services and selling, general and administrative expense to: (1) increase
compensation expense for the net profits of the dermatology practice of Beno
Michel, M.D., Inc. (the "Derm Practice") which are payable to the practicing
dermatologists; (2) eliminate certain nonrecurring expenses directly related to
the 1996 Acquisitions and 1997 Acquisitions and related transactions, and
revenues and direct costs associated with the loss of a lab contract by one of
the Practices included in the 1997 Acquisitions ("Other Adjustments"); (3)
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 ("Physician Compensation"); and (4) reclassify
the net revenue and expenses to display the results of operations of the PA
Contractor as discussed in Note (d) above ("Management Service Agreement"). The
following tables summarize these adjustments for the 1996 Acquisitions, the
1997 Acquisitions and the 1996 and 1997 Acquisitions combined:
<TABLE>
<CAPTION>
MANAGEMENT
PHYSICIAN SERVICE
YEAR ENDED DECEMBER 31, 1996 DERM PRACTICE OTHER ADJUSTMENTS COMPENSATION AGREEMENT TOTAL
---------------------------- ------------- ----------------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C>
1996 ACQUISITIONS
Patient services................. $ -- $ -- $ -- $ (2,770) $ (2,770)
Management service agreement..... -- -- -- 2,440 2,440
Cost of services................. 111 -- (10,667) (330) (10,886)
Selling, general and
administrative expense......... -- (1,039) -- (1,039)
1997 ACQUISITIONS
Patient services................. $ -- $(1,742) $ -- $ (1,742)
Cost of services................. -- (520) (2,834) (3,354)
Selling, general and
administrative expense......... -- (458) (458)
1996 AND 1997 ACQUISITIONS -
COMBINED
Patient services................. $ -- $(1,742) $ -- $ (2,770) $ (4,512)
Management service agreement..... -- -- -- 2,440 2,440
Cost of services................. 111 (520) (13,501) (330) (14,240)
Selling, general and
administrative expense......... -- (1,497) -- -- (1,497)
SIX MONTHS ENDED JUNE 30, 1997
1997 ACQUISITIONS
Patient services................. $ -- $ (643) $ -- $ -- $ (643)
Cost of services................. -- (375) (1,709) -- (2,084)
Selling, general and
administrative expense......... -- (404) -- -- (404)
</TABLE>
33
<PAGE> 36
<TABLE>
<S> <C>
The following summarizes the pro forma acquisition
adjustments for each of the Practices included in the 1997
Acquisitions:
</TABLE>
<TABLE>
<CAPTION>
OTHER ADJUSTMENTS
-----------------
PATIENT COST OF PHYSICIAN
1997 ACQUISITIONS SERVICES SERVICES SG&A COMPENSATION
----------------- -------- -------- ----- ------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Unipath..................................................... $(1,742) $(520) $ -- $ 1,248
CoLab....................................................... -- -- (458) (3,957)
Sturgis..................................................... -- -- -- (125)
------- ----- ----- -------
Total............................................... $(1,742) $(520) $(458) $(2,834)
======= ===== ===== =======
SIX MONTHS ENDED JUNE 30, 1997
Unipath..................................................... $ (643) $(375) -- $ 503
CoLab....................................................... -- -- (404) (2,195)
Sturgis..................................................... -- -- -- (17)
------- ----- ----- -------
Total............................................... $ (643) $(375) $(404) $(1,709)
======= ===== ===== =======
The following is a summary of the UniPath physician
compensation adjustment:
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- ----------------
<S> <C> <C>
Reduction in historical compensation expense................ $ (402) $ (322)
Increase in compensation related to historical partner
distributions............................................. 1,650 825
------- -------
Net increase in UniPath physician compensation...... $ 1,248 $ 503
======= =======
(f) Represents additional amortization expense for both net
identifiable intangible assets and goodwill based upon the
Company's preliminary allocation of purchase price as if the
1996 Acquisitions and the 1997 Acquisitions all occurred as
of January 1, 1996. The net identifiable intangible assets
related to the 1996 Acquisitions total approximately $63.4
million and are being amortized over periods ranging from 10
to 40 years. The amortization periods of identifiable
intangible assets related to the 1996 Acquisitions, except
the management service agreement, were estimated by the
Company based on reports of independent consultants. The
identifiable intangible asset related to the management
service agreement is being amortized over 25 years. The net
identifiable intangible assets of the 1997 Acquisitions
relate primarily to hospital contracts and total
approximately $47.0 million and are being amortized over 35
years. In determining amortization periods, the Company
considered each Practice's operating history, contract
renewals, stability of physician client lists and industry
statistics. The values were determined using a discounted
cash flow valuation model. The net goodwill related to the
1996 Acquisitions is approximately $57.9 million and is
being amortized over periods ranging from 15 to 35 years.
The goodwill related to the 1997 Acquisitions is
approximately $41.4 million and is being amortized over a
period of 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.
The following table summarizes the values assigned to each
of the identifiable intangible assets and goodwill and the
related weighted average amortization periods for the 1996
Acquisitions and the 1997 Acquisitions:
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
1997 ACQUISITIONS AVERAGE
1996 ------------------------------------- AMORTIZATION
ACQUISITIONS UNIPATH COLAB STURGIS TOTAL TOTAL PERIOD
------------ ------- ------- ------- ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Hospital contracts.......... $ 27,737 $25,032 $20,454 $1,504 $46,990 $ 74,727 35.6
Physician client lists...... 27,331 -- -- -- -- 27,331 18.8
Laboratory contracts........ 1,800 -- -- -- -- 1,800 10.0
Management service
agreements................ 6,473 -- -- -- -- 6,473 25.0
Goodwill.................... 57,920 22,578 17,689 1,147 41,414 99,334 34.5
-------- ------- ------- ------ ------- --------
$121,261 $47,610 $38,143 $2,651 $88,404 $209,665
======== ======= ======= ====== ======= ========
</TABLE>
34
<PAGE> 37
<TABLE>
<S> <C>
(g) Represents interest expense related to amounts borrowed to finance the
1996 Acquisitions and 1997 Acquisitions as if such borrowings had
occurred as of January 1, 1996. The adjustment assumes borrowings of
approximately $135.8 million used in the 1996 Acquisitions and 1997
Acquisitions and related transaction fees at an interest rate of 8.25% and
8.50% for the year ended December 31, 1996 and the six months ended June
30, 1997, respectively. In addition, the adjustment for the year ended
December 31, 1996 includes interest expense in connection with the
Subordinated Notes.
(h) Represents an adjustment to the amortization of deferred debt issuance
costs as if the Credit Facility was in place as of January 1, 1996.
(i) Represents the incremental tax effect of the pro forma acquisition
and offering adjustments related to the Practices included in the 1996
Acquisitions and 1997 Acquisitions and the provision for income taxes
related to such Practices, which did not provide 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.
(j) 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 January 1, 1996.
(k) 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; and (iii) 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.
(l) In the six months ended June 30, 1997, the Company recorded a
nonrecurring charge of $1.3 million, primarily professional fees and
printing costs, as a result of the postponement of the Company's planned
initial public offering of Common Stock.
</TABLE>
35
<PAGE> 38
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 in 1996, the Company's
operations consisted principally of providing outpatient anatomic pathology
services, primarily dermatopathology, through pathologists employed by the
Company. With the 1996 Acquisitions, the Company affiliated with three Practices
that provide exclusively outpatient anatomic pathology services and acquired
eight Practices that provide both inpatient anatomic pathology services under
exclusive contracts with hospitals as well as outpatient anatomic pathology
services. With the 1997 Acquisitions, the Company acquired or affiliated with
three additional practices, one of which exclusively provides inpatient
pathology services and two of which provide both inpatient and outpatient
pathology services. The Company intends to pursue other acquisitions of, and
affiliations with, inpatient and outpatient anatomic pathology practices. The
Company derives its net revenue from the net revenue of the Practices.
The Practices provide anatomic pathology and related histological services
with particular emphasis on dermatopathology (diseases of the skin),
hematopathology (diseases of the blood), and cytopathology (diseases of the
cells), as well as surgical pathology (diagnostic services in connection with
surgical procedures).
Outpatient pathology services are performed in free-standing, independent
pathology laboratories owned and operated by the Company or in hospital-owned
laboratories operated by the Company. Services performed are billed to patients,
Medicare, Medicaid, other third party payors, national clinical laboratories and
attending physicians on a fee-for-service basis, which cover both the
professional and technical components of such services.
The Company currently derives management service agreement revenue from a
management service agreement between its PA Contractor Subsidiary in Texas and
Clay J. Cockerell, M.D., P.A., one of the Company's two PA Contractors in Texas.
Effective on or before October 10, 1997, such PA Contractor will transfer its
business to a Texas 5.01(a) non-profit corporation, which the Company organized
and of which the Company is the sole member. Members of the board of directors
of such 5.01(a) corporation are appointed by, and can be removed by, the sole
member, which is the Company. The Company has direct voting control over such
5.01(a) corporation and will consolidate its operations in the Company's
consolidated financial statements for periods following the transfer to such
5.01(a) non-profit corporation. The Company will consolidate any future
acquisitions or affiliations in which it acquires the controlling financial
interest through the acquisition of direct ownership of voting stock or other
appropriate means. For any future affiliations with practices in other states
that prohibit the corporate practice of medicine and in which the Company
affiliates through management service or other agreements and in which the
Company does not obtain the controlling financial interest, but does have a net
profits interest, the Company will separately display management service
agreement revenue (at least, until such time that the Company gains a
controlling financial interest). See Note 3 to the Consolidated Financial
Statements.
Inpatient pathology services are performed pursuant to exclusive
contractual arrangements with hospitals. Net revenue for inpatient pathology
services is dependent in large part on the level of inpatient admissions at the
hospitals. Generally, such arrangements provide that a pathologist will provide
diagnostic pathology services for the hospital's staff physicians and serve as
the medical director of the hospital's laboratory with responsibility for the
clinical laboratory and histology departments, as well as the hospital's blood
bank and microbiology services. Generally, the Company and the PA Contractors
bill patients, Medicare, Medicaid and other third party payors for the
professional component of the services provided by the pathologists on a fee-
for-service basis. In certain cases, the Practices are paid an annual fee for an
Affiliated Physician to serve as the medical director of the laboratory.
36
<PAGE> 39
The Company and the PA Contractors typically bill government programs
(principally Medicare and Medicaid), indemnity insurance companies, managed care
organizations, national clinical laboratories, physicians and patients. Net
revenue differs from amounts billed for services due to: (i) Medicare and
Medicaid reimbursements at annually established rates; (ii) payments from
managed care organizations at discounted fee-for-service rates; (iii) negotiated
reimbursement rates with other third party payors; (iv) rates negotiated under
sub-contracts with national clinical laboratories for the provision of anatomic
pathology services; and (v) discounted and uncollectible amounts, principally
from private pay accounts.
In recent years, there has been a shift away from traditional indemnity
insurance plans to managed care as employers and other payors move their
participants into lower cost plans. The Company benefits more from patients
covered by Medicare and traditional indemnity insurance than managed care
organizations and national clinical laboratories, many of whom contract with
managed care organizations to provide anatomic pathology services. The Company
and the PA Contractors have contracts with managed care organizations and
national clinical laboratories and the Company is attempting to increase the
number of such contracts to increase test volume. Since the majority of the
Company's operating costs, principally physician and non-physician technical
compensation, are fixed, increases in volume resulting from contracts at
discounted rates enhance the Company's profitability. Historically, net revenue
from capitated contracts has represented an insignificant amount of net revenue.
See "Risk Factors -- Reliance upon Government Programs."
The Company estimates that for the six months ended June 30, 1997,
approximately one-third of its 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
decreased by 5.3% to 6.0% in Florida, where a majority of the Company's net
revenue from Medicare is derived. The federal government recently has enacted
balanced budget legislation that substantially cuts Medicare expenditures over
the next five years. The current cuts do not directly affect the services
provided by the Company, but there can be no assurance that future cuts will not
have a material adverse effect on the Company's financial condition or results
of operations. The Company plans to mitigate the adverse effects of
reimbursement reductions on net revenue and earnings through implementation of
its strategy, specifically (i) increasing marketing efforts to expand referral
sources and (ii) reducing practice costs through implementation of operating and
production efficiencies.
During 1996, the Company ceased the unprofitable operation of a clinical
laboratory resulting in a non-recurring charge of $910,000 to operations as the
result of severance payments, write-downs of property, equipment and other
assets to estimated realizable values, and the write-off of the unamortized
balances of intangible assets associated with the clinical operations. The
Company also 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."
1996 ACQUISITIONS
The 1996 Acquisitions were funded with various combinations of cash, Common
Stock, debt and Contingent Notes. The aggregate non-contingent purchase price
paid for the 1996 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 $24.8 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 Note 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
37
<PAGE> 40
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, including principal and
interest, of at least $9.0 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, including principal and interest, of approximately $36.5
million between 1997 and 2001. Since the profitability criteria are calculated
on a cumulative basis over the period covered by 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 additional purchase price for
the Practice. During the six months ended June 30, 1997, the Company made
Contingent Note payments aggregating $1.4 million. The Company believes that the
incremental cash generated from operations will be sufficient to satisfy the
payment, if any, of the Contingent Note 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.
In connection with the 1996 Acquisitions, PA Contractor Subsidiaries
entered into long-term management agreements with three PA Contractors in Texas
and Ohio (the "PA Management Agreements"). Effective on or before October 10,
1997, Clay J. Cockerell, M.D., P.A., one of such PA Contractors, will transfer
its business to a non-profit corporation of which AmPath is the sole member. In
Ohio, each of the PA Contractors is owned by a trust, of which AmPath is the
sole beneficiary. Under the PA Management Agreements, the Company has control
over all non-medical functions of the PA Contractors, including all
administrative, management, billing and support functions, while the PA
Contractors and the physicians they employ have control over all functions
relating to the provision of medical services. AmeriPath's PA Contractor
Subsidiaries receive a management fee for the services. In Ohio, the fee is
equal to the net revenue less practice expenses 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 fee. The performance-based fee is determined on an annual basis and is
based on the achievement of discretionary performance criteria as set forth in
the annual operating plan of the Practice. The performance fee and the criteria
therefor may vary from year to year based on the goals and objectives of the PA
Contractor Subsidiary and may include, among other things, identifying,
recruiting and retaining physicians, expanding the business of the PA Contractor
and providing the PA Contractor with certain operational efficiencies. In
addition, such PA Contractor reimburses the PA Contractor Subsidiary in Texas
for all direct operating and production costs. Pursuant to the PA Management
Agreement with such PA Contractor, the PA Contractor Subsidiary in Texas expects
to receive a flat base management fee of approximately $400,000 in 1997, which
amount excludes the performance fee. The base management fee together with the
performance fee are expected by the Company (assuming the Texas PA Contractor
Subsidiary meets its targets pursuant to the PA Management Agreement) to
approximate the net revenue less practice expenses of the PA Contractor in 1997.
Each of the PA Management Agreements has a term of 40 years and is subject to
renegotiation at the end of such term. See "Business -- Government Regulation,"
"Risk Factors -- Effect of Government Regulation" and "Risk
Factors -- Dependence on Pathologists."
Other than the acquisitions of the assets of PDK and D&P, each of the 1996
Acquisitions involving Practices in Florida, Kentucky and Alabama were
structured as the purchase of all of the outstanding capital stock of the
acquired Practice. Each of the 1996 Acquisitions involving Practices in Ohio
were effected through a long-term management agreement between the Ohio PA
Contractor Subsidiaries and each Ohio PA Contractor, and contribution of the
stock of each Ohio PA Contractor to a trust, of which AmPath is the
38
<PAGE> 41
sole beneficiary. The 1996 Acquisition involving the Practice in Texas was
effected through the purchase of all of the Practice's laboratory facilities and
related equipment and other assets, and through a long-term management agreement
between the Texas PA Contractor Subsidiary and the practice employing the
Affiliated Physician in Texas. See Note (a) to Unaudited Pro Forma Consolidated
Financial Data and "Business -- Affiliation Structure." Each of the 1996
Acquisitions was accounted for as a purchase of the underlying net assets.
The 1996 Acquisitions have resulted in a significant increase in intangible
assets. At December 31, 1996, net intangible assets were $131.5 million,
including $74.1 million of net identifiable intangible assets and $57.4 million
of goodwill principally due to the 1996 Acquisitions. Virtually all of the 1996
Acquisitions' aggregate purchase price of approximately $108.0 million was
recorded as either identifiable intangible assets or goodwill. For a discussion
of the preliminary allocation of the purchase price in the 1996 Acquisitions,
see Note 3 to the Consolidated Financial Statements. Net identifiable intangible
assets include hospital contracts, physician client lists, a management service
agreement, and laboratory contracts acquired in connection with the 1994
Acquisition and the 1996 Acquisitions and are being amortized on a straight line
basis over periods ranging from 10 to 40 years. For the year ended December 31,
1996 and for the six months ended June 30, 1997, amortization of net
identifiable intangible assets was $1.3 million and $1.5 million, respectively.
Goodwill represents the excess of cost over the fair value of the net assets of
the 1994 Acquisition and the 1996 Acquisitions and is being amortized on a
straight line basis over periods ranging from 15 to 35 years. For the year ended
December 31, 1996, and for the six months ended June 30, 1997, amortization of
goodwill was $658,000 and $910,000, respectively. These amortization amounts
will increase on an annual basis in the event that the contingent payments are
made pursuant to the Contingent Notes. There can be no assurance that the value
of the intangible assets will ever be realized by the Company. The Company will
evaluate the carrying values attributed to intangible assets on an on-going
basis. In the event of an impairment of the values attributed to goodwill or
identifiable intangible assets, there would be a charge to earnings that could
have a material adverse effect on the Company's financial condition and results
of operations. See "Risk Factors -- Risks Related to Intangible Assets" and
Unaudited Pro Forma Consolidated Financial Data.
To date, the Company has integrated certain aspects of the billing, sales
and marketing, accounting, purchasing, insurance and courier functions of the
Practices. Integration of such functions has resulted in greater efficiency in
negotiating insurance coverage and effective marketing of the Practices to
national clinical laboratories. In addition, the Company has taken steps to
consolidate the accounting procedures and financial reporting systems of the
Practices and is implementing cash management and other fiscal control programs.
See "Business -- Regional Business Model" and "Business -- Affiliation
Structure."
1997 ACQUISITIONS
The 1997 Acquisitions were funded with various combinations of cash, Common
Stock and Contingent Notes. The aggregate non-contingent consideration paid for
the 1997 Acquisitions was approximately $58.9 million in cash and 1,910,808
shares of Common Stock (subject to five-year vesting). 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 1998 to 2002. The contingent
payments have durations of five years and vary in the minimum and maximum
amounts to be paid upon the achievement of profitability objectives relating to
the Practice. If the Practices achieve minimum specified profitability
objectives, the Company would be obligated to make aggregate contingent
payments, including principal and interest, of at least $25.7 million between
1998 and 2002. 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, including principal and
interest, of approximately $62.1 million between 1998 and 2002. Similar to the
1996 Acquisitions, 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. See "Risk Factors -- Unpaid Contingent Acquisition Consideration" and
"-- 1996 Acquisitions."
39
<PAGE> 42
The 1997 Acquisitions in Texas and Indiana involve long-term management
agreements, similar in form and substance to the PA Management Agreements in
Texas and Ohio, respectively, with the managed PA Contractor entities employing
the physicians in such states. With respect to the 1997 Acquisition in Texas, a
non-profit corporation of which AmPath is the sole member employs the
physicians. In Indiana, a trust of which AmPath is the sole beneficiary is the
sole member of a limited liability company that employs the physicians. In
Indiana, the management fee is equal to the net revenue less practice expenses
of the pathology practice. In Texas, in addition to the reimbursement of
expenses, 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 fee. The performance-based fee is determined on an annual
basis and is based on the achievement of discretionary performance criteria as
set forth in the annual operating plan. The base management fee together with
the performance fee are expected by the Company (assuming the performance
targets pursuant to the management service agreement are met) to approximate the
net revenue less practice expenses. Each of the management agreements has a term
of 40 years and is subject to renegotiation at the end of such term. See
"Business -- Government Regulation," "Risk Factors -- Effect of Government
Regulation," "Risk Factors -- Dependence on Pathologists" and "-- 1996
Acquisitions."
The 1997 Acquisition in Mississippi was effected through a purchase by
AmeriPath of all of the outstanding stock of the Practice, making such Practice
a wholly-owned subsidiary of AmPath. Each of the 1997 Acquisitions were
accounted for as a purchase of the underlying net assets.
The 1997 Acquisitions resulted in a significant increase in intangible
assets. For a discussion of the preliminary allocation of the purchase price in
the 1997 Acquisitions, see Note 3 to the Unaudited Pro Forma Consolidated
Financial Data. See "Risk Factors -- Risks Related to Intangible Assets,"
Unaudited Pro Forma Consolidated Financial Data and "-- 1996 Acquisitions."
40
<PAGE> 43
PRACTICES
As of September 26, 1997, the 15 Practices consisted of:
<TABLE>
<CAPTION>
1996
PRO FORMA
AFFILIATED TOTAL HOSPITAL OUTPATIENT NET
PRACTICE(1) LOCATION PHYSICIANS(2)(3) PERSONNEL(3) CONTRACTS LABORATORY REVENUE(4)
- --------------------- ------------------- ---------------- ------------ --------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
American Laboratory Fort Lauderdale, FL 9 144 -- X $ 15,813
Associates
Cutaneous Pathology & Beachwood, OH 3 27 -- X 3,979
Immunofluorescence
Laboratory
D&P Pathology Fort Lauderdale, FL 6 6 3 2,121
Derrick and Orlando, FL 29 262 14 X 21,833
Associates
Pathology
Florida Pathology Miami Beach, FL 2 14 1 3,559
Associates
Freeman-Cockerell Dallas, TX 2 58 -- X 3,482
Laboratories
Gulf Coast Pathology Cape Coral, FL 5 30 3 X 8,686
Associates
Pathology Associates Lexington, KY 9 62 18 X 5,080
Richfield Laboratory Cincinnati, OH 3 42 -- X 6,201
of Dermatopathology
Seidenstein, Levine & Fort Myers, FL 10 48 5 7,293
Associates
SkinPath Birmingham, AL 2 27 1 X 2,726
Volusia Pathology Ormond Beach, FL 7 34 3 X 6,011
Group
Unipath, Ltd. Dallas, TX 21 122 10 X 20,152
Colab Incorporated Indianapolis, IN 13 17 8 11,789
Professional
Corporation
Sturgis, Henderson & Jackson, MS 5 17 6 X 3,341
Proctor
--- --- -- --------
Totals 126 910 72 $122,066
=== === == ========
</TABLE>
- ---------------
(1) The Company is not licensed to practice medicine. The practice of medicine
is conducted solely by the Affiliated Physicians who are employed by either
the Direct Subsidiaries or the PA Contractors.
(2) In the Practices located in Ohio, Indiana and Texas, the Affiliated
Physicians are employed directly by the Ohio PA Contractors, the Indiana PA
Contractor and the Texas PA Contractors, respectively.
(3) Does not include one physician and 40 other administrative and executive
personnel of AmPath. Does include the Affiliated Physicians employed by the
Ohio PA Contractors, the Indiana PA Contractor and the Texas PA Contractors.
(4) For the year ended December 31, 1996, giving effect to the 1996 Acquisitions
and the 1997 Acquisitions as if all of such acquisitions had been effected
on January 1, 1996.
41
<PAGE> 44
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
consolidated financial data as a percentage of net revenue (billings net of
contractual allowances).
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUE
-------------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------- ----------------
1994 1995 1996 1996 1997
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net revenue........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating costs:
Cost of services................................. 48.6 53.2 47.2 48.6 45.3
Selling, general and administrative expense...... 15.8 16.5 19.9 18.8 19.1
Provision for doubtful accounts.................. 6.9 7.2 8.4 6.7 9.2
Amortization expense............................. 4.7 4.2 4.7 3.1 5.4
Loss on cessation of clinical operations......... -- -- 2.1 9.4 --
----- ----- ----- ----- -----
Total operating costs.................... 76.0 81.1 82.3 86.6 79.0
----- ----- ----- ----- -----
Income from operations............................. 24.0 18.9 17.7 13.4 21.0
Interest expense................................... (11.0) (9.4) (8.3) (7.9) (9.0)
Non recurring charge............................... -- -- -- -- (2.9)
Other income (expense), net........................ (0.3) (0.3) (1.0) (2.1) (0.1)
----- ----- ----- ----- -----
Income before income taxes......................... 12.7 9.2 8.4 3.4 9.0
Provision for income taxes......................... 4.8 3.6 3.6 1.3 3.9
----- ----- ----- ----- -----
Net income......................................... 7.9% 5.6% 4.8% 2.1% 5.1%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended June 30, 1997 as Compared to Six Months Ended June 30, 1996
The Company completed the acquisition of 11 Practices in 1996, the results
of which are included in the Company's operating results from the date of
acquisition. Changes in operations between the six months ended June 30, 1996
and the six months ended June 30, 1997 were primarily due to eight of the 1996
Acquisitions which were completed subsequent to June 30, 1996.
