<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
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Commission File Number: 000-22313
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AMERIPATH, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0642485
- ---------------------------------------- ---------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
7289 Garden Road, Suite 200
Riviera Beach, FL 33404
--------------------------------------------------
(Address, including zip code, of principal executive office)
(561) 845-1850
Registrant's telephone number, including area code
NOT APPLICABLE
(Former name, former address and fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 12, 1998
- ---------------------------------- -----------------------------------
Common stock, $.01 par value 19,744,582 shares
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AMERIPATH, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of December 31, 1997 and
March 31, 1998 (unaudited) 3 - 4
Condensed Consolidated Statements of Operations
for the Three month periods ended March 31,
1997 and 1998 (unaudited) 5
Condensed Consolidated Statements of Cash Flows
for the Three month periods ended March 31,
1997 and 1998 (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
EXHIBITS 16
</TABLE>
2
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PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, March 31,
1997 1998
-------- --------
* (Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 397 $ 128
Accounts receivable, net 23,520 27,308
Inventories 268 330
Deferred tax asset 1,667 1,667
Other current assets 865 1,547
-------- --------
Total current assets 26,717 30,980
-------- --------
PROPERTY AND EQUIPMENT, NET 6,242 7,285
-------- --------
OTHER ASSETS:
Goodwill, net 100,371 107,322
Identifiable intangibles, net 133,420 138,421
Other 2,477 2,650
-------- --------
Total other assets 236,268 248,393
-------- --------
TOTAL ASSETS $269,227 $286,658
======== ========
* Condensed from audited financial statements
The accompanying notes are an integral part of
these financial statements
3
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AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - (Continued)
(In thousands)
December 31, March 31,
1997 1998
-------- --------
* (Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 11,869 $ 14,584
Current portion of long-term debt 2,720 2,820
-------- --------
Total current liabilities 14,589 17,404
LONG-TERM LIABILITIES:
Revolving loan 6,605 15,998
Senior term loan 64,350 64,350
Subordinated notes 1,399 1,264
Deferred tax liability 37,467 36,767
-------- --------
Total liabilities 124,410 135,783
-------- --------
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS' EQUITY:
Common stock 196 198
Additional paid in capital 134,590 136,860
Retained earnings 10,031 13,817
-------- --------
Total common stockholders' equity 144,817 150,875
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $269,227 $286,658
======== ========
* Condensed from audited financial statements
The accompanying notes are an integral part of
these financial statements
4
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AMERIPATH, INC. AND SUBSIDARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1998
-------- --------
<S> <C> <C>
Net revenue $ 22,057 $ 37,991
-------- --------
Operating costs:
Cost of services 10,093 17,188
Selling, general and administrative expense 4,314 6,190
Provision for doubtful accounts 2,122 3,932
Amortization expense 1,199 2,051
-------- --------
Income from operations 4,329 8,630
Other income (expense):
Interest expense (1,932) (1,755)
Other income (expense), net 26 (52)
-------- --------
Income before income taxes 2,423 6,823
Provision for income taxes 1,042 3,036
-------- --------
Net income $ 1,381 $ 3,787
======== ========
Basic Earnings Per Common Share:
Basic weighted average shares outstanding 5,793 19,673
======== ========
Basic earnings per common share $ 0.22 $ 0.19
======== ========
Diluted Earnings Per Common Share:
Diluted weighted average shares outstanding 11,934 20,453
======== ========
Diluted earnings per common share $ 0.12 $ 0.19
======== ========
</TABLE>
The accompanying notes are an integral part of
these financial statements
5
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AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 2,607 4,527
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (619) (1,106)
Purchase of subsidiaries, net of cash acquired -- (10,184)
Payments of contingent notes (256) (2,765)
-------- --------
Net cash used in investing activities (875) (14,055)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Offering costs (1,307) --
Principal payments on long-term debt (328) (164)
Net borrowings (payments) under revolving loan (285) 9,393
Issuance of common stock under stock option plan -- 30
-------- --------
Net cash provided (used) by financing activities (1,920) 9,259
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (188) (269)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,262 397
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,074 $ 128
======== ========
</TABLE>
The accompanying notes are an integral part of
these financial statements
6
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AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
AmeriPath, Inc. and Subsidiaries (the "Company") and have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and in accordance with Rule 10-01 of Regulation S-X. Accordingly, the
financial statements do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying financial statements contain all
adjustments (consisting of normal recurring items) necessary for a fair
presentation of results for the interim periods presented. The results of
operations for any interim periods are not necessarily indicative of results for
a full year. The financial statements and footnote disclosures should be read in
conjunction with the Company's December 31, 1997 audited consolidated financial
statements and the notes thereto, which are included in the Company's Form 10-K
for the year ended December 31, 1997, which was filed under the Securities
Exchange Act of 1934, as amended, (Commission number 000-22313).
