Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Annual Report -- [x] Reg. S-K Item 405 80± 378K
3: EX-10.26 Material Contract 19 23K
4: EX-10.27 Material Contract 19 41K
5: EX-10.28 Material Contract 92± 350K
6: EX-10.32 Material Contract 1 7K
2: EX-10.5 Material Contract 19± 89K
7: EX-21.1 Subsidiaries of the Registrant 1 5K
8: EX-23.1 Consent of Experts or Counsel 1 8K
9: EX-24.1 Power of Attorney 6 23K
10: EX-27 Financial Data Schedule (Pre-XBRL) 2 9K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1996
---------------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ---------------------
Commission file number 1-11353
------------------------------------------------------
LABORATORY CORPORATION OF AMERICA HOLDINGS
----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3757370
----------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
358 SOUTH MAIN STREET, BURLINGTON, NORTH CAROLINA
----------------------------------------------------------------------------
910-229-1127
----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
--------------------------- ------------------------------------
Common Stock, $0.01 par value New York Stock Exchange
Common Stock Purchase Warrants New York Stock Exchange
Securities registered pursuant to Section 12(g)of the Act: None
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
----- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
----
State the aggregate market value of the voting stock held by non-affiliates
of the registrant, by reference to the price at which the stock was sold as
of a specified date within 60 days prior to the date of filing:
$215,620,388 at March 14, 1997.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 122,935,080
shares at March 14, 1997, of which 61,329,256 shares are held by indirect
wholly owned subsidiaries of Roche Holding Ltd. The number of warrants
outstanding to purchase shares of the issuer's common stock is 22,151,308 as
of March 15, 1997, of which 8,325,000 are held by an indirect wholly owned
subsidiary of Roche Holding Ltd.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Laboratory Corporation of America Holdings is one of the three largest
independent clinical laboratory companies in the United States based on 1996
net revenues. Through a national network of laboratories, the Company
offers a broad range of testing services used by the medical profession in
the diagnosis, monitoring and treatment of disease and other clinical
states. Since its founding in 1971, the Company has grown into a network of
28 major laboratories and approximately 1,500 service sites consisting of
branches, patient service centers and STAT laboratories, serving clients in
48 states.
The Company has achieved a substantial portion of its growth through
acquisitions. On April 28, 1995, the Company completed a merger with Roche
Biomedical Laboratories, Inc. ("RBL"), an indirect subsidiary of Roche
Holdings Inc. ("Roche"), pursuant to an Agreement and Plan of Merger dated
as of December 13, 1994 (the "Merger"). In connection with the Merger, the
Company changed its name from National Health Laboratories Holdings Inc.
("NHL") to Laboratory Corporation of America Holdings. In June 1994, the
Company acquired Allied Clinical Laboratories, Inc.("Allied"), then the
sixth largest independent clinical laboratory testing company in the United
States (based on 1993 net revenues)(the "Allied Aquisition"). In addition to
the Merger and the Allied Acquisition, since 1993, the Company has acquired
a total of 57 small clinical laboratories with aggregate sales of
approximately $182.4 million.
RECENT DEVELOPMENTS
During 1996 and the early part of 1997, the Company has undergone
significant changes in management with Thomas P. Mac Mahon assuming the role
of President and Chief Executive Officer in January 1997 in addition to his
position as Chairman. Prior to such time Mr. Mac Mahon served as Senior
Vice President of Roche and President of Roche Diagnostics Group where he
was responsible for the management of all United States operations of the
diagnostic businesses of Roche. In addition to Mr. Mac Mahon, the Company
is led by a new Chief Financial Officer, Wesley R. Elingburg, formerly
Senior Vice President_Finance, and a new management committee.
As part of an examination of the rapid growth of Federal expenditures
for clinical laboratory services, several Federal agencies, including the
Federal Bureau of Investigation, the Office of Inspector General ("OIG") of
the Department of Health and Human Services ("HHS") and the Department of
Justice ("DOJ"), have investigated allegations of fraudulent and abusive
conduct by health care providers. On November 21, 1996, the Company reached
a settlement with the OIG and the DOJ regarding the prior billing practices
of various of its predecessor companies (the "1996 Government Settlement").
Consistent with this overall settlement the Company paid $187 million to the
Federal Government in December 1996, with proceeds from a loan from Roche
(the "Roche Loan"). As a result of negotiations related to the 1996
Government Settlement, the Company recorded a charge of $185 million in the
third quarter of 1996 to increase reserves for the 1996 Government
Settlement, and other related expenses of government and private claims
resulting therefrom.
During 1996, management began implementing a new business strategy in
response to the Company's declining performance. These new strategic
objectives are as follows: remaining a low cost provider of clinical
testing services; providing high quality service to its clients; and
improving account profitability. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition", "Business-Management
Information Systems" and "-- Sales and Marketing and Client Service". In
addition, the Company is focused on certain growth initiatives beyond the
routine clinical laboratory testing. In particular the Company is focused
on increasing market share in certain sections of the market by providing
innovative services in three primary areas: (i) hospital alliances; (ii)
specialty and niche businesses; and (iii) direct marketing to payors. See
"Business--Affiliations and Alliances," "--Testing Services" and "--PCS
Health Systems, Inc."
In February 1997, the Company filed a registration statement with the
Securities and Exchange Commission (the "Commission") relating to the
proposed offering of an aggregate of $500.0 million of convertible preferred
stock issuable in two series pursuant to transferable subscription rights to
be granted on a pro rata basis to each stockholder of the Company (the
"Rights Offering"). Rights holders who exercise their rights in full will
also be entitled to subscribe for additional shares of preferred stock
issuable pursuant to any unexercised rights.
The proceeds of the Rights Offering will be used to reduce amounts
outstanding under the Company's revolving and term loan credit facilities,
repay the Roche Loan, and pay fees and expenses related to the Rights
Offering and the Amended Credit Agreement discussed below.
In March 1997, the Company entered into the Sixth Amendment and Waiver
(the "Sixth Amendment") to its credit agreement (the "Existing Credit
Agreement"). The Sixth Amendment eliminates amortization payments on its
term loan facility (the "Term Loan Facility") under the Existing Credit
Agreement for 1997 and modifies the interest coverage and leverage ratios
for the quarterly periods through December 31, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Pursuant to this amendment, the Company paid an amendment fee of 37.5 basis
points on commitments and will pay an additional fee of 62.5 basis points if
the Rights Offering is not completed by June 30, 1997.
In addition, the Roche Loan was originally due on March 31, 1997. In
March 1997, the Company negotiated an amendment to the Roche Loan which
provided for an extension of the due date to March 31, 1998.
The Company also entered into an amended and restated credit agreement
(the "Amended Credit Agreement") with its lenders under the Existing Credit
Agreement which will become effective upon completion of the Rights Offering
following satisfaction of certain conditions precedent. The Amended Credit
Agreement makes available to the Company a term loan facility of $693.8
million (the "Amended Term Loan Facility") and a $450.0 million revolving
credit facility (the "Amended Revolving Credit Facility"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 9 of the Notes to Consolidated Financial Statements for
a complete description of the Existing Credit Agreement and the Amended
Credit Agreement.
THE CLINICAL LABORATORY TESTING INDUSTRY
Laboratory tests and procedures are used generally by hospitals,
physicians and other health care providers and commercial clients to assist
in the diagnosis, evaluation, detection, monitoring and treatment of
diseases and other medical conditions through the examination of substances
in the blood, tissues and other specimens. Clinical laboratory testing is
generally categorized as either clinical testing, which is performed on body
fluids including blood and urine, or anatomical pathology testing, which is
performed on tissue and other samples, including human cells. Clinical and
anatomical pathology procedures are frequently ordered as part of regular
physician office visits and hospital admissions in connection with the
diagnosis and treatment of illnesses. Certain of these tests and procedures
are used principally as tools in the diagnosis and treatment of a wide
variety of medical conditions such as cancer, AIDS, endocrine disorders,
cardiac disorders and genetic disease. The most frequently requested tests
include blood chemistry analyses, urinalyses, blood cell counts, PAP smears,
AIDS tests, microbiology cultures and procedures and alcohol and other
substance-abuse tests.
The clinical laboratory industry consists primarily of three types of
providers: hospital based laboratories, physician-office laboratories and
independent clinical laboratories, such as those owned by the Company.
The Company believes that in 1996 approximately 50% of the clinical
testing revenues in the United States were derived by hospital-based
laboratories, approximately 15% were derived by physicians in their offices
and laboratories and approximately 35% were derived by independent clinical
laboratories. The Health Care Financing Administration ("HCFA") of HHS has
estimated that in 1996 there were over 5,000 independent clinical
laboratories in the United States.
EFFECT OF MARKET CHANGES ON THE CLINICAL LABORATORY BUSINESS
Many market-based changes in the clinical laboratory business have
occurred, most involving the shift away from traditional, fee-for-service
medicine to managed-cost health care. The growth of the managed care sector
presents various challenges to the Company and other independent clinical
laboratories. Managed care providers typically contract with a limited
number of clinical laboratories and negotiate discounts to the fees charged
by such laboratories in an effort to control costs. Such discounts have
resulted in price erosion and have negatively impacted the Company's
operating margins. In addition, managed care providers have used capitated
payment contracts in an attempt to promote more efficient use of laboratory
testing services. Under a capitated payment contract, the clinical
laboratory and the managed care provider agree to a per member, per month
payment to cover all laboratory tests during the month, regardless of the
number or cost of the tests actually performed. Such contracts also shift
the risks of additional testing beyond that covered by the capitated payment
to the clinical laboratory. For the year ended December 31, 1996 such
contracts accounted for approximately $64.5 million in net sales. The
increase in managed-cost health care has also resulted in declines in the
utilization of laboratory testing services.
In addition, Medicare (which principally services patients 65 and
older), Medicaid (which principally serves indigent patients) and insurers
have increased their effort to control the cost, utilization and delivery of
health care services. Measures to regulate health care delivery in general
and clinical laboratories in particular have resulted in reduced prices and
added costs and decreasing test utilization for the clinical laboratory
industry by increasing complexity and adding new regulatory and
administrative requirements. From time to time, Congress has also
considered changes to the Medicare fee schedules in conjunction with certain
budgetary bills. Any future changes to the Medicare fee schedules cannot be
predicted at this time and management, therefore, cannot predict the impact,
if any, such proposals, if enacted, would have on the results of operations
of the Company.
The Company believes that the volume of clinical laboratory testing
will be positively influenced by several factors, including primarily: an
expanded base of scientific knowledge which has led to the development of
more sophisticated specialized tests and increased the awareness of
physicians of the value of clinical laboratory testing as a cost-effective
means of prevention, early detection of disease and monitoring of treatment.
Additional factors which have contributed to recent volume growth include:
an increase in the number and types of tests which are, due to advances in
technology and increased cost efficiencies, readily available on a more
affordable basis to physicians; expanded substance-abuse testing by
corporations and governmental agencies; increased testing for sexually
transmitted diseases such as AIDS; and the general aging of the population
in the United States. The impact of these factors is expected to be
partially offset by declines in volume as a result of increased controls
over the utilization of laboratory services by Medicare and other third
party payors, particularly managed care organizations.
LABORATORY TESTING OPERATIONS AND SERVICES
The Company has 28 major laboratories, and approximately 1,500 service
sites consisting of branches, patient service centers and STAT laboratories.
A "branch" is a central office which collects specimens in a region for
shipment to one of the Company's laboratories for testing. Test results can
be printed at a branch and conveniently delivered to the client. A branch
also is used as a base for sales staff. A "patient service center"
generally is a facility maintained by the Company to serve the physicians in
a medical professional building or other strategic location. The patient
service center collects the specimens as requested by the physician. The
specimens are sent, principally through the Company's in-house courier
system (and, to a lesser extent, through independent couriers), to one of
the Company's major laboratories for testing. Some of the Company's patient
service centers also function as "STAT labs", which are laboratories that
have the ability to perform certain routine tests quickly and report results
to the physician immediately. The Company processed an average of
approximately 250,000 patient specimens per day in 1996. Patient specimens
are delivered to the Company accompanied by a test request form. These
forms, which are completed by the client, indicate the tests to be performed
and provide the necessary billing information.
Each specimen and related request form is checked for completeness and
then given a unique identification number. The unique identification number
assigned to each specimen helps to assure that the results are attributed to
the correct patient. The test request forms are sent to a data entry
terminal where a file is established for each patient and the necessary
testing and billing information is entered. Once this information is
entered into the computer system, the tests are performed and the results
are entered primarily through computer interface or manually, depending upon
the tests and the type of equipment involved. Most of the Company's
computerized testing equipment is directly linked with the Company's
information systems. Most routine testing is completed by early the next
morning, and test results are printed and prepared for distribution by
service representatives that day. Some clients have local printer capability
and have reports printed out directly in their offices. Clients who request
that they be called with a result are so notified in the morning. It is
Company policy to notify the client immediately if a life-threatening result
is found at any point during the course of the testing process.
TESTING SERVICES
Routine Testing
The Company currently offers over 1,700 different clinical laboratory
tests or procedures. Several hundred of these are frequently used in
general patient care by physicians to establish or support a diagnosis, to
monitor treatment or medication or to search for an otherwise undiagnosed
condition. The most frequently requested routine tests include blood
chemistry analyses, urinalyses, blood cell counts, pap smears and AIDS
tests. These routine procedures are most often used by practicing
physicians in their outpatient office practices. Physicians may elect to
send such procedures to an independent laboratory or they may choose to
establish an in-house laboratory to perform some of the tests.
The Company performs this core group of routine tests in each of its 28
major regional laboratories, which constitutes a majority of the testing
performed by the Company. The Company generally performs and reports most
routine procedures within 24 hours, utilizing a variety of sophisticated and
computerized laboratory testing instruments.
Specialty and Niche Testing
While the information provided by many routine tests may be used by
nearly all physicians, regardless of specialty, many other procedures are
more specialized in nature. Certain types of unique testing capabilities
and/or client requirements have been developed into specialty or niche
businesses by the Company which have become a primary growth strategy for
the Company. In general the specialty and niche businesses are designed to
serve two market segments: (i) markets which are not served by the routine
clinical testing laboratory and therefore are subject to less stringent
regulatory and reimbursement constraints; and (ii) markets which are served
by the routine testing laboratory and offer the possibility of adding
related services from the same supplier. The Company's research and
development group continually seeks new and improved technologies for early
diagnosis. For example, the Company's Center for Molecular and Biology and
Pathology is a leader in molecular diagnostics and polymerase chain reaction
technologies which are often able to provide earlier and more reliable
information regarding HIV, genetic diseases, cancer and many other viral and
bacterial diseases. Management believes these technologies may represent a
significant savings to managed care organizations by increasing the
detection of early stage (treatable) diseases. Also, the Company recently
acquired Genetic Design, Inc. and management believes it is now the largest
provider of identity testing services in the United States. The following
are specialty and niche businesses in which the Company offers testing and
related services:
Allergy Testing. The Company offers an extensive range of allergen
testing services as well as computerized analysis and a treatment program
that enables primary care physicians to diagnose and treat many kinds of
allergic disorders.