Net revenue increased by $35.2 million, or 363%, to $44.8 million for the
six months ended June 30, 1997 from $9.7 million for the six months ended June
30, 1996. Of this increase, $35.0 million was attributable to the 1996
Acquisitions, and $169,000 to same practice growth. The increase in same
practice revenue was comprised of a $304,000 increase in outpatient revenue,
which was due to a 3.8% increase in volume which was partially offset by a 5.3%
decrease in the Medicare reimbursement for surgical biopsies which became
effective on January 1, 1997. Hospital revenues decreased $135,000 primarily due
to a decrease in revenue from a managed care contract. 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 $15.6 million, or 331%, to $20.3 million for
the six months ended June 30, 1997 from $4.7 million for the six months ended
June 30, 1996. Of this increase, $16.5 million was attributable to the 1996
Acquisitions and $220,000 to same practice costs, offset by a reduction of $1.1
million attributable to ALA's clinical laboratory operations which ceased
operations on May 31, 1996. In connection with closing ALA's clinical operations
in 1996, the Company recorded a non-recurring charge to operations during the
six months ended June 30, 1996 aggregating $910,000, which included severance
payments, write-downs of property, equipment and other assets to estimated
realizable values, and the write-off of the unamortized balances of intangible
assets associated with the clinical operations.
Selling, general and administrative expense increased by $6.7 million, or
370%, to $8.6 million for the six months ended June 30, 1997 from $1.8 million
for the six months ended June 30, 1996. Of this increase, $3.3 million, or
49.1%, was attributable to the 1996 Acquisitions. The remaining increase was due
to increased staffing levels in marketing, billing, human resources and
accounting and costs incurred to expand the Company's administrative support
infrastructure and complete the conversion to an upgraded billing system.
42
<PAGE> 45
Provision for doubtful accounts increased by $3.5 million, or 538%, to $4.1
million for the six months ended June 30, 1997 from $645,000 for the six months
ended June 30, 1996. This increase was primarily attributable to the Practices
acquired in 1996. The provision for doubtful accounts as a percentage of net
revenue was 9.2% and 6.7% for the six months ended June 30, 1997 and 1996,
respectively. This increase was primarily attributable to the 1996 Acquisitions,
which acquisitions increased the percentage of net revenues from services
provided in inpatient laboratories. 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, more difficulties gathering complete and accurate billing information
and longer billing and collection cycles for inpatient services.
Amortization expense increased by $2.1 million or 693%, to $2.4 million for
the six months ended June 30, 1997 from $304,000 for the six months ended June
30, 1996. This increase is attributable to the amortization of goodwill and net
identifiable intangible assets from the 1996 Acquisitions. Amortization expense
is expected to increase on an annual basis as a result of identifiable
intangible assets and goodwill arising from the 1996 Acquisitions, amortization
in connection with the Company's 1997 Acquisitions and future acquisitions, and
any contingent payments required to be 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
"-- 1996 Acquisitions."
During the six months ended June 30, 1997, the Company wrote-off certain
deferred offering costs aggregating $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.
Interest expense increased by $3.3 million, or 429%, to $4.1 million for
the six months ended June 30, 1997 from $767,000 for the six months ended June
30, 1996. This increase was attributable to indebtedness incurred to finance the
1996 Acquisitions.
The effective income tax rate was approximately 43% for the six months
ended June 30, 1997 as compared to 38% for the six months ended June 30, 1996.
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 1996 Acquisitions.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
The Company completed the acquisition of 11 Practices in 1996, the results
of which are included in the Company's operating results from the date of
acquisition. Changes in operations between the year ended December 31, 1995 and
the year ended December 31, 1996 were primarily due to these acquisitions.
Net revenue increased by $26.5 million, or 166%, to $42.6 million for the
year ended December 31, 1996 from $16.0 million for the year ended December 31,
1995. Of this increase, $26.7 million was attributable to the 1996 Acquisitions,
and $1.1 million to same practice growth, offset by the decline in net revenue
of $1.3 million from ALA's clinical laboratory which ceased operations on May
31, 1996. Same practice net revenue increased $1.1 million, or 8.3%, to $14.8
million 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 $11.6 million, or 136%, to $20.1 million for
the year ended December 31, 1996 from $8.5 million for the year ended December
31, 1995. Of this increase, $13.0 million was attributable to the 1996
Acquisitions, offset by a decrease of $1.1 million attributable to ALA's
clinical laboratory which ceased operations on May 31, 1996. In addition, same
practice cost of services decreased by $273,000 for the year ended December 31,
1996 compared to the same period in 1995 due to increased efficiency by the
Affiliated Physicians. In connection with closing ALA's clinical operations in
1996, the Company recorded a non-recurring charge to operations aggregating
$910,000, which included severance payments, write-downs of
43
<PAGE> 46
property, equipment and other assets to estimated realizable values, and the
write-off of the unamortized balances of intangible assets associated with the
clinical operations.
Selling, general and administrative expense increased by $5.8 million, or
221%, to $8.5 million for the year ended December 31, 1996 from $2.6 million for
the year ended December 31, 1995. Of this increase, $2.4 million was
attributable to the 1996 Acquisitions. 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.
Provision for doubtful accounts increased by $2.4 million, or 208%, to $3.6
million for the year ended December 31, 1996 from $1.2 million for the year
ended December 31, 1995. The provision for doubtful accounts as a percentage of
net revenue was 8.4% and 7.2% for the years ended December 31, 1996 and 1995,
respectively. This increase was primarily attributable to the 1996 Acquisitions,
which acquisitions increased the percentage of net revenue from services
provided in inpatient laboratories. 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, more difficulties gathering complete and accurate billing information,
and longer billing and collection cycles for inpatient services.
Amortization expense increased by $1.3 million, or 189%, to $2.0 million
for the year ended December 31, 1996 from $700,000 for the year ended December
31, 1995. This increase is attributable to the amortization of goodwill and net
identifiable intangible assets from the 1996 Acquisitions. Amortization expense
is expected to increase as a result of identifiable intangible assets and
goodwill arising from the 1996 Acquisitions and future acquisitions as well as
any contingent payments required to be 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
" -- 1996 Acquisitions."
Interest expense increased by $2.0 million, or 135%, to $3.5 million for
the year ended December 31, 1996 from $1.5 million for the year ended December
31, 1995. This increase was attributable to indebtedness incurred to finance the
1996 Acquisitions.
Other expense, net increased by $385,000 to $431,000 for the year ended
December 31, 1996 from $46,000 for the year ended December 31, 1995 due
primarily to the write-off of deferred debt issuance costs related to the
replacement of a line of credit with the Credit Facility.
The effective income tax rate was approximately 43% for the year ended
December 31, 1996 as compared to 39% for the year ended December 31, 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 1996 Acquisitions.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net revenue increased by $1.6 million, or 11%, 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 ALA's clinical laboratory.
Cost of services increased by $1.5 million, or 21%, to $8.5 million for the
year ended December 31, 1995 from $7.0 million for the year ended December 31,
1994. Of this increase, $981,000 was due to the addition of two Affiliated
Physicians, additional non-physician personnel and increased variable operating
costs for anatomic pathology services and $510,000 was due to increased variable
operating costs, additional non-physician personnel and overtime costs and
allocation of additional overhead for ALA's clinical laboratory. As a percentage
of net revenue, cost of services increased to 53.2% in 1995 from 48.6% in 1994.
44
<PAGE> 47
Selling, general and administrative expense increased by $357,000, or 16%,
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 16%, 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 ALA'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.
Interest expense decreased by $80,000, or 5%, 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 39% for the year ended
December 31, 1995 compared to 38% for the year ended December 31, 1994.
QUARTERLY RESULTS
The following table presents certain unaudited quarterly financial data for
each of the quarters in the years ended December 31, 1995 and 1996 and the
quarters ended March 31 and June 30, 1997. 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.
45
<PAGE> 48
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1997 CALENDAR
1995 CALENDAR QUARTERS 1996 CALENDAR QUARTERS QUARTERS
------------------------------- --------------------------------- -------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND
------ ------ ------ ------ ------ ------ ------- ------- ------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue............ $3,929 $4,267 $3,980 $3,848 $4,853 $4,837 $11,150 $21,718 $21,858 $22,986
Operating costs:
Cost of services..... 2,029 2,191 2,112 2,185 2,485 2,223 5,771 9,627 9,966 10,347
Selling, general and
administrative
expense............ 631 663 637 713 924 898 2,020 4,641 4,310 4,254
Provision for
doubtful
accounts........... 290 303 317 251 309 336 1,010 1,921 2,054 2,062
Amortization
expense............ 170 170 169 169 152 152 510 1,144 1,199 1,211
Loss on cessation of
clinical lab
operations......... -- -- -- -- -- 910 -- -- -- --
------ ------ ------ ------ ------ ------ ------- ------- ------- --------
Total......... 3,120 3,327 3,235 3,318 3,870 4,519 9,311 17,333 17,529 17,874
------ ------ ------ ------ ------ ------ ------- ------- ------- --------
Income from
operations........... 809 940 745 530 983 318 1,839 4,385 4,329 5,112
Interest expense....... (401) (384) (366) (353) (374) (393) (870) (1,903) (1,932) (2,125)
Non-recurring charge... -- -- -- -- -- -- -- -- -- (1,289)
Other income (expense),
net.................. (21) 27 (19) (33) (2) (199) 58 (288) 26 (83)
------ ------ ------ ------ ------ ------ ------- ------- ------- --------
Income (loss) before
income taxes......... 387 583 360 144 607 (274) 1,027 2,194 2,423 1,615
Provision (benefit) for
income taxes......... 150 226 140 56 232 (105) 392 1,009 1,042 694
------ ------ ------ ------ ------ ------ ------- ------- ------- --------
Net income (loss)...... $ 237 $ 357 $ 220 $ 88 $ 375 $ (169) $ 635 $ 1,185 $ 1,381 $ 921
====== ====== ====== ====== ====== ====== ======= ======= ======= ========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
In the 1994 Acquisition, 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 connection with the 1994 Acquisition, 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 connection with the 1994
Acquisition, the Company also entered into the line of credit and borrowed $7.5
million thereunder. See "Certain Transactions." In April 1996, the ALA
Contingent Note obligations were satisfied by the issuance of 194,400 shares of
Common Stock.
Following the 1994 Acquisition, 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 has funded these requirements
with cash generated from operations and with borrowings under the line of credit
and the Credit Facility. The Company generated cash from operations of $2.3
million for each of the years ended December 31, 1994 and 1995, $551,000 for the
year ended December 31, 1996 and $6.1 million for the six months ended June 30,
1997. The decrease in 1996 of approximately $1.8 million was primarily
attributable to a decrease in accounts payable and accrued expenses, and the
increase for the six months ended June 30, 1997 was primarily due to the 1996
Acquisitions.
The Credit Facility replaced the line of credit in May 1996 and was amended
and restated in June 1997 increasing the amount available from $85 million to
$150 million. The Company borrowed $78.6 million under the Credit Facility in
connection with the 1996 Acquisitions and an additional $58.9 million to
finance, in part, the 1997 Acquisitions. At December 31, 1995, 1996, and at June
30, 1997, the Company had working capital of $1.4 million, $5.3 million and $5.1
million, respectively, including $58,000 and $2.3 million, and $1.0 million,
respectively, in cash and cash equivalents. In addition, practices acquired by
the Company are
46
<PAGE> 49
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. Net accounts receivable increased by $12.6
million to $14.7 million at December 31, 1996 from $2.1 million at December 31,
1995, primarily as a result of the 1996 Acquisitions. Net accounts receivable
increased $1.5 million, to $16.2 million at June 30, 1997, primarily due to the
increase in revenues during the period. See Note 4 to the Consolidated Financial
Statements.
At June 30, 1997, of the $150.0 million available under the Credit
Facility, $65 million and $17.3 million was outstanding under the term loan
facility and revolving loan facility, respectively. Since June 30, 1997, the
Company borrowed an additional $58.9 million to finance, in part, the 1997
Acquisitions. See "Unaudited Pro Forma Consolidated Financial Data." Borrowings
under the Credit Facility bear interest, at the Company's option, at the Agent's
base rate (8.5% at June 30, 1997) or the Eurodollar rate plus a premium that are
adjusted quarterly based upon the Company's ratio of total debt to cash flow. At
June 30, 1997, amounts outstanding under the term loan and revolving loan of the
Credit Facility had annual effective interest rates of 9.25% and 8.75%,
respectively. The Credit Facility provides for up to $150.0 million through a 7
year term loan of $65.0 million and a revolving credit facility of up to $85.0
million that is available as a working capital line of credit in an amount equal
to a maximum of 80% of the Company's eligible accounts receivable, (which at
June 30, 1997, amounted to available funds of $10.6 million, of which $1.6
million was outstanding) or a revolving line of credit available to fund
acquisitions. Amounts due under the revolving credit facility are due June 2002.
Commencing July 1, 1998, the term loan requires annual principal payments of
$650,000. During the year ended December 31, 1996 and the six months ended June
30, 1997, the Company received advances under the Credit Facility of $89.3
million and $8.4 million, respectively, and repaid $11.8 million and $7.8
million, respectively, primarily from cash provided by 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 June 30, 1997, 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 $492,000, $488,000, $996,000 and $2.0 million in
1994, 1995, 1996 and for the six months ended June 30, 1997, respectively.
Capital expenditures to date have included $1.0 million related to information
systems and $569,000 for equipment and leasehold improvements to expand the
Orlando facility to accommodate the expansion of its contract to provide
anatomic pathology services with SmithKline Beecham Clinical Laboratories, Inc.
("SmithKline"), a national provider of clinical laboratory services, which
commenced in May 1997. The contract provides that the Company will maintain the
appropriate manpower staffing levels to handle the estimated workload. In this
regard, the Company anticipates additional capital outlays of approximately
$250,000 over the amounts expended to date. The Company has been assessing, and
will continue to assess, the capabilities of the various information systems
acquired in connection with each of its acquisitions, and is in the process of
replacing, upgrading and integrating certain of the systems into a single
network. See "Business -- Management Information Systems." Priority has been
given to enhancements in billing and
47
<PAGE> 50
financial information systems. Planned capital expenditures are expected to be
between $1.0 million and $1.5 million during the remainder of 1997.
The net proceeds of this offering, estimated to be $63.0 million, will be
used to repay the outstanding principal amount 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 and the consummation of the 1997 Acquisitions, the
Company will have reduced its aggregate indebtedness on a pro forma basis as of
June 30, 1997 from $156.1 million to $94.3 million. The Company may reborrow
under the revolving loan facility to fund future acquisitions, working capital
and for general corporate purposes.
The Company anticipates that its outstanding indebtedness following the
consummation of this offering will be an aggregate of $94.3 million under the
Credit Facility and Subordinated Notes. The Company expects to make further
borrowings under the revolving loan facility in the short term to fund
acquisitions. The Company anticipates that, following consummation of the
offering, funds generated by operations and funds available under the Credit
Facility will be sufficient to meet working capital requirements and Contingent
Note obligations, and to finance capital expenditures and, together with the
issuance of shares of Common Stock and Contingent Notes, acquisitions over the
next 18 months. 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. For the year ended December 31, 1996 and the
six months ended June 30, 1997, capital expenditures of the Company approximated
2.3% and 4.4%, respectively, of net revenue. The Company is integrating its
financial information, billing and collections systems, which may result in an
increase in capital expenditures as a percentage of net revenue. The Company
believes, however, that such information systems enhancements will result in
cost 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
the 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 or increase the Credit Facility, secure
additional bank borrowings or complete additional debt or equity financings on
terms favorable to the Company.
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BUSINESS
GENERAL
AmeriPath believes it is the leading physician practice management company
focused on anatomic pathology services, based on an analysis of geographic
breadth, number of physicians, number of hospital contracts, number of practices
and net revenue. The Company owns or is affiliated with 15 Practices located in
seven states which employed, as of September 26, 1997, a total of 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. Of these
pathologists, 126 are board certified, one is board eligible and 61 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). See "The Company."
The Company provides physician practice management services and the
Affiliated Physicians provide medical services in the Company's outpatient
laboratories and in inpatient laboratories owned by hospitals. As of September
26, 1997, 11 Practices had exclusive contracts with a total of 72 hospitals to
manage their inpatient laboratories and provide professional pathology services.
Six of these 11 Practices also have established outpatient laboratories that
focus upon outpatient referral sources. Generally under a hospital contract, the
Practice provides the medical director for the hospital's laboratory, who is
responsible for the laboratory's anatomic and clinical operations, as well as
the hospital's blood bank and microbiology services. Through their relationships
with the medical staff of the hospitals and the local medical community,
inpatient based Practices also provide anatomic pathology services to office
based physicians. By using an inpatient laboratory to conduct both outpatient
and inpatient services, the Practices capitalize on the trend towards more
procedures being performed in an outpatient setting. Four of the Practices
(three of which are PA Contractors) operate in outpatient laboratories and
provide services to attending physicians, national clinical laboratories and
managed care organizations. The outpatient pathology services provided by the
Practices are focused primarily on dermatopathology, which relates to the
examination of skin biopsies.
ANATOMIC PATHOLOGY
The practice of pathology includes anatomic pathology, which involves the
diagnosis of diseases through examination of tissues and cells, and clinical
pathology, which involves the chemical testing and analysis of body fluids, such
as blood and urine. Clinical pathology involves an interpretation of
standardized laboratory test results, a process which is frequently automated,
while anatomic pathology typically requires the involvement of a pathologist in
making a specific diagnosis. Anatomic pathologists do not treat patients, but
rather assist physicians by establishing a definitive diagnosis for many
diseases. In addition, anatomic pathologists may consult with attending
physicians regarding treatment plans. In these capacities, the anatomic
pathologist serves as the "physician's physician," creating what is often a
long-term relationship. Attending physicians remove specimens which are then
transported to a laboratory, either by courier or by overnight delivery service.
Once received at the laboratory, a specimen is processed and mounted onto a
slide by a laboratory technician for examination by a pathologist. Since
specimens may be transported, samples can be diagnosed by a pathologist from a
remote location. Therefore, pathologists are generally not needed "on-site" to
make a diagnosis, which enhances utilization of available capacity in outpatient
and inpatient laboratories and allows the practice to service a wider geographic
area.
An anatomic pathologist must have an understanding of a broad range of
medical specialties. Subspecialties 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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Based on information published by the American Medical Association, there
are approximately 14,000 practicing pathologists in the United States. According
to the American Society of Dermatopathology, in 1994, approximately 900
practicing pathologists specialized in dermatopathology. The Company has
targeted outpatient pathology services and inpatient pathology services at
hospitals with 400 or fewer beds. Based on a study prepared for the Company, the
Company believes that the domestic market as of 1995 for non-hospital pathology
services (approximately 3,300 outpatient laboratories) was approximately $2.1
billion and inpatient pathology services at hospitals with 400 or fewer beds was
approximately $1.1 billion. The Company expects the provision of anatomic
pathology services to grow primarily due to the aging of the United States
population, increased incidence of cancer and medical advancements that allow
for earlier diagnosis and treatment of diseases. As an example, according to The
Journal of the American Academy of Dermatology, the number of new cases of
non-melanoma skin cancer diagnosed in 1977 was 480,000 as compared to over
900,000 new cases diagnosed in 1994. Further, estimates published by The
American Cancer Society in 1996 indicate that 50% of the U.S. population who
live to age 65 or older will develop some form of skin cancer during their
lifetimes.
Most hospitals operate a pathology laboratory to provide urgent anatomic
pathology services, as well as more routine testing, for the physicians on
staff. Laboratories operated by a hospital or by a single independent pathology
practice are limited in the range of specialty services that they can provide
and in their available referral sources for utilization of the pathologists, and
are often constrained by time and expense associated with administrative
functions. Cost containment pressures and medical advancements are expected to
decrease the number of tests being performed in hospitals and increase the
number of procedures that will be performed by a physician in an outpatient
setting. Further, as hospitals consolidate their operations and increase the
outsourcing of certain services, the Company expects growth in outpatient
pathology services to continue to outpace the growth in inpatient pathology
services. As a result of these trends, the Company believes that there will be
greater utilization of outpatient pathology laboratories, such as those operated
by the Company.
Cost containment pressures are also causing hospitals to increase their
utilization of outside contract management companies to manage specialized
functions, improve physician utilization and reduce the hospital's
responsibility for certain administrative duties. Physician practice management
companies, such as the Company, can provide a hospital with professional
management of its pathology laboratory staff, including recruiting and
scheduling, as well as the assumption of certain financial risks and
administrative duties associated with physician billing and collections,
utilization and outcome data and payment of physician malpractice insurance
premiums.
Although the selection of a pathologist is primarily made by individual
physicians, a trend is evolving toward decisions being made by managed care
organizations and other insurance plans. While the majority of referrals by
managed care organizations for outpatient anatomic pathology services are made
directly to pathology practices on a local basis, in certain cases managed care
organizations contract with national clinical laboratories. Generally, national
clinical laboratories subcontract anatomic pathology services to large practices
that can provide a comprehensive range of anatomic pathology services. The
Company believes that hospitals, managed care organizations and national
clinical laboratories will continue to contract for the provision of anatomic
pathology services.
Historically, the anatomic pathology industry has been highly fragmented,
with the majority of the services being provided by relatively small practices.
The Company estimates that there are over 3,300 pathology practices operating in
outpatient laboratories in the United States. There is an evolving trend among
pathologists to form larger practices that can provide a broad range of
outpatient and inpatient services and enhance the utilization of the
pathologists. The Company believes this trend can be attributed to several
factors, including cost containment pressures by government and other
third-party payors, increased competition and rising costs of operating a
medical practice. In addition, given the current trends of increasing outpatient
services and outsourcing and consolidation by hospitals, pathologists are
seeking to align themselves with larger practices and physician practice
management companies that can assist providers in the evolving healthcare
environment. Larger practices and physician practice management companies can
also offer physicians certain advantages, such as negotiating contracts with
hospitals, managed care providers and
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national clinical laboratories, marketing of professional services, providing
continuing education and career advancement opportunities, making available a
broad range of specialists with whom to consult, providing access to capital and
business experience, establishing and implementing billing and collection
procedures and expanding the Practice's geographic coverage area. Each of these
factors support the pathologists in the efficient management of the complex and
time-consuming, non-medical aspects of their practice.
BUSINESS STRATEGY
The Company's objective is to enhance its position as the leading provider
of physician practice management services to anatomic pathology practices
through the following strategies:
Focus on Anatomic Pathology. The Company believes that its focus on
providing management services to anatomic pathology practices provides it
with a competitive advantage in the acquisition of such practices. A
significant opportunity exists to acquire or affiliate with anatomic
pathology practices that are seeking to be acquired or to affiliate with a
physician practice management company with experienced management and
access to capital. As a result of the Company's focus on providing
management services to anatomic pathology practices, Affiliated Physicians
are able to form an internal network for consultations and to offer
specialized services to their clients. The Company believes that its focus
allows it to develop expertise in managing both inpatient and outpatient
pathology practices.
Acquire Leading Practices. The Company expects to increase its
presence in existing markets and enter into new markets through
acquisitions of, affiliations with and strategic minority investments in
leading practices. The Company's acquisition criteria include market
demographics, size, profitability, local prominence, payor relationships,
fit with other acquisitions and opportunities for growth of the acquired
Practice. The Company intends to continue to source acquisitions by
capitalizing on the professional reputations of the Practices and the
Affiliated Physicians, the Company's management experience and the benefits
of being part of a public company, including increased resources and
improved access to capital. In existing markets, the Company targets
acquisitions that can expand its presence, provide new medical services,
such as dermatopathology, and provide operational efficiencies for the
Practices in that market. In new markets, the Company seeks to acquire and
affiliate with prominent practices to serve as a platform for expansion.
