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, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-22313
AMERIPATH, INC.
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(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 21,935,187 shares of common stock, $.01 par value,
outstanding as of November 10, 2000.
<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, 2000 (Unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
</TABLE>
2
<PAGE>
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 2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,342 $ 620
Accounts receivable, net 52,538 45,969
Inventories 468 482
Other current assets 6,998 7,144
-------- --------
Total current assets 61,346 54,215
-------- --------
PROPERTY AND EQUIPMENT, NET 17,418 14,129
-------- --------
OTHER ASSETS:
Goodwill, net 169,258 142,767
Identifiable intangibles, net 241,279 235,668
Other 4,247 3,367
-------- --------
Total other assets 414,784 381,802
-------- --------
TOTAL ASSETS $493,548 $450,146
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 24,927 $ 18,508
Current portion of long-term debt 775 539
-------- --------
Total current liabilities 25,702 19,047
-------- --------
LONG-TERM LIABILITIES:
Revolving loan 176,821 163,300
Subordinated notes 111 777
Deferred tax liability 68,835 62,980
-------- --------
Total liabilities 271,469 246,104
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 219 216
Additional paid-in capital 154,256 152,187
Retained earnings 67,604 51,639
-------- --------
Total stockholders' equity 222,079 204,042
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $493,548 $450,146
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
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,
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET REVENUES $ 74,918 $ 59,866 $ 216,776 $ 167,608
--------- --------- --------- ---------
OPERATING COSTS AND EXPENSES:
Cost of services 35,094 27,931 102,122 76,590
Selling, general and administrative expenses 11,806 9,790 34,423 27,516
Provision for doubtful accounts 8,825 6,005 24,199 18,546
Amortization expense 3,887 3,317 11,357 8,846
Asset impairment and related charges -- -- 5,245 --
--------- --------- --------- ---------
Total operating costs and expenses 59,612 47,043 177,346 131,498
--------- --------- --------- ---------
INCOME FROM OPERATIONS 15,306 12,823 39,430 36,110
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (3,488) (2,528) (10,198) (6,568)
Other, net 23 50 103 55
--------- --------- --------- ---------
Total other expense (3,465) (2,478) (10,095) (6,513)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 11,841 10,345 29,335 29,597
PROVISION FOR INCOME TAXES 4,959 4,448 13,370 12,726
--------- --------- --------- ---------
NET INCOME $ 6,882 $ 5,897 $ 15,965 $ 16,871
========= ========= ========= =========
BASIC EARNINGS PER COMMON SHARE:
Basic earnings per common share $ 0.32 $ 0.28 $ 0.74 $ 0.80
========= ========= ========= =========
Basic weighted average shares outstanding 21,702 21,431 21,630 21,200
========= ========= ========= =========
DILUTED EARNINGS PER COMMON SHARE:
Diluted earnings per common share $ 0.31 $ 0.27 $ 0.72 $ 0.78
========= ========= ========= =========
Diluted weighted average shares outstanding 22,517 22,034 22,240 21,742
========= ========= ========= =========
</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,
---------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,965 $ 16,871
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation 2,740 2,073
Amortization 11,698 9,131
Loss on disposal of assets 19 3
Asset impairment and related charges 5,245 --
Deferred income taxes (2,650) (3,500)
Provision for doubtful accounts 24,199 18,546
Changes in assets and liabilities (net of effects of acquisitions):
Increase in accounts receivable (28,933) (21,144)
Decrease in inventories 14 78
Decrease in other current assets 122 2,464
Increase in other assets (137) (865)
Increase in accounts payable and accrued expenses 2,115 4,053
-------- --------
Net cash provided by operating activities 30,397 27,710
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (5,862) (5,619)
Investment in Genomics Collaborative, Inc. (1,000) --
Cash paid for acquisitions and acquisition costs, net of cash acquired (15,165) (43,100)
Payments of contingent notes (21,486) (15,807)
-------- --------
Net cash used in investing activities (43,513) (64,526)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 817 7
Debt issuance costs (70) --
Principal payments on long-term debt (430) (1,153)
Net borrowings under revolving loan 13,521 42,392
-------- --------
Net cash provided by financing activities 13,838 41,246
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 722 4,430
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 620 458
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,342 $ 4,888
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 10,163 $ 6,667
Income taxes $ 18,046 $ 13,452
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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,
1999, 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.
Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements, which
provided the staff's views in applying generally accepted accounting principles
to selected revenue recognition issues. In June 2000, SAB 101 was amended by SAB
101B, which delayed the implementation of SAB 101 until no later than the fourth
fiscal quarter of fiscal years beginning after December 15, 1999. Management
believes that the adoption of the provisions of SAB 101 will not have a material
impact on the Company's financial position or results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
133") and in June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137 "Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of FASB Statement No. 133," which delayed the
effective date the Company is required to adopt SFAS 133 until its fiscal year
2001. In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment to FASB Statement No. 133." This statement amended
certain provisions of SFAS 133. SFAS 133 requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company does not enter into derivative financial
instruments for trading purposes. Upon adoption of SFAS 133 in the first fiscal
quarter of 2001, these activities will be recognized on the Consolidated Balance
Sheet. The Company anticipates that adoption of SFAS 133 will not have a
material effect on the Company's earnings.
NOTE 2 - ACQUISITIONS
During the third quarter, the Company acquired four anatomic pathology
practices. Effective July 1, 2000, the Company acquired a practice in Orange
Park, Florida, which was merged into its Jacksonville, Florida practice.
Effective August 1, 2000, the Company acquired a practice in Winter Park,
Florida, which was merged into its Center for Advanced Diagnostics. Effective
September 1, 2000, the Company acquired two practices in Texas, one located in
Arlington, Texas, and the other located in Sherman, Texas. Both of these
practices were merged into the Company's practice in Dallas, Texas.
6
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The accompanying financial statements include the results of operations of the
Company's 2000 and 1999 acquisitions from the date acquired through September
30, 2000 and 1999, respectively. The allocation of the purchase price of some of
the 1999 and 2000 acquisitions are preliminary, while the Company continues to
obtain the information necessary to determine the fair value of the assets
acquired and liabilities assumed. When the Company obtains such final
information, management believes that adjustments, if any, will not be material
in relation to the consolidated financial statements.
