UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
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(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 21,580,687 shares of common stock, $.01 par value,
outstanding as of November 15, 1999.
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1999 (Unaudited) and December 31, 1998 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1999 and 1998 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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 11-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,888 $ 458
Accounts receivable, net 43,258 36,090
Inventories 448 526
Other current assets 6,496 8,960
-------- --------
Total current assets 55,090 46,034
-------- --------
PROPERTY AND EQUIPMENT, NET 12,280 8,584
-------- --------
OTHER ASSETS:
Goodwill, net 145,039 112,388
Identifiable intangibles, net 227,865 193,078
Other 2,208 1,863
-------- --------
Total other assets 375,112 307,329
-------- --------
TOTAL ASSETS $442,482 $361,947
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 23,520 $ 16,127
Current portion of long-term debt 564 1,315
-------- --------
Total current liabilities 24,084 17,442
LONG-TERM LIABILITIES:
Revolving loan 163,479 121,087
Subordinated notes 721 1,106
Deferred tax liability 56,288 44,488
-------- --------
Total liabilities 244,572 184,123
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 215 211
Additional paid-in capital 152,154 148,943
Retained earnings 45,541 28,670
-------- --------
Total stockholders' equity 197,910 177,824
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $442,482 $361,947
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET REVENUES $ 59,866 $ 47,005 $ 167,608 $ 125,822
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES:
Cost of services 27,931 20,677 76,590 55,889
Selling, general and administrative expenses 9,790 8,093 27,516 20,881
Provision for doubtful accounts 6,005 4,843 18,546 12,887
Amortization expense 3,317 2,507 8,846 6,832
--------- --------- --------- ---------
Total operating costs and expenses 47,043 36,120 131,498 96,489
--------- --------- --------- ---------
INCOME FROM OPERATIONS 12,823 10,885 36,110 29,333
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (2,528) (2,167) (6,568) (5,916)
Other, net 50 83 55 47
--------- --------- --------- ---------
Total other expense (2,478) (2,084) (6,513) (5,869)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 10,345 8,801 29,597 23,464
PROVISION FOR INCOME TAXES 4,448 3,793 12,726 10,171
--------- --------- --------- ---------
NET INCOME $ 5,897 $ 5,008 $ 16,871 $ 13,293
========= ========= ========= =========
BASIC EARNINGS PER COMMON SHARE:
Basic earnings per common share $ 0.28 $ 0.24 $ 0.80 $ 0.66
========= ========= ========= =========
Basic weighted average shares outstanding 21,431 20,748 21,200 20,106
========= ========= ========= =========
DILUTED EARNINGS PER COMMON SHARE:
Diluted earnings per common share $ 0.27 $ 0.23 $ 0.78 $ 0.64
========= ========= ========= =========
Diluted weighted average shares outstanding 22,034 21,397 21,742 20,841
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,871 $ 13,293
Adjustments to reconcile net income to net cash flows provided by operating
activities:
Depreciation and amortization 11,204 8,666
Gain on disposal of assets 3 --
Deferred income taxes (3,500) (2,800)
Provision for doubtful accounts 18,546 12,887
Changes in assets and liabilities (net of effects of acquisitions):
Increase in accounts receivable (21,144) (15,063)
Decrease (increase) in inventories 78 (32)
Decrease (increase) in other current assets 2,464 (356)
(Increase) decrease in other assets (865) 272
Increase (decrease) in accounts payable and accrued expenses 4,053 347
-------- --------
Net cash provided by operating activities 27,710 17,214
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (5,619) (2,930)
Cash paid for acquisitions and acquisition costs, net of cash acquired (43,100) (41,907)
Payments of contingent notes (15,807) (6,089)
-------- --------
Net cash used in investing activities (64,526) (50,926)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 7 162
Debt issuance costs -- (294)
Principal payments on long-term debt (1,153) (1,352)
Net borrowings under revolving loan 42,392 38,740
-------- --------
Net cash provided by financing activities 41,246 37,256
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 4,430 3,544
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 458 397
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,888 $ 3,941
======== ========
</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
The following acquisitions occurred in the third quarter of 1999:
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 $3.3 million, the issuance of
60,198 shares of common stock with an aggregate market value of approximately
$570,000 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.
On September 13, 1999, the Company completed the acquisition of Pathology
Associates of Texas, a hospital-based pathology practice located in Fort Worth,
Texas. Total consideration paid by the Company in connection with this
acquisition included cash of $8.7 million and additional purchase price in the
form of contingent notes aggregating $7.1 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 September 23, 1999, the Company completed the acquisition of Associated
Laboratory Physician Services, S.C., an anatomic pathology practice located in
Wauwatosa, Wisconsin. Total consideration paid by the Company in connection with
this acquisition included cash of $9.0 million, the issuance of 164,098 shares
of common stock with an aggregate market value of approximately $1.5 million and
additional purchase price in the form of contingent notes aggregating $5.0
million. The contingent notes are payable upon the achievement of stipulated
levels of cumulative operating earnings of the 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
6
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AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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 September 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 nine months ended September 30, 1999 and 1998, after
giving effect to amortization of 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 nine months ended September 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).