Expand Sales and Marketing Efforts. The Company focuses on generating
internal growth for the Practices by augmenting their existing physician
and contractual relationships with a professional sales and marketing
program. The Company's marketing program is designed to (i) increase
relationships with physicians over a broader geographic region, (ii) expand
contracts with national clinical laboratories that subcontract for anatomic
pathology services, and (iii) capitalize on existing managed care
relationships. Since specimens can be transported, the Company's sales and
marketing efforts focus on expanding the geographic scope of the Practices.
Four Practices contract with national clinical laboratories to provide
outpatient anatomic pathology services. These contracts generally are
exclusive to the individual Practice and are limited to the local area. The
Company is seeking to extend existing contracts with national clinical
laboratories to include multiple Practices that cover a broader geographic
region. The Company believes that this regional business model can offer
national clinical laboratories and managed care organizations a convenient
single source for anatomic pathology services. The Company also intends to
apply its regional business model in obtaining managed care contracts.
Increase Contracts with Hospitals. The Company seeks to gain
additional exclusive hospital contracts for the Practices through the
acquisition of or affiliation with anatomic pathology practices, as well as
through expansion of the Company's existing relationships with
multi-hospital systems. The Company believes that multi-hospital systems
will benefit from contracting with a single provider of pathology services
in a geographic region. The Company believes that providing inpatient
laboratory services to multiple hospitals within a geographic area
facilitates the development of a successful outpatient services operation
by creating market presence, economies of scale and important physician
relationships.
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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, centralized reporting and
other administrative functions. The Company intends to achieve operational
efficiencies by centralizing certain functions, enhancing Practice
efficiency and utilizing its size to negotiate discounts on laboratory
equipment, other medical supplies and services and health, malpractice, and
other insurances. The Company has centralized financial reporting, payroll
and benefits administration and regulatory compliance. Prior to their
acquisition, the Practices either managed their billing and collections
inhouse or outsourced these functions. In September 1996, the Company
entered into a contract with Medaphis Physician Services Corporation
("Medaphis") to provide inpatient billing services for four of the
Practices. Rates paid to Medaphis under the contract are tied to billing
volume handled by Medaphis. In addition, the Company's Fort Lauderdale
administrative office has assumed the outpatient billing for three of the
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, including the 1997
Acquisitions. 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 has developed 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
currently owns, controls and manages anatomic pathology practices in Florida
that extend from Miami to Orlando and from Fort Myers to Tampa. Together, as of
September 26, 1997, these Practices employed a total of 538 persons, including
68 Affiliated Physicians, had contracts with 29 hospitals and 21 outpatient
surgery centers and operated seven 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, 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
accounting and payroll, purchasing, billing and collections, and expects such
integration to result in enhanced operational efficiencies. The Company has
consolidated outpatient billing for three 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
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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.
AFFILIATION STRUCTURE
AmPath is a holding company that currently owns, controls and manages the
15 Practices through seven wholly-owned subsidiaries and long-term management
agreements with the five PA Contractors in Texas, Indiana and Ohio (where the
Company manages and controls all non-medical functions). Each Practice is either
a Subsidiary, a division of a Subsidiary or a PA Contractor. AmPath controls all
non-medical functions of the Practices, including financial reporting, human
resources, payroll, billing, employee benefits and accounting. In Texas, Indiana
and Ohio, the Affiliated Physicians are employed by the PA Contractors. In
Florida, Alabama, Mississippi and Kentucky, the Affiliated Physicians are
employed by the Direct Subsidiaries, which also own and operate the outpatient
laboratories. See " -- Physician, PA Contractor and Other Contractual
Relationships."
In Texas, Indiana and Ohio, states that prohibit the corporate practice of
medicine, a PA Contractor Subsidiary of the Company has entered into 40 year
management agreements with the Ohio PA Contractors, the Indiana PA Contractor
and the Texas PA Contractors. Pursuant to the terms of these management
contracts, the Company provides all non-medical administrative support functions
to the PA Contractor. See "-- Physician, PA Contractors and Other Contractual
Relationships."
The Board of Directors and management formulate strategies and policies
which are implemented locally on a day-to-day basis by each Practice. Each
Practice has a Managing Director who reports to the Company's Chief Operating
Officer. The Company's executive officers who are physicians, principally the
Company's Medical Director, 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 has also developed personnel
policies and uniform benefit plans for all employees of the Company. 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.
As of September 26, 1997, the Company employed, or had long-term agreements
with PA Contractors who employed, 127 pathologists, 126 of whom are board
certified, one of whom is board eligible and 61 of whom 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. Several Affiliated Physicians have teaching positions
with a university or an affiliation with another institution for training and
continuing medical education of physicians, particularly dermatologists. In
addition to salary and bonuses, the Company provides Affiliated Physicians with
benefit plans, group health insurance and physician malpractice insurance. See
"-- Insurance" and "-- Physician, PA Contractor and Other Contractual
Relationships."
The Company manages and controls all of the non-medical functions of the
Practices, including: (i) recruiting, training, employing and managing the
technical and support staff of the Practices; (ii) developing, equipping and
staffing laboratory facilities; (iii) establishing and maintaining courier
services to transport specimens; (iv) negotiating and maintaining contracts with
hospitals, national clinical laboratories and managed care organizations and
other payors; (v) providing financial reporting and administration, clerical,
purchasing, payroll, billing and collection, information systems, sales and
marketing, risk management, employee benefits, legal, tax and accounting
services to the Practices; (vi) complying with applicable laws and regulations;
and (vii) with respect to the Company's ownership and operation of anatomic
pathology laboratories, providing slide preparation and other technical
services. The Company is not licensed to practice
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medicine. The practice of medicine is conducted solely by the Affiliated
Physicians. All of the Company's outpatient laboratories are certified 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. Five 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.
The Practices contract with hospitals to provide pathology services. The
Practices staff each hospital with at least one pathologist who generally serves
as the medical director of the laboratory, which facilitates the hospital's
compliance with licensing requirements. The Practices are responsible for
recruiting, staffing and scheduling the Affiliated Physicians in the hospital's
inpatient laboratories. In addition to providing pathology services, the medical
director of the laboratory is responsible for (i) the overall management of the
laboratory, including quality of care, professional discipline, and utilization
review; (ii) serving as a liaison to the hospital administrators and medical
staff; and (iii) maintaining professional and public relations in the hospital
and the community. Four 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 the hospitals, technical personnel are typically
employed by the hospital, rather than by the Practices. Four Practices have a
centralized histology laboratory which serves the needs of multiple hospitals.
MANAGEMENT INFORMATION SYSTEMS
The Company believes that the integration of its laboratory information,
billing and collections and financial reporting systems will enable it to cost
effectively monitor the operations of the Practices, enhance utilization of the
Affiliated Physicians, develop practice protocols and archives and provide the
Company with a competitive advantage in negotiating national clinical laboratory
and managed care contracts. Each of the Company's laboratories has a laboratory
information system that enables laboratory personnel to track, process, report
and archive biopsies and other specimens. The Company acquired an outpatient
billing and collections software program and upgraded its computer hardware in
1995 to increase operating efficiency and storage capacity at its Fort
Lauderdale administrative office, and has upgraded the software and hardware in
1997 to handle the integration of out-patient billing for certain of the 1996
Acquisitions. In addition, the Company recently installed 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 some of the Practices have outsourced their
inpatient billing and collections functions to Medaphis, a national provider of
physician billing services. The Company entered into a new contract with
Medaphis in September 1996 to provide inpatient billing services for four of the
Practices 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 three of the Practices
at the Company's centralized billing operation at its Fort Lauderdale
administrative office and may transfer additional inpatient billing for other
Practices to Medaphis. The Company invested $332,000, $526,000 and $1.0 million
in information systems in 1995, 1996 and the six months ended June 30, 1997,
respectively, and plans to invest an additional amount of approximately $500,000
in the second half of 1997 to further increase the capacity of its centralized
outpatient billing system and financial information system at its Fort
Lauderdale administrative office and development of a plan for a company-wide
laboratory information system. 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.
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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 the Practices' volume of business by also directing its
marketing efforts to other medical specialists, including gynecologists,
urologists and gastroenterologists. Since specimens may be sent by courier
service or overnight delivery, the Company will utilize its sales professionals
to expand the potential geographic market for each Practice beyond its local
physician community. Several of the Practices currently market their outpatient
services to a broad geographic area including neighboring states. The Company
intends to augment its 21 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.
As of September 26, 1997, the Practices had contracts with 72 hospitals, 25
of which are owned by Columbia, the country's largest publicly-owned hospital
company. The Company plans to dedicate members of its professional sales force
to meet the needs of multi-hospital systems with facilities of 400 or fewer
beds. The Company believes it can assist multi-hospital systems which currently
have numerous contracts for pathology services by serving as a single source
provider of pathology services. The Company's marketing effort will be directed
toward consolidating the various contracts of multi-hospital systems on a
regional basis and thus facilitating more efficient operation of multiple
laboratories owned by such systems. See "-- Regional Business Model."
Four Practices, including two of the PA Contractors, have an aggregate of
six contracts with three national clinical laboratories, SmithKline, Quest
Diagnostics (formerly known as Corning Clinical Laboratories) and Laboratory
Corporation of America Holdings, on a local basis. The Company is directing
marketing efforts to national clinical laboratories to expand these contracts on
a regional basis to additional Practices as well as to enter into new contracts.
In addition, the Company is seeking to secure new contracts and expand existing
contracts with managed care organizations for the provision of anatomic
pathology services. The Company is prepared to negotiate flexible arrangements
for the Practices with managed care organizations, including on a discounted
fee-for-service or capitated contract basis. The Company does not believe that
contracting directly with managed care organizations will adversely affect the
Company's relationships with national clinical laboratories because anatomic
pathology services are not part of a national clinical laboratory's core
business.
CLIENT AND PAYOR RELATIONSHIPS
The Practices provide services to a wide variety of healthcare providers
and payors including physicians, government programs, indemnity insurance
companies, managed care organizations and national clinical laboratories.
Physicians who are not affiliated with a hospital or managed care organization
are a principal source of the business. Fees for anatomic pathology services
rendered to the physicians are billed either to the physicians, the patient, or
the patient's third party payor. Hospital contracts grant Practices the
exclusive right and responsibility to manage the pathology services at the
hospital. In this capacity, the Practices provide pathology services to staff
physicians and support personnel and administrative services for the laboratory,
as well as an Affiliated Physician who serves as the medical director of the
laboratory. Upon initiation, the contracts typically have terms of one to five
years. Thereafter, the contracts typically renew for additional terms of one
year unless otherwise terminated by either party. Since 47 of the contracts have
passed their initial term, they are currently subject to renewal on an annual
basis. One of the 25 remaining contracts is subject to renewal prior to June 30,
1998. The contracts typically provide that the hospital may terminate the
agreement prior to the expiration of the initial or renewal term. With respect
to the hospital contracts, technical laboratory support personnel are typically
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
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hospitals. As the medical director of the laboratory, the Affiliated Physician
may be responsible for hiring and terminating laboratory personnel. Neither the
Company nor any Practice prior to its acquisition has lost a contract in a
hospital with ongoing operations.
The national clinical laboratories that contract with managed care
organizations perform clinical laboratory services and generally subcontract
anatomic pathology services to large practices. Under these contracts, the
practices bill national clinical laboratories on a fee schedule basis. Contracts
with national clinical laboratories provide for the exclusive subcontracting of
anatomic pathology services for clients of the national clinical laboratories in
a defined geographic area. These contracts have terms of one to three years and
generally provide for automatic renewal for additional one to three year terms.
The Company's relationships with managed care organizations typically provide
for the provision of services to their participants on the basis of an agreed
upon fee schedule.
PHYSICIAN, PA CONTRACTOR AND OTHER CONTRACTUAL RELATIONSHIPS
The Company employs pathologists, or contracts with the PA Contractors who
employ pathologists, to provide medical services in hospitals and in other
inpatient and outpatient laboratories. The employment agreements typically have
terms of five years and generally can be terminated at any time upon 60 to 180
days' notice. The Affiliated Physicians generally receive a base salary and a
performance bonus. The Affiliated Physicians are required to hold a valid
license to practice medicine in the jurisdiction in which the pathologist
practices and, with respect to inpatient services, to become a member of the
medical staff at the contracting hospital with privileges in pathology. The
Company is responsible for billing patients, physicians and third party payors
for services rendered by the Affiliated Physicians. Substantially all of the
Affiliated Physicians have agreed, for a period of one to two years after
termination of employment, not to compete with AmeriPath or the PA Contractor
within a defined geographic area and not to solicit Affiliated Physicians, other
employees or certain clients of the Company. See "Risk Factors -- Professional
Liability and Insurance."
AmeriPath has management agreements with five PA Contractors in Texas,
Indiana and Ohio (the "PA Management Agreements"). In Texas, one PA Contractor
is a controlled non-profit corporation, of which the Company is the sole member
and, effective on or before October 10, 1997, another PA Contractor will be a
controlled non-profit corporation, of which AmPath is the sole member. In Ohio
and in Indiana, the PA Contractors are owned by trusts, 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 and in Indiana, 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
has a term of 40 years and is subject to renegotiation at the end of such term.
See "Risk Factors -- Effect of 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 1996
Acquisitions and 1997 Acquisitions. AMS performs its services for the Company on
a non-exclusive, independent contractor basis and is indemnified by the Company
for actions other than fraud, gross neglect or willful misconduct. Since the
Company believes that AMS's services have increased the efficiency of the
Company's acquisition process, the Company expects to continue to use AMS's
services in the near term.
GOVERNMENT REGULATION
The business of the Company and the PA Contractors is subject to a variety
of governmental and regulatory requirements relating to healthcare matters as
well as laws and regulations which relate to business
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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 1996 Acquisitions and the 1997 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 by or affiliation with the Company could
result in civil and criminal penalties, exclusion of the Physician, the Practice
or the Company from participation in Medicare and Medicaid programs and/or loss
of a physician's license to practice medicine. To the extent the Practices were
found not to be in compliance with such laws, the Company's financial condition
and results of operations could be materially adversely affected. See "Risk
Factors -- Assumption of Liabilities of Acquired Practices."
The Company derived 57.0%, 39.0%, approximately 35.5% and approximately
28.6% of collections for the years ended December 31, 1995 and 1996, for the six
months ended June 30, 1997 and on a pro forma basis for the six months ended
June 30, 1997, respectively, from payments made by government-sponsored
healthcare programs (principally Medicare and Medicaid). The decrease in the
percentage of net revenue attributable to government sponsored healthcare
programs resulted primarily from the acquisition of Practices outside Florida.
These programs are subject to substantial regulation by the federal and state
governments. Any change in reimbursement regulations, policies, practices,
interpretations or statutes that places 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. Recently adopted Federal legislation
will result in a reduction of Medicare and Medicaid funding and increases in
state discretion over Medicaid funding. 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 such changes or other 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 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. 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
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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 and Mississippi, has anti-kickback,
anti-fee splitting and/or self-referral laws that are similar to the federal
laws, some of which apply to all payors. These laws 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 or that such enforcement, if sought, would not have a
material adverse effect on the Company. See "Risk Factors -- Effect of
Government Regulation."
The Medicare and Medicaid fraud and abuse provisions apply to laboratories
participating in such programs. These provisions include prohibitions on
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.
The Company is not licensed to practice medicine. The practice of medicine
is conducted solely by the Affiliated Physicians. The manner in which licensed
physicians can be organized to perform and bill for medical services is governed
by the laws of the state in which medical services are provided and by the
medical boards or other entities authorized by such states to oversee the
practice of medicine. Business corporations are generally not permitted under
state law to exercise control over the medical judgments or decisions of
physicians, or engage in certain practices such as fee-splitting with
physicians. In states where the Company is not permitted to directly own a
medical practice, the Company performs only non-medical administrative services,
does not represent to the public or its clients that it offers medical services
and does not exercise influence or control over the practice of medicine by the
PA Contractors or the Affiliated Physicians employed by the PA Contractors.
Corporate practice of medicine restrictions in Ohio prohibit a business
corporation from employing physicians to engage in the practice of medicine, but
permit an entity employing physicians to practice medicine to be owned by a
trust, provided that the trustee of such trust is a licensed physician. In
addition, a business corporation is not prohibited from being the beneficial
owner of such trust or from performing administrative, marketing, billing and
other non-medical or other services on behalf of the entity employing physicians
engaged in the practice of medicine. In Ohio, the Company contracts with two PA
Contractors (which are owned by trusts of which AmPath is the sole beneficiary),
which in turn employ or contract with physicians to provide necessary physician
and medical services. The trustees of each of the trusts that own the stock of
the Ohio PA Contractors are physicians licensed to practice medicine in Ohio.
Indiana law also prohibits the practice of medicine by non-physician owned
entities. In Indiana, the Company uses a structure similar to that used in Ohio,
with the Company contracting with a practice entity (owned by a trust of which
AmPath is the sole beneficiary), which in turn employs the physicians who
provide medical services. The trustee of the Indiana trust is a physician
licensed to practice medicine in Indiana.
In Texas, corporate practice of medicine restrictions generally provide
that only certain entities are permitted to employ physicians to engage in the
practice of medicine. However, such entities are not prohibited from retaining
business corporations to manage other aspects of the business, including
administrative, marketing, billing and other non-medical services. In Texas, one
of the PA Contractors is a controlled non-profit corporation of which the
Company is the sole member and, effective on or before October 10, 1997, another
PA Contractor will be a controlled Texas non-profit 5.01(a) corporation of which
the Company is the sole member. In these cases, the non-profit corporation owns
or will own the medical-related assets and employs or will employ the
physicians.
Florida, Kentucky, Alabama and Mississippi do not have laws prohibiting
business corporations from directly employing physicians to practice medicine.
Such states, however, have medical practice acts which provide that only
licensed physicians may provide medical care. Accordingly, in Florida, Kentucky,
Alabama and Mississippi, business corporations may directly employ physicians to
engage in the provision of medical services, provided that the physicians have
control over the manner in which medical care is provided. The
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"Managing Directors" of the Practices located in Florida, Kentucky, Mississippi
and Alabama are each physicians licensed to practice medicine in their
respective states. Pursuant to their employment agreements with the
Subsidiaries, such Managing Directors have exclusive control over the actual
provision of medical care at their respective Practices and are responsible for
setting policies relating to and monitoring the practice of medicine.
Based on the advice of the Company's state health care regulatory counsel,
Jenkens & Gilchrist, a professional corporation, Bricker & Eckler LLP, Wyatt,
Tarrant & Combs, Baker & Daniels and Greenberg Traurig Hoffman Lipoff Rosen &
Quentel, P.A., the Company believes that it currently is in compliance with the
laws in Texas, Ohio, Kentucky, Indiana, Florida, Mississippi and Alabama,
respectively, relating to the corporate practice of medicine.
There can be no assurance that regulatory authorities or other parties will
not assert that the Company is engaged in the corporate practice of medicine. If
such a claim were successfully asserted in any jurisdiction, the Company, the PA
Contractors and the Affiliated Physicians could be subject to civil and criminal
penalties under such jurisdiction's laws and could be required to restructure
their 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."
In addition to current regulation, state and federal government sponsored
initiatives 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 and Operation Restore
Trust, initiated in 1995, have 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. Federal
and state audits and inspections, whether on a scheduled or unannounced basis,
are conducted from time to time at the Company's facilities. An inspection was
conducted in April 1997 at ALA's laboratory facility by representatives of
federal and state agencies under Operation Restore Trust. A report to the
Department of Justice with respect to this inspection was expected prior to
October 1, 1997. The Company has received a preliminary report from AHCA
relating to Medicaid which cites limited alleged non-compliances the effects of
which are immaterial to the Company's operations as a whole. The Company has not
received a report from the agency representing Medicare, and there can be no
assurance that the findings of such a report relating to Medicare, or other
findings in connection with the inspection, will not have an adverse effect on
the Company. In addition, significant media and public attention has recently
been focused on the health care industry due to ongoing federal and state
investigations reportedly related to certain referral and billing practices,
laboratory and home healthcare services and physician ownership and joint
ventures involving hospitals. Most notably, Columbia is under investigation with
respect to such practices. The Company operates laboratories on behalf of and
has numerous contractual arrangements with hospitals, including 25 pathology
services contracts with Columbia. The government's investigation of Columbia
could result in a governmental investigation of one or more of the Company's
operations which have arrangements with Columbia. In addition, the Office of the
Inspector General and the Department of Justice have initiated hospital
laboratory billing review projects in certain states and are expected to extend
such projects to additional states, including states in which the Company
operates hospital laboratories. These projects increase the likelihood of
governmental investigations of hospital laboratories operated by the Company.
Although the Company monitors its billing practices and hospital arrangements to
ensure compliance with prevailing industry practices under applicable laws, such
laws are complex and are constantly evolving and there can be no assurance that
governmental investigators will not take positions that are inconsistent with
industry practices, including the Company's practices. The government's
investigation of Columbia may have other effects which could adversely affect
the Company, including the termination or amendment of one or more of the
Company's contracts with Columbia or the sale of hospitals potentially
disrupting the performance of services under such contracts. The investigation
of Columbia or other hospital operators with whom the Company does business
could also result in adverse
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publicity concerning the Company, which could limit the Company's ability to
acquire or affiliate with additional practices or to obtain new or expanded
hospital contracts, or could result in termination or non-renewal of the
Company's existing hospital contracts. See "Risk Factors -- Recent Government
Investigations of Hospitals and Hospital Laboratories."
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, and enforcement actions against, healthcare
providers.
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 "Risk Factors -- No Prior
Market; Volatility of Stock Price."
CLIA extends federal oversight to virtually all laboratories by requiring
that laboratories be certified by the government. Many laboratories must also
meet governmental quality and personnel standards, undergo proficiency testing
and be subject to biennial inspection. Rather than focusing on location, size or
type of laboratory, this extended oversight is based on the complexity of the
test performed by the laboratory. In 1992, HHS published regulations
implementing CLIA. The quality standards and enforcement procedure regulations
became effective in 1992. The quality standards regulations divide all tests
into three categories (waivered, moderate complexity and high complexity) and
establish varying requirements depending upon the complexity of the test
performed. A laboratory that performs high complexity tests must meet more
stringent requirements than a laboratory that performs only moderate complexity
tests, while those that perform only one or more of eight routine "waivered"
tests may apply for a waiver from most requirements of CLIA. The Company's
outpatient laboratories are certified by CLIA to perform high complexity
testing. Generally, the HHS regulations require laboratories that perform high
complexity or moderate complexity tests to implement systems that ensure the
accurate performance and reporting of tests results, establish quality control
systems and have proficiency testing conducted by approved agencies, and
biennial inspections. The sanction for failure to comply with these regulations
may be suspension, revocation or limitation of a laboratory's CLIA certificate
necessary to conduct business, significant fines and criminal penalties. The
loss of a license, imposition of a fine or future changes in such federal, state
and local laws and regulations (or in the interpretation of current laws and
regulations) could have a material adverse effect on the Company's financial
condition and results of operations. The Company is also subject to state
regulation. CLIA provides that a state may adopt more stringent regulations than
federal law. For example, state law may require that laboratory personnel meet
certain qualifications, specify certain quality controls, maintain certain
records and undergo proficiency testing.
In addition, the Company is subject to licensing and regulation under
federal, state and local laws relating to the handling and disposal of medical
specimens, infectious and hazardous waste and radioactive materials as well as
to the safety and health of laboratory employees. All Company laboratories are
operated in accordance with applicable federal and state laws and regulations
relating to the generation, storage, treatment and 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 equipment, training, medical
follow-up, vaccinations and other measures designed to minimize exposure to, and
transmission of, blood-borne pathogens. Regulations of the Department of
Transportation,
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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 1996 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 $16.0 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 1996 Acquisitions and the 1997 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 all potential
liabilities will be covered by available insurance, 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 or on favorable
terms. See "Risk Factors -- Assumption of Liabilities of Acquired Practices,"
"Risk Factors -- Professional Liability and Insurance" and "-- Legal
Proceedings."
