UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 21,601,487 shares of common stock, $.01 par value,
outstanding as of May 15, 2000.
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AMERIPATH, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
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PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2000 (Unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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<CAPTION>
March 31, December 31,
ASSETS 2000 1999
--------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 356 $ 620
Accounts receivable, net 47,893 45,969
Inventories 384 482
Other current assets 7,063 7,144
-------- --------
Total current assets 55,696 54,215
-------- --------
PROPERTY AND EQUIPMENT, NET 14,685 14,129
-------- --------
OTHER ASSETS:
Goodwill, net 154,192 142,767
Identifiable intangibles, net 233,521 235,668
Other 3,154 3,367
-------- --------
Total other assets 390,867 381,802
-------- --------
TOTAL ASSETS $461,248 $450,146
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 22,401 $ 18,508
Current portion of long-term debt 706 539
-------- --------
Total current liabilities 23,107 19,047
LONG-TERM LIABILITIES:
Revolving loan 164,000 163,300
Subordinated notes 493 777
Deferred tax liability 63,388 62,980
-------- --------
Total liabilities 250,988 246,104
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 216 216
Additional paid-in capital 152,288 152,187
Retained earnings 57,756 51,639
-------- --------
Total stockholders' equity 210,260 204,042
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $461,248 $450,146
======== ========
</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)
Three Months Ended
March 31,
----------------------
2000 1999
-------- --------
NET REVENUES $ 68,174 $ 52,336
-------- --------
OPERATING COSTS AND EXPENSES:
Cost of services 32,784 23,747
Selling, general and administrative expenses 10,703 8,785
Provision for doubtful accounts 7,066 5,963
Amortization expense 3,701 2,684
-------- --------
Total operating costs and expenses 54,254 41,179
-------- --------
INCOME FROM OPERATIONS 13,920 11,157
-------- --------
OTHER INCOME (EXPENSE):
Interest expense (3,289) (1,922)
Other, net 45 6
-------- --------
Total other expense (3,244) (1,916)
-------- --------
INCOME BEFORE INCOME TAXES 10,676 9,241
PROVISION FOR INCOME TAXES 4,559 3,974
-------- --------
NET INCOME $ 6,117 $ 5,267
======== ========
BASIC EARNINGS PER COMMON SHARE:
Basic earnings per common share $ 0.28 $ 0.25
======== ========
Basic weighted average shares outstanding 21,584 21,078
======== ========
DILUTED EARNINGS PER COMMON SHARE:
Diluted earnings per common share $ 0.28 $ 0.24
======== ========
Diluted weighted average shares outstanding 22,122 21,610
======== ========
The accompanying notes are an integral part of these financial statements.
4
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AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
2000 1999
--------- --------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,117 $ 5,267
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization 4,668 3,475
(Gain) loss on disposal of assets (5) 7
Deferred income taxes (500) (1,000)
Provision for doubtful accounts 7,066 5,963
Changes in assets and liabilities (net of effects of acquisitions):
Increase in accounts receivable (8,976) (7,252)
Decrease in inventories 98 61
Decrease in other current assets 65 474
Increase (decrease) in other assets 137 (72)
Increase in accounts payable and accrued expenses 4,050 4,388
--------- --------
Net cash provided by operating activities 12,720 11,311
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (1,407) (1,021)
Cash paid for acquisitions and acquisition costs, net of cash acquired (407) (1,426)
Payments of contingent notes (11,850) (5,820)
--------- --------
Net cash used in investing activities (13,664) (8,267)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 101 --
Debt issuance costs (4) --
Principal payments on long-term debt (117) (802)
Net borrowings (payments) under revolving loan 700 (1,086)
--------- --------
Net cash provided by (used in) financing activities 680 (1,888)
--------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (264) 1,156
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 620 458
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 356 $ 1,614
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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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.
NOTE 2 - ACQUISITIONS
There were no significant acquisitions in the first three months of 2000.
The accompanying financial statements include the results of operations of the
Company's 1999 acquisitions from the date acquired through March 31, 2000 and
1999, respectively. The allocation of the purchase price of some of the 1999
acquisitions is preliminary, while the company continues to obtain the
information necessary to determine the fair value of the assets acquired and
liabilities assumed. When the Company obtains final information, management
believes that adjustments, if any will not be material in relation to the
consolidated financial statements.