Reclassification - Certain amounts have been reclassified to conform to the
March 31, 1998 presentation.
NOTE 2 - ACQUISITIONS
During 1997, the Company acquired or became affiliated with five anatomic
pathology practices in Texas, Indiana, Mississippi, Florida and Pennsylvania.
The total consideration paid by the Company in connection with these
acquisitions included cash of $67.9 million and 2,247,139 shares of common
stock. In addition, the Company issued additional purchase price consideration
in the form of contingent notes. Payments under these notes are contingent upon
the achievement of stipulated levels of cumulative operating earnings (as
defined) of the acquired practice over a five year period. If the maximum levels
of cumulative operating earnings for each Practice specified in the contingent
notes were achieved, the Company would be required to make aggregate maximum
payments, including principal and interest, of $70.8 million over the next five
years.
During the first quarter of 1998, the Company acquired or became affiliated with
two anatomic pathology practices in Indiana and Texas. The total consideration
paid by the Company in connection with these acquisitions included cash of $9.3
million and 186,828 shares of common stock. In addition, the Company issued
additional purchase price consideration in the form of contingent notes. In the
Indiana acquisition, payments under the notes are contingent upon the
achievement of stipulated levels of cumulative operating earnings (as defined)
of the acquired practice over a five year period. If the maximum levels of
cumulative operating earnings for the Practice specified in the contingent notes
are achieved, the Company would be required to make aggregate maximum payments,
including principal and interest, of $5.8 million over the next five years. In
the Texas acquisition, payments under the note are contingent upon retention of
a hospital contract for a five year period. The maximum aggregate payments,
including principal and interest, the Company may be required to make is
$935,000.
The allocation of the purchase price of the 1997 acquisitions and the 1998
acquisitions (the "Acquisitions") is preliminary, while the Company continues to
obtain the information necessary to determine the fair value of the assets
acquired and liabilities assumed. When the Company obtains final information,
management believes that adjustments, if any, will not be material in relation
to the financial statements.
The accompanying financial statements include the results of operations of the
1998 acquisitions from the date acquired through March 31, 1998. The following
unaudited pro forma information presents the consolidated results of the
Company's operations and the results of operations of the Acquisitions for the
7
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AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
year ended December 31, 1997 and the three months ended March 31 1998, after
giving affect to amortization of goodwill and identifiable intangible assets,
interest expense on long-term debt incurred in connection with these
acquisitions, and the reduced level of certain specific operating expenses
(primarily compensation and related expenses attributable to former owners) as
if the acquisitions had been consummated on January 1, 1997. Such unaudited pro
forma information is based on historical financial information with respect to
the 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, 1997 and the
three months ended March 31, 1998 presented below is for illustrative
information purposes only and is not indicative of results which would have been
achieved or results which may be achieved in the future (in thousands except per
share data).