COMPETITION
The markets for the services provided by the Company and the Practices
consist of: (1) the provision of physician practice management services to
anatomic pathology practices; and (2) the provision of anatomic pathology
services. The Company competes with other physician practice management
companies that are focused on the ownership or management of anatomic pathology
practices. Through its Direct Subsidiaries and affiliations with the PA
Contractors, the Company competes with anatomic pathology practices, national
clinical laboratories, hospitals and clinics which provide anatomic pathology
medical services. The Company estimates that there are over 3,300 pathology
practices operating in outpatient laboratories in the United States. In
addition, competition may result from companies in other healthcare industry
segments, such as managers of other hospital-based specialties or large
physician group practices, that may enter the Company's markets, some of which
have financial and other resources greater than those of the Company. With
respect to physician practice management services, the Company believes that the
principal competitive factors are sales and marketing, billing, collections and
financial reporting, management of physicians, laboratories and related medical
services and human resources. To date, the Company has not experienced
significant competition in the provision of physician practice management
services to anatomic pathology practices. The Practices do, however, experience
competition in local markets in which the Practices provide anatomic pathology
services. The Company believes that the infrastructure it is building provides a
competitive advantage in its markets. The principal competitive factors
regarding the provision of anatomic pathology services are professional
reputation and skill of the pathologist, the price charged for pathology
services, the scope of services offered, the ability to operate laboratories on
an efficient basis and geographic coverage. The Company competes with several
other companies for the acquisition of or affiliation with anatomic pathology
practices. In addition, companies in other healthcare segments, such as
hospitals, HMOs and large physician practices, many of which have greater
financial and other resources than the Company, may become competitors in
acquiring, or providing physician practice management services to, anatomic
pathology practices. The Company competes for acquisitions on the basis of the
reputation of the Practices, its management experience and its focus on anatomic
pathology. There can be no assurance that the Company will not experience more
competition in its markets, that new competitors will not enter such markets, or
that such competition will not make it more difficult for the Company to acquire
or affiliate with practices on favorable terms.
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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 September 26, 1997, there were a total of 951 persons, including 127
Affiliated Physicians, employed by or affiliated with the Company. Of the
Affiliated Physicians, 84 were employed by Subsidiaries of the Company and 42
were employed by PA Contractors. The Company's employees include 348 laboratory
technicians, 75 couriers and 401 billing, marketing, transcription and
administrative staff, of which 41 personnel are located at the Company's
executive offices. None of the Company's employees or prospective 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 12,000 square feet) and its billing and administrative office in
Fort Lauderdale, Florida (approximately 5,000 square feet) and leases 18 other
facilities: ten in Florida, one in Alabama, two in Kentucky, two in Ohio, one in
Mississippi and two in Texas. See "Certain Transactions." These facilities are
used for laboratory operations, administrative and billing and collections
operations and storage space. The 18 facilities encompass an aggregate of
approximately 125,000 square feet, have an aggregate annual rent of
approximately $1.2 million 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 employees and Affiliated
Physicians 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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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)..................... 52 President, Chief Executive Officer and
Director
Alan Levin, M.D........................ 46 Chief Operating Officer and Director
Robert P. Wynn......................... 50 Executive Vice President and Chief
Financial Officer
Leslie B. Rosen, M.D................... 43 Executive Vice President and Medical
Director
Annette L. Bell........................ 39 Vice President of Sales
Stephen V. Fuller...................... 41 Vice President of Human Resources
Thomas S. Roberts(1)(2)(3)............. 34 Chairman of the Board
Timothy Kilpatrick, M.D................ 41 Director and Managing Director of
Derrick
C. Arnold Renschler, M.D............... 55 Director
E. Roe Stamps, IV(3)................... 51 Director
</TABLE>
- ---------------
(1) Member of Acquisition Review Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
Within 60 days following consummation of this offering, the Company's Board
of Directors intends to appoint an additional person who is not currently
affiliated with the Company as an additional director. Such director will serve
on the Compensation Committee and the Audit Committee.
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 served as the medical
director of the inpatient pathology laboratory at Columbia Medical Center, Port
St. Lucie, Florida from 1983 until 1997, and presently is 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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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.
Leslie B. Rosen, M.D. has been an Executive Vice President and the Medical
Director of the Company since June 1997. He became an Affiliated Physician in
June 1996 after the Company acquired FPA. He has also been the Managing Director
of FPA since September 1988. Prior to the sale of FPA to the Company, Dr. Rosen
practiced pathology for over 14 years at various hospitals in South Florida. He
also holds teaching positions at various Florida universities. Dr. Rosen is
certified in Anatomic and Clinical Pathology as well as in Dermatopathology. Dr.
Rosen received his B.A. from Kenyon College and his M.D. from State University
of New York Downstate. He completed his residency and fellowship at Mount Sinai
Medical Center in Miami Beach, Florida.
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 1994 Acquisition 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 and Intelligroup, Inc., 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.
C. Arnold Renschler, M.D. has been a director of the Company since April
1997. Since June 1996, Dr. Renschler has been the President and Chief Executive
Officer of Pharmacy Corporation of America, a division of Beverly Enterprises,
Inc. From January 1990 to June 1996, he held various positions, including
serving as a Director, President and Chief Operating Officer and Chief Clinical
Officer, at NovaCare, Inc. Dr. Renschler is certified in pediatric medicine. He
received his B.A. from Walla Walla College and his M.D. from Loma Linda
University School of Medicine. He completed his internal medicine residency at
Georgetown University Hospital is Washington, D.C., and his pediatric residency
at Stanford University in Palo Alto, California.
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<PAGE> 67
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 1994 Acquisition 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 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 Director
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 1994 Acquisition, 3,084,730 shares of the Convertible
Preferred Stock were issued to Summit, with which Messrs. Roberts and Stamps are
affiliated, for approximately $5.3 million. Additionally, the Company issued
approximately $7.2 million principal amount of Junior Notes to Summit. A
financing fee of $190,000 was paid to Summit in connection with these
transactions. In connection with the formation of AmPath in February 1996,
Summit exchanged its holdings of Junior Notes and Convertible Preferred Stock of
ALA for the same number and type of debt and equity securities of the Company.
In February 1996, Summit converted 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.
Summit will convert its shares of Convertible Preferred Stock into 5,344,816
shares of Common Stock prior to consummation of this offering.
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<PAGE> 68
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 213,942 158,631
President and Chief Executive Officer
Alan Levin, M.D.(2)......................................... 1996 112,732 100,000
Chief Operating Officer
Robert P. Wynn.............................................. 1996 141,605 50,694
Executive Vice President and Chief Financial Officer
Annette L. Bell(3).......................................... 1996 64,153 56,559
Vice President of Sales
Michael J. Demaray, M.D.(4)................................. 1996 349,820 --
</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.
(3) Bonus amounts paid to Ms. Bell include commissions.
(4) During 1996, Dr. Demaray was employed as an Affiliated Physician and was
also employed by AmPath as its Executive Vice President and Medical
Director. In June 1997, Dr. Demaray resigned from his position with AmPath.
Dr. Demaray continues to be employed as an Affiliated Physician.
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(3)
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 49% $ 1.67 1/1/06 $7,609,857 $12,472,836
Alan Levin, M.D........... 36,000 5% 10.00 9/26/06 460,963 947,246
Robert P. Wynn............ -- -- -- -- -- --
Annette L. Bell........... 18,000 2% 10.00 9/26/06 230,481 473,623
Michael J. Demaray,
M.D..................... -- -- -- -- -- --
</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 $14.00 per share)
multiplied by the number of shares of Common Stock underlying the option.
These assumed annual rates of appreciation were used in compliance with the
rules of the Commission and are not intended to forecast future price
appreciation of the Common Stock or to take into account the immediate
increase in potential realizable value that will occur. The actual value
realized from the options could be higher or lower than the values reported
above, depending on the future appreciation or depreciation of the Common
Stock during the option period and the timing of exercise of the options.
66
<PAGE> 69
Year End Option Table. The following table sets forth information
regarding exercise of options and the number and value of options held at
December 31, 1996 by each of the Named Officers. No options were exercised
during 1996 by such executives.
AGGREGATE UNEXERCISED OPTIONS AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT YEAR END(#) AT YEAR END($)(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
Robert P. Wynn.................................. 86,400 129,600 $1,113,696 1,670,544
Annette L. Bell................................. -- 18,000 -- 72,000
Michael J. Demaray, M.D......................... -- -- -- --
</TABLE>
- ---------------
(1) The value of the options is based on the difference between the option
exercise price of $1.67, $10.00, $1.11 and $10.00 with respect to Mr. New,
Dr. Levin, Mr. Wynn and Ms. Bell, respectively, and the initial public
offering price of the Common Stock (based upon an assumed initial public
offering price of $14.00) multiplied by the number of shares of Common Stock
underlying the option. No market existed for the Common Stock prior to this
offering.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Mr. New effective
January 1, 1996. The agreement, as amended, provides that Mr. New will receive a
base salary of $275,000 per year. Mr. New is eligible to receive an annual bonus
equal to 25% of his base salary and up to an additional 25% of his base salary
upon attaining mutually agreed upon objectives relating to the Company's
performance. For the year ended December 31, 1996, the Compensation Committee of
the Board of Directors determined that Mr. New exceeded the performance
objectives of his employment agreement and awarded a bonus to Mr. New in excess
of the percentages specified in such agreement. 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 Share Exchange, the Company assumed ALA's employment
agreement with Mr. Wynn. The agreement, as amended, provides that Mr. Wynn shall
receive a base salary of $148,000 per year and may receive a discretionary bonus
based on his performance. For the year ended December 31, 1996, Mr. Wynn
received a bonus equal to 36% 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
12 months.
The Company entered into an employment agreement with Dr. Levin as an
Affiliated Physician as of June 30, 1996 in connection with the acquisition of
Derrick. Effective October 1, 1996, the Company entered into an additional
agreement with Dr. Levin pursuant to which Dr. Levin became Chief Operating
Officer of AmPath and amended his employment agreement with AmeriPath Florida,
Inc., the Florida subsidiary of AmPath. The agreements provide for an annual
salary of $255,000, $155,000 of which is paid by AmPath and $100,000 of which is
paid by AmeriPath Florida, Inc. Beginning in 1997, Dr. Levin will be eligible to
receive a bonus of up to $25,000 per year, subject to achievement of performance
objectives of the Company. Upon termination by the Company other than for cause,
Dr. Levin will receive his annual salary for one year. In connection with his
employment as Chief Operating Officer, the Company granted options to purchase
36,000 shares of Common Stock.
In addition to their roles as executive officers and directors of the
Company, Drs. Levin, Demaray and Kilpatrick, and Leslie B. Rosen, M.D. (AmPath's
Executive Vice President and Medical Director), are also Affiliated Physicians
and have entered into separate employment agreements with the Company that
govern their relationship with the Company as Affiliated Physicians. These
agreements have terms of five years and provide for annual base salaries of
$255,000, $350,000, $255,000 and $400,000, respectively. Each employ-
67
<PAGE> 70
ment 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, Kilpatrick and Rosen and 18
months with respect to Dr. Demaray. Dr. Rosen's employment agreement, which
expires June 30, 2001, subject to renewal, provides that the Company may
terminate his employment only for cause.
Pursuant to their respective employment agreements, Drs. Levin, Rosen,
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. Rosen
will devote approximately 30% of his professional time to his responsibilities
as 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
Effective July 1, 1997, the Company consolidated its previous 401(k)
retirement plan and other defined contribution plans of the Practices into a new
qualified 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 up to
$9,500, as defined. Employer contributions of 25% of employee contributions (up
to a maximum of $1,000 per employee) are required. During 1994, 1995 and 1996,
the Company elected not to make a contribution to the previous plans. The
Company expects to make contributions to the 401(k) Plan in 1997.
OPTION PLAN
Under the Option Plan, 2,200,000 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 may be 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 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
have the authority to amend or
68
<PAGE> 71
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 September 26, 1997, the Company had outstanding options to purchase
an aggregate of 1,172,211 shares of Common Stock under the Option Plan at a
weighted average exercise price of $5.20 per share, of which options to purchase
265,682 shares of Common Stock were exercisable at September 26, 1997.
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, provided that no such action may impair the rights of the
holder of any outstanding option without the consent of such optionholder, and
provided further that certain amendments of the Director Option Plan are subject
to stockholder approval. Unless terminated sooner, the Director Option Plan will
continue in effect until all Director Options granted thereunder have expired or
been exercised, provided that no options may be granted ten years after the
effective date of the Director Option Plan, which is November 21, 1996.
As of September 26, 1997, Director Options to purchase 5,000 shares of
Common Stock at an exercise price of $10.00 per share have been granted, none of
which are currently exercisable.
69
<PAGE> 72
CERTAIN TRANSACTIONS
1994 ACQUISITION
Pursuant to the 1994 Acquisition: (i) ALA acquired substantially all of the
assets and assumed substantially all of the liabilities of PDK for $20.5 million
in cash, $3.5 million principal amount of Senior Notes and $2.5 million
principal amount of ALA Contingent Notes; (ii) 3,208,120 shares of the
Convertible Preferred Stock were issued to Summit and Schroder for $5.5 million;
and (iii) Drs. Demaray, Poulos and Kowalczyk, the owners of PDK, purchased an
aggregate of 1,425,600 shares of ALA common stock for an aggregate purchase
price of $1.0 million. Prior to the 1994 Acquisition, Drs. Demaray, Poulos and
Kowalczyk owned 100% of the then issued and outstanding shares of common stock
of ALA. However, after the 1994 Acquisition, the owners of PDK held 19.8% of the
voting interest (taking into account the voting rights of the holders of the
Convertible Preferred Stock). 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 5,558,607 shares of
Common Stock prior to consummation of this offering. The Company has reserved
5,558,607 shares of Common Stock for the conversion of the Convertible Preferred
Stock.
In the 1994 Acquisition, each of Drs. Demaray, Poulos and Kowalczyk
received in exchange for the net assets of PDK the following from the Company:
(i) a cash distribution of $6.8 million; (ii) Senior Notes in the principal
amounts of $1.2 million; and (iii) ALA Contingent Notes in the principal amounts
of $833,000. The ALA Contingent Notes were payable in annual installments of
$500,000, plus interest thereon, in years 1994 through 1998, if operating
earnings exceeded a specified annual level. If the specified operating earnings
levels were not achieved, the amounts payable for that year, including the
related accrued interest, were to be canceled. The specified levels of operating
earnings for the years ended December 31, 1995 and 1994 were not achieved;
therefore, $500,000 of the principal amount of the ALA Contingent Notes for each
such year and related accrued interest were canceled. In April 1996, the
remaining obligations under the ALA Contingent Notes were canceled in exchange
for an aggregate of 194,400 shares of Common Stock (64,800 shares to each of
Drs. Demaray, Poulos and Kowalczyk) with an aggregate fair value of $242,000. In
connection with the acquisition by the Company of substantially all of the
assets of D&P in January 1996 and the termination by the Company of a stock
purchase option granted in connection with the 1994 Acquisition, 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 Drs. Demaray, Poulos and Kowalczyk exchanged their
respective holdings of Junior Notes, Senior Notes, Convertible Preferred Stock
and common stock of ALA for the same number and type of debt and equity
securities of AmPath in the Share Exchange.
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.
1996 ACQUISITIONS
Pursuant to the acquisition of Derrick, Drs. Levin and Kilpatrick received
in exchange for their interests in Derrick the following: (i) with respect to
Dr. Levin, cash of $1.1 million, 78,925 shares of Common Stock and a Contingent
Note in the maximum principal amount of $584,615; and (ii) with respect to Dr.
Kilpatrick, cash of $1.1 million, 78,925 shares of Common Stock and $584,615
principal amount of Contingent Notes. The Company paid $74,614 and $74,614 to
Drs. Levin and Kilpatrick, respectively, in 1997 with respect to Contingent Note
payments for operating earnings achieved in 1996.
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<PAGE> 73
Pursuant to the acquisition of FPA, Dr. Rosen received cash of $2.8
million, a Subordinated Note in the principal amount of $800,000, 79,999 shares
of Common Stock and a Contingent Note in the maximum principal amount of $1.3
million. During 1997, the Company paid Dr. Rosen $44,008 with respect to the
Contingent Note for operating earnings achieved in 1996 and $160,000 pursuant to
the Subordinated Note.
1997 ACQUISITIONS
In connection with the Company's 1997 Acquisition in Texas, the Company
leases office space and an outpatient laboratory in Dallas, Texas from an entity
owned by certain of the sellers thereof who will continue to be Affiliated
Physicians. The lease expires on June 1, 2000 and contains an option to renew
for an additional five years, and requires monthly rental payments of $8,656,
plus sales taxes, property taxes, insurance, utilities, and maintenance costs.
The Company believes that the terms of the lease are comparable to those which
would be available from an unaffiliated entity on the basis of an arms-length
negotiation.
In connection with the Company's 1997 Acquisition in Indiana, the sellers
of such practice are also shareholders of CoLab Investments, LLC, which holds a
9% interest in Mid-America Clinical Laboratories ("MACL"), a joint venture
between Seton Health Corporation of Central Indiana, Community Hospitals of
Indiana, SmithKline Beecham Clinical Laboratories, Inc., and CoLab Investments,
LLC. MACL was established June 1, 1997 to operate a licensed clinical laboratory
for the hospitals. The Indiana Practice provides anatomical and clinical
pathology services to MACL for a monthly fee.
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 each of 1995 and 1996. The Company
believes that the terms of the lease are comparable to those which would be
available from 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 1996 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 from 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 ALA frozen section laboratories. Such fee paid to D&P 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.
AGREEMENTS REGARDING DIRECTORS
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.
In connection with the Company's 1997 Acquisition in Texas, AmPath has
agreed to nominate one of the sellers of such Practice, designated by such
sellers and acceptable to AmPath, to the next available vacancy for inside
directors on the board of directors of AmPath.
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<PAGE> 74
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's outstanding Common Stock as of September 26, 1997 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; and (iii) 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>
PERCENT BENEFICIALLY OWNED
----------------------------------
SHARES
BENEFICIALLY PRIOR TO THE
NAME(1) OWNED(2) OFFERING(3)
- ------- ------------ -------------------
<S> <C> <C> <C>
Summit(4)........................................... 5,344,816 40.0% 29.1%
Schroder(5)......................................... 213,791 1.6 1.2
James C. New(6)..................................... 252,007 1.9 1.4
Alan Levin, M.D.(7)................................. 86,125 * *
Leslie B. Rosen, M.D.(8)............................ 79,999 * *
Michael J. Demaray, M.D.(9)......................... 540,000 4.0 2.9
Robert P. Wynn(10).................................. 129,600 * *
Annette L. Bell(11)................................. 3,600 * *
Timothy M. Kilpatrick, M.D.(12)..................... 78,925 * *
Thomas S. Roberts(4)................................ 5,344,816 40.0 29.1
C. Arnold Renschler, M.D............................ -- -- --
E. Roe Stamps, IV(4)................................ 5,344,816 40.0 29.1
All directors and executive officers as a group
(11 persons)(4)(6)(10)............................ 6,515,072 48.0 35.1
</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 13,356,365 shares of Common Stock outstanding prior to this
offering and 18,356,365 shares of Common Stock outstanding immediately
after this offering. Pursuant to the rules of the Securities and Exchange
Commission (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. In addition to the
information contained in footnotes 4, 5, 6, 7 and 8 below, in the event the
over-allotment option is exercised in full, Alexander P. Kowalczyk, M.D.
and Evangelos G. Poulos, M.D., both of whom beneficially own less than 5%
of the outstanding shares of Common Stock, will each sell 31,590 shares of
Common Stock.
(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
5,558,607 shares of Common Stock prior to the consummation of this
offering. See "Certain Transactions."
(4) Includes 2,086,029, 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. 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. In the event the overallotment option is exercised in full,
Summit will sell 360,750 shares of Common Stock and will own 4,984,066
shares of Common Stock, or 27.2%, after the offering.
(5) Includes 47,509.6, 57,010.8 and 14,252.8 shares of Convertible Preferred
Stock held by Schroder Incorporated, Schroder Ventures, L.P., and Schroder
Ventures U.S. Trust, respectively. These shares of Convertible Preferred
Stock will be converted into 213,791 shares of Common Stock prior to
consummation of this offering. The address of Schroder is 1 Beacon Street,
Suite 4500, Boston, Massachusetts 02108. In the event the overallotment
option is exercised in full, Schroder will sell 14,250 shares of Common
Stock and will own 199,541 shares of Common Stock, or 1.1%, 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
overallotment option is exercised in full, Mr. New will sell 50,000 shares
of Common Stock and will beneficially own 202,007 shares of Common Stock,
or 1.1%, after the offering.
(7) Includes 7,200 shares subject to options exercisable within 60 days. Does
not include 28,800 shares subject to presently unexercisable stock options.
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<PAGE> 75
(8) Does not include 25,000 shares subject to presently unexercisable stock
options.
(9) Includes 180,000 shares held in trust for the benefit of members of Dr.
Demaray's family. Dr. Demaray disclaims beneficial ownership with respect
to such shares. In the event the overallotment option is exercised in full,
Dr. Demaray will sell 31,590 shares of Common Stock and will beneficially
own 508,410 shares of Common Stock, or 2.8%, after the offering. In August
1997, Dr. Demaray resigned from his position as a director of AmPath.
(10) Includes 129,600 shares subject to stock options exercisable within 60
days. Excludes 86,400 shares subject to unexercisable options. In the event
the overallotment option is exercised in full, Mr. Wynn will sell 20,000
shares of Common Stock and will own 109,600 shares of Common Stock, or less
than 1%, after the offering.
(11) Includes 3,600 shares subject to presently exercisable options. Excludes
14,400 shares subject to presently unexercisable stock options.
(12) Includes 36,000 shares held in trust for the benefit of members of Dr.
Kilpatrick's family. Dr. Kilpatrick disclaims beneficial ownership with
respect to such shares.
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<PAGE> 76
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 30,000,000 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 September 26, 1997, an
aggregate of 7,797,758 shares of Common Stock were outstanding and held of
record by 82 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. Immediately 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
eliminate the designation of Convertible Preferred Stock and return such shares
to shares of authorized and undesignated 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, following consummation of the offering, up to 5,000,000 shares of
Preferred Stock may be issued from time to time in one or more classes or series
with such designations, powers, preferences, rights, qualifications, limitations
and restrictions as may be fixed by the Board of Directors. The Board of
Directors, without obtaining stockholder approval, could issue the Preferred
Stock with voting and/or conversion rights and thereby dilute the voting power
and equity of the holders of Common Stock and adversely affect the market price
of such stock. Preferred Stock may also be used to delay, defer or prevent a
takeover attempt with respect to the Company. See "Risk Factors -- Anti-Takeover
Provisions; Possible Issuance of Preferred Stock."
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND THE COMPANY'S
CERTIFICATE OF INCORPORATION AND BYLAWS
The Company is subject to the provisions of Section 203 of the DGCL.
Subject to certain exceptions, Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the interested
stockholder attained such status with the approval of the Board of Directors or
unless the business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together
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<PAGE> 77
with affiliates and associates, owns, or within three years did own, 15% or more
of the corporation's voting 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 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 is 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> 78
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, or the perception that such sales may occur, may
have an adverse impact of such market price.
Upon consummation of this offering, the Company will have 18,356,365 shares
of Common Stock outstanding, based upon the number of shares outstanding as of
September 26, 1997. Of these shares, the 5,000,000 shares sold in this offering
(5,750,000 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
As of September 26, 1997, there were 13,356,365 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 one year, 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
183,564 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 two years may resell such
shares without compliance with the foregoing requirements. In meeting the one
and two 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 additional amendments to Rule 144, including the definition of
Affiliate and the holding periods under the rule. The additional proposals have
not yet been adopted by the Commission.
OPTIONS
As of September 26, 1997, options to purchase a total of 1,172,211 shares
of Common Stock were outstanding. All of these shares will be subject to the
Lock-up Agreements. The Company intends to file one or more registration
statements on Form S-8 under the Securities Act to register shares of Common
Stock
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<PAGE> 79
subject to outstanding stock options and Common Stock issuable pursuant to the
Option Plan or the Director Option Plan, with respect to options that were
granted, or are to be granted, to employees of the Company. 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 13,356,365 shares of Common Stock outstanding
immediately prior to this offering and options to purchase an aggregate of
1,172,211 shares of Common Stock have agreed not to, directly or indirectly,
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation, 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 this Prospectus. See "Underwriting."
REGISTRATION RIGHTS
Following the consummation of this offering and subject to the Lock-up
Agreements, Summit and Schroder will be entitled to require the Company to
register under the Securities Act a total of 5,558,607 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 and subject to certain
limitations, including the Lock-up Agreements, 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 of
1,620,000 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 85,998 shares of Common Stock
in such registration, subject to certain limitations, including the Lock-up
Agreements, on the number of shares to be included in the registration by the
underwriter of such offering.