Ambulatory Monitoring. The Company performs a computer assisted analysis
of electrocardiograms and blood pressure measurements. Many of these
analyses are submitted by physicians who require extended (up to 24 hours)
monitoring of these parameters for patients.
Clinical Research Testing. The Company regularly performs clinical
laboratory testing for pharmaceutical companies conducting clinical
research trials on new drugs. This testing often involves periodic testing
of patients participating in the trial over several years.
Diagnostic Genetics. The Company offers cytogenetic, biochemical and
molecular genetic tests.
Identity Testing. The Company provides forensic identity testing used in
connection with criminal proceedings and parentage evaluation services which
are used to assist in the resolution of disputed parentage in child support
litigation. Parentage testing involves the evaluation of immunological and
genetic markers in specimens obtained from the child, the mother and the
alleged father.
Industrial Hygiene Testing. The Company maintains a separate testing
facility in Richmond, Virginia, dedicated to the analysis of potentially
toxic substances in the workplace environment.
Kidney Stone Analysis. The Company offers specialized patient analysis
assessing the risk of kidney stones based on laboratory measurements and
patient history.
Oncology Testing. The Company offers an extensive series of testing
technologies that aid in diagnosing and monitoring certain cancers and
predicting the outcome of certain treatments.
Substance Abuse Testing. The Company provides urinalysis testing for the
detection of drugs of abuse for private and government customers, and also
provides blood testing services for the detection of drugs of abuse and
alcohol. These testing services are designed to produce "forensic" quality
test results that satisfy the rigorous requirements for admissibility as
evidence in legal proceedings.
Veterinary Testing. The Company offers clinical laboratory testing of
animal specimens for veterinarians which require specialized testing
procedures and handling due to their differing characteristics.
The specialized or niche testing services noted above, as well as other
complex procedures, are sent to designated facilities where the Company has
concentrated the people, instruments and related resources for performing
such procedures so that quality and efficiency can be most effectively
monitored. The Company's Center for Molecular Biology and Pathology in
Research Triangle Park, North Carolina, also specializes in new test
development and education and training related thereto.
CLIENTS
The Company provides testing services to a broad range of health care
providers. During the year ended December 31, 1996, no client or group of
clients under the same contract accounted for more than two percent of the
Company's net sales. The primary client groups serviced by the Company
include:
Independent Physicians and Physician Groups
Physicians requiring testing for their patients who are unaffiliated
with a managed care plan are one of the Company's primary sources of testing
services. Fees for clinical laboratory testing services rendered for these
physicians are billed either to the physician, to the patient or the
patient's third party payor such as insurance companies, Medicare and
Medicaid. Billings are typically on a fee-for service basis. If the
billings are to the physician, they are based on the wholesale or customer
fee schedule and subject to negotiation. Otherwise, the patient is billed
at the laboratory's retail or patient fee schedule and subject to third
party payor limitations and negotiation by physicians on behalf of their
patients. Medicare and Medicaid billings are based on government set fee
schedules.
Hospitals
The Company serves hospitals with services ranging from routine and
specialty testing to contract management services. Hospitals generally
maintain an on-site laboratory to perform immediately needed testing on
patients receiving care. However, they also refer less time sensitive
procedures, less frequently needed procedures and highly specialized
procedures to outside facilities, including independent clinical
laboratories and larger medical centers. The Company typically charges
hospitals for any such tests on a fee-for-service basis which is derived
from the Company's customer fee schedule.
HMOs and Other Managed Care Groups
The Company serves HMOs and other managed care organizations. These
medical service providers typically contract with a limited number of
clinical laboratories and then designate the laboratory or laboratories to
be used for tests ordered by participating physicians. Testing is mostly
performed on a capitated basis for managed care organizations. Under a
capitated payment contract, the Company agrees to cover all laboratory tests
during a given month for which the managed care organization agrees to pay a
flat monthly fee. The tests covered under agreements of this type are
negotiated for each contract, but usually include mostly routine tests and
exclude highly specialized tests. Many of the national and large regional
managed care organizations prefer to use large independent clinical labs
such as the Company because they can service them on a national basis.
Other Institutions
The Company serves other institutions, including governmental agencies,
large employers and other independent clinical laboratories that do not have
the breadth of the Company's testing capabilities. The institutions
typically pay on a negotiated or bid fee-for-service basis.
PAYORS
Most testing services are billed to a party other than the "client"
that ordered the test. In addition, tests performed by a single physician
may be billed to different payors depending on the medical benefits of a
particular patient. Payors other than the direct patient, include, among
others, insurance companies, managed care organizations, Medicare and
Medicaid. Based on the year ended December 31, 1996 billings to the
Company's respective payors based on the total volume of accessions are as
follows:
Accession Volume as a % Revenue
of Total per
1996 Accession
----------------------- ---------
Private Patients 3 - 5% $65 - 75
Medicare, Medicaid and
Insurance 25 - 30% $25 - 35
Commercial Clients 45 - 50% $15 - 25
Managed Care 15 - 20% $10 - 30
AFFILIATIONS AND ALLIANCES
The Company provides management services in a variety of health care
settings. The Company generally supplies the laboratory manager and other
laboratory personnel, as well as equipment and testing supplies, to manage a
laboratory that is owned by a hospital, managed care organization or other
health care provider. In addition, the Company maintains a data processing
system to organize and report test results and to provide billing and other
pertinent information related to the tests performed in the managed
laboratory. Under the typical laboratory management agreement, the
laboratory manager, who is employed by the Company, reports to the hospital
or clinic administration. Thus, the hospital or clinic ("Provider")
maintains control of the laboratory. A pathologist designated by the
Provider serves as medical director for the laboratory.
An important advantage the Company offers to its clients is the
flexibility of the Company's information systems used in contract management
services. In addition to the ability to be customized for a particular
user's needs, the Company's information systems also interface with several
hospital and clinic systems, giving the user more efficient and effective
information flow.
The Company's management service contracts typically have terms between
three and five years. However, most contracts contain a clause that permits
termination prior to the contract expiration date. The termination terms
vary but they generally fall into one of the following categories: (i)
termination without cause by either the Company or the contracted Provider
after written notice (generally 60 to 90 days prior to termination); (ii)
termination by the contracted Provider only if there are uncorrected
deficiencies in the Company's performance under the contract after notice by
the contracted Provider; or (iii) termination by the contracted Provider if
there is a loss of accreditation held by any Company laboratory that
services the contracted Provider, which accreditation is not reinstated
within 30 days of the loss, or up to 30 days' notice if there is a decline
in the quality of services provided under such contract which remains
uncorrected after a 15-day period. While the Company believes that it will
maintain and renew its existing contracts, there can be no assurance of such
maintenance or renewal.
As part of its marketing efforts, and as a way to focus on a contract
management client's particular needs, the Company has developed several
different pricing formulas for its management services agreements. In
certain cases, profitability may depend on the Company's ability to
accurately predict test volumes, patient encounters or the number of
admissions in the case of an inpatient facility.
One of the Company's primary growth strategies is to develop an
increasing number of hospital alliances. These alliances can take several
different forms including laboratory management contracts, discussed above,
reference agreements and joint ventures. As hospitals continue to be
impacted by decreasing fee schedules from third party payors and managed
care organizations, the Company believes that they will seek the most cost-
effective laboratory services for their patients. Management believes the
Company's economies of scale as well as its delivery system will enable it
to assist the hospital in achieving its goals. These alliances are
generally more profitable than the Company's core business due to the
specialized nature of many of the testing services offered in the alliance
program. In 1996, the Company added 6 alliance agreements with hospitals,
physician groups and other care provider organizations representing
approximately $20 million of annual sales. This increased the total number
of alliances to 20 at December 31, 1996 from 14 at December 31, 1995.
PCS HEALTH SYSTEMS, INC.
In 1996 the Company began to focus efforts on selling its services
directly to payors of laboratory services. As a result of that focus, the
Company entered into an agreement with PCS Health Systems, Inc. ("PCS") to
provide laboratory services as an extension of its prescription card
services. PCS, a wholly-owned subsidiary of Eli Lilly and Company, is one
of the leading pharmacy benefit management companies in the United States
with 58 million members covered by its programs and services. The
arrangement with PCS is modeled after the current PCS prescription benefit
plan. Patients will be provided with identification cards indicating
beneficiary eligibility for both PCS prescription benefits and Company
testing services. The Company will provide testing services as requested
and bill PCS based on a predetermined fee schedule. The Company will pay
PCS certain percentage and fixed fees for adjudication of claims.
The process begins when a test sample is collected at the physician's
office or local Company service center. Patient eligibility will be
determined at the time of testing through interface with the PCS information
system which will expedite processing of the claim for reimbursement. The
laboratory sample will be sent via the courier to the Company testing
facility. After tests are completed, the results are forwarded to the
physician and the billing information regarding the tests performed are sent
to PCS for plan processing and claim remittance.
The benefits to the client under the PCS arrangement include the
ability to tailor the program to meet the specific needs of client companies
and their employees and the ability to provide (i) combined utilization
reporting for potential outcomes measurement and disease management and (ii)
consistent, cost effective, quality laboratory services to employees in
several geographic locations through the Company's national presence. The
benefits to the Company are the ability to ensure eligibility at the time of
specimen collection, pricing above the Company's current composite price per
accession despite a significant discount to the client and improved cash
flow through contracted reimbursement. The Company expects to begin to
realize revenues from this agreement beginning in the second half of 1997.
SALES AND MARKETING AND CLIENT SERVICE
The Company offers its services through a combination of direct sales
generalists and specialists. Sales generalists market the mainstream or
traditional routine laboratory services primarily to physicians, while
specialists concentrate on individual market segments, such as hospitals or
managed care organizations, or on testing niches, such as identity testing
or genetic testing. Specialist positions are established when an in-depth
level of expertise is necessary to effectively offer the specialized
services. When the need arises, specialists and generalists work
cooperatively to address specific opportunities. At December 31, 1996, the
Company employed approximately 267 generalists and 81 specialists. The
Company's sales generalists and specialists are compensated through a
combination of salaries, commissions and bonuses, at levels commensurate
with each individual's qualifications and responsibilities. Commissions are
primarily based upon the individual's productivity in generating new
business for the Company.
The Company also employs customer service associates ("CSAs") to
interact with clients on an ongoing basis. CSAs monitor the status of the
services being provided to clients, act as problem-solvers, provide
information on new testing developments and serve as the client's regular
point of contact with the Company. At December 31, 1996, the Company
employed approximately 370 CSAs. CSAs are compensated with a combination of
salaries and bonuses commensurate with each individual's qualifications and
responsibilities.
The Company believes that the clinical laboratory service business is
shifting away from the traditional direct sales structure and into one in
which the purchasing decisions for laboratory services are increasingly made
by managed care organizations, insurance plans, employers and increasingly
by patients themselves. In view of these changes, the Company has adapted
its sales and marketing structure to more appropriately address the new
opportunities. For example, the Company has expanded its specialists sales
positions in both its primary business and its niche businesses in order to
maximize the Company's competitive strengths of advanced technology and
marketing focus.
The Company competes primarily on the basis of the quality of its
testing, reporting and information systems, its reputation in the medical
community, the pricing of its services and its ability to employ qualified
personnel. As a result of the required focus on the consolidation process
related to the Merger, however, the Company believes that its level of
client service has been negatively impacted. Therefore, in 1997, with the
consolidation process substantially completed, one of the Company's goals is
to improve client service. An important factor in improving client service
includes the Company's initiatives to improve its billing process. See
"_Billing."
INFORMATION SYSTEMS
The Company has developed and implemented sophisticated management
information systems to monitor operations and control costs. All financial
functions are centralized in Burlington, North Carolina including purchasing
and accounting. Management believes this provides greater control over
spending as well as increased supervision and monitoring of results of
operations.
The Company believes that the health care provider's need for data will
continue to place high demands on its information systems staff. The Company
operates several systems to handle laboratory, billing and financial data
and transactions. The Company believes that the efficient handling of
information involving clients, patients, payors and other parties will be a
critical factor in the Company's future success. The Company's Corporate
Information Systems Division manages its information resources and programs
on a consolidated basis in order to achieve greater efficiency and economies
of scale. In addition, as a key part of its response to these challenges,
the Company employs a Chief Information Officer, whose responsibility is to
integrate, manage and develop the Company's information systems.
In 1996, information systems activities have been focused on selection
and consolidation of the Company's multiple laboratory and billing systems
to standardized laboratory testing and billing systems. The Company has
also been focused on the establishment of regional data centers to handle
all of the information processing needs of the Company. The Company
believes that it can benefit from the conversion of its multiple billing
systems into a centralized system which it plans to implement once problems
with the collection of accounts receivable balances resulting from increased
medical necessity and diagnosis code requirements are corrected. These
conversions are expected to be completed within two years. The Company does
not anticipate that the conversion costs will result in a significant
increase in capital expenditures over the levels spent during the last
several years.
BILLING
Billing for laboratory services is a complicated process. Laboratories
must bill many different payors such as doctors, patients, hundreds of
different insurance companies, Medicare, Medicaid and employer groups, all
of whom have different billing requirements. The Company believes that a
majority of its bad debt expense is the result of non-credit related issues
which slow the billing process, create backlogs of unbilled requisitions and
generally increase the aging of accounts receivable. A primary cause of bad
debt expense is missing or incorrect billing information on requisitions.
The Company believes that this experience is similar to that of its primary
competitors. The Company performs the requested tests and returns back the
test results regardless of whether billing information has been provided at
all or has been provided incorrectly. The Company subsequently attempts to
obtain any missing information or rectify any incorrect billing information
received from the health care provider. Among the many other factors
complicating the billing process are more complicated billing arrangements
due to contracts with third-party administrators, disputes between payors as
to the party responsible for payment of the bill and auditing for specific
compliance issues. Ultimately, if all issues are not resolved in a timely
manner, the related receivables are written off.
