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, 2002
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 30,497,159 shares of common stock, $.01 par value,
outstanding as of May 7, 2002.
AMERIPATH, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
March 31, 2002 (Unaudited) and December 31, 2001 3
Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 2002 and 2001 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2002 and 2001 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-36
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 37
Item 2. Changes in Securities and Use of Proceeds 37
Item 6. Reports on Form 8-K and 8-K/A 37
SIGNATURES 38
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
ASSETS 2002 2001
------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,051 $ 4,808
Accounts receivable, net 85,878 81,595
Inventories 2,153 1,892
Other current assets 16,196 15,780
------------ -----------
Total current assets 105,278 104,075
------------ -----------
PROPERTY AND EQUIPMENT, NET 24,215 24,118
------------ -----------
OTHER ASSETS:
Goodwill, net 237,568 216,222
Identifiable intangibles, net 257,085 253,562
Other 6,734 6,485
------------ -----------
Total other assets 501,387 476,269
------------ -----------
TOTAL ASSETS $ 630,880 $ 604,462
============ ===========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 44,002 $ 42,876
Current portion of long-term debt 663 469
Other current liabilities 3,712 3,910
------------ -----------
Total current liabilities 48,377 47,255
------------ -----------
LONG-TERM LIABILITIES:
Revolving loan 97,000 90,000
Long-term debt 2,786 2,853
Other liabilities 2,289 2,690
Deferred tax liability 64,814 62,474
------------ -----------
Total liabilities 166,889 158,017
------------ -----------
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS' EQUITY:
Common stock 305 302
Additional paid-in capital 317,941 314,168
Retained earnings 97,368 84,720
------------ -----------
Total common stockholders' equity 415,614 399,190
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 630,880 $ 604,462
============ ===========
The accompanying notes are an integral part of these unaudited financial
statements.
3
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
-----------------------
2002 2001
--------- ---------
NET REVENUES:
Net patient service revenue $ 105,802 $ 91,724
Net management service revenue 7,090 7,021
--------- ---------
Total net revenues 112,892 98,745
--------- ---------
OPERATING COSTS AND EXPENSES:
Cost of services 54,340 48,432
Selling, general and administrative expenses 20,049 17,218
Provision for doubtful accounts 13,674 10,658
Amortization expense 2,782 4,526
Merger- related charges -- 7,103
--------- ---------
Total operating costs and expenses 90,845 87,937
--------- ---------
INCOME FROM OPERATIONS 22,047 10,808
--------- ---------
OTHER INCOME (EXPENSE):
Interest expense (1,053) (4,742)
Other, net 85 24
--------- ---------
Total other expense (968) (4,718)
--------- ---------
INCOME BEFORE INCOME TAXES 21,079 6,090
PROVISION FOR INCOME TAXES 8,431 2,849
--------- ---------
NET INCOME $ 12,648 $ 3,241
========= =========
BASIC EARNINGS PER COMMON SHARE:
Basic earnings per common share $ 0.42 $ 0.13
========= =========
Basic weighted average shares outstanding 30,325 24,809
========= =========
DILUTED EARNINGS PER COMMON SHARE:
Diluted earnings per common share $ 0.41 $ 0.12
========= =========
Diluted weighted average shares outstanding 31,228 25,983
========= =========
The accompanying notes are an integral part of these unaudited financial
statements.
4
AMERIPATH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
------------------------------
2002 2001
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,648 $ 3,241
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,683 6,128
Loss on disposal of assets (15) (12)
Deferred income taxes (2,000) (1,300)
Provision for doubtful accounts 13,674 10,658
Merger-related charges -- 7,103
Changes in assets and liabilities (net of effects of acquisitions):
Increase in accounts receivable (17,957) (16,780)
Increase in inventories (261) (101)
(Increase) / decrease in other current assets (416) 62
Increase in other assets (70) (76)
Increase in accounts payable and accrued expenses 3,279 4,271
Pooling merger-related charges paid (68) (1,528)
--------- ---------
Net cash provided by operating activities 13,497 11,666
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (1,684) (2,069)
Merger-related charges paid (662) (97)
Cash paid for acquisitions and acquisition costs, net of cash acquired (6,893) (236)
Payments of contingent notes (17,653) (13,401)
--------- ---------
Net cash used in investing activities (26,892) (15,803)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 735 1,109
Debt issuance costs (206) --
Principal payments on long-term debt (109) (26)
Net borrowings under revolving loan 7,000 4,783
Tax benefits from stock options 2,218 --
--------- ---------
Net cash provided by financing activities 9,638 5,866
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,757) 1,729
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,808 2,418
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,051 $ 4,147
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Contingent stock issued $ 822 $ 822
The accompanying notes are an integral part of these unaudited financial
statements.
5
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements, which
include the accounts of AmeriPath, Inc. and its Subsidiaries (collectively,
"AmeriPath" or the "Company"), have been prepared in accordance with accounting
principles generally accepted in the United States ("GAAP") 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 GAAP 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 year ended December 31, 2002.
The accompanying unaudited 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, 2001, 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 June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
133") and in June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137 "Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of FASB Statement No. 133," which delayed the
effective date the Company is required to adopt SFAS 133 until its fiscal year
2001. In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment to FASB Statement No. 133." This statement amended
certain provisions of SFAS 133 which requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company does not enter into derivative financial
instruments for trading purposes.
6
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
(Continued)
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" ("SFAS 141"). SFAS 141 requires the purchase
method of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The Company does not believe that
the adoption of SFAS 141 will have a significant impact on its financial
statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which is effective
January 1, 2002. SFAS 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires us to complete a transitional
goodwill impairment test six months from the date of adoption. We are currently
assessing, but have not yet determined, the impact of SFAS 142 on our financial
position and results of operations. For the first quarter of 2001 and for the
year ending December 31, 2001, goodwill amortization was approximately $1.7
million and $7.4 million, respectively. Based on our preliminary assessment of
SFAS 142, The Company has stopped amortizing goodwill effective January 1, 2002.
In addition, due to the fact that a portion of this goodwill was not tax
deductible, our effective tax rate was greater than the statutory rate. The
elimination of the goodwill amortization, including nondeductible goodwill
amortization, from future periods should result in a 1% to 2% reduction in our
effective tax rate.
In July 2001, the FASB issued SFAS, No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development, and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. The provisions of
SFAS 143 will be effective for fiscal years beginning after June 15, 2002;
however early application is permitted. The Company is currently evaluating the
implications of adoption of SFAS 143 on its financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 provides accounting
guidance for financial accounting and reporting for impairment or disposal of
long-lived assets. SFAS 144 supersedes SFAS 121. SFAS 144 is effective for the
Company in fiscal 2002. Management does not currently believe that the
implementation of SFAS 144 will have a material impact on the Company's
financial condition or results of operations.
NOTE 2 -- ACQUISITIONS
During the first quarter of 2002, the Company acquired an operation which was
previously managed under a management services agreement. Total consideration
paid consisted of cash, consideration in the form of contingents notes and
the assumption of certain liabilities. In addition, during the first quarter of
2002, we made contingent note payments of $17.7 million relating to previous
acquisitions.
7
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED 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):
March 31, 2002
Amortization Periods
(Years)
----------------------------
March 31, December 31, Weighted
2002 2001 Range Average
------------- ------------ ----------- ---------------
Hospital contracts $ 215,944 $ 211,638 25-40 31.5
Physician client lists 68,645 66,646 10-30 19.3
Laboratory contracts 4,543 4,543 10 10.0
Management service agreement 11,379 11,379 25 25.0
------------- ------------
300,511 294,206
Accumulated amortization (43,426) (40,644)
------------- ------------
Identifiable intangibles, net $ 257,085 $ 253,562
============= ============
Goodwill $ 260,707 $ 239,361
Accumulated amortization (23,139) (23,139)
------------- ------------
Goodwill, net $ 237,568 $ 216,222
============= ============
The weighted average amortization period for identifiable intangible assets is
approximately 27 years.
NOTE 4 - MERGER-RELATED CHARGES
In connection with the Inform DX merger and other previous acquisitions, the
Company has recorded reserves for transaction costs, employee-related costs
(including severance agreement payouts) and various exit costs associated with
the consolidation of certain operations, including the elimination of duplicate
facilities and certain exit and restructuring costs. As part of the Inform DX
acquisition, the Company is closing or consolidating certain facilities.
A reconciliation of the activity for the quarter ended March 31, 2002 with
respect to the merger-related reserves is as follows:
Balance Statement of Balance
December 31, Operations March 31,
2001 Charges Payments 2002
---- ------- -------- ----
Transaction costs $ 116 $ -- $(68) $ 48
Employee termination costs
3,432 -- (401) 3,031
Lease commitments 2,165 -- (235) 1,930
Other exit costs 160 -- (26) 134
------ ----- ------- ------
Total 5,873 $ -- $ (730) 5,143
===== =======
Less: portion included in
other current liabilities
(3,183) (2,854)
------ ------
Total included in other
liabilities $2,690 $2,289
====== ======
8
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
NOTE 5 - MARKETABLE SECURITIES
The Company accounts for investments in certain debt and equity securities under
the provisions of Statement of Financial Accounting Standards No. 115 ("SFAS No.
115"), "Accounting for Certain Debt and Equity Securities". Under SFAS No. 115,
the Company must classify its debt and marketable equity securities in one of
three categories: trading, available-for-sale, or held-to-maturity.
In September 2000, the Company made a $1 million investment in Genomics
Collaborative, Inc ("GCI") for which it received 333,333 shares of Series D
Preferred Stock, par value $0.01. The shares of GCI Series D Preferred Stock are
convertible into shares of GCI common stock on a one-for-one basis and are
redeemable after 2005 at $3.00 per share at the option of the holder. GCI is a
privately held, start-up, company which has a history of operating losses. As of
March 31, 2002, it appears that GCI has sufficient cash to fund operations for
the next twelve months. In the event that they are unable to become profitable
and/or raise additional funding, it could result in an impairment of the
Company's investment. This available for sale security is recorded at its
estimated fair value, which approximates cost, and is classified as other assets
on the Company's consolidated balance sheet. At March 31, 2002, there were no
unrealized gains or losses associated with this investment.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Liability Insurance -- The Company is insured with respect to general liability
on an occurrence basis and medical malpractice risks on a claims made basis. The
Company records an estimate of its liabilities for claims incurred but not
reported. Such liabilities are not discounted. Effective July 1, 1999, the
Company changed its medical malpractice carrier and the Company is currently in
a dispute with its former insurance carrier on an issue related to the
applicability of surplus insurance coverage. The Company believes that an
unfavorable resolution, if any, of such dispute would not have a material
adverse effect on the Company's financial position or results of operations.
The Company was recently notified by its medical malpractice carrier that they
will no longer be underwriting medical malpractice insurance and this has placed
the Company on non-renewal status effective July 1, 2002. The Company is
currently evaluating other potential carriers for medical malpractice and
conducting a feasibility study of a captive insurance company. There can be no
assurance the Company will be able to obtain medical malpractice insurance on
terms consistent with our current coverage, which may increase our cost.
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 continuously
subject to review and inspection by regulatory authorities.