Pro Forma (Unaudited)
---------------------------
Nine Months Ended
September 30,
1999 1998
--------- ---------
Net revenues $ 185,033 $ 175,591
========= =========
Net income $ 18,664 $ 18,259
========= =========
Net income per share (diluted) $ 0.84 $ 0.82
========= =========
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>
September 30, 1999
Amortization Periods
(Years)
----------------------------
September 30, December 31, Weighted
1999 1998 Range Average
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Hospital contracts $ 184,264 $ 150,076 25-40 33.4
Physician client lists 50,701 50,701 17-30 21.3
Laboratory contracts 8,054 1,800 10 10.0
Management service agreement 2,477 2,481 25 25.0
----------- ----------
245,496 205,058
Accumulated amortization (17,631) (11,980)
----------- ----------
Balance, net $ 227,865 $ 193,078
=========== ==========
Goodwill $ 154,369 $ 118,523 10-35 31.0
Accumulated amortization (9,330) (6,135)
----------- ----------
Balance, net $ 145,039 $ 112,388
=========== ==========
</TABLE>
The weighted average amortization period for identifiable intangible assets and
goodwill is 30.5 years.
7
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
NOTE 4 - COMMITMENTS AND CONTINGENCIES
LIABILITY INSURANCE -- The Company is insured with respect to general liability
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 September 30, 1999, the Company is in dispute with its
former insurance carrier on an issue related to applicability of the 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
years ended December 31, 1997 and 1996. The examination is in the early 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
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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 nine months ended September
30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Assets acquired $ 64,840 $ 57,500
Liabilities assumed (17,484) (4,935)
Common stock issued (3,014) (11,192)
-------- --------
Cash paid 44,342 41,373
Less cash acquired (1,517) (696)
-------- --------
Net cash paid for acquisitions $ 42,825 $ 40,677
Costs related to completed and pending acquisitions 275 1,230
-------- --------
Cash paid for acquisitions and acquisition costs, net of
cash acquired $ 43,100 $ 41,907
======== ========
</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 Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic Earnings Per Common Share:
Net income $ 5,897 $ 5,008 $16,871 $13,293
======= ======= ======= =======
Basic earnings per common share $ 0.28 $ 0.24 $ 0.80 $ 0.66
======= ======= ======= =======
Basic weighted average shares outstanding 21,431 20,748 21,200 20,106
======= ======= ======= =======
Diluted Earnings Per Common Share:
Net income $ 5,897 $ 5,008 $16,871 $13,293
======= ======= ======= =======
Diluted earnings per common share $ 0.27 $ 0.23 $ 0.78 $ 0.64
======= ======= ======= =======
Basic weighted average shares outstanding 21,431 20,748 21,200 20,106
Effects of dilutive stock options 603 649 542 735
------- ------- ------- -------
Diluted weighted average shares outstanding 22,034 21,397 21,742 20,841
======= ======= ======= =======
</TABLE>
9
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Certain options outstanding as of September 30, 1999 were excluded from the
calculations of diluted earnings per share because their effect would have been
anti-dilutive. Such excluded options totaled 617,300 at a weighted-average
exercise price per share of $12.15 for the nine months ended September 30, 1999,
592,300 at a weighted-average exercise price per share of $12.27 for the three
months ended September 30, 1999, 50,000 at a weighted-average exercise price per
share of $16.73 for the nine months ended September 30, 1998 and 303,050 at a
weighted-average price per share of $14.50 for the three months ended September
30, 1998.
NOTE 7 - SUBSEQUENT EVENTS
Subsequent to September 30, 1999, the Company paid approximately $123,000 on
contingent notes issued in connection with previous acquisitions.
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 the year ended
December 31, 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 and laboratory management 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 42 physician practices
(the "Practices") located in twelve states. The 288 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, 285 are board certified, and 146 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 September 30, 1999, 23 Practices had contracts with a total of 153
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 28 outpatient
laboratories, of which 12 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 nine 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 relatively 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 to 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, and issued a final
rule on November 2, 1999 that could impact payment for pathology services. The
changes include: (a) the implementation of resource-based malpractice 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. In the November 2, 1998 final rule, an
interim solution was developed which created a separate practice expense pool
for all services with zero work RVUs. As published in the November 2, 1999 final
rule, certain reimbursement codes were removed from the zero work RVU pool. The
impact of these procedures from the zero work pool varies by procedure and
geographic region, and AmeriPath's management believes this will result in a
positive impact on the payment for global and technical component procedures. In
addition, HCFA announced that it will cease the direct payment by Medicare for
the technical component of inpatient physician pathology services to an
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outside independent laboratory on the basis that it 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.
Implementation of this change will commence January 1, 2001 in order to allow
independent laboratories and hospitals sufficient time to negotiate
arrangements. Where one of the Company's facilities is providing technical
component for inpatient services, it will now be required to seek reimbursement
directly from the hospital. HCFA also announced that the physician fee schedule
conversion factor will increase from $34.73 to $36.61 in 2000.
Management continuously monitors changes in legislation impacting reimbursement.
The impact of the legislative changes on the Company's results of operations
will depend upon several factors, including comments on proposed rules, the mix
of inpatient and outpatient pathology services furnished by the Company, the
amount of Medicare business and conversion factors (budget neutrality
adjustments) which are published in November of each year.
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, could
have a negative effect on the Company's average unit reimbursement in the
future. In addition, other third-party payors could adjust their reimbursement
based on changes to the 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
1998
During the first nine months of 1999, the Company acquired eight anatomic
pathology practices, four of which were acquired in the third quarter, the
operating results of which are included in the accompanying financial statements
from the effective acquisition date. Changes in the results of operations
between the three and nine month periods ended September 30, 1999 and 1998 are
due primarily to the acquisitions which were consummated by the Company
subsequent to September 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 $41.8 million, or 33.2%, from $125.8 million for the
nine months ended September 30, 1998, to $167.6 million for the same nine months
ended in 1999. Same practice net revenues increased $5.2 million or 4.4% from
$118.2 million for the nine months ended September 30, 1998 to $123.4 million
for the nine months ended September 30, 1999. The increase in same practice net
revenues was due primarily to increases of $2.8 million in outpatient net
revenues and $3.0 million in inpatient revenues. This was offset in part by
decreases in the Medicare reimbursement rates, which amounted to approximately
$600,000. The remaining increase of $36.6 million was from the operations of
practices acquired during the first nine months of 1999 and those acquired
during the year ended December 31, 1998.
