UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 21,714,607 shares of common stock, $.01 par value,
outstanding as of August 11, 2000.
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2000 (Unaudited) and December 31, 1999 3
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2000 and 1999 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 4. Submission of Matters to Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,539 $ 620
Accounts receivable, net 48,923 45,969
Inventories 507 482
Other current assets 6,355 7,144
---------- ----------
Total current assets 57,324 54,215
---------- ----------
PROPERTY AND EQUIPMENT, NET 15,910 14,129
---------- ----------
OTHER ASSETS:
Goodwill, net 159,503 142,767
Identifiable intangibles, net 232,105 235,668
Other 3,192 3,367
---------- ----------
Total other assets 394,800 381,802
---------- ----------
TOTAL ASSETS $ 468,034 $ 450,146
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 19,778 $ 18,508
Current portion of long-term debt 703 539
---------- ----------
Total current liabilities 20,481 19,047
LONG-TERM LIABILITIES:
Revolving loan 170,675 163,300
Subordinated notes 214 777
Deferred tax liability 63,438 62,980
---------- ----------
Total liabilities 254,808 246,104
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock 216 216
Additional paid-in capital 152,288 152,187
Retained earnings 60,722 51,639
---------- ----------
Total stockholders' equity 213,226 204,042
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 468,034 $ 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 Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUES $ 73,684 $ 55,406 $ 141,858 $ 107,742
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of services 34,244 24,912 67,028 48,659
Selling, general and administrative expenses 11,914 8,941 22,617 17,726
Provision for doubtful accounts 8,308 6,578 15,374 12,541
Amortization expense 3,769 2,845 7,470 5,529
Asset impairment and related charges 5,245 -- 5,245 --
----------- ----------- ----------- -----------
Total operating costs and expenses 63,480 43,276 117,734 84,455
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 10,204 12,130 24,124 23,287
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (3,421) (2,118) (6,710) (4,040)
Other, net 35 (1) 80 5
----------- ----------- ----------- -----------
Total other expense (3,386) (2,119) (6,630) (4,035)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 6,818 10,011 17,494 19,252
PROVISION FOR INCOME TAXES 3,852 4,304 8,411 8,278
----------- ----------- ----------- -----------
NET INCOME $ 2,966 $ 5,707 $ 9,083 $ 10,974
=========== =========== =========== ===========
BASIC EARNINGS PER COMMON SHARE:
Basic earnings per common share $ 0.14 $ 0.27 $ 0.42 $ 0.52
=========== =========== =========== ===========
Basic weighted average shares outstanding 21,601 21,089 21,593 21,083
=========== =========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE:
Diluted earnings per common share $ 0.13 $ 0.26 $ 0.41 $ 0.51
=========== =========== =========== ===========
Diluted weighted average shares outstanding 22,102 21,636 22,119 21,615
=========== =========== =========== ===========
</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>
Six Months Ended
June 30,
---------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,083 $ 10,974
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization 9,457 7,088
Loss on disposal of assets 9 28
Asset impairment and related charges 5,245 --
Deferred income taxes (2,150) (1,800)
Provision for doubtful accounts 15,374 12,541
Changes in assets and liabilities (net of effects of acquisitions):
Increase in accounts receivable (17,903) (13,590)
(Increase) decrease in inventories (25) 51
Decrease in other current assets 765 3,368
Increase (decrease) in other assets 81 (645)
(Decrease) increase in accounts payable and accrued expenses (1,049) 1,076
-------- --------
Net cash provided by operating activities 18,887 19,091
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (3,450) (2,013)
Cash paid for acquisitions and acquisition costs, net of cash acquired (5,464) (10,958)
Payments of contingent notes (16,061) (11,857)
-------- --------
Net cash used in investing activities (24,975) (24,828)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 101 4
Debt issuance costs (70) --
Principal payments on long-term debt (399) (1,140)
Net borrowings under revolving loan 7,375 8,919
-------- --------
Net cash provided by financing activities 7,007 7,783
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 919 2,046
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 620 458
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,539 $ 2,504
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 6,666 $ 4,283
Income taxes $ 12,466 $ 8,819
</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.
NOTE 2 - ACQUISITIONS
Effective May 1, 2000, the Company acquired an anatomic pathology practice
located in Texarkana, Texas. On June 30, 2000, the Company also acquired another
hospital-based anatomic pathology practice located in South Hill, Virginia,
which will be folded into the Company's North Carolina practice.
The accompanying financial statements include the results of operations of the
Company's 2000 and 1999 acquisitions from the date acquired through June 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 six months ended June 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 six months ended June 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.