In August 2001, we received two letters from the United States Attorney for the
Southern District of Ohio (the "U.S. Attorney") requesting information regarding
billing practices and documentation of gross descriptions on skin biopsy
reports. We provided documentation to the U.S. Attorney regarding the tests that
were the subject of its requests for information. Requests for information such
as these are often the
9
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
result of a qui tam, or whistleblower, action filed by a private party. In
February 2002, we received notification that the U.S. Attorney would not pursue
this matter any further. In addition, we were notified that there were then no
presently pending lawsuits in the Southern District of Ohio against the Company
relating to the request by any private party relator bringing a qui tam action.
Employment Agreements - The Company has entered into employment agreements with
certain of its management employees, which include, among other terms,
non-compete provisions and salary continuation benefits.
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 shares issuable upon the exercise of
stock options and warrants, 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
and warrants that were outstanding at various times during the respective
periods presented. The dilutive effects of stock options and warrants 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):
Three Months Ended
March 31,
--------------------------
2002 2001
------------ ------------
Earnings Per Common Share:
Net income $ 12,648 $ 3,241
========= =========
Basic earnings per common share $ 0.42 $ 0.13
========= =========
Diluted earnings per common share $ 0.41 $ 0.12
========= =========
Basic weighted average shares outstanding 30,325 24,809
Effect of dilutive stock options and warrants 903 1,174
--------- ---------
Diluted weighted average shares outstanding 31,228 25,983
========= =========
Options to purchase 223,859 shares and 84,629 shares of common stock which were
outstanding at March 31, 2002 and 2001, respectively, have been excluded from
the calculation of diluted earnings per share for the respective years because
their effect would be anti-dilutive.
10
AMERIPATH, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(Continued)
NOTE 8 - COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), which requires the Company to
report and display certain information related to comprehensive income. As of
December 31, 2001 and March 31, 2002 net income equaled comprehensive income.
NOTE 9 - SEGMENT REPORTING
The Company has two reportable segments, Owned and Managed practices. The
segments were determined based on the type of service and customer. Owned
practices provide anatomic pathology services to hospitals and referring
physicians, while under the management relationships the Company provides
management services to the affiliated physician groups. The accounting policies
of the segments are the same as those described in the summary of accounting
policies. The Company evaluates performance based on revenue and income before
amortization of intangibles, merger-related charges, interest expense, other
income and expense and income taxes ("Segment Operating Income"). In addition to
the business segments above, the Company evaluates certain corporate expenses
which are not allocated to the business segments.
The following is a summary of the financial information for the three months
ended March 31 for the business segments and corporate.
Owned 2002 2001
----- ---- ----
Net patient service revenue $105,802 $91,724
Operating income 31,319 27,326
Segment assets 414,198 275,800
Managed
-------
Net management service revenue $7,090 $7,021
Operating income 781 1,129
Segment assets 22,678 20,208
Corporate
---------
Operating loss $(7,271) $(6,018)
Segment assets 224,078 313,796
Elimination of intercompany accounts (30,074) (29,821)
NOTE 10 - SUBSEQUENT EVENTS
Subsequent to March 31, 2002, the Company paid approximately $5.3 million
relating to contingent notes issued in connection with previous acquisitions,
which has been recorded as additional purchase price and an increase in
goodwill.
In April 2002, the Company acquired Empire Pathology, a full service anatomic
pathology located in Irvine, California.
11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are one of the leading national providers of anatomic pathology services. The
more than 400 pathologists in our owned and managed operations as of March 31,
2002 provide medical diagnostic services in outpatient laboratories owned,
operated and managed by us, in hospitals, and in ambulatory surgery centers.
Under our ownership or employment model, we acquire a controlling equity (i.e.,
voting) interest or have a controlling financial interest in pathology
operations. We refer to these operations as our owned operations. Under our
management or equity model, we acquire certain assets of, and operate pathology
laboratories under long-term management services agreements. We refer to these
as our managed operations. Under the management services agreements, we provide
facilities and equipment as well as administrative and technical support for the
managed operations. As of March 31, 2002, we had six managed operations. When we
refer to "companies" generally, we mean our owned and managed operations as a
group.
As of March 31, 2002, our companies had contracts or business relationships with
more than 200 hospitals pursuant to which we manage their clinical pathology and
other laboratories and provide professional pathology services. The majority of
these hospital contracts and relationships are exclusive provider relationships.
We also have more than 40 licensed outpatient laboratories.
Generally, we manage and control all of the non-medical functions of the
companies, including:
. recruiting, training, employing and managing the technical and support
staff;
. developing, equipping and staffing laboratory facilities;
. establishing and maintaining courier services to transport specimens;
. negotiating and maintaining contracts with hospitals, national clinical
laboratories and managed care organizations and other payors;
. 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;
. maintaining compliance with applicable laws, rules and regulations; and
. with respect to our ownership and operation of outpatient anatomic
pathology laboratories, providing slide preparation and other technical
services.
ACQUISITIONS
Since the first quarter of 1996, we have completed the acquisition of 50
pathology organizations located in 21 states. These acquisitions included the
acquisition of Inform DX, during the fourth quarter of 2000. As a result of the
Inform DX acquisition, we now have managed operations from which we derive
management fees. Prior to the Inform DX transaction, we only had owned
operations.
During the first three months of 2002, we acquired an operation located in
Denver, CO which was previously managed by us under a management service
agreement. The total consideration paid by us in connection with this
acquisition included cash, consideration in the form of contingent notes and the
assumption of certain liabilities. In addition, during the first quarter of
2002, we made contingent note payments of $17.7 million relating to previous
acquisitions.
12
In April 2002, the Company acquired Empire Pathology, a full service anatomic
pathology laboratory located in Irvine, California.
BUSINESS COLLABORATIONS
We have commenced our transition to becoming a fully integrated health care
diagnostic information provider. As part of this transition, we have entered
into business collaborations intended to generate additional revenues through
leveraging our personnel, technology and resources. Three examples of such
endeavors, including one with Genomics Collaborative, Inc. ("GCI"), one with
Molecular Diagnostics, Inc. ("Molecular Diagnostics" (f/k/a Ampersand Medical of
Chicago)), and one with TriPath Oncology, Inc. ("TriPath Oncology"), are
described below. Although we believe such new endeavors are promising, we cannot
assure you that they will be profitable.
During the third quarter of 2000, we formed an alliance with 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 our national network of hospitals, physicians and
pathologists and GCI's capabilities in large-scale DNA tissue analysis and
handling, tied together by proprietary information systems and bioinformatics.
In connection with our alliance, we made a $1.0 million investment in GCI in
exchange for 333,333 shares of Series D Preferred Stock, par value $0.01. The
net revenue resulting from our alliance with GCI was not material to our
operations during 2000 or 2001. Working with GCI, we have developed procedures
to comply with informed consent requirements and other regulations regarding the
taking and processing of specimens from donors and related records. Failure to
comply with such regulations could result in adverse consequences including
potential liability to us.
On March 27, 2001, we announced an agreement with Molecular Diagnostics which
illustrates another example of leveraging our existing resources. In this
alliance, we will be performing clinical trial work for Molecular Diagnostics'
cytology platform that utilizes proteomic biomarkers to help pathologists and
cytologists identify abnormal and cancerous cells in pap smears and other body
fluids, such as sputum and urine. We will be paid on a fee-for-service basis for
each clinical trial we conduct. The agreement also calls for us to assist
Molecular Diagnostics with the development of associated products and tests. We
would receive equity in Molecular Diagnostics for the developmental work and
would be entitled to royalty payments based on future sales of these products
and tests. One of the Molecular Diagnostics products we are currently evaluating
is a new test for human papilloma virus or HPV, which causes over 99% of all
cervical dysplasia and cancer. This new test involves the application of genomic
and proteomic markers directed against the specific oncogenes and oncoproteins
of HPV that are directly responsible for the virus' ability to cause cancer.
Preliminary studies indicate superior performance of these markers compared to
currently available tests. However, there can be no assurance that such tests or
such markers will be successful or become commercially viable.
On February 5, 2002, AmeriPath signed a letter of intent with TriPath Oncology
to validate and offer exclusively a novel gene expression assay for Melastatin,
a prognostic marker for melanoma. Melanoma represents the deadliest skin cancer
whose incidence is rapidly increasing. Given our outstanding team of
dermatopathologists and our market leadership in this field, we believe that
this agreement may provide revenue to the Company as well as lead to additional
opportunities.
13
SOURCES OF NET REVENUE
We derive our net revenue primarily from our owned and managed operations. Net
revenue was comprised of net patient service revenue from our owned operations
and net management service revenue from our managed operations.
The percent of our net revenue from outpatient and inpatient pathology and
management services is presented below. The type and mix of business among these
three categories, which can change from period to period as a result of new
acquisitions and other factors, may change our ratio of operating costs to net
revenue, particularly the provision for doubtful accounts as discussed below in
our results of operations.
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
Revenue Type
Outpatient...................................... 48% 42%
Inpatient....................................... 46% 51%
Management service revenues..................... 6% 7%
NET PATIENT REVENUES
The majority of services furnished by our pathologists are anatomic pathology
diagnostic services. We typically bill government programs, principally Medicare
and Medicaid, indemnity insurance companies, managed care organizations,
national clinical laboratories, physicians and patients. Net patient revenue
differs from amounts billed for services due to:
. Medicare and Medicaid reimbursements at annually established rates;
. payments from managed care organizations at discounted fee-for-service
rates;
. negotiated reimbursement rates with national clinical laboratories and
other third-party payors; and
. other discounts and allowances.
In many instances, the national clinical laboratories contract directly under
capitated agreements with managed care organizations to provide clinical as well
as anatomic pathology services. We, in turn, subcontract with national clinical
laboratories to provide anatomic pathology services at a discounted
fee-for-service rate and are, in most cases, attempting to increase the number
of such subcontracts to increase test volume. Since the majority of our
operating costs -- principally the compensation of physicians and non-physician
technical personnel -- are relatively fixed, increases in test volume generally
enhance our profitability. Historically, net patient service revenue from
capitated contracts has represented an insignificant amount of total net patient
service revenue. However, we may be required to enter into more capitated
arrangements in order to compete effectively for managed care contracts in the
future.
Virtually all of our net patient service revenue is derived from charging for
services on a fee-for-service basis. Accordingly, we assume 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 us to borrow funds to meet current
obligations or may otherwise have a material adverse effect on our 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, we bill 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 a "Part
A" fee by the hospital. Hospitals and third-party payors are continuing to
14
increase pressure to reduce the payment of these clinical professional component
charges and "Part A" fees, and in the future we may sustain substantial
decreases in these payments.
Approximately 23% of our collections in the first quarter of 2002 was from
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 services under these programs
could have a material adverse effect on our financial position and results of
operations.
The impact of legislative changes on our results of operations will depend upon
several factors, including the mix of inpatient and outpatient pathology
services, the amount of Medicare business, and changes in reimbursement levels
which are published in November of each year. Management continuously monitors
changes in legislation impacting reimbursement.
In prior years, we have been able to mitigate the impact of reductions in
Medicare reimbursement rates for anatomic pathology services through the
achievement of economies of scale and production efficiencies. Despite any
offsets, the recent substantial modifications to the physician fee schedule,
along with additional adjustments by Medicare, could have a material adverse
effect on 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 also have a
material negative impact on average unit reimbursement.
NET MANAGEMENT SERVICE REVENUE
Net management service revenue is based on a predetermined percentage of
operating income of the managed operations, before physician group retainage,
plus reimbursement of certain practice expenses as defined in each management
service agreement. Management fees are recognized at the time the net physician
group revenue is recorded by the physician group.