Net revenues increased by $12.9 million, or 27.4%, from $47.0 million for the
three months ended September 30, 1998, to $59.9 million for the three months
ended September 30, 1999. Same practice net revenues increased $1.9 million or
4.1% from $46.6 million for the three months ended September 30, 1998 to $48.5
million for the three months ended September 30, 1999. The increase in same
practice net revenues was due primarily to an increase of $2.2 million in
outpatient net revenues. This was offset by decreases of $100,000 in inpatient
net revenues, and in the reduction of the Medicare reimbursement rates, which
amounted to approximately $200,000. The remaining increase of $11.0 million was
from the operations of practices acquired during or subsequent to the quarter
ended September 30, 1998.
During the nine months ended September 30, 1999, approximately $15.2 million, or
9.1%, of the Company's net revenue was from individual contracts with national
labs including SmithKline Beecham
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Clinical Laboratories, Inc. ("SmithKline"), Quest Diagnostics ("Quest"), and
Laboratory Corporation of America Holdings ("LabCorp"). The Company's contract
with LabCorp expired September 30, 1999. The Company is currently negotiating
the renewal of this contract, however, no assurance can be made that the
contract will be renewed or if renewed, renewed under terms comparable with the
existing contract. In addition, approximately 16.8% of the Company's net revenue
came from 27 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 also
contain clauses that allow for termination by either party 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
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 from time to time evaluates 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 $20.7 million, or 37.0%, from $55.9 million for the nine months ended
September 30, 1998 to $76.6 million for the same period in 1999. Of this
increase, $5.4 million was attributable to same practice growth and $15.3
million from the acquisitions which occurred during 1999 or for the year ended
December 31, 1998. The gross margin for the nine months ended September 30,
1999, was approximately 54.3% as compared to the gross margin of approximately
55.6% for the nine months ended September 30, 1998. A portion of the decline is
related to the decrease in Medicare reimbursement rates. In addition, the
Company incurred approximately $500,000 of expenses related to the start-up of a
de novo outpatient dermatopathology laboratory in New York. This facility
commenced operations in August 1999. Excluding the results of operations for the
New York startup, the Company's gross margin would have been 54.6% in 1999.
Cost of services increased by $7.2 million, or 35.1%, from $20.7 million for the
three months ended September 30, 1998 to $27.9 million for the same period in
1999. Of this increase, $3.0 million was attributable to same practice growth
and $4.2 million from the acquisitions which occurred during or subsequent to
the quarter ended September 30, 1998. The gross margin for the three months
ended September 30, 1999, was approximately 53.3% as compared to the gross
margin of approximately 56.0% for the three months ended September 30, 1998. 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 decreased to 16.4% for the nine months ended
September 30, 1999 as compared to 16.6% for the same period of 1998, but was
comparable with the second 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, incurs start-up costs associated with its Center for
Advanced Diagnostics and the New York facility, and invest in its centralized
billing operations.
Selling, general and administrative expenses increased by $6.6 million, or
31.8%, from $20.9 million for the nine months ended September 30, 1998 to $27.5
million for the comparable period of 1999. Of this increase, approximately $3.9
million was due to the expansion of the Company's administrative support
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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
September 30, 1998.
Selling, general and administrative expenses increased by $1.7 million, or
21.0%, from $8.1 million for the three months ended September 30, 1998 to $9.8
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 accounting. The remainder of the increase was from the
operations of practices acquired during or subsequent to the quarter ended
September 30, 1998.
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts increased by $5.6 million, or 43.9%, from
$12.9 million for the nine months ended September 30, 1998, to $18.5 million for
the same period in 1999. The dollar increase is primarily due to the increase in
net revenues and accounts receivable from the acquisitions that occurred during
the first nine months of 1999 or during or subsequent to the quarter ended
September 30, 1998. The provision for doubtful accounts as a percentage of net
revenues was 11.1% and 10.2% for the nine month periods ended September 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 hospital inpatient services increased as a percentage of
consolidated net revenue to 56% in the first nine months of 1999 from 52% 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 $1.2 million, or 24.0%, from
$4.8 million for the three months ended September 30, 1998, to $6.0 million for
the same period in 1999. The provision for doubtful accounts as a percentage of
net revenues was 10.0% and 10.3% for the three month periods ended September 30,
1999 and 1998, respectively. The Company has instituted a bad debt reduction
initiative focused on improving the quality of inpatient information it
receives, and has started to see positive results in the third quarter of 1999.
AMORTIZATION EXPENSE
Amortization expense increased by $2.0 million, or 29.5%, from $6.8 million for
the nine months ended September 30, 1998, to $8.8 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 September 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. As of September 30, 1999, the Company does not believe that any
adjustments are necessary.
Amortization expense increased by $800,000, or 32.3%, from $2.5 million for the
three months ended September 30, 1998, to $3.3 million for the same period of
1999.
INCOME FROM OPERATIONS
Income from operations increased $6.8 million or 23.1%, from $29.3 million for
the first nine months of 1998, to $36.1 million in the same period of 1999. As a
percentage of consolidated net revenues, income
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from operations was 21.5% and 23.3% for the nine month periods ended September
30, 1999 and 1998, respectively.