The following unaudited pro forma information presents the consolidated results
of the Company's operations and the results of operations of the acquisitions
for the three months ended March 31, 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 three months ended March 31, 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. There is no pro forma information presented for the
three months ended March 31, 2000, since there were no significant acquisitions
made during the first three months of 2000. These amounts are in thousands,
except per share amounts.
Pro Forma (Unaudited)
Three Months Ended
March 31, 1999
Net revenues $ 61,863
========
Net income $ 6,172
========
Net income per share (diluted) $ 0.28
========
6
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AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3 - INTANGIBLE ASSETS
Intangible assets and the related accumulated amortization and amortization
periods are set forth below (dollars in thousands):
<TABLE>
<CAPTION>
March 31, 2000
Amortization Periods
(Years)
------------------------
March 31, December 31, Weighted
2000 1999 Range Average
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<S> <C> <C> <C> <C>
Hospital contracts $ 191,524 $ 191,524 25-40 33.3
Physician client lists 54,758 54,558 10-30 21.0
Laboratory contracts 7,317 7,317 10 10.0
Management service agreement 2,483 2,478 25 25.0
---------- ----------
256,082 255,877
---------- ----------
Accumulated amortization (22,561) (20,209)
---------- ----------
Balance, net $ 233,521 $ 235,668
========== ==========
Goodwill $ 165,902 $ 153,128 10-35 31.8
Accumulated amortization (11,710) (10,361)
Balance, net $ 154,192 $ 142,767
========== ==========
</TABLE>
The weighted average amortization period for identifiable intangible assets and
goodwill is 30.7 years.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
LIABILITY INSURANCE -- The Company is insured with respect to general liability
on an occurrence basis and medical malpractice risks on a claims made basis. The
Company records an estimate of its liabilities for claims incurred but not
reported. Such liabilities are not discounted. Effective July 1, 1999, the
Company changed its medical malpractice carrier and the Company is currently in
dispute with its former insurance carrier on an issue related to 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 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. The Company's operations are continually
subject to review and inspection.
INTERNAL REVENUE SERVICE EXAMINATION -- 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 continuing 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.
7
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AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 5 - 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. All previously reported earnings per share data has been
restated in the accompanying financial statements to reflect the requirements of
SFAS No. 128.
Basic and diluted earnings per share for the respective periods are set forth in
the table below (amounts in thousands, except per share amounts):
Three Months Ended
March 31,
----------------------
2000 1999
-------- --------
Earnings Per Common Share:
Net income $ 6,117 $ 5,267
======== ========
Basic earnings per common share $ 0.28 $ 0.25
======== ========
Diluted earnings per common share $ 0.28 $ 0.24
======== ========
Basic weighted average shares outstanding 21,584 21,078
Effects of dilutive stock options 538 532
-------- --------
Diluted weighted average shares outstanding 22,122 21,610
======== ========
Certain options outstanding as of March 31, 2000 were excluded from the
calculations of diluted earnings per share because their effect would have been
anti-dilutive. Such excluded options totaled 632,000 at a weighted-average
exercise price per share of $12.03 for the three months ended March 31, 2000,
and 633,000 options at a weighted-average exercise price per share of $12.15 for
the three months ended March 31, 1999.
NOTE 6 - SUBSEQUENT EVENTS
Subsequent to March 31, 2000, the Company paid approximately $3.6 million on
contingent notes issued in connection with previous acquisitions.
8
<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, 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.
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
strategies; 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; changes in
technology; 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
The Company is the nation's leading integrated physician group practice and
laboratory management company focused on providing anatomic pathology diagnostic
services, based on number of physicians, number of hospital contracts, number of
practices and net revenues. Since inception, the Company has acquired or
affiliated with 44 physician practices (the "Practices") located in 13 states.
The 302 pathologists employed by the Company provide medical diagnostic services
in outpatient laboratories owned and operated by the Company, hospitals, and
outpatient ambulatory surgery centers. Of these pathologists, 298 are board
certified in anatomic and clinical pathology, and 142 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 March 31, 2000, 23 Practices had contracts with a total of 161 hospitals
to manage their clinical pathology and other 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 13 operate in conjunction with hospital laboratories.