Generally, net management service revenue equates to net physician group revenue
less amounts retained by the physician groups, which we refer to as physician
group retainage. Net physician group revenue is equal to billed charges reduced
by provisions for bad debt and contractual adjustments. Contractual adjustments
represent the difference between amounts billed and amounts reimbursable by
commercial insurers and other third-party payors pursuant to their respective
contracts with the physician group. The provision for bad debts represents an
estimate of potential credit issues associated with amounts due from patients,
commercial insurers, and other third-party payors. Net physician group revenue,
which underlies our management service revenue, is subject to the same
legislative and regulatory factors discussed above with respect to net patient
revenue.
MEDICARE REIMBURSEMENT
Since 1992 the Centers for Medicare and Medicaid Services ("CMS") (formerly
known as the Health Care Financing Administration, or "HCFA") had paid for
physician's services under section 1848 of the Social Security Act. CMS
calculates and reimburses fees for all physician services ("Part B" fees),
including anatomic pathology services, based on a fee schedule methodology known
as the resource-based relative value system ("RBRVS"). The RBRVS initially was
phased in over a four-year period. Subsequently, CMS proposed changes in the
computation of the malpractice portion and practice expense portion of the
relative value units ("RVUs"). Although these changes have changed reimbursement
to some extent, they are not expected to have a material impact on the Company's
revenues. 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 us.
The Medicare Part B fee schedule payment for each service is determined by
multiplying the total RVUs established for the service by a Geographic Practice
Cost Index ("GPCI"). The sum of this value is
15
multiplied by a statutory conversion factor. The number of RVUs assigned to each
service is in turn calculated by adding three separate components: work RVU
(intensity of work), practice exposure RVU (expense related to performing the
service) and malpractice RVU (malpractice costs associated with the service).
CMS reviews annually the RBRVS payment schedule in conjunction with its
budgeting process. The resulting payment schedule is published each year in the
Federal Register in November. The blended payment rates for services provided by
AmeriPath to Medicare patients, based on our values and locations of services,
increased by 11.3% from 1999 to 2000, and by 6.8% from 2000 to 2001. However,
there can be no assurance that we will receive similar increases in the future,
and it is possible that our blended rates may decrease at some point in the
future.
A final rule published in the Federal Register on November 1, 2001 indicates
that the conversion factor used in the Medicare Physician Fee Schedule was
reduced by 5.4%. The RVUs were also changed in 2002, with certain services
getting an increase in RVUs, while others are decreased. We estimate the overall
impact to be neutral for 2002.
In 1999, CMS announced that it would cease the direct payment by Medicare for
the technical component of inpatient physician pathology services to an outside
independent laboratory because they concluded payment for the technical
component is included already in the payment to hospitals under the hospital
inpatient prospective payment system. Implementation of this change commenced
January 1, 2001. Under these rules, independent pathology laboratories would be
required to bill the hospital directly for technical services on hospital
Medicare inpatients. Congress, however, "grandfathered," for a period of two
years, certain existing hospital-lab arrangements in effect before July 22,
1999. Effective January 2001, hospital arrangements that were not grandfathered
are not reimbursed by Medicare for the technical component. The majority of our
hospital arrangements were grandfathered under the proposed rules. Upon
expiration of the two years, the grandfather provision is scheduled to expire.
Additionally, with the implementation of the hospital outpatient prospective
payment system ("PPS") during 2000, independent pathology laboratories providing
technical services to Medicare hospital outpatients generally are no longer able
to bill Medicare for the technical component ("TC") of those services. Rather,
they need to bill the hospital for the TC. The hospital is reimbursed as part of
the new Ambulatory Payment Classification ("APC") payment system. Laboratories
providing these services now need to contract directly with hospitals for
reimbursement. As the amount paid to hospitals for the most common pathology
services is less than the technical component under the RBRVS, it is likely that
those laboratories will incur substantial reductions in reimbursement under PPS.
However, services provided by us which are subject to PPS are not material to
our total net revenue.
MANAGED CARE CONTRACTING
The Company signed two new managed care agreements in the first quarter of 2002.
First, the Company announced the signing of a nationwide PPO agreement covering
15 million Aetna/U.S. Healthcare members, as well as a statewide HMO, capitated
agreement in Florida for 750,000 HMO lives. Secondly, we signed a fee-for-
service agreement with Independence Blue Cross/Keystone in Philadelphia covering
one million lives. The contract, which is critical to our market growth, was the
result of market demand to Keystone for AmeriPath's quality local diagnostic
services.
16
In addition, during the quarter we signed new contracts with 12 other payors,
generally on a non-exclusive fee-for-service basis, covering approximately 3.4
million lives.
CRITICAL ACCOUNTING POLICIES AND METHODS
Intangible Assets
As of March 31, 2002, we had net identifiable intangible assets and goodwill of
$257.1 million and $237.6 million, respectively. Management assesses on an
ongoing basis if there has been an impairment in the carrying value of its
intangible assets. If the undiscounted future cash flows over the remaining
amortization period of the respective intangible asset indicates that the value
assigned to the intangible asset may not be recoverable, the carrying value of
the respective intangible asset will be reduced. The amount of any such
impairment would be determined by comparing anticipated discounted future cash
flows from acquired businesses with the carrying value of the related assets. In
performing this analysis, management considers such factors as current results,
trends and future prospects, in addition to other relevant factors. Significant
changes in our future cash flow resulting from events such as loss of hospital
or national lab contracts, physician referrals, or management service agreements
could result in further charge offs of intangible assets.
Identifiable intangible assets include hospital contracts, physician referral
lists, laboratory contracts, and management service contracts acquired in
connection with acquisitions. Such assets are recorded at fair value the date of
acquisition as determined by management and are being amortized over the
estimated periods to be benefited, ranging from 10 to 40 years. In determining
these lives, the Company considered each practice's operating history, contract
renewals, stability of physician referral lists and industry statistics. If
circumstances change, indicating a shorter estimated period of benefit, future
amortization expense could increase.
Revenue Recognition
The Company recognizes net patient service revenue at the time services are
performed. Unbilled receivables are recorded for services rendered during, but
billed subsequent to, the reporting period. Net patient service revenue is
reported at the estimated realizable amounts from patients, third-party payors
and others for services rendered. Revenue under certain third-party payor
agreements is subject to audit and retroactive adjustments. Provision for
estimated third-party payor settlements and adjustments are estimated in the
period the related services are rendered and adjusted in future periods as final
settlements are determined. The provision and the related allowance are adjusted
periodically, based upon an evaluation of historical collection experience with
specific payors for particular services, anticipated collection levels with
specific payors for new services, industry reimbursement trends, and other
relevant factors. Changes in these factors in future periods could result in
increases or decreases in the provision, our results of operations and financial
position.
Contingent Purchase Price
Our acquisitions, except for the pooling with Inform DX, have been accounted for
using the purchase method of accounting. The aggregate consideration paid, and
to be paid, is based on a number of factors, including the acquired operation's
demographics, size, local prominence, position in the marketplace and historical
cash flows from operations. Assessment of these and other factors, including
uncertainties regarding the health care environment, resulted in the sellers and
the Company being unable to reach agreement on the final purchase price. We
agreed to pay a minimum purchase price and to pay additional purchase price
considerations to the sellers in proportion to their respective ownership
interest. The additional payments are contingent upon the achievement of
stipulated levels of operating earnings (as defined) by each of the operations
over periods of three to five years from the date of the acquisition as set
forth in the respective agreements, and are not contingent on the continued
employment of the sellers. In certain cases, the payments are contingent upon
other factors such as the retention of certain hospital contracts for periods
ranging from three to five years. The amount of the payments cannot be
determined until the achievement of the operating earnings levels or other
factors during the terms of the respective agreements. Additional payments made
in connection with the contingent notes are accounted for as additional purchase
price, which increases the recorded goodwill and, in
17
accordance with accounting principles, generally accepted in the United States
of America, are not reflected in our results of operations.
Provision for Doubtful Accounts
The provision for doubtful accounts is estimated in the period the related
services are rendered and adjusted in future accounting periods as necessary.
The estimates for the provision and the related allowance are based on an
evaluation of historical collection experience, the aging profile of the
accounts receivable, the historical doubtful account write-off percentages,
revenue channel (i.e., inpatient vs. outpatient) and other relevant factors.
Changes in these factors in future periods could result in increases or
decreases in the provision, our results of operations and financial position.
Principles of Consolidation
Our consolidated financial statements include the accounts of AmeriPath, Inc.,
its wholly-owned subsidiaries, and companies in which the Company has the
controlling financial interest by means other than the direct record ownership
of voting stock. Intercompany accounts and transactions have been eliminated. If
it was determined that we do not have a controlling financial interest for any
or all companies where we do not have a direct ownership of voting stock, the
results of operations could be materially affected. We do not consolidate the
affiliated physician groups we manage as we do not have controlling financial
interest as described in EITF 97-2.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
Changes in the results of operations between the three month periods ended March
31, 2002 and 2001 are due primarily to the various acquisitions which were
consummated by the Company subsequent to March 31, 2001. Reference to same store
means practices at which we provided services for the entire period for which
the amount is calculated and the entire prior comparable period, including de
novo (start-up) operations and expanded ancillary testing services added to
existing operations. During the first three months of 2002, the Company
completed one acquisition.
18
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):
Three Months Ended
March 31,
-----------------------
2002 2001
-------- ---------
NET REVENUES 100.0% 100.0%
------ ------
OPERATING COSTS AND EXPENSES:
Cost of services 48.1% 49.0%
Selling, general and administrative expenses 17.8% 17.4%
Provision for doubtful accounts 12.1% 10.8%
Amortization expense 2.5% 4.6%
Merger-related charges -- 7.2%
------ ------
Total operating costs and expenses 80.5% 89.0%
------ ------
INCOME FROM OPERATIONS 19.5% 11.0%
------ ------
Interest expense and other, net .8% 4.8%
------ ------
INCOME BEFORE INCOME TAXES 18.7% 6.2%
PROVISION FOR INCOME TAXES 7.5% 2.9%
------ ------
NET INCOME 11.2% 3.3%
====== ======
Net Revenues
Net revenues increased by $14.2 million, or 14.4%, from $98.7 million for the
three months ended March 31, 2001, to $112.9 million for the three months ended
March 31, 2002. Same store net revenue increased $11.6 million or 11.7% from
$98.7 million for the three months ended March 31, 2001 to $110.3 million for
the three months ended March 31, 2002. We estimate that 3% of the same store
revenue increase was attributable to price and the remaining 9% of the same
store revenue increase was attributable to volume and mix. Same store outpatient
revenue increased $7.3 million, or 16.5%, same store hospital revenue increased
$3.3 million, or 6.9%, and same store management service revenue increased $1.0
million, or 14.7%, compared to the same period of the prior year. The remaining
increase in revenue of $2.6 million resulted from acquired operations. Our mix
of revenue for the first quarter of 2002 was 48% outpatient, 46% inpatient
(hospital based) and 6% management services.
During the three months ended March 31, 2002, approximately $6.8 million, or
6.0%, of the Company's net revenue was attributable to contracts with national
labs including Quest Diagnostics ("Quest") and Laboratory Corporation of America
Holdings ("LabCorp"). We are currently experiencing substantial declines in
volume from Quest work in our Philadelphia laboratory. As a result, we are
attempting to broaden our customer base in this market to lessen any potential
impact. There can be no assurances that we will be able to recover lost volume.