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, 2000 and 1999, after giving effect to
amortization of goodwill and identifiable intangible assets, interest expense on
debt incurred in connection with these acquisitions, and the reduced level of
certain specific operating expenses (primarily compensation and related expenses
attributable to former owners) as if the acquisitions had been consummated on
January 1, 1999. 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, 2000
and 1999 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. These amounts are in thousands, except per share
amounts.
Pro Forma (Unaudited)
Nine Months Ended
September 30,
2000 1999
---------- ----------
Net revenues $ 222,914 $ 198,833
========== ==========
Net income $ 16,660 $ 19,864
========== ==========
Diluted earnings per common share $ 0.74 $ 0.88
========== ==========
NOTE 3 - INTANGIBLE ASSETS
Intangible assets and the related accumulated amortization and amortization
periods are set forth below (dollars in thousands):
September 30, 2000
Amortization Periods
(Years)
--------------------
September 30, December 31, Weighted
2000 1999 Range Average
--------- --------- ------- ---------
Hospital contracts $ 200,192 $ 191,524 25-40 32.8
Physician client lists 58,516 54,558 10-30 20.9
Laboratory contracts 7,317 7,317 10 10.0
Management service agreement 2,483 2,478 25 25.0
--------- --------- ------- ---------
268,508 255,877
Accumulated amortization (27,229) (20,209)
--------- ---------
Identifiable intangibles, net $ 241,279 $ 235,668
========= =========
Goodwill $ 183,737 $ 153,128 10-35 31.0
Accumulated amortization (14,479) (10,361)
--------- ---------
Goodwill, net $ 169,258 $ 142,767
========= =========
The weighted average amortization period for identifiable intangible assets and
goodwill is 30.1 years.
7
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 4 - ASSET IMPAIRMENT AND RELATED CHARGES
During the second quarter ended June 30, 2000, the Company recorded a pre-tax
noncash charge of approximately $4.7 million, and related cash charges of
approximately $545,000, in connection with the impairment of intangible assets
at an acquired practice in Cleveland, Ohio. The Company had provided services at
four hospitals and an ambulatory care facility owned by Primary Health Systems
("PHS"), a regional hospital network in Cleveland, Ohio. During the first
quarter of 2000, PHS began implementing a plan of reorganization filed under
Chapter 11 with the U.S. Bankruptcy Court for the District of Delaware, and
closed one hospital. During the second quarter, the bankruptcy court approved
the sale of two hospitals and the ambulatory care facility to local purchasers
in the Cleveland area. The Company's contracts with these two hospitals and the
ambulatory care facility were not accepted by the purchasers, who have elected
to employ their own pathologists. One hospital has not been sold and continues
to do business with the Company. As a result, the Company determined, using the
discounted cash flow method, that the intangible assets, including goodwill, had
no remaining fair value. Therefore, the Company wrote off the unamortized
intangible asset balance. In addition, the Company recorded approximately
$545,000 of related charges for potentially uncollectible accounts receivable,
employee termination costs and legal fees. These charges, net of income tax,
resulted in a reduction of net income for the nine months ended September 30,
2000 of $3.9 million, or $0.18 per share.
NOTE 5 - MARKETABLE SECURITIES
The Company accounts for investments in certain debt and equity securities under
the provisions of Statement of Financial Accounting Standards No. 115 ("SFAS No.
115"), "Accounting for Certain Debt and Equity Securities". Under SFAS No. 115,
the Company must classify its debt and marketable equity securities in one of
three categories: trading, available-for-sale, or held-to-maturity.
Available-for-sale securities are recorded at fair value. Unrealized gains and
losses, net of the tax effect, on available-for-sale securities are excluded
from earnings and are reported as a separate component of stockholders' equity
until realized. Declines in the market value of available-for-sale securities
deemed to be other than temporary result in charges to current earnings and
establishment of a new cost basis. At September 30, 2000, the Company's
marketable securities consisted principally of a $1.0 million investment in
333,333 shares of Series D Preferred Stock, par value $0.01, of Genomics
Collaborative, Inc. These marketable securities are classified as other assets
on the Company's balance sheet. The Company has classified all of its marketable
securities as available-for-sale. At September 30, 2000, there were no
unrealized gains or losses.
NOTE 6 - 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 the Company is currently in
a dispute with its former insurance carrier on an issue related to the
applicability of surplus 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 or results of operations.
Healthcare Regulatory Environment and Reliance on Government Programs -- The
healthcare industry in general, and the services that the Company provides, are
subject to extensive federal and state laws and regulations. Additionally, a
significant portion of the Company's net revenue is from payments by
government-sponsored 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
8
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
adverse effect on the Company's financial position and results of operations.
The Company's operations are continuously subject to review and inspection by
regulatory authorities.
Internal Revenue Service Examination -- The Internal Revenue Service ("IRS")
conducted an examination of the Company's federal income tax returns for the tax
years ended December 31, 1996 and 1997 and concluded that no changes to the tax
reported needed to be made. 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 in any other years, it could have a material
adverse effect on the Company's financial position and results of operations.
NOTE 7 - 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, 2000 and 1999 are as follows (in thousands):
Nine Months Ended
September 30,
---------------------
2000 1999
-------- --------
Assets acquired $ 27,303 $ 64,840
Liabilities assumed (9,242) (17,484)
Common Stock issued (1,255) (3,014)
-------- --------
Cash paid 16,806 44,342
Less cash acquired (1,129) (1,517)
-------- --------
Net cash paid for acquisitions 15,677 42,825
Costs or (accruals) related to completed
and pending acquisitions (512) 275
-------- --------
Cash paid for acquisitions and acquisition
costs, net of cash acquired $ 15,165 $ 43,100
======== ========
NOTE 8 - EARNINGS PER SHARE
Earnings per share is computed and presented in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." Basic
earnings per share, which excludes the effects of any dilutive common equivalent
shares that may be outstanding, such as shares issuable upon the exercise of
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.