Income from operations increased $1.9 million or 17.8%, from $10.9 million for
the three months ended September 30, 1998, to $12.8 million in the same period
of 1999. As a percentage of consolidated net revenues, income from operations
was 21.4% and 23.2% for the three month periods ended September 30, 1999 and
1998, respectively.
INTEREST EXPENSE
Interest expense increased by $700,000, or 11.0%, from $5.9 million for the nine
months ended September 30, 1998, to $6.6 million for the same period in 1999.
The majority of this increase was attributable to the higher average amount of
debt outstanding during the first nine 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 $300,000, or 16.7%, from $2.2 million for the
three months ended September 30, 1998, to $2.5 million for the same period in
1999. The Company's effective annual interest rate on the credit facility was
6.57% and 6.96% for the nine and three month periods ended September 30, 1999,
respectively.
PROVISION FOR INCOME TAXES
The Company's effective income tax rate was 43.0% for the nine and three month
periods ended September 30, 1999, as compared to 43.3% and 43.1% for the nine
and three month periods ended September 30, 1998, respectively. The decrease in
the Company's effective tax rate was primarily due to the tax deductibility of
additional goodwill for certain 1999 and 1998 acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had working capital of approximately $31.0
million, an increase of $2.4 million over the amount of working capital
available at December 31, 1998. Increases in net accounts receivable of $7.2
million and cash and cash equivalents of $4.4 million were offset by an increase
in accounts payable and accrued liabilities of $7.4 million and a decrease in
other current assets of $2.5 million.
For the nine month periods ended September 30, 1999 and 1998, cash flows from
operations were $27.7 million and $17.2 million, respectively. For the nine
months ended September 30, 1999, the cash flow from operations and borrowings
under the Company's credit facility were used primarily to: (i) fund the $44.3
million cash portion of the acquisitions completed during the period; (ii) make
contingent note payments of $15.8 million; and (iii) acquire $5.6 million of
property and equipment, primarily for the build-out of the New York facility,
laboratory equipment and information systems as the Company continues to upgrade
its billing and lab information systems.
At September 30, 1999, the Company had $36.5 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 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 September 30,
1999, $163.5 million was outstanding under the revolving loan with an annual
effective interest rate of 6.69%. The Company is currently seeking an amendment
to its facility to increase the amount available from $200 million to up to $300
million. The proposed terms of this agreement could increase the Company's
annual effective interest rate by 1%. 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%
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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 September 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.
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 completed its remediation, validation and
implementation of its multi-phase plan discussed below for its mission-critical
systems other than with respect to practices acquired since June 1999, which
will be completed prior to year end.
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 had dialogue with its key vendors and customers,
including
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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 under $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
less than $100,000.
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 this requirement 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 $163.5 million at September 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.
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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 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 - In connection with three of the
acquisitions completed during the third quarter of 1999, the Company issued the
following shares of common stock:
<TABLE>
<CAPTION>
Effective Shares
Location Date Issued
--------------- ------------------ --------
<S> <C> <C> <C>
Ocmulgee Medical Pathology Association, P.A. Macon, GA July 1, 1999 262,500
Consulting Pathologists, P.A. Springfield, PA July 19, 1999 60,198
Associated Laboratory Physician Services, S.C. Wauwatosa, WI September 15, 1999 164,098
</TABLE>
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.
20
<PAGE>
ITEM 5. OTHER INFORMATION
AGREEMENTS WITH CHIEF EXECUTIVE OFFICER.
On November 1, 1999, the Company entered into two agreements which
clarify the Company's severance obligations, and provide for related consulting
and non-competition agreements, with the Company's President and Chief Executive
Officer, James C. New. The first agreement is a letter agreement, between Mr.
New and the Company, clarifying the definition of "cause" for purposes of Mr.
New's employment agreement with the Company dated October 24, 1995 (which
provides, among other things, for 12 months salary and benefits continuation in
the event Mr. New is separated from the Company for a reason other than
"cause"). The second agreement, a Consulting and Non-competition Agreement,
provides for continuation of Mr. New's current salary and benefits for an
additional 12 month period in exchange for Mr. New's agreement to provide
certain consulting services, and to refrain from competing with or soliciting
personnel from the Company, during the agreement's (24-month) term. This latter
agreement becomes effective if either (a) Mr. New's employment with the Company
is terminated for a reason other than death, disability or voluntary resignation
prior to a change-in-control of the Company, or by the Company for "cause", or
(b) Mr. New voluntarily resigns following a change-in-control.
The description of the agreements referenced above is only a summary
and is not complete, and is qualified in its entirety by reference to the full
text of such agreements which are filed as Exhibits 10.41 and 10.42 hereto and
which are incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.41 Letter Agreement dated November 1, 1999
between AmeriPath, Inc. and James C. New.
10.42 Consulting and Non-competition Agreement
dated November 1, 1999 between AmeriPath,
Inc. and James C. New.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three month period ended
September 30, 1999.
21
<PAGE>
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: November 15, 1999 By: /S/ JAMES C. NEW
------------------------------------
James C. New
Chairman, President and
Chief Executive Officer
Date: November 15, 1999 By: /S/ ROBERT P. WYNN
------------------------------------
Robert P. Wynn
Executive Vice President and
Chief Financial Officer
22
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.41 Letter Agreement dated November 1, 1999 between
AmeriPath, Inc. and James C. New.
10.42 Consulting and Non-competition Agreement dated November
1, 1999 between AmeriPath, Inc. and James C. New.
