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 JUNE 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-22313
AMERIPATH, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 65-0642485
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7289 GARDEN ROAD, SUITE 200, RIVIERA BEACH, FLORIDA 33404
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(Address of principal executive offices) (Zip Code)
(561) 845-1850
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and formal 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 period 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 [ ]
The registrant had 21,414,589 shares of common stock, $.01 par value,
outstanding as of August 16, 1999.
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of June 30, 1999 (Unaudited) and
December 31, 1998 3
Condensed Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 1999
and 1998 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1999 and
1998 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements
(Unaudited) 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-18
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 20
Item 4. Submission of Matters to Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,504 $ 458
Accounts receivable, net 37,873 36,090
Inventories 475 526
Other current assets 5,592 8,960
-------- --------
Total current assets 46,444 46,034
-------- --------
PROPERTY AND EQUIPMENT, NET 9,234 8,584
-------- --------
OTHER ASSETS:
Goodwill, net 126,847 112,388
Identifiable intangibles, net 198,061 193,078
Other 2,293 1,863
-------- --------
Total other assets 327,201 307,329
-------- --------
TOTAL ASSETS $382,879 $361,947
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 17,291 $ 16,127
Current portion of long-term debt 524 1,315
-------- --------
Total current liabilities 17,815 17,442
LONG-TERM LIABILITIES:
Revolving loan 130,006 121,087
Subordinated notes 773 1,106
Deferred tax liability 45,288 44,488
-------- --------
Total liabilities 193,882 184,123
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 211 211
Additional paid-in capital 149,142 148,943
Retained earnings 39,644 28,670
-------- --------
Total stockholders' equity 188,997 177,824
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $382,879 $361,947
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET REVENUES $ 55,406 $ 40,826 $ 107,742 $ 78,817
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES:
Cost of services 24,912 18,024 48,659 35,212
Selling, general and administrative expenses 8,941 6,598 17,726 12,788
Provision for doubtful accounts 6,578 4,112 12,541 8,044
Amortization expense 2,845 2,274 5,529 4,325
--------- --------- --------- ---------
Total operating costs and expenses 43,276 31,008 84,455 60,369
--------- --------- --------- ---------
INCOME FROM OPERATIONS 12,130 9,818 23,287 18,448
OTHER INCOME (EXPENSE):
Interest expense (2,118) (1,929) (4,040) (3,749)
Other, net (1) (49) 5 (36)
--------- --------- --------- ---------
Total other expense (2,119) (1,978) (4,035) (3,785)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 10,011 7,840 19,252 14,663
PROVISION FOR INCOME TAXES 4,304 3,342 8,278 6,378
--------- --------- --------- ---------
NET INCOME $ 5,707 $ 4,498 $ 10,974 $ 8,285
========= ========= ========= =========
BASIC EARNINGS PER COMMON SHARE:
Basic earnings per common share $ 0.27 $ 0.23 $ 0.52 $ 0.42
========= ========= ========= =========
Basic weighted average shares outstanding 21,089 19,884 21,083 19,779
========= ========= ========= =========
DILUTED EARNINGS PER COMMON SHARE:
Diluted earnings per common share $ 0.26 $ 0.22 $ 0.51 $ 0.40
========= ========= ========= =========
Diluted weighted average shares outstanding 21,636 20,678 21,615 20,550
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,974 $ 8,285
Adjustments to reconcile net income to
net cash flows provided by operating activities:
Depreciation and amortization 7,088 5,487
Gain on disposal of assets 28 --
Deferred income taxes (1,800) (1,400)
Provision for doubtful accounts 12,541 8,044
Changes in assets and liabilities
(net of effects of acquisitions):
Increase in accounts receivable (13,590) (10,082)
Decrease (increase) in inventories 51 (51)
Decrease in other current assets 3,368 111
(Increase) decrease in other assets (645) 294
Increase (decrease) in accounts payable
and accrued expenses 1,076 (1,081)
-------- --------
Net cash provided by operating activities 19,091 9,607
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (2,013) (2,047)
Cash paid for acquisitions and acquisition costs,
net of cash acquired (10,958) (26,843)
Payments of contingent notes (11,857) (4,367)
-------- --------
Net cash used in investing activities (24,828) (33,257)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 4 138
Debt issuance costs -- (263)
Principal payments on long-term debt (1,140) (1,023)
Net borrowings under revolving loan 8,919 29,056
-------- --------
Net cash provided by financing activities 7,783 27,908
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 2,046 4,258
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 458 397
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,504 $ 4,655
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements, which include the
accounts of AmeriPath, Inc. and its Subsidiaries (collectively, the "Company"),
have been prepared in accordance with generally accepted accounting principles
for interim financial reporting and the instructions to Form 10-Q and Article 10
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, such interim
financial statements contain all adjustments (consisting of normal recurring
items) considered necessary for a fair presentation of the Company's financial
position, results of operations and cash flows for the interim periods
presented. The results of operations and cash flows for any interim periods are
not necessarily indicative of results which may be reported for the full year.
The accompanying interim financial statements should be read in conjunction with
the audited consolidated financial statements, and the notes thereto, included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1998, as filed with the Securities and Exchange Commission.
In order to maintain consistency and comparability between periods presented,
certain amounts have been reclassified in order to conform with the financial
statement presentation of the current period.
NOTE 2 - ACQUISITIONS
On April 1, 1999, the Company completed the acquisition of Plaza Pathology,
P.A., a hospital-based anatomic pathology practice located in Fort Worth, Texas.
Total consideration paid by the Company in connection with this acquisition
included cash of $2.4 million and additional purchase price in the form of
contingent notes aggregating $1.6 million. The contingent notes are payable upon
retention of a hospital contract.
On April 21, 1999, the Company also completed the acquisition of Edgar G. McKee,
P.A., a hospital-based anatomic pathology practice also located in Fort Worth,
Texas. Total consideration paid by the Company in connection with this
acquisition included cash of $700,000 and additional purchase price in the form
of contingent notes aggregating $500,000. The contingent notes are payable upon
retention of a hospital contract.
On May 12, 1999, the Company completed the acquisition of two practices under
common ownership. Hialeah Pathology Associates, P.A. ("Hialeah"), is a Hialeah,
Florida, anatomic pathology hospital-based practice. South Florida Pathology
Associates, P.A. ("South Florida"), is an outpatient practice with a contract
with SmithKline Beecham Clinical Laboratories, Inc. that covers three South
Florida counties. Total consideration paid by the Company in connection with
this acquisition included cash of $6.3 million and additional purchase price in
the form of contingent notes aggregating $4.2 million. The Hialeah contingent
notes are payable upon retention of a hospital contract and the South Florida
contingent notes are payable upon the achievement of stipulated levels of
cumulative operating earnings of the outpatient practice over a five year
period.
The allocation of the purchase price of some of the 1998 acquisitions and the
1999 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
consolidated financial statements.
The accompanying financial statements include the results of operations of the
1999 and 1998 acquisitions from the date acquired through June 30, 1999 and
1998, respectively. 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 six months ended June 30, 1999 and 1998, after
giving effect to amortization of
6
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
goodwill and identifiable intangible assets, interest expense on debt incurred
in connection with those acquisitions, and the reduced level of certain specific
operating expenses (primarily compensation and related expenses attributable to
former owners) as if the acquisition had been consummated on January 1, 1998.
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 six months ended June 30, 1999 and
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 amounts).
<TABLE>
<CAPTION>
PRO FORMA (UNAUDITED)
--------------------------------
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net revenues $ 109,666 $ 103,441
============ ============
Net income $ 11,190 $ 10,764
============ ============
Net income per share (diluted) $ 0.52 $ 0.49
============ ============
</TABLE>
NOTE 3 - INTANGIBLE ASSETS
Intangible assets and the related accumulated amortization and amortization
periods are set forth below (in thousands, except amortization periods):
<TABLE>
<CAPTION>
JUNE 30, 1999
AMORTIZATION PERIODS
(YEARS)
------------------------
JUNE 30, DECEMBER 31, WEIGHTED
1999 1998 RANGE AVERAGE
----------- ------------ ----- --------
<S> <C> <C> <C> <C>
Hospital contracts $ 155,470 $ 150,076 25-40 34.9
Physician client lists 50,701 50,701 17-30 21.3
Laboratory contracts 4,950 1,800 10 19.5
Management service agreement 2,474 2,481 25 25.0
----------- ----------
213,595 205,058
Accumulated amortization (15,534) (11,980)
----------- ----------
Balance, net $ 198,061 $ 193,078
=========== ==========
Goodwill $ 134,957 $ 118,523 15-35 32.8
Accumulated amortization (8,110) (6,135)
----------- ----------
Balance, net $ 126,847 $ 112,388
=========== ==========
</TABLE>
The weighted average amortization period for identifiable intangible assets and
goodwill is 31.8 years.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
LIABILITY INSURANCE -- The Company is insured with respect to general liability
on an occurrence basis and medical malpractice risks on a claims made basis. The
Company records an estimate of its liabilities for claims incurred but not
reported. Such liabilities are not discounted. Effective July 1, 1999, the
Company changed its medical malpractice carrier and is evaluating increased
levels of coverage. At June 30, 1999, the Company is in dispute with its former
insurance carrier on an issue related to applicability of the
7
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
insurance coverage. The Company believes that an unfavorable resolution, if any,
of such dispute will not have a material adverse effect on the Company's
financial position and 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 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
increased regulatory audits and adjustments, or changes in the interpretation of
the coding of services or 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.
INTERNAL REVENUE SERVICE EXAMINATIONS -- The Internal Revenue Service ("IRS") is
conducting an examination of the Company's federal income tax return for the tax
year ended December 31, 1996. The examination is in the fieldwork phase and the
IRS has not issued any notice of proposed adjustments, and the amount of any
payments required as a result thereof cannot presently be determined. Although
the Company believes it is in compliance with all applicable IRS rules and
regulations, if the IRS should determine the Company is not in compliance, it
could have a material adverse effect on the Company's financial position and
results of operations.