9
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AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Basic and diluted earnings per share for the respective periods are set forth in
the table below (amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Earnings Per Common Share:
Net income $ 6,882 $ 5,897 $15,965 $16,871
======= ======= ======= =======
Basic earnings per common share $ 0.32 $ 0.28 $ 0.74 $ 0.80
======= ======= ======= =======
Diluted earnings per common share $ 0.31 $ 0.27 $ 0.72 $ 0.78
======= ======= ======= =======
Basic weighted average shares outstanding 21,702 21,431 21,630 21,200
Effect of dilutive stock options 815 603 610 542
------- ------- ------- -------
Diluted weighted average shares outstanding 22,517 22,034 22,240 21,742
======= ======= ======= =======
</TABLE>
Certain stock options outstanding as of September 30, 2000 were excluded from
the calculation of diluted earnings per share because their effect would have
been anti-dilutive. Such excluded options totaled 545,100 at a weighted average
exercise price per share of $12.35 for the nine months ended September 30, 2000,
281,300 at a weighted average exercise price per share of $14.55 for the three
months ended September 30, 2000, 617,300 at a weighted average exercise price
per share of $12.15 for the nine months ended September 30, 1999, and 592,300 at
a weighted average exercise price per share of $12.27 for the three months ended
September 30, 1999.
NOTE 9 - LONG TERM DEBT
On July 21, 2000, the Company amended its Credit Facility, dated December 16,
1999. This amendment allowed for the Company to be in compliance with the Credit
Facility by excluding noncash charges totaling approximately $5.2 million from
the calculation of the Company's consolidated operating cash flow covenant
through March 31, 2001. These charges relate to the impairment of assets and
related charges at an acquired practice in Cleveland, Ohio as more fully
discussed in Note 4 to the financial statements. The amendment was obtained to
cure a potential default that otherwise would likely have occurred under the
operating cash flow covenant contained in the Credit Facility. In addition, the
amendment: (i) increased the Company's operating cash flow requirements under
the facility for the trailing twelve months ending December 31, 2002 and
thereafter; (ii) requires that a minimum of 10% of the purchase price of future
acquisitions greater than $5 million be in the form of the Company's capital
stock, and (iii) allowed for an investment of up to $3 million in Genomics
Collaborative, Inc. The amendment is not expected to have an adverse effect on
the Company's operations or strategies.
NOTE 10 - SUBSEQUENT EVENTS
Subsequent to September 30, 2000, the Company paid approximately $1.6 million on
contingent notes issued in connection with previous acquisitions.
On November 7, 2000, the Company announced its plan to acquire Pathology
Consultants of America, Inc. (d/b/a Inform DX ("Inform DX")). Inform DX, based
in Nashville, TN, operates 12 anatomic pathology laboratories and provides
services in 43 hospitals in 10 states. Five of the pathology practices are owned
practices, similar to the Company's typical practice ownership structure, and
the remaining seven practices are managed under long-term management services
agreements with fee arrangements ranging from 15% to 29% of the practice's
operating profit. Inform DX (including its laboratories and owned and managed
practices) has approximately 400 employees, including 88 board-certified
pathologists, of which 22 are board certified in the subspecialty of
dermatopathology.
10
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company has entered into a definitive agreement, subject to certain
pre-closing conditions, to acquire Inform DX. In the acquisition, the Company
will issue, subject to certain downward adjustments, up to 2.7 million shares of
common stock in exchange for all the outstanding common stock and warrants of
Inform DX, and in addition, the Company will assume certain obligations to issue
shares of common stock pursuant to outstanding options under Inform DX stock
option plans. The combined company will have additional debt of approximately
$12 million. The transaction will be accounted for as a pooling of interests and
is scheduled to close by the end of the year.
In a pooling of interest transaction, merger-related costs and restructuring
charges are recorded in the quarter in which the costs are incurred. The Company
expects to record approximately $12 million of such transaction costs and
charges during the fourth quarter of 2000. These costs include changing Inform
DX's method of estimating reserves for contractual adjustments and bad debts to
conform to the Company's methodology, investment banking fees, legal and
accounting fees and expenses, payments triggered by a change in control and
other restructuring costs.
This transaction, if consummated, is expected to result in a dilution to the
Company's fourth quarter earnings per share, excluding non-recurring costs, of
approximately $0.03 to $0.05, and for the first six months of 2001 by
approximately $0.01 to $0.03. The acquisition, however, is anticipated to be
accretive for the entire year of 2001 and 2002.
The definitive agreement to acquire Inform DX is subject to numerous significant
pre-closing conditions, including a Hart-Scott-Rodino filing (and clearance),
the receipt of waivers and or amendments from the Company's credit facility
lending group, Inform DX shareholder approval, compliance with registration
exemption requirements under the federal securities laws and other conditions,
many of which are beyond the control of the Company. There can be no assurance
that such conditions will be satisfied, or that the merger and related
transactions contemplated by the definitive agreement will be consummated.
11
<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 anywhere in this Form 10-Q 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, 1999), 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. Forward-looking statements are sometimes indicated by
words such as "may," "should," "believe," "expect," "anticipate" and similar
expressions.
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 and changes in competitive factors; the extent of success of the
Company's operating initiatives and growth strategies (including without
limitation, the Company's continuing efforts to (i) achieve continuing
improvements in performance of its current operations, by reason of various
synergies, marketing efforts, revenue growth, cost savings or otherwise, (ii)
transition into becoming a fully integrated healthcare diagnostic information
provider, including the Company's efforts to develop, and the Company's
investment in, new products, services, technologies and related alliances, such
as the alliance with Genomics Collaborative, Inc. and Per-Se Technologies, Inc.,
(iii) acquire or develop additional pathology practices (as further described
below), and (iv) develop and expand its managed care and national clinical lab
contracts); federal and state healthcare regulation (and compliance);
reimbursement rates under government-sponsored and third party healthcare
programs and the payments received under such programs; changes in coding;
changes in technology; dependence upon pathologists and contracts; the ability
to attract, motivate, and retain pathologists; labor and technology costs;
marketing and promotional efforts; the availability of pathology practices in
appropriate locations that the Company is able to acquire on suitable terms or
develop; the successful completion and integration of acquisitions (and
achievement of planned or expected synergies); access to sufficient amounts of
capital on satisfactory terms; and tax laws. 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, execution and consummation of
definitive acquisition, affiliation, management and/or employment agreements;
the economic stability of each targeted market; compliance with state, local and
federal healthcare and/or other laws and regulations in each targeted market
(including health, safety, waste disposal and zoning laws); compliance with
applicable licensing approval procedures; restrictions under labor and
employment laws, especially non-competition covenants. Past performance is not
necessarily indicative of future results.