27.1 Financial Data Schedule
EXHIBIT 10.41
November 1, 1999
Mr. James C. New
307 Eagleton Golf Drive
Palm Beach Gardens, Florida 33418
Dear Jim:
Reference is made to that certain letter agreement, dated October 24,
1995 (the "Letter Agreement"), entered into by and between you and AmeriPath,
Inc. (the "Company"), which provides for the payment of certain severance
benefits by the Company to you in the event that your employment with the
Company terminates for any reason other than death, disability or voluntary
resignation, or by the Company for "cause". In an effort to clarify and agree
what constitutes "cause" for purposes of the Agreement, and based upon our
discussions with you with regard to this matter, the following represents our
mutually agreed upon definition:
"Cause" shall mean (i) an act or acts of fraud or personal dishonesty
taken by you and intended to result in substantial personal enrichment for you
at the expense and to the detriment of the Company, (ii) repeated violations by
you of your obligations to the Company as its Chief Executive Officer which are
demonstrably willful and deliberate on your part and which are not remedied in a
reasonable period of time after receipt of written notice by you from the
Company, or (iii) the conviction by a court of competent jurisdiction of a
felony crime committed by you. The determination of Cause shall be made in good
faith by the Board of Directors of the Company (the "Board"), or its successor
or assigns, at a meeting of the Board called and held for such purpose, where
you will be provided reasonable advance written notice of such meeting and of
the acts or omissions alleged to constitute "cause," and will be provided with
an opportunity to address the Board in person regarding the acts or omissions of
which you are accused. Any termination for cause shall be made in writing to you
by the Board, which notice shall set forth in detail all acts or omissions upon
which the Company is relying for such termination.
If the foregoing definition is consistent with your understanding of
the agreed upon definition of "cause" for purposes of the Agreement, please sign
below and return the executed letter to me.
AMERIPATH, INC.
/s/ THOMAS S. ROBERTS
-----------------------
By: Thomas S. Roberts
Chairman of the Board's
Compensation Committee
AGREED TO AND ACCEPTED BY:
/s/ JAMES C. NEW
- --------------------------
JAMES C. NEW
EXHIBIT 10.42
CONSULTING AND NONCOMPETITION AGREEMENT
THIS CONSULTING AND NONCOMPETITION AGREEMENT (this "Agreement") is made
and entered into as of November 1, 1999, by and among AMERIPATH, INC., a
Delaware corporation (the "Company") and JAMES C. NEW (the "Consultant").
R E C I T A L S
A. The Consultant is currently employed by the Company as its President
and Chief Executive Officer.
B. The Company and the Consultant have entered into a letter agreement,
dated October 24, 1995 (the "Letter Agreement"), relating to certain severance
compensation payable by the Company to the Consultant. The Compensation
Committee of the Board of Directors of the Company has previously approved
certain additional severance compensation payable to the Consultant, the terms
and conditions of which are documented and set forth herein.
C. The Company recognizes that the Consultant possesses extensive
knowledge and experience regarding the businesses in which the Company is
engaged and all aspects of the Company's operations. The Company believes that
the Consultant's knowledge and business advice will be extremely beneficial to
the Company even after the Consultant's employment with the Company is
terminated.
D. In the event of the termination of the Consultant's employment with
the Company (i) for any reason other than death, Disability, voluntary
resignation by the Consultant prior to the "Change in Control Date" or by the
Company for "Cause" (as such terms are defined herein), or (ii) by reason of the
voluntary resignation by the Consultant of his employment with the Company on or
after the Change in Control Date (any such termination of employment described
in clause (i) or (ii) hereof being referred to herein as a "Qualifying
Termination"), the Company desires to retain the services of and obtain certain
restrictive covenants from the Consultant, and the Consultant desires to provide
those services and is willing to agree to those restrictive covenants, upon and
subject to the payments, terms and conditions set forth in this Agreement. For
purposes of this Agreement, "Change in Control Date" shall have the same meaning
as provided in that certain Executive Retention Agreement, dated August 12,
1999, by and between the Company and the Consultant (the "Executive Retention
Agreement").
O P E R A T I V E P R O V I S I O N S
In consideration of the foregoing recitals, the mutual promises and
agreements hereinafter set forth and other good and valuable consideration, the
receipt and sufficiency of which are acknowledged hereby, the parties hereto,
intending to be legally bound, hereby covenant and agree as follows:
- 1 -
<PAGE>
ARTICLE I
ENGAGEMENT OF SERVICES
1.1 TERM OF CONSULTING SERVICES. The consulting services to be provided
by the Consultant to the Company pursuant to this Article I shall commence as of
the date on which a Qualifying Termination occurs (the "Commencement Date") and
shall continue for twenty-four (24) consecutive months thereafter (the
"Consulting Term"). For purposes of this Agreement, "Cause" shall mean and
include (i) an act or acts of fraud or personal dishonesty taken by the
Consultant and intended to result in substantial personal enrichment of the
Consultant at the expense, and to the detriment, of the Company, (ii) repeated
violations by the Consultant of the Consultant's obligations to the Company or
under this Agreement which are demonstrably willful and deliberate on the
Consultant's part and which are not remedied in a reasonable period of time
after receipt of written notice by the Consultant from the Company, or (iii) the
conviction of the Consultant by a court of competent jurisdiction of a felony
crime. The determination of Cause shall be made in good faith by the Board of
Directors of the Company (the "Board") at a meeting of the Board called and held
for such purpose, where the Consultant shall be provided reasonable advance
written notice of such meeting and of the acts or omissions alleged to
constitute "Cause," and shall be provided an opportunity to address the Board in
person regarding the acts or omissions of which he is accused. Any termination
for Cause shall be made in writing to the Consultant by the Board, which notice
shall set forth in detail all acts or omissions upon which the Company is
relying for such termination.