The Company's bad debt expense has increased since the Merger
principally due to three developments that have further complicated the
billing process: (1) increased complexities in the billing process due to
requirements of managed care payors; (2) increased medical necessity and
diagnosis code requirements; and (3) existence of multiple billing
information systems. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
During the fourth quarter of 1995 and the second quarter of 1996, the
Company recorded pre-tax special charges of $15 million and $10 million,
respectively, based on the Company's determination that additional reserves
were needed to cover potentially lower collection rates from several third-
party payors. The 1995 charge was necessitated by the deterioration in the
Company's accounts receivable collection rates in the fourth quarter of 1995
primarily due to the effect of increased medical necessity and diagnosis
code requirements of third party payors placed on the Company in the second
half of 1995. Additional such requirements were placed on the Company at
the beginning of 1996, which resulted in a further deterioration in accounts
receivable collection rates in the second quarter of 1996. As a result of
this further deterioration, the Company recorded the special charge of $10.0
million in the second quarter of 1996. In addition, the Company increased
its monthly provision for doubtful accounts beginning in the third quarter
of 1996 as a result of continued lower collection rates. To date, accounts
receivable balances have continued to grow even though revenues have not
increased. Although there can be no assurance of success, the Company has
recently developed a number of initiatives to address the complexity of the
billing process and to improve collection rates. These initiatives include:
reorganization of departments to allow for more focus on specific issues;
retention of management consultants to assess the situation and assist in re-
engineering the billing process; establishment of a project group to address
inaccurate and missing billing information captured when the specimen is
received; addition of staff in each operating division to train field
personnel in billing matters and to review and approve contracts with third-
party payors to ensure that contracts can be properly billed; and training
of clients related to limited coverage tests and the importance of providing
diagnosis codes pertaining to such tests. Additionally, the Company
believes that it can benefit from the conversion of its multiple billing
systems into a centralized system which it plans to implement once the
growth in accounts receivable is stabilized.
QUALITY ASSURANCE
The Company considers the quality of its tests to be of critical
importance, and it has established a comprehensive quality assurance program
for all of its laboratories and other facilities, designed to help assure
accurate and timely test results. In addition to the compulsory external
inspections and proficiency programs demanded by HCFA and other regulatory
agencies, Company-wide systems and procedures are in place to emphasize and
monitor quality assurance. All of the Company's regional laboratories are
subject to on-site evaluations, the College of American Pathologists ("CAP")
proficiency testing program, state surveys and the Company's own internal
quality control programs.
External Proficiency/ Accreditations. The Company participates in
numerous externally-administered, blind quality surveillance programs,
including the CAP program. The blind programs supplement all other quality
assurance procedures and give Company management the opportunity to review
its technical and service performance from the client's perspective.
Internal Quality Control. The Company regularly performs internal
quality control testing by running quality control samples with known values
with patient samples submitted for testing. All quality control sample test
results are entered into the Company's national laboratory computer, which
connects the Company's facilities nationwide to a common on-line quality
control database. This system helps technologists and technicians check
quality control values and requires further prompt verification if any
quality control value is out of range. The Company has an extensive,
internally administered program of blind sample proficiency testing (i.e.
the testing laboratory does not know the sample being tested is a quality
control sample), as part of which the Company's locations receive specimens
from the Company's Quality Assurance and Corporate Technical Services
departments for analysis.
The CAP accreditation program involves both on-site inspections of the
laboratory and participation in the CAP's proficiency testing program for
all categories in which the laboratory is accredited by the CAP. The CAP is
an independent non-governmental organization of board certified pathologists
which offers an accreditation program to which laboratories can voluntarily
subscribe. The CAP has been accredited by HCFA to inspect clinical
laboratories to determine Clinical Laboratory Improvement Act of 1967, and
the Clinical Laboratory Improvement Amendments of 1988 (collectively, as
amended "CLIA") standards. A laboratory's receipt of accreditation by the
CAP satisfies the Medicare requirement for participation in proficiency
testing programs administered by an external source. All of the Company's
major laboratories are accredited by the CAP.
COMPETITION
The clinical laboratory business is intensely competitive. The Company
believes that in 1996 the entire United States clinical laboratory testing
industry had revenues exceeding $36 billion; approximately 50% of such
revenues were attributable to hospital-affiliated laboratories,
approximately 35% were attributable to independent clinical laboratories and
approximately 15% were attributable to physicians in their offices and
laboratories. As recently as 1993, there were seven laboratories that
provided clinical laboratory testing services on a national basis: NHL, RBL,
Quest Diagnostics Incorporated, formerly known as Corning Clinical
Laboratories ("Quest"), SmithKline Beecham Clinical Laboratories, Inc.
("SmithKline"), Damon Corporation, Allied and Nichols Institute. Apart from
the Merger and the Allied Acquisition, Quest acquired Nichols Institute in
August 1994 and Damon Corporation in August 1993. In addition, in the last
several years a number of large regional laboratories have been acquired by
national clinical laboratories. There are presently three national
independent clinical laboratories: the Company, Quest, which had
approximately $1.6 billion in revenues from clinical laboratory testing in
1996; and SmithKline, which had approximately $1.3 billion in revenues from
clinical laboratory testing in 1996.
In addition to the two other national clinical laboratories, the
Company competes on a regional basis with many smaller regional independent
clinical laboratories as well as laboratories owned by hospitals and
physicians. The Company believes that the following factors, among others,
are often used by health care providers in selecting a laboratory: (i)
pricing of the laboratory's test services; (ii) accuracy, timeliness and
consistency in reporting test results; (iii) number and type of tests
performed; (iv) service capability and convenience offered by the
laboratory; and (v) its reputation in the medical community. The Company
believes that it competes favorably with its principal competitors in each
of these areas and is currently implementing strategies to improve its
competitive position. See "_Clients" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company believes that consolidation will continue in the clinical
laboratory testing business. In addition, the Company believes that it and
the other large independent clinical laboratory testing companies will be
able to increase their share of the overall clinical laboratories testing
market due to a number of external factors including cost efficiencies
afforded by large-scale automated testing, Medicare reimbursement reductions
and the growth of managed health care entities which require low-cost
testing services and large service networks. In addition, legal
restrictions on physician referrals and the ownership of laboratories as
well as increased regulation of laboratories are expected to contribute to
the continuing consolidation of the industry.
EMPLOYEES
At December 31, 1996, the Company employed approximately 22,000 people.
These include approximately 18,000 full-time employees and approximately
4,000 part-time employees, which represents the equivalent of approximately
19,300 persons full-time. Of the approximately 19,300 full-time equivalent
employees, approximately 400 are sales personnel, approximately 17,000 are
laboratory and distribution personnel and approximately 1,900 are
administrative and data processing personnel. A subsidiary of the Company
has one collective bargaining agreement which covers approximately 20
employees and believes that its overall relations with its employees are
good.
REGULATION AND REIMBURSEMENT
General
The clinical laboratory industry is subject to significant governmental
regulation at the Federal, state and local levels. Under CLIA, virtually
all clinical laboratories, including those owned by the Company, must be
certified by the Federal government. Many clinical laboratories must also
meet governmental standards, undergo proficiency testing and are subject to
inspection. Certifications or licenses are also required by various state
and local laws.
The health care industry is undergoing significant change as
third-party payors, such as Medicare (which principally serves patients 65
and older) and Medicaid (which principally serves indigent patients) and
insurers, increase their efforts to control the cost, utilization and
delivery of health care services. In an effort to address the problem of
increasing health care costs, legislation has been proposed or enacted at
both the Federal and state levels to regulate health care delivery in
general and clinical laboratories in particular. Some of the proposals
include managed competition, global budgeting and price controls. Although
the Clinton Administration's health care reform proposal, initially advanced
in 1994, was not enacted, such proposal or other proposals may be considered
in the future. In particular, the Company believes that reductions in
reimbursement for Medicare services will continue to be implemented from
time to time. Reductions in the reimbursement rates of other third-party
payors are likely to occur as well. The Company cannot predict the effect
health care reform, if enacted, would have on its business, and there can be
no assurance that such reforms, if enacted, would not have a material
adverse effect on the Company's business and operations.
Regulation of Clinical Laboratories
CLIA extends Federal oversight to virtually all clinical laboratories
by requiring that laboratories be certified by the government. Many
clinical laboratories must also meet governmental quality and personnel
standards, undergo proficiency testing and be subject to biennial
inspection. Rather than focusing on location, size or type of laboratory,
this extended oversight is based on the complexity of the tests performed by
the laboratory.
In 1992, HHS published regulations implementing CLIA. The quality
standards and enforcement procedure regulations became effective in 1992,
although certain personnel, quality control and proficiency testing
requirements are currently being phased in by HHS. The quality standards
regulations divide all tests into three categories (waivered, moderate
complexity and high complexity) and establish varying requirements depending
upon the complexity of the test performed. A laboratory that performs high
complexity tests must meet more stringent requirements than a laboratory
that performs only moderate complexity tests, while those that perform only
one or more of approximately twelve routine "waivered" tests may apply for a
waiver from most requirements of CLIA. All major and many smaller company
facilities are certified by CLIA to perform high complexity testing. The
remaining smaller testing sites of the Company are certified by CLIA to
perform moderate complexity testing or have obtained a waiver from most
requirements of CLIA. Generally, the HHS regulations require, for
laboratories that perform high complexity or moderate complexity tests, the
implementation of systems that ensure the accurate performance and reporting
of test results, establishment of quality control systems, proficiency
testing by approved agencies and biennial inspections.
The sanction for failure to comply with these regulations may be
suspension, revocation or limitation of a laboratory's CLIA certificate
necessary to conduct business, significant fines and criminal penalties.
The loss of a license, imposition of a fine or future changes in such
Federal, state and local laws and regulations (or in the interpretation of
current laws and regulations) could have a material adverse effect on the
Company.
The Company is also subject to state regulation. CLIA provides that a
state may adopt more stringent regulations than Federal law. For example,
state law may require that laboratory personnel meet certain qualifications,
specify certain quality controls, maintain certain records and undergo
proficiency testing. For example, certain of the Company's laboratories are
subject to the State of New York's clinical laboratory regulations, which
contain provisions that are more stringent than Federal law.
The Company's laboratories have continuing programs to ensure that
their operations meet all applicable regulatory requirements.
Regulation Affecting Reimbursement of Clinical Laboratory Services
Containment of health care costs, including reimbursement for clinical
laboratory services, has been a focus of ongoing governmental activity. In
1984, Congress established a Medicare fee schedule for clinical laboratory
services performed for patients covered under Part B of the Medicare
program. Subsequently, Congress imposed a national ceiling on the amount
that can be paid under the fee schedule. Laboratories bill the program
directly and must accept the scheduled amount as payment in full for covered
tests performed on behalf of Medicare beneficiaries. In addition, state
Medicaid programs are prohibited from paying more than the Medicare fee
schedule amount for clinical laboratory services furnished to Medicaid
recipients. In 1996 and 1995, the Company derived approximately 23% and
28%, respectively, of its net sales from tests performed for beneficiaries
of Medicare and Medicaid programs. In addition, the Company's other
business depends significantly on continued participation in these programs
because clients often want a single laboratory to perform all of their
testing services. Since 1984, Congress has periodically reduced the
ceilings on Medicare reimbursement to clinical laboratories from previously
authorized levels. In 1993, pursuant to provisions in the Omnibus Budget
and Reconciliation Act of 1993 ("OBRA `93"), Congress reduced, effective
January 1, 1994, the Medicare national limitations from 88% of the 1984
national median to 76% of the 1984 national median, which reductions were
implemented on a phased-in basis from 1994 through 1996 (to 84% in 1994, 80%
in 1995 and 76% in 1996). The 1996 reduction to 76% was implemented as
scheduled on January 1, 1996. OBRA `93 also eliminated the provision for
annual fee schedule increases based upon the consumer price index for 1994
and 1995. These reductions were partially offset, however, by annual
consumer price index fee schedule increases of 3.2% and 2.7% in 1996 and
1997, respectively. Because a significant portion of the Company's costs
are relatively fixed, these Medicare reimbursement reductions have a direct
adverse effect on the Company's net earnings and cash flows. The Company
cannot predict if additional Medicare reductions will be implemented.
On January 1, 1993, numerous changes in the Physicians' Current
Procedural Terminology ("CPT") were published. The CPT is a coding system
that is published by the American Medical Association. It lists descriptive
terms and identifying codes for reporting medical and medically related
services. The Medicare and Medicaid programs require suppliers, including
laboratories, to use the CPT codes when they bill the programs for services
performed. HCFA implemented these CPT changes for Medicare on August 1,
1993. The CPT changes have altered the way the Company bills third-party
payors for some of its services, thereby reducing the reimbursement the
Company receives from those programs for some of its services. For example,
certain codes for calculations, such as LDL cholesterol, were deleted and
are no longer a payable service under Medicare and Medicaid.
Moreover, Medicare denied reimbursement to NHL for claims submitted for
HDL cholesterol and serum ferritin (a measure of iron in the blood) tests
from September 1993 to December 1993, at which time NHL removed such tests
from its basic test profiles.
In 1996, the HCFA implemented changes in the policies used to
administer Medicare payments to clinical laboratories for the most
frequently performed automated blood chemistry profiles. Among other
things, the changes established a consistent standard nationwide for the
content of the automated chemistry profiles. Another change incorporated in
the HCFA policy requires laboratories performing certain automated blood
chemistry profiles to obtain and provide documentation of the medical
necessity of tests included in the profiles for each Medicare beneficiary.
The Company expects to incur additional costs associated with the
implementation of these requirements. The amount of additional costs and
potential reductions in reimbursement for certain components of chemistry
profiles and the impact on the Company's financial condition and results of
operations have not yet been determined.
Future changes in Federal, state and local regulations (or in the
interpretation of current regulations) affecting governmental reimbursement
for clinical laboratory testing could have a material adverse effect on the
Company. The Company is unable to predict, however, whether and what type
of legislation will be enacted into law.
Fraud and Abuse Regulations
The Medicare and Medicaid anti-kickback laws prohibit intentionally
paying anything of value to influence the referral of Medicare and Medicaid
business. HHS has published safe harbor regulations which specify certain
business activities that, although literally covered by the laws, will not
violate the Medicare/Medicaid anti-kickback laws. Failure to fall within a
safe harbor does not constitute a violation of the anti-kickback laws if all
conditions of the safe harbor are met; rather, the arrangement would remain
subject to scrutiny by HHS.
In October 1994, the OIG issued a Special Fraud Alert, which set forth
a number of practices allegedly engaged in by clinical laboratories and
health care providers that the OIG believes violate the anti-kickback laws.
These practices include providing employees to collect patient samples at
physician offices if the employees perform additional services for
physicians that are typically the responsibility of the physicians' staff;
selling laboratory services to renal dialysis centers at prices that are
below fair market value in return for referrals of Medicare tests which are
billed to Medicare at higher rates; providing free testing to a physician's
HMO patients in situations where the referring physicians benefit from such
lower utilization; providing free pickup and disposal of bio-hazardous waste
for physicians for items unrelated to a laboratory's testing services;
providing facsimile machines or computers to physicians that are not
exclusively used in connection with the laboratory services performed; and
providing free testing for health care providers, their families and their
employees (professional courtesy testing). The OIG stressed in the Special
Fraud Alert that when one purpose of the arrangements is to induce referral
of program-reimbursed laboratory testing, both the clinical laboratory and
the health care provider or physician may be liable under the anti-kickback
laws and may be subject to criminal prosecution and exclusion from
participation in the Medicare and Medicaid programs.