OVERVIEW
The Company is the largest physician and laboratory company focused on providing
anatomic pathology cancer diagnostic and healthcare information services. Since
the first quarter of 1996, the Company has completed the acquisition of 47
pathology practices. The Company is revisiting its acquisition strategy,
particularly its pace of acquisitions, and will focus on fold-in acquisitions
that will densify its operations in strategically targeted markets and larger
pedestal acquisitions. The 314 pathologists employed by the
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Company provide cancer-related diagnostic services in outpatient laboratories
owned and operated by the Company, hospitals, and outpatient ambulatory surgery
centers. Of these pathologists, approximately 309 are board certified in
anatomic and clinical pathology, and 137 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 cell abnormalities).
As of September 30, 2000, 23 practices had contracts with a total of 165
hospitals to manage their clinical pathology and other laboratories and provide
professional pathology services. The majority of these hospital contracts are
exclusive provider relationships. The Company also has 29 licensed outpatient
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) 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; (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 has commenced its transition to becoming a fully integrated
healthcare diagnostic information provider, which includes the Company's
development of new ways to generate additional revenues through leveraging the
Company's personnel, technology and resources. In addition to the Company's
establishment of its Center for Advanced Diagnostics, the Company has taken the
steps described in the following paragraphs in connection with such transition.
Although the Company believes that such new endeavors are promising, there can
be no assurance that they will be profitable.
As announced on July 19, 2000, the Company formed an alliance with Genomics
Collaborative, Inc. ("GCI") to provide fresh frozen samples from normal,
diseased, and cancerous tissue to GCI for subsequent sale to researchers in
industry and academic laboratories who are working to discover genes associated
with more common disease categories, such as heart disease, hypertension,
diabetes, osteoporosis, depression, dementia, asthma, and cancer, with a special
focus on breast, colon, and prostate tumors. This alliance utilizes the
Company's national network of hospitals, physicians, and pathologists and GCI's
capabilities in large scale DNA tissue analysis and handling, all tied together
by proprietary information systems and bioinformatics. The financial results of
the alliance with GCI are not expected to be material to the Company's
operations during 2000. The Company is working with GCI to develop procedures to
comply with informed consent requirements and other regulations regarding the
taking and processing of specimens from donors and related records. However,
failure to comply with such regulations could result in adverse consequences
including potential liability of the Company. On September 15, 2000, the Company
made a $1.0 million investment in GCI in exchange for 333,333 shares of Series D
Preferred Stock, par value $0.01.
During the second quarter of 2000, the Company also formed a strategic alliance
with Per-Se Technologies, Inc. ("Per-Se") to assist in the development and
implementation of PathWay SolutionsTM, the Company's web-based business
intelligence solution designed to provide utilization and outcome data to the
Company's customers, referring physicians, hospitals, patients and payors.
PathWay Solutions is designed to provide comparative, statistical and diagnostic
information that can be used for disease management and awareness, utilization
management and research capabilities. The Per-Se agreement will also provide the
Company with the ability to aggregate its billing information through the
submission of electronic claims and remittance advice processing to government
and other third party payors through Per-Se's clearinghouse operation, Per-Se
Exchange. The Company expects the relationship to expedite claims processing and
assist in optimizing reimbursement and facilitating managed care contracting on
a broader scale.
The Company derives its net revenue from the services provided by the practices
it owns or manages. The majority of services furnished by the Company's
pathologists are diagnostic cancer-related anatomic
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pathology services. Reimbursement from government programs (principally Medicare
and Medicaid) for these services represented approximately 20% and 21% of the
Company's cash collections in the first nine months of 2000 and 1999,
respectively. The Company typically bills government programs, indemnity
insurance companies, managed care organizations, national clinical laboratories,
physicians and patients on a fee-for-service basis. 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 national clinical laboratories and
other third party payors; and
o other discounts and allowances.
In recent years, there has been a shift away from traditional indemnity
insurance plans to managed care as employers 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. However, the Company is attempting to increase the number and
geographic coverage of its contracts with national labs, which presently
approximates 10% of net revenues. 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 from contracts with
national labs 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, histology,
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 professional component charges. For Medicare and Medicaid patients, the
pathologist is typically paid a Director's fee or "Part A" fee by the hospital.
For the nine months ended September 30, 2000, the Company recorded approximately
$6.9 million of revenue from Director's fees. Hospitals and third-party payors
continue to increase pressure to reduce the payment of these clinical
professional component charges and "Part A" fees, and in the future the Company
may sustain substantial decreases in these payments.
Medicare calculates and reimburses fees for all physician services ("Part B"
fees), including anatomic pathology services, based on a methodology known as
the resource-based relative value system ("RBRVS"), which Medicare began phasing
in since 1992 and had fully implemented by 1997. 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.
In July 1999, the Health Care Financing Administration ("HCFA") announced
several proposed rule changes, and issued a final rule on November 2, 1999 that
impacts payment for pathology services. The changes include: (a) the
implementation of resource-based malpractice relative value units ("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 Balanced
Budget Act 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. The impact of the changes for
pathology revenue were estimated by HCFA to be 8%, however, the magnitude of
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<PAGE>
the impact that Medicare has on AmeriPath depends upon the mix of Medicare and
non-Medicare services. For those outpatient facilities that AmeriPath bills
globally, the average percentage increase is 16.6% for a common CPT code 88305.
On August 10, 2000, the Final Update to the 2000 Medicare Physician Fee Schedule
Database was published by HFCA. The changes included increases to various codes
including CPT code 88305. Increases vary by region and averaged 5.68%.