MEDICARE PROGRAM SAFEGUARDS -- An inspection was conducted in April 1997 at the
Company's laboratory facility in Fort Lauderdale, Florida by representatives of
federal and state agencies (Medicare (Florida) Program Safeguards ("MPS")) under
Operation Restore Trust, regarding the Company's 1996 Medicare billing
practices. As the result of the 1997 inspection, in 1998 MPS attempted to recoup
$2.95 million in alleged Medicare overpayments for the use of an improper
procedure code. The government alleged that many of the skin biopsies performed
by the Company should have been coded as an 88304, rather than the 88305 code
used by the Company. The Company mounted a vigorous protest and defense and
argued that its coding practice and procedure codes were accurate and consistent
with accepted CPT code assignment guidelines. As support for its position, the
Company provided MPS with the reports of two reputable coding experts who
independently concluded that the Company's coding practices were in conformity
with accepted CPT assignment guidelines. After review of the Company's position
and the studies presented by the Company, MPS determined that $204.05 was due as
a result of improper documentation. MPS concluded that no fraud or intentional
abuse was demonstrated. AmeriPath promptly paid the $204.05 to resolve the
matter.
Due to the uncertain nature of coding for pathology services, the Company cannot
assure that issues such as those addressed in the 1997 Operation Restore Trust
inspection will not arise again. If negative findings are made as a result of
such an investigation, the Company could be required to change coding practices
or repay amounts paid for incorrect practices either of which could have a
materially adverse effect on the operating results and financial condition of
the Company.
8
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental information presents the non-cash impact on the
balance sheets of assets acquired and liabilities assumed in connection with the
acquisitions consummated by the Company. The non-cash effect of these investing
activities for acquisitions consummated during the six months ended June 30,
1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Assets acquired $ 12,302 $ 34,839
Liabilities assumed (1,817) (2,325)
Common stock issued -- (5,807)
-------- --------
Cash paid 10,485 26,707
Less cash acquired (144) (407)
-------- --------
Net cash paid for acquisitions $ 10,341 $ 26,300
Costs related to completed and
pending acquisitions 617 543
-------- --------
Cash paid for acquisitions and
acquisition costs, net of
cash acquired $ 10,958 $ 26,843
======== ========
</TABLE>
NOTE 6 - EARNINGS PER SHARE
Earnings per share is computed and presented in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which the
Company adopted in the fourth quarter of 1997. Basic earnings per share, which
excludes the effects of any dilutive common equivalent shares that may be
outstanding, such as stock options, is computed by dividing income attributable
to common stockholders by the weighted-average number of common shares
outstanding for the respective periods. Diluted earnings per share gives effect
to the potential dilution that could occur upon the exercise of certain stock
options that were outstanding at various times during the respective periods
presented. The dilutive effects of stock options are calculated using the
treasury stock method .
Basic and diluted earnings per share for the respective periods are set forth in
the table below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic Earnings Per Common Share:
Net income $ 5,707 $ 4,498 $10,974 $ 8,285
------- ------- ------- -------
Basic earnings per common share $ 0.27 $ 0.23 $ 0.52 $ 0.42
------- ------- ------- -------
Basic weighted average shares outstanding 21,089 19,884 21,083 19,779
------- ------- ------- -------
Diluted Earnings Per Common Share:
Net income $ 5,707 $ 4,498 $10,974 $ 8,285
------- ------- ------- -------
Diluted earnings per common share $ 0.26 $ 0.22 $ 0.51 $ 0.40
------- ------- ------- -------
Weighted average shares outstanding 21,089 19,884 21,083 19,779
Effects of dilutive stock options 547 794 532 771
------- ------- ------- -------
Diluted weighted average shares outstanding 21,636 20,678 21,615 20,550
------- ------- ------- -------
</TABLE>
9
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Certain options outstanding as of June 30, 1999 were excluded from the
calculations of diluted earnings per share because their effect would have been
anti-dilutive. Such excluded options totaled 630,050 at a weighted-average
exercise price per share of $12.13 for the three and six months ended June 30,
1999, and 50,000 options at a weighted-average exercise price per share of
$16.73 for the three and six months ended June 30, 1998.
NOTE 7 - SUBSEQUENT EVENTS
Subsequent to June 30, 1999, the Company paid approximately $2.6 million on
contingent notes issued in connection with previous acquisitions.
On July 1, 1999, the Company completed the acquisition of Ocmulgee Medical
Pathology Association, Inc. a hospital-based anatomic pathology practice located
in Macon, Georgia. Total consideration paid by the Company in connection with
this acquisition included cash of $12.8 million, the issuance of 262,500 shares
of common stock with an aggregate market value of approximately $2.1 million and
additional purchase price in the form of contingent notes aggregating $6.7
million. The contingent notes are payable upon the achievement of stipulated
levels of cumulative operating earnings of the practice over a five year period.
On July 26, 1999, the Company completed the acquisition of Consulting
Pathologists, P.A., an outpatient pathology practice with locations in the
Philadelphia, Pennsylvania area. Total consideration paid by the Company in
connection with this acquisition included cash of $3.1 million, the issuance of
60,198 shares of common stock with an aggregate market value of approximately
$600,000 and additional purchase price to the sellers in the form of contingent
notes aggregating $2.3 million. The contingent notes are payable upon the
achievement of stipulated levels of cumulative operating earnings of the
practice over a five year period.
10
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
QUALIFICATION OF FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements made
pursuant to the safe harbor provisions of the Securities Litigation Reform Act
of 1995. Statements contained in this report that are not limited to historical
information are considered 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, plans or strategies regarding the
future. These forward-looking statements are based largely on the Company's
expectations which are subject to a number of known and unknown risks,
uncertainties and other factors discussed in this report and in other documents
filed by the Company with the Securities and Exchange Commission (including,
without limitation, the Company's Annual report on Form 10-K for fiscal 1998),
which may cause actual results to be materially different from those
anticipated, expressed or implied by the forward-looking statements. 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 to reflect future
events or circumstances.
In addition to the risks and uncertainties identified elsewhere herein and in
other documents filed by the Company with the Securities and Exchange
Commission, the following factors should be carefully considered when evaluating
the Company's business and future prospects: general economic conditions;
competition; success of the Company's operating initiatives and growth strategy;
healthcare regulation; payment and reimbursement rates under
government-sponsored healthcare programs; changes in coding; dependence upon
certain pathologists; labor and technology costs; advertising and promotional
efforts; the availability of pathology practices in appropriate locations that
the Company is able to acquire on suitable terms or develop and the overall
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, affiliation, management and/or employment
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 laws, especially non-competition covenants; access to
affordable capital; governmental reimbursement and assistance programs, and tax
laws.
OVERVIEW
AmeriPath, Inc. and its subsidiaries ("AmeriPath" or "the Company") is the
nation's leading integrated physician group practice focused on anatomic
pathology services, based on an analysis of geographic breadth, number of
physicians, number of hospital contracts, number of practices and net revenues.
The Company owns or is affiliated with 36 physician practices (the "Practices")
located in eleven states. The 240 pathologists employed by the Company provide
medical diagnostic services in outpatient laboratories owned and operated by the
Company, in hospitals, and in outpatient ambulatory surgery centers. Of these
pathologists, 235 are board certified, and 104 are also board certified in a
subspecialty of anatomic pathology, including dermatopathology (study of
diseases of the skin), hematopathology (study of diseases of the blood) and
cytopathology (study of abnormalities of the cells).
As of June 30, 1999, 22 Practices had contracts with a total of 140 hospital
locations to manage their inpatient laboratories and provide professional
pathology services. The majority of these hospital contracts are exclusive
provider relationships of the Company. The Company has 23 outpatient
laboratories, of which 11 operate in conjunction with hospital laboratories.
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)
11
<PAGE>
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 Company derives its net revenue from the net revenue of the Practices it
owns or manages. The majority of services furnished by the Company's
pathologists are diagnostic anatomic pathology services. Medicare reimbursement
for these services represented approximately 21% and 23% of the Company's cash
collections in the first six months of 1999 and 1998, respectively. The Company
typically bills government programs (principally Medicare and Medicaid),
indemnity insurance companies, managed care organizations, national clinical
laboratories, physicians and patients. Net revenue differs from amounts billed
for services due to:
o Medicare and Medicaid reimbursements at annually established rates;
o payments from managed care organizations at discounted fee-for-service rates;
o negotiated reimbursement rates with other third party payors;
o rates negotiated under sub-contracts with national clinical laboratories for
the provision of anatomic pathology services; and
o discounts and other allowances, 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, which contract directly under
capitated agreements with managed care organizations to provide clinical as well
as anatomic pathology services. The Company also contracts with national
clinical laboratories and is attempting to increase the number of such contracts
to increase test volume. Since the majority of the Company's operating costs --
principally the compensation of physicians and non-physician technical personnel
- -- are primarily fixed, increases in volume, whether from indemnity or
non-indemnity plans, enhance the Company's profitability. Historically, net
revenue from capitated contracts has represented an insignificant amount of
total net revenue.
Virtually all of the Company's net revenue is derived from the Practices'
charging for services on a fee-for-service basis. Accordingly, the Company
assumes the financial risk related to collection, including potential
uncollectability of accounts, long collection cycles for accounts receivable and
delays in 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. In addition to services billed on a fee-for-service basis, the
hospital-based pathologists have supervision and oversight responsibility for
their roles as Medical Directors of the hospitals' clinical, microbiology and
blood banking operations. For this role, the Company bills non-Medicare patients
according to a fee schedule for what is referred to as clinical component
professional charges. For Medicare patients, the pathologist is typically paid a
Director's fee or "Part A" fee by the hospital. Reimbursement of these clinical
component billing charges and "Part A" fees is coming under increased pressure
for reduction from hospitals and third-party payors, and in the future the
Company may sustain substantial decreases in these payments.