9
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The Company manages and controls all of the non-medical functions of the
Practices, including: (i) recruiting, training, employing and managing the
technical and support staff of the Practices; (ii) developing, equipping and
staffing laboratory facilities; (iii) establishing and maintaining courier
services to transport specimens; (iv) negotiating and maintaining contracts with
hospitals, national clinical laboratories and managed care organizations and
other payors; (v) providing financial reporting and administration, clerical,
purchasing, payroll, billing and collection, information systems, sales and
marketing, risk management, employee benefits, legal, tax and accounting
services to the Practices; (vi) complying with applicable laws and regulations;
and (vii) with respect to the Company's ownership and operation of anatomic
pathology laboratories, providing slide preparation and other technical
services. The Company is not licensed to practice medicine.
The 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. Reimbursement from
government programs (principally Medicare and Medicaid) for these services
represented approximately 22% and 21% of the Company's cash collections in the
first quarter of 2000 and 1999, respectively. The Company typically bills
government programs, 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 other discounts and allowances.
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. However, the Company is attempting to increase
the number of national lab 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 professional
component charges. For Medicare patients, the pathologist is typically paid a
Director's fee or "Part A" fee by the hospital. For the quarter ended March 31,
2000, the Company recorded approximately $2.3 million of revenue from director
fees. For the year 2000, the Company estimates that director fees will be
approximately $8.2 million. The year 2000 estimate reflects the loss of
approximately $1.0 million of fees from existing contracts. Hospitals and
third-party payors are continuing to increase pressure to reduce the payment of
these clinical professional component billing charges and "Part A" fees, and in
the future the Company may sustain substantial decreases in these payments.
10
<PAGE>
Medicare currently 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 has
been phasing in since 1992. 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 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 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. 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. HCFA also
announced that the physician fee schedule conversion factor will increase from
$34.73 to $36.61 in 2000.
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 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 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.
11
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Changes in the results of operations between the three month periods ended March
31, 2000 and 1999 are due primarily to the various acquisitions which were
consummated by the Company subsequent to March 31, 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 three months of 2000, the
Company acquired no significant anatomic pathology practices.
NET REVENUES
Net revenues increased by $15.9 million, or 30.3%, from $52.3 million for the
three months ended March 31, 1999, to $68.2 million for the three months ended
March 31, 2000. Same practice net revenues increased $5.2 million or 10.0% from
$52.3 million for the three months ended March 31, 1999 to $57.5 million for the
three months ended March 31, 2000. This increase was driven by a 7.4% increase
in outpatient revenue and a 2.5% increase in reimbursement from Medicare. The
remaining increase of $10.7 million was from the operations of practices
acquired after the first quarter of 1999.
The 30% quarter over quarter revenue increase resulted from a 28% unit growth in
biopsies diagnosed (approximately 640,000 in the first three months of 2000 as
compared to 500,000 in the same period of 1999), and a 50% unit increase in
cytology interpretations (approximately 450,000 Pap smears in the first three
months of 2000 versus 300,000 in the comparable period of 1999).
During the three months ended March 31, 2000, approximately $6.8 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"). Although the Company has had these national lab contracts
for a number of years, a decision 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 14% of the Company's net revenue is derived 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 conditional 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. During 1999, Columbia closed one hospital and sold another
hospital where the Company provided pathology services. The estimated net
revenue from the loss of these contracts is less than 1% of 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. In addition, further closures and\or sales of Columbia hospitals could
have a material adverse effect on the Company's financial position and results
of operations. Although the Company, through its acquisitions, has had
relationships with these hospitals 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.
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 $9.0 million, or 38.1%, from $23.7 million for the three months ended March
31, 1999 to $32.7 million for the same period in 2000. Cost of services, as a
percentage of net revenues, increased from 45.4% in the first quarter of 1999 to
48.1% in 2000. Gross margin decreased from 54.6% in the first quarter of 1999 to
51.9% in 2000. The decline in gross margin is primarily attributable to four
factors: increased physician compensation; increase in lower margin national
clinical lab business; and developmental activities at the de novo New York lab
and the Center for Advanced Diagnostics ("CAD").
12
<PAGE>
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 from 16.8% for the three months
ended March 31, 1999 to 15.7% for the same period of 2000, as the Company
imposed measures to control the growth in 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 may result in additional selling, general and
administrative costs.