1.2 SERVICES TO BE PROVIDED.
(a) SERVICES. During the Consulting Term, the Consultant shall
make himself available to consult with the Board (or, at the Board of Directors'
direction, to consult with the Company's Chief Executive Officer) upon
reasonable advance notice from the Company, during the Company's normal business
hours. The Consultant shall report exclusively to the Board (or such Chief
Executive Officer) and shall perform such consulting services (consistent with
the services the Consultant previously provided to the Company while he was an
employee) as shall be requested by the Board from time to time and which are
reasonably acceptable to the Consultant (collectively referred to herein as the
"Services")
(b) PERFORMANCE OF SERVICES. The Consultant is responsible
for reasonably determining the method, details and means of performing the
Services required under this Agreement. The Consultant shall maintain all
permits, licenses and authorizations necessary to Consultant's performance of
Services hereunder and shall at all times perform such Services and conduct
Consultant's business and affairs in accordance with all applicable federal,
state and local laws and regulations. Such consultation may be by telephone, in
writing or by other method of communication selected in the reasonable exercise
of the Consultant's discretion. Unless otherwise agreed to in writing by the
Consultant, the Consultant shall provide the Services required hereunder at the
location or locations which the Consultant deems appropriate; provided, however,
that at least once per fiscal quarter, the Consultant agrees that he will use
his best efforts to make himself available to provide Services at the Company's
executive offices located in Riviera Beach, Florida.
- 2 -
<PAGE>
(c) HOURS. During the Consulting Term, it is agreed that the
Consultant shall not be required to devote more than ten (10) hours (the "Agreed
Hours") in any calendar month to the performance of the Services set forth in
subsection 1.2(a) hereof.
1.3 NATURE OF CONSULTING RELATIONSHIP. It is agreed and understood by
the parties to this Agreement that, for all purposes, during the Consulting
Term, the Consultant shall serve solely as an independent contractor of the
Company and shall not be an employee of the Company in any capacity. Nothing in
this Agreement shall be interpreted or construed as creating or establishing the
relationship of employer and employee between the Consultant and Company. As an
independent contractor, the Consultant shall accept any directions issued by the
Company pertaining to the goals to be attained and the results to be achieved by
him (solely to the extent consistent with the required Services), but shall be
solely responsible for the manner and hours in which he will perform his
services under this Agreement.
ARTICLE II
COMPENSATION
2.1 CONSULTING FEES. In consideration for the services to be provided
by the Consultant pursuant to Section 1.2 hereof, the Company shall pay a fee to
the Consultant equal to One Hundred Thousand Dollars ($100,000) for the
Consulting Term, payable in twelve (12) equal consecutive monthly installments
of Eight Thousand Three Hundred Thirty Three Dollars and 33 Cents ($8,333.33)
per month, which monthly payments shall commence on the first anniversary of the
Commencement Date.
2.2 COMPENSATION FOR RESTRICTIVE COVENANTS. In consideration for the
Consultant's agreement to abide by the restrictive covenant provisions contained
in Article III of this Agreement during the Consulting Term, the Company shall
pay to the Consultant an additional amount equal to Two Hundred Fifty Thousand
Dollars ($250,000), payable in twelve (12) equal consecutive monthly
installments of Twenty Thousand Eight Hundred Thirty Three Dollars and 33 Cents
($20,833.33) per month, which monthly payments shall commence on the first
anniversary of the Commencement Date.
2.3 SEVERANCE PAYMENTS. The payments required pursuant to Sections 2.1
and 2.2 do not begin until the first anniversary of the Commencement Date
because, during the first twelve (12) months of the Consulting Term, the
Consultant is entitled to receive severance payments pursuant to the Letter
Agreement. Except for any applicable reduction in payments due to the operation
of Section 7 of the Executive Retention Agreement, the provisions of this
Agreement shall not in any way alter or reduce or affect any amounts or benefits
payable by the Company to the Consultant, whether under the Letter Agreement,
the Executive Retention Agreement or otherwise.
- 3 -
<PAGE>
2.4 EXPENSE REIMBURSEMENTS. During the Consulting Term, the Company
shall reimburse the Consultant for all reasonable business expenses actually
paid or incurred by the Consultant in the course of and pursuant to the
performance of the Services or the advancement of the business interests of the
Company, upon submission of supporting documentation by the Consultant and in
accordance with such policies and guidelines as from time to time may be
established by the Company (as applicable to the Company's executive officers).
2.5 BENEFIT CONTINUATION. During the period commencing on the first
anniversary of the Commencement Date and ending on the last day of the
Consulting Term, the Company will provide Consultant with benefits under the
Company's benefit programs, at substantially the same coverage and limits as
Consultant had in his role as Chief Executive Officer of the Company, and at no
cost to Consultant. The benefits required to be provided to Consultant pursuant
to this Sections 2.5 do not begin until the first anniversary of the
Commencement Date because during the first twelve (12) months of the Consulting
Term the Consultant is entitled to receive these benefits under the Letter
Agreement.
ARTICLE III
DEATH & DISABILITY
3.1 DEATH OR DISABILITY. Notwithstanding anything to the contrary
contained in this Agreement, in the event of the Consultant's death or
Disability during the Consulting Term, the Consultant, his beneficiary, his
estate or personal representative shall continue to receive the compensation
provided for in Sections 2.1 and 2.2 hereof, at such times and in such amounts
as if the Consultant had not died or suffered a Disability. For purposes of this
Agreement, "Disability" shall mean if the Consultant shall, as a result of
mental or physical incapacity, illness or disability, become unable to perform
his obligations hereunder for a period of 180 days during any 12-month period.