Effective January 1, 1992, Medicare began reimbursing all physician services,
including anatomic pathology services, based on a methodology known as the
resource-based relative value system ("RBRVS"), which was to be fully phased in
by 1996. Overall, anatomic pathology reimbursement rates declined during the fee
schedule phase-in period, despite an increase in payment rates for certain
pathology services performed by the Company.
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The Medicare Part B fee schedule payment for each service is determined by
multiplying the total relative value units ("RVUs") established for the service
by a Geographic Practice Cost Index (GPCI). The sum of this value is multiplied
by a statutory conversion factor. The number of RVUs assigned to each service is
in turn calculated by adding three separate components: work RVU (intensity of
work), practice expense RVU (expense related to performing the service) and
malpractice RVU (malpractice costs associated with the service).
In 1996, the Health Care Financing Administration ("HCFA") completed a five-year
review of the work value component and, as a result, revised the work value
amount assigned to many physician services. In addition, based on a default
formula established by statute, the 1997 conversion factor for non-surgical
services dropped 0.8% to $33.85. As part of its five-year review of the RBRVS
system, HCFA recalculated all of the RBRVS weights. These revisions generally
resulted in a further reduction in Medicare reimbursement. HCFA also reduced the
number of physician fee schedule payment localities from 210 to 89, effective
January 1, 1997. Because of all these changes, there was an overall decrease in
reimbursement rates for pathology services of approximately 5.3% beginning
January 1, 1997.
The Balanced Budget Act of 1997 ("BBA") added coverage for an annual screening
pap smear for Medicare beneficiaries who are at high risk of developing cervical
or vaginal cancer and for beneficiaries of childbearing age effective January 1,
1998, as well as coverage for annual prostate cancer screening, including a
prostate-specific antigen blood test, for beneficiaries over age 50, effective
January 1, 2000. Although most women of childbearing age and men under age 65
are not Medicare beneficiaries, the addition of Medicare coverage for these
tests could provide additional revenues for the Company. With the BBA, Congress
merged the three existing conversion factors into one for all types of services
provided resulting in a single conversion factor for 1998 of $36.69. These
changes effectively provided for an 8.3% increase in reimbursement in 1998.
In 1997, HCFA published regulations that recalculated a key component of the
RBRVS fee schedule. This recalculation modified the practice overhead expense
RVUs to reflect resource consumption, rather than the historical charge data
used to establish the original practice expense. The implementation of resource
based practice expense RVUs began in 1999, and will be phased in over the period
1999-2002. Also, in 1999 the physician fee schedule conversion factor was
reduced by 5% from $36.69 in 1998 to $34.73 for 1999. The law provides that if
adjustments to RVUs cause the total physician fee schedule payments to differ by
$20 million from the amount of expenditures that would have been made if such
adjustments had not been made, HCFA must make adjustments to the conversion
factors to preserve budget neutrality. The conversion factor was also affected
by the elimination of the separate 0.917 budget-neutrality adjustment to the
work relative value units and the adjustments made to the practice expense and
malpractice relative value units to ensure that percentages of fee schedule
allowed charges for work, practice expense and malpractice premiums equal the
new percentages that those categories represent in the revised Medicare Economic
Index ("MEI") weights. The MEI measures the weighted-average annual price change
for various inputs needed to produce physician's services.
HCFA also provided for a separate pap smear interpretation be made for all
smears that require interpretation by a pathologist beginning January 1, 1999.
The amount of this reimbursement will be approximately $36.00 adjusted for the
payor locality.
In July 1999, HCFA announced several proposed rule changes that, if enacted,
could impact the Part payments for pathology services. The proposed changes
include: (a) the implementation of resource -based malpractice insurance RVUs,
which should not significantly change reimbursement; and (b) as noted above, the
1997 regulations required HCFA to develop a methodology for resource-based
practice expense RVUs for each physician service beginning in 1998. The BBA of
1997 provided for a four-year transition period. HCFA has established, and is
proposing, a new methodology for computing resource-based practice expense that
uses available practice expense data. Neither of the forgoing proposals reflects
the final budget neutrality adjustments, and it is too early to evaluate the
financial impacts thereof. In addition, HCFA is proposing to cease the direct
payment by Medicare for the technical component of inpatient physician pathology
services to an outside independent laboratory on the basis that HCFA believes
that the cost of the technical component for inpatient services is already
included in the payment to hospitals under the hospital inpatient prospective
payment system. HCFA is proposing that after December 31, 1999, it will only pay
the hospital for the inpatient technical component services, therefor in those
situations where one of the
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Company's facilities is providing the technical component for inpatient services
it would be required to seek reimbursement for the services directly from the
hospital.
Management continues to monitor changes in legislation impacting reimbursement.
The actual impact of the forgoing changes will depend upon several factors
including comments on proposed rules, the mix of inpatient and outpatient
pathology services furnished by the Company, and final conversion factors
(budget neutrality adjustments) which are published in November of each year.
The actual impact of the forgoing changes on Medicare pathology revenues will
depend on the mix of pathology services furnished by the Company's pathologists,
which we estimate will result in a reduction in Medicare reimbursement in 1999
in the range of 1.5% to 3%. In prior years, the Company has been able to
mitigate the impact of reduced Medicare reimbursement rates for anatomic
pathology services through the achievement of economies of scale and the
introduction of alternative technologies that are not dependent upon
reimbursement through the RBRVS system. Despite these offsets, the recent
substantial modifications to the physician fee schedule, along with additional
adjustments anticipated under Medicare, will have a negative effect on the
Company's average unit reimbursement. In addition, some of the other payors of
the Company could adjust their reimbursement based on the revised Medicare fee
schedule. Any reductions made by other payors could have a negative impact on
the average unit reimbursement.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
During the first six months of 1999, the Company acquired four anatomic
pathology practices, three of which were acquired in the second quarter, the
operating results of which are included in the accompanying financial statements
from the effective acquisition date. Changes in operations between the three and
six month periods ended June 30, 1999 and 1998 are due primarily to the various
acquisitions which were consummated by the Company subsequent to June 30, 1998.
References to "same practice" means practices at which the Company provided
services for the entire period for which the amount is calculated and the entire
prior comparable period and acquired hospital contracts and expanded ancillary
testing services added to existing practices.
NET REVENUES
Net revenues increased by $28.9 million, or 36.7%, from $78.8 million for the
six months ended June 30, 1998, to $107.7 million for the six months ended June
30, 1999. Same practice net revenues increased $4.0 million or 5.1% from $77.9
million for the six months ended June 30, 1998 to $81.9 million for the six
months ended June 30, 1999. The increase in same practice net revenues was due
primarily to increases of $1.3 million in outpatient net revenues and $3.1
million in inpatient revenues. This was offset in part by decreases in the
Medicare reimbursement rates, which amounted to approximately $400,000. The
remaining increase of $24.9 million was from the operations of practices
acquired during the first half of 1999 and those acquired during the year ended
December 31, 1998.
Net revenues increased by $14.6 million, or 35.7%, from $40.8 million for the
three months ended June 30, 1998, to $55.4 million for the three months ended
June 30, 1999. Same practice net revenues increased $1.9 million or 4.7% from
$40.0 million for the three months ended June 30, 1998 to $41.9 million for the
three months ended June 30, 1999. The increase in same practice net revenues was
due primarily to increases of $100,000 in outpatient net revenues and $2.0
million in inpatient net revenues. This was offset by decreases in the Medicare
reimbursement rates, which amounted to approximately $200,000. The remaining
increase of $12.7 million was from the operations of practices acquired during
or subsequent to the quarter ended June 30, 1998.
During the six months ended June 30, 1999, approximately $8.9 million, or 8.2%,
of the Company's net revenue was from contracts with national labs including
SmithKline Beecham Clinical Laboratories, Inc. ("SmithKline"), Quest Diagnostics
(formerly known as Corning Clinical Laboratories) ("Quest"), and Laboratory
Corporation of America Holdings ("LabCorp"). In addition, approximately 17.2% of
the Company's net revenue came from 28 Columbia/HCA Healthcare Corporation
("Columbia") hospitals. Generally, these contracts and other hospital 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
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with relatively short notice. Columbia has been under government investigation
for some time and is evaluating its operating strategies; including the sale,
spin-off or closure of certain hospitals. Although the Company, through its
acquisitions, has had relationships with these hospitals and national labs for
extended periods of time, the termination of one or more of these contracts
could have a material adverse effect on the Company's financial position and
results of operations. On June 30, 1999, the Company was notified that one of
the Columbia hospitals, located in Florida, had been sold and our contract to
provide pathology services would be terminated August 30, 1999. The estimated
net revenue loss as the result of the termination of this contract is less than
1% of consolidated net revenue, however, there can be no assurance that the
Company will be able to make proportionate reductions in operating costs to
offset the decrease in net revenue. The Company has evaluated the carrying
values of identified intangibles and goodwill and the related useful lives
assigned to such assets and has concluded that no adjustments are necessary at
this time.
COST OF SERVICES
Cost of services consists principally of the compensation and fringe benefits of
pathologists, licensed technicians and support personnel, laboratory supplies,
shipping and distribution costs and facility costs. Cost of services increased
by $13.4 million, or 38.2%, from $35.2 million for the six months ended June 30,
1998 to $48.6 million for the same period in 1999. Of this increase, $2.8
million was attributable to same practice growth and $10.6 million from the
acquisitions which occurred during 1999 or for the year ended December 31, 1998.