Approximately 40% of selling, general and administrative costs relate to billing
and collection. Billing and collection costs increased 37% from the first
quarter 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 and the aggregation of billing information and
utilization data.
Selling, general and administrative expenses increased by $1.9 million, or
21.8%, from $8.8 million for the three months ended March 31, 1999 to $10.7
million for the comparable period of 2000. Of this increase, approximately
$650,000 was attributable to the acquisitions the Company completed during 1999.
The remaining increase was due primarily to increased staffing levels in
marketing, billing, human resources and accounting and salary increases during
the fourth quarter of 1999, and costs incurred to expand the Company's
administrative support infrastructure and to upgrade information systems.
PROVISION FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts increased by $1.1 million, or 18.5%, from
$6.0 million for the three months ended March 31, 1999, to $7.1 million for the
same period in 2000. The dollar increase is primarily due to the increase in net
revenues. The provision for doubtful accounts as a percentage of net revenues
was 11.4% and 10.4% for the three month periods ended March 31, 1999 and 2000,
respectively. The decrease in the percentage of net revenue was primarily
attributable to two factors. First, net revenue from national lab contracts and
medical director fees increased from 10% in the first three months of 1999 to
13% for the comparable period of 2000. Typically, there are no bad debts
associated with these revenues. Secondly, the Company's bad debt and collection
initiatives are beginning to produce results. Net revenue from inpatient
services as a percentage of net revenue was 58% in the first quarter of 1999 and
2000. 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.
AMORTIZATION EXPENSE
Amortization expense increased by $1.0 million, or 37.9%, from $2.7 million for
the three months ended March 31, 1999, to $3.7 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 the acquisition of
anatomic pathology practices subsequent to March 31, 1999, and payments made on
the contingent notes, as well as a reduction in the weighted average
amortization periods from 32 to 31 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
13
<PAGE>
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.
During the first quarter of 2000, the Company received information that Primary
Health Systems ("PHS"), a regional hospital network in Cleveland, Ohio that the
Company provides services to, began implementing its plan of reorganization it
filed under Chapter 11 with the U.S. Bankruptcy Court for the District of
Delaware. One of the Company's practices, acquired in 1998, provides services at
four PHS hospitals and an ambulatory care facility. Information received to date
indicates that PHS, in accordance with its bankruptcy plan, closed one hospital
and plans to sell two hospitals and the ambulatory care facility. Management and
the practice's Managing Director are actively pursuing the retention of the
hospital contracts and outpatient business, which it plans to combine with the
Company's other Cleveland outpatient lab. At this time, the Company is still
uncertain as to the future operations or cash flows from this practice. If the
final reorganization of PHS results in a reduction of cash flow and the Company
is unable to sufficiently reduce the corresponding operating costs, an
impairment of the intangible assets attributable to this practice acquisition
may occur. If impairment were to occur, the maximum non-cash charge would be
approximately $4.7 million offset by a deferred tax benefit of approximately
$1.1 million. Net revenues of this practice were approximately $2.5 million for
the year ended December 31, 1999 and $550,000 for the first quarter of 2000.
There can be no assurance this practice will continue to derive any revenues
from PHS due to the events described above. The Company will continue to monitor
the status of the reorganization and the effect on cash flows and the carrying
values of the related intangibles.
INCOME FROM OPERATIONS AND NET INCOME
Income from operations increased $2.8 million or 24.8%, from $11.1 million for
the first three months of 1999, to $13.9 million in the same period of 2000. As
a percentage of net revenues, income from operations was 21.3% for the first
three months of 1999 as compared to 20.4% for the comparable period of 2000,
primarily as a result of the increase in cost of services.
Net income for the first three months of 2000 was $6.1 million, an increase of
$850,000, or 16%, over the same period in 1999. Diluted earnings per share for
the first three months of 2000 increased to $0.28 from $0.24 for the comparable
period of 1999, based on 22.1 million and 21.6 million weighted average shares
outstanding, respectively.
INTEREST EXPENSE
Interest expense increased by $1.4 million, or 71.1%, from $1.9 million for the
three months ended March 31, 1999, to $3.3 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 three months of 2000 as compared to the first
three months of 1999. In the first quarter of 1999, average indebtedness
outstanding was $123.0 million, compared to average indebtedness of $165.4
million outstanding in the same period of 2000, also, the Company's effective
interest rate was 6.2% and 7.9% for the three month periods ended March 31, 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 42.7% for the three month period ended March
31, 2000, as compared to 43.0% for the three month period ended March 31, 1999.