According to the 1995 work plan of the OIG, its recently established
Office of Civil Fraud and Administrative Adjudication ("OCFAA") will be
responsible for protecting the government-funded health care programs and
deterring fraudulent conduct by health care providers through the
negotiation and imposition of civil monetary penalties, assessments and
program exclusions. The OCFAA works very closely with the Department of
Justice, the Office of General Counsel and the OIG investigative and audit
offices in combating fraud and abuse. In addition, the OIG has stated in
its 1995 work plan that it will determine the extent to which laboratories
supply physicians' offices with phlebotomists (blood-drawing technicians),
offer management services or medical waste pick-up to physicians, provide
training to physicians or engage in other financial arrangements with
purchasers of laboratories' services. The OIG will assess the potential
benefits of such arrangements as well as the extent to which such
arrangements might be unlawful.
In March 1992, HCFA published proposed regulations to implement the
Medicare statute's prohibition (with certain exceptions) on referrals by
physicians who have an investment interest in or a compensation arrangement
with laboratories. The prohibition on referrals also applies where an
immediate family member of a physician has an investment interest or
compensation arrangement with a laboratory. The proposed regulations would
define remuneration that gives rise to a compensation arrangement as
including discounts granted by a laboratory to a physician who sends testing
business to the laboratory and who pays the laboratory for such services.
If that definition of remuneration were to have become effective, it could
have had an impact on the way the Company prices its services to physicians.
However, in August 1993, the referenced Medicare statute was amended by OBRA
`93. One of these amendments makes it clear that day-to-day transactions
between laboratories and their customers, including, but not limited to,
discounts granted by laboratories to their customers, are not affected by
the compensation arrangement provisions of the Medicare statute.
Environmental and Occupational Safety
The Company is subject to licensing and regulation under Federal, state
and local laws and regulations relating to the protection of the environment
and human health and safety, including laws and regulations relating to the
handling, transportation and disposal of medical specimens, infectious and
hazardous waste and radioactive materials as well as to the safety and
health of laboratory employees. All Company laboratories are subject to
applicable Federal and state laws and regulations relating to biohazard
disposal of all laboratory specimens and the Company utilizes outside
vendors for disposal of such specimens. In addition, the Federal
Occupational Safety and Health Administration has established extensive
requirements relating to workplace safety for health care employers,
including clinical laboratories, whose workers may be exposed to blood-borne
pathogens such as HIV and the hepatitis B virus. These regulations, among
other things, require work practice controls, protective clothing and
equipment, training, medical follow-up, vaccinations and other measures
designed to minimize exposure to, and transmission of, blood-borne
pathogens. Although the Company is not aware of any current material non-
compliances with such Federal, state and local laws and regulations, failure
to comply could subject the Company to denial of the right to conduct
business, fines, criminal penalties and/or other enforcement actions.
Drug Testing
Drug testing for public sector employees is regulated by the Substance
Abuse and Mental Health Services Administration ("SAMSHA") (formerly the
National Institute on Drug Abuse), which has established detailed
performance and quality standards that laboratories must meet in order to be
approved to perform drug testing on employees of Federal government
contractors and certain other entities. To the extent that the Company's
laboratories perform such testing, each must be certified as meeting SAMSHA
standards. The Company's Research Triangle Park, North Carolina; Memphis,
Tennessee; Raritan, New Jersey; Seattle, Washington; Herndon, Virginia and
Reno, Nevada laboratories are SAMSHA certified.
Controlled Substances
The use of controlled substances in testing for drugs of abuse is
regulated by the Federal Drug Enforcement Administration.
OIG INVESTIGATIONS
Several Federal agencies are responsible for investigating allegations
of fraudulent and abusive conduct by health care providers, including the
Federal Bureau of Investigation, the OIG and the DOJ. In its published work
plan for 1992-1993, the OIG indicated its intention to target certain
laboratory practices for investigation and prosecution. Pursuant to one
such project described in such work plan, entitled "Laboratory Unbundle,"
laboratories that offer packages of tests to physicians and "unbundle" them
into several "tests to get higher reimbursement when billing Medicare and
Medicaid" will be identified and "suitable cases will be presented for
prosecution." Under another project described in such work plan,
laboratories "that link price discounts to the volume of physician
referrals, `unbundle' tests in order to bill Medicare at a higher total
rate, and conduct unnecessary tests... will be identified to coordinate
investigations through the country."
1996 Government Settlement
In August 1993, RBL and Allied each received a subpoena from the OIG
requesting documents and information concerning pricing and billing
practices. In September 1993, NHL received a subpoena from the OIG which
required NHL to provide documents to the OIG concerning its regulatory
compliance procedures. Among other things, the OIG subpoena received by RBL
and Allied called for the production of documents regarding 14 blood
chemistry tests which were being or had been performed by certain
independent clinical laboratories in conjunction with automated chemistry
profiles and which were being or had been billed separately to Medicare or
Medicaid. An automated chemistry profile is a grouping of tests that can be
performed together on a single specimen and that Medicare and Medicaid pay
under the Medicare fee schedule. The government's investigations covered
billings for tests performed by NHL, RBL and Allied from 1988 to 1994.
These tests were deemed by regulators to be medically unnecessary. The
investigations were part of a broad-based federal inquiry into Medicare and
related billings that have resulted in financial settlements with a number
of other clinical laboratories. The inquiries have also prompted the
imposition of more stringent regulatory compliance requirements industry-
wide. In November 1996, the Company agreed to enter into a comprehensive
Corporate Integrity Agreement and to pay $182 million to settle civil claims
involving Medicare and related government billings for tests performed by
NHL, RBL and Allied (the "1996 Government Settlement"). These claims arose
out of the government's contention that laboratories offering profiles
containing certain test combinations had the obligation to notify ordering
physicians how much would be billed to the government for each test
performed for a patient whose tests are paid for by Medicare, Medicaid or
other government agency. The government contended claims submitted for
tests ordered by physicians and performed by the laboratories were improper.
The Company settled these allegations without an admission of fault. The
Corporate Integrity Agreement, among other things, requires that detailed
notifications be made to physicians. In addition, as part of the overall
settlement, a San Diego laboratory that was formerly part of Allied agreed
to plead guilty to a charge of filing a false claim with Medicare and
Medicaid in 1991 and to pay $5 million to the Federal government. The
assets of the San Diego laboratory were sold by Allied in 1992, two years
before the Allied Acquisition. As is customary with asset sales, Allied
retained the liability for conduct preceding the sale - a liability the
Company later succeeded to, following the Allied Acquisition and Merger. As
a result of negotiations related to the 1996 Government Settlement, the
Company recorded a charge of $185 million in the third quarter of 1996 (the
"Settlement Charge") to increase reserves for the 1996 Government Settlement
described above and other related expenses of government and private claims
resulting therefrom. The Company has recently been contacted by
representatives of certain insurance companies, and individuals in a
purported class action, who have asserted claims for private reimbursement
which are similar to the Government claims recently settled. The Company
is carefully evaluating these claims, however, due to the early stage of
the claims, the ultimate outcome cannot presently be predicted.
Pursuant to the 1996 Government Settlement, the Company paid $187
million in December 1996 (the "Settlement Payment"). The Settlement Payment
was paid from the proceeds of a $187 million loan made by Roche to the
Company in December 1996. See "Management Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources".
1992 NHL Government Settlement
In November 1990, NHL became aware of a grand jury inquiry relating to
its pricing practices being conducted by the United States Attorney for the
San Diego area (the Southern District of California) with the assistance of
the OIG. On December 18, 1992, NHL entered into a settlement with the
United States Attorney (the "1992 NHL Government Settlement"), which related
to the government's contention that NHL improperly included tests for HDL
cholesterol and serum ferritin in its basic test profile, without clearly
offering an alternative profile that did not include these medical tests.
The government also contended that, in certain instances, physicians were
told that these additional tests would be included in the basic test profile
at no extra charge. As a result, the government contended, NHL's marketing
activities denied physicians the ability to exercise their judgment as to
the medical necessity of these tests.
Pursuant to the 1992 NHL Government Settlement, NHL pleaded guilty to
the charge of presenting two false claims to the Civilian Health and Medical
Program of the Uniformed Services ("CHAMPUS") and paid a $1 million fine.
In connection with pending and threatened civil claims, NHL also agreed to
pay $100 million to the Federal Government in installments. As of December
31, 1995, all such payments due to the government under the 1992 NHL
Government Settlement had been made. Concurrent with the 1992 NHL Government
Settlement, NHL settled related Medicaid claims with states that account for
over 99.5% of its Medicaid business and paid $10.4 million to the settling
states.
1994 Allied Government Settlement
In April 1994, Allied received a subpoena from the OIG requesting
documents and certain information regarding the Medicare billing practices
of its Cincinnati, Ohio clinical laboratory with respect to certain cancer
screening tests. In March 1995, Allied resolved the issues raised by the
April 1994 subpoena and a related qui tam action commenced in Cincinnati,
Ohio Federal court by entering into agreements with, among others, HHS, the
United States Department of Justice and the relators in the qui tam action
pursuant to which it agreed to pay $4.9 million to settle all pending claims
and inquiries regarding these billing practices and certain others. NHL had
previously established reserves that were adequate to cover such settlement
payments. In connection with the settlement, Allied agreed with HHS, among
other things, to implement a corporate integrity program to ensure that
Allied and its representatives remain in compliance with applicable laws and
regulations and to provide certain reports and information to HHS regarding
such compliance efforts.
COMPLIANCE PROGRAM
Because of evolving interpretations of regulations and the national
debate over health care, compliance with all Medicare, Medicaid and other
government-established rules and regulations has become a significant factor
throughout the clinical laboratory industry. The Company has implemented a
comprehensive company-wide compliance program. The objective of the program
is to develop, implement and update as necessary aggressive and reliable
compliance safeguards. Emphasis is placed on developing training programs
for personnel to attempt to assure the strict implementation of all rules
and regulations. Further, in-depth reviews of procedures, personnel and
facilities are conducted to assure regulatory compliance throughout the
Company. Such sharpened focus on regulatory standards and procedures will
continue to be a priority for the Company in the future.
The Company believes that it is in compliance in all material respects
with all statutes, regulations and other requirements applicable to its
clinical laboratory operations. The clinical laboratory testing industry
is, however, subject to extensive regulation, and many of these statutes and
regulations have not been interpreted by the courts. There can be no
assurance therefore that applicable statutes and regulations might not be
interpreted or applied by a prosecutorial, regulatory or judicial authority
in a manner that would adversely affect the Company. Potential sanctions for
violation of these statutes and regulations include significant fines and
the loss of various licenses, certificates and authorizations.
ITEM 2. PROPERTIES
The following table summarizes certain information as to the
Company's principal operating and administrative facilities as of December
31, 1996.
APPROXIMATE
AREA NATURE OF
LOCATION (IN SQUARE FEET) OCCUPANCY
----------------------- ---------------- --------------------
Operating Facilities:
Birmingham, Alabama 100,000 Lease expires 2005
Phoenix, Arizona 43,000 Lease expires 2001;
one 5 year renewal
option
San Diego, California 54,000 Lease expires 2007
Denver, Colorado 20,000 Lease expires 2001;
two 5 year renewal
options
Tampa, Florida 95,000 Lease expires 2009;
one 5 year renewal
option
Chicago, Illinois 40,000 Lease expires 2003;
two 5 year renewal
options
Louisville, Kentucky 60,000 Lease expires 2002;
three 5 year
renewal options
Detroit, Michigan 32,000 Lease expires 2004;
two 5 year renewal
options
Kansas City, Missouri 78,000 Owned
Reno, Nevada 16,000 Owned
14,000 Lease expires 1999;
2 year renewal option
Raritan, New Jersey 186,000 Owned
Uniondale, New York 108,000 Lease expires 2007;
two 5 year renewal
options
Burlington, North Carolina 205,000 Owned
Charlotte, North Carolina 25,000 Lease expires 1997;renewal
option every 3 years
Research Triangle Park, 74,000 Lease expires 2008,three
North Carolina 5 year renewal options
111,000 Lease expires 2011;
three 5 year renewal
options
Winston-Salem, 73,000 Lease expires 2009; one
North Carolina 5 year renewal option
Dublin, Ohio 82,000 Owned
Memphis, Tennessee 30,000 Lease expires 1999; one
5 year renewal option
Dallas, Texas 54,000 Lease expires 2004; one
5 year renewal option
Houston, Texas 32,000 Lease expires 1997
San Antonio, Texas 44,000 Lease expires 2004; one
5 year renewal option
Salt Lake City, Utah 20,000 Lease expires 2002; two
5 year renewal options
Chesapeake, Virginia 21,000 Lease expires 2002; two
5 year renewal options
Herndon, Virginia 64,000 Leases expire 1999,2004;
one 5 year
renewal option
Richmond, Virginia 57,000 Lease Expires 2001; one
5 year renewal option
Seattle, Washington 42,000 Lease expires 1998; two
5 year renewal options
Fairmont, West Virginia 25,000 Lease expires 2005;three
5 year renewal options
Administrative facilities:
Burlington, North Carolina 160,000 Owned
188,000 Leases expire 1997
2008;various options
to purchase or renew
All of the major laboratory facilities have been built or improved for
the single purpose of providing clinical laboratory testing services. The
Company believes that these facilities are suitable and adequate and have
sufficient production capacity for its currently foreseeable level of
operations. The Company believes that if it were to lose the lease on any
of the facilities it presently leases, it could find alternate space at
competitive market rates and readily relocate its operations to such new
locations without material disruption to its operations.
ITEM 3. LEGAL PROCEEDINGS
The Company has recently been contacted by representatives of certain
insurance companies, and individuals in a purported class action, who
have asserted claims for private reimbursement which are similar to the
Government claims recently settled. The Company is carefully evaluating
these claims, however, due to the early stage of the claims, the
ultimate outcome cannot presently be predicted.
The Company is involved in certain claims and legal actions arising in
the ordinary course of business. In the opinion of management, based upon
the advice of counsel, the ultimate disposition of these matters will not
have a material adverse effect on the financial position or results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of the Stockholders of the Company
was held on November 20, 1996.
(b) The following individuals were elected to the board
of directors:
Thomas P. Mac Mahon
James B. Powell, M.D.
Jean-Luc Belingard
Wendy E. Lane
Robert E. Mittelstaedt, Jr.
David B. Skinner, M.D.
Andrew G. Wallace, M.D.