The gross margin on the same practice revenue for the six months ended June 30,
1999, was approximately 54.0% as compared to the Company's consolidated gross
margin of approximately 55.3% for the six months ended June 30, 1998. A portion
of the decline is related to the decrease in Medicare reimbursement rates. In
addition, the Company incurred approximately $300,000 of expenses related to the
start-up of a de novo outpatient dermatopathology laboratory in New York. This
facility is expected to commence operations in August 1999.
Cost of services increased by $6.9 million, or 38.2%, from $18.0 million for the
three months ended June 30, 1998 to $24.9 million for the same period in 1999.
Of this increase, $1.5 million was attributable to same practice growth and $5.4
million from the acquisitions which occurred during or subsequent to the quarter
ended June 30, 1998. The gross margin on the same practice revenue for the three
months ended June 30, 1999, was approximately 53.9% as compared to the Company's
consolidated gross margin of approximately 55.9% for the three months ended June
30, 1998. A portion of the decline is related to the decrease in Medicare
reimbursement rates, as well as the expensing of the start-up costs attributed
to the Company's de novo outpatient dermatopathology facility in New York.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The cost of corporate support, sales and marketing, and billing and collections
comprise the majority of what is classified as selling, general and
administrative expense. As a percentage of consolidated net revenues, selling,
general and administrative expenses increased to 16.5% for the six months ended
June 30, 1999 as compared to 16.2% for the same period of 1998, but was lower
than the 16.8% reported in the first quarter of 1999. The Company's objective is
to decrease these costs, as a percentage of net revenues. However, in 1999 these
costs as a percentage of net revenues may increase as the Company completes its
Year 2000 remediation, start-up costs associated with the Center for Advanced
Diagnostics and the New York facility.
Selling, general and administrative expenses increased by $4.9 million, or
38.6%, from $12.8 million for the six months ended June 30, 1998 to $17.7
million for the comparable period of 1999. Of this increase, approximately $2.6
million was due to the expansion of the Company's administrative support
infrastructure in areas such as increased staffing levels in marketing, billing,
human resources and accounting. The remainder of the increase was attributable
to operations and expansion of the practices acquired by the Company since June
30, 1998.
Selling, general and administrative expenses increased by $2.3 million, or
35.5%, from $6.6 million for the three months ended June 30, 1998 to $8.9
million for the comparable period of 1999. Of this increase, approximately $1.1
million was due to the expansion of the Company's administrative support
infrastructure in areas such as increased staffing levels in marketing, billing,
human resources and
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accounting. The remainder of the increase was attributable to operations and
expansion of the practices acquired during and subsequent to the quarter ended
June 30, 1998.
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts increased by $4.5 million, or 55.9%, from
$8.0 million for the six months ended June 30, 1998, to $12.5 million for the
same period in 1999. The dollar increase is primarily due to the increase in net
revenues from the acquisitions that occurred during the first half of 1999 or
subsequent to the six months ended June 30, 1998. The provision for doubtful
accounts as a percentage of net revenues was 11.6% and 10.2% for the six month
periods ended June 30, 1999 and 1998, respectively. The increase in the
percentage of net revenue was primarily attributable to an overall increase in
hospital based revenues. Net revenue from inpatient services increased as a
percentage of consolidated net revenue to 57% in the first half of 1999 from 50%
in same period of 1998. The provision for doubtful accounts as a percentage of
net revenue is higher for inpatient (hospital) 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.
The provision for doubtful accounts increased by $2.5 million, or 60.0%, from
$4.1 million for the three months ended June 30, 1998, to $6.6 million for the
same period in 1999. Net revenue from inpatient services increased as a
percentage of consolidated net revenue to 56% in the three months ended June 30,
1999 from 48% in same period of 1998.
AMORTIZATION EXPENSE
Amortization expense increased by $1.2 million, or 27.8%, from $4.3 million for
the six months ended June 30, 1998, to $5.5 million for the same period of 1999.
The increase is primarily attributable to the amortization of goodwill and other
identifiable intangible assets recorded in connection with the acquisition of
the anatomic pathology practices subsequent to June 30, 1998, and payments made
on the contingent notes. Amortization expense is expected to increase in the
future as a result of additional identifiable intangible assets and goodwill
arising from future acquisitions, and any payments required to be made pursuant
to the contingent notes issued in connection with acquisitions.
The Company continually evaluates whether events or circumstances have occurred
that may warrant revisions to the carrying values of its goodwill and other
identifiable intangible assets, or to the estimated useful lives assigned to
such assets. Any significant impairment recorded on the carrying values of the
Company's goodwill or other identifiable intangible assets could have a material
adverse effect on the Company's consolidated financial position and results of
operations.
Amortization expense increased by $600,000, or 25.1%, from $2.2 million for the
three months ended June 30, 1998, to $2.8 million for the same period of 1999.
INCOME FROM OPERATIONS
Income from operations increased $4.8 million or 26.2%, from $18.5 million for
the first six months of 1998, to $23.3 million in the same period of 1999. As a
percentage of consolidated net revenues, income from operations was 21.6% and
23.4% for the six month periods ended June 30, 1999 and 1998, respectively.
Income from operations increased $2.3 million or 23.6%, from $9.8 million for
the three months ended June 30, 1998, to $12.1 million in the same period of
1999. As a percentage of consolidated net revenues, income from operations was
21.9% and 24.0% for the three month periods ended June 30, 1999 and 1998,
respectively.
INTEREST EXPENSE
Interest expense increased by $300,000, or 7.8%, from $3.7 million for the six
months ended June 30, 1998, to $4.0 million for the same period in 1999. The
majority of this increase was attributable to the higher
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average amount of debt outstanding during the first six months of 1999 as
compared to the 1998 period offset in part by more favorable interest rates for
the 1999 period under the Company's amended $200 million credit facility.
Interest expense increased by $200,000, or 9.8%, from $1.9 million for the three
months ended June 30, 1998, to $2.1 million for the same period in 1999. The
Company's effective annual interest rate on the credit facility was 6.41% and
6.64% for the six and three month periods ended June 30, 1999, respectively.
PROVISION FOR INCOME TAXES
The effective income tax rate was 43.0% for the six and three month periods
ended June 30, 1999, as compared to 43.5% and 42.6% for the six and three month
periods ended June 30, 1998, respectively. The decrease in the Company's
effective tax rate was primarily due to the tax deductibility of additional
goodwill for certain 1998 acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had working capital of approximately $28.6
million, essentially the same amount of working capital available at December
31, 1998. However, there was a decrease in other current assets of $3.4 million
offset by increases in net accounts receivable of $1.8 million and cash and cash
equivalents of $2.0 million.
For the six month periods ended June 30, 1999 and 1998, cash flows from
operations were $19.1 million and $9.6 million, respectively. For the six months
ended June 30, 1999, the cash flow from operations and borrowings under the
Company's credit facility were used primarily to: (i) fund the $10.5 million
cash portion of the acquisitions completed during the period; (ii) make
contingent note payments of $11.9 million; and (iii) acquire $2.0 million of
property and equipment, primarily laboratory equipment and information systems
as the Company continues to upgrade its billing and financial reporting systems.
At June 30, 1999, the Company had $70.0 million available under its credit
facility with a syndicate of banks led by BankBoston, N.A., as agent. The
amended facility 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 to the
extent not otherwise used for working capital purposes. As of June 30, 1999,
$130.0 million was outstanding under the revolving loan with an annual effective
interest rate of 6.41%. In October 1998, the Company entered into two, two year,
interest rate swap transactions which involves the exchange of floating for
fixed rate interest payments over the life of the agreement without the exchange
of the underlying principal amounts. The differential to be paid or received is
accrued and is recognized as an adjustment to interest expense. The agreements
are with notional amounts of $75 million and $30 million. Under the $75 and $30
million agreements, the Company receives interest on the notional amounts if the
30 day LIBOR exceeds 4.675% and 5.425%, respectively, and pays interest on the
notional amounts if the 30 day LIBOR is less than the foregoing rates. These
derivative financial instruments are being used by the Company to reduce
interest rate volatility and associated risks arising from the floating rate
structure of its credit facility and is not held or issued for trading purposes.
At June 30, 1999, the Company believes that it is in compliance with the
covenants of the credit facility.
The Company anticipates that its cash flows from operations, together with funds
available under the credit facility and cash on-hand, will be sufficient to meet
its working capital requirements, finance any required capital expenditures and
fund planned acquisitions for at least the next twelve months. With respect to
the deployment of its long-term growth strategy, the Company may be required to
seek additional financing through: increases in availability under the existing
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 increase availability under its
existing credit facility, secure additional bank borrowings or complete
additional debt or equity financing on terms favorable to the Company or at all.
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YEAR 2000 ISSUES
The Year 2000 issue is a result of computer programs or chipsets being written
using two digits rather than four to define the applicable year. Computer
programs that have time sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculation causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar activities.
The Company is continually working to resolve the potential risks and concerns
of the Year 2000 issue. The Company has made progress in assessing, remediating,
testing and implementing systems to be Year 2000 ready. The Company has a
comprehensive working assessment for both information technology and
non-information technology systems covering the majority of its existing
practices. When acquiring new practices, the Company assesses the Year 2000 risk
and compliance as part of the due diligence process. The Company classifies all
systems into categories of importance: mission-critical, business critical and
non-critical. The Company has nearly completed its remediation, validation and
implementation of its multi-phase plan discussed below for its mission-critical
systems as of June 30, 1999.
The Company's Year 2000 phases to correct most information technology and
non-information technology systems are as follows:
Awareness: The continuous process of promoting awareness of the Year 2000
issue across the Company, including communications to the
management and Board of Directors.