Our decision or decisions by Quest or LabCorp to discontinue processing work
from the national laboratories, could materially harm our financial position and
results of operations, including the potential impairment of intangible assets.
As of March 31, 2002, we had net identifiable intangible assets related to lab
contracts of $2.8 million.
19
In addition, approximately $12.1 million, or 10.8%, of the Company's net revenue
is derived from 29 hospitals operated by HCA, Inc. ("HCA"), formerly known as
Columbia/HCA Healthcare Corporation. Generally, any contracts or relationships
we may have with these and other hospitals are short-term and allow for
termination by either party with relatively short notice. HCA has been under
government investigation for some time, and we believe that HCA is evaluating
its operating strategies, including the possible sale, spin-off or closure of
certain hospitals. Closures or sales of HCA hospitals or terminations or non-
renewals of one or more of our contracts or relationships with HCA hospitals
could have a material adverse effect on our 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 $5.9 million, or 12.2%, from $48.4 million for the
three months ended March 31, 2001 to $54.3 million for the same period in 2002.
Cost of services, as a percentage of net revenues, decreased from 49.0% for the
three months ended March 31, 2001 to 48.1% in the comparable period of 2002.
Gross margin increased from 51.0% in the three months ended March 31, 2001 to
51.9% in 2002. The increase over the prior year was due in part to synergies
from the Inform DX acquisition with some offset by higher costs.
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 ("SG&A"). As a percentage of consolidated net revenues,
SG&A increased from 17.4% for the three months ended March 31, 2001 to 17.8% for
the same period of 2002, as the Company continues to invest in marketing,
information systems and billing operations.
SG&A increased by $2.8 million, or 16.3%, from $17.2 million for the three
months ended March 31, 2001 to $20.0 million for the comparable period of 2002.
Of this increase, approximately $800,000 was attributable to the increase in
billing and collection costs which typically increases as revenue and cash
collections increase. In addition, in connection with our focus on increasing
our sales and marketing and information technology efforts, these costs
increased $1.2 million and $443,000, respectively. The increase in marketing
costs includes the cost of additional marketing personnel to cover new markets
for dermatopathology, marketing literature, and products to expand our
penetration in the urology, gastroenterology and oncology markets. The remaining
increase was due primarily to increased staffing levels in human resources and
accounting, salary increases, and costs incurred to expand our administrative
support infrastructure and to enhance our services.
Provision for Doubtful Accounts
The provision for doubtful accounts increased by $3.0 million, or 28.0%, from
$10.7 million for the three months ended March 31, 2001, to $13.7 million for
the same period in 2002. The provision for doubtful accounts as a percentage of
net revenues was 10.8% and 12.1% for the three month periods ended March 31,
2001 and 2002, respectively. This increase was related primarily to a change in
revenue mix. The mix change relates, in part, to the shift from Quest and
management service revenues, which carry zero bad debt, to outpatient and
hospital revenues. In addition, within the hospital mix, there was an increase
in clinical professional component billing which carries a higher bad debt
percentage.
Amortization Expense
Amortization expense decreased by $1.7 million, or 37.8%, from $4.5 million for
the three months ended March 31, 2001, to $2.8 million for the same period of
2002. The decrease is attributable to the
20
discontinuance of goodwill amortization as promulgated by Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets", which was
effective January 1, 2002. Identifiable intangible amortization expense is
expected to increase in the future as a result of additional identifiable
intangible assets arising from future acquisitions.
We continually evaluate whether events or circumstances have occurred that may
warrant revisions to the carrying values of our 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 our goodwill or other
identifiable intangible assets could materially harm results of operations. Such
impairment would be recorded as a charge to operating profit and reduction in
intangible assets.
Merger-related Charges
The merger-related charges of $7.1 million for the three months ended March 31,
2001 relate to AmeriPath's acquisition of Inform DX and include transaction
costs and costs related to the closing of the Inform DX corporate office in
Nashville and the consolidation or closing of the overlapping operations of
Inform DX in New York and Pennsylvania. The restructuring of the combined
operations of AmeriPath and Inform DX resulted in annual operating synergies of
approximately $5 million.
Income from Operations and Net Income
Income from operations increased $11.2 million, or 103.7%, from $10.8 million
for the three months ended March 31, 2001, to $22.0 million in the same period
of 2002. Without the merger-related charges, income from operations would have
increased by $4.1 million, or 23.1%.
Net income for the three months ended March 31, 2002 was $12.6 million, an
increase of $9.4 million, or 293.8%, over the same period in 2001. Diluted
earnings per share for the three months ended March 31, 2002 increased to $0.41
from $0.12 for the comparable period of 2001, based on 31.2 million and 26.0
million weighted average shares outstanding, respectively. Diluted earnings per
share would have been $0.30 without the merger-related charge in the first
quarter of 2001.
Interest Expense
Interest expense decreased by $3.6 million, or 76.6%, from $4.7 million for the
three months ended March 31, 2001, to $1.1 million for the same period in 2002.
This decrease was attributable to a combination of lower average amount of debt
outstanding and lower interest rates during the three months ended March 31,
2002. For the three months ended March 31, 2002, average indebtedness
outstanding was $99.3 million, compared to average indebtedness of $207.3
million outstanding in the same period of 2001. The Company's effective interest
rate was 4.2% and 9.2% for the three month periods ended March 31, 2002 and
2001, respectively. The decrease in the average indebtedness was due to the
Company completing a secondary offering and using the proceeds to repay debt in
the fourth quarter of 2001. In addition, during the fourth quarter of 2001, the
Company entered into a new credit facility agreement. The new credit facility
has a borrowing rate based on the Company's leverage ratio. As of March 31,
2002, the borrowing rate was LIBOR plus 150 basis points.
Provision for Income Taxes
The effective income tax rate was approximately 46.8% and 40.0% for the three
month period ended March 31, 2001 and 2002, respectively. In the quarter ended
March 31, 2001, the effective tax rate is higher than AmeriPath's statutory
rates primarily due to the non-deductibility of the goodwill amortization
related to the Company's acquisitions. In addition, for the three-month period
ended March 31, 2001, the Company had non-deductible merger-related charges,
which further increased the effective tax rate. The effective tax rate for the
three-month period ended March 31, 2001, excluding these items and goodwill
would have been approximately 40.3%.
21
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, the Company had working capital of approximately $56.9
million, an increase of $0.1 million from the working capital of $56.8 million
at December 31, 2001. The increase in working capital was due primarily to the
increase in net accounts receivable of $4.3 million and other assets of $0.7
million offset by a reduction in cash and cash equivalents of $3.8 million and
an increase in accounts payable and accrued expenses of $1.1 million.
For the three month periods ended March 31, 2001 and 2002, cash flows from
operations were $11.7 million and 11.9% of net revenue, and $13.5 million and
12.0% of net revenue, respectively. Excluding pooling merger-related charges
incurred by Inform DX and paid by us of $1.5 million in the first quarter of
2001, cash flow from operations would have been $13.2 million. For the three
months ended March 31, 2002, cash flow from operations and borrowings under the
Company's credit facility were used to make contingent note payments of $17.7
million, fund an acquisition of $6.9 million, and acquire $1.7 million of
property and equipment.
At March 31, 2002, the Company had $103.0 million available under its credit
facility with a syndicate of banks. The credit facility provides for borrowings
of up to $200 million, with commitments totaling $175 million, in the form of a
revolving loan that may be used for working capital purposes and to fund
acquisitions. As of March 31, 2002, $97.0 million was outstanding under the
revolving loan with an annual effective interest rate of 4.24%.
The credit facility has a five-year term with a final maturity date of November
30, 2006. Interest is payable monthly at variable rates which are based, at the
Company's option, on the agent's base rate (4.75% at March 31, 2002) or the
LIBOR rate plus a premium that is based on the Company's ratio of total funded
debt to pro forma consolidated earnings before interest, taxes, depreciation and
amortization. As of March 31, 2002, the LIBOR premium was 1.5%. The new facility
also requires a commitment fee to be paid quarterly equal to 0.375% of the
unused portion of the total commitment. The credit facility has three basic
financial covenants regarding leverage, fixed charge coverage and interest
coverage. In addition, the agreement has a number of nonfinancial covenants. At
March 31, 2002, we are in compliance with the covenants of the credit facility.
The unused commitments under the credit facility will be used for general
working capital needs and our acquisition program.
During the first quarter of 2002, the Company acquired an operation which was
previously managed under a management services agreement. Total consideration
paid consisted of cash, consideration in the form of contingent notes and the
assumption of certain liabilities.
In connection with all of our acquisitions, we generally agree to pay a base
purchase price plus additional contingent purchase price consideration to the
sellers of the practices. The additional payments are generally contingent upon
the achievement of stipulated levels of operating earnings by the acquired
practices over periods of three to seven years (generally five years) from the
date of the acquisition, and are
22
not contingent on the continued employment of the sellers of the practices. In
certain cases, the payments are contingent upon other factors such as the
retention of certain hospital contracts or relationships for periods ranging
from three to five years. The amount of the payments cannot be determined until
the achievement of the operating earnings levels or other factors during the
terms of the respective agreements. If the maximum specified levels of operating
earnings for each acquired practice are achieved, we would make aggregate
maximum payments, including principal and interest, of approximately $140.9
million over the next three to five years. A lesser amount or no payments at all
would be made if the stipulated levels of operating earnings specified in each
agreement were not met. In the first quarter of 2002, we made contingent note
payments aggregating $17.7 million. These contingent note payments are currently
estimated to be $18-$19 million and $34-35 million for the remainder of 2002 and
the year 2003, respectively. After 2003 these payments are projected to decline.
We expect to continue to use our credit facility to fund acquisitions and for
working capital. We anticipate that funds generated by operations and funds
available under our credit facility will be sufficient to meet working capital
requirements and anticipated contingent note obligations, and to finance capital
expenditures over the next 12 months. Further, in the event additional payments
under the contingent notes issued in connection with acquisitions become due, we
believe that the incremental cash generated from operations would exceed the
cash required to satisfy our payment, if any, of the contingent obligations in
any one-year period. Such payments, if any, will result in a corresponding
increase in goodwill. Funds generated from operations and funds available under
the credit facility may not be sufficient to implement our longer-term growth
strategy. We may be required to seek additional financing through additional
increases in the credit facility, to negotiate credit facilities with other
banks or institutions or to seek additional capital through private placements
or public offerings of equity or debt securities. No assurances can be given
that we will be able to extend or increase the existing credit facility, secure
additional bank borrowings or complete additional debt or equity financings on
terms favorable to us or at all.
23
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 Private Securities Litigation
Reform Act of 1995. Statements contained anywhere in this Form 10-Q that are not
limited to historical information are considered forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, including, without limitation,
statements regarding the Company's expectations, beliefs, intentions, plans or
strategies regarding the future. These forward-looking statements are based
largely on the Company's expectations which are subject to a number of known and
unknown risks, uncertainties and other factors discussed in this report and in
other documents filed by the Company with the Securities and Exchange Commission
(including, without limitation, the Company's Annual Report on Form 10-K for the
year ended December 31, 2001), which may cause actual results to be materially
different from those anticipated, expressed or implied by the forward-looking
statements. All forward-looking statements included in this document are based
on information available to the Company on the date hereof, and the Company
assumes no obligation to update any such forward-looking statements to reflect
future events or circumstances. Forward-looking statements are sometimes
indicated by words such as "may," "should," "believe," "expect," "anticipate"
and similar expressions.