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<PAGE> 80
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
(the "Underwriting Agreement"), the underwriters named below (the
"Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities Corporation,
Morgan Stanley & Co. Incorporated, Smith Barney Inc. and Piper Jaffray Inc. are
serving as representatives (the "Representatives"), have severally agreed to
purchase from the Company an aggregate of 5,000,000 shares of Common Stock. The
number of shares of Common Stock that each Underwriter has agreed to purchase is
set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Morgan Stanley & Co. Incorporated...........................
Smith Barney Inc............................................
Piper Jaffray Inc...........................................
---------
Total............................................. 5,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. The Underwriters are obligated to take and pay
for all the shares of Common Stock offered hereby (other than those covered by
the over-allotment option described below) if any such shares are taken.
Prior to this offering, there has been no established trading market for
the Common Stock. The initial price to the public for the Common Stock set forth
on the cover page of this Prospectus has been determined by negotiations between
the Company and the Representatives. The principal factors considered in
determining the initial price to the public include the information set forth in
this Prospectus and otherwise available to the Representatives, the history of
and the prospects for the industry in which the Company competes, the ability of
the Company's management, the past and present earnings of the Company, the
historical results of operations of the Company, the prospects for future
earnings of the Company, the present state of the Company's development, the
general condition of the securities markets at the time of this offering and the
recent market prices of and the demand for publicly traded common stock of
generally comparable companies.
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 that the Underwriters may be
required to make in respect thereof.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public initially at the
public offering price set forth on the cover page of this Prospectus, and to
certain securities dealers (who may include the Underwriters) at such prices
less a concession not in excess of $ per share. The Underwriters may allow,
and such dealers may re-allow, discounts not in excess of $ per share to any
other Underwriter and certain other dealers.
The Company and the Selling Stockholders have granted to the Underwriters
an option to purchase up to an aggregate of 750,000 additional shares of Common
Stock, at the initial public offering price less the underwriting discounts and
commissions, solely to cover over-allotments. Such option may be exercised at
anytime until 30 days after the date of this Prospectus. To the extent that the
Underwriters exercise such option, each of the Underwriters will be committed,
subject to certain conditions, to purchase a number of option shares
proportionate to such Underwriter's initial commitment as indicated in the
preceding table.
In connection with this offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot this offering,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Common Stock in the open market to cover syndicate short positions. In
addition, the Underwriters may bid for and purchase shares of Common Stock in
the open market to stabilize the price of the Common Stock. These activities may
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<PAGE> 81
stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters are not required to engage in these activities,
and may end these activities at any time.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to 250,000 shares offered hereby for
directors, officers, employees and their relatives and other persons having
certain relationships with the Company. The number of shares of Common Stock
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares which are not so
purchased will be offered by the Underwriters to the general public on the same
basis as the other shares offered hereby.
The Company, its executive officers and directors, the Selling
Stockholders, and certain other stockholders of the Company who in the aggregate
beneficially own substantially all of the outstanding shares of Common Stock
immediately prior to this offering have agreed that, without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation, they will not,
for a period of 180 days after the date of this Prospectus, (a) 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
Common Stock (provided that such shares or securities are currently owned by
such person or are thereafter acquired from the Company) or (b) enter into any
swap or other agreement that transfers, in whole or in part, any of the economic
consequences of ownership of such shares of Common Stock, whether any such
transaction described in clause (a) or (b) above is to be settled by delivery of
Common Stock or such other securities, in cash or otherwise, other than (i) the
sale to the Underwriters of the shares of Common Stock offered hereby; (ii) the
issuance by the Company of shares of Common Stock pursuant to the acquisition of
anatomic pathology practices that has been approved by the Board of Directors or
by an authorized committee thereof; or (iii) the issuance by the Company of
shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date of this Prospectus or disclosed
herein and of which the Underwriters have been advised in writing.
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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., Fort Lauderdale, Florida. Certain legal matters
will be passed upon for the Underwriters by Alston & Bird LLP, Atlanta, GA.
EXPERTS
The consolidated financial statements and the related consolidated
financial statement schedule of AmeriPath, Inc. as of December 31, 1995 and 1996
and for each of the three years in the period ended December 31, 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, 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, of Unipath Ltd. and Affiliates as of and for the years
ended June 30, 1996 and 1997, and of CoLab Incorporated Professional
Corporation, MicroDiagnostics, P.C. and Anatomical Pathology Services, P.C. as
of December 31, 1996 and June 30, 1997 and for the year ended December 31, 1996
and the six months ended June 30, 1997, 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. as of and 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> 83
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.
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by its independent public
accountants and quarterly reports for the first three quarters of each fiscal
year containing unaudited consolidated financial information.
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<PAGE> 84
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, 1995 and 1996
and June 30, 1997 (Unaudited)............................. F-5
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 and the Six Months Ended
June 30, 1996 and 1997 (Unaudited)........................ F-6
Consolidated Statements of Convertible Preferred and
Redeemable Common Stock and Common Stockholders' Equity
(Deficit) for the years ended December 31, 1994, 1995 and
1996 and the Six Months Ended June 30, 1997 (Unaudited)... F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 and the Six Months Ended
June 30, 1996 and 1997 (Unaudited)........................ F-8
Notes to Consolidated Financial Statements.................. F-9
ACQUIRED BUSINESSES
DEMARAY AND POULOS, P.A.
Independent Auditors' Report................................ F-30
Balance Sheets as of December 31, 1994 and 1995............. F-31
Statements of Operations and Retained Earnings for the years
ended December 31, 1994 and 1995.......................... F-32
Statements of Cash Flows for the years ended December 31,
1994 and 1995............................................. F-33
Notes to Financial Statements............................... F-34
AMAZON AND ROSEN, M.D., P.A. D/B/A FLORIDA PATHOLOGY
ASSOCIATES
Independent Auditors' Report................................ F-37
Balance Sheets as of December 31, 1994 and 1995 and June 30,
1996...................................................... F-38
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-39
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-40
Notes to Financial Statements............................... F-41
DERRICK AND ASSOCIATES PATHOLOGY, INC.
Independent Auditors' Report................................ F-45
Balance Sheets as of December 31, 1994 and 1995 and June 30,
1996...................................................... F-46
Statements of Operations for the years ended December 31,
1994 and 1995 and the Six Months Ended June 30, 1995
(Unaudited) and 1996...................................... F-47
Statements of Shareholders' Equity for the years ended
December 31, 1994 and 1995 and the Six Months Ended June
30, 1996.................................................. F-48
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-49
Notes to Financial Statements............................... F-50
SKINPATH, P.C.
Independent Auditors' Report................................ F-56
Balance Sheets as of December 31, 1995 and July 31, 1996.... F-57
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-58
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-59
Notes to Financial Statements............................... F-60
</TABLE>
F-1
<PAGE> 85
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PATHOLOGY ASSOCIATES, P.S.C. AND TECHNICAL PATHOLOGY
SERVICES, INC.
Independent Auditors' Report................................ F-64
Combined Balance Sheets as of December 31, 1994 and 1995 and
July 31, 1996............................................. F-65
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-66
Combined Statements of Stockholders' Equity for the years
ended December 31, 1994 and 1995 and the Seven Months
Ended July 31, 1996....................................... F-67
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-68
Notes to Combined Financial Statements...................... F-69
VOLUSIA PATHOLOGY GROUP, M.D., P.A.
Independent Auditors' Report................................ F-74
Balance Sheets as of December 31, 1994 and 1995 and
September 30, 1996........................................ F-75
Statements of Operations for the years ended December 31,
1994 and 1995 and the Nine Months Ended September 30, 1995
(Unaudited) and 1996...................................... F-76
Statements of Shareholders' Equity for the years ended
December 31, 1994 and 1995 and the Nine Months Ended
September 30, 1996........................................ F-77
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-78
Notes to Financial Statements............................... F-79
DAVID R. BARRON, M.D., INC. D/B/A RICHFIELD LABORATORY OF
DERMATOPATHOLOGY
Independent Auditors' Report................................ F-83
Balance Sheets as of December 31, 1995 and September 30,
1996...................................................... F-84
Statements of Operations for the year ended December 31,
1995 and the Nine Months Ended September 30, 1995
(Unaudited) and 1996...................................... F-85
Statements of Stockholders' Equity for the year ended
December 31, 1995 and the Nine Months Ended September 30,
1996...................................................... F-86
Statements of Cash Flows for the year ended December 31,
1995 and the Nine Months Ended September 30, 1995
(Unaudited) and 1996...................................... F-87
Notes to Financial Statements............................... F-88
BENO MICHEL, M.D., INC. D/B/A CUTANEOUS PATHOLOGY &
IMMUNOFLUORESCENSE LABORATORY
Independent Auditors' Report................................ F-91
Balance Sheets as of December 31, 1994 and 1995 and
September 30, 1996........................................ F-92
Statements of Operations for the years ended December 31,
1994 and 1995 and the Nine Months Ended September 30, 1995
(Unaudited) and 1996...................................... F-93
Statements of Stockholders' Equity for the years ended
December 31, 1994 and 1995 and the Nine Months Ended
September 30, 1996........................................ F-94
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-95
Notes to Financial Statements............................... F-96
DRS. SEIDENSTEIN, LEVINE & ASSOCIATES, P.A.
Independent Auditors' Report................................ F-99
Balance Sheets as of December 31, 1994 and 1995 and
September 30, 1996........................................ F-100
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-101
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-102
Notes to Financial Statements............................... F-103
</TABLE>
F-2
<PAGE> 86
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CLAY J. COCKERELL, M.D., P.A. AND FREEMAN-COCKERELL
LABORATORIES, INC.
Independent Auditors' Report................................ F-107
Combined Balance Sheets as of December 31, 1994 and 1995 and
September 30, 1996........................................ F-108
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-109
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-110
Notes to Combined Financial Statements...................... F-111
FERNANDEZ AND KALEMERIS, P.A. D/B/A GULF COAST PATHOLOGY
ASSOCIATES
Independent Auditors' Report................................ F-115
Balance Sheets as of December 31, 1995 and September 30,
1996...................................................... F-116
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-117
Statements of Cash Flows for the year ended December 31,
1995 and the Nine Months Ended September 30, 1995
(Unaudited) and 1996...................................... F-118
Notes to Financial Statements............................... F-119
UNIPATH LTD. AND AFFILIATES
Independent Auditors' Report................................ F-123
Combined Balance Sheets as of June 30, 1996 and 1997........ F-124
Combined Statements of Operations for the years ended June
30, 1996 and 1997......................................... F-125
Combined Statements of Equity for the years ended June 30,
1996 and 1997............................................. F-126
Combined Statements of Cash Flows for the years ended June
30, 1996 and 1997......................................... F-127
Notes to Combined Financial Statements...................... F-128
COLAB INCORPORATED PROFESSIONAL CORPORATION, MICRODIAGNOSTICS, P.C.
AND ANATOMICAL PATHOLOGY
SERVICES, P.C.
Independent Auditors' Report................................ F-132
Combined Balance Sheets as of December 31, 1996 and June 30,
1997...................................................... F-133
Combined Statements of Operations and Retained Earnings for
the year ended December 31, 1996 and the Six Months Ended
June 30, 1997............................................. F-134
Combined Statements of Cash Flows for the year ended
December 31, 1996 and the Six Months Ended June 30,
1997...................................................... F-135
Notes to Combined Financial Statements...................... F-136
</TABLE>
F-3
<PAGE> 87
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, 1995 and 1996 and the
related consolidated statements of operations, convertible preferred and
redeemable common stock and common stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 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, 1995
and 1996 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Fort Lauderdale, Florida
March 6, 1997
F-4
<PAGE> 88
AMERIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------ JUNE 30, JUNE 30,
1995 1996 1997 1997
------- -------- ------------ ------------
(UNAUDITED)
(UNAUDITED) (NOTE 2)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 58 $ 2,262 $ 1,035 $ 1,035
Accounts receivable, net.................................. 2,114 14,691 16,213 16,213
Inventories............................................... 162 269 290 290
Other current assets...................................... 130 1,012 1,082 1,082
------- -------- -------- --------
Total current assets................................ 2,464 18,234 18,620 18,620
------- -------- -------- --------
PROPERTY AND EQUIPMENT, NET................................. 1,460 3,932 5,337 5,337
------- -------- -------- --------
OTHER ASSETS:
Deferred tax asset........................................ 912
Goodwill, net............................................. 3,987 57,385 60,134 60,134
Identifiable intangibles, net............................. 10,915 74,099 72,533 72,533
Other..................................................... 296 4,204 4,707 4,707
------- -------- -------- --------
Total other assets.................................. 16,110 135,688 137,374 137,374
------- -------- -------- --------
TOTAL ASSETS........................................ $20,034 $157,854 $161,331 $161,331
======= ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 1,027 $ 9,890 $ 10,667 $ 10,667
Current portion of long-term debt......................... 1,762 1,604 1,604
Deferred tax liability.................................... 1,307 1,277 1,277
------- -------- -------- --------
Total current liabilities........................... 1,027 12,959 13,548 13,548
LONG-TERM LIABILITIES:
Revolving loan............................................ 4,146 81,652 17,308 17,308
Senior term loan.......................................... 65,000 65,000
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........................................ 2,825 2,334 2,334
Dividend payable -- Convertible Preferred Stock........... 1,206
Deferred tax liability.................................... 18,298 17,898 17,898
------- -------- -------- --------
Total liabilities................................... 16,173 126,734 127,088 128,294
------- -------- -------- --------
COMMITMENTS AND CONTINGENCIES (Notes 3, 10 and 13)
CONVERTIBLE PREFERRED STOCK
Series A 6% Redeemable Cumulative Convertible Preferred
Stock -- $.01 par value, 5,000 shares authorized; 3,208
and 3,088 shares issued and outstanding at December 31,
1995 and 1996 and June 30, 1997, respectively; $6,502
minimum aggregate liquidation preference at June 30,
1997.................................................... 6,085 6,217 6,406
------- -------- -------- --------
REDEEMABLE COMMON STOCK
1,494 shares issued and outstanding at December 31, 1996
and June 30, 1997......................................... -- 12,210 12,210 12,210
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value, 30,000 shares authorized,
1,426, 4,299, 4,390 and 9,949 shares issued and
outstanding at December 31, 1995, 1996 and June 30, 1997
and pro forma, respectively............................. 14 43 44 99
Additional paid-in capital................................ (3,605) 9,898 10,718 15,863
Note receivable from officer.............................. (270) (270) (270)
Retained earnings......................................... 1,367 3,022 5,135 5,135
------- -------- -------- --------
Total common stockholders' equity (deficit)......... (2,224) 12,693 15,627 20,827
------- -------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)........ $20,034 $157,854 $161,331 $161,331
======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 89
AMERIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue:
Patient services.......................................... $14,461 $16,024 $41,516 $ 9,690 $42,830
Management service agreement.............................. 1,042 -- 2,014
------- ------- ------- ------- -------
Total............................................... 14,461 16,024 42,558 9,690 44,844
------- ------- ------- ------- -------
Operating costs:
Cost of services.......................................... 7,026 8,517 20,106 4,708 20,313
Selling, general and administrative expense............... 2,287 2,644 8,483 1,822 8,564
Provision for doubtful accounts........................... 1,003 1,161 3,576 645 4,116
Amortization expense...................................... 678 678 1,958 304 2,410
Loss on cessation of clinical lab operations.............. 910 910 --
------- ------- ------- ------- -------
Total............................................... 10,994 13,000 35,033 8,389 35,403
------- ------- ------- ------- -------
Income from operations...................................... 3,467 3,024 7,525 1,301 9,441
Interest expense............................................ (1,584) (1,504) (3,540) (767) (4,057)
Non-recurring charge........................................ (1,289)
Other income (expense), net................................. (46) (46) (431) (201) (57)
------- ------- ------- ------- -------
Income before income taxes.................................. 1,837 1,474 3,554 333 4,038
Provision for income taxes.................................. 692 572 1,528 127 1,736
------- ------- ------- ------- -------
Net income.................................................. $ 1,145 $ 902 $ 2,026 $ 206 $ 2,302
======= ======= ======= ======= =======
Pro forma net income per share information (unaudited):
Pro forma net income per share............................ $ 0.22 $ 0.19
======= =======
Pro forma weighted average common and common equivalent
shares outstanding...................................... 9,378 12,066
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 90
AMERIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED AND
REDEEMABLE COMMON STOCK
AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE REDEEMABLE COMMON
PREFERRED STOCK COMMON STOCK STOCK
--------------- ------------------------- --------------- ADDITIONAL RETAINED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PAID-IN CAPITAL EARNINGS
------ ------ --------------- ------- ------ ------ --------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock...... 1,426 $14 $ 986
Issuance of Convertible
Preferred Stock............. 3,208 $5,500
Cost of issuance.............. (95) (17)
Excess purchase price deemed
distributed to the PDK
shareholders................ (4,574)
Accrued dividends on
Convertible Preferred
Stock....................... 330 $ (330)
Net income.................... 1,145
----- ------ ------ ------- ------ --- ------- ------
BALANCES, DECEMBER 31, 1994..... 3,208 5,735 1,426 14 (3,605) 815
Accrued dividends on
Convertible Preferred
Stock....................... 350 (350)
Net income.................... 902
----- ------ ------ ------- ------ --- ------- ------
BALANCES, DECEMBER 31, 1995..... 3,208 6,085 1,426 14 (3,605) 1,367
Conversion of Convertible
Preferred Stock to common
stock....................... (120) (207) 216 2 205
Dividends paid on Convertible
Preferred Stock converted... (32)
Settlement of ALA Contingent
Notes....................... 194 2 240
Stock issued in connection
with 1996 Acquisitions...... 1,494 $12,210 2,377 24 12,595
Stock issued for loan fees.... 86 1 463
Accrued dividends on
Convertible Preferred
Stock....................... 371 (371)
Net income.................... 2,026
----- ------ ------ ------- ------ --- ------- ------
BALANCES, DECEMBER 31, 1996..... 3,088 6,217 1,494 12,210 4,299 43 9,898 3,022
Accrued dividends on
Convertible Preferred Stock
(unaudited)................. 189 (189)
Stock issued in connection
with the 1996 Acquisitions
(unaudited)................. 91 1 820
Net income (unaudited)........ 2,302
----- ------ ------ ------- ------ --- ------- ------
BALANCES, JUNE 30, 1997
(UNAUDITED)................... 3,088 $6,406 1,494 $12,210 4,390 $44 $10,718 $5,135
===== ====== ====== ======= ====== === ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 91
AMERIPATH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------------- -------------------
1994 1995 1996 1996 1997
-------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 1,145 $ 902 $ 2,026 $ 206 $ 2,302
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization...................... 1,265 1,253 3,056 654 3,179
(Gain) loss on disposal of assets.................. (10) 28 775 746 (29)
Deferred income taxes.............................. 374 243 (950)
Provision for doubtful accounts.................... 1,003 1,161 3,576 645 4,116
Non-recurring charge............................... 1,289
Changes in assets and liabilities:
Increase in accounts receivable.................. (1,354) (1,534) (3,766) (346) (5,639)
(Increase) decrease in inventories............... (49) 6 (107) 89 (21)
(Increase) decrease in other current assets...... (166) 39 (632) (7) (70)
(Increase) decrease in other assets.............. (37) 21 (1,426) (143) 966
Increase (decrease) in accounts payable and
accrued expenses.............................. 154 183 (2,001) (137) 21
-------- ------- -------- -------- --------
Net cash flows provided by operating
activities.................................. 2,325 2,302 551 1,707 6,114
-------- ------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment................ (492) (488) (996) (313) (1,983)
Purchase of subsidiaries, net of cash acquired....... (20,189) (73,073) (21,379) (1,275)
Payments of contingent notes......................... (1,444)
-------- ------- -------- -------- --------
Net cash flows used in investing activities... (20,681) (488) (74,069) (21,692) (4,702)
-------- ------- -------- -------- --------
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) (250) (973)
Deferred offering costs.............................. (992) (1,591)
Principal payments on long-term debt................. (1,021) (240) (731)
Borrowing under senior term loan..................... 65,000
Net borrowings (payments) under revolving loan....... 77,506 21,224 (64,344)
Note receivable from officer......................... (270) (270)
Dividends paid to convertible preferred
stockholders....................................... (32) (32)
-------- ------- -------- -------- --------
Net cash flows provided by (used in) financing
activities.................................. 18,459 (1,859) 75,722 20,922 (2,639)
-------- ------- -------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 103 (45) 2,204 937 (1,227)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......... 103 58 58 2,262
-------- ------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD............... $ 103 $ 58 $ 2,262 $ 995 $ 1,035
======== ======= ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................. $ 1,540 $ 1,504 $ 2,856 $ 483 $ 4,219
Income taxes......................................... $ 409 $ 63 $ 2,835 $ 274 $ 1,983
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 92
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
1. BUSINESS AND ORGANIZATION
AmeriPath, Inc. was incorporated in February 1996 to be the leading
physician practice management company focused on providing anatomic
pathology services. The Company provides physician practice management
services to pathologists in both outpatient and hospital inpatient
laboratories, with particular focus on dermatopathology (pathology related
to diseases of the skin). Unless the context otherwise requires, references
to the Company or AmeriPath include AmeriPath, Inc., and subsidiaries,
including American Laboratory Associates, Inc. ("ALA").
Such services are provided under contractual arrangements with hospitals
and in free-standing, independent laboratory settings. The contractual
arrangements with hospitals vary, but essentially provide that, in exchange
for physician representatives of the Company serving as the medical
director of a hospital's anatomic and clinical laboratory operations, the
Company is able to bill and collect the professional component of the
charges for medical services rendered by the Company's health care
professionals. In some cases, the Company is also paid an annual fee for
providing the medical director for the hospital laboratory. The Company
also owns and operates outpatient pathology laboratories, for which it is
able to bill patients and third party payors, principally on a
fee-for-service basis, covering both the professional and technical
components of such services. In addition, the Company contracts directly
with national clinical laboratories and managed care organizations,
principally on a fee-for-service basis.
ALA was organized in December 1993 to acquire the net assets of E.G.
Poulos, M.D., M.J. Demaray, M.D., and A.P. Kowalczyk, M.D., P.A. ("PDK"), a
full service reference laboratory providing clinical laboratory testing and
anatomic pathology services, principally dermatopathology. In connection
with its capitalization, ALA issued 1,425,600 shares of common stock to the
PDK shareholders for $1,000 in cash and 3,208,120 shares of voting Series A
6% Redeemable Cumulative Convertible Preferred Stock (the "Convertible
Preferred Stock") to Summit Ventures III, L.P., Summit Subordinated Debt
Fund, L.P. and Summit Investors II, L.P. (collectively, "Summit") and
Schroder Incorporated, Schroder Ventures Limited Partnership and Schroder
Ventures U.S. Trust (collectively, "Schroder"), 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
fund a portion of the acquisition of PDK. The Company also paid a financing
fee of $190 to Summit.
Effective January 1, 1994, ALA acquired the net assets of PDK (the "1994
Acquisition") for approximately $20,511 in cash, the issuance of $3,500 8%
Senior Subordinated Notes (the "Senior Notes") due in 1998, and the
issuance of 8% Subordinated Contingent Notes (the "ALA Contingent Notes")
in the maximum principal amount of $2,500 to the owners of PDK (See Note
13). The acquisition of the net assets of PDK was accounted for using the
purchase method of accounting. The purchase price was allocated to the net
assets acquired based on the fair values at the date of acquisition as
determined by management based on an independent consultant's report. The
PDK shareholders held approximately 20% of the voting interests and served
as the management group of the Company following the acquisition.
Accordingly, 20% of the purchase price in excess of the carryover basis of
the PDK shareholders, or $4,574, was deemed to be a distribution to the PDK
shareholders. Such amount was not allocated to the net assets acquired and
was charged to additional paid-in capital in accordance with Emerging
Issues Task Force No. 88-16. Such excess is shown as "Excess purchase price
deemed distributed to the PDK shareholders" in stockholders' equity. In
addition to the PDK shareholders, the shareholders of the Company included
Summit and Schroder holding approximately 77% and 3%, respectively of the
voting interests at the date of the acquisition.
F-9
<PAGE> 93
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
As a result of the allocation of purchase price, approximately $4,271 was
allocated to goodwill as follows:
<TABLE>
<S> <C>
Purchase price.............................................. $24,011
Less -- Excess purchase price deemed distributed to PDK
shareholders.............................................. (4,574)
-------
19,437
-------
Net assets acquired:
Working capital........................................... 402
Property and equipment, net............................... 1,521
Identifiable intangible assets............................ 11,987
Long-term debt............................................ (274)
Deferred income taxes..................................... 1,530
-------
15,166
-------
Goodwill arising from 1994 Acquisition...................... $ 4,271
=======
</TABLE>
Subsequent to the 1994 Acquisition, and in connection with the formation of
the Company in February 1996, the shareholders of ALA and AmeriPath entered
into a series of exchange transactions, whereby the equity interests held
in ALA were exchanged for identical interests in the Company. The
operations of ALA are now conducted through a wholly-owned subsidiary of
the Company, AmeriPath Florida, Inc.