In addition, HCFA announced that it will cease the direct payment by Medicare
for the technical component of inpatient physician pathology services to an
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. Current language in the Ways & Means BBA relief bill
would "grandfather" in hospital-lab arrangements in effect as of July 22, 1999
as long as the lab was submitting TC claims to the Medicare carrier as of July
22, 1999. The physician fee schedule conversion factor increased from $34.73 to
$36.61 in 2000. HCFA made a preliminary announcement that the physician fee
schedule conversion factor will increase from $36.61 to $37.27 in 2001.
Due to the implementation of the hospital outpatient prospective payment system
("PPS"), effective as of January 1, 2001, independent pathology laboratories
will be required to adopt the Ambulatory Payment Classification ("APC") payment
system. The APC's apply to Medicare reimbursement for the technical component
("TC") of anatomic pathology and cytology services provided to hospital
outpatients. Medicare will no longer reimburse independent laboratories for the
TC; and the Company's independent laboratories will have to look to the hospital
for the TC payment on Medicare patients, rather than Medicare Part B. This
change will require new billing arrangements be made with the hospitals which
may result in an increase in the amount of time necessary for collections and
reduction in the amounts paid. The actual change in revenue has not been
determined due to current negotiations in progress with the hospitals. There can
be no assurance that these changes will not have an adverse effect on the
Company.
As indicated above, and as further described in the Company's Annual Report on
Form 10-K for fiscal 1999 (including discussions in Item 1 -- General Business,
and in Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results Of Operations), 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.
The impact of legislative changes on the Company's results of operations will
depend upon several factors, including the mix of inpatient and outpatient
pathology services furnished by the Company, the amount of the Company's
Medicare business, and changes in conversion factors (budget neutrality
adjustments) which are published in November of each year. Management
continuously monitors changes in legislation impacting reimbursement.
In prior years, the Company has been able to mitigate the impact of reductions
in 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 any offsets, the recent substantial modifications to the physician fee
schedule, along with additional adjustments by Medicare, could have an 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.
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RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND
1999
Changes in the results of operations between the three and nine month periods
ended September 30, 2000 and 1999 are due primarily to the various acquisitions
which were consummated by the Company subsequent to September 30, 1999.
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, including acquired hospital contracts and expanded
ancillary testing services added to existing practices. During the first nine
months of 2000, the Company acquired six anatomic pathology practices.
PERCENTAGE OF NET REVENUE
The following table sets forth, for the periods indicated, certain consolidated
financial data as a percentage of net revenue (billings net of contractual and
other allowances):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET REVENUES 100.0% 100.0% 100.0% 100.0%
------- ------- ------- -------
OPERATING COSTS AND EXPENSES:
Cost of services 46.8% 46.7% 47.1% 45.7%
Selling, general and administrative expenses 15.8% 16.4% 15.9% 16.4%
Provision for doubtful accounts 11.8% 10.0% 11.2% 11.1%
Amortization expense 5.2% 5.5% 5.2% 5.3%
Asset impairment and related charges -- -- 2.4% --
------- ------- ------- -------
Total operating costs and expenses 79.6% 78.6% 81.8% 78.5%
------- ------- ------- -------
INCOME FROM OPERATIONS 20.4% 21.4% 18.2% 21.5%
------- ------- ------- -------
Interest expense and other, net 4.6% 4.1% 4.6% 3.8%
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 15.8% 17.3% 13.6% 17.7%
------- ------- ------- -------
PROVISION FOR INCOME TAXES 6.6% 7.4% 6.2% 7.6%
------- ------- ------- -------
NET INCOME 9.2% 9.9% 7.4% 10.1%
======= ======= ======= =======
</TABLE>
Net Revenues
Net revenues increased by $15.0 million, or 25.1%, from $59.9 million for the
three months ended September 30, 1999, to $74.9 million for the three months
ended September 30, 2000. Same practice net revenues increased $8.2 million or
14.1% from $57.9 million for the three months ended September 30, 1999 to $66.1
million for the three months ended September 30, 2000, including $2.4 million
related to the increase in Medicare reimbursement. The increase in Medicare
reimbursement includes an estimate of a retroactive reimbursement as the result
of HCFA's correction of certain 2000 technical component expense RVUs. Inpatient
revenues increased $2.4 million and outpatient revenues increased $5.8 million.
The increase in inpatient revenue was principally due to higher surgical volumes
and clinical revenues, particularly in Texas and Florida. Outpatient revenue
increased in almost all dermatopathology practices, especially in Texas,
Florida, Pennsylvania, and the de novo operation in New York. On a same practice
comparison, national clinical lab business increased 21%, or $1.1 million, in
the third quarter 2000 from the same period in 1999. Expanded contracts in
Texas, New York, and Pennsylvania contributed to these increases.
Net revenues increased by $49.2 million, or 29.3%, from $167.6 million for the
nine months ended September 30, 1999, to $216.8 million for the nine months
ended September 30, 2000. Same practice net
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<PAGE>
revenues increased $21.3 million or 13.3% from $160.4 million for the nine
months ended September 30, 1999 to $181.7 million for the nine months ended
September 30, 2000. Same practice inpatient revenues increased $5.8 million and
outpatient revenues increased $15.5 million. Approximately $5.0 million of the
increase in same practice net revenue of $21.3 million was attributable to the
increase in Medicare reimbursement, primarily in the outpatient area. For the
nine months ended September 30, 2000 the New York lab contributed approximately
$3.0 million of the $21.3 million increase in same practice net revenue. The
remaining increase of $27.9 million was from the operations of practices
acquired after the January 1, 1999.
During the nine months ended September 30, 2000, approximately $21.9 million, or
10%, of the Company's net revenue was attributable to contracts with national
labs including Quest Diagnostics ("Quest") and Laboratory Corporation of America
Holdings ("LabCorp"). On July 28, 2000, Quest served notice to the Company that,
effective December 31, 2000, Quest intends to terminate its contract with the
Company in South Florida. The Company believes that some portion of this work
may be transferred by Quest to other practices owned by the Company and the
Company is implementing a marketing strategy to retain and provide services
directly to these customers in South Florida. The Company is currently assessing
the possible intangible asset impairment that may occur due to the loss of this
contract. If impairment were to occur, the maximum non-cash charge would be
approximately $3.4 million. Also, the Company is reassessing its relationship
with Quest in San Antonio, Texas. Effective October 1, 2000, much of the
Company's business in San Antonio was moved by Quest to the Company's Dallas
operations. The Company is directly marketing its services to referring
physicians previously served in the San Antonio area. There is no identifiable
intangible asset associated with this contract, therefore, there is no issue of
impairment related to the loss of this contract. Management is currently
evaluating these changes and the related impact, if any, on the Company's
financial position or results of operations. In addition, effective August 4,
2000, the Company entered into a new contract with LabCorp to provide pathology
services from its New York facility. This contract is expected to generate
annual net revenue in excess of $1.0 million. Although the Company has had these
national lab contracts for a number of years, decisions by Quest and/or LabCorp
to discontinue using the Company for pathology services, at any or all of its
practices, could have a material adverse effect on the Company's financial
position and results of operations.