(c) The matters voted upon were the election of
directors, approval and adoption of the 1997 Employee
Stock Purchase Plan and the ratification of the
appointment of KPMG Peat Marwick LLP as the Company's
independent auditors for the fiscal year ending
December 31, 1996. Each of such matters was
described in the proxy statement dated October 25,
1996 which was distributed to stockholders in
connection with the annual meeting of the
stockholders of the Company. The results of the vote
were as follows:
For Withheld
--- --------
Election of the members
of the board of directors:
Thomas P. Mac Mahon 94,970,162 16,653,733
James B. Powell, MD 94,969,162 16,654,733
Jean-Luc Belingard 94,970,162 16,653,733
Wendy E. Lane 109,673,536 1,950,359
Robert E. Mittelstaedt, Jr. 109,673,636 1,950,259
David B. Skinner, MD 109,673,636 1,950,259
Andrew G. Wallace, MD 109,673,636 1,950,259
Votes Votes Votes
For Against Abstained
----- ------- ---------
Approval and adoption of the
Laboratory Corporation of
America Holdings 1997
Employee Stock Purchase
Plan: 104,336,606 6,597,917 54,784
Ratification of the
appointment of KPMG Peat
Marwick LLP as the Company's
independent auditors for
the fiscal year ending
December 31, 1996: 111,139,247 453,431 31,217
In addition, certain shares of NHL which have not been
converted to Company shares were eligible to vote at the annual meeting and
were voted as follows:
For Withheld
--- --------
Election of the members
of the board of directors:
Thomas P. Mac Mahon 215 100
James B. Powell, MD 215 100
Jean-Luc Belingard 215 100
Wendy E. Lane 215 100
Robert E. Mittelstaedt, Jr. 215 100
David B. Skinner, MD 215 100
Andrew G. Wallace, MD 215 100
Votes Votes Votes
For Against Abstained
----- ------- ---------
Approval and adoption of the
Laboratory Corporation of
America Holdings 1997 Employee
Stock Purchase Plan: 215 100 0
Ratification of the appointment
of KPMG Peat Marwick LLP as the
Company's independent auditors
for the fiscal year ending
December 31, 1996: 215 100 0
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On May 1, 1995, the Common Stock commenced trading on the New York
Stock Exchange ("NYSE") under the symbol "LH". Prior to such date and since
April 24, 1991, the Common Stock traded on the NYSE under the symbol "NH."
Prior to April 24, 1991, the Common Stock was quoted on the Nasdaq National
Market under the symbol "NHLI".
The following table sets forth for the calendar periods indicated the
high and low sales prices for the Common Stock reported on the NYSE
Composite Tape, and the cash dividends declared per share of Common Stock.
High Low
------ ------
1995
First Quarter 15 1/2 12 5/8
Second Quarter 15 1/4 11 3/4
Third Quarter 14 9 1/8
Fourth Quarter 10 8 1/8
1996
First Quarter 9 3/8 7 1/4
Second Quarter 9 7 3/8
Third Quarter 7 5/8 3 1/4
Fourth Quarter 3 7/8 2 3/8
1997
First Quarter 4 2 1/2
Second Quarter (through April 7, 1997) 3 3/8 2 3/4
On April 7, 1997 there were approximately 900 holders of record of
the Common Stock.
The Company, in connection with the Allied Acquisition in 1994,
discontinued its dividend payments for the foreseeable future in order to
increase its flexibility with respect to its acquisition strategy. In
addition, the Company's credit agreement, as amended, places certain
restrictions, as defined in the credit agreement, on the payment of
dividends.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the captions
"Statement of Operations Data" and "Balance Sheet Data" as of and for each
of the years in the five-year period ended December 31, 1996 are derived
from consolidated financial statements of the Company, which financial
statements have been audited by KPMG Peat Marwick LLP, independent certified
public accountants. This data should be read in conjunction with the
accompanying notes, the Company's consolidated financial statements and the
related notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," all included elsewhere
herein.
[Download Table]
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 (a) 1994 (b) 1993 1992
------ ------- ------ ----- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net sales $1,607.7 $1,432.0 $872.5 $760.5 $ 721.4
Gross profit 423.8 407.7 275.5 316.0 326.3
Operating income (loss) (118.8)(c) 67.2(d) 109.9 185.5 64.1(e)
Earnings (loss) before
extraordinary loss (153.5) (4.0) 30.1 112.7 40.6
Extraordinary loss -- (8.3)(f) -- -- --
------- ------- ----- ----- ------
Net earnings (loss) $ (153.5) $ (12.3) $ 30.1 $112.7 $ 40.6
======= ======= ===== ===== ======
Earnings (loss) per common
share before extraordinary
loss $ (1.25) $ (0.03) $ 0.36 $ 1.26 $ 0.43
Extraordinary loss per
common share -- (0.08) -- -- --
------- ------- ----- ----- ------
Net earnings (loss) per
common share $ (1.25) $ (0.11) $ 0.3 $ 1.26 $ 0.43
======= ======= ===== ===== ======
Dividends per common
share $ -- $ -- $ 0.08 $ 0.32 $ 0.31
Weighted average
common shares outstanding
(in thousands) 122,920 110,579 84,754 89,439 94,468
DECEMBER 31,
--------------------------------------------------
1996 1995 (a) 1994 (b) 1993 1992
------- ------- ------ ------ -------
BALANCE SHEET DATA:
Cash and cash equivalents $ 29.3 $ 16.4 $ 26.8 $ 12.3 $ 33.4
Intangible assets, net 891.1 916.7 551.9 281.5 188.3
Total assets 1,917.0 1,837.2 1,012.7 585.5 477.4
Long-term obligations (g) 1,089.4 948.6 583.0 314.6 114.2
Due to affiliates (h) 190.5 0.9 -- 0.1 0.9
Total stockholders'
equity 258.1 411.6 166.0 140.8 212.5
<FN>
--------------------------------
(a) In April 1995, the Company completed the Merger. RBL's results of
operations have been included in the Company's results of operations since
April 28, 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations_General" and Note 2 of the Notes to the
Consolidated Financial Statements.
(b) In June 1994, the Company completed the Allied Acquisition. Allied's
results of operations have been included in the Company's results of
operations since June 23, 1994. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations_General" and Note 2 of the
Notes to Consolidated Financial Statements.
(c) In the second quarter of 1996, the Company recorded certain charges of
a non-recurring nature including additional charges related to the
restructuring of operations following the Merger. The Company recorded a
restructuring charge totaling $13.0 million for the shutdown of its La
Jolla, California administrative facility and other workforce reductions.
In addition, the Company recorded $10.0 million in non-recurring charges in
the second quarter of 1996 related to the integration of its operations
following the Merger. See Note 3 of the Notes to Consolidated Financial
Statements. As a result of negotiations with the OIG and DOJ related to the
1996 Government Settlement, the Company recorded the Settlement Charge of
$185.0 million in the third quarter of 1996 to increase accruals for
settlements and related expenses of government and private claims resulting
from these investigations. See "Regulation and Reimbursement-OIG
Investigations_1996 Government Settlement."
(d) In 1995, following the Merger, the Company determined that it would be
beneficial to close certain laboratory facilities and eliminate duplicate
functions in certain geographic regions where duplicate NHL and RBL
facilities or functions existed at the time of the Merger. The Company
recorded restructuring charges of $65.0 million in connection with these
plans. See Note 3 of the Notes to Consolidated Financial Statements which
sets forth the Company's restructuring activities for the years ended
December 31, 1996 and 1995. Also in 1995, the Company recorded a pre-tax
special charge of $10.0 million in connection with the estimated costs of
settling various claims pending against the Company, substantially all of
which were billing disputes with various third party payors relating to the
contention that NHL improperly included tests for HDL cholesterol and serum
ferritin in its basic test profile without clearly offering an alternative
profile that did not include these medical tests. As of December 31, 1996,
the majority of these disputes have been settled.
(e) In the fourth quarter of 1992, the Company recorded a charge against
operating income of $136.0 million related to the 1992 NHL Government
Settlement (as defined herein). See "Regulation and Reimbursement_OIG
Investigations_1992 NHL Government Settlement."
(f) In connection with the repayment in 1995 of existing revolving credit
and term loan facilities in connection with the Merger, the Company recorded
an extraordinary loss of approximately $13.5 million ($8.3 million, net of
tax), consisting of the write-off of deferred financing costs, related to
the early extinguishment of debt.
(g) Long term obligations include a capital lease obligation of $9.8
million, $9.6 million, $9.8 million, $9.7 million and $9.6 million at
December 31, 1996, 1995, 1994, 1993 and 1992, respectively. Long term
obligations also includes the long-term portion of the expected value of
future contractual and contingent amounts to be paid to the principals of
acquired laboratories. Such payments are principally based on a percentage
of future revenues derived from the acquired customer lists or specified
amounts to be paid over a period of time. At December 31, 1996, 1995, 1994,
1993 and 1992, such amounts were $14.8 million, $14.7 million, $8.5 million,
$15.9 million, and $2.6 million, respectively. Long term obligations
exclude amounts due to affiliates.
(h) In December 1996, Roche loaned $187.0 million to the Company to fund
the Settlement Payment in the form of a promissory note. Such note bears
interest at a rate of 6.625% per annum and matures on March 31, 1998. The
Settlement Payment was subsequently made in December 1996. In addition the
Company owes affiliated companies approximately $3.5 million in trade
payables.
</FN>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company has grown significantly over the last several years, a
substantial portion of which has been achieved through acquisitions. In
April 1995, the Company completed the Merger with RBL. In connection with
the Merger, the Company issued 61,329,256 shares of Common Stock to HLR and
Roche Holdings in exchange for all outstanding shares of RBL and $135.7
million in cash. The exchange consideration of approximately $558.0 million
for the purchase of RBL consisted of the value of the stock issued to HLR
and Roche Holdings, as well as other cash costs of the Merger, net of cash
received from HLR. In June 1994, the Company acquired Allied for
approximately $191.5 million in cash plus the assumption of $24.0 million of
Allied indebtedness. The Allied Acquisition and the Merger have been
accounted for under the purchase method of accounting; as such, the acquired
assets and liabilities were recorded at their estimated fair values on the
date of acquisition. Allied's and RBL's results of operations have been
included in the Company's results of operations since June 23, 1994 and
April 28, 1995, respectively. See Note 2 of the Notes to Consolidated
Financial Statements. In addition to the Merger and the Allied Acquisition,
since 1993 the Company has acquired a total of 57 small clinical
laboratories with aggregate sales of approximately $182.4 million.
Following the Merger in 1995, the Company determined that it would be
beneficial to close certain laboratory facilities and eliminate duplicate
functions in certain geographic regions where both NHL and RBL facilities or
functions existed at the time of the Merger. The Company recorded
restructuring charges of $65.0 million in connection with these plans in
1995. In addition, in the second quarter of 1995, the Company had an
extraordinary loss of $8.3 million, net of taxes, related to early
extinguishment of debt related to the Merger. In the second quarter of
1996, the Company recorded certain additional charges related to the
restructuring of operations following the Merger. The Company recorded a
restructuring charge totaling $13.0 million for the shutdown of its La
Jolla, California administrative facility and other workforce reductions and
$10.0 million in non-recurring charges related to the integration of its
operations following the Merger. See Note 3 of the Notes to Consolidated
Financial Statements. Future cash payments under the restructuring plan are
expected to be $16.1 million in the year ended December 31, 1997 and $9.1
million thereafter.
In the last several years, the Company's business has been affected by
significant government regulation, price competition and increased influence
of managed care organizations resulting from payors' efforts to control the
cost, utilization and delivery of health care services. As a result of
these factors, the Company's profitability has been impacted by changes in
the volume of testing, the prices and costs of its services, the mix of
payors and the level of bad debt expense.
Many market-based changes in the clinical laboratory business have
occurred, most involving the shift away from traditional, fee-for-service
medicine to managed-cost health care. The growth of the managed care sector
presents various challenges to the Company and other independent clinical
laboratories. Managed care providers typically contract with a limited
number of clinical laboratories and negotiate discounts to the fees charged
by such laboratories in an effort to control costs. Such discounts have
resulted in price erosion and have negatively impacted the Company's
operating margins. In addition, managed care providers have used capitated
payment contracts in an attempt to promote more efficient use of laboratory
testing services. Under a capitated payment contract, the clinical
laboratory and the managed care provider agree to a per month payment to
cover all laboratory tests during the month, regardless of the number or
cost of the tests actually performed. Such contracts also shift the risks
of additional testing beyond that covered by the capitated payment to the
clinical laboratory. The increase in managed-cost health care has also
resulted in declines in the utilization of laboratory testing services. For
the year ended December 31, 1996, such contracts accounted for approximately
$64.5 million in net sales.
In addition, Medicare (which principally serves patients 65 and older)
and Medicaid (which principally serves indigent patients) and insurers, have
increased their efforts to control the cost, utilization and delivery of
health care services. Measures to regulate health care delivery in general
and clinical laboratories in particular have resulted in reduced prices and
added costs and decreasing test utilization for the clinical laboratory
industry by increasing complexity and adding new regulatory and
administrative requirements. From time to time, Congress has also
considered changes to the Medicare fee schedules in conjunction with certain
budgetary bills. Any future changes to the Medicare fee schedules cannot be
predicted at this time and management, therefore, cannot predict the impact,
if any, such proposals, if enacted, would have on the results of operations
or financial condition of the Company.
These market based factors have had a significant adverse impact on the
clinical laboratory industry, and on the Company's profitability.
Management expects that price erosion and utilization declines will continue
to negatively impact net sales and results of operations for the foreseeable
future. It is the objective of management to partially offset the increases
in cost of sales as a percentage of net sales and selling, general and
administrative expenses as a percentage of net sales through the cost
savings the Company expects to realize following the Merger, and through
other comprehensive cost reduction programs, as discussed below. In
addition, since the third quarter of 1996 the Company has expanded its
efforts to improve the profitability of new and existing business. To date
this effort has focused primarily on reviewing existing contracts, including
those with managed care organizations, and selectively repricing or
discontinuing business with existing accounts which perform below Company
expectations. The Company believes that as a result of this effort, the
fourth quarter of 1996 was the second consecutive quarter since the Merger
that the Company's price per accession did not decline versus the immediately
preceding quarter. The Company is also targeting price increases across
most of its business lines, including specialty and niche testing, which
have not seen price increases since the Merger. While such increases may
adversely affect volumes, the Company believes that such measures along with
other cost reduction programs, will improve its overall profitability. There
can be no assurance, however, of the timing or success of such measures or
that the Company will not lose market share as a result of these measures.
Finally, the Company is reviewing its sales organization and expects to
modify its commission structure so that compensation is tied more directly
to the profitability of retained and new business instead of the current
practice of basing commissions primarily on revenue generated. The Company
is also reviewing alternatives relating to regions of the country and certain
businesses where profitability is not reaching internal goals and may enter
into joint ventures, alliances, or asset swaps with interested parties in
order to maximize regional operating efficiencies.