Assessment: The assessment phase includes: (1) the physical inventory of all
information technology and non-information technology hardware,
software and embedded systems; (2) the determination of whether
hardware and software are Year 2000 ready or if remediation is
required; (3) the determination of risk tradeoffs and
contingencies needed; and (4) the determination of whether our
business partners, vendors, and third-party payors are Year 2000
compliant.
Remediation: The installation of software or hardware upgrades, replacements
or renovations to be Year 2000 ready.
Validation: The generation of approved test plans, perform tests and produce
results for Year 2000 certification and signoff.
Implementation: Implementation of the Company's remediated systems prior to
2000.
The Company is also assessing the risks and contingencies for third-party
payors, strategic partners, vendors, contracted hospitals, large commercial
payors (e.g. Medicare, Blue Cross/Blue Shield and Cigna) and facility safety
systems. The Company has initiated dialogue with its key vendors and customers,
including hospitals and third-party payors, to determine the extent of any
exposure that the Company may have with respect to failure on the part of such
third parties to become Year 2000 compliant. The Company is working directly
with strategic partners and third-parties to avoid business interruptions in the
year 2000. There can be no assurance that the computer systems of such external
parties upon which the Company is dependent, including third-party payors, will
become compliant in a timely manner; or, that such lack of compliance will not
have an adverse effect on the Company's systems, results of operations or
financial position.
The majority of the Company's costs to correct the Year 2000 issue stem from
professional services and hardware and software replacements. The cost of new
hardware or software purchased in this regard is capitalized and all other costs
associated with such remedial actions are expensed as incurred. The total cost
associated with the Company's Year 2000 project is estimated to be about $1.0
million, which will be funded by cash flow generated by operations and the
Company's credit facility. The Company does not expect these costs to have a
material adverse effect on its results of operations or financial position. To
date, the costs incurred were approximately $600,000, and the current estimated
cost to complete the remediation for all remaining systems is estimated to be
approximately $400,000.
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The Company believes that the most likely worst risk scenario relating to the
Year 2000 could impact diagnosis reporting or bill generation causing strategic
partners, payors and patients from receiving medical and billing information in
a timely matter. The worst case scenarios could result in such things as
decreased cash flows, claims rejection and untimely diagnostic reporting. The
Company has developed contingency plans (i.e. identified alternate systems and
processing capabilities) for any internal Company systems which are mission
critical or business critical systems, if Year 2000 compliance is not achieved.
The estimated Year 2000 costs include the contingency plans and workarounds.
The costs associated with the Company's efforts to become Year 2000 compliant
and the date it expects to complete the required modifications are based on
management's current estimates. Such estimates reflect numerous assumptions as
to future events, including the continued availability of required resources,
the Year 2000 readiness of practices acquired in the future, the reliability of
the compliance plans and actions of third parties and other factors. There can
be no assurance that the final costs of the Year 2000 compliance project will
not exceed the current estimates or that all systems, including those of planned
acquisitions, will be compliant by the anticipated compliance date. Specific
factors that might cause material differences in actual results include, but are
not limited to, the availability and cost of qualified personnel and other
required resources, the ability to identify and correct all relevant computer
codes, and similar uncertainties. There can be no assurances that any failure in
the Company's systems or third parties to be Year 2000 compliant will not have a
material effect on the Company. Further, the present credit facility required
the Company to certify that it was Year 2000 compliant no later than June 30,
1999. To meet this requirement, the banking syndicate requested the Company to
provide them with a detailed Year 2000 status report no later than June 30,
1999. The Company furnished the members of the banking syndicate with a detailed
status report of Year 2000 activities on June 28, 1999. The banking syndicate
has accepted such Year 2000 status report as meeting the requirements of the
credit facility.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risk associated principally with changes in
interest rates. Interest rate exposure is principally limited to the revolving
loan with a balance of $130 million at June 30, 1999.
In October 1998, the Company entered into two, two year, interest rate swap
transactions which involved the exchange of floating for fixed rate interest
payments over the life of the agreement without the exchange of the underlying
principal amounts. The differential to be paid or received is accrued and is
recognized as an adjustment to interest expense. The agreements are with
notional amounts of $75 million and $30 million. Under the $75 and $30 million
agreements, the Company receives interest on the notional amounts if the 30 day
LIBOR exceeds 4.675% and 5.425%, respectively, and pays interest on the notional
amounts if the 30 day LIBOR is less than the foregoing rates. These derivative
financial instruments are being used by the Company to reduce interest rate
volatility and associated risks arising from the floating rate structure of its
Credit Facility and are not held or issued for trading purposes.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the ordinary course of business, the Company has become and may in the
future become subject to pending and threatened legal actions and proceedings.
The Company may have liability with respect to its employees and its
pathologists as well as with respect to hospital employees who are under the
supervision of the hospital based pathologists. The majority of the pending
legal proceedings involve claims of medical malpractice. Most of these relate to
cytology services. These claims are generally covered by insurance. Based upon
investigations conducted to date, the Company believes the outcome of such
pending 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 the Company is ultimately found liable under
these medical malpractice claims, there can be no assurance that the Company's
medical malpractice insurance coverage will be adequate to cover any such
liability. The Company may also, from time to time, be involved with legal
actions related to the acquisition of and affiliation with physician practices,
the prior conduct of such practices, or the employment of (and restriction on
competition of) physicians. There can be no assurance any costs or liabilities
for which the Company becomes responsible in connection with such
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claims or actions will not be material or will not exceed the limitations of any
applicable indemnification provisions or the financial resources of the
indemnifying parties.
As reported in the Company's Form 10-K for the year ended December 31, 1998, in
November 1998 AmeriPath received (and publicly announced that it received) a
request for a refund of $2.95 million from the Medicare (Florida) Program
Safeguards, and the Company also announced that it was vigorously contesting the
Medicare repayment. Following that announcement, seven class action lawsuits
were filed against the Company and certain officers and directors on behalf of
AmeriPath stockholders alleging, among other things, that the Company had
violated securities laws because the Company allegedly had previously failed to
properly disclose the use of improper billing procedures. In December 1998, the
Company announced that Medicare, after further consideration of the Company's
position, agreed with the Company and was withdrawing its request for the $2.95
million refund. As a result, AmeriPath insisted that all the plaintiff's dismiss
their lawsuits against the Company without any payment from AmeriPath and that
all class action plaintiffs publish notice to the class that they sought to
represent that Medicare had withdrawn its refund claim and the plaintiffs would
no longer be pursuing their actions against AmeriPath either on their own behalf
or on behalf of any other shareholder. As of January 8, 1999, all seven of the
class action lawsuits had been dismissed and the requested notices had been
published.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities - No issuance of unregistered securities
by the Company occurred in the second quarter of 1999. Subsequent to June 30,
1999, the Company issued shares of its common stock in connection with the
acquisition of two additional pathology practices, Ocmulgee Medical Pathology
Association, Inc. and Consulting Pathologists, P.A. . The Company issued a total
of 322,698 shares of common stock at closing to the sellers of these pathology
practices.
All of the foregoing shares were exempt from registration under the Securities
Act of 1933 when they were issued, 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 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 5, 1999. The
matters voted on at the Annual Meeting and the tabulation of votes on such
matters are as follows:
(a) Election of Class II Directors.
NUMBER AGAINST OR
NAME VOTING FOR WITHHELD
---- ---------- ---------- ----------
Thomas S. Roberts 16,328,365 16,024,111 304,254
Timothy M. Kilpatrick, M.D. 16,328,365 15,902,627 425,738
The remaining directors whose terms continued after the meeting were James C.
New, E. Roe Stamps, IV, Alan Levin, M.D. and C. Arnold Renschler, M.D.
(b) Approval of the Company's Amended and Restated 1996 Stock Option Plan
The shareholders of the Company ratified the Company's Amended and Restated 1996
Stock Option Plan, by the following vote:
FOR AGAINST ABSTENTIONS
---------- --------- -----------
14,365,708 1,937,934 24,723
20
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ITEM 5. OTHER INFORMATION
Executive Retention Agreements
On August 12, 1999, the Company entered into Executive Retention Agreements
(each an "Agreement") with certain executive officers of the Company, following
approval of such Agreements by the Company's Board of Directors. Each Agreement
generally provides that in the event of a "change in control" of the Company (as
defined), the Company will continue to employ the Officer under the Agreement
for a period of one year following the change in control, at a monthly salary
(the "Base Salary") equal to the highest monthly salary paid to the Officer
during the twelve months preceding the change in control. In addition, upon the
occurrence of a change in control, the Officer will receive a bonus equal to
twelve times the Base Salary, and at the end of the one-year employment period
the Officer will receive another bonus in the same amount. The Agreements
provide for various termination payments if employment is terminated prior to
the end of the one-year employment period.
This description of the Agreements is not complete and is qualified in its
entirety by reference to the full text of the form of Agreement which is filed
as Exhibit 10.40 hereto and which is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.40 Form of Executive Retention Agreement dated August 12, 1999,
between AmeriPath and each of James C. New, Alan
Levin, M.D. and Robert P. Wynn.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated April 8, 1999, was filed by
the Company with the Securities and Exchange Commission on April
16, 1999, reporting that on April 8, 1999, the Board of Directors
of the Company adopted a Preferred Share Purchase Rights Plan and,
in connection therewith, declared a dividend distribution of one
preferred share purchase right on each outstanding share of the
Company's common stock to shareholders of record at the close of
business on April 19, 1999.
21
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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: August 16, 1999 By: /s/ JAMES C. NEW
--------------------------------------------
James C. New
Chairman, President and
Chief Executive Officer
Date: August 16, 1999 By: /s/ ROBERT P. WYNN
--------------------------------------------
Robert P. Wynn
Executive Vice President and
Chief Financial Officer
22
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.40 Form of Executive Retention Agreement dated August 12, 1999,
between AmeriPath and each of James C. New, Alan Levin, M.D. and
Robert P. Wynn.