The effective tax rate is higher than the Company's statutory rates primarily
due to the non-deductibility of the goodwill amortization related to a number of
the Company's acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had working capital of approximately $32.6
million, a decrease of $2.6 million from the working capital of $35.2 million at
December 31, 1999. The decrease in working capital
14
<PAGE>
was due primarily to an increase in accounts payable and accrued expenses of
$4.1 million offset by an increase in net accounts receivable of $1.9 million.
For the three month periods ended March 31, 2000 and 1999, cash flows from
operations were $12.7 million and $11.3 million, respectively. Cash flow from
operations was positively impacted by an increase in income taxes payable of
$3.5 million related primarily to tax payments that were due April 15, 2000. For
the three months ended March 31, 2000, the cash flow from operations and
borrowings under the Company's credit facility were used primarily to make
contingent note payments of $11.8 million; and acquire $1.4 million of property
and equipment, primarily for the build-out of the de novo New York lab,
laboratory equipment and information systems as the Company continues to upgrade
its billing and financial reporting systems.
At March 31, 2000, the Company had $66 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 $230 million in the form of a
revolving loan that may be used for working capital purposes and to fund
acquisitions. As of March 31, 2000, $164 million was outstanding under the
revolving loan with an annual effective interest rate of 7.63%. In October 1998,
the Company entered into two, two year, interest rate swap transactions which
involves the exchange of floating for fixed rate interest payments over the life
of the agreement without the exchange of the underlying principal amounts. The
differential to be paid or received is accrued and is recognized as an
adjustment to interest expense. The agreements are with notional amounts of $75
million and $30 million. Under the $75 and $30 million agreements, the Company
receives interest on the notional amounts if the 30 day LIBOR exceeds 4.675% and
5.425%, respectively, and pays interest on the notional amounts if the 30 day
LIBOR is less than the foregoing rates. These derivative financial instruments
are being used by the Company to reduce interest rate volatility and associated
risks arising from the floating rate structure of its credit facility and is not
held or issued for trading purposes. The Company is required by the terms of its
credit facility to keep these interest swap agreements in place. The Company is
currently evaluating additional interest rate protection arrangements including,
the replacement of these contracts when they expire in October 2000, new types
of protection and increasing the notional amounts. Changes to the Company's
interest rate protection and the recent increases in the prime rate and
potential further tightening of interest rates by the Federal Reserve will
result in an increase in the Company's overall interest cost. At March 31, 2000,
the Company believes that it is in compliance with the covenants of the credit
facility.
The Company anticipates that its 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 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 $164 million at March 31, 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. 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.
15
<PAGE>
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. 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 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
There were no shares of Common Stock issued in the first three months of 2000 or
through the date of this report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three-month
period ended March 31, 2000.
16
<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: May 15, 2000 By: /S/ JAMES C. NEW
-----------------
James C. New
Chairman, President
and Chief Executive Officer
Date: May 15, 2000 By: /S/ ROBERT P. WYNN
-------------------
Robert P. Wynn
Executive Vice President and
Chief Financial Officer
17
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 356
<SECURITIES> 0
<RECEIVABLES> 103,301
<ALLOWANCES> 55,408
<INVENTORY> 384
<CURRENT-ASSETS> 7,063
<PP&E> 26,769
<DEPRECIATION> 12,084
<TOTAL-ASSETS> 461,248
<CURRENT-LIABILITIES> 23,107
<BONDS> 164,000
0
0
<COMMON> 216
<OTHER-SE> 210,044
<TOTAL-LIABILITY-AND-EQUITY> 461,248
<SALES> 0
<TOTAL-REVENUES> 68,174
<CGS> 0
<TOTAL-COSTS> 32,784
<OTHER-EXPENSES> 14,404
<LOSS-PROVISION> 7,066
<INTEREST-EXPENSE> 3,289
<INCOME-PRETAX> 10,676
<INCOME-TAX> 4,559
<INCOME-CONTINUING> 6,117
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,117
<EPS-BASIC> .28
<EPS-DILUTED> .28
</TABLE>