As a result of the Merger, the Company has realized and is expected to
continue to achieve substantial savings in operating costs through the
consolidation of certain operations and the elimination of redundant
expenses. Such savings are being realized over time as the consolidation
process is completed. Since the Merger, the Company has been able to effect
substantial operating cost reductions in the combined businesses and expects
that the full effect of these savings (in excess of $120 million per year
when compared to the businesses' costs immediately prior to the Merger) will
be realized during 1997. Such savings include an annualized reduction of
$4.7 million in corporate, general and administrative expenses including the
consolidation of administrative staff. Combining the NHL sales force with
the RBL sales force where duplicate territories existed has added
approximately $17.8 million of annualized synergies. Operational savings
have resulted in approximately $94.8 million of annualized synergies. These
include closing of overlapping laboratories and other facilities and savings
realized from additional buying power by the larger Company. The Company
has also realized annualized savings of approximately $14.2 million relating
to employee benefits as a result of changes to certain benefit arrangements.
The realization of the savings have been partially offset by increased
temporary help and overtime expenses during the consolidation process.
These costs are expected to reduce to normal levels at the conclusion of the
consolidation process in early 1997. In addition, these savings have been
largely offset by price erosion and utilization declines resulting from the
increase in managed care and to a lesser extent from increases in other
expenses such as bad debt expenses as discussed below. The effects of price
erosion and utilization declines on the Company's results of operations,
however, would have been greater but for savings achieved through the
synergy program. In addition, the Company is focused on additional
initiatives which are expected to achieve incremental cost savings in 1997.
These plans include further regional laboratory consolidation, a new
agreement with a supplier of telecommunications services and additional
supply savings primarily due to increased efficiency. There can be no
assurance that the estimated additional cost savings expected to be achieved
will be realized or achieved in a timely manner or that improvements, if
any, in profitability will be achieved or that such savings will not be
offset by increases in other expenses.
RECENT DEVELOPMENTS
As part of an examination of the rapid growth of Federal expenditures
for clinical laboratory services, several Federal agencies, including the
Federal Bureau of Investigation, the OIG and the DOJ, have investigated
allegations of fraudulent and abusive conduct by health care providers. On
November 21, 1996, the Company reached a settlement with the OIG and the DOJ
regarding the prior billing practices of various of its predecessor
companies. Consistent with this overall settlement the Company paid $187.0
million to the Federal government in December 1996, with proceeds from the
Roche Loan. As a result of negotiations related to the 1996 Government
Settlement, the Company recorded a charge of $185.0 million in the third
quarter of 1996 to increase accruals for the 1996 Government Settlement, and
other related expenses of government and private claims resulting therefrom.
In February 1997, the Company filed a registration statement with the
Commission relating to the proposed offering of an aggregate of $500 million
of convertible preferred stock issuable in two series pursuant to
transferable subscription rights to be granted on a pro rata basis to each
stockholder of the Company. Rights holders who exercise their rights in
full will also be entitled to subscribe for additional shares of preferred
stock issuable pursuant to any unexercised rights.
The subscription rights will give the holder thereof the option to
purchase one of two series of preferred stock, each of which will be
convertible at the option of the holder into common stock. One series will
pay cash dividends and will be exchangeable at the Company's option for
convertible subordinated notes due 2012. The other series will pay
dividends in kind and will not be exchangeable for notes. Each series of
preferred stock will be mandatorily redeemable in 2012 and will be
redeemable at the option of the Company after three years.
The proceeds of the Rights Offering will be used to reduce amounts
outstanding under the Company's revolving and term loan credit facilities,
repay the Roche Loan, and pay fees and expenses related to the Rights
Offering and the Amended Credit Agreement.
In March 1997, the Company entered into the Sixth Amendment which
eliminates amortization payments on the Term Loan Facility for 1997 and
modifies the interest coverage and leverage ratios for the quarterly periods
through December 31, 1997. Pursuant to this amendment, the Company paid an
amendment fee of 37.5 basis points on commitments and will pay an additional
fee of 62.5 basis points if the Rights Offering, is not completed by June
30, 1997. In addition, the Roche Loan which originally matured on March 31,
1997, was amended to extend the maturity thereof to March 31, 1998.
The Company also entered into the Amended Credit Agreement which will
become effective upon completion of the Rights Offering following
satisfaction of certain conditions precedent. The Amended Credit Agreement
makes available to the Company a term loan facility of $693.8 million and a
$450.0 million revolving credit facility. See "Liquidity and Capital
Resources" below and Note 9 of the Notes to Consolidated Financial
Statements for a complete description of the Existing and Amended Credit
Agreements.
SEASONALITY
Volume of testing generally declines during the summer months, year-end
holiday periods and other major holidays, resulting in net revenues and cash
flows in the third and fourth quarter below the annual average. In
addition, volume declines due to inclement weather may reduce net revenues
and cash flows. Therefore, comparison of the results of successive quarters
may not accurately reflect trends or results for the full year.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 compared with Year Ended December 31, 1995.
Net sales increased by $175.7 million to $1,607.7 million in 1996, an
increase of 12.3% from $1,432.0 million reported in 1995. The inclusion of
RBL as a result of the Merger increased net sales by approximately $243.5
million or 17.0%. Acquisitions of small clinical laboratory companies
increased net sales by approximately 1.8%. Also contributing to the
increases in net sales was growth in new accounts and price increases in
selective markets. Such increases were partially offset by price erosion in
the industry as a whole, lower utilization of laboratory testing and lost
accounts. Price erosion and lower utilization of laboratory testing
primarily resulted from continued changes in payor mix brought on by the
increase in managed care. A reduction in Medicare fee schedules from 80% to
76% of the national limitation amounts on January 1, 1996, reduced net sales
by approximately 1.3%. Severe weather in January and February of 1996 also
negatively impacted net sales.
Cost of sales, which includes primarily laboratory and distribution
costs, increased to $1,183.9 million in 1996 from $1,024.3 million in 1995.
Of the $159.6 million increase, approximately $181.9 million or 17.8% was
due to the inclusion of the cost of sales of RBL. Cost of sales increased
(i) approximately $23.8 million as a result of wage increases prior to the
implementation of a six-month deferral on wage rate increases implemented on
July 1, 1996, (ii) approximately $5.0 million as a result of higher overtime
and temporary employee expenses related to the acceleration of the Company's
synergy program and other operational factors, (iii) approximately $7.5
million due to higher depreciation and maintenance of lab equipment as a
result of the Company's purchase in 1996 of more sophisticated equipment to
improve efficiency, and (iv) approximately $8.0 million in outside
collection and reference testing fees. These increases were partially offset
by decreases due to lower volume of approximately $14.7 million. Additional
decreases in salaries and benefits of $49.5 million, and several other
expense categories aggregating approximately $2.4 million were primarily a
result of the Company's synergy and cost reduction programs. Cost of sales
as a percentage of net sales was 73.6% in 1996 and 71.5% in 1995. The
increase in the cost of sales percentage of net sales primarily resulted
from a reduction in net sales due to price erosion and utilization declines,
each of which provided little corresponding reduction in costs, and, to a
lesser extent, due to severe weather in January and February of 1996 and a
reduction in Medicare fee schedules.
Selling, general and administrative expenses increased to $305.0
million in 1996 from $238.5 million in the same period in 1995 representing
an increase of $66.5 million or 27.9%. The inclusion of the selling,
general and administrative expenses of RBL since April 28, 1995 increased
expenses by approximately $36.5 or 15.3%. Increases in salaries, overtime
and temporary employee expenses, primarily related to billing issues, and
related telephone and data processing costs, aggregated approximately $24.8.
Also, increased medical necessity and related diagnosis code requirements of
third-party payors placed on the Company in late 1995 and additional
requirements placed on the Company at the beginning of 1996 have resulted in
lower collection rates. As a result the provision for doubtful accounts for
1996 increased approximately $16.6 million, including a charge of $10.0
million in the second quarter of 1996 compared to 1995 which included a
$15.0 million charge in the fourth quarter of 1995. The 1995 charge was
necessitated by the deterioration in the Company's accounts receivable
collection rates in the fourth quarter of 1995 primarily due to the effect
of increased medical necessity and diagnosis code requirements of third
party payors placed on the Company in the second half of 1995. Additional
such requirements were placed on the Company at the beginning of 1996, which
resulted in a further deterioration in accounts receivable collection rates
in the second quarter of 1996. As a result of this further deterioration,
the Company recorded the special charge of $10.0 million in the second
quarter of 1996. In addition, the Company increased its monthly provision
for doubtful accounts beginning in the third quarter of 1996 as a result of
continued lower collection rates. These increases were partially offset by
decreases in legal expenses, excluding settlement expenses, insurance and
several other expense categories aggregating approximately $1.9 million.
Selling, general and administrative expenses were 19.0% and 16.7% as a
percentage of net sales in 1996 and 1995, respectively. The increase in the
selling, general and administrative percentage primarily resulted from
increased employee expenses related to billing and collection activities and
the increases in the provision for doubtful accounts discussed above and to
a lesser extent, from a reduction in net sales due to price erosion and
utilization declines, each of which provided little corresponding reduction
in costs.
In the second quarter of 1996, the Company recorded certain charges of
a non-recurring nature including additional charges related to the
restructuring of operations. The Company recorded a restructuring charge
totaling $13.0 million for the shutdown of its La Jolla, California
administrative facility and other workforce reductions. In addition, the
Company recorded $10.0 million of non-recurring charges in the second
quarter of 1996 related to the abandonment of certain data processing
systems, relocation of its principal drug testing facility and various other
items including the write-off of certain laboratory testing supplies related
to changes in testing methodologies to increase efficiency.
As a result of negotiations related to the 1996 Government Settlement,
the Company recorded the Settlement Charge of $185.0 million in the third
quarter of 1996 to increase reserves for the 1996 Government Settlement
described above, and other related expenses of government and private claims
resulting therefrom.
The increase in amortization of intangibles and other assets to $29.6
million in 1996 from $27.0 million in 1995 primarily resulted from the
Merger in April 1995.
Net interest expense was $69.5 million in 1996 compared to $64.1
million in 1995. The increase resulted primarily from increased borrowings
due to higher accounts receivable balances and a higher effective borrowing
rate as a result of an amendment to the Company's credit agreement. See
"Liquidity and Capital Resources."
As a result of the restructuring and non-recurring charges in 1996 and
1995, the provision for income taxes is not comparable between periods.
However, before charges, the Company's effective income tax rate in 1996 has
increased from 1995 as a result of increased non-deductible amortization and
lower earnings before income taxes.
Year Ended December 31, 1995 compared with Year Ended December 31, 1994.
Net sales increased by $559.5 million to $1,432.0 million in 1995, an
increase of 64.1% from $872.5 million reported in 1994. Net sales from the
inclusion of RBL, increased net sales by approximately $514.7 million or
59.0%. Also, net sales from the inclusion of Allied, which was acquired on
June 23, 1994, increased net sales by approximately $56.6 million or 6.5%.
Growth in new accounts and acquisitions of small clinical laboratory
companies increased net sales by approximately 8.6% and 2.8%, respectively.
Lower utilization of laboratory testing and price erosion in the industry as
a whole decreased net sales by approximately 5.0%. A reduction in Medicare
fee schedules from 84% to 80% of the national limitation amounts on January
1, 1995, plus changes in reimbursement policies of various third-party
payors, reduced net sales by approximately 1.5%. Other factors, including
accounts terminated by management, comprised the remaining reduction in net
sales.
Cost of sales increased to $1,024.3 million in 1995 from $597.0 million
in 1994. Of the $427.3 million increase, approximately $368.8 million was
due to the inclusion of the cost of sales of RBL and approximately $44.8
million was due to the inclusion of the cost of sales of Allied. Cost of
sales increased by approximately $26.1 million due to higher testing volume
unrelated to the Merger or acquisition of Allied and approximately $4.5
million due to increases in other expenses. Reductions in compensation and
benefit expense of $9.2 million, insurance of $4.8 million, and other
expense categories of $2.9 million decreased cost of sales an aggregate of
approximately $16.9 million. These decreases resulted from the
consolidation of operations as a result of the Merger and the Company's on-
going cost-reduction program. As a percentage of net sales, cost of sales
increased to 71.5% in 1995 from 68.4% in 1994. The increase in the cost of
sales percentage primarily resulted from a reduction in net sales due to a
reduction in Medicare fee schedules, pricing pressures and utilization
declines, each of which provided little corresponding reduction in costs.
Selling, general and administrative expenses increased to $238.5
million in 1995 from $149.3 million in 1994, an increase of $89.2 million.
Approximately $74.3 million of the increase was due to the inclusion of the
selling, general and administrative expenses of RBL and approximately $7.7
million due to the inclusion of the selling, general and administrative
expenses of Allied. In the fourth quarter of 1995, the Company recorded an
additional $15.0 million of provision for doubtful accounts which reflects
the Company's determination, based on trends that became evident in the
fourth quarter, that additional reserves were needed primarily to cover
potentially lower collection rates from several third-party payors. The
increase in selling, general and administrative expenses was partially
offset by decreases in other expense categories, including reductions in
selling expenses, as a result the elimination of duplicative functions in
connection with the Merger and the Company's on-going cost-reduction
program. Before the increase to the provision for doubtful accounts,
selling, general and administrative expenses as a percentage of net sales
was 15.6% in 1995 and 17.1% in 1994. The decrease in the selling, general
and administrative percentage primarily resulted from reductions in expenses
as discussed above.
The increase in amortization of intangibles and other assets to $27.0
million in 1995 from $16.3 million in 1994 primarily resulted from the
Merger in April 1995 and the acquisition of Allied in June 1994.
See Note 3 of the Notes to Consolidated Financial Statements which sets
forth the Company's restructuring activities for the year ended December 31,
1995.
In the second quarter of 1995, the Company took a pre-tax special
charge of $10.0 million in connection with the estimated costs of settling
various claims pending against the Company, substantially all of which were
billing disputes with various third party payors relating to the contention
that NHL improperly included tests for HDL cholesterol and serum ferritin in
its basic test profile without clearly offering an alternative profile that
did not include these medical tests. As of December 31, 1996, the majority
of these disputes have been settled.
Net interest expense was $64.1 million in 1995 compared to $33.5
million in 1994. The change resulted primarily from increased borrowings
used to finance the Merger with RBL and the acquisition of Allied and, to a
lesser extent, due to a higher effective borrowing rate in the first four
months of 1995.
In connection with the repayment of the Company's existing revolving
credit and term loan facilities at the time of the Merger, the Company
recorded an extraordinary loss from the early extinguishment of debt of
approximately $13.5 million ($8.3 million net of tax) consisting of the
write-off of deferred financing costs.
As a result of the restructuring charges and extraordinary loss, the
provision for income taxes as a percentage of earnings before income taxes
for 1995 is not comparable to prior periods.