PRO FORMA (UNAUDITED)
--------------------------
Three Months
Year Ended Ended
December 31, March 31,
1997 1998
------------ ------------
Net revenue $ 147,714 $38,568
========= =======
Net income $ 12,199 $ 3,838
========= =======
Net income per share (diluted) $ 0.78 0.19
========= =======
NOTE 3 - INTANGIBLE ASSETS
Intangible assets and the related accumulated amortization and amortization
periods are as follows (dollars in thousands):
<TABLE>
<CAPTION>
AMORTIZATION PERIODS
(YEARS)
---------------------------
DECEMBER 31, MARCH 31, WEIGHTED
1997 1998 RANGE AVERAGE
----------- --------- -------- --------
<S> <C> <C> <C> <C>
Hospital contracts $ 91,250 $ 94,560 35-40 35.5
Physician client lists 43,321 46,158 17-30 22.0
Laboratory contracts 4,400 4,400 10 10.0
--------- ---------
138,971 145,118
Accumulated amortization (5,551) (6,697)
--------- ---------
Balance, net $ 133,420 $ 138,421
========= =========
Goodwill $ 103,475 $ 111,319 15-35 33.9
Accumulated amortization (3,104) (3,997)
--------- ---------
Balance, net $ 100,371 $ 107,322
========= =========
</TABLE>
8
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AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
(Unaudited)
NOTE 4 - 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 provided
for a reserve for incurred but not reported incidents. It is the opinion of
management that the ultimate resolution of any unasserted claims will not have a
material adverse effect on the Company's financial position or results of
operations.
Healthcare Matters - The healthcare industry in general, and the services that
the Company provides are subject to extensive federal and state laws and
regulations. Additionally, a significant portion of the Company's net revenue is
from payments by government-sponsored health care programs, principally Medicare
and Medicaid, and is subject to audit and adjustments by applicable regulatory
agencies. Failure to comply with any of these laws or regulations, the results
of regulatory audits and adjustments, or changes in the amounts payable for the
Company's services under these programs could have a material adverse effect on
the Company's financial position and results of operations.
In addition, the Company has contracts to provide pathology services for 26
Columbia/HCA Healthcare Corporation ("Columbia") hospitals. Columbia is
currently under government investigation and is evaluating its operating
strategies including the sale, spin-off or closure of certain hospitals. The
government's investigation of Columbia and Columbia's re-evaluation of its
operating strategies may adversely effect the Company, including but not limited
to, through reduction of revenue, termination or non-renewal of existing
contracts, adverse publicity and/or difficulties obtaining new or expanded
contracts.
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental information presents the non-cash impact on the
balance sheets of assets and liabilities assumed in the 1998 acquisitions (in
thousands).
Three Months
Ended
March 31,
1998
-----------
Assets acquired $ 13,077
Liabilities assumed (386)
Common stock issued (2,242)
--------
Cash paid 10,449
Less cash acquired (265)
--------
Net cash paid $ 10,184
========
NOTE 6 - SUBSEQUENT EVENTS
Effective April 28, 1998, the Company amended its credit facility with a
syndicate of banks led by co-agents BankBoston N.A. and NationsBank N.A., as
lenders and agents (the "Agents"), which provides for borrowings of up to $200.0
million in the form of a revolving loan that may be used for working capital
purposes, in an amount limited to 75% of the Company's net accounts receivable,
as reflected on the Company's quarterly consolidated balance sheet, and to fund
acquisitions if not otherwise used for working capital purposes. All outstanding
advances under the revolving loan are due and payable on April 30, 2003. The
amended credit facility bears interest at variable rates, based, at the
Company's option, on the Agents' base rate or the Eurodollar rate plus a premium
that is adjusted based on the Company's quarterly ratio of total debt to cash
flow. The amended credit facility also requires the quarterly payment of an
annual commitment fee equal 0.25%, on the unused portion of the commitment. The
Company will use the
9
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AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
additional funds under the amended credit facility to continue its acquisition
program and for working capital purposes.
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, new debt issuance, sale of assets, leasing commitments and annual
capital expenditures, and contains provisions which preclude mergers and
acquisitions under certain circumstances. All of the Company's assets are
pledged as collateral under the credit facility.
NOTE 7 - EARNINGS PER SHARE
Earnings per share are computed and presented in accordance with SFAS No. 128,
Earnings Per Share, which the Company adopted in the fourth quarter of 1997.
Basic earnings per share excludes dilution and is computed by dividing income
attributable to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. The
effects of convertible preferred stock are calculated using the as if converted
method and the effects of stock options are calculated using the treasury stock
method. All prior reported earnings per share data has been restated in
accordance with SFAS No. 128 (in thousands except per share data).