6
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Pro Forma (Unaudited)
Six Months Ended
June 30,
2000 1999
-----------------------------
Net revenues $ 142,975 $ 128,471
========= =========
Net income $ 9,245 $ 13,027
========= =========
Diluted earnings per common share $ 0.42 $ 0.59
========= =========
NOTE 3 - INTANGIBLE ASSETS
Intangible assets and the related accumulated amortization and amortization
periods are set forth below (dollars in thousands):
<TABLE>
<CAPTION>
June 30, 2000
Amortization Periods
(Years)
-----------------------
June 30, December 31, Weighted
2000 1999 Range Average
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Hospital contracts $ 190,593 $ 191,524 25-40 33.2
Physician client lists 56,512 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
---------- ----------
256,905 255,877
Accumulated amortization (24,800) (20,209)
---------- ----------
Balance, net $ 232,105 $ 235,668
========== ==========
Goodwill $ 172,525 $ 153,128 10-35 31.6
Accumulated amortization (13,022) (10,361)
---------- ----------
Balance, net $ 159,503 $ 142,767
========== ==========
</TABLE>
The weighted average amortization period for identifiable intangible assets and
goodwill is 30.5 years.
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 three and six months ended June
30, 2000 of $3.9 million, or $0.18 per share.
7
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 5 - 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 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 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")
conducted an examination of the Company's federal income tax return for the tax
year ended December 31, 1996 and concluded that no changes to the tax reported
needed to be made. The IRS is continuing its examination of the tax year ended
December 31, 1997 and 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.
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental information presents the non-cash impact on the
balance sheets of assets acquired and liabilities assumed in connection with the
acquisitions consummated by the Company. The non-cash effect of these investing
activities for acquisitions consummated during the six months ended June 30,
2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
Assets acquired $ 8,630 $ 12,302
Liabilities assumed (2,655) (1,817)
----------- -----------
Cash paid 5,975 10,485
Less cash acquired (132) (144)
----------- -----------
Net cash paid for acquisitions 5,843 10,341
Costs or (accruals) related to completed and pending
acquisitions (379) 617
----------- -----------
Cash paid for acquisitions and acquisition costs, net of
cash acquired $ 5,464 $ 10,958
=========== ===========
</TABLE>
8
<PAGE>
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 7 - 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 stock options, is computed by dividing
income attributable to common stockholders by the weighted average number of
common shares outstanding for the respective periods. Diluted earnings per share
gives effect to the potential dilution that could occur upon the exercise of
certain stock options that were outstanding at various times during the
respective periods presented. The dilutive effects of stock options are
calculated using the treasury stock method.
Basic and diluted earnings per share for the respective periods are set forth in
the table below (amounts in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings Per Common Share:
Net income $ 2,966 $ 5,707 $ 9,083 $ 10,974
======== ======== ======== =========
Basic earnings per common share $ 0.14 $ 0.27 $ 0.42 $ 0.52
======== ======== ======== ========
Diluted earnings per common share $ 0.13 $ 0.26 $ 0.41 $ 0.51
======== ======== ======== ========
Basic weighted average shares outstanding 21,601 21,089 21,593 21,083
Effect of dilutive stock options 501 547 526 532
-------- -------- -------- --------
Diluted weighted average shares outstanding 22,102 21,636 22,119 21,615
======== ======== ======== ========
</TABLE>
Certain options outstanding as of June 30, 2000 were excluded from the
calculations of diluted earnings per share because their effect would have been
anti-dilutive. Such excluded options totaled 604,300 at a weighted average
exercise price per share of $12.09 for the six months ended June 30, 2000,
816,340 at a weighted average exercise price per share of $11.12 for the three
months ended June 30, 2000, and 630,050 at a weighted average exercise price per
share of $12.13 for the three and six months ended June 30, 1999.
NOTE 8 - LONG TERM DEBT
On July 21, 2000, the Company amended its present Credit Facility, dated
December 16, 1999. This amendment allows for the Company's 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. 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 to the Company's
Credit Facility 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. In addition, the amendment:
(i) increases 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)
allows 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 9 - SUBSEQUENT EVENTS
Subsequent to June 30, 2000, the Company paid approximately $1.1 million on
contingent notes issued in connection with previous acquisitions.