LIQUIDITY AND CAPITAL RESOURCES
Net cash (used for) provided by operating activities (after payment of
settlement and related expenses of $188.9 million, $32.1 million and $29.8
million, respectively) was $(186.8) million, $47.0 million and $14.7
million, in 1996, 1995 and 1994, respectively. The decrease in cash flow
from operations in 1996 primarily resulted from the Settlement Payment, an
increase in accounts receivable related to increased medical necessity and
related diagnosis code requirements of third-party payors placed on the
Company at the beginning of 1996 and reflects the lower collection rates
experienced beginning in the second quarter as a result of the more
stringent requirements as discussed above.
Capital expenditures were $54.1 million, $75.4 million and $48.9
million for 1996, 1995 and 1994, respectively. The Company expects capital
expenditures to be approximately $65.0 million in 1997 and $70.0 million in
1998 to further automate laboratory processes and to improve efficiency.
Such expenditures are expected to be funded by cash flow from operations as
well as borrowings under the Company's credit facilities.
Increased medical necessity and related diagnosis code requirements of
the Medicare program were placed on the Company by certain third party
carriers in late 1995 and additional requirements were placed on the Company
at the beginning of 1996. The Company has experienced lower collection
rates as a result of these more stringent requirements. In addition,
increased difficulty in collecting amounts due from private insurance
carriers, including certain managed care plans, has negatively impacted cash
flow from operations. Finally, Merger related integration issues have also
resulted in increased accounts receivable balances as a result of the
Company maintaining multiple billing information systems. The Company
currently has plans in place to stabilize collection rates and improve the
collection of accounts receivable. See "Business--Billing". To date,
however, collection rates have continued to decline and additional changes
in requirements of third-party payors could increase the difficulty in
collections. There can be no assurance of the success of the Company's
plans to improve collections and, due to changes in medical necessity
requirements, the Company expects accounts receivable balances to continue
to exceed 1995 levels.
In connection with the Merger, the Company entered into the Existing
Credit Agreement, with the banks named therein (the "Banks") and an
administrative agent (the "Bank Agent"), which made available to the Company
a term loan facility (the "Term Loan Facility") of $800.0 million and a
revolving credit facility (the "Revolving Credit Facility") of $450.0
million. On April 28, 1995, the Company borrowed $800.0 million under the
Term Loan Facility and $184.0 million under the Revolving Credit Facility
(i) to pay the cash payment to shareholders in connection with the Merger;
(ii) to repay in full the existing revolving credit and term loan facilities
of a wholly owned subsidiary of the Company of approximately $640.0 million
including interest and fees; (iii) to repay approximately $50.0 million of
existing indebtedness of RBL; and (iv) for other transaction costs in
connection with the Merger and for use as working capital and general
corporate purposes of the Company and its subsidiaries. Availability of
funds under the Existing Credit Agreement is conditioned on certain
customary conditions, and the Existing Credit Agreement, as amended,
contains customary representations, warranties, covenants and events of
default.
As a result of potential defaults under the Existing Credit Agreement
resulting from among other things, the Company's performance and higher than
projected debt levels, the Settlement Charge, and the Roche Loan, the
Company has obtained several amendments and waivers to the Existing Credit
Agreement. In September 1996, the Company negotiated an amendment (the
"Fourth Amendment") to the Existing Credit Agreement. The Fourth Amendment
modified the interest coverage and leverage ratios applicable to the
quarters ending September 30 and December 31, 1996. The Fourth Amendment
also increased the interest rate margin on its revolving credit facility
from 0.25% to 0.875% and increased the interest rate margin on its term loan
facility from 0.375% to 1.00%. As a result of the Settlement Charge in the
third quarter of 1996, as described above, the Company obtained a waiver
(the "Third Waiver") which excluded the special charge from covenant
calculations for the periods covered by the most recent amendment until 30
days after the 1996 Government Settlement. As a result of the Roche Loan
and the 1996 Government Settlement, the Company negotiated a Fifth Amendment
and Fourth Waiver (the "Fifth Amendment") to the Existing Credit Agreement.
The Fifth Amendment extended the Third Waiver until January 31, 1997 and
excluded the Roche Loan from covenant calculations for the quarters ending
December 31, 1996 and March 31, 1997. On January 27, 1997, the Company
negotiated a waiver (the "Fifth Waiver") which further extended the Third
Waiver until March 31, 1997.
As mentioned above, in March 1997, the Company entered into the Sixth
Amendment which eliminates amortization payments on the Term Loan Facility
for 1997 and modifies the interest coverage and leverage ratios for the
quarterly periods through December 31, 1997. As a result of the Sixth
Amendment certain amounts outstanding under the Revolving Credit Facility
and Term Loan Facility that were classified as current liabilities in the
September 30, 1996 financial statements have been reclassified to long-term
debt in the December 31, 1996 financial statements. Under the Sixth
Amendment, maturities under the term loan facility aggregate $243.8 million,
$162.5 million, $187.5 million and $100.0 million in 1998 through 2001,
respectively.
In March 1997 the Company also entered into the Amended Credit
Agreement which will become effective upon completion of the Rights Offering
following satisfaction of certain conditions precedent. The Amended Credit
Agreement makes available to the Company the Amended Term Loan Facility of
$693.8 million and the Amended Revolving Credit Facility of $450.0 million.
As in the Existing Credit Agreement, the senior unsecured credit
facilities under the Amended Credit Agreement are composed of the Amended
Term Loan Facility and the Amended Revolving Credit Facility. The Amended
Revolving Credit Facility includes a $50.0 million letter of credit
sublimit. The Amended Credit Agreement maturity dates are extended
approximately three years for the Amended Term Loan Facility to March 31,
2004 and approximately two years for the Amended Revolving Credit Facility
to March 31, 2002.
As in the Existing Credit Agreement, both the Amended Term Loan
Facility and the Amended Revolving Credit Facility bear interest, at the
option of the Company, at (i) the base rate plus the applicable base rate
margin or (ii) the eurodollar rate plus the applicable eurodollar rate
margin. The Amended Credit Agreement provides that in the event of a
reduction of the percentage of Common Stock held by HLR, Roche Holdings and
their affiliates (other than the Company and its subsidiaries) below 25%,
the applicable interest margins and facility fees on borrowings outstanding
under the Amended Credit Agreement will increase. The amount of the
increase will depend, in part, on the leverage ratio of the Company at the
time of such reduction. In addition, pursuant to the Amended Credit
Agreement, the applicable interest margins on borrowings outstanding
thereunder will be based upon the leverage ratio.
Any lender that is party to the Amended Credit Agreement may serve as a
letter of credit issuer under the Amended Credit Agreement, as agreed
between the Company and such lender. The fronting fee payable to each
letter of credit issuer will be as negotiated between the Company and such
issuer, but will not exceed 0.125% per annum of the outstanding amount of
such issuer's letter of credit. Each lender will be deemed to have
purchased a participating interest in each letter of credit, and in addition
to the fronting fee the Company will pay a letters of credit fee for the
account of all the lenders equal to the applicable Amended Revolving Credit
Facility Eurodollar Rate Margin minus 0.125% per annum.
Total amortization of the Amended Term Loan Facility for each twelve-
month period following the consummation of the Rights Offering will be
reduced significantly for the first three years, and will be made (in
quarterly installments) in accordance with the following table:
Year Amount
---- ------
(in millions)
1997 $ --
1998 --
1999 50.0
2000 100.0
2001 150.0
2002 150.0
2003 150.0
3/31/2004 93.8
As in the Existing Credit Agreement, the amounts available under the
Amended Revolving Credit Facility are subject to certain mandatory permanent
reduction and prepayment requirements and the Amended Term Loan Facility is
subject to specified mandatory prepayment requirements. In the Amended
Credit Agreement, required amounts will first be applied to repay scheduled
Amended Term Loan Facility payments until the Amended Term Loan Facility is
repaid in full and then to reduce the commitments and advances under the
Amended Revolving Credit Facility. Required payments and reductions will
include (i) the proceeds of debt issuances, subject to certain exceptions;
(ii) the proceeds of certain asset sales, unless reinvested within one year
of the applicable asset sale in productive assets of a kind then used or
usable in the business of the Company and its subsidiaries; (iii) the
proceeds of sales of equity securities in excess of certain amounts; and
(iv) under certain circumstances, a percentage of excess cash flow, as
calculated annually.
The Amended Credit Agreement contains representations and warranties
substantially similar to those set forth in the Existing Credit Agreement.
Conditions precedent to effectiveness of the Amended Credit Agreement
include, without limitation, gross cash proceeds from the Rights Offering in
an aggregate amount equal to at least $250.0 million, receipt of appropriate
certificates and legal opinions, accuracy in all material respects of
representations and warranties, including absence of material adverse change
in the Company and its subsidiaries (taken as a whole) since December 31,
1996, absence of defaults, evidence of authority, and payment of transaction
fees.
The Amended Credit Agreement contains customary covenants similar to,
and in the case of limitations on acquisitions and incurrence of additional
debt more restrictive than, the covenants set forth in the Existing Credit
Agreement.
Like the Existing Credit Agreement, the Amended Credit Agreement
contains financial covenants with respect to a leverage ratio, an interest
coverage ratio and minimum stockholders' equity. The covenant levels are
less restrictive than under the Existing Credit Agreement, and will be
tested quarterly.
The Amended Credit Agreement contains events of default substantially
similar to those set forth in the Existing Credit Agreement.
Borrowings under the Revolving Credit Facility were $384.0 million as
of March 31, 1997. In addition, in December 1996, the Company received a
loan of $187.0 million from Roche Holdings to fund the Settlement Payment in
the form of a promissory note which bears interest at 6.625% per annum and
originally matured on March 31, 1997. As discussed above, in late March
1997, the Company obtained an extension of the Roche Loan to March 31, 1998.
The Company subsequently made the Settlement Payment in December 1996. The
Roche Loan is expected to be repaid with a portion of the proceeds from the
Rights Offering. Cash and cash equivalents on hand, cash flow from
operations and additional borrowing capabilities of $66.0 million under the
Revolving Credit Facility as of March 31, 1997 are expected to be sufficient
to meet anticipated operating requirements, debt repayments and provide
funds for capital expenditures and working capital through 1997. The
Company's ability to meet anticipated operating requirements, debt
repayments, including the Roche Loan, and other anticipated cash outlays
beyond 1997 is substantially dependant upon the completion of the Rights
Offering. Failure to complete the Rights Offering by the end of February
1998 will require additional waivers or amendments to the Existing Credit
Agreement and an extension of the Roche Loan. There can be no assurance
that such waivers, amendments or an extension can be obtained. Therefore,
the failure to complete the Rights Offering by the end of February 1998
could have a material adverse effect on the Company's financial condition
and liquidity.
At December 31, 1996, the Company was a party to interest rate swap
agreements with certain major financial institutions, rated A or better by
Moody's Investor Service, solely to manage its interest rate exposure with
respect to $600.0 million of its floating rate debt under the Term Loan
Facility. The agreements effectively changed the interest rate exposure on
$600.0 million of floating rate debt to a weighted average fixed interest
rate of 6.01%, through requiring that the Company pay a fixed rate amount in
exchange for the financial institutions paying a floating rate amount.
Amounts paid by the Company in 1996 were $2.0 million. The notional amounts
of the agreements are used to measure the interest to be paid or received
and do not represent the amount of exposure to credit loss. These agreements
mature in September 1998. The estimated cost at which the Company could
terminate such agreements was $0.9 million at December 31, 1996.
IMPACT OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128--
"EARNINGS PER SHARE"
On March 3, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," replacing Accounting Principles Board ("APB") Opinion No. 15,
"Earnings per Share." SFAS No. 128 replaces "primary" and "fully diluted"
earnings per share ("EPS") under APB Opinion No. 15 with "basic" and
"diluted" EPS. Unlike primary EPS, basic EPS excludes the dilutive effects
of options, warrants and other convertible securities. Dilutive EPS
reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted EPS. However, under SFAS
No. 128, the Company would use the average market price for its stock during
the reporting period to determine the cost of options as opposed to the
greater of the closing price at the end of the period or the average market
price during the period, as currently required by APB Opinion No. 15. SFAS
No. 128 is effective for years ending after December 15, 1997. The Company
is currently evaluating the impact of the implementation of SFAS No. 128.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in the statement. Included herein are
certain forward-looking statements concerning the Company's operations,
economic performance and financial condition, including, in particular,
forward-looking statements regarding the Company's expectation of future
performance following implementation of its new business strategy. Such
statements are subject to various risks and uncertainties. Accordingly, the
Company hereby identifies the following important factors that could cause
the Company's actual financial results to differ materially from those
projected, forecast, estimated, or budgeted by the Company in such forward-
looking statements.
(a) Heightened competition, including the intensification of price
competition.
(b) Impact of changes in payor mix, including the shift from traditional,
fee-for-service medicine to managed-cost health care.
(c) Adverse actions by governmental or other third-party payors,
including unilateral reduction of fee schedules payable to the
Company.
(d) The impact upon the Company's collection rates or general or
administrative expenses resulting from compliance with Medicare
administrative policies including specifically the HCFA's recent
requirement that laboratories performing certain automated blood
chemistry profiles to obtain and provide documentation of the medical
necessity of tests included in the profiles for each Medicare
beneficiary.
(e) Adverse results from investigations of clinical laboratories by the
Federal Bureau of Investigation and the OIG including specifically
significant monetary damages and/or exclusion from the Medicare and
Medicaid programs.
(f) Failure to obtain new customers, retain existing customers or
reduction in tests ordered or specimens submitted by existing
customers.
(g) Adverse results in significant litigation matters.
(h) Denial of certification or licensure of any of the Company's clinical
laboratories under CLIA, by Medicare and Medicaid programs or other
Federal, state or local agencies.
(i) Adverse publicity and news coverage about the Company or the clinical
laboratory industry.
(j) Inability to carry out marketing and sales plans.
(k) Inability to successfully integrate the operations of or fully realize
the costs savings expected from the consolidation of certain
operations and the elimination of duplicative expenses resulting
from the April 28, 1995 merger of the Company and RBL or risk that
declining revenues or increases in other expenses will offset such
savings.
(l) Ability of the Company to attract and retain experienced and qualified
personnel.
(m) Changes in interest rates causing an increase in the Company's
effective borrowing rate.
(n) The effect of the Company's effort to improve account profitability by
selectively repricing or discontinuing business with existing
accounts which perform below Company expectations.
(o) The failure to consummate the Rights Offering by the end of the second
quarter of 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index on Page F-1 of the Financial
Report included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
The information required by Part III, Items 10 through 13, of Form 10-K is
incorporated by reference from the registrant's definitive proxy statement
for its 1997 annual meeting of stockholders, which is to be filed pursuant
to Regulation 14A not later than April 30, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of documents filed as part of this Report:
(1) Consolidated Financial Statements and Independent
Auditors' Report included herein:
See Index on page F-1
(2) Financial Statement Schedules:
See Index on page F-1
All other schedules are omitted as they are inapplicable or the
required information is furnished in the Consolidated Financial Statements
or notes thereto.