<TABLE>
<CAPTION>
QUARTERS ENDED MARCH 31,
-------------------------
1997 1998
-------- --------
<S> <C> <C>
Basic Earnings Per Common Share:
Net income $ 1,381 $ 3,787
Preferred stock dividends (94) --
-------- --------
Income attributable to common stockholders $ 1,287 $ 3,787
======== ========
Basic weighted average shares outstanding 5,793 9,673
-------- --------
Basic earnings per common share $ 0.22 $ 0.19
======== ========
Diluted Earnings Per Common Share:
Net income $ 1,391 $ 3,787
======== ========
Weighted average shares outstanding 5,793 19,673
Effects of convertible preferred stock
and stock options 6,141 780
-------- --------
Diluted weighted average shares outstanding 11,934 20,453
======== ========
Diluted earnings per common share $ 0.12 $ 0.19
======== ========
</TABLE>
Options to purchase 48,000 shares of common stock at a price of $16.75 per share
which were outstanding at March 31, 1998 have been excluded from the calculation
of diluted earnings per share for the quarter ended March 31, 1998 because their
effect would be anti-dilutive.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
QUALIFICATION OF FORWARD-LOOKING STATEMENTS
The statements contained in this Report that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
without limitation statements regarding the Company's expectations, beliefs,
intentions or strategies regarding the future. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. The forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause actual results,
experience and effects and the performance or achievements of the Company to be
materially different from those anticipated, expressed or implied by the
forward-looking statements (including, without limitation, those risks,
uncertainties and other factors identified in the Company's Form 10-K for fiscal
1997 under "Business" and elsewhere therein and under "RISK FACTORS" in the
Company's Prospectus for its initial public offering in the Company's
Registration Statement on Form S-1, nos. 333-34265 and 333-38429). In evaluating
the Company's business, the following factors, in addition to the other
information set forth herein and in the Company's 10-K and Prospectus, should be
carefully considered: competition; success of the Company's operating
initiatives and growth strategy; healthcare regulation; payment and
reimbursement rates under government sponsored healthcare programs; dependence
upon pathologists; labor and technology costs; general economic conditions;
advertising and promotional efforts; availability, locations and terms of
additional practices for acquisition and/or development and the success of the
Company's acquisition strategy. In addition, the Company's strategy to penetrate
and develop new markets involves a number of risks and challenges and there can
be no assurance that the healthcare regulations of the new states in which the
Company enters and other factors will not have a material adverse effect on the
Company. The factors which may influence the Company's success in each targeted
market in connection with this strategy include: the selection of appropriate
qualified practices; negotiation and execution of definitive acquisition and/or
management agreements; the economic stability of each targeted market;
compliance with the healthcare and/or other laws and regulations in each
targeted market, including the regulation of the healthcare industry in each
targeted market on a national, regional and local basis (including health,
safety, waste disposal and zoning laws); compliance with applicable licensing
approval procedures; restrictions under labor and employment matters, especially
non-competition covenants; access to affordable capital; governmental
reimbursement and assistance programs; tax laws and the availability of
appropriate media for marketing efforts.
OVERVIEW
The Company is the leading physician practice management company focused on
anatomic pathology services, based on an analysis of geographic breadth, number
of physicians, number of hospital contracts, number of practices and net
revenue. As of March 31, 1998, the Company owned or was affiliated with 19
anatomic pathology practices (the "Practices") located in eight states which
employed 146 pathologists. The pathologists provide medical services in 16
outpatient pathology laboratories owned and operated by the Company and in
inpatient laboratories for 82 hospitals and 32 outpatient surgery centers.
The Company manages and controls all of the non-medical functions of the
Practices, including: (i) recruiting, training, employing and managing the
technical and support staff of the Practices; (ii) developing, equipping and
staffing laboratory facilities; (iii) establishing and maintaining courier
services to transport specimens; (iv) negotiating and maintaining contracts with
hospitals, national clinical laboratories and managed care organizations and
other payors; (v) providing financial reporting and administration, clerical,
purchasing, payroll, billing and collection, information systems, sales and
marketing, risk management, employee benefits, legal, tax and accounting
services to the Practices; (vi) complying with applicable laws and regulations;
and (vii) with respect to the Company's ownership and
11
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operation of anatomic pathology laboratories, providing slide preparation and
other technical services. The Company is not licensed to practice medicine.