In addition, approximately 15% of the Company's net revenue is derived from 29
hospitals operated by HCA-The Healthcare Company ("HCA"), formerly known as
Columbia/HCA Healthcare Corporation. The Company's contracts with HCA and other
hospitals generally have remaining terms of less than five years and contain
conditional renewal provisions. Some of the contracts also contain clauses that
allow for termination by either party with relatively short notice. HCA 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 for extended periods of time, the closure and/or sales, or termination
of one or more of these contracts could have a material adverse effect on the
Company's financial position and results of operations.
Included in net revenues for the nine months ended September 30, 2000 are
approximately $874,000 in revenues from the hospitals owned by the bankrupt
Primary Health Systems ("PHS"). This represents a reduction of $953,000 in net
revenues from the nine months ended September 30, 1999, which reduction has been
included as a decrease in same practice net revenues for the nine month period
ended September 30, 2000. Annualized, the Company expects a reduction of revenue
of approximately $2.0 million relating to the PHS bankruptcy. The Company has
already implemented staff reductions to partially compensate for the loss of
these revenues.
Cost of Services
Cost of services increased by $7.2 million, or 25.6%, from $27.9 million for the
three months ended September 30, 1999 to $35.1 million for the same period in
2000. Cost of services, as a percentage of net revenues, increased slightly from
46.7% for the three months ended September 30, 1999 to 46.8% in the comparable
period of 2000. Gross margin decreased from 53.3% in the three months ended
September 30, 1999 to 53.2% in 2000. The decline is primarily attributable to:
increased physician compensation; increase in lower margin national clinical lab
business; the loss from operations of the Cleveland practice;
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<PAGE>
and developmental activities and start-up costs at the New York lab and the
Center for Advanced Diagnostics ("CAD").
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 $25.5 million, or 33.3%, from $76.6 million for the nine months ended
September 30, 1999 to $102.1 million for the same period in 2000. Cost of
services, as a percentage of net revenues, increased from 45.7% in the first
nine months of 1999 to 47.1% in 2000. The gross margin decreased from 54.3% in
the first nine months of 1999 to 52.9% in 2000. The decline in gross margin is
primarily attributable to the factors cited above.
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 expenses. As a percentage of consolidated net revenues, selling,
general and administrative expenses decreased from 16.4% for the nine months
ended September 30, 1999 to 15.9% for the same period of 2000, as the Company
continues to implement measures to better control these costs and continued to
spread these costs over a larger revenue base. One of the Company's objectives
is to decrease these costs as a percentage of net revenues, however, these
costs, as a percentage of net revenue, may increase as the Company continues to
invest in marketing, information systems and billing operations. In addition,
the relocation of CAD to Orlando resulted in additional selling, general and
administrative costs during the period.
Selling, general and administrative expenses increased by $2.0 million, or
20.6%, from $9.8 million for the three months ended September 30, 1999 to $11.8
million for the comparable period of 2000. Of this increase, approximately
$755,000 was attributable to the increase in billing and collection costs and
approximately $200,000 attributable to the acquisitions the Company completed
after September 30, 1999 and the New York lab. The remaining increase was due
primarily to increased staffing levels in marketing, human resources and
accounting and salary increases affected during the fourth quarter of 1999, and
costs incurred to expand the Company's administrative support infrastructure.
The Company continues its transition to becoming a fully integrated healthcare
diagnostic information company with the expansion of its information technology
("IT") organization. Four highly qualified personnel were added in the third
quarter of 2000, including an Infrastructure Project Manager, NT Operating
System Analyst, Production Control Manager, and a Director of Applications
Development. These positions are expected to annually add approximately $500,000
to selling, general and administrative costs in the future.
For the nine months ended September 30, 2000, approximately 41% of selling,
general and administrative costs relate to billing and collection. Billing and
collection costs increased 26% from the first nine months of 1999 as payment
under a number of billing contracts are a function of collected revenue, and the
Company continues to invest in upgrading its billing and collection systems and
processes. These investments are directed at improving cash collections,
reducing bad debts, and aggregating billing information and utilization data.
Selling, general and administrative expenses increased by $6.9 million, or
25.1%, from $27.5 million for the nine months ended September 30, 1999 to $34.4
million for the comparable period of 2000. Of this increase, approximately $2.9
million was attributable to an increase in billing and collection costs and
$750,000 was attributable to the acquisitions the Company completed after
September 30, 1999, and the New York lab. The remaining increase was due
primarily to increased staffing levels in marketing, human resources, accounting
and salary increases affected during the fourth quarter of 1999, and costs
incurred to expand the Company's administrative support infrastructure and to
enhance the Company's information systems support services. Marketing costs for
the nine months ended September 30, 2000 were $4.0 million as compared to $2.9
million in 1999, an increase of 39.1%, reflecting the Company's commitment to
increase same practice net revenues. The increase includes the cost of
additional marketing personnel to cover new markets for dermatopathology,
marketing literature, and products to expand the Company's penetration in the
urology, gastroenterology and oncology markets. The Company's objective is to
achieve annual same practice net revenue growth in excess of 10%, however, there
can be no assurance that the Company will achieve this objective.