On August 1, 1994, the Company effected a 40 for 1 stock split for its
common and preferred stock in the form of a stock dividend. The effect of
such stock split is reflected in all common and preferred share amounts.
On January 13, 1997, the Company effected a 1.8 for 1 stock split for its
common stock in the form of a stock dividend. The effect of such stock
split is reflected in all common share amounts.
On April 30, 1997, the authorized shares of common stock were increased to
30,000,000.
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., its wholly-owned subsidiaries, and two companies in which the Company
has the controlling financial interest by means other than direct record
ownership of voting stock, as discussed in Note 3. All significant
intercompany accounts and transactions have been eliminated.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim consolidated financial statements and the related information
in these notes as of June 30, 1997 and for the six months ended June 30,
1996 and 1997 are unaudited. Such interim consolidated financial statements
have been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of management, reflect all adjustments
(including normal accruals) necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim
periods presented. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for
the full year.
ACCOUNTING 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
F-10
<PAGE> 94
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
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 Credit
Facility 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 Credit
Facility bears interest at a variable market rate, and thus has a carrying
amount that approximates fair value.
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 December 31, 1995,
1996 and June 30, 1997 was $10,400, $10,900 and $10,955, respectively.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid instruments with maturities at
the time of purchase of three months or less.
INVENTORIES
Inventories, consisting of laboratory supplies, are stated at the lower of
cost, determined on a first-in-first-out basis, or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment under capital leases
is stated at the net present value of the future minimum lease payments at
the inception of the related leases. Routine maintenance and repairs are
charged to expense as incurred, while cost of betterments and renewals are
capitalized.
Depreciation and amortization are calculated on a straight-line basis and
accelerated methods, over the estimated useful lives of the respective
assets which lives range from 3 to 7 years. Leasehold improvements are
amortized over the shorter of the term of the related lease, including
renewal options, or the useful life of the asset (20 years).
INTANGIBLE ASSETS
Identifiable intangible assets include hospital contracts, physician
referral lists, a management service agreement and laboratory contracts
acquired in connection with acquisitions. Such assets, except the
management service agreement, are recorded at fair value on the date of
acquisition as determined by management based on independent consultants'
reports and are being amortized over the estimated periods to be benefited,
ranging from 10 to 40 years. The management service agreement was assigned
a value equal to the excess of the cost over the fair value of the acquired
net assets and is being amortized over 25 years.
F-11
<PAGE> 95
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
Goodwill relates to the excess of cost over the fair value of net assets of
the businesses acquired. Amortization is calculated on a straight line
basis over periods ranging from 15 to 35 years. The overall business
strategy of the Company includes the acquisition and integration of
independent pathology practices and related support services. The Company
believes that this strategy creates synergies, achieves operating
efficiencies and responds to the cost containment objectives of payors, all
of which will provide benefits for the foreseeable future.
Management assesses on an ongoing basis if there has been an impairment in
the carrying value of its intangible assets. If the undiscounted future
cash flows over the remaining amortization period of the respective
intangible asset indicates that the value assigned to the intangible asset
may not be recoverable, the carrying value of the respective intangible
asset will be reduced. The amount of any such impairment would be
determined by comparing anticipated discounted future cash flows from
acquired businesses with the carrying value of the related assets. In
performing this analysis, management considers such factors as current
results, trends and future prospects, in addition to other relevant
factors.
DEFERRED DEBT ISSUANCE COSTS
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 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, net of allowances, as of December 31, 1996 and June
30, 1997 amounted to approximately $2,202 and $1,778, respectively.
Unbilled receivables as of December 31, 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.
F-12
<PAGE> 96
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
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. Adoption of the statement in 1996 did not have a material effect on
the Company's financial statements.
In February 1997, SFAS No. 128, "Earnings Per Share," was issued. SFAS No.
128, which supersedes Accounting Principles Board ("APB") Opinion No. 15,
requires a dual presentation of basic and diluted earnings per share on the
face of the income statement. Basic earnings per share excludes dilution
and is computed by dividing income or loss attributable to common
stockholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity. Diluted
earnings per share is computed similarly to fully diluted earnings per
share under APB Opinion No. 15. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods; earlier application is not permitted.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and
losses) in a full set of general-purpose financial statements. SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS No. 130 requires that a company (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of the balance sheet. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. The Company
has not determined the effects, if any, that SFAS No. 130 will have on its
consolidated financial statements.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," was issued. SFAS No. 131 establishes standards
for the way that public companies report selected information about
operating segments in annual financial statements and requires that those
companies report selected information about segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. SFAS No. 131, which supersedes SFAS No. 14, "Financial Reporting
for Segments of a Business Enterprise," but retains the requirement to
report information about major customers, requires that a public company
report financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how
F-13
<PAGE> 97
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
to allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 requires that a public company report a
measure of segment profit or loss, certain specific revenue and expense
items, and segment assets. However, SFAS No. 131 does not require the
reporting of information that is not prepared for internal use if reporting
it would be impracticable. SFAS No. 131 also requires that a public company
report descriptive information about the way that the operating segments
were determined, the products and services provided by the operating
segments, differences between the measurements used in reporting segment
information and those used in the enterprise's general-purpose financial
statements, and changes in the measurement of segment amounts from period
to period. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. The Company has not determined the
effects, if any, that SFAS No. 131 will have on the disclosures in its
consolidated financial statements.
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
The unaudited pro forma consolidated balance sheet at June 30, 1997 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 June 30, 1997. Prior to the completion of the offering, the
holders of all outstanding Convertible Preferred Stock will convert such
shares into 5,558,607 shares of common stock of the Company. Accrued
dividends of $1,206 as of June 30, 1997 will be payable upon conversion of
the Convertible Preferred Stock.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
3. ACQUISITIONS
1996 ACQUISITIONS
In 1996 the Company completed eleven acquisitions of or affiliations with
(the "1996 Acquisitions") anatomic pathology practices (the "Practices").
The consideration given by the Company in the 1996 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 1996 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 to pay additional purchase price consideration to
the sellers of the Practices in proportion to their respective ownership
interest in each Practice. The additional payments are contingent upon the
achievement of stipulated levels of operating earnings (as defined) by each
of the Practices over
F-14
<PAGE> 98
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
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, including principal and interest, of
$37,720 over the next 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 additional purchase price for the Practices.
The total consideration paid by the Company in the 1996 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). The following table presents for each 1996 Acquisition, the date
of acquisition or affiliation, the total consideration paid, excluding the
contingent payments, if any, the number of shares of Common Stock issued by
the Company, and the maximum contingent payments.
<TABLE>
<CAPTION>
MAXIMUM
CONTINGENT
PAYMENTS
DATE TOTAL ----------------
ACQUIRED CONSIDERATION COMMON STOCK PERIOD
IN 1996 PAID ISSUED (SHARES) (YEARS) AMOUNT
----------- ------------- --------------- ------- -------
<S> <C> <C> <C> <C> <C>
Demaray and Poulos, P.A..................... January 1 $ 1,679
Derrick and Associates Pathology, Inc....... July 1 16,844 1,080,009 5 $ 9,680
Amazon and Rosen, M.D., P.A................. July 1 6,333 119,999 5 2,420
SkinPath, P.C............................... August 1 5,275 207,000 3 342
Pathology Associates, P.S.C................. August 1 6,795 107,399 5 908
Freeman-Cockerell Laboratories, Inc......... October 1 4,806 90,000 5 1,271
Volusia Pathology Group, M.D., P.A.......... October 3 7,344 169,814 5 2,228
David R. Barron, M.D., Inc.................. October 4 17,700 455,999 5 4,114
Drs. Seidenstein, Levine & Associates,
P.A....................................... October 10 15,657 477,721 5 6,881
Beno Michel, M.D., Inc...................... October 15 8,833 262,800 3 1,710
Fernandez & Kalemeris, M.D., P.A............ November 1 16,700 900,000 5 8,166
</TABLE>
The agreements related to five of the acquisitions contain provisions which
would require the Company to repurchase the common stock issued in the
acquisitions, aggregating 1,493,520 shares, for $8.33 per share if the
Company has not completed an initial public offering of its common stock
within specified periods ranging from three to five years from the date of
acquisition, such common stock is presented in the consolidated financial
statements as Redeemable Common Stock.
In the six months ended June 30, 1997, the Company issued an additional
91,201 shares of common stock, valued at $821, and made other purchase
price adjustments of $1,246 in connection with certain post-closing
adjustments. Additionally, the Company made payments and accruals of
contingent consideration amounting to $1,526 relating to the 1996
Acquisitions.
The Company does not have technical majority ownership of the common stock
of David R. Barron, M.D., Inc. ("Richfield Labs") and Beno Michel, M.D.,
Inc. ("CPI"). All of the common stock of each of these companies is held in
trust. AmeriPath is the sole beneficiary of each trust and receives all
income from the trusts. The Company, at its sole discretion, can replace
the trustees, withdraw any asset from the trusts, modify the terms of the
trust agreements, or terminate the trusts, and direct the trustees to
distribute income and any asset from the trusts. No assets of the trusts
can be sold or otherwise disposed of without AmeriPath's consent.
Additionally, a wholly-owned subsidiary of the Company entered into 40-year
management agreements with each of Richfield Labs and CPI, under which such
subsidiary
F-15
<PAGE> 99
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
provides all management and other non-medical services to Richfield Labs
and CPI for a fee equal to the practice's net revenue less practice
expenses, including physician salaries, which are fixed by employment
agreements, and related professional expenses. Therefore, the Company is
entitled to all of the net income of these practices. Based on the
provisions of the purchase agreements, trust agreements and management
agreements, consolidation of Richfield Labs and CPI is required to present
the Company's financial position and results of operations in conformity
with generally accepted accounting principles because the Company has the
controlling financial interest in Richfield Labs and CPI by means other
than direct record ownership of voting stock. Accordingly, these
acquisitions are accounted for as purchase business combinations and
included in the consolidated financial statements.
In connection with the acquisition of Freeman-Cockerell Laboratories, Inc.,
a wholly-owned subsidiary of the Company (the "PA Contractor Subsidiary")
and Clay J. Cockerell, M.D., P.A. (the "Texas PA Contractor") have entered
into a 40-year management service agreement under which the PA Contractor
Subsidiary provides, on an exclusive basis, the technical laboratory
services, management and all other non-medical practice services to the
Texas PA Contractor. The PA Contractor Subsidiary employs all of the
technical employees and owns all of the laboratory facilities, testing
equipment and other assets used in connection with the pathology services
performed by the Texas PA Contractor's physicians. The Texas PA
Contractor's payments to the Company under this management service
agreement are comprised of the reimbursement of the costs and expenses for
providing services, a base fee and a performance fee based on the
achievement of goals and objectives established annually. Assuming the PA
Contractor Subsidiary achieves its goals and objectives, such fees will
result in the Company receiving substantially all net revenue less practice
expenses of the Texas PA Contractor. Practice expenses include physician
salaries which are fixed by employment agreement and related professional
expenses. Therefore, the Company is the direct beneficiary of substantially
all of the net income of the Texas PA Contractor which is reported as
management service agreement revenue in the consolidated statement of
operations. Although the Texas PA Contractor is not included in the
consolidated financial statements, the net revenue and expenses of the
Texas PA Contractor are displayed in Note 4.
Under the terms of the acquisition agreement, the sole shareholder of the
Texas PA Contractor is prohibited from selling, assigning or disposing of
the common stock of the Texas PA Contractor prior to September 30, 1997,
except that at the direction of the Company, without further consideration,
such shareholder is required to transfer ownership of the shares of the
Texas PA Contractor to, or merge the Texas PA Contractor into, a Texas
5.01(a) non-profit corporation (the "501(a) corporation"). The Company is
in the process of forming the 501(a) corporation of which the Company will
be the sole member. The formation of the 501(a) corporation is subject to
review by Texas regulatory authorities. Members of the board of directors
of the 501(a) corporation may be appointed by, and may be removed by, the
sole member, which will be the Company. The Company expects to complete the
formation of the 501(a) corporation and the transfer of the business of the
Texas PA Contractor on or about September 30, 1997. Upon such transfer, the
Company will have direct voting control over the 501(a) corporation and,
subsequent to such transfer, will consolidate the financial statements of
the 501(a) corporation in the Company's consolidated financial statements.
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. When the Company obtains final
information, management believes that adjustments, if any, 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.
F-16
<PAGE> 100
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
The accompanying consolidated financial statements include the results of
operations of the 1996 Acquisitions from the date acquired through December
31, 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 1996 Acquisitions for the year ended December 31, 1995 and
1996 after giving effect to amortization of goodwill and identifiable
intangible assets, interest expense on the long-term debt incurred in
connection with the 1996 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 1996 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 1996
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, 1995
and 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,
------------------
1995 1996
------- -------
<S> <C> <C>
Net revenue................................................. $83,188 $86,784
======= =======
Net income.................................................. $ 5,467 $ 5,220
======= =======
Net income per share........................................ $ .45 $ .43
======= =======
</TABLE>
Common and common equivalent shares used in calculating net income per
share include the effects of the planned conversion of the Convertible
Preferred Stock as discussed in Note 19.
1997 ACQUISITIONS
The Company completed acquisitions of or affiliations with three anatomic
pathology practices subsequent to June 30, 1997. The total consideration
paid by the Company in connection with these acquisitions included cash of
$58,863 and 1,910,808 shares of common stock (aggregate estimated value of
$19,229). In addition, the Company agreed to pay additional purchase price
consideration in the form of contingent notes. The additional payments are
contingent upon the achievement of stipulated levels of cumulative
operating earnings (as defined) over a five year period. If the maximum
specified levels of cumulative operating earnings for each Practice are
achieved, the Company would be required to make aggregate maximum payments,
including principal and interest of $62,132 over the next three to five
years.
4. ACCOUNTS RECEIVABLE AND NET REVENUE
Accounts receivable are recorded at net realizable value. The allowance for
contractual and other adjustments are estimated based on the differences
between established rates and the amounts the Company expects to collect
from third party payors. The allowance for uncollectible accounts is based
on historical experience and judgments about future events. Accordingly,
the actual amounts experienced could vary significantly from the recorded
allowances.
F-17
<PAGE> 101
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Gross accounts receivable................................... $ 4,037 $30,841 $ 34,163
Less: Allowance for contractual and other adjustments....... (908) (5,672) (6,804)
Allowance for uncollectible accounts.................. (1,015) (10,478) (11,146)
------- ------- --------
Accounts receivable, net.................................... $ 2,114 $14,691 $ 16,213
======= ======= ========
</TABLE>
The Company grants credit without collateral to individual patients, most
of whom are insured under third party payor agreements. The estimated mix
of receivables from patients and third-party payors are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1995 1996 1997
----- ----- --------
<S> <C> <C> <C>
Government programs....................................... 45.7% 35.2% 36.0%
Third-party payors........................................ 27.6 41.9 35.3
Private pay patients...................................... 15.3 17.7 20.3
Other..................................................... 11.4 5.2 8.4
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Net patient services revenue consisted of the following:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
------------------------------ JUNE 30,
1994 1995 1996 1997
------- ------- -------- ----------
<S> <C> <C> <C> <C>
Gross revenue.................................... $17,027 $19,121 $ 56,381 $ 59,324
Less contractual and other adjustments........... (2,566) (3,097) (14,865) (16,494)
------- ------- -------- --------
Net patient services revenue............ $14,461 $16,024 $ 41,516 $ 42,830
======= ======= ======== ========
</TABLE>
A significant portion of the Company's net revenue is generated by the
hospital-based practices through contracts with 47 hospitals, primarily as
a result of the 1996 Acquisitions discussed in Note 3. Columbia Healthcare
Corporation owns 20 of these hospitals. For the year ended December 31,
1996 and the six months ended June 30, 1997, approximately 19.0% and 22.0%,
respectively of net revenue was generated directly from contracts with
hospitals owned by Columbia. 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.
F-18
<PAGE> 102
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
The components of management service agreement revenue, and the net revenue
and expenses from the date of affiliation (October 1, 1996) to December 31,
1996 and for the six months ended June 30, 1997 of Freeman-Cockerell, the
Texas PA, are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1996 1997
------ --------
<S> <C> <C>
Texas PA:
Net revenue............................................... $1,143 $2,494
Practice expenses......................................... 101 480
------ ------
Management service agreement revenue.............. $1,042 $2,014
====== ======
Components of management service agreement revenue:
Reimbursement of expenses and overhead.................... $ 878 $1,640
Base management fee....................................... 100 200
Performance fee........................................... 64 174
------ ------
Total............................................. $1,042 $2,014
====== ======
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIFE ----------------- JUNE 30,
(YEARS) 1995 1996 1997
----------- ------ ------- --------
<S> <C> <C> <C> <C>
Laboratory and data processing.............. 5 $1,617 $ 4,993 $5,795
Leasehold improvements...................... 20 413 1,038 1,153
Furniture and fixtures...................... 7 197 1,006 1,636
Mobile lab units............................ 3 42 99 99
Automotive vehicles......................... 3 48 393 537
Construction in progress.................... 7 121 --
------ ------- ------
2,324 7,650 9,220
Less accumulated depreciation............... (864) (3,718) (3,883)
------ ------- ------
Property and equipment, net................. $1,460 $ 3,932 $5,337
====== ======= ======
</TABLE>
Depreciation expense was $521, $512 and $862 for the years ended December
31, 1994, 1995 and 1996, respectively, and $608 for the six months ended
June 30, 1997.
F-19
<PAGE> 103
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
6. INTANGIBLE ASSETS
Intangible assets and the related accumulated amortization and amortization
periods are as follows:
<TABLE>
<CAPTION>
AMORTIZATION PERIODS
(YEARS)
DECEMBER 31, --------------------
----------------------- JUNE 30, WEIGHTED
1995 1996 1997 RANGE AVERAGE
------- ------------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Hospital contracts................ $29,015 $28,950 35-40 36.5
Physician client lists............ $11,987 38,863 38,863 17-30 22.2
Management service agreement...... 6,429 6,473 25.0 25.0
Laboratory contracts.............. 1,800 1,800 10 10.0
------- ------- -------
11,987 76,107 76,086
Accumulated amortization.......... (1,072) (2,008) (3,553)
------- ------- -------
Balance, net...................... $10,915 $74,099 $72,533
======= ======= =======
Goodwill.......................... $ 4,271 $58,264 $61,850 15-35 33.8
Accumulated amortization.......... (284) (879) (1,716)
------- ------- -------
Balance, net...................... $ 3,987 $57,385 $60,134
======= ======= =======
</TABLE>
The amortization periods for the identifiable intangible assets, except the
management service agreement, were determined by the Company based on
reports of independent consultants. The amortization period for the
identifiable intangible asset related to the management service agreement
was determined by reference to the term of the agreement. In determining
these lives the Company considered each practice's operating history,
contract renewals, stability of physician referral lists and industry
statistics.
The amortization periods for goodwill were determined by the Company with
consideration given to the lives assigned to the identifiable intangibles,
the reputation of the practice, the length of the practice's operating
history, and the potential of the market in which the acquired practice is
located.
The weighted average amortization period for identifiable intangible assets
and goodwill, is 30.3 years.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1995 1996 1997
------ ------ --------
<S> <C> <C> <C>
Accounts payable............................................ $ 287 $ 848 $ 1,659
Accrued compensation........................................ 432 1,572 3,031
Accrued acquisition costs................................... 1,648 1,685
Accrued interest............................................ 683 677
Income taxes payable........................................ 175 567 303
Other accrued expenses...................................... 133 3,072 2,646
Amounts due to former owners of the 1996 Acquisitions....... 1,500 666
------ ------ -------
$1,027 $9,890 $10,667
====== ====== =======
</TABLE>
F-20
<PAGE> 104
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
8. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Credit Facility:
Revolving loan.................................... $ 4,146 $81,652 $17,308
Senior term loan.................................. 65,000
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 and assumed in connection
with the 1996 Acquisitions, payable in varying
amounts through 2001, with interest at the rate of
7% and 8%......................................... 4,587 3,938
------- ------- -------
15,146 97,239 97,246
Less current portion................................ (1,762) (1,604)
------- ------- -------
Long term debt, net of current portion.............. $15,146 $95,477 $95,642
======= ======= =======
</TABLE>
As of June 30, 1997, the maturities of long-term debt were as follows:
<TABLE>
<S> <C>
Six months ended December 31, 1997.......................... $ 1,036
1998........................................................ 5,654
1999........................................................ 1,278
2000........................................................ 1,051
2001........................................................ 8,520
2002........................................................ 17,957
Thereafter.................................................. 61,750
-------
Total....................................................... $97,246
=======
</TABLE>
On May 29, 1996, the Company replaced its line of credit with a new
revolving line of credit (the "Facility") with the BankBoston N.A. (F/K/A
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 Facility was amended in October 1996, and the
aggregate amount available was increased to $85 million. Outstanding
advances under the Facility were due and payable on December 31, 1998.
Borrowings under the Facility bear interest at variable rates based, at the
Company's option, on the bank's base rate or the Eurodollar rate plus
2.50%. The Facility also required the quarterly payment of an annual
commitment fee equal to 0.375% of the unused portion of the commitment
until the commitment is terminated. During 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.
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 the Agent, which provides for borrowings
of up to $150 million in the form of: (i) a term loan of $65 million; and a
revolving loan of up
F-21
<PAGE> 105
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
to $85 million that may be used for working capital, 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 interests at variable interest 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.
At June 30, 1997, $65.0 million and $17.3 million were outstanding under
the term loan and revolving loan, respectively, at interest rates of 9.25%
and 8.75%, respectively. Interest rates are adjusted quarterly based upon
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. During 1996, the Company issued to
the Agent, 85,998 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 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 June 30, 1997, the effective annual
interest rate was approximately 9.1%.
The Company believes that it is in compliance with all of its existing
covenants at June 30, 1997.
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 year ended December 31, 1996, the Company paid accrued dividends
in the amount of $32 with respect to the 120,004 shares of Convertible
Preferred Stock that were converted into 216,007 shares of common stock by
the holders of the Convertible Preferred Stock in their sale of shares of
common stock to the Company's President and 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
F-22
<PAGE> 106
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
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 June
30, 1997, the Company has reserved 5,558,607 shares of common stock for the
conversion of the Convertible Preferred Stock.
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 December 31, 1996:
<TABLE>
<S> <C>
1997........................................................ $1,204
1998........................................................ 1,117
1999........................................................ 1,044
2000........................................................ 851
2001........................................................ 790
Thereafter.................................................. 1,541
------
$6,547
======
</TABLE>
Rent expense under operating leases for 1994, 1995 and 1996 was $153, $170,
and $499 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 June 30, 1997,
925,211 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 June 30,
1997, 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.
F-23
<PAGE> 107
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
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.
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 1996............................ 738,011 1.67 10.00 5.28
Cancelled.................................. (19,800) 8.33 10.00 9.85
-------
Outstanding December 31, 1996.............. 970,211 1.11 10.00 4.12
Cancelled.................................. (45,000) 8.33 8.33 8.33
-------
Outstanding June 30, 1997.................. 925,211 $1.11 $10.00 $3.91
=======
</TABLE>
Options to purchase 187,202 shares are exercisable at June 30, 1997. The
weighted-average remaining contractual life of those options outstanding at
June 30, 1997 is 8.4 years.
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, 1994, 1995 and 1996, the Company
elected not to make contributions to the 401(k) Plan.
In addition, in connection with the 1996 Acquisitions, 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 December 31, 1996. The Company is in the process of establishing a
uniform benefit plan for all employees.
F-24
<PAGE> 108
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
Effective July 1, 1997, the Company consolidated the previous plans into a
new qualified 401(k) retirement plan covering substantially all eligible
employees as defined in the 401(k) plan. The new Plan requires employer
matching contributions equal to 25% of the employees' contributions up to a
maximum of $1,000 per employee.
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 1994 Acquisition, the
Company issued Subordinated Contingent notes in the amount of $2,500 which
have an interest rate of 8% (the "ALA Contingent 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. The issuance of shares has been accounted for as an
additional cost of the 1994 Acquisition.