9
<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 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 43
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 targeted markets and larger pedestal
acquisitions. The 301 pathologists employed by the Company provide
cancer-related diagnostic services in outpatient laboratories owned and operated
by the Company, hospitals, and outpatient ambulatory surgery centers. Of these
pathologists, 294 are board certified in anatomic and clinical pathology, and
140 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 June 30, 2000, 23 Practices had contracts with a total of 162 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 also has 29 outpatient
laboratories.
10
<PAGE>
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 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 during
2000. The Company is working with GCI to develop procedures to comply with
informed consent requirements and other regulation 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.
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 net revenue of the Practices it
owns or manages. The majority of services furnished by the Company's
pathologists are diagnostic cancer-related anatomic pathology services.
Reimbursement from government programs (principally Medicare and Medicaid) for
these services represented approximately 21% of the Company's cash collections
in the first six months of 2000 and 1999. 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 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 and other payors move their
participants into lower cost plans. The Company benefits more from
11
<PAGE>
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
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 six months ended June 30, 2000, the Company recorded approximately $4.6
million of revenue from Director 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 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 and required to be 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 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. 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.
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<PAGE>
Due to the implementation of the hospital outpatient prospective payment system
("PPS"), effective as of August 1, 2000, 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.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Changes in the results of operations between the three and six month periods
ended June 30, 2000 and 1999 are due primarily to the various acquisitions which
were consummated by the Company subsequent to June 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 six months of 2000, the
Company acquired two anatomic pathology practices.
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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 Six Months Ended
June 30, June 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 46.5% 45.0% 47.2% 45.2%
Selling, general and administrative expenses 16.2% 16.1% 15.9% 16.5%
Provision for doubtful accounts 11.3% 11.9% 10.8% 11.6%
Amortization expense 5.1% 5.1% 5.3% 5.1%
Asset impairment and related charges 7.1% -- 3.7% --
------ ------ ------ ------
Total operating costs and expenses 86.2% 78.1% 82.9% 78.4%
------ ------ ------ ------
INCOME FROM OPERATIONS 13.8% 21.9% 17.1% 21.6%
------ ------ ------ ------
Interest expense and other, net 4.6% 3.8% 4.8% 3.7%
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 9.2% 18.1% 12.3% 17.9%
PROVISION FOR INCOME TAXES 5.2% 7.8% 5.9% 7.7%
------ ------ ------ ------
NET INCOME 4.0% 10.3% 6.4% 10.2%
====== ====== ====== ======
</TABLE>
Net Revenues
Net revenues increased by $34.1 million, or 31.7%, from $107.7 million for the
six months ended June 30, 1999, to $141.8 million for the six months ended June
30, 2000. Same practice net revenues increased $12.5 million or 11.7% from
$107.0 million for the six months ended June 30, 1999 to $119.5 million for the
six months ended June 30, 2000. Same practice inpatient revenues increased $3.0
million and outpatient revenues increased $9.5 million. Approximately $2.7
million of the increase in same practice net revenue of $12.5 million was
attributable to the increase in Medicare reimbursement, primarily in the
outpatient area. For the six months ended June 30, 2000 the New York lab
contributed approximately $2.1 million of the $12.5 million increase in same
practice net revenue. The remaining increase of $21.6 million was from the
operations of practices acquired after the January 1, 1999.
Net revenues increased by $18.3 million, or 33.0%, from $55.4 million for the
three months ended June 30, 1999, to $73.7 million for the three months ended
June 30, 2000. Same practice net revenues increased $8.0 million or 14.6% from
$54.7 million for the three months ended June 30, 1999 to $62.7 million for the
three months ended June 30, 2000. Same practice inpatient revenues increased
$2.9 million and outpatient revenues increased $5.1 million. Approximately $1.4
million of the increase in same practice net revenue of $8.0 million was
attributable to the increase in Medicare reimbursement, primarily in the
outpatient area. For the three months ended June 30, 2000 the New York lab
contributed approximately $1.2 million of the $8.0 million increase in same
practice net revenue. The remaining increase of $10.3 million was from the
operations of practices acquired after April 1, 1999.
During the six months ended June 30, 2000, approximately $14.2 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
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<PAGE>
provide services directly to these customers in South Florida. 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 will be moved by
Quest to the Company's Dallas operations. The Company is planning to directly
market its services to referring physicians previously served in the San Antonio
area. 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 16% of the Company's net revenue is derived from 27
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 six months ended June 30, 2000 are
approximately $874,000 in revenues from the hospitals owned by the bankrupt
Primary Health Systems ("PHS"). This represents a reduction of $505,000 in net
revenues from the six months ended June 30, 1999, which reduction has been
included as a decrease in same practice net revenues for the three and six month
periods ended June 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 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 $18.3 million, or 37.7%, from $48.7 million for the six months ended June 30,
1999 to $67.0 million for the same period in 2000. Cost of services, as a
percentage of net revenues, increased from 45.2% in the first six months of 1999
to 47.2% in 2000. The gross margin decreased from 54.8% in the first six months
of 1999 to 52.8% 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; and developmental activities
and start-up costs at the New York lab and the Center for Advanced Diagnostics
("CAD").