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<PAGE>
Provision for Doubtful Accounts
The provision for doubtful accounts increased by $2.8 million, or 47.0%, from
$6.0 million for the three months ended September 30, 1999, to $8.8 million for
the same period in 2000. The provision for doubtful accounts as a percentage of
net revenues was 10.0% and 11.8% for the three month periods ended September 30,
1999 and 2000, respectively. This increase was principally driven by price
increases in clinical professional component billing implemented earlier in the
year. The increase in the percentage was also impacted by the amount of revenues
from national lab contracts and Part A, medical director's fees, which are not
susceptible to bad debt.
The provision for doubtful accounts increased by $5.7 million, or 30.5%, from
$18.5 million for the nine months ended September 30, 1999, to $24.2 million for
the same period in 2000. The provision for doubtful accounts as a percentage of
net revenues was 11.1% and 11.2% for the nine month periods ended September 30,
1999 and 2000, respectively. The dollar increase is primarily due to the
increase in net revenues and to the factors cited above.
Amortization Expense
Amortization expense increased by $570,000, or 17.2%, from $3.3 million for the
three months ended September 30, 1999, to $3.9 million for the same period of
2000.
Amortization expense increased by $2.5 million, or 28.4%, from $8.8 million for
the nine months ended September 30, 1999, to $11.3 million for the same period
of 2000. The increase is attributable to the amortization of goodwill and other
identifiable intangible assets recorded in connection with anatomic pathology
practices acquired after September 30, 1999, and payments made on the contingent
notes, as well as a reduction in the weighted average amortization periods from
31 to 30 years. 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. Such impairment would be recorded as a charge to operating profit
and reduction in intangible assets.
Asset Impairment and Related Charges
As more fully described in Note 4 to the financial statements, the Company
recorded a pre-tax noncash charge of approximately $4.7 million and related cash
charges of approximately $545,000 in connection with the impairment of
intangible assets at an acquired practice in Cleveland, Ohio. These charges, net
of income tax, resulted in a reduction of net income for the nine months ended
September 30, 2000 of $3.9 million, or $0.18 per share.
Income from Operations and Net Income
Income from operations increased $2.5 million, or 19.4%, from $12.8 million for
the three months ended September 30, 1999, to $15.3 million in the same period
of 2000.
Income from operations increased $3.3 million, or 9.2%, from $36.1 million for
the first nine months of 1999, to $39.4 million in the same period of 2000. As a
percentage of net revenues, income from operations was 21.5% for the first nine
months of 1999 as compared to 18.2% for the comparable period of 2000, primarily
as a result of the increase in cost of services and the asset impairment charge.
Without the asset impairment charge, income from operations would have increased
by $8.6 million, or 23.7% to $44.7 million.
19
<PAGE>
Net income for the three months ended September 30, 2000 was $6.9 million, an
increase of $985,000, or 16.7%, over the same period in 1999. Diluted earnings
per share for the three months ended September 30, 2000 increased to $0.31 from
$0.27 for the comparable period of 1999, based on 22.5 million and 22.0 million
weighted average shares outstanding, respectively.
Net income for the first nine months of 2000 was $16.0 million, a decrease of
$906,000, or 5.4%, over the same period in 1999. Without the asset impairment
charge, net income would have increased by $3.0 million, or 18.0% to $19.9
million. Diluted earnings per share for the first nine months of 2000 decreased
to $0.72 from $0.78 for the comparable period of 1999, based on 22.2 million and
21.7 million weighted average shares outstanding, respectively. Diluted earnings
per share would have been $0.90 without the asset impairment charge.
Interest Expense
Interest expense increased by $960,000, or 37.9%, from $2.5 million for the
three months ended September 30, 1999, to $3.5 million for the same period in
2000. The majority of this increase was attributable to the higher average
amount of debt outstanding during the three months ended September 30, 2000. For
the three months ended September 30, 1999, average indebtedness outstanding was
$145.2 million, compared to average indebtedness of $170.2 million outstanding
in the same period of 2000.
Interest expense increased by $3.6 million, or 55.3%, from $6.6 million for the
nine months ended September 30, 1999, to $10.2 million for the same period in
2000. The majority of this increase was attributable to the higher average
amount of debt outstanding during the first nine months of 2000 as compared to
the first nine months of 1999. In the first nine months of 1999, average
indebtedness outstanding was $133.3 million, compared to average indebtedness of
$168.2 million outstanding in the same period of 2000.
The Company's effective interest rate was 7.0% and 8.2% for the three month
periods ended September 30, 1999 and 2000, respectively, and 6.6% and 8.1% for
the nine month periods ended September 30, 1999 and 2000, respectively. The
increase in rates reflects the renegotiation and increase in the Company's
Credit Facility in the fourth quarter of 1999, which increased the borrowing
rate 75 basis points, and the general rise in interest rates during the past two
quarters, which affects the floating rate under the Credit Facility.
Provision for Income Taxes
The effective income tax rate was 41.9% for the three month period ended
September 30, 2000, as compared to 43.0% for the three month period ended
September 30, 1999. This reduction was partially due to the Company's initiative
to restructure certain practices to save state income taxes and the tax
deductibility of stock options exercised during 2000. The Company's effective
tax rate is higher than statutory rates due to the non-deductibility of the
goodwill amortization related to a number of the Company's other acquisitions.
The effective income tax rate was 45.6% for the nine month period ended
September 30, 2000, as compared to 43.0% for the nine month period ended
September 30, 1999. The increase in the effective tax rate relates to the
non-deductibility of the goodwill written off in connection with the asset
impairment charge. As a result of this non-deductibility, the income tax benefit
associated with the charge was approximately $900,000 less than it would have
been using the Company's normal effective tax rate. This was partially offset by
the Company's initiative to restructure certain practices to save state taxes
and the tax deductibility of stock options exercised during 2000. Excluding the
second quarter asset impairment charge, the Company anticipates its effective
tax rate for the year to be 42.5%.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had working capital of approximately $35.6
million, an increase of $400,000 from the working capital of $35.2 million at
December 31, 1999. The increase in working capital was due primarily to
increases in net accounts receivable of $6.6 million and cash and cash
equivalents of $700,000 offset by an increase in accounts payable and accrued
expenses of $6.7 million.