In addition to the risks and uncertainties identified elsewhere herein and in
other documents filed by the Company with the Securities and Exchange
Commission, the following factors should be carefully considered when evaluating
the Company's business and future prospects: general economic conditions;
competition and changes in competitive factors; the extent of success of the
Company's operating initiatives and growth strategies (including without
limitation, the Company's continuing efforts to (i) achieve continuing
improvements in performance of its current operations, by reason of various
synergies, marketing efforts, revenue growth, cost savings or otherwise, (ii)
transition into becoming a fully integrated healthcare diagnostic information
provider, including the Company's efforts to develop, and the Company's
investment in, new products, services, technologies and related alliances, such
as the alliance with Genomics Collaborative, Inc. (iii) acquire or develop
additional pathology practices (as further described below), and (iv) develop
and expand its managed care and national clinical lab contracts; federal and
state
24
healthcare regulation (and compliance); reimbursement rates under
government-sponsored and third party healthcare programs and the payments
received under such programs; changes in coding; changes in technology;
dependence upon pathologists and contracts; the ability to attract, motivate,
and retain pathologists; labor and technology costs; marketing and promotional
efforts; the availability of pathology practices in appropriate locations that
the Company is able to acquire on suitable terms or develop; the successful
completion and integration of acquisitions (and achievement of planned or
expected synergies); access to sufficient amounts of capital on satisfactory
terms; and tax laws. In addition, the Company's strategy to penetrate and
develop new markets involves a number of risks and challenges and there can be
no assurance that the healthcare regulations of the new states in which the
Company enters and other factors will not have a material adverse effect on the
Company. The factors which may influence the Company's success in each targeted
market in connection with this strategy include: the selection of appropriate
qualified practices; negotiation, execution and consummation of definitive
acquisition, affiliation, management and/or employment agreements; the economic
stability of each targeted market; compliance with state, local and federal
healthcare and/or other laws and regulations in each targeted market (including
health, safety, waste disposal and zoning laws); compliance with applicable
licensing approval procedures; restrictions under labor and employment laws,
especially non-competition covenants. Past performance is not necessarily
indicative of future results. Certain risks, uncertainties and other factors
discussed or noted above are more fully described elsewhere in this report,
including under the caption - "Risk Factors" below.
RISK FACTORS
You should carefully consider each of the following risks and all of the other
information set forth in this Form 10-Q. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not
presently known to us or that we currently believe to be immaterial may also
adversely affect our business.
If any of the following risks actually occur, our business prospects, financial
condition and results of operations could be materially adversely affected and
the trading price of our common stock could decline. In any such case, you could
lose all or part of your investment in our company.
25
Our business could be materially harmed by future interpretation or
implementation of state laws regarding prohibitions on the corporate practice of
medicine.
We acquire or affiliate with pathology operations located in many states across
the country. However, the laws of many states prohibit business corporations,
including AmeriPath and its subsidiaries, from owning corporations that employ
physicians, or from exercising control over the medical judgments or decisions
of physicians. These laws and their interpretations vary from state to state and
are enforced by both the courts and regulatory authorities, each with broad
discretion. The manner in which we operate each organization is determined
primarily by the corporate practice of medicine restrictions of the state in
which the organization is located and other applicable regulations.
We believe that we are currently in material compliance with the corporate
practice of medicine laws in each of the states in which we operate.
Nevertheless, it is possible that regulatory authorities or other parties may
assert that we are engaged in the unauthorized corporate practice of medicine.
If such a claim were successfully asserted in any jurisdiction, we could be
subject to civil and criminal penalties, which could exclude us from
participating in Medicare, Medicaid and other governmental health care programs,
or we could be required to restructure our contractual and other arrangements.
Any restructuring of our contractual and other arrangements with our operations
could result in lower revenues, increased expenses and reduced influence over
the business decisions of those operations. Alternatively, some of our existing
contracts could be found to be illegal and unenforceable, which could result in
the termination of those contracts and an associated loss of revenue. In
addition, expansion of our operations to other corporate practice states may
require structural and organizational modification to the form of relationships
that we currently have with our operations and hospitals. Such modifications
could result in less profitable operations, less influence over the business
decisions and failure to achieve our growth objectives.
We could be hurt by future interpretation or implementation of federal and state
anti-kickback laws.
Federal anti-kickback laws and regulations prohibit the offer, payment,
solicitation and receipt of any form of remuneration in exchange for referrals
of products or services for which payment may be made by Medicare, Medicaid or
other federal health care programs. Violations of federal anti-kickback laws are
punishable by monetary fines, civil and criminal penalties and exclusion from
participation in Medicare, Medicaid and other governmental health care programs.
Several states have similar laws. While we believe our operations are in
material compliance with applicable Medicare and fraud and abuse laws, including
the anti-kickback law, there is a risk that government authorities might take a
contrary position or might investigate our arrangements with physicians and
third parties, particularly those arrangements that do not satisfy the
compliance safe harbors provided under the relevant regulations or that are
similar to arrangements found to be problematic in advisory opinions of the
Department of Health and Human Services Office of Inspector General (OIG). For
example, the OIG has addressed physician practice management arrangements in an
advisory opinion and found that management fees based on a percentage of
practice revenues may violate the federal anti-kickback statute. While we
believe our fee arrangements can be distinguished from those addressed in the
opinion, government authorities may disagree. Such occurrences, regardless of
their outcome, could damage our reputation and adversely affect important
business relationships that we have with third parties, including physicians,
hospitals and private payors. If our arrangements with physicians and third
parties were found to be illegal, we could be subject to civil and criminal
penalties, including fines and possible exclusion from participation in
government payor programs. Significant fines could cause liquidity problems and
adversely affect our results of operations. Exclusion from participation in
government payor programs, which represented 23% of our collections from owned
operations in the first quarter of 2002, would eliminate an important source of
revenue and could materially adversely affect our business. In addition, some of
our existing contracts could be found to be illegal and unenforceable, which
could result in the termination of those contracts and an associated loss of
revenue.
Our business could be harmed by future interpretation or implementation of the
federal Stark Law and other state and federal anti-referral laws.
We are also subject to federal and state statutes and regulations banning
payments for referrals of patients and referrals by physicians to health care
providers with whom the physicians have a financial relationship. The federal
Stark Law applies to Medicare and Medicaid and prohibits a physician from
referring patients for certain services, including laboratory services, to an
entity with which the physician has a financial relationship.
26
Financial relationship includes both investment interests in an entity and
compensation arrangements with an entity. The state laws and regulations vary
significantly from state to state, are often vague and, in many cases, have not
been interpreted by courts or regulatory agencies. These state laws and
regulations generally apply to services reimbursed by both governmental and
private payors. Violations of these federal and state laws and regulations may
result in prohibition of payment for services rendered, loss of licenses, fines,
criminal penalties and exclusion from governmental and private payor programs.
We have financial relationships with our pathologists, as defined by the federal
Stark Law, in the form of compensation arrangements, ownership of our common
stock and contingent promissory notes issued by us in connection with
acquisitions. While we believe that our financial relationships with
pathologists and referral practices are in material compliance with applicable
laws and regulations, government authorities might take a contrary position or
prohibited referrals may occur. We cannot be certain that pathologists who own
our capital stock or hold contingent promissory notes will not violate these
laws or that we will have knowledge of the identity of all beneficial owners of
our capital stock. If our financial relationships with pathologists were found
to be illegal, or if prohibited referrals were found to have been made, we could
be subject to civil and criminal penalties, including fines, exclusion from
participation in government and private payor programs and requirements to
refund amounts previously received from government and private payors. In
addition, expansion of our operations to new jurisdictions, or new
interpretations of laws in our existing jurisdictions, could require structural
and organizational modifications of our relationships with physicians to comply
with that jurisdiction's laws. Such structural and organizational modifications
could result in lower profitability and failure to achieve our growth
objectives.
Our business could be materially harmed by future interpretation or
implementation of state laws regarding prohibitions on fee-splitting.
Many states prohibit the splitting or sharing of fees between physicians and
non-physicians. These laws vary from state to state and are enforced by courts
and regulatory agencies, each with broad discretion. Some states have
interpreted management agreements between entities and physicians as unlawful
fee-splitting. We believe our arrangements with physicians comply in all
material respects with the fee-splitting laws of the states in which we operate.
Nevertheless, it is possible regulatory authorities or other parties could claim
we are engaged in fee-splitting. If such a claim were successfully asserted in
any jurisdiction, our pathologists could be subject to civil and criminal
penalties and we could be required to restructure our contractual and other
arrangements. Any restructuring of our contractual and other arrangements with
our operations could result in lower revenues, increased expenses in the
operations and reduced influence over the business decisions. Alternatively,
some of our existing contracts could be found to be illegal and unenforceable,
which could result in the termination of those contracts and an associated loss
of revenue. In addition, expansion of our operations to other states with
fee-splitting prohibitions may require structural and organizational
modification to the form of our current relationships. Any modifications could
result in less profitable relationships, less influence over the business
decisions of and failure to achieve our growth objectives.
We could be hurt by future interpretation or implementation of state and federal
anti-trust laws.
In connection with the corporate practice of medicine laws, the operations with
which we are affiliated in some states are organized as separate legal entities.
As such, the separate legal entities may be deemed to be persons separate both
from us and from each other under the antitrust laws and, accordingly, subject
to a wide range of laws that prohibit anti-competitive conduct among separate
legal entities. In addition, we are seeking to acquire or affiliate with
established and reputable pathology organizations in new geographic markets.
While we believe that we are in material compliance with these laws and intend
to comply with any laws that may apply to our development of integrated health
care delivery networks, courts or regulatory authorities could nevertheless take
a contrary position or investigate our business practices. If our business
practices were found to violate these laws, we could be required to pay
substantial fines, penalties and damage awards, or we could be required to
restructure our business in a manner that would materially reduce our
profitability or impede our growth.
27
Our business could be harmed by future interpretation or implementation of the
Health Care Insurance Portability and Accountability Act.
The Health Care Insurance Portability and Accountability Act, or HIPAA, created
provisions that impose criminal penalties for fraud against any health care
benefit program, for theft or embezzlement involving health care and for false
statements in connection with the payment of any health benefits. The HIPAA
provisions apply not only to federal programs, but also to private health
benefit programs. HIPAA also broadened the authority of the OIG to exclude
participants from federal health care programs. Because of the uncertainties as
to how the HIPAA provisions will be enforced, we are currently unable to predict
their ultimate impact on us. Compliance with HIPAA could cause us to modify our
business operations in a manner that would increase our operating costs or
impede our growth. In addition, although we are unaware of any current
violations of HIPAA, if we were found to be in violation of HIPAA, the
government could seek penalties against us or seek to exclude us from
participation in government payor programs. Significant fines could cause
liquidity problems and adversely affect our results of operations. Exclusion
from participation in government payor programs, which represented 23% of
collections for 2002, would eliminate an important source of revenue and could
materially adversely affect our business.
Federal and state regulation of the privacy, security and transmission of health
information could restrict our operations, impede the implementation of our
business strategies or cause us to incur significant costs.