Cost of services increased by $9.3 million, or 37.5%, from $24.9 million for the
three months ended June 30, 1999 to $34.2 million for the same period in 2000.
Cost of services, as a percentage of net revenues, increased from 45.0% for the
three months ended June 30, 1999 to 46.5% in the comparable period of 2000.
Gross margin decreased from 55.0% in the three months ended June 30, 1999 to
53.5% 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 16.5% for the six months
ended June 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
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<PAGE>
billing operations. In addition, the relocation of CAD to Orlando resulted in
additional selling, general and administrative costs during the period.
For the six months ended June 30, 2000, approximately 40% of selling, general
and administrative costs relate to billing and collection. Billing and
collection costs increased 30% from the first six 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 $4.9 million, or
27.6%, from $17.7 million for the six months ended June 30, 1999 to $22.6
million for the comparable period of 2000. Of this increase, approximately $2.1
million was attributable to an increase in billing and collection costs
and $1.3 million was attributable to the acquisitions the Company completed
during the second half of 1999, including 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 six months ended June 30, 2000 were $2.7
million as compared to $1.9 million in 1999, an increase of 36.3%, 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.
Selling, general and administrative expenses increased by $3.0 million, or
33.3%, from $8.9 million for the three months ended June 30, 1999 to $11.9
million for the comparable period of 2000. Of this increase, approximately
$893,000 was attributable to the increase in billing and collection costs and
approximately $900,000 attributable to the acquisitions the Company completed
during the second half of 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 also continues its transition to becoming a fully integrated
healthcare diagnostic information company with the expansion of its information
technology ("IT") organization. Five highly qualified personnel were added in
the second quarter, including a Director of IT Operations, Database
Administrator, NT Network Specialist, and two project managers. Four more
positions expected to be filled in the third quarter include a senior web
developer, a manager of production control, a director of application
development, and another project manager. These positions are expected to
annually add approximately $500,000 to selling, general and administrative costs
in the future.
Provision for Doubtful Accounts
The provision for doubtful accounts increased by $2.8 million, or 22.6%, from
$12.6 million for the six months ended June 30, 1999, to $15.4 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 11.6% and 10.8% for the six month periods ended June 30, 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 11% in the first six 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 producing results. Net revenue from inpatient services as a percentage of
net revenue was 57% in the first six months 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.
The provision for doubtful accounts increased by $1.7 million, or 26.3%, from
$6.6 million for the three months ended June 30, 1999, to $8.3 million for the
same period in 2000. The dollar increase is primarily
16
<PAGE>
due to the increase in net revenues. The provision for doubtful accounts as a
percentage of net revenues was 11.9% and 11.3% for the three month periods ended
June 30, 1999 and 2000, respectively.
Amortization Expense
Amortization expense increased by $1.9 million, or 35.1%, from $5.5 million for
the six months ended June 30, 1999, to $7.4 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 June 30, 1999, and payments made on the contingent
notes, as well as a reduction in the weighted average amortization periods from
32 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.
Amortization expense increased by $924,000, or 32.5%, from $2.8 million for the
three months ended June 30, 1999, to $3.7 million for the same period of 2000.
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 three and six
months ended June 30, 2000 of $3.9 million, or $0.18 per share.
Income from Operations and Net Income
Income from operations increased $837,000, or 3.6%, from $23.3 million for the
first six months of 1999, to $24.1 million in the same period of 2000. As a
percentage of net revenues, income from operations was 21.6% for the first six
months of 1999 as compared to 17.1% 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 $6.1 million, or 26.1% to $29.4 million, or 20.7% of net revenues.
Income from operations decreased $1.9 million, or 15.9%, from $12.1 million for
the three months ended June 30, 1999, to $10.2 million in the same period of
2000. Without the asset impairment charge, income from operations would have
increased by $3.3 million, or 27.4% to $15.4 million.