RESULTS OF OPERATIONS
THREE MONTH PERIOD ENDED MARCH 31, 1998 AS COMPARED TO THE THREE MONTH PERIOD
ENDED MARCH 31, 1997
During 1997 and the first quarter of 1998, the Company acquired or became
affiliated with seven practices, the results of which are included in the
Company's operating results from the effective date of acquisition. Changes in
operations between the three month periods ended March 31, 1997 and 1998 were
primarily due to the Acquisitions which were completed subsequent to the first
quarter ended March 31, 1997. References to "same practice" means those
practices whose results of operations were included in the Company's
consolidated results of operations for the entire three month periods ended
March 31, 1997 and 1998.
Net revenue increased to $38.0 million for the three months ended March 31, 1998
as compared with $22.1 million for the same period in 1997, an increase of $15.9
million, or 72%. Of this increase, $3.2 million, or 20%, was attributable to
same practice growth and $12.7 million from the Acquisitions, which occurred
subsequent to the quarter ended March 31, 1997. The increase in same practice
net revenue resulted primarily from the expansion of a national lab contract
which increased same practice outpatient net revenue by $1.5 million. In
addition, there was an increase in the Medicare reimbursement rate which
increased same practice revenue by approximately $500,000. The $3.2 million
increase in same practice net revenue resulted from a $3.1 million increase in
outpatient practice net revenue and a $100,000 increase in hospital based net
revenue. The average net revenue per hospital contract remained at approximately
$250,000 per contract for each of the quarters ended March 31, 1998 and 1997.
Cost of services increased by $7.1 million, or 70%, to $17.2 million for the
three months ended March 31, 1998 from $10.1 million for the same period in
1997. Of this increase, $2.1 million was attributable to same practice growth
and $5.0 million from the Acquisitions which occurred subsequent to the quarter
ended March 31, 1997. The gross margin on the same practice revenue was
approximately 34.0%. This gross margin percentage is lower than the Company's
typical gross margin percentage due primarily to a lower fee schedule on the
expanded national lab contract.
Selling, general and administrative expense increased by $1.8 million, or 44%,
to $6.2 million for the three months ended March 31, 1998 from $4.4 million for
the same period in 1997. Of this increase, $600,000 was attributable to same
practice growth and $1.2 million from the Acquisitions which occurred subsequent
to the quarter ended March 31, 1997. The same practice increase is primarily
attributable to increased staffing levels in marketing, billing, human resources
and accounting and other costs incurred to expand the Company's administrative
support infrastructure.
The provision for doubtful accounts increased by $1.8 million, or 85%, to $3.9
million for the three months ended March 31, 1998 from $2.1 million for the same
period in 1997. The dollar increase is primarily due to the completion of the
Acquisitions which occurred subsequent to the quarter ended March 31, 1997. The
provision for doubtful accounts as a percentage of net revenue was 10.3% and
9.6% for the three month periods ended March 31, 1998 and 1997, respectively.
The increase in the provision for doubtful accounts as a percentage of net
revenue is due primarily to the increase in hospital based net revenue. Hospital
based practices generally have a higher provision as a percent of net revenue
due to a larger concentration of indigent and private pay patients, more
difficulties gathering complete and accurate billing information and longer
billing and collection cycles.
Amortization expense increased by $852,000, or 71%, to $2.1 million for the
three months ended March 31, 1998 from $1.2 million for the same period in 1997.
This increase is primarily attributable to the amortization of goodwill and net
identifiable intangible assets as a result of the Acquisitions which
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occurred subsequent to the quarter ended March 31, 1997 and payments made on the
contingent notes. Amortization expense is expected to increase in the future as
a result of identifiable intangible assets and goodwill arising from future
acquisitions, and any contingent payments required to be made pursuant to the
contingent notes issued in connection with acquisitions. Additionally, the
Company evaluates the carrying values attributable to identifiable intangible
assets and goodwill on an ongoing basis. In the event of an impairment of the
values attributable to goodwill or identifiable intangible assets, there would
be a charge to earnings that could have a material adverse effect on the
Company's financial position and results of operations.