27.1 Financial Data Schedule
EXHIBIT 10.40
EXECUTIVE RETENTION AGREEMENT
THIS EXECUTIVE RETENTION AGREEMENT ("Agreement") is made and entered
into as of the _____ day of August, 1999, by and between AmeriPath, Inc., a
Delaware corporation (the "Company"), and [EXECUTIVE NAME] (the "Executive").
RECITALS:
The Compensation Committee of the Board of Directors, and the
Board of Directors, of the Company have determined that it is in the best
interests of the Company and its stockholders to assure that the Company will
have the continued dedication, commitment and services of the Executive,
notwithstanding the possibility, threat, proposal with regard to, or occurrence
of a Change of Control (as defined below) of the Company.
The Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and risks
created by a pending or threatened Change of Control. In order to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change of Control, the Board of Directors has
authorized and directed that the Company enter into this Agreement.
AGREEMENT
NOW, THEREFORE, for and in consideration of the premises, benefits
and mutual covenants set forth herein, IT IS HEREBY AGREED AS FOLLOWS:
1. CHANGE IN CONTROL DATE
For purposes of this Agreement, the "Change in Control Date" shall be
the date on which a Change of Control occurs. Anything in this Agreement to the
contrary notwithstanding, if the Executive's employment with the Company is
terminated prior to the date on which a Change of Control occurs, and it is
reasonably demonstrated that such termination (i) was at the request of a third
party who has taken steps reasonably calculated to effect a Change of Control,
or (ii) otherwise arose in connection with or anticipation of a Change of
Control, then for all purposes of this Agreement the "Change in Control Date"
shall mean the date immediately prior to the date of such termination.
2. "CHANGE OF CONTROL"
For the purpose of this Agreement, the term "Change of Control" shall
mean and include:
(i) The acquisition (other than by or from the Company),
at any time
<PAGE>
after the date hereof, by any person, entity or "group", within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange
Act of 1934 (the "Exchange Act"), of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of fifty
percent (50%) or more of either the then outstanding shares of common
stock or of the combined voting power of the Company's then
outstanding voting securities entitled to vote generally in the
election of directors; or
(ii) The six (6) individuals who, as of the date hereof,
constitute the Board of Directors (as of the date hereof the
"Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any person becoming a director
subsequent to the date hereof whose election, or nomination for
election by the Company's stockholders, was approved by a vote of at
least a majority of the directors then comprising the Incumbent Board
(other than an election or nomination of an individual whose initial
assumption of office is in connection with an actual or threatened
election contest relating to the election of the directors of the
Company, as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) shall be, for purposes of this
Agreement, considered as though such person were a member of the
Incumbent Board; or
(iii) Approval by the stockholders of the Company of (1) a
reorganization, merger or consolidation with respect to which persons
who were the stockholders of the Company immediately prior to such
reorganization, merger or consolidation do not, immediately
thereafter, own more than fifty percent (50%) of the combined voting
power entitled to vote generally in the election of directors of the
reorganized, merged or consolidated company's (or entity's) then
outstanding voting securities in substantially the same proportions
as their ownership immediately prior to such reorganization, merger,
or consolidation, (2) a liquidation or dissolution of the Company, or
(3) the sale of all or substantially all of the assets of the
Company, unless any such approved reorganization, merger,
consolidation, liquidation, dissolution or sale is subsequently
abandoned.
3. EMPLOYMENT PERIOD
The Company hereby agrees to continue the Executive in its employ,
and the Executive hereby agrees to remain in the employ of the Company, for the
period commencing on the Change in Control Date and ending on the first
anniversary of such date (the "Employment Period").
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4. TERMS OF EMPLOYMENT DURING EMPLOYMENT PERIOD
(a) POSITION AND DUTIES.
(i) During the Employment Period, (1) the Executive's position
(including status, offices, titles and reporting requirements),
authority, duties and responsibilities shall be at least commensurate
in all material respects with the most significant of those held,
exercised and assigned at any time during the 180-day period
immediately preceding the Change in Control Date, and (2) the
Executive's services shall be performed at the location where the
Executive was employed immediately preceding the Change in Control
Date or in any office or location less than twenty-five (25) miles
from such location.
(ii) During the Employment Period, and excluding any periods
of vacation and sick leave to which the Executive is entitled, the
Executive agrees to devote reasonable attention and time during
normal business hours to the business and affairs of the Company and,
to the extent necessary to discharge the responsibilities assigned to
the Executive hereunder, to use the Executive's reasonable efforts to
perform faithfully and efficiently such responsibilities. During the
Employment Period it shall not be a violation of this Agreement for
the Executive to (1) serve on corporate, civic or charitable boards
or committees, (2) deliver lectures, fulfill speaking engagements or
teach at educational institutions, or (3) manage personal
investments, so long as such activities do not significantly
interfere with the performance of the Executive's responsibilities as
an employee of the Company in accordance with this Agreement. It is
expressly understood and agreed that to the extent that any such
activities have been conducted by the Executive prior to the Change
in Control Date, the continued conduct of such activities (or the
conduct of activities similar in nature and scope) subsequent to the
Change in Control Date shall not thereafter be deemed to interfere
with the performance of the Executive's responsibilities to the
Company.
(b) COMPENSATION.
(i) BASE SALARY. During the Employment Period, the Executive
shall receive a base salary at a monthly rate at least equal to the
highest monthly base salary paid or payable to the Executive by the
Company during the twelve-month period immediately preceding the
month in which the Change in Control Date occurs ("Base Salary").
During the Employment Period, the Base Salary shall be reviewed and
shall be increased at any time and from time to time as shall be
substantially consistent with increases in base salary awarded in the
ordinary course of business to other key executives of the Company
and its subsidiaries. Any increase in Base Salary shall not serve to
limit or reduce any other obligation to the Executive under this
Agreement. Base Salary shall not be reduced after any such increase.
(ii) CHANGE IN CONTROL DATE BONUS. In addition to Base Salary,
the Executive shall be paid on the Change in Control Date a bonus
payable in cash and in the amount
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equal to twelve times the Executive's monthly Base Salary (the
"Change in Control Date Bonus"). Nothing in this Agreement shall
require the payment of a bonus prior to the Change in Control Date.
Executive shall be entitled to the Change in Control Date Bonus,
irrespective of any other obligation (or the fulfillment thereof) of
Executive under this Agreement (including, without limitation, the
employment and related obligations set forth or described in Sections
3 and 4(a) hereof).
(iii) ANNIVERSARY BONUS. If on the date of the one-year
anniversary of the Change in Control Date the Executive is in the
employ of the Company, or any successor thereto or assign thereof,
the Executive shall be paid, on such one-year anniversary date, an
additional bonus payable in cash and in an amount that is not less
than twelve times the Executive's monthly Base Salary as determined
immediately prior to the Change in Control Date (the "Anniversary
Bonus").
(iv) INCENTIVE, SAVINGS AND RETIREMENT PLANS. In addition to
Base Salary, the Change in Control Date Bonus, and the Anniversary
Bonus payable as hereinabove provided, the Executive shall be
entitled to participate during the Employment Period in all
incentive, savings and retirement plans, practices, policies and
programs applicable to other key executives of the Company (including
its successors or assigns) and its affiliates, in each case
comparable to those in effect on the Change in Control Date or as
subsequently amended. Such plans, practices, policies and programs,
in the aggregate, shall provide the Executive with compensation,
benefits and reward opportunities at least as favorable as the most
favorable of such compensation, benefits and reward opportunities
provided by the Company for the Executive under such plans,
practices, policies and programs as in effect at any time during the
180-day period immediately preceding the Change in Control Date or,
if more favorable to the Executive, as provided at any time
thereafter with respect to other key executives.
(v) WELFARE BENEFIT PLANS. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, shall be
eligible for participation in and shall receive all benefits under
welfare benefit plans, practices, policies and programs provided by
the Company and its subsidiaries (including, without limitation,
medical, prescription, dental, disability, salary continuance,
employee life, group life, accidental death and travel accident
insurance plans and programs), at least as favorable as the most
favorable of such plans, practices, policies and programs in effect
at any time during the 180-day period immediately preceding the
Change in Control Date or, if more favorable to the Executive and/or
the Executive's family, as in effect at any time thereafter with
respect to other key executives.
(vi) EXPENSES. During the Employment Period, the Executive
shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by the Executive in connection with the business of
the Company in accordance with the most favorable policies, practices
and procedures of the Company and its subsidiaries in effect at any
time during the 180-day period immediately preceding the Change in
Control Date or, if more favorable to the Executive, as in effect at
any time thereafter with respect to other
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key executives.
(vii) FRINGE BENEFITS. During the Employment Period, the
Executive shall be entitled to fringe benefits, including use of an
automobile and payment of related expenses, in accordance with the
most favorable plans, practices, programs and policies of the Company
and its subsidiaries in effect at any time during the 180-day period
immediately preceding the Change in Control Date or, if more
favorable to the Executive, as in effect at any time thereafter with
respect to other key executives.
(viii) OFFICE AND SUPPORT STAFF. During the Employment Period,
the Executive shall be entitled to an office or offices of a size and
with furnishings and other appointments, and to secretarial and other
assistance, at least equal to the most favorable of the foregoing
provided to the Executive by the Company and its subsidiaries at any
time during the 180-day period immediately preceding the Change in
Control Date or, if more favorable to the Executive, as provided at
any time thereafter with respect to other key executives of the
Company and its subsidiaries.
(ix) VACATION. During the Employment Period, the Executive
shall be entitled to paid vacation in accordance with the most
favorable plans, policies, programs and practices of the Company and
its subsidiaries as in effect at any time during the 180-day period
immediately preceding the Change in Control Date or, if more
favorable to the Executive, as in effect at any time thereafter with
respect to other key executives of the Company and its subsidiaries.