Net income for the first six months of 2000 was $9.1 million, a decrease of $1.9
million, or 17.2%, over the same period in 1999. Without the asset impairment
charge, net income would have increased by $2.0 million, or 18.7% to $13.0
million. Diluted earnings per share for the first six months of 2000 decreased
to $0.41 from $0.51 for the comparable period of 1999, based on 22.1 million and
21.6 million weighted average shares outstanding, respectively. Diluted earnings
per share would have been $0.59 without the asset impairment charge.
Net income for the three months ended June 30, 2000 was $3.0 million, a decrease
of $2.7, or 48.0%, over the same period in 1999. Without the asset impairment
charge, net income would have increased by $1.2 million, or 21.1% to $6.9
million. Diluted earnings per share for the three months ended June 30, 2000
decreased to $0.13 from $0.26 for the comparable period of 1999, based on 22.1
million and 21.6 million
17
<PAGE>
weighted average shares outstanding, respectively. Diluted earnings per share
would have been $0.31 without the asset impairment charge.
Interest Expense
Interest expense increased by $2.7 million, or 66.1%, from $4.0 million for the
six months ended June 30, 1999, to $6.7 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 six months of 2000 as compared to the first six
months of 1999. In the first six months of 1999, average indebtedness
outstanding was $126.0 million, compared to average indebtedness of $167.5
million outstanding in the same period of 2000.
Interest expense increased by $1.3 million, or 61.5%, from $2.1 million for the
three months ended June 30, 1999, to $3.4 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 June 30, 2000. For the three
months ended June 30, 1999, average indebtedness outstanding was $127.5 million,
compared to average indebtedness of $168.7 million outstanding in the same
period of 2000.
The Company's effective interest rate was 6.4% and 8.0% for the six month
periods ended June 30, 1999 and 2000, respectively and 6.6% and 8.1% for the
three month periods ended June 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 48.1% for the six month period ended June 30,
2000, as compared to 43.0% for the six month period ended June 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. 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 56.5% for the three month period ended June
30, 2000, as compared to 43.0% for the three month period ended June 30, 1999
due to the factors cited above.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had working capital of approximately $36.8
million, an increase of $1.6 million from the working capital of $35.2 million
at December 31, 1999. The increase in working capital was due primarily to an
increase in net accounts receivable of $3.0 million offset by an increase in
accounts payable and accrued expenses of $1.3 million.
For the six month periods ended June 30, 1999 and 2000, cash flows from
operations were $19.1 million and $18.9 million, respectively. For the six
months ended June 30, 2000, cash flow from operations and borrowings under the
Company's Credit Facility were used to make contingent note payments of $16.1
million; and acquire $3.5 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.
Since the first quarter of 1996, the Company has completed the acquisition of 43
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 targeted markets and larger pedestal
acquisitions. 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.
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<PAGE>
At June 30, 2000, the Company had $59.3 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 June 30, 2000, $170.7 million was
outstanding under the revolving loan with an annual effective interest rate of
7.95%.
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 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. 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) increases
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 to the Company's Credit Facility 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 June 30, 2000, the Company believes as a result of this
amendment, that it is in compliance with the covenants of the Credit Facility.
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 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 $170.7 million at June 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
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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 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
There were no shares of Common Stock issued in the second quarter of 2000 or
through the date of this report.
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ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 4, 2000. The
matters voted on at the Annual Meeting and the tabulation of votes on such
matters are as follows:
(a) Election of Class III Directors.
Number Against or
Name Voting For Withheld
-------------------------- ---------------- ---------------- ----------------
Alan Levin, M.D. 14,315,152 14,054,808 260,344
C. Arnold Renschler, M.D.. 14,315,152 14,113,633 201,519
The remaining directors whose terms continue after the meeting were James C.
New, E. Roe Stamps, IV, Thomas S. Roberts and Timothy M. Kilpatrick, M.D.
(b) To ratify the reappointment of Deloitte & Touche LLP as the
Company's independent public accountants.
The shareholders of the Company ratified the reappointment of Deloitte & Touche
LLP as the Company's independent public accountants, by the following vote:
For Against Abstentions
------------------------ ------------------------ ------------------------
14,209,709 87,755 17,688
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.44 Amended And Restated Credit Agreement, Amendment No. 1,
dated as of July 21, 2000, among AmeriPath, Inc.,
certain of its Subsidiaries, Fleet National Bank (f/k/a
BankBoston, N.A.), and certain other lenders
(incorporated by reference to the Company's Form 8-K
filed on August 2, 2000)
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 June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERIPATH, INC.
Date: August 14, 2000 By: /s/ JAMES C. NEW
-----------------
James C. New
Chairman, President and
Chief Executive Officer
Date: August 14, 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