The privacy, security and transmission of health information is subject to
federal and state laws and regulations, including HIPAA. Some of our operations
will be subject to HIPAA and its regulations. Because HIPAA's privacy
regulations do not supercede state laws that are more stringent, we will have to
comply both with the federal privacy regulations under HIPAA and with any state
privacy laws that are more stringent than HIPAA. Our operations that are subject
to HIPAA must be in compliance with HIPAA's regulations by April 2003. Another
set of regulations issued under HIPAA establishes uniform standards relating to
data reporting, formatting, and coding that covered entities must use when
conducting certain transactions involving health information. The compliance
date for these regulations is October 2002. A third set of regulations, which
have not yet been finalized, will establish minimum security requirements to
protect health information. The HIPAA regulations could result in significant
financial obligations for us and will pose increased regulatory risk. The
privacy regulations could limit our use and disclosure of patient health
information and could impede the implementation of some of our business
strategies, such as our genomics initiatives. For example, the Department of
Health and Human Services, or HHS, has indicated that cells and tissues are not
protected health information, but that analyses of them are protected. HHS has
stated that if a person provides cells to a researcher and tells the researcher
that the cells are an identified individual's cancer cells, that accompanying
statement is protected health information. At this time, we are unable to
determine the full impact of the HIPAA regulations on our business and our
business strategies or the total cost of complying with the regulations, but the
impact and the cost could be significant. Many states have enacted, or indicated
an intention to enact, privacy laws similar to HIPAA. These state laws could
also restrict our operations, impede the implementation of our business
strategies or cause us to incur significant compliance costs. In addition,
failure to comply with federal or state privacy laws and regulations could
subject us to civil or criminal penalties.
We charge our clients on a fee-for-service basis, so we incur financial risk
related to collections as well as potentially long collection cycles when
seeking reimbursement from third-party payors.
Substantially all of our net revenues are derived from our operations' charging
for services on a fee-for-service basis. Accordingly, we assume the financial
risk related to collection, including the potential uncollectability of
accounts, long collection cycles for accounts receivable and delays attendant to
reimbursement by third-party payors, such as governmental programs, private
insurance plans and managed care organizations. Our provision for doubtful
accounts for the quarter ended March 31, 2002 was 12.1% of net revenues, with
net revenues from inpatient services having a provision for doubtful accounts of
approximately 20.5%. If our revenue from hospital-based services increases as a
percentage of our total net revenues, our provision for doubtful accounts as a
percentage of total net revenues may increase. Increases in write-offs of
doubtful accounts, delays in receiving payments or potential retroactive
adjustments and penalties resulting from audits by payors may adversely affect
our operating cash flow and liquidity, require us to borrow funds to meet our
current obligations, reduce our profitability, impede our growth or otherwise
materially adversely affect our business.
28
We rely upon reimbursement from government programs for a significant portion of
our collections, and therefore our business would be harmed if reimbursement
rates from government programs decline.
We derived 23% of our collections in the first quarter of 2002 from payments
made by government sponsored health care programs, principally Medicare and
Medicaid. These programs are subject to substantial regulation by federal and
state governments. Any changes in reimbursement regulations, policies,
practices, interpretations or statutes that place limitations on reimbursement
amounts or change reimbursement coding practices could materially harm our
business by reducing revenues and lowering profitability. Increasing budgetary
pressures at both the federal and state levels and concerns over escalating
costs of health care have led, and may continue to lead, to significant
reductions in health care reimbursements. State concerns over the growth in
Medicaid expenditures also could result in significant payment reductions. Since
these programs generally reimburse on a fee schedule basis, rather than a
charge-related basis, we generally cannot increase net revenue by increasing the
amount charged for services provided. As a result, cost increases may not be
able to be recovered from government payors. In addition, Medicare, Medicaid and
other government health care programs are increasingly shifting to forms of
managed care, which generally offer lower reimbursement rates. Some states have
enacted legislation to require that all Medicaid patients be transitioned to
managed care organizations, which could result in reduced payments to us for
such patients. Similar legislation may be enacted in other states. In addition,
a state-legislated shift of Medicaid patients to a managed care organization
could cause us to lose some or all Medicaid business in that state if we were
not selected by the managed care organization as a participating provider.
Additionally, funds received under all health care reimbursement programs are
subject to audit with respect to the proper billing for physician services and,
accordingly, repayments and retroactive adjustments of revenue from these
programs could occur. We expect that there will continue to be proposals to
reduce or limit Medicare and Medicaid reimbursements.
The continued growth of managed care may have a material adverse effect on our
business.
The number of individuals covered under managed care contracts or other similar
arrangements has grown over the past several years and may continue to grow in
the future and a substantial portion of our net revenue is from reimbursement
from managed care organizations. Entities providing managed care coverage have
been successful in reducing payments for medical services in numerous ways,
including entering into arrangements under which payments to a service provider
are capitated, limiting testing to specified procedures, denying payment for
services performed without prior authorization and refusing to increase fees for
specified services. These trends reduce revenues, increase the cost of doing
business and limit the ability to pass cost increases on to customers. The
continued growth of the managed care industry and increased efforts to reduce
payments to medical care providers could materially harm our business.
There have been an increasing number of state and federal investigations of
hospitals and hospital laboratories, which may increase the likelihood of
investigations of our business practices.
Significant media and public attention has been focused on the health care
industry due to ongoing federal and state investigations reportedly related to
referral and billing practices, laboratory and home health care services and
physician ownership and joint ventures involving hospitals. Most notably,
HCA-The Healthcare Company, or HCA, is reportedly under investigation with
respect to such practices. We provide medical director services for numerous
hospital laboratories, including 29 HCA hospital laboratories as of March 31,
2002. Therefore, the government's ongoing investigation of HCA or other hospital
operators could result in governmental investigations of one or more of our
operations. In addition, the OIG and the Department of Justice have initiated
hospital laboratory billing review projects in certain states, including some in
which we operate, and are expected to extend such projects to additional states,
including states in which we operate. These projects further increase the
likelihood of governmental investigations of laboratories that we own or
operate. Although we monitor our billing practices and hospital arrangements for
compliance with prevailing industry practices under applicable laws, such laws
are complex and constantly evolving, and it is possible that governmental
investigators may take positions that are inconsistent with our practices or
industry practices. The government's investigations of entities with which we
contract may materially harm our business, including termination or amendment of
one or more of our contracts or the sale of hospitals, potentially disrupting
the performance of
29
services under our contracts. In addition, some indemnity insurers and other
non-governmental payors have sought repayment from providers, including
laboratories, for alleged overpayments.
The heightened scrutiny of Medicare and Medicaid billing practices in recent
years may increase the possibility that we will become subject to costly and
time consuming lawsuits and investigations.
Payors periodically reevaluate the services for which they provide
reimbursement. In some cases, government payors such as Medicare also may seek
to recoup payments previously made for services determined not to be
reimbursable. Any such action by payors would adversely affect our revenues and
earnings. In addition, under the federal False Claims Act, any person convicted
of submitting false or fraudulent claims to the government may be required to
make significant payments, including damages and penalties in addition to
repayments of amounts not properly billed, and may be excluded from
participating in Medicare, Medicaid and other government health care programs.
Many states have similar false claims laws. The federal government has become
more aggressive in examining laboratory billing practices and seeking repayments
and penalties allegedly resulting from improper billing for services, such as
using an improper billing code for a test to realize higher reimbursement. While
the primary focus of this initiative has been on hospital laboratories and on
routine clinical chemistry tests, which comprise only a portion of our revenues,
the scope of this initiative could expand and it is not possible to predict
whether or in what direction the expansion might occur. In addition, recent
government enforcement efforts have asserted poor quality of care as the basis
for a false claims action. Private insurers may also bring actions under false
claims laws and, in some circumstances, private whistleblowers may bring false
claim suits on behalf of the government. While we believe that our practices are
proper and do not include any allegedly improper practices now being examined,
the government could take a contrary position or could investigate our
practices. Furthermore, HIPAA and the joint federal and state anti-fraud
initiative commenced in 1995 called Operation Restore Trust have strengthened
the powers of the OIG and increased funding for Medicare and Medicaid audits and
investigations. As a result, the OIG is expanding the scope of its health care
audits and investigations. Federal and state audits and inspections, whether on
a scheduled or unannounced basis, are conducted from time to time at our
facilities. If a negative finding is made as a result of any such investigation,
we could be required to change coding practices, repay amounts paid for
incorrect practices, pay substantial penalties or cease participating in
Medicare, Medicaid and other government health care programs.
In August 2001, we received two letters from the United States Attorney for
the Southern District of Ohio (the "U.S. Attorney") requesting information
regarding billing practices and documentation of gross descriptions on skin
biopsy reports. We provided documentation to the U.S. Attorney regarding the
tests that were the subject of its requests for information. Requests for
information such as these are often the result of a qui tam, or whistleblower,
action filed by a private party relator. In February 2002, we received
notification that the U.S. Attorney would not pursue this matter any further. In
addition, we were notified that there were then no presently pending lawsuits in
the Southern District of Ohio against the Company relating to the request by any
private party relator bringing a qui tam action.
We derive a significant portion of our revenues from short-term hospital
contracts and hospital relationships that can easily be terminated.
Many of our hospital contracts provide that the hospital or we may terminate the
agreement prior to the expiration of the initial or any renewal term with
relatively short notice and without cause. We also have business relationships
with hospitals that are not subject to written contracts and that may be
terminated by the hospitals at any time. Loss of any particular hospital
contract or relationship would not only result in a loss of net revenue to us
under that contract or relationship, but may also result in a loss of outpatient
net revenue that may be derived from our association with the hospital and its
medical staff. Any such loss could also result in an impairment of the value of
the assets we have acquired or may acquire, requiring substantial charges to
earnings. For example, during the fourth quarter of 2000, we were unsuccessful
in retaining a contract to perform pathology services for a hospital in South
Florida. Based upon the remaining projected cash flow from this hospital
network, we determined that the intangible assets were impaired and recorded a
pre-tax non-cash charge of approximately $1.0 million. This hospital contract
accounted for approximately $800,000 of net revenue during 2000. Continuing
consolidation in the hospital industry may result in fewer hospitals or fewer
30
laboratories as hospitals move to combine their operations. Our contracts and
relationships with hospitals may be terminated or, in the case of contracts, may
not be renewed as their current terms expire.
Our business strategy emphasizes growth, which places significant demands on our
financial, operational and management resources and creates the risk of failing
to meet the growth expectations of investors.
Our growth strategy includes efforts to acquire and develop new practices,
develop and expand managed care and national clinical laboratory contracts and
develop new products, services, technologies and related alliances with third
parties. The pursuit of this growth strategy consumes capital resources, thereby
creating the financial risk that we will not realize an adequate return on this
investment. In addition, our growth may involve the acquisition of companies,
the development of products or services or the creation of strategic alliances
in areas in which we do not currently operate. This would require our management
to develop expertise in new areas, manage new business relationships and attract
new types of customers. The success of our growth strategy also depends on our
ability to expand our physician and employee base and to train, motivate and
manage employees. The success or failure of our growth strategy is difficult to
predict. The failure to achieve our stated growth objectives or the growth
expectations of investors could disappoint investors and harm our stock price.
We may not be able to implement our growth strategy successfully or to manage
our expanded operations effectively and profitably.