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For the nine month periods ended September 30, 1999 and 2000, cash flows from
operations were $27.7 million, 17% of net revenue, and $30.4 million, 14% of net
revenue, respectively. Cash flows per share increased from $1.27 per share for
the nine months ended September 30, 1999 to $1.37 per share for same period of
2000. For the nine months ended September 30, 2000, cash flow from operations
and borrowings under the Company's Credit Facility were used to make contingent
note payments of $21.5 million; and acquire $5.9 million of property and
equipment, primarily for the build-out of the New York lab, laboratory
equipment, and information systems as the Company continues to upgrade its
billing and financial reporting systems and to make a $1.0 million investment in
GCI.
On September 15, 2000, the Company made a $1.0 million investment in GCI
receiving 333,333 shares of Series D Preferred Stock, par value $0.01.
Since the first quarter of 1996, the Company has completed the acquisition of 47
pathology practices. The Company is revisiting its acquisition strategy,
particularly its pace of acquisitions, and will focus on fold-in acquisitions
that will densify its operations in strategically targeted markets and larger
pedestal acquisitions. As more fully described in Note 10 to the financial
statements, on November 7, 2000, the Company entered into a definitive
agreement, subject to certain closing conditions, to acquire Pathology
Consultants of America, Inc. (d/b/a Inform DX). Further, notwithstanding
opportunities to raise additional capital in the equity markets, should there be
a resurgence of interest in healthcare stocks, the Company plans to utilize
available cash flows to reduce its outstanding debt. Such changes in strategy
should lessen the Company's demand for capital.
At September 30, 2000, the Company had $53.2 million available under its Credit
Facility with a syndicate of banks led by Fleet National Bank (formerly
BankBoston, N.A.). The amended facility provides for borrowings of up to $230
million in the form of a revolving loan that may be used for working capital
purposes and to fund acquisitions. As of September 30, 2000, $176.8 million was
outstanding under the revolving loan with an annual effective interest rate of
8.04%.
In October 1998, the Company entered into two, two year, interest rate swap
transactions. The agreements are with notional amounts of $75 million and $30
million. Under the $75 and $30 million agreements, the Company received interest
on the notional amounts if the 30 day LIBOR exceeds 4.675% and 5.425%,
respectively, and paid interest on the notional amounts if the 30 day LIBOR is
less than the foregoing rates. In anticipation of the expiration of these
agreements, on May 15, 2000, the Company entered into three interest rate swaps
transactions with an effective date of October 5, 2000, variable maturity dates,
and a combined notional amount of $105 million. See Item 3. - Quantitative and
Qualitative Disclosures About Market Risk for details on these new swap
agreements. The Company uses derivative financial instruments 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. The Company
is required by the terms of its Credit Facility to keep some form of interest
rate protection in place.
On July 21, 2000, the Company amended its present Credit Facility, dated
December 16, 1999. This amendment allows for the Company's compliance with
certain computational covenants contained in the Credit Facility by excluding
charges totaling approximately $5.2 million from the calculation of the
Company's consolidated operating cash flow covenant through March 31, 2001.
These charges relate to the impairment of assets and related charges at an
acquired practice in Cleveland, Ohio. In addition, the amendment: (i) increased
the Company's operating cash flow requirements under the facility for the
trailing twelve months ending December 31, 2002 and thereafter; (ii) requires
that a minimum of 10% of the purchase price of future acquisitions in excess of
$5 million be in the form of the Company's capital stock; (iii) and permits the
Company to invest up to $3.0 million in Genomics Collaborative, Inc.. The
amendment is not expected to have an adverse effect on the Company's operations
or strategies. The amendment was obtained to cure a potential default that
otherwise would have likely occurred under the operating cash flow covenant of
the Credit Facility as a result of the asset impairment charge. At September 30,
2000, the Company believes as a result of this amendment, that it is in
compliance with the Credit Facility covenants.
The Company anticipates that cash flow 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
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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.
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 of $176.8 million at September 30, 2000.
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. In anticipation of
the expiration of these agreements, on May 15, 2000, the Company entered into
three interest rate swaps transactions with an effective date of October 5,
2000, variable maturity dates, and a combined notional amount of $105 million.
These agreements are indexed to 30 day LIBOR. The following table summarizes the
terms of the swaps:
Notional Amount(in millions) Fixed Rate Term in Months Maturity
---------------------------- ---------- -------------- --------
$45.0 7.604% 24 10/07/02
$30.0 7.612% 36 10/06/03
$30.0 7.626% 48 10/05/04
The fixed rates do not include the credit spread which is currently 2.0%. The
fixed rates under the new agreements are approximately 2.6% higher than the
prior agreements reflecting the numerous interest rate increases by the Federal
Reserve since October 1998 and the current interest rate environment. Beginning
in October 2000, these higher fixed rates will increase the Company's annual
interest cost by approximately $2.7 million. In addition, further tightening of
interest rates by the Federal Reserve will increase the Company's interest cost
on the outstanding balance of the Credit Facility not subject to interest rate
protection. All of the Company's swap transactions involve 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
Company uses derivative financial instruments 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. The Company is
required by the terms of its Credit Facility to keep some form of interest rate
protection in place.
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. The majority of these
relate to cytopathology 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. However, 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
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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 that 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities - In connection with one of the
acquisitions completed during the third quarter of 2000, the Company issued the
following shares of common stock:
<TABLE>
<CAPTION>
Effective Shares
Location Date Issued
------------- ----------------- -------
Arlington Pathology Association and Arlington
<S> <C> <C> <C>
Pathology Associates Arlington, TX September 1, 2000 155,860
</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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated July 21, 2000, was filed by
the Company with the Securities and Exchange Commission on August
2, 2000, reporting that on July 20, 2000 the Company announced
that it has amended its up to $300 million credit facility with
the syndicate of banks led by Fleet National Bank. The amendment
allows for the Company's current compliance with the credit
facility by excluding charges totaling approximately $5.2 million
from the calculation of the Company's consolidated operating cash
flow covenant through March 31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERIPATH, INC.
Date: November 10, 2000 By: /S/ JAMES C. NEW
--------------------------------
James C. New
Chairman, President and
Chief Executive Officer
Date: November 10, 2000 By: /S/ ROBERT P. WYNN
--------------------------------
Robert P. Wynn
Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
27.1 Financial Data Schedule