ARTICLE IV
RESTRICTIVE COVENANTS
4.1 NON-COMPETITION. At all times during the Consulting Term, the
Consultant shall not, directly or indirectly, engage in or have any interest in
any sole proprietorship, partnership, corporation or business or any other
person or entity (whether as an employee, officer, director, partner, agent,
security holder, creditor, consultant or otherwise) that directly or indirectly
(or through any affiliated entity) engages in the business of conducting or
performing anatomic pathology services (whether such services are provided by
physicians or laboratories; provided that such provision shall not apply to the
Consultant's ownership of Common Stock of the Company or the acquisition or
ownership by the Consultant, solely as an investment, of securities of any
issuer that is registered under Section 12(b) or 12(g) of the Securities
Exchange Act of 1934, as amended, and that are listed or admitted for trading on
any United States national securities exchange or that are quoted on the
National Association of Securities Dealers Automated Quotations System, or any
similar system or automated dissemination of
- 4 -
<PAGE>
quotations of securities prices in common use, so long as the Consultant does
not control, acquire a controlling interest in or become a member of a group
which exercises direct or indirect control or, more than five percent (5.0%) of
any class of voting securities of such corporation.
4.2 NONSOLICITATION OF EMPLOYEES AND CLIENTS. At all times during the
Consulting Term, the Consultant shall not, directly or indirectly, for himself
or for any other person, firm, corporation, partnership, association or other
entity (a) employ or attempt to employ or solicit the employment of any employee
or former employee of the Company, unless such employee or former employee has
not been employed by the Company for a period in excess of six (6) months,
and/or (b) call on or solicit any of the actual or targeted prospective clients
of the Company on behalf of any person or entity in connection with any business
competitive with the business of the Company on the date hereof, nor shall the
Consultant make known the names and addresses of such clients or any information
relating in any manner to the Company's trade or business relationships with
such customers, other than in connection with the performance of Consultant's
duties under this Agreement.
4.3 NONDISCLOSURE. The Consultant shall not at any time divulge,
communicate, use to the detriment of the Company or for the benefit of any other
person or persons any Confidential Information (as hereinafter defined)
pertaining to the business of the Company. Any Confidential Information or data
now or hereafter acquired by the Consultant with respect to the business of the
Company (which shall include, but not be limited to, information concerning the
Company's business, financial condition, prospects, personnel, technology,
customers and methods of doing business) shall be deemed a valuable, special and
unique asset of the Company that is received by the Consultant in confidence and
as a fiduciary, and Consultant shall remain a fiduciary to the Company with
respect to all of such information for the term of this agreement. For purposes
of this Agreement, "Confidential Information" means information disclosed to the
Consultant or known by the Consultant as a consequence of or through his
employment by or services with the Company (including information conceived,
originated, discovered or developed by the Consultant) prior to or after the
date hereof, and not generally known or available to the public, competitors or
the Consultant, about the Company or its business. Notwithstanding the
foregoing, nothing herein shall be deemed to restrict the Consultant from
disclosing Confidential Information to the extent required by law.
4.4 REFORMATION BY COURT. In the event that a court of competent
jurisdiction shall determine that any provision of this Article IV is invalid or
more restrictive than permitted under the governing law of such jurisdiction,
then only as to enforcement of this Article IV within the jurisdiction of such
court, such provision shall be interpreted and enforced as if it provided for
the maximum restriction permitted under such governing law.
4.5 SURVIVAL. The provisions of this Article IV shall survive the
termination of this Agreement, as applicable.
- 5 -
<PAGE>
4.6 INJUNCTION. It is recognized and hereby acknowledged by the parties
hereto that a breach by the Consultant of any of the covenants contained in
Article IV of this Agreement will cause irreparable harm and damage to the
Company, the monetary amount of which may be virtually impossible to ascertain.
As a result, the Consultant recognizes and hereby acknowledges that the Company
shall be entitled to an injunction from any court of competent jurisdiction
enjoining and restraining any violation of any or all of the covenants contained
in Article IV of this Agreement by the Consultant or any of his affiliates,
associates, partners or agents, either directly or indirectly, and that such
right to injunction shall be cumulative and in addition to whatever other
remedies the Company may possess.
ARTICLE V
MISCELLANEOUS
5.1 ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the entire
agreement between the parties hereto with respect to the specific subject matter
hereof and supersedes all prior agreements, understandings, negotiations and
discussions, both written and oral, among the parties hereto with respect to
such specific matter. This Agreement may not be amended or modified in any way
except by a written instrument executed by the Company and the Consultant.
5.2 NOTICE. All notices under this Agreement shall be in writing and
shall be given by personal delivery, or by registered or certified United States
mail, postage prepaid, return receipt requested, to the address set forth below:
If to the Consultant, to: James C. New
307 Eagleton Golf Drive
Palm Beach Gardens, FL 33418
If to the Company, to: AmeriPath, Inc..
7289 Garden Road, Suite 200
Riviera Beach, Florida 33404
Attn: President
or to such other person or persons or to such other address or addresses as the
Consultant and the Company or their respective successors or assigns may
hereafter furnish to the other by notice similarly given. Notices, if personally
delivered, shall be deemed to have been received on the date of delivery, and if
given by registered or certified mail, shall be deemed to have been received on
the fifth business day after mailing.
5.3 GOVERNING LAW. This Agreement shall be governed by, and construed
and interpreted in accordance with, the laws of the State of Florida, without
giving effect to the conflict of laws principles of each State. With respect to
any disputes concerning federal law, such disputes shall be determined in
accordance with the law as it would be interpreted and applied by the United
States Court of Appeals for the Eleventh Circuit.