We are pursuing business opportunities in new markets, such as genomics, which
adds uncertainty to our future results of operations and could divert financial
and management resources away from our core business.
As we pursue business opportunities in new markets, such as genomics, we
anticipate that significant investments and costs will be related to, and future
revenue may be derived from, products, services and alliances that do not exist
today or have not been marketed in sufficient quantities to measure accurately
market acceptance. Similarly, operating costs associated with new business
endeavors are difficult to predict with accuracy, thereby adding further
uncertainty to our future results of operations. We may experience difficulties
that could delay or prevent the successful development and introduction of new
products and services and such products and services may not achieve market
acceptance. Any failure by us to pursue new business opportunities successfully
could result in financial losses and could inhibit our anticipated growth. In
addition, the pursuit of new business endeavors could divert financial and
management resources away from our core business.
Ethical, social and legal issues concerning genomic research and testing may
result in regulations restricting the use of genomic testing or reduce the
demand for genomic testing products, which could impede our ability to achieve
our growth objectives.
Ethical, social and legal concerns about genomic testing and genomic research
could result in regulations restricting our or our customers' activities or in
only limited demand for those products. For example, the potential availability
of testing for some genomic predispositions to illness has raised issues
regarding the use and confidentiality of information obtained from this testing.
Some states in the United States have enacted legislation restricting the use of
information from some genomic testing, and the United States Congress and some
foreign governments are considering similar legislation. The United States Food
and Drug Administration, or FDA, has subjected the commercialization of certain
elements of genomic testing to limited regulation. The federal Centers for
Disease Control and Prevention has published notice of its intent to revise the
regulations under the Clinical Laboratory Improvements Amendments, or CLIA, to
specifically recognize and regulate a genomic testing specialty. The Department
of Health and Human Services' Secretary's Advisory Committee on Genetic Testing
advises the Department of Health and Human Services as to various issues raised
by the development and use of genomic testing and has published preliminary
recommendations for increased participation on the part of the FDA and increased
regulation of genomic testing under CLIA. As a result of these activities, it is
likely that genomic testing will be subject to heightened regulatory standards.
Restrictions on our or our customers' use of genomic information or testing
products could impede our ability to broaden the range of testing services we
offer and to penetrate the genomic and genomic testing markets.
31
If we are unable to make acquisitions in the future, our rate of growth could
slow.
Much of our historical growth has come from acquisitions, and we continue to
pursue growth through the acquisition and development of laboratories and
pathology operations. However, we may be unable to continue to identify and
complete suitable acquisitions at prices we are willing to pay or to obtain the
necessary financing on acceptable terms. In addition, as we become a bigger
company, the amount that acquired businesses contribute to our revenue and
profits will likely be smaller on a percentage basis. We compete with other
companies to identify and complete suitable acquisitions. We expect this
competition to intensify, making it more difficult to acquire suitable companies
on favorable terms. For example, we may be unable to accurately and consistently
identify operations whose pathologists have strong professional reputations in
their local medical communities. Further, we may acquire operations whose
pathologists' individual marketing and other sales efforts do not produce a
profitable customer base. As a result, the businesses we acquire may not perform
well enough to justify our investment.
We may raise additional capital, which could be difficult to obtain at
attractive prices and which could cause us to engage in financing transactions
that adversely affect our stock price.
We need capital for both internal growth and the acquisition and integration of
new practices, products and services. Therefore, we may raise additional capital
through public or private offerings of equity securities or debt financings. Our
issuance of additional equity securities could cause dilution to holders of our
common stock and may adversely affect the market price of our common stock. The
incurrence of additional debt could increase our interest expense and other debt
service obligations and could result in the imposition of covenants that
restrict our operational and financial flexibility. Additional capital may not
be available to us on commercially reasonable terms or at all. The failure to
raise additional needed capital could impede the implementation of our operating
and growth strategies.
The success of our growth strategy depends on our ability to adapt to new
markets and effectively integrate newly acquired operations.
Our expansion into new markets will require us to maintain and establish payor
and customer relationships and to convert the patient tracking and financial
reporting systems of new operations to our systems. Significant delays or
expenses with regard to this process could materially harm the integration of
additional operations and our profitability. The integration of acquisitions
also requires the implementation and centralization of purchasing, accounting,
sales and marketing, payroll, human resources, management information systems,
cash management, risk management and other systems, which may be difficult,
costly and time-consuming. Accordingly, our operating results, particularly in
fiscal quarters immediately following an acquisition, may be adversely affected
while we attempt to complete the integration process. We may encounter
significant unanticipated costs or other problems associated with the future
integration into our combined network. Our expansion into new markets may
require us to comply with present or future laws and regulations that may differ
from those to which we are currently subject. Failure to meet these requirements
could materially impede our growth objectives or materially harm our business.
We may inherit significant liabilities from operations that we have acquired or
acquire in the future.
We perform due diligence investigations with respect to potential liabilities of
acquisitions and typically obtain indemnification with respect to liabilities
from the sellers. Nevertheless, undiscovered claims may arise and liabilities
for which we become responsible may be material and may exceed either the
limitations of any applicable indemnification provisions or the financial
resources of the indemnifying parties. Claims or liabilities of acquired and
affiliated operations may include matters involving compliance with laws,
including health care laws. While we believe, based on our due diligence
investigations, that the operations of our operations prior to their acquisition
were generally in compliance with applicable health care laws, it is
nevertheless possible that such operations were not in full compliance with such
laws and that we will become accountable for their non-compliance. We have, from
time to time, identified certain past practices of acquired operations that do
not conform to our standards. A violation of applicable health care laws,
whether or not the violation occurred prior to our acquisition, could result in
civil and criminal penalties, exclusion of the
32
physician, the operation or us from participation in Medicare and Medicaid
programs and loss of a physician's license to practice medicine. Significant
fines and other penalties could cause liquidity problems and adversely affect
our results of operations. Exclusion from participation in government payor
programs, which represented 23% of our collections in the first quarter of 2002,
would eliminate an important source of revenue and could materially harm our
business.
We have significant contingent liabilities payable to many of the sellers of
practices that we have acquired.
In connection with our practice acquisitions, we typically agree to pay the
sellers additional consideration in the form of contingent debt obligations,
payment of which depends upon the practice achieving specified profitability
criteria over periods ranging from three to five years after the acquisition.
The amount of these contingent payments cannot be determined until the
contingency periods terminate and achievement of the profitability criteria is
determined. As of March 31, 2002, if the maximum criteria for the contingency
payments with respect to all prior acquisitions were achieved, we would be
obligated to make payments, including principal and interest, of approximately
$140.9 million over the next three to five years. This amount could increase
significantly as we continue selectively to acquire new practices. Lesser
amounts would be paid if the maximum criteria were not met. Although we believe
we will be able to make such payments from internally generated funds or
proceeds of future borrowings, it is possible that such payments could cause
significant liquidity problems for us. We continue to use contingent notes as
partial consideration for acquisitions and affiliations.
We have recorded a significant amount of intangible assets, which may never be
realized.
Our acquisitions have resulted in significant increases in net identifiable
intangible assets and goodwill. Net identifiable intangible assets, which
include hospital contracts, physician client lists, management service
agreements and laboratory contracts acquired in acquisitions were approximately
$257.1 million at March 31, 2002, representing approximately 41% of our total
assets. Net identifiable intangible assets are recorded at fair value on the
date of acquisition and are being amortized over periods ranging from 10 to 40
years. Goodwill, which relates to the excess of cost over the fair value of net
assets of businesses acquired, was approximately $237.6 million at March 31,
2002, representing approximately 38% of our total assets. On an ongoing basis,
we make an evaluation to determine whether events and circumstances indicate
that all or a portion of the carrying value of intangible assets may no longer
be recoverable, in which case an additional charge to earnings may be necessary.
For example, during the years ended December 31, 2000 and 2001, we recorded
asset impairment charges to intangible assets in the amount of $9.6 million and
$3.8 million, respectively. We may not ever realize the full value of our
intangible assets. Any future determination requiring the write-off of a
significant portion of intangible assets could materially harm our results of
operations for the period in which the write-off occurs, which could adversely
affect our stock price.
Our business is highly dependent on the recruitment and retention of qualified
pathologists.
Our business is dependent upon recruiting and retaining pathologists,
particularly those with subspecialties, such as dermatopathology,
hematopathology, immunopathology and cytopathology. While we have been able to
recruit, principally through acquisitions, and retain pathologists, we may be
unable to continue to do so in the future as competition for the services of
pathologists increases. In addition, we may have to modify the economic terms of
our relationships with pathologists in order to enhance our recruitment and
retention efforts. Because it may not be possible to recover increased costs
through price increases, this could materially harm our profitability. The
relationship between the pathologists and their respective local medical
communities is important to the operation and continued profitability of each
practice. Loss of one of our pathologists for any reason could lead to the loss
of hospital contracts or other sources of revenue that depend on our continuing
relationship with that pathologist. Our revenues and earnings could be adversely
affected if a significant number of pathologists terminate their relationships
with our practices or become unable or unwilling to continue their employment,
or if a number of our non-competition agreements with physicians are terminated
or determined to be invalid or unenforceable. For example, the two pathologists
in our Birmingham, Alabama practice recently terminated their employment with us
and opened their own pathology lab. As a result, we closed an operating lab in
Alabama. We have implemented a strategy to retain those customers and service
33
them through other AmeriPath facilities, including another lab recently acquired
in Alabama. As of December 31, 2001, we had been unable to retain these
customers, and therefore recorded a non-cash asset impairment charge of $3.8
million. We continue to aggressively market in Alabama and expect to be
successful in gaining some of these customers back during 2002.
Enactment of proposals to reform the health care industry may restrict our
existing operations, impose additional requirements on us, limit our expansion
or increase our costs of regulatory compliance.
Federal and state governments periodically focus significant attention on health
care reform. It is not possible to predict which, if any, proposal will be
adopted. It is possible that the health care regulatory environment will change
so as to restrict our existing operations, impose additional requirements on us
or limit our expansion. Costs of compliance with changes in government
regulations may not be subject to recovery through price increases.
Competition from other providers of pathology services may materially harm our
business.
Health care companies such as hospitals, national clinical laboratories,
third-party payors and health maintenance organizations may compete with us in
the employment of pathologists and the management of pathology practices. We
also expect to experience increasing competition in the provision of pathology
and cytology diagnostic services from other anatomic pathology practices,
companies in other health care industry segments, such as other hospital-based
specialties, national clinical laboratories, large physician group practices or
other pathology physician practice management companies. In particular,
national clinical laboratories who presently refer business to us may seek to
develop the capacity to do this business in-house. Some of our competitors may
have greater financial and other resources than we, which could further
intensify competition. Increasing competition may erode our customer base,
reduce our sources of revenue, cause us to reduce prices or enter into a greater
number of capitated contracts in which we take on greater pricing risks or
increase our marketing and other costs of doing business. Increasing competition
may also impede our growth objectives by making it more difficult or more
expensive for us to acquire or affiliate with additional pathology practices.
We are subject to significant professional or other liability claims, and we
cannot assure you that insurance coverage will be available or sufficient to
cover such claims.