Healthcare Regulatory Environment and Reliance on Government
Programs -- The healthcare industry in general, and the services that the
Company provides are subject to extensive federal and state laws and
regulations. Additionally, a significant portion of the Company's net
revenue is from payments by government-sponsored health care programs,
principally Medicare and Medicaid, and is subject to audit and adjustments
by applicable regulatory agencies. Failure to comply with any of these laws
or regulations, the results of 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 $140, in 1994, 1995
and 1996, and $70 during the six months ended June 30, 1997.
F-25
<PAGE> 109
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
Note Receivable from Officer -- In connection with the employment of the
Company's President and 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.
15. INCOME TAXES
The provision for income taxes for the years ended December 31, 1994, 1995
and 1996 consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1994 1995 1996
----- ----- -------
<S> <C> <C> <C>
Current:
Federal................................................... $272 $281 $2,133
State..................................................... 46 48 345
---- ---- ------
Total current provision........................... 318 329 2,478
---- ---- ------
Deferred:
Federal................................................... 319 207 (817)
State..................................................... 55 36 (133)
---- ---- ------
Total deferred provision (benefit)................ 374 243 (950)
---- ---- ------
Total provision for income taxes.................. $692 $572 $1,528
==== ==== ======
</TABLE>
The effective tax rate on income before income tax is reconciled to
statutory federal income tax rates as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal rate.................................... 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit..... 3.6 3.7 3.6
Non-deductible items, primarily goodwill.................. 4.6
Other..................................................... .1 1.1 .8
---- ---- ----
Effective rate............................................ 37.7% 38.8% 43.0%
==== ==== ====
</TABLE>
F-26
<PAGE> 110
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
The following is a summary of the deferred income tax assets and
liabilities as of December 31, 1995 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------ --------
<S> <C> <C>
Deferred tax assets:
Intangible assets acquired................................ $ 741
Property and equipment.................................... 41 $ 307
Allowance for doubtful accounts........................... 142 1,839
Accrued liabilities....................................... 401
Other..................................................... 23 49
------ --------
Total deferred tax assets................................... 947 2,596
------ --------
Deferred tax liabilities:
Change from cash to accrual basis by the 1996
Acquisitions........................................... (3,547)
Intangible assets acquired................................ (18,643)
Other..................................................... (35) (11)
------ --------
Total deferred tax liabilities.............................. (35) (22,201)
------ --------
Net deferred tax asset (liability)................ $ 912 $(19,605)
====== ========
</TABLE>
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 1994
Acquisition and the 1996 Acquisitions consummated during the year ended
December 31, 1996. No acquisitions were consummated during the six months
ended June 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1996
------- --------
<S> <C> <C>
Assets acquired............................................. $21,201 $140,910
Liabilities assumed......................................... (1,764) (32,944)
Debt issued................................................. (3,500) (4,511)
Excess purchase price deemed distributed to PDK
shareholders.............................................. 4,574
Common stock issued......................................... (24,829)
------- --------
Cash paid................................................... 20,511 78,626
Less cash acquired.......................................... (322) (5,553)
------- --------
Net cash paid..................................... $20,189 $ 73,073
======= ========
</TABLE>
F-27
<PAGE> 111
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
17. LOSS ON CESSATION OF CLINICAL LAB OPERATIONS
In May 1996, the Company ceased the unprofitable operation of a clinical
laboratory resulting in a non-recurring charge of $910 to operations which
included severance payments, write-downs of property, equipment and other
assets to estimated realizable values, and the write-off of the unamortized
balances of intangible assets associated with the clinical operations. The
following is a summary of the net revenue and operating costs, including
the non-recurring charge, of such clinical laboratory:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Net revenue.............................................. $1,712 $2,385 $1,046
Operating costs.......................................... 2,179 2,814 2,102
</TABLE>
18. NONRECURRING CHARGE
In May 1997, the Company withdrew its registration statement filed with the
Securities and Exchange Commission and postponed the planned initial public
offering of common stock. In the six months ended June 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.
19. PRO FORMA NET INCOME PER SHARE INFORMATION (UNAUDITED)
The Company is planning to issue shares of its common stock in an initial
public offering late in 1997. Immediately prior to the offering, the
outstanding shares of Convertible Preferred Stock will be converted into
5,558,607 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. 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 both periods presented. Shares issued in the 1996
Acquisitions are included in the weighted average share calculation from
the date of acquisition. The following presents the
F-28
<PAGE> 112
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
calculation of the pro forma weighted average common shares and common
equivalent shares outstanding for each period (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
Shares outstanding for all periods presented................ 1,426 1,426
Effects of shares subsequently issued:
Conversion of Convertible Preferred Stock in January
1996................................................... 216 216
Settlement of ALA Contingent Notes in April 1996.......... 194 194
1996 Acquisitions......................................... 1,297 3,985
Effects of stock options.................................... 686 686
----- ------
3,819 6,507
Planned conversion of Convertible Preferred Stock........... 5,559 5,559
----- ------
Pro forma weighted average common and common equivalent
shares outstanding........................................ 9,378 12,066
===== ======
</TABLE>
F-29
<PAGE> 113
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-30
<PAGE> 114
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-31
<PAGE> 115
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-32
<PAGE> 116
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-33
<PAGE> 117
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
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-34
<PAGE> 118
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-35
<PAGE> 119
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-36
<PAGE> 120
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-37
<PAGE> 121
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-38
<PAGE> 122
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 THE 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-39
<PAGE> 123
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 THE 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-40
<PAGE> 124
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 THE 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-41
<PAGE> 125
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-42
<PAGE> 126
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-43
<PAGE> 127
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-44
<PAGE> 128
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-45
<PAGE> 129
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-46
<PAGE> 130
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-47
<PAGE> 131
DERRICK AND ASSOCIATES PATHOLOGY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
NOTE
RECEIVABLE
CLASS A CLASS B ADDITIONAL FROM
COMMON COMMON PAID-IN RETAINED SHAREHOLDER
STOCK STOCK CAPITAL EARNINGS (NOTE 8) TOTAL
------- ------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1994................ $1,300 $ $1,275,599 $1,919,218 $(107,923) $3,088,194
Net loss..................... (177,088) (177,088)
Principal payments received
on note receivable from
shareholder............... 55,269 55,269
------ --- ---------- ---------- --------- ----------
DECEMBER 31, 1994.............. 1,300 1,275,599 1,742,130 (52,654) 2,966,375
Net income................... 433,615 433,615
Issuance of common stock
(Note 8).................. 100 193,848 193,948
Repurchase and retirement of
common stock (Note 8)..... (200) (236,643) (171,268) (408,111)
Principal payments received
on note receivable from
shareholder............... 52,654 52,654
------ --- ---------- ---------- --------- ----------
DECEMBER 31, 1995.............. 1,200 1,232,804 2,004,477 3,238,481
Net loss..................... (17,434) (17,434)
Issuance of Class A common
stock (Note 8)............ 100 193,848 193,948
Issuance of Class B non
voting common stock (Note
8)........................ 30 1,032,470 1,032,500
------ --- ---------- ---------- --------- ----------
JUNE 30, 1996.................. $1,300 $30 $2,459,122 $1,987,043 $ $4,447,495
====== === ========== ========== ========= ==========
</TABLE>
See notes to financial statements.
F-48
<PAGE> 132
DERRICK AND ASSOCIATES PATHOLOGY, INC.
STATEMENTS OF CASH FLOWS
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>
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-49
<PAGE> 133
DERRICK AND ASSOCIATES PATHOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995
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-50
<PAGE> 134
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-51
<PAGE> 135
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
-------------------------
1994 1995 JUNE 30, 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-52
<PAGE> 136
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-53
<PAGE> 137
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-54
<PAGE> 138
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-55
<PAGE> 139
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-56
<PAGE> 140
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-57
<PAGE> 141
SKINPATH, P.C.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
PERIOD FROM 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>
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-58
<PAGE> 142
SKINPATH, P.C.
STATEMENTS OF CASH FLOWS
PERIOD FROM 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>
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-59
<PAGE> 143
SKINPATH, P.C.
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JANUARY 5, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995 AND
THE 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-60
<PAGE> 144
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-61
<PAGE> 145
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-62
<PAGE> 146
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-63
<PAGE> 147
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-64
<PAGE> 148
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-65
<PAGE> 149
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-66
<PAGE> 150
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-67
<PAGE> 151
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-68
<PAGE> 152
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-69
<PAGE> 153
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-70
<PAGE> 154
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-71
<PAGE> 155
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-72
<PAGE> 156
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-73
<PAGE> 157
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-74
<PAGE> 158
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-75
<PAGE> 159
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-76
<PAGE> 160
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 A CLASS 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-77
<PAGE> 161
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-78
<PAGE> 162
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-79
<PAGE> 163
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-80
<PAGE> 164
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-81
<PAGE> 165
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-82
<PAGE> 166
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-83
<PAGE> 167
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-84
<PAGE> 168
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-85
<PAGE> 169
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-86
<PAGE> 170
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-87
<PAGE> 171
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-88
<PAGE> 172
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-89
<PAGE> 173
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-90
<PAGE> 174
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-91
<PAGE> 175
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-92
<PAGE> 176
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-93
<PAGE> 177
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-94
<PAGE> 178
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-95
<PAGE> 179
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-96
<PAGE> 180
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-97
<PAGE> 181
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-98
<PAGE> 182
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-99
<PAGE> 183
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-100
<PAGE> 184
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-101
<PAGE> 185
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-102
<PAGE> 186
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 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-103
<PAGE> 187
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-104
<PAGE> 188
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-105
<PAGE> 189
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-106
<PAGE> 190
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-107
<PAGE> 191
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-108
<PAGE> 192
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-109
<PAGE> 193
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-110
<PAGE> 194
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-111
<PAGE> 195
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-112
<PAGE> 196
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-113
<PAGE> 197
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-114
<PAGE> 198
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-115
<PAGE> 199
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-116
<PAGE> 200
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-117
<PAGE> 201
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-118
<PAGE> 202
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-119
<PAGE> 203
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-120
<PAGE> 204
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-121
<PAGE> 205
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-122
<PAGE> 206
INDEPENDENT AUDITORS' REPORT
To Unipath Ltd.:
We have audited the accompanying combined balance sheets of Unipath Ltd. and
Affiliates ("Unipath") as of June 30, 1996 and 1997 and the related combined
statements of operations, equity and cash flows for the years then ended. These
financial statements are the responsibility of Unipath'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 Unipath as of June 30, 1996 and
1997 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
Dallas, Texas
August 22, 1997
F-123
<PAGE> 207
UNIPATH LTD. AND AFFILIATES
COMBINED BALANCE SHEETS
JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 493,922 $ 341,158
Accounts receivable (net of allowances for contractual
adjustments and doubtful accounts of $3,385,038 and
$4,247,940 at June 30, 1996 and 1997, respectively).... 3,377,897 3,531,502
Prepaid expenses and other assets......................... 27,698 18,316
---------- ----------
Total current assets.............................. 3,899,517 3,890,976
PROPERTY AND EQUIPMENT, Net (Note 3)........................ 394,699 423,606
OTHER ASSETS................................................ 100,000
---------- ----------
TOTAL............................................. $4,294,216 $4,414,582
========== ==========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 521,145 $ 622,822
Accrued liabilities....................................... 253,881 101,777
---------- ----------
Total current liabilities......................... 775,026 724,599
COMMITMENTS AND CONTINGENCIES (Note 7)
EQUITY:
Partners' capital......................................... 2,027,796 1,968,133
Arlington-Mansfield Pathology Associates, P.A.:
Common stock, no par value, 54,000 shares authorized,
54,000 issued and outstanding.......................... 1,500 1,500
Dallas Pathology Associates, Inc.:
Common stock, $1 par value, 10,000 shares authorized,
1,000 issued and outstanding........................... 1,000 1,000
Retained earnings......................................... 1,488,894 1,719,350
---------- ----------
Total equity...................................... 3,519,190 3,689,983
---------- ----------
TOTAL............................................. $4,294,216 $4,414,582
========== ==========
</TABLE>
See notes to combined financial statements.
F-124
<PAGE> 208
UNIPATH LTD. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
NET REVENUES -- (Note 5).................................... $21,433,617 $22,421,918
----------- -----------
COSTS AND EXPENSES:
Cost of services rendered................................. 7,260,555 7,965,430
Selling, billing and administrative expenses.............. 2,092,293 1,828,532
Provision for doubtful accounts........................... 1,679,894 1,916,677
----------- -----------
Total costs and expenses.......................... 11,032,742 11,710,639
----------- -----------
NET INCOME.................................................. $10,400,875 $10,711,279
=========== ===========
</TABLE>
See notes to combined financial statements.
F-125
<PAGE> 209
UNIPATH LTD. AND AFFILIATES
COMBINED STATEMENTS OF EQUITY
FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON RETAINED PARTNERS'
STOCK EARNINGS CAPITAL TOTAL
------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE, JULY 1, 1995.......................... $2,500 $ 1,136,274 $ 1,830,348 $ 2,969,122
Net income................................... 1,932,928 8,467,947 10,400,875
Distributions................................ (1,580,308) (8,270,499) (9,850,807)
------ ----------- ----------- ------------
BALANCE, JUNE 30, 1996......................... 2,500 1,488,894 2,027,796 3,519,190
Net income................................... 2,429,179 8,282,100 10,711,279
Distributions................................ (2,198,723) (8,341,763) (10,540,486)
------ ----------- ----------- ------------
BALANCE, JUNE 30, 1997......................... $2,500 $ 1,719,350 $ 1,968,133 $ 3,689,983
====== =========== =========== ============
</TABLE>
See notes to combined financial statements.
F-126
<PAGE> 210
UNIPATH LTD. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1996 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 10,400,875 $10,711,279
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 143,243 247,255
Provision for doubtful accounts........................ 1,679,894 1,916,677
Changes in assets and liabilities:
Increase in accounts receivable, net................. (2,322,375) (2,070,282)
Decrease in other current assets..................... 4,895 9,382
Increase in other assets............................. -- (100,000)
Decrease in accounts payable and accrued expenses.... (278,238) (50,427)
------------ -----------
Net cash flows provided by operating activities... 9,628,294 10,663,884
------------ -----------
CASH FLOWS USED IN INVESTING ACTIVITIES --
Acquisition of property and equipment..................... (125,254) (276,162)
------------ -----------
CASH FLOWS USED IN FINANCING ACTIVITIES --
Distributions to equity owners, net....................... (9,850,807) (10,540,486)
------------ -----------
DECREASE IN CASH AND CASH EQUIVALENTS....................... (347,767) (152,764)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 841,689 493,922
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 493,922 $ 341,158
============ ===========
</TABLE>
See notes to combined financial statements.
F-127
<PAGE> 211
UNIPATH LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
1. ORGANIZATION AND BUSINESS
Effective May 31, 1995, the equity holders of Arlington-Mansfield Pathology
Associates, P.A. (a Texas professional association), Dallas Pathology
Associates (a Texas partnership), Dallas Pathology Associates, Inc. (a Texas
Corporation), Plano Pathology Associates (a Texas partnership), Metroplex
Pathology Associates, P.A. (a Texas professional association), and Metroplex
Pathology Associates, Ltd. (a Texas limited partnership) entered into an
agreement to form Unipath Ltd. (a Texas limited partnership) and Unipath
Management, P.L.L.C. (a Texas professional limited liability company),
(collectively "Unipath") for the purpose of combining their individual
hospital-based anatomic and clinical pathology practices and outpatient
laboratories and consolidating the administrative support, histology
laboratories and billing operations of the individual practices. The
accompanying financial statements of Unipath and its affiliates have been
prepared on a combined basis due to the common management and the existence
of significant intercompany transactions. In addition, since the proposed
acquisition of Unipath (see Note 8) will occur in a single transaction, it
is more meaningful to present the combined financial position and results of
operations of the entities to be acquired. All material intercompany
transactions and balances have been eliminated in combination.
Unipath employs 20 pathologists which staff 10 contracted hospitals and 4
surgery centers. Unipath also provides billing services to certain hospitals
and doctors' offices. The contracts with the hospitals and centers vary in
length from 1 to 3 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 results of operations
of Unipath.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies followed by Unipath are as
follows:
CASH AND CASH EQUIVALENTS
Unipath 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. Depreciation is calculated using
accelerated methods, including double declining balance, over the estimated
useful lives of the assets which range from five to seven years.
Expenditures for routine maintenance and repairs are charged to expense as
incurred.
INCOME TAXES
The entities comprising Unipath are formed as either partnerships or have
elected to be taxed as S corporations for federal income tax purposes. As a
partnership or an S corporation, the results of operations flow to each of
the partners or shareholders in accordance with their respective ownership
percentages; related income taxes or benefits are recognized by each of the
partners or shareholders. Accordingly, Unipath does not record a provision
for income taxes in the accompanying combined financial statements.
REVENUE RECOGNITION
Unipath recognizes revenue at the time services are performed. Unipath
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.
F-128
<PAGE> 212
UNIPATH LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Unbilled receivables are recorded for services rendered during, but billed
subsequent, to the reporting period. Such receivables, net of allowances, as
of June 30, 1996 and 1997 amounted to approximately $325,579 and $570,383,
respectively.
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 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 Unipath to concentrations
of credit risk, consist principally of cash and cash equivalents and
accounts receivable. Unipath places its cash and cash equivalents with high
credit quality institutions. With respect to accounts receivable, Unipath
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 from patients and third-party payors at June 30, 1996 and 1997
are as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Medicare and Medicaid....................................... 2% 2%
Other third-party payors.................................... 78 68
Private pay patients........................................ 20 30
--- ---
100% 100%
=== ===
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 1996 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Furniture and fixtures................................ $ 106,058 $ 110,412
Computer equipment.................................... 421,741 567,440
Lab equipment......................................... 121,762 247,871
Leasehold improvements................................ 97,628 97,628
---------- ----------
Total................................................. 747,189 1,023,351
Less: Accumulated depreciation........................ (352,490) (599,745)
---------- ----------
Property and equipment, net........................... $ 394,699 $ 423,606
========== ==========
</TABLE>
Depreciation expense totaled $143,243 and $247,255 for the years ended June
30, 1996 and 1997, respectively.
4. EMPLOYEE PROFIT SHARING PLAN
Unipath has a 401(k) plan covering all employees who meet eligibility
requirements. Employer contributions are made to the plan at the discretion
of Unipath's Board of Managers. No employer contributions were made for the
years ended June 30, 1996 and 1997.
F-129
<PAGE> 213
UNIPATH LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. NET REVENUES
Net revenues 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, public and private
insurance and managed care contracts under applicable laws, regulations, and
program instructions. Collectible amounts are generally less than the
established rates. Contractual 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 revenues consisted of the following for the years ended June 30, 1996
and 1997:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Gross charges at established rates.................. $24,334,652 $26,729,265
Less allowances for contractual and other
adjustments....................................... (2,901,035) (4,307,347)
----------- -----------
Net revenues.............................. $21,433,617 $22,421,918
=========== ===========
</TABLE>
6. RELATED PARTY TRANSACTIONS
The physician partners who own Dallas Pathology Associates and Plano
Pathology Associates do not receive salaries for their services, but receive
distributions from those partnerships for their ownership interests. The
shareholders of the professional corporations and associations included in
the combined financial statements are employed as physicians and
accordingly, receive compensation for their services. The compensation
included in costs of services rendered for these individuals was $964,500
and $1,215,000 for the years ended June 30, 1996 and 1997, respectively.
Unipath leases its lab facilities from a partnership whose partners have
ownership interests in Unipath. The lease expires June 30, 2000 and requires
minimum annual rental payments of $103,870. Rent expense for this lease was
$103,870 for each of the years ended June 30, 1996 and 1997.
7. COMMITMENTS AND CONTINGENCIES
SELF INSURANCE
Unipath is self insured with respect to a portion of health insurance risks
on a claims made basis. Claims in excess of contracted amounts are covered
by reinsurance. Unipath has provided and reserved for claims incurred up to
the contracted maximum amounts that Unipath would incur under its insurance
arrangements. 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, results of operations or cash flows of Unipath.
LIABILITY INSURANCE
Unipath is insured with respect to medical malpractice risks on a claims
made basis. Unipath 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 will not have a material adverse effect on the
financial position, results of operations or cash flows of Unipath.
F-130
<PAGE> 214
UNIPATH LTD. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
HEALTH CARE REGULATORY ENVIRONMENT AND RELIANCE ON GOVERNMENT PROGRAMS
The health care industry in general, and the services that Unipath provides
are subject to extensive Federal and State laws and regulations.
Additionally, a portion of Unipath's revenues are from payments by
government-sponsored health care 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 Unipath's services under these programs could have a material
adverse effect on Unipath's financial position, results of operations and
cash flows.
8. SUBSEQUENT EVENT
The individual equity holders of Unipath have entered into a definitive
agreement dated August 21, 1997, to sell their respective interests in
Unipath to entities controlled by AmeriPath, Inc.
F-131
<PAGE> 215
INDEPENDENT AUDITORS' REPORT
To the Stockholders of CoLab Incorporated Professional Corporation,
MicroDiagnostics, P.C. and
Anatomical Pathology Services, P.C.:
We have audited the accompanying combined balance sheets of CoLab Incorporated
Professional Corporation, MicroDiagnostics, P.C. and Anatomical Pathology
Services, P.C. (companies under common ownership and management, collectively
the "Companies") as of December 31, 1996 and June 30, 1997, and the related
combined statements of operations and retained earnings and of cash flows for
the year ended December 31, 1996 and the six months ended June 30, 1997. These
combined financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these combined
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 combined 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,
1996 and June 30, 1997, and the results of their operations and their cash flows
for the year ended December 31, 1996 and the six months ended June 30, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Indianapolis, Indiana
August 15, 1997
F-132
<PAGE> 216
COLAB INCORPORATED PROFESSIONAL CORPORATION, MICRODIAGNOSTICS, P.C. AND
ANATOMICAL PATHOLOGY SERVICES, P.C.
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND JUNE 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 477,453 $ 887,365
Accounts receivable (net of allowance for contractual
adjustments and doubtful accounts of $1,981,411 and
$1,931,441 at December 31, 1996 and June 30, 1997,
respectively).......................................... 1,517,190 1,638,724
Management income receivable.............................. 91,272 166,819
Prepaid expenses.......................................... 30,847 16,671
---------- ----------
Total current assets.............................. 2,116,762 2,709,579
PROPERTY AND EQUIPMENT, net................................. 3,814 3,504
OTHER ASSETS, net........................................... 4,073 3,652
---------- ----------
TOTAL............................................. $2,124,649 $2,716,735
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................. $ 328,856 $1,031,821
Payable to stockholders................................... 351,700
Deferred taxes............................................ 519,386 610,898
---------- ----------
Total current liabilities......................... 1,199,942 1,642,719
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
COLAB INCORPORATED PROFESSIONAL CORPORATION:
Common stock, no par value, 14,000 shares authorized,
14,000 issued and outstanding......................... 14,000 14,000
MICRODIAGNOSTICS, P.C.:
Common stock, no par value, 1,000 shares authorized,
700 issued and outstanding............................ 1,400 1,400
ANATOMICAL PATHOLOGY SERVICES, P.C.:
Common stock, $100 par value, 100 shares authorized, 80
issued and outstanding................................ 8,000 8,000
Retained earnings......................................... 901,307 1,050,616
---------- ----------
Total stockholders' equity........................ 924,707 1,074,016
---------- ----------
TOTAL............................................. $2,124,649 $2,716,735
========== ==========
</TABLE>
See notes to combined financial statements.
F-133
<PAGE> 217
COLAB INCORPORATED PROFESSIONAL CORPORATION, MICRODIAGNOSTICS, P.C. AND
ANATOMICAL PATHOLOGY SERVICES, P.C.
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1966 AND THE
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ ----------
<S> <C> <C>
REVENUES:
Services revenue, net..................................... $10,535,626 $4,924,426
Management income......................................... 1,220,222 641,883
Other..................................................... 33,071 19,498
----------- ----------
Total revenues.................................... 11,788,919 5,585,807
----------- ----------
EXPENSES:
COST OF SERVICES RENDERED:
Physician compensation.................................... 6,840,490 3,637,159
Other compensation........................................ 187,604 101,772
----------- ----------
Total cost of services rendered................... 7,028,094 3,738,931
SELLING, BILLING AND ADMINISTRATIVE EXPENSES:
Provision for doubtful accounts........................... 1,426,969 528,042
Other..................................................... 1,967,051 1,078,013
----------- ----------
Total selling, billing and administrative
expenses........................................ 3,394,020 1,606,055
----------- ----------
Total expenses.................................... 10,422,114 5,344,986
----------- ----------
INCOME BEFORE PROVISION FOR DEFERRED TAXES.................. 1,366,805 240,821
PROVISION FOR DEFERRED TAXES................................ 519,386 91,512
----------- ----------
NET INCOME.................................................. 847,419 149,309
DIVIDENDS................................................... (16,500)
RETAINED EARNINGS, BEGINNING................................ 70,388 901,307
----------- ----------
RETAINED EARNINGS, ENDING................................... $ 901,307 $1,050,616
=========== ==========
</TABLE>
See notes to combined financial statements.