- 6 -
<PAGE>
5.4 ASSIGNMENT: SUCCESSORS AND ASSIGNS. Neither the Consultant nor the
Company may make an assignment of this Agreement or any interest herein, by
operation of law or otherwise, without the prior written consent of the other
party; provided, however, that this Agreement shall inure to the benefit of and
be binding upon the Company and its successors and assigns (whether by merger,
sale, consolidation, sale or transfer of assets or otherwise) and the Consultant
and his heirs, personal representatives, executors, legal representatives or
assigns.
5.5 WAIVER. The waiver by any party hereto of the other party's prompt
and complete performance or breach or violation of any provision of this
Agreement shall not operate nor be construed as a waiver of any subsequent
breach or violation, and the waiver by any party hereto to exercise any right or
remedy which he or it may possess shall not operate nor be construed as the
waiver of such right or remedy by such party or as a bar to the exercise of such
right or remedy by such party upon the occurrence of any subsequent breach or
violation.
5.6 SEVERABILITY. The invalidity of any one or more of the words,
phrases, sentences, clauses, sections or subsections contained in this Agreement
shall not affect the enforceability of the remaining portions of this Agreement
or any part thereof, all of which are inserted conditionally on their being
valid in law, and, in the event that any one or more of the words, phrases,
sentences, clauses, sections or subsections contained in this Agreement shall be
declared invalid by a court of competent jurisdiction, then this Agreement shall
be construed as if such invalid word or words, phrase or phrases, sentence or
sentences, clause or clauses, section or sections, or subsection or subsections
had not been inserted.
5.7 ARBITRATION. Except to the extent the Company has the right to seek
an injunction under Section 4.6 hereof, any dispute or controversy arising under
or in connection with this Agreement shall be settled exclusively by arbitration
in Palm Beach County, Florida, in accordance with the Rules of the American
Arbitration Association then in effect (except to the extent that the procedures
outlined below differ from such rules). Within thirty (30) days after written
notice by either party has been given that a dispute exists and that arbitration
is required, each party must select an arbitrator and those two arbitrators
shall promptly, but in no event later than thirty (30) days after their
selection, select a third arbitrator. The parties agree to act as expeditiously
as possible to select arbitrators and conclude the dispute. The selected
arbitrators must render their decision in writing. The cost and expenses of the
arbitration and of enforcement of any award in any court shall be borne by the
non-prevailing party. If advances are required, each party will advance one-half
of the estimated fees and expenses of the arbitrators. Judgment may be entered
on the arbitrators' award in any court having jurisdiction. Although arbitration
is contemplated to resolve disputes hereunder, either party may proceed to court
to obtain an injunction to protect its rights hereunder, the parties agreeing
that either could suffer irreparable harm by reason of any breach of this
Agreement. Pursuit of an injunction shall not impair arbitration on all
remaining issues.
- 7 -
<PAGE>
5.9 COMPLIANCE WITH LEGAL REQUIREMENTS. The Company shall not be
required, by reason of this Agreement, to provide workers' compensation,
disability insurance, Social Security or unemployment compensation coverage nor
any other statutory benefit to the Consultant. The Consultant shall comply at
his expense with all applicable provisions of workers' compensation laws,
unemployment compensation laws, federal Social Security law, the Fair Labor
Standards Act, federal, state and local income tax laws, and all other
applicable federal, state and local laws, regulations and codes relating to
terms and conditions of employment required to be fulfilled by employers or
independent contractors.
5.10 GENDER AND NUMBER. Wherever the context shall so require, all
words herein in the male gender shall be deemed to include the female or neuter
gender, all singular words shall include the plural and all plural words shall
include the singular.
5.11 SECTION HEADINGS. The section or other headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of any or all of the provisions of this Agreement.
5.12 NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this
Agreement is intended, or shall be construed, to confer upon or give any person,
firm, corporation, partnership, association or other entity, other than the
parties hereto and each of their respective heirs, personal representatives,
legal representatives, successors and assigns, any rights or remedies under or
by reason of this Agreement.
5.13 NO AUTHORITY TO BIND COMPANY. During the Consulting Term, the
Consultant does not and shall not have any authority to enter into any contract
or agreement for, on behalf of or in the name of the Company, or to legally bind
the Company to any commitment or obligation, except as expressly authorized by
the Company.
5.14 INDEMNIFICATION. To the maximum extent permitted by law, the
Company shall indemnify, hold harmless, protect and defend (with counsel
reasonably acceptable to the Consultant) Consultant and all others who could be
liable for the obligations of any of them from and against any and all claims,
demands, actions, fines, penalties, liabilities, losses, taxes, damages,
injuries and expenses (including without limitation, actual attorneys',
consultant's and expert witness' fees and costs at the pre-trial, trial and
appellate levels and in bankruptcy proceedings) related to, arising out of or
resulting from the performance by the Consultant of his obligations and duties
hereunder in accordance with the terms hereof, provided, however, that the
Company does not hereby agree, and shall not be obligated to, so indemnify, the
Consultant from any such loss, cost, damage, liability or expense arising out of
any act or omission of the Consultant or any of his agents, officers, employees,
independent contractors or representatives, which act or omission constitutes
gross negligence, willful misconduct or fraud or is in material breach of this
Agreement. Notwithstanding any other provisions of this Agreement to the
contrary, the Company's obligations under this Section shall survive the
expiration, termination or cancellation of this Agreement.
- 8 -
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
THE COMPANY:
AMERIPATH, INC.
/s/ THOMAS S. ROBERTS
-------------------------------
By: Thomas S. Roberts
` Chairman of the Board's
Compensation Committee
THE CONSULTANT:
/s/ JAMES C. NEW
-------------------------------
JAMES C. NEW
- 9 -
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0
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