Income from operations increased by $4.3 million, or 99%, to $8.6 million for
the three months ended March 31, 1998 from $4.3 million for the same period in
1997. Of this increase $4.2 million was attributable to the completion of the
Acquisitions subsequent to the quarter ended March 31, 1997. The same practice
income from operations increased approximately $800,000 offset by a $700,000
increase in expenses associated with increased marketing, human resources, and
accounting and other expenses incurred to expand the Company's support
infrastructure. Income from operations as a percent of net revenue increased to
23% for the three months ended March 31, 1998 as compared 20% for the same
period in 1997.
Interest expense decreased by $177,000 or 9%, to $1.8 million for the three
months ended March 31, 1998 from $1.9 million for the same period in 1997. The
majority of this decrease resulted from the lower amount of debt outstanding in
the first quarter of 1998 as compared to the first quarter of 1997. The Company
used $83.4 million of proceeds from the initial public offering to repay
outstanding debt in the fourth quarter of 1997.
The effective income tax rate was approximately 44.5% for the three month period
ended March 31, 1998 as compared to approximately 43.0% for three month period
ended March 31, 1997. The increase in the Company's effective tax rate was
primarily due to the non-deductibility of amortization expense relating to
intangible assets from certain of its acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of approximately $13.6
million, an increase of $1.5 million from the working capital of $12.1 million
available at December 31, 1997. The increase in working capital was due
primarily to an increase in net accounts receivable of $3.8 million, offset by a
decrease in cash of $269,000 and an increase in accounts payable and accrued
expenses of $2.7 million.
For the three month periods ended March 31, 1998 and 1997, cash provided by
operations was $4.5 million and $2.6 million, respectively. For the three month
period ended March 31, 1998, the cash flow from operations and borrowings under
the Company's credit facility were used primarily to: (i) purchase $1.1 million
of property and equipment, primarily for medical equipment and for information
systems as the Company continues to upgrade its billing and financial reporting
systems; (ii) fund the $9.3 million cash portion of the 1998 acquisitions; (iii)
make additional payments of $3.5 million in connection with acquisitions (or
affiliations) the Company completed prior to January 1, 1998, including
contingent note payments of $2.7 million; and (iv) make principal payments on
long term debt.
The Company anticipates that its cash flows from operations, cash on hand, and
funds available under the amended credit facility, will be sufficient to meet
its working capital requirements and finance any required capital expenditures
for at least the next twelve months. In connection with implementing the
Company's growth strategy over the long term, the Company may be required to
seek additional financing through increases to the amended credit facility,
negotiation of credit facilities with other banks or public offerings or private
placements of equity or debt securities. No assurances can be given that the
Company will be able to extend or increase the credit facility, secure
additional bank borrowings or complete additional debt or equity financing on
terms favorable to the Company or at all.
13
<PAGE> 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, the Company has become a party to and may in
the future be subject to pending and threatened legal actions and proceedings.
The majority of the pending legal proceedings involve claims of medical
malpractice, particularly cytology, which are generally covered by insurance.
The Company believes that the outcome of such legal actions and proceedings,
individually or in the aggregate, will not have a material adverse effect on the
Company's financial condition, results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
Effective February 1, 1998, the Company completed the acquisition of the assets
and business of Anatomic Pathology Associates, LLP ("APA"), located in
Indianapolis, Indiana and issued 186,828 shares of common stock to the partners
of APA. The issuance of these shares of common stock was exempt from
registration under the Securities Act pursuant to an exemption provided under
Section 4(2) of the Securities Act based upon, among other things, certain
representations made by the recipients of the stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY-HOLDERS
None
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K, dated February 27, 1998,
reporting the acquisition of the assets and business of
Anatomic Pathology Associates, LLP which was amended to add
Financial Statements and pro forma financial information by
Form 8-K/A (Amendment No. 1), dated April 28, 1998.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AmeriPath, Inc.
Date: May 15, 1998 By: /s/ JAMES C. NEW
--------------------------------------
James C. New
President, Chief Executive Officer
and Director (principal executive
officer)
Date: May 15, 1998 By: /s/ ROBERT P. WYNN
--------------------------------------
Robert P. Wynn
Executive Vice President and Chief
Financial Officer (principal
financial officer and principal
accounting officer)
15
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