F-134
<PAGE> 218
COLAB INCORPORATED PROFESSIONAL CORPORATION, MICRODIAGNOSTICS, P.C. AND
ANATOMICAL PATHOLOGY SERVICES, P.C.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ $847,419 $ 149,309
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 2,988 731
Deferred tax expense................................... 519,386 91,512
Provision for doubtful accounts........................ 1,426,969 528,042
Changes in assets and liabilities:
(Increase) in accounts receivable.................... (2,856,174) (649,576)
(Increase) in management income receivable........... (91,272) (75,547)
(Increase) decrease in prepaid expenses and other
assets.............................................. (30,847) 14,176
Increase (decrease) in payable to stockholders....... 351,700 (351,700)
Increase in accounts payable and accrued
liabilities......................................... 307,013 702,965
----------- ---------
Net cash provided by operating activities......... 477,182 409,912
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (2,044)
Payments for organizational costs......................... (1,966)
----------- ---------
Net cash used by investing activities............. (4,010)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 14,000
Payment of dividends...................................... (16,500)
----------- ---------
Net cash used by financing activities............. (2,500)
----------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 470,672 409,912
CASH AND CASH EQUIVALENTS, BEGINNING........................ 6,781 477,453
----------- ---------
CASH AND CASH EQUIVALENTS, ENDING........................... $ 477,453 $ 887,365
=========== =========
</TABLE>
See notes to combined financial statements.
F-135
<PAGE> 219
COLAB INCORPORATED PROFESSIONAL CORPORATION, MICRODIAGNOSTICS, P.C. AND
ANATOMICAL PATHOLOGY SERVICES, P.C.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND
THE SIX MONTHS ENDED JUNE 30, 1997
1. BUSINESS AND BASIS OF COMBINATION
CoLab Incorporated Professional Corporation ("CoLab"), MicroDiagnostics,
P.C. ("MD") and Anatomical Pathology Services, P.C. ("APS") provide
professional pathology and diagnostic services for St. Vincent's Hospitals,
Community Hospitals and various other hospitals and clinics in the greater
Indianapolis, Indiana area and employ 15 pathologists. CoLab began
operations on January 1, 1996. MD and APS act as billing entities for
non-hospital pathology services performed by CoLab.
The accompanying combined financial statements present the combined
financial position of CoLab, MD and APS (collectively the "Companies"). MD
and APS are 100% owned by stockholders of CoLab. All significant
intercompany accounts and transactions have been eliminated in combination.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies followed by the Companies are
as follows:
CASH AND CASH EQUIVALENTS
The Companies consider 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 primarily consists of computer equipment and is
stated at cost less accumulated depreciation. Depreciation is calculated
using the straight-line method over the estimated useful lives of five
years.
OTHER ASSETS
Other assets consist of organizational costs and are stated at cost less
accumulated amortization. Amortization is calculated using the straight line
method over five years.
REVENUE RECOGNITION
The Companies recognize revenues at the time services are performed. The
Companies provide 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.
The Companies have contracts with certain hospitals and other organizations
to provide medical director services for the anatomic and clinical
laboratory operations. The Companies recognize revenues pro-rata over the
lives of the contracts.
PHYSICIAN COMPENSATION
The Companies recognize compensation expense as base wages are paid and
bonuses are approved by the Board of Directors, as required by the
employment contracts (Note 7).
INCOME TAXES
CoLab 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
F-136
<PAGE> 220
COLAB INCORPORATED PROFESSIONAL CORPORATION, MICRODIAGNOSTICS, P.C. AND
ANATOMICAL PATHOLOGY SERVICES, P.C.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
MD and APS have elected to be treated as S-Corporations for federal and
state income tax purposes. Accordingly, MD and APS do not pay federal or
state income tax. The stockholders include the taxable income of MD and APS
in their individual income tax returns.
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.
CONCENTRATION RISKS
Financial instruments, which potentially subject the Companies to
concentrations of credit risk, consist principally of cash and cash
equivalents and accounts receivable. The Companies place their cash and cash
equivalents with high credit quality institutions. With respect to accounts
receivable, the Companies grant credit without collateral to their 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 of patients, third-party
payors, and clients.
The Companies' revenues are derived from their agreements with hospitals and
clinics. The contracts vary in length up to two years. A number of the
contracts also contain cancellation clauses with notification periods
ranging from 60 to 180 days which allow either party to terminate the
agreement without cause. Termination of the agreements would have a material
adverse effect on the operations of the Companies.
3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following at
December 31, 1996 and June 30, 1997:
<TABLE>
<CAPTION>
1996 1997
-------- ----------
<S> <C> <C>
Accounts payable....................................... $ 47,737 $ 88,147
Accrued collection fees................................ 172,243 157,509
Accrued physician compensation......................... 108,876 786,165
-------- ----------
Total accounts payable and accrued
liabilities................................ $328,856 $1,031,821
======== ==========
</TABLE>
4. EMPLOYEE BENEFIT PLANS
CoLab has a defined contribution profit sharing plan and a defined
contribution pension plan which cover all full-time employees who meet
eligibility requirements. Employer contributions are made to the profit
sharing plan at the discretion of CoLab's Board of Directors and to the
pension plan in the amount of 5.7% of the participant's compensation, plus
5.7% of the participant's excess compensation, as defined. Employer
contributions are limited to the maximum amount allowable by the Internal
Revenue Code.
F-137
<PAGE> 221
COLAB INCORPORATED PROFESSIONAL CORPORATION, MICRODIAGNOSTICS, P.C. AND
ANATOMICAL PATHOLOGY SERVICES, P.C.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Contributions of $478,000 and $424,000 were made to the plans for the year
ended December 31, 1996 and the six months ended June 30, 1997,
respectively, and are included in other selling, billing and administrative
expenses.
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 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. It is the opinion of management that the ultimate resolution of
any claims that may be asserted as a result of reviews by program
representatives will not have a material adverse effect on the financial
position or results of operations of the Companies.
Net revenue consists of the following for the year ended December 31, 1996
and the six months ended June 30, 1997:
<TABLE>
<CAPTION>
1996 1997
----------- ----------
<S> <C> <C>
Gross charges at established rates................... $17,566,975 $8,524,234
Less allowances for contractual, charity and other
adjustments........................................ 7,031,349 3,599,808
----------- ----------
Net revenue................................ $10,535,626 $4,924,426
=========== ==========
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Companies' stockholders are employed by the Companies as physicians and
accordingly, receive compensation for their services to the Companies. The
compensation included in costs of services rendered for these individuals
was $6,665,490 and $3,549,658 for the year ended December 31, 1996 and for
the six months ended June 30, 1997, respectively.
The stockholders of the Companies are also the shareholders of CoLab
Investments, LLC. CoLab Investments, LLC holds a 9% interest in Mid-America
Clinical Laboratories (MACL), a joint venture between Seton Health
Corporation of Central Indiana, Community Hospitals of Indiana, SmithKline
Beecham Clinical Laboratories, Inc., and CoLab Investments, LLC. MACL was
established June 1, 1997 to operate the licensed clinical laboratory of the
hospitals. CoLab provides anatomical and clinical pathology services to MACL
for a monthly fee of $83,333.
At December 31, 1996, CoLab was holding cash of $351,700 which was payable
to certain stockholders. This cash was distributed to these stockholders on
January 2, 1997.
7. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
CoLab has employment agreements with each of its physicians. The agreements
generally provide for certain annual base wages and bonuses. CoLab's policy
is to award bonuses that are equal to the cash basis taxable income.
F-138
<PAGE> 222
COLAB INCORPORATED PROFESSIONAL CORPORATION, MICRODIAGNOSTICS, P.C. AND
ANATOMICAL PATHOLOGY SERVICES, P.C.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
LIABILITY INSURANCE
The Companies, and the individual pathologists, are insured with respect to
general liability and medical malpractice risks on either a claims made or
occurrence basis. Management is not aware of any claims against the
Companies or the stockholders. In addition, the Companies have 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 financial position
or results of operations of the Companies.
HEALTH CARE REGULATORY ENVIRONMENT AND RELIANCE ON GOVERNMENT PROGRAMS
The health care industry in general, and the services that the Companies
provide are subject to extensive Federal and State laws and regulations.
Additionally, a portion of the Companies' revenues are from payments by
government-sponsored health care programs, principally Medicare, 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 Companies'
services under these programs could have a material adverse effect on the
Companies' financial position and results of operations.
8. INCOME TAXES
The provision for deferred income taxes in the accompanying statements of
operations for the year ended December 31, 1996 and the six months ended
June 30, 1997 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
Federal................................................ $464,714 $81,880
State.................................................. 54,672 9,632
-------- -------
Total........................................ $519,386 $91,512
======== =======
</TABLE>
CoLab's effective tax rate differs from the statutory federal income tax
rate for the following reasons:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ --------
<S> <C> <C>
Statutory federal income tax rate....................... 34% 34%
State income taxes, net of federal income tax benefit... 4% 4%
---- -----
Effective tax rate................................. 38% 38%
==== =====
</TABLE>
The significant components of the net deferred income tax liability at
December 31, 1996 and June 30, 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
<S> <C> <C>
Deferred tax assets (liabilities):
Allowance for contractuals and doubtful
accounts..................................... $ 752,936 $ 733,948
Tax cash basis items........................... (1,272,322) (1,344,846)
----------- -----------
$ (519,386) $ (610,898)
=========== ===========
</TABLE>
F-139
<PAGE> 223
COLAB INCORPORATED PROFESSIONAL CORPORATION, MICRODIAGNOSTICS, P.C. AND
ANATOMICAL PATHOLOGY SERVICES, P.C.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
9. SUBSEQUENT EVENT
On August 15, 1997, the Companies' stockholders entered into a definitive
agreement to sell all of the Companies' issued and outstanding common stock
to AmeriPath, Inc.
F-140
<PAGE> 224
======================================================
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE COMMON STOCK OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 9
The Company............................. 18
Dilution................................ 22
Use of Proceeds......................... 23
Dividend Policy......................... 23
Capitalization.......................... 24
Selected Consolidated Financial Data.... 25
Unaudited Pro Forma Consolidated
Financial Data........................ 27
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 36
Business................................ 49
Management.............................. 63
Certain Transactions.................... 70
Principal Stockholders.................. 72
Description of Capital Stock............ 74
Shares Eligible for Future Sale......... 76
Underwriting............................ 78
Legal Matters........................... 80
Experts................................. 80
Additional Information.................. 81
Index to Consolidated Financial
Statements............................ F-1
</TABLE>
------------------------
Until , 1997 (25 days from the date of this Prospectus), all
dealers effecting transactions in the Common Stock, 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.
======================================================
======================================================
5,000,000 SHARES
[AMERIPATH LOGO]
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MORGAN STANLEY DEAN WITTER
SMITH BARNEY INC.
PIPER JAFFRAY INC.
, 1997
======================================================
<PAGE> 225
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......... $26,137
NASD filing fee............................................. 9,125
Nasdaq National Market listing fee.......................... 50,000
Printing expenses........................................... *
Accounting fees and expenses................................ *
Legal fees and expenses..................................... *
Healthcare regulatory consulting 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.
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 has obtained 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 1994 Acquisition: (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> 226
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 207,698 and 8,309 shares,
respectively, of Common Stock.
In connection with the establishment of the Credit Facility and amendments
thereto and the payment of related commitment fees, the Company issued (i) to
FSC Corp., an affiliate of The First National Bank of Boston, 14,999 shares,
22,500 shares and 20,000 shares of Common Stock on June 26, 1996, August 29,
1996 and November 4, 1996, respectively, and (ii) to Atlantic Equity
Corporation, an affiliate of NationsBank, 14,999 shares and 13,500 shares of
Common Stock on June 26, 1996 and August 29, 1996, respectively.
Summit and Schroder will convert their shares of Convertible Preferred
Stock into an aggregate of 5,558,607 shares of Common Stock prior to
consummation of this offering. The Company has reserved 5,558,607 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 1,080,009 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 136,501 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 275,999 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 172,800 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 11,999 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 360,000 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: 79,999 to
Leslie B. Rosen, M.D.; 40,000 to Kip Amazon, M.D.; 103,500 to each of Robert E.
Jones, Jr., M.D. and James E. Elder, M.D.; 140,076 to David R. Barron, M.D.;
39,924 to Ruth S. Kleier, M.D.; 90,000 to Beno Michel, M.D.; 22,545 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.; 90,000 to Clay J.
Cockerell, M.D.; 107,399 to James E. Dunnington, M.D.; 113,740 to each of
Lawrence Seidenstein, M.D., Steven E. Levine, M.D. and David M. Reardon, M.D.;
and 270,000 to each of George C. Kalemeris, M.D. and Richard Fernandez, M.D.
In May, 1997, in connection with certain post-closing adjustments relating
to the acquisition of CPI, the Company issued 91,201 shares of Common Stock to
Beno Michel, M.D.
On August 1, 1997, the Company consummated the acquisition of the practice
of Steven D. Weiss, M.D. and in connection therewith issued 3,000 shares of
Common Stock to Steven D. Weiss, M.D.
On August 29, 1997, the Company consummated the acquisition of Sturgis and
in connection therewith issued 60,417 shares of Common Stock to the five
shareholders of Sturgis.
On September 1, 1997, the Company consummated the acquisition of Unipath
and in connection therewith issued 1,000,001 shares of Common Stock to the ten
shareholders of Unipath.
II-2
<PAGE> 227
On September 3, 1997, the Company consummated the acquisition of Colab and
in connection therewith issued 850,390 shares of Common Stock to the 14
shareholders of Colab.
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
3.3 -- AmeriPath's Certificate of Amendment to the Amended and
Restated Certificate of Incorporation
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.
10.8 -- Employment Agreement, dated as of June 30, 1996, between
AmeriPath Florida and Les Rosen, M.D.
10.9 -- Credit Agreement originally dated as of May 29, 1996 and
amended and restated as of June 27, 1997, among AmeriPath,
Inc., the subsidiaries of AmeriPath, Inc. from time to time
party thereto, the lenders from time to time party thereto
and Bank of Boston, N.A.
10.11 -- Lease dated as of April 8, 1988 by and between MLS
Properties, Inc. and E.G. Poulos, M.D., M.J. Demaray, M.D. &
A.P. Kowalczyk, M.D., P.A., doing business as American
Laboratory Associates
10.12 -- Stock Purchase Agreement, dated as of May 23, 1996, among
AmeriPath, Inc., Derrick & Associates and the shareholders
of Derrick & Associates
10.13 -- Stock Purchase Agreement, dated as of September 30, 1996, by
and among AmeriPath, Inc., David R. Barron, M.D., Inc., Ruth
S. Kleier, M.D. and David R. Barron, M.D.
10.14 -- Stock Purchase Agreement, dated as of October 31, 1996 among
AmeriPath, Inc., Gulf Coast Pathology Associates, Inc.,
Richard Fernandez, M.D., and George Kalemeris, M.D.
10.15 -- Form of Stock Rights Surrender & Restricted Stock Grant
Agreement
10.16 -- 1996 Director Stock Option Plan
10.17 -- American Laboratory Associates, Inc. Series A Preferred
Stock, Common Stock and Junior Subordinated Note Purchase
Agreement, dated as of January 1, 1994
10.18 -- Letter Agreement, dated September 18, 1996, between
Acquisition Management Services, Inc. and AmeriPath, Inc.
10.19 -- AmeriPath Management Agreement by and between AmeriPath
Cincinnati, Inc. and AmeriPath Ohio, Inc., dated September
30, 1996
10.20 -- Management Agreement by and between Beno Michel, M.D., Inc.
and AmeriPath, Inc., dated October 15, 1996
10.21 -- Management Agreement by and between Clay J. Cockerell, M.D.,
P.A. and AmeriPath Texas, Inc., dated September 30, 1996, as
amended January 16, 1997
</TABLE>
II-3
<PAGE> 228
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
10.22 -- Agreement for Professional Pathology Services between SmithKline Beecham Clinical Laboratories, Inc. and
Derrick and Associates Pathology, P.A., dated April 1, 1992
10.23 -- Agreement for Medical Directorship between SmithKline Beecham Clinical Laboratories, Inc. and Derrick
and Associates Pathology, P.A., dated April 1, 1992
10.24 -- Agreement for Professional Pathology Services between SmithKline Beecham Clinical Laboratories, Inc. and
AmeriPath Florida, Inc., dated November 1, 1996
10.25 -- Share Exchange Agreement, dated as of February 15, 1996, by and among American Laboratory Associates,
Inc., AmeriPath, Inc. and the holders of common and convertible preferred stock of American Laboratory
Associates, Inc.
10.26 -- Trust Agreement, dated as of October 15, 1996, between AmeriPath, Inc. and Beno Michel, as trustee
10.27 -- Trust Agreement, dated as of September 30, 1996, between AmeriPath, Inc. and David R. Barron, M.D. as
trustee
10.28 -- Form of Nonqualified Stock Option Agreement
10.29 -- Stock Purchase Agreement, dated as of October 15, 1996, by and among AmeriPath, Inc., Beno Michel, M.D.,
Inc. and Beno Michel, M.D.
10.30 -- Stock Purchase Agreement, dated as of October 10, 1996, by and among AmeriPath, Inc., Drs. Seidenstein,
Levine and Associates, Inc., Seidenstein, Levine Real Estate Partnership, Lawrence Seidenstein, M.D.,
Steven E. Levine, M.D. and David M. Reardon, M.D.
10.31 -- Stock Issuance Agreement, dated as of June 26, 1996, among AmeriPath, Inc., The First National Bank of
Boston, FSC Corp., NationsBank, N.A. (South) and Atlantic Equity Corporation
10.32 -- Stock Issuance Agreement, dated as of August 29, 1996, among AmeriPath, Inc., The First National Bank of
Boston, FSC Corp., NationsBank, N.A. (South) and Atlantic Equity Corporation
10.33 -- Stock Issuance Agreement, dated as of November 4, 1996, among AmeriPath, Inc., The First National Bank
of Boston and FSC Corp.
10.34 -- Stock Purchase Agreement, dated August 21, 1997, by and among AmeriPath, Inc., J. Sloan Leonard, M.D.,
Joseph A. Sonnier, M.D., Van Q. Telford, M.D., William C. Burton, M.D., James Scot Milvenan, M.D.,
Leslie L. Walters, M.D., Thomas M. James, M.D., Stephen W. Aldred, M.D., John E. McDonald, M.D. and
Barbara A. Shinn, M.D.
10.35 -- Stock Purchase Agreement, dated August 15, 1997, by and among AmeriPath, Inc., Colab Incorporated
Professional Corporation, Anatomical Pathology Services, P.C., Microdiagnostics, P.C. and the sellers
set forth therein
10.36 -- Lease effective June 1, 1995 by and between Dallas Pathology Leasing and Unipath, Ltd.
10.37 -- Trust Agreement, dated August 29, 1997, between AmeriPath, Inc. and Jeffery A. Mossler, M.D.
10.38 -- Management Agreement, by and between Colab, Inc. and AmeriPath Indianapolis, L.L.C., effective September
1, 1997
10.39 -- Management Agreement by and between AmeriPath Texas, Inc. and DFW 5.01, effective September 1, 1997
21.1 -- Subsidiaries of AmeriPath*
23.1 -- Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. (to be included in its opinion to
be filed as Exhibit 5.1)*
23.2 -- Consent and Report on Schedules of Deloitte & Touche LLP**
23.3 -- Consent of Deloitte & Touche LLP (Fort Lauderdale, Florida)**
23.4 -- Consent of Deloitte & Touche LLP (Orlando, Florida)**
23.5 -- Consent of Deloitte & Touche LLP (Cincinnati, Ohio)**
23.6 -- Consent of Deloitte & Touche LLP (Dallas, Texas)**
23.7 -- Consent of Deloitte & Touche LLP (Indianapolis, Indiana)**
23.8 -- Consent of Jenkens & Gilchrist a professional corporation
23.9 -- Consent of Bricker & Eckler LLP
23.10 -- Consent of Wyatt, Tarrant & Combs
</TABLE>
II-4
<PAGE> 229
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<C> <S> <C>
23.11 -- Consent of Baker & Daniels
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.
** Filed herewith.
(b) Financial Statement Schedules:
The following supplemental schedules can be found on the indicated
pages of this Registration Statement.
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C>
Schedule II -- Valuation and Qualifying Accounts............ S-1
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions or are not applicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A 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-5
<PAGE> 230
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Riviera Beach, State of
Florida, on October 1, 1997.
AMERIPATH, INC.
By: /s/ JAMES C. NEW
------------------------------------
James C. New
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints James C. New and Robert P. Wynn his true
and lawful attorneys-in-fact, each acting alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments, including any
post-effective amendments, to this registration statement, and any additional
registration statements filed pursuant to Rule 462 under the Securities Act of
1933 relating hereto, and to file the same, with exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorneys-in-fact or their
substitutes, each acting alone, may lawfully do or cause to be done by virtue
hereof.
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 Executive October 1, 1997
- ----------------------------------------------------- Officer and Director
James C. New (principal executive
officer)
* Chief Operating Officer and October 1, 1997
- ----------------------------------------------------- Director
Alan Levin, M.D.
/s/ ROBERT P. WYNN Executive Vice President and October 1, 1997
- ----------------------------------------------------- Chief Financial Officer
Robert P. Wynn (principal financial
officer and principal
accounting officer)
* Chairman of the Board and October 1, 1997
- ----------------------------------------------------- Director
Thomas S. Roberts
* Director October 1, 1997
- -----------------------------------------------------
Timothy Kilpatrick, M.D.
* Director October 1, 1997
- -----------------------------------------------------
C. Arnold Renschler, M.D.
Director
- -----------------------------------------------------
E. Roe Stamps, IV
</TABLE>
*By: /s/ JAMES C. NEW
---------------------------------
James C. New
Attorney-in-fact
II-6
<PAGE> 231
AMERIPATH, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 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, 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
======= ======= ======= ======== =======
Year ended December 31, 1996:
Allowances for contractual, other
adjustments and uncollectible
accounts........................... $ 1,923 $18,441 $13,758 $(17,972) $16,150
======= ======= ======= ======== =======
</TABLE>
- ---------------
(1) Represents the allowances for contractual, other adjustments and
uncollectible accounts related to the 1996 Acquisitions as defined in the
Prospectus.
S-1
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES
To the Board of Directors and Stockholders of AmeriPath, Inc.:
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-34265 of AmeriPath, Inc. on Form S-1 of our report dated March 6, 1997,
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 of E.G. Poulos, M.D., M.J. Demaray, M.D. and A.P.
Kowalczyk, M.D., P.A. (the "Predecessor") as of December 31, 1992 and 1993, and
the related statements of income, stockholders' equity, and cash flows for the
years ended December 31, 1992 and 1993, and the balance sheet of American
Laboratory Associates, Inc. as of December 31, 1994 (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, 1993 and
1994 and for the years ended December 31, 1992 and 1993, 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
October 1, 1997
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-34265 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
October 1, 1997
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-34265 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
October 1, 1997
<PAGE> 1
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-34265 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
October 1, 1997
<PAGE> 1
EXHIBIT 23.6
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-34265 of AmeriPath, Inc. on Form S-1 of our reports appearing in this
Prospectus, which is part of this Registration Statement, as follows: dated
November 12, 1996 on the combined financial statements of Clay J. Cockerell,
M.D., P.A. and Freeman-Cockerell Laboratories, Inc.; and dated August 22, 1997
on the combined financial statements of Unipath Ltd. and Affiliates. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Dallas, Texas
October 1, 1997
<PAGE> 1
EXHIBIT 23.7
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-34265 of AmeriPath, Inc. on Form S-1 of our report dated August 15, 1997 on
the combined financial statements of CoLab Incorporated Professional
Corporation, MicroDiagnostics, P.C. and Anatomical Pathology Services, P.C.
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
Indianapolis, Indiana
October 1, 1997
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