Our business entails an inherent risk of claims of physician professional
liability or other liability for acts or omissions of our physicians and
laboratory personnel or of hospital employees who are under the supervision of
our hospital-based pathologists. We and our physicians periodically become
involved as defendants in medical malpractice and other lawsuits, some of which
are currently ongoing, and are subject to the attendant risk of substantial
damage awards. While we believe that we have a prudent risk management program,
including professional liability and general liability insurance coverage as
well as agreements from third parties, such as hospitals and national clinical
laboratories, to indemnify or insure us, it is possible that pending or future
claims will not be covered by or will exceed the limits of our risk management
program, including the limits of our insurance coverage or applicable
indemnification provisions, or that third parties will fail or otherwise be
unable to comply with their obligations to us. While we believe this practice is
routine, in a number of pending claims our insurers have reserved their rights
to deny coverage. In addition, we are currently in a dispute with our former
medical malpractice carrier on an issue related to the applicability of excess
insurance coverage. If we do not prevail, a gap of several months in our excess
insurance coverage may exist for a period in which significant claims have been
made. It is also possible that the costs of our insurance coverage will rise
causing us either to incur additional costs or to further limit the amount of
coverage we have. In addition, our insurance does not cover all potential
liabilities arising from governmental fines and penalties, indemnification
agreements and certain other uninsurable losses. For example, from time to time
we agree to indemnify third parties, such as hospitals and national clinical
laboratories, for various claims that may not be covered by insurance. As a
result, we may become responsible for substantial damage awards that are
uninsured. We are currently subject to indemnity claims which, if determined
adversely to us, could result in substantial uninsured losses.
The Company was recently notified by its medical malpractice carrier that they
will no longer be underwriting medical malpractice insurance and this has placed
the Company on non-renewal status effective July 1, 2002. The Company is
currently evaluating other potential carriers for medical malpractice and
conducting a feasibility study of a captive insurance company. There can be no
assurance the
34
Company will be able to obtain medical malpractice insurance on terms consistent
with our current coverage, which may increase our cost.
We depend on certain key executives, the loss of whom could disrupt our
operations, cause us to incur additional expenses and impede our ability to
expand our operations.
Our success is dependent upon the efforts and abilities of our key management
personnel, particularly James C. New, our Chairman and Chief Executive Officer,
Brian C. Carr, our President, Gregory A. Marsh, our Vice President and Chief
Financial Officer, and Dennis M. Smith, Jr., M.D., our Executive Vice President
of Genomic Strategies and Medical Director. It would be costly, time consuming
and difficult to find suitable replacements for these individuals. The need to
find replacements combined with the temporary loss of these key services could
also materially disrupt our operations and impede our growth by diverting
management attention away from our core business and growth strategies.
We depend on numerous complex information systems and any failure to
successfully maintain those systems or implement new systems could materially
harm our operations.
We depend upon numerous information systems to provide operational and financial
information on our operations, provide test reporting to physicians and handle
our complex billing operations. We currently have several major information
technology initiatives underway, including the integration of information from
our operations. No assurance can be given that we will be able to enhance
existing and/or implement new information systems that can integrate
successfully the disparate operational and financial information systems of our
operations. In addition to their integral role in helping our operations realize
operating efficiencies, such new systems are critical to developing and
implementing a comprehensive enterprise-wide management information database. To
develop such an integrated network, we must continue to invest in and administer
sophisticated management information systems. We may experience unanticipated
delays, complications and expenses in implementing, integrating and operating
such systems. Furthermore, our information systems may require modifications,
improvements or replacements as we expand and as new technologies become
available. Such modifications, improvements or replacements may require
substantial expenditures and may require interruptions in operations during
periods of implementation. Moreover, implementation of such systems is subject
to the availability of information technology and skilled personnel to assist us
in creating and implementing the systems. The failure to successfully implement
and maintain operation, financial, test reports, billing and physician practice
information systems could substantially impede the implementation of our
operating and growth strategies and the realization of expected operating
efficiencies.
Failure to timely or accurately bill for our services may have a substantial
negative impact on our revenues, cash flow and bad debt expense.
Billing for laboratory testing services is complicated. The industry practice of
performing tests in advance of payment and without certainty as to the outcome
of the billing process may have a substantial negative impact on our revenues,
cash flow and bad debt expense. We bill various payors, such as patients,
insurance companies, Medicare, Medicaid, and national clinical laboratories, all
of which have different billing requirements. In addition, the billing
information requirements of the various payors have become increasingly
stringent, typically conditioning reimbursement to us on the provision of proper
medical necessity and diagnosis codes by the requisitioning client. This
complexity may increase our bad debt expense, due primarily to several
non-credit related issues such as missing or incorrect billing information on
test requisitions.
Among many other factors complicating our billing are:
. disputes between payors as to which party is responsible for
payment;
. disparity in coverage among various payors; and
. the difficulty of adherence to specific compliance
requirements, diagnosis coding and procedures mandated by
various payors.
35
The complexity of laboratory billing also tends to cause delays in our cash
collections. Confirming incorrect or missing billing information generally slows
down the billing process and increases the aging of accounts receivable. We
assume the financial risk related to collection, including the potential
uncollectability of accounts and delays due to incorrect and missing information
and the other complex factors identified above.
Disruption in New York City and in U.S. commercial activities generally
following the September 2001 terrorist attacks on the U.S. adversely impacted
and may continue to adversely impact our results of operations and could
adversely impact our ability to raise capital or our future growth.
The operations of our laboratories were and may continue to be harmed by
terrorist attacks on the U.S., like the one in New York City. For example,
transportation systems and couriers that we rely on to receive and process
specimens have been and may continue to be disrupted, thereby causing a decrease
in testing volumes and revenues. In addition, we may experience a rise in
operating costs, such as costs for transportation, courier services, insurance
and security. We also may experience delays in receiving payments from payors
that have been affected by attacks, which, in turn, would harm our cash flow.
The U.S. economy in general may be adversely affected by the terrorist attacks
or by any related outbreak of hostilities. Any such economic downturn could
adversely impact our results of operations, impair our ability to raise capital
or impede our ability to continue growing our business.
Our stock price is volatile and the value of your investment may decrease for
various reasons, including reasons that are unrelated to the performance of our
business.
There has been significant volatility in the market price of securities of
health care companies that often has been unrelated to the operating performance
of such companies. In fact, since January 1, 2000, our common stock, which
trades on the NASDAQ National Market, has traded from a low of $7.00 per share
to a high of $37.16 per share. We believe that various factors, such as
legislative and regulatory developments, investigations by regulatory bodies or
third-party payors, quarterly variations in our actual or anticipated results of
operations, lower revenues or earnings than those anticipated by securities
analysts, the overall economy and the financial markets could cause the price of
our common stock to fluctuate substantially. For example, in the fourth quarter
of 1998, our stock price declined significantly as a result of an announcement
by the government of its intent to seek recovery of amounts allegedly improperly
reimbursed to us under Medicare. Although the claim was resolved to our
satisfaction and resulted only in a small fine, similar investigations may be
announced having the same effect on the market price of our stock. In addition,
securities class action claims have been brought against companies whose stock
prices have been volatile. Several such suits were brought against us, and
subsequently dismissed, as a result of the decline in our stock price described
above. This kind of litigation could be very costly and could divert our
management's attention and resources. Any adverse determination in this type of
litigation could also subject us to significant liabilities, any or all of which
could materially harm our liquidity and capital resources.
Certain provisions of our charter, by-laws and Delaware law may delay or prevent
a change of control of our company.
Our corporate documents and Delaware law contain provisions that may enable our
board of directors or management to resist a change of control of our company.
These provisions include a staggered board of directors, limitations on persons
authorized to call a special meeting of stockholders and advance notice
procedures required for stockholders to make nominations of candidates for
election as directors or to bring matters before an annual meeting of
stockholders. We also have a rights plan designed to make it more costly and
more difficult to gain control of our company. These anti-takeover defenses
could discourage, delay or prevent a change of control. These provisions could
also discourage proxy contests and make it more difficult for you and other
stockholders to elect directors and cause us to take other corporate actions. In
addition, the existence of these provisions, together with Delaware law, might
hinder or delay an attempted takeover other than through negotiations with our
board of directors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
INTEREST RATE RISK
We are subject to market risk associated principally with changes in interest
rates. Interest rate exposure is principally limited to the amount outstanding
under the credit facility of $97.0 million at March 31, 2002. Currently the
balances outstanding under the credit facility are at floating rates. Based on
the outstanding balance of $97.0 million, each quarter point increase or
decrease in the floating rate changes interest expense by $242,000 per year. In
the future, the Company may evaluate entering into interest rate swaps,
involving the exchange of floating for fixed rate interest payments, to reduce
interest rate volatility.
36
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the ordinary course of business, the Company has become and may in the
future become subject to pending and threatened legal actions and proceedings.
The Company may have liability with respect to its employees and its
pathologists as well as with respect to hospital employees who are under the
supervision of the hospital based pathologists. The majority of the pending
legal proceedings involve claims of medical malpractice. Most of these relate to
cytology services. These claims are generally covered by insurance. Based upon
investigations conducted to date, the Company believes the outcome of such
pending legal actions and proceedings, individually or in the aggregate, will
not have a material adverse effect on the Company's financial condition, results
of operations or liquidity. If the Company is ultimately found liable under
these medical malpractice claims, there can be no assurance that the Company's
medical malpractice insurance coverage will be adequate to cover any such
liability. The Company may also, from time to time, be involved with legal
actions related to the acquisition of and affiliation with physician practices,
the prior conduct of such practices, or the employment (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 2002.
In April 2002, the Company issued 11,570 shares of stock in connection with the
Empire Pathology acquisition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K AND 8-K/A
(a) Reports on Form 8-K and 8-K/A
A Current Report on Form 8-K, dated April 4, 2002, was filed by
the Company with the Securities and Exchange Commission on April
4, 2002, reporting that on April 1, 2002, the Audit Committee of
AmeriPath, Inc. recommended to its Board of Directors and the
Board of Directors approved the engagement of Ernst and Young as
its independent auditors for the year ending December 31, 2002 to
replace the firm of Deloitte & Touche LLP (Deloitte). Deloitte was
dismissed on April 1, 2002 as auditors of the Company effective
upon the completion of the required procedures and communications
in connection with Deloitte's audit of the financial statements
for the year ended December 31, 2001. The reports of Deloitte on
the Company's financial statements for the past two years did not
contain an adverse opinion or a disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope, or
accounting principles. In connection with the audits of the
Company's financial statements for each of the two years in the
period ended December 31, 2001, and in the subsequent interim
period, through the date of Deloitte's termination on April 1,
2002, there were no disagreements with Deloitte on any matters of
accounting principles or practices, financial statement
disclosure, or auditing scope and procedures which, if not
resolved to the satisfaction of Deloitte, would have caused
Deloitte to make reference to the matter in their report. The
Company had requested Deloitte to furnish it a letter addressed to
the Commission stating whether it agrees with the above
statements. A copy of that letter, dated April 12, 2002 is filed
as Exhibit 16 to the Form 8-K A.
The current report on Form 8-K, dated April 4, 2002, was
subsequently amended on a current report on Form 8-K/A, dated
April 1, 2002, as filed by the Company with the Securities and
Exchange Commission on April 15, 2002.
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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: May 14, 2002 By: /s/ JAMES C. NEW
-----------------
James C. New
Chairman and Chief Executive Officer
Date: May 14, 2002 By: /s/ GREGORY A. MARSH
---------------------
Gregory A. Marsh
Vice President and
Chief Financial Officer
38