5. TERMINATION
(a) DEATH OR DISABILITY. This Agreement shall terminate automatically
upon the Executive's death. If the Company determines in good faith that the
Disability of the Executive has occurred (pursuant to the definition of
"Disability" set forth below), it may give to the Executive written notice of
its intention to terminate the Executive's employment. In such event, the
Executive's employment with the Company shall terminate effective on the 30th
day after receipt of such notice by the Executive (the "Disability Effective
Date"), provided that, within 30 days after such receipt, the Executive shall
not have returned to full-time performance of the Executive's duties. For
purposes of this Agreement, "Disability" means a mental or physical incapacity,
illness or disability which renders the Executive unable to perform his duties
and responsibilities for the Company and which, at least twenty (20) weeks after
its commencement, is determined to be total and permanent by a physician
selected by the Company or its insurers and acceptable to the Executive or the
Executive's legal representative (such agreement as to acceptability not to be
withheld unreasonably).
(b) CAUSE. The Company may terminate the Executive's employment for
"Cause." For purposes of this Agreement, "Cause" shall mean (i) an act or acts
of personal dishonesty taken by the Executive and intended to result in
substantial personal enrichment of the Executive at the expense of the Company,
(ii) repeated violations by the Executive of the Executive's obligations under
Section 4(a) of this Agreement which are demonstrably willful and deliberate
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on the Executive's part and which are not remedied in a reasonable period of
time after receipt of written notice from the Company to the Executive, or (iii)
the conviction of the Executive of a felony crime.
(c) GOOD REASON. The Executive's employment may be terminated by the
Executive for "Good Reason". For purposes of this Agreement, "Good Reason" shall
mean:
(i) the assignment to the Executive of any duties
inconsistent in any material respect with the Executive's position
(including status, offices, titles and reporting requirements),
authority, duties or responsibilities as contemplated by Section 4(a)
of this Agreement, or any other action by the Company which results
in a diminution in such position, authority, duties or
responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which
is remedied by the Company promptly after receipt of notice thereof
given by the Executive;
(ii) any failure by the Company to comply with any of the
provisions of Section 4(b) of this Agreement, other than an isolated,
insubstantial and inadvertent failure not occurring in bad faith and
which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(iii) the Company's requiring the Executive to be based at
any office or location other than that described in Section
4(a)(i)(2) hereof, except for travel reasonably required in the
performance of the Executive's responsibilities consistent with
practices in effect prior to the Change in Control Date;
(iv) any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by this
Agreement; or
(v) any failure by the Company to comply with and satisfy
Section 9(c) of this Agreement.
(d) NOTICE OF TERMINATION. Any termination by the Company for Cause
or by the Executive for Good Reason shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 10(b) of
this Agreement. For purposes of this Agreement, a "Notice of Termination" means
a written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated, and (iii) if the Date of
Termination (as defined below) is other than the date of receipt of such notice,
specifies the termination date (which date shall be not more than fifteen (15)
days after the giving of such notice). The failure by the Executive to set forth
in the Notice of Termination any fact or circumstance which contributes to a
showing of Good Reason shall not waive any right of the Executive hereunder or
preclude the Executive from asserting such fact or circumstance in enforcing his
rights hereunder.
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(e) DATE OF TERMINATION. "Date of Termination" means the date of
receipt of the Notice of Termination or any later date specified therein, as the
case may be; PROVIDED, HOWEVER, that (i) if the Executive's employment is
terminated by the Company other than for Cause or Disability, the Date of
Termination shall be the date on which the Executive receives the Company's
notice of such termination, and (ii) if the Executive's employment is terminated
by reason of death or Disability, the Date of Termination shall be the date of
death of the Executive or the Disability Effective Date, as the case may be.
6. OBLIGATIONS OF THE COMPANY UPON TERMINATION
(a) DEATH. If during the Employment Period the Executive's employment
is terminated by reason of the Executive's death, this Agreement shall terminate
without further obligation to the Executive's legal representatives under this
Agreement, other than those obligations accrued or earned and vested (if
applicable) by the Executive as of the Date of Termination, including, for this
purpose (i) the Executive's full Base Salary through the Date of Termination at
the rate in effect on the Date of Termination or, if higher, at the highest rate
in effect at any time from the 180-day period preceding the Change in Control
Date through the Date of Termination (the "Highest Base Salary"), (ii) an amount
equal to the product of (x) the highest bonus payable to the Executive from the
Company and its subsidiaries in respect of any of the three fiscal years
immediately preceding the fiscal year in which the Change in Control Date
occurs, multiplied by (y) a fraction, the numerator of which is the number of
days in the current fiscal year through the Date of Termination, and the
denominator of which is 365 (the "Termination Bonus"), (iii) if the Change in
Control Date has occurred, the Change in Control Date Bonus, if and to the
extent not previously paid pursuant to Section 4(b)(ii) hereof, (iv) if the Date
of Termination occurs on or after the first anniversary of the Change in Control
Date, the Anniversary Bonus, if and to the extent not previously paid pursuant
to Section 4(b)(iii) hereof, and (v) any compensation previously deferred by the
Executive (together with any accrued interest thereon) and not yet paid by the
Company and any accrued vacation pay not yet paid by the Company (such amounts
specified in clauses (i) through (v) are hereinafter referred to as "Accrued
Obligations"). All such Accrued Obligations shall be paid to the Executive's
estate or beneficiary, as applicable, in a lump sum in cash within 30 days of
the Date of Termination. Anything in this Agreement to the contrary
notwithstanding, the Executive's family shall be entitled to receive benefits at
least equal to the most favorable benefits provided by the Company and any of
its subsidiaries to surviving families of executives of the Company and such
subsidiaries under such plans, programs, practices and policies relating to
family death benefits, if any, in accordance with the most favorable plans,
programs, practices and policies of the Company and its subsidiaries in effect
at any time during the 180-day period immediately preceding the Change in
Control Date or, if more favorable to the Executive and/or the Executive's
family, as in effect on the date of the Executive's death with respect to other
key executives of the Company and its subsidiaries and their families.
(b) DISABILITY. If during the Employment Period the Executive's
employment is terminated by reason of the Executive's Disability, this Agreement
shall terminate without further obligations to the Executive, other than those
obligations accrued or earned and vested (if applicable) by the Executive as of
the Date of Termination, including for this purpose, all
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Accrued Obligations. All such Accrued Obligations shall be paid to the Executive
in a lump sum in cash within 30 days of the Date of Termination. Anything in
this Agreement to the contrary notwithstanding, the Executive shall be entitled
after the Disability Effective Date to receive disability and other benefits at
least equal to the most favorable of those provided by the Company and its
subsidiaries to disabled employees and/or their families in accordance with such
plans, programs, practices and policies relating to disability, if any, in
accordance with the most favorable plans, programs, practices and policies of
the Company and its subsidiaries in effect at any time during the 180-day period
immediately preceding the Change in Control Date or, if more favorable to the
Executive and/or the Executive's family, as in effect at any time thereafter
with respect to other key executives and their families.
(c) TERMINATION FOR CAUSE OR OTHER THAN FOR GOOD REASON. If during
the Employment Period the Executive's employment shall be terminated by the
Company for Cause, this Agreement shall terminate without further obligations to
the Executive other than the obligation to pay to the Executive the Highest Base
Salary through the Date of Termination plus the amount of any compensation
previously deferred by the Executive (together with accrued interest thereon)
and other than those obligations accrued or earned and vested (if applicable) by
the Executive through the Date of Termination. If the Executive terminates his
employment other than for Good Reason during the Employment Period, this
Agreement shall terminate without further obligation to the Executive, other
than those obligations accrued or earned and vested (if applicable) by the
Executive through the Date of Termination, including for this purpose all
Accrued Obligations other than the Termination Bonus specified in Section
6(a)(ii) hereof. All such Accrued Obligations shall be paid to the Executive in
a lump sum in cash within 30 days of the Date of Termination.
(d) GOOD REASON; OTHER THAN FOR CAUSE OR DISABILITY. If, during the
Employment Period, the Company shall terminate the Executive's employment other
than for Cause, Disability or death, or if the Executive shall terminate his
employment for Good Reason, then:
(i) the Company shall pay to the Executive in a lump sum
in cash within 30 days after the Date of Termination the aggregate of
the following amounts:
1 to the extent not theretofore paid: (x) the
Executive's Highest Base Salary through the Date of
Termination, and (y) the Change in Control Date Bonus
payable under Section 4(b)(ii) hereof; and
2 an amount equal to the Anniversary Bonus as
defined in Section 4(b)(iii) hereof; and
3 in the case of compensation previously
deferred by the Executive, all amounts previously deferred
(together with any accrued interest thereon) and not yet
paid by the Company, and any accrued vacation pay not yet
paid by the Company; and
4 all other amounts accrued or earned by the
Executive through
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the Date of Termination and amounts otherwise owing under
the then existing plans and policies at the Company; and
(ii) for the remainder of the Employment Period, or such
longer period as any plan, program, practice or policy may provide,
the Company shall continue benefits to the Executive and/or the
Executive's family at least equal to those which would have been
provided to them in accordance with the plans, programs, practices
and policies described in Section 4(b)(v) of this Agreement if the
Executive's employment had not been terminated, including health,
dental, disability insurance and life insurance, in accordance with
the most favorable plans, practices, programs or policies of the
Company and its subsidiaries during the 180-day period immediately
preceding the Change in Control Date or, if more favorable to the
Executive, as in effect at any time thereafter with respect to other
key executives and their families and, for purposes of eligibility
for retiree benefits pursuant to such plans, practices, programs and
policies, the Executive shall be considered to have remained employed
until the end of the Employment Period and to have retired on the
last day of such period.
(e) TERMINATION BEFORE OR AFTER EMPLOYMENT PERIOD. If the Executive's
employment with the Company terminates or is terminated either before or after
the Employment Period, then the provisions of paragraphs (a) through (d) of this
Agreement shall not apply, and the rights and obligations of the Executive and
the Company relating to such termination of employment shall be determined
without regard thereto.
(f) NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation in any
benefit, bonus, incentive or other plans, programs, policies or practices
provided by the Company or any of its subsidiaries and for which the Executive
may qualify, nor shall anything herein limit or otherwise affect such rights as
the Executive may have under any compensation, stock option, benefit or other
agreements with the Company or any of its subsidiaries, including without
limitation any right to receive compensation under any severance agreement or
arrangement with the Company. Amounts which are vested benefits or which the
Executive is otherwise entitled to receive under any plan, policy, practice or
program of the Company or any of its subsidiaries at or subsequent to the Date
of Termination shall be payable in accordance with such plan, policy, practice
or program.
(g) NO SET-OFF OR MITIGATION; PAYMENT OF LEGAL FEES AND EXPENSES. The
Company's obligation to make the payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be affected by any
set-off, counterclaim, recoupment, defense or other claim, right or action which
the Company may have against the Executive or others. In no event shall the
Executive be obligated to seek other employment or take any other action by way
of mitigation of the amounts payable to the Executive under any of the
provisions of this Agreement. The Company agrees to pay, to the full extent
permitted by law, all legal fees and expenses which the Executive may reasonably
incur as a result of any contest (regardless of the outcome thereof) by the
Company (including its successors, assigns or affiliates) or others of the
validity or enforceability of, or liability under, any provision of this
Agreement or any guarantee of performance thereof (including as a result of any
contest by the Executive about the
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amount of any payment pursuant to Section 7 of this Agreement), plus in each
case interest at the applicable Federal rate provided for in Section 7872(f)(2)
of the Code.
7. CERTAIN REDUCTION OF PAYMENTS BY THE COMPANY
(a) For purposes of this section, (i) A Payment shall mean any payment
or distribution in the nature of compensation to or for the benefit of the
Executive, whether paid or payable pursuant to this Agreement or otherwise; (ii)
Agreement Payment shall mean a Payment paid or payable pursuant to this
Agreement (disregarding this Section 7); (iii) Net After Tax Receipt shall mean
the Present Value of a Payment net of all taxes imposed on the Executive with
respect thereto under Sections 1 and 4999 of the Internal Revenue Code of 1986,
as amended (the "Code"), determined by applying the highest marginal rate under
Section 1 of the Code which applied to the Executive's taxable income for the
immediately preceding taxable year; (iv) "Present Value" shall mean such value
determined in accordance with Section 280G(d)(4) of the Code; and (v) "Reduced
Amount" shall mean the smallest aggregate amount of Payments which (a) is less
than the sum of all Payments and (b) results in aggregate Net After Tax Receipts
which are equal to or greater than the Net After Tax Receipts which would result
if the aggregate Payments were any other amount equal to or less than the sum of
all Payments.
(b) Anything in this Agreement to the contrary notwithstanding, in the
event that the Company's independent auditors or, at the Executive's option, any
other nationally or regionally recognized firm of independent accountants
selected by the Executive and approved by the Company, which approval shall not
be unreasonably withheld (the "Accounting Firm"), shall determine that receipt
of all Payments would subject the Executive to tax under Section 4999 of the
Code, it shall determine whether some amount of Payments would meet the
definition of a "Reduced Amount." If the Accounting Firm determines that there
is a Reduced Amount, the aggregate Agreement Payments shall be reduced to such
Reduced Amount; provided, however, that if the Reduced Amount exceeds the
aggregate Agreement Payments, the aggregate Payments shall, after the reduction
of all Agreement Payments, be reduced (but not below zero) in the amount of such
excess.
(c) If the Accounting Firm determines that aggregate Agreement Payments
or Payments, as the case may be, should be reduced to the Reduced Amount, the
Company shall promptly give the Executive notice to that effect and a copy of
the detailed calculation thereof, and the Executive may then elect, in his sole
discretion, which and how much of the Agreement Payments or Payments, as the
case may be, shall be eliminated or reduced (as long as after such election the
present value of the aggregate Payments equals the Reduced Amount), and shall
advise the Company in writing of his election within ten days of his receipt of
notice. If no such election is made by the Executive within such ten-day period,
the Company may elect which of the Agreement Payments or Payments, as the case
may be, shall be eliminated or reduced (as long as after such election the
present value of the aggregate Payments equals the Reduced Amount) and shall
notify the Executive promptly of such election. All determinations made by the
Accounting Firm under this Section shall be binding upon the Company and the
Executive and shall be made within 60 days of a termination of employment of the
Executive. As promptly
-10-
<PAGE>
as practicable following such determination, the Company shall pay to or
distribute for the benefit of the Executive such Payments as are then due to the
Executive under this Agreement and shall promptly pay to or distribute for the
benefit of the Executive in the future such Payments as become due to the
Executive under this Agreement.
(d) While it is the intention of the Company and the Executive to
reduce the amounts payable or distributable to the Executive hereunder only if
the aggregate Net After Tax Receipts to the Executive would thereby be
increased, as a result of the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that amounts will not have been paid or distributed by
the Company to or for the benefit of the Executive pursuant to this Agreement
which should not have been so paid or distributed ("Overpayment") or that
additional amounts which will have not been paid or distributed by the Company
to or for the benefit of the Executive pursuant to this Agreement could have
been so paid or distributed ("Underpayment"), in each case, consistent with the
calculation of the Reduced Amount hereunder. In the event that the Accounting
Firm, based either upon the assertion of a deficiency by the Internal Revenue
Service against the Company or the Executive which the Accounting Firm believes
has a high probability of success or controlling precedent or other substantial
authority, determines that an Overpayment has been made, any such Overpayment
paid or distributed by the Company to or for the benefit of the Executive shall
be treated for all purposes as a loan AB INITIO to the Executive which the
Executive shall repay to the Company together with interest at the applicable
federal rate provided for in Section 7872(f)(2) of the Code; provided, however,
that no loan shall be deemed to have been made and no amount shall be payable by
the Executive to the Company if and to the extent such deemed loan and payment
would not either reduce the amount on which the Executive is subject to tax
under Section 1 and Section 4999 of the Code or generate a refund of such taxes.
In the event that the Accounting Firm, based upon controlling precedent or other
substantial authority, determines that an Underpayment has occurred, any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive together with interest at the applicable federal rate provided for in
Section 7872(f)(2) of the Code.
8. CONFIDENTIAL INFORMATION
The Executive shall hold in a fiduciary capacity for the benefit of the
Company all secret or confidential information, knowledge or data relating to
the Company or any of its subsidiaries, and their respective businesses, which
shall have been obtained by the Executive during the Executive's employment by
the Company or any of its subsidiaries and which shall not be or become public
knowledge (other than by acts by the Executive or his representatives in
violation of this Agreement). After termination of the Executive's employment
with the Company, the Executive shall not, without the prior written consent of
the Company, communicate or divulge any such information, knowledge or data to
anyone other than the Company and those designated by it. In no event shall an
asserted violation of the provisions of this Section 8 constitute a basis for
deferring or withholding any amounts otherwise payable to the Executive under
this Agreement.
-11-
<PAGE>
9. SUCCESSORS
(a) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to assume expressly and agree to
perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
10. MISCELLANEOUS
(a) This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Florida, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may not
be amended or modified otherwise than by a written agreement executed by the
parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing
and shall be given by hand delivery to the other party or by registered or
certified mail, return receipt requested, postage prepaid, addressed as follows:
IF TO THE EXECUTIVE:
[EXECUTIVE NAME]
[EXECUTIVE ADDRESS LINE 1]
[EXECUTIVE CITY], [EXECUTIVE STATE]
[EXECUTIVE ZIP CODE]
IF TO THE COMPANY:
AmeriPath, Inc.
7289 Garden Road, Suite 200
Riviera Beach, FL 33404
Attention: President
or to such other address as either party shall have furnished to the other in
writing in accordance
-12-
<PAGE>
herewith. Notice and communications shall be effective when actually received by
the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(e) The Executive's failure to insist upon strict compliance with any
provision hereof shall not be deemed to be a waiver of such provision or any
other provision thereof.
(f) This Agreement contains the entire understanding of the Company and
the Executive with respect to the subject matter hereof.
(g) The Company (including its Board of Directors or any committee
thereof) will not take any action that is inconsistent with the terms or
provisions of this Agreement. In addition, the Company (including its Board of
Directors or any committee thereof) will not take any action by reason of or in
connection with a Change of Control to cancel or otherwise terminate or rescind
(i) any compensation or benefit to which the Executive is entitled under any
agreement between the Company and the Executive, or (ii) any outstanding stock
options granted by the Company to the Executive, unless the Executive is
afforded a reasonable opportunity to exercise those options (whether or not
otherwise exercisable) prior to the Change in Control Date.
(h) The Executive and the Company acknowledge that, except as set forth
in any written employment agreement between the Executive and the Company and
effective from and after the date hereof, the employment of the Executive by the
Company is "at will," and, prior to the Change in Control Date, may be
terminated by either the Executive or the Company at any time. Upon a
termination of the Executive's employment prior to the Change in Control Date,
there shall be no further rights of the Executive under this Agreement.
-13-
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set his hand and,
pursuant to the authorization from its Board of Directors, the Company has
caused this agreement to be executed in its name on its behalf, all as of the
day and year first above written.
-------------------------------
[EXECUTIVE NAME]
AMERIPATH, INC.
By:____________________________
Thomas S. Roberts
Chairman of the Compensation Committee
of the Board of Directors
-14-
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<FISCAL-YEAR-END> DEC-31-1999
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0
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<COMMON> 211
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