(3) Index to and List of Exhibits
(a) Exhibits:*
Exhibits 10.1 through 10.3 and 10.6 through 10.13 are management
contracts or compensatory plans or arrangements.
2.1 - Agreement and Plan of Merger among the Company, NHL Sub
Acquisition Corp. and NHLI (incorporated herein by reference
to the Company's Registration Statement on Form S-4 filed
with the Securities and Exchange Commission
(the "Commission") on March 14, 1994, File No. 33-52655
(the "1994 S-4")).
2.2 - Agreement and Plan of Merger dated as of May 3, 1994 of
NHLI and N Acquisition Corp. (incorporated herein by
reference to Exhibit (c)(1) of Schedule 14D-1 and Schedule
13D ("Schedule 14D-1 and Schedule 13D") filed with the
Commission on May 9, 1994).
2.3 - Agreement dated as of June 7, 1994, among N Acquisition
Corp., the Company and NHLI (incorporated herein by
reference to Exhibit (c)(7) of amendment No. 2 to Schedule
14D-1 and Schedule 13D of NHLI and N Acquisition Corp filed
with the Commission on June 8, 1994).
2.4 - Agreement and Plan of Merger dated as of December 13, 1994
among the Company, HLR Holdings Inc., Roche Biomedical
Laboratories, Inc. and (for the purposes stated therein)
Hoffmann-La Roche Inc. (incorporated herein by reference to
the Company's Annual Report on Form 10-K for the year ended
December 31, 1994 filed with the Commission on March 3, 1995,
File No. 1-11353 (the "1994 10-K")).
2.5 - Stock Purchase Agreement dated December 30, 1994 between
Reference Pathology Holding Company, Inc. and Allied Clinical
Laboratories, Inc. ("Allied") (incorporated herein by
reference to the 1994 10-K).
3.1 - Certificate of Incorporation of the Company (amended
pursuant to a Certificate of Merger filed on April 28, 1995)
(incorporated by reference herein to the report on Form 8-K
dated April 28, 1995, filed with the Commission on May 12,
1995, File No. 1-11353 (the "April 28, 1995 Form 8-K")).
3.2 - Amended and Restated By-Laws of the Company (incorporated
herein by reference to the April 28, 1995 Form 8-K).
4.1 - Warrant Agreement dated as of April 10, 1995 between the
Company and American Stock Transfer & Trust Company
(incorporated herein by reference to the April 28, 1995
Form 8-K).
4.2 - Specimen of the Company's Warrant Certificate (included in
the Exhibit to the Warrant Agreement included therein as
Exhibit 4.1 hereto) (incorporated herein by reference to
the April 28, 1995 Form 8-K).
4.3 - Specimen of the Company's Common Stock Certificate
(incorporated herein by reference to the April 28, 1995
Form 8-K).
10.1 - National Health Laboratories Incorporated Employees'
Savings and Investment Plan (incorporated herein by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1991 filed with the Commission
on February 13, 1992, File No. 1-10740** (the "1991 10-K")).
10.2 - National Health Laboratories Incorporated Employees'
Retirement Plan (incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992 filed with the Commission on March 26,
1993, File No. 1-10740 (the "1992 10-K")).
10.3 - National Health Laboratories Incorporated Pension
Equalization Plan (incorporated herein by reference to the
1992 10-K).
10.4 - Settlement Agreement dated December 18, 1992 between the
Company and the United States of America (incorporated
herein by reference to the 1992 10-K).
10.5* - Settlement Agreement dated November 21, 1996 between the
Company and the United States of America.
10.6 - National Health Laboratories 1988 Stock Option Plan, as
amended (incorporated herein by reference to the Company's
Registration Statement on Form S-1 (No. 33-35782) filed
with the Commission on July 9, 1990 (the "1990 S-1")).
10.7 - National Health Laboratories 1994 Stock Option Plan
(incorporated herein by reference to the Company's
Registration Statement on Form S-8 filed with the Commission
on August 12, 1994, File No. 33-55065).
10.8 - Laboratory Corporation of America Holdings Performance Unit
Plan (incorporated by reference to Annex II of the Company's
1995 Annual Proxy Statement filed with the Commission on
August 17, 1995 (the "1995 Proxy")).
10.9 - Laboratory Corporation of America Holdings Annual Bonus
Incentive Plan (incorporated by reference to Annex III of
the 1995 Proxy).
10.10 - Laboratory Corporation of America Holdings Master Senior
Executive Severence Plan (incorporated herein by reference
to the report on Form 8-K dated October 24, 1996 (the
"October 24, 1996 8-K") filed with the Commission on
October 24, 1996, File No. 1-11353).
10.11 - Special Severance Agreement dated June 28, 1996 between the
Company and Timothy J. Brodnik (incorporated herein by
reference to the October 24, 1996 8-K).
10.12 - Special Severance Agreement dated July 12, 1996 between the
Company and John F. Markus (incorporated herein by
reference to the October 24, 1996 8-K).
10.13 - Special Severance Agreement dated June 28, 1996 between the
Company and Robert E. Whalen (incorporated herein by
reference to the October 24, 1996 8-K).
10.14 - Tax Allocation Agreement dated as of June 26, 1990 between
MacAndrews & Forbes Holding Inc., Revlon Group
Incorporated, New Revlon Holdings, Inc. and the
subsidiaries of Revlon set forth on Schedule A thereto
(incorporated herein by reference to the 1990 S-1).
10.15 - Loan Agreement dated August 1, 1991 among the Company,
Frequency Property Corp. and Swiss Bank Corporation, New
York Branch (incorporated herein by reference to the 1991
10-K).
10.16 - Sharing and Call Option Agreement dated as of December 13,
1994 among HLR Holdings Inc., Roche Biomedical
Laboratories, Inc., Mafco Holdings Inc., National Health
Care Group, Inc. and (for the purposes stated therein) the
Company (incorporated by reference herein to the 1994 10-K).
10.17 - Stockholder Agreement dated as of April 28, 1995 among the
Company, HLR Holdings Inc., Hoffmann-La Roche Inc. and Roche
Holdings, Inc. (incorporated herein by reference to the
April 28, 1995 Form 8-K).
10.18 - Exchange Agent Agreement dated as of April 28, 1995 between
the Company and American Stock Transfer & Trust Company
(incorporated herein by reference to the April 28, 1995
Form 8-K).
10.19 - Credit Agreement dated as of April 28, 1995, among the
Company, the banks named therein, and Credit Suisse (New
York Branch), as Administrative Agent (incorporated herein
by reference to the April 28, 1995 Form 8-K).
10.20 - First Amendment to Credit Agreement dated as of September
8, 1995 among the Company, the banks named therein, and Credit
Suisse (New York Branch), as Administrative Agent.
(incorporated by reference herein to the Company's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995 filed with the Commission on November 14,
1995, File No. 1-11353).
10.21 - Second Amendment to Credit Agreement dated as of February
16, 1996 among the Company, the banks named therein, and
Credit Suisse (New York Branch), as Administrative Agent
(incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995
filed with the Commission on March 29, 1996, File No.
1-11353).
10.22 - Third Amendment and Second Waiver to Credit Agreement dated
as of July 10, 1996 among the Company, the banks named
therein and Credit Suisse (New York Branch) as
Administrative Agent (incorporated herein by reference to
the Company's quarterly report on Form 10-Q for the quarter
ended June 30, 1996 filed with the Commission on August 14,
1996, File No. 1-11353).
10.23 - Fourth Amendment to the Credit Agreement dated as of
September 23, 1996 among the Company, the banks named
therein and Credit Suisse (New York Branch), as
Administrative Agent (incorporated herein by reference to
the report in Form 8-K dated September 23, 1996, filed
with the Commission on September 30, 1996, File No. 1-11353).
10.24 - Third Waiver to the Credit Agreement dated as of November
4, 1996 among the Company, the banks named therein and Credit
Suisse (New York Branch), as Administrative Agent
(incorporated herein by reference to the Company's
quarterly report on Form 10-Q for the quarter ended
September 30, 1996 filed with the Commission on November
14, 1996, File No. 1-11353).
10.25 - Fifth Amendment and Fourth Waiver to the Credit Agreement
dated as of December 23, 1996 among the Company, the banks
named therein and Credit Suisse (New York Branch), as
Administrative Agent (incorporated herein by reference to
the report on Form 8-K filed with the Commission on January
6, 1997, File No. 1-11353 (the "January 6, 1997 8-K")).
10.26* - Fifth Waiver to the Credit Agreement dated as of January
27, 1997 among the Company, the banks named therein and Credit
Suisse (New York Branch) as Administrative Agent.
10.27* - Sixth Amendment and Waiver to the Credit Agreement dated as
of March 31, 1997 among the Company, the banks named
therein and Credit Suisse First Boston as Administrative
Agent.
10.28* - Amended and Restated Credit Agreement dated as of March 31,
1997 among the Company, the banks named therein and Credit
Suisse First Boston as Administrative Agent.
10.29 - Laboratory Corporation of America Holdings 1995 Stock Plan
for Non-Employee Directors (incorporated by reference
herein to the report of Form S-8 dated September 26, 1995,
filed with the Commission on September 26, 1995).
10.30 - Laboratory Corporation of America Holdings 1997 Employee
Stock Purchase Plan (incorporated by reference herein to
Annex I of the Company's 1996 Annual Proxy Statement filed
with the Commission on October 25, 1996.
10.31 - Promissory note dated December 30, 1996 between the Company
and Roche Holdings Inc. (incorporated herein by reference
to the January 6, 1997 8-K).
10.32* - First Amendment to promissory note given by the Company to
Roche Holdings Inc.
21.1* - List of Subsidiaries of the Company
23.1* - Consent of KPMG Peat Marwick LLP.
24.1* - Power of Attorney of Jean-Luc Belingard
24.2* - Power of Attorney of Wendy E. Lane
24.3* - Power of Attorney of Robert E. Mittelstaedt, Jr.
24.4* - Power of Attorney of James B. Powell, M.D.
24.5* - Power of Attorney of David B. Skinner
24.6* - Power of Attorney of Andrew G. Wallace, M.D.
27 - Financial Data Schedule (electronically filed version
only).
(b) Reports on Form 8-K
1) A current report on Form 8-K dated November 21, 1996 was filed on
November 20, 1996 in connection with the Company's press release dated
November 21, 1996 announcing a settlement agreement with the U.S.
Government as well as certain other information.
2) A current report on Form 8-K dated December 4, 1996 was filed on
December 4, 1996 in connection with the resignation of the Company's
Chief Operating Officer.
3) A current report on Form 8-K dated December 30, 1996 was filed on
January 6, 1997 in connection with promissory note between the Company
and Roche Holdings Inc and an amendment to the Company's Credit agreement.
------------------------
* Filed herewith.
** Previously filed under File No. 0-17031 which has been corrected to
File No. 1-10740.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
LABORATORY CORPORATION OF AMERICA HOLDINGS
------------------------------------------
Registrant
By:/s/ THOMAS P. MAC MAHON
----------------------------------
Thomas P. Mac Mahon
Chairman of the Board, President
and Chief Executive Officer
Dated: April 9, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on April 9, 1997 in the
capacities indicated.
Signature Title
--------- -----
/s/ THOMAS P. MAC MAHON Chairman of the Board,
------------------------------------- President and Chief
Thomas P. Mac Mahon Executive Officer
(Principal Executive Officer)
/s/ WESLEY R. ELINGBURG Executive Vice President,
------------------------------------- Chief Financial Officer
Wesley R. Elingburg and Treasurer
(Principal Financial
Officer and Principal
Accounting Officer)
/s/ JEAN-LUC BELINGARD* Director
-------------------------------------
Jean-Luc Belingard
/s/ WENDY E. LANE* Director
-------------------------------------
Wendy E. Lane
/s/ ROBERT E. MITTELSTAEDT, JR.* Director
-------------------------------------
Robert E. Mittelstaedt, Jr.
/s/ JAMES B. POWELL, M.D.* Director
-------------------------------------
James B. Powell, M.D.
/s/ DAVID B. SKINNER, M.D.* Director
-------------------------------------
David B. Skinner, M.D.
/s/ ANDREW G. WALLACE, M.D.* Director
-------------------------------------
Andrew G. Wallace, M.D.
--------------------------------
* Bradford T. Smith, by his signing his name hereto, does hereby sign this
report on behalf of the directors of the Registrant after whose typed names
asterisks appear, pursuant to powers of attorney duly executed by such
directors and filed with the Securities and Exchange Commission.
By:/s/ BRADFORD T. SMITH
--------------------------------------
Bradford T. Smith
Attorney-in-fact
LABORATORY CORPORATION OF AMERICA HOLDINGS
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULE
Page
----
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for
each of the years in the three-year
period ended December 31, 1996. F-4
Consolidated Statements of Stockholders'
Equity for each of the years in the
three-year period ended December 31, 1996 F-5
Consolidated Statements of Cash Flows for
each of the years in the three-year
period ended December 31, 1996. F-6
Notes to Consolidated Financial Statements F-8
Financial Statement Schedule:
II - Valuation and Qualifying Accounts and Reserves F-31
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Laboratory Corporation of America Holdings:
We have audited the consolidated financial statements of Laboratory
Corporation of America Holdings and subsidiaries as listed in the
accompanying index. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedule
as listed in the accompanying index. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Laboratory Corporation of America Holdings and subsidiaries as of December
31, 1996 and 1995, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
Raleigh, North Carolina
February 14, 1997 except for Notes 9
and 10 as to which the date is March 31, 1997.
[Download Table]
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share data)
December 31,
----------------------------
1996 1995
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 29.3 $ 16.4
Accounts receivable, net 505.6 426.8
Inventories 44.3 50.1
Prepaid expenses and other 21.8 21.4
Deferred income taxes 66.2 63.3
Income taxes receivable 54.3 21.9
------- -------
Total current assets 721.5 599.9
Property, plant and equipment, net 282.9 304.8
Intangible assets, net 891.1 916.7
Other assets, net 21.5 15.8
------- -------
$1,917.0 $1,837.2
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 65.7 $ 106.2
Accrued expenses and other 168.4 173.5
Current portion of long-term debt 18.7 70.8
------- -------
Total current liabilities 252.8 350.5
Loan from affiliate 187.0 --
Revolving credit facility 371.0 218.0
Long-term debt, less current portion 693.8 712.5
Capital lease obligation 9.8 9.6
Other liabilities 144.5 135.0
Stockholders' equity:
Preferred stock, $0.10 par value;
10,000,000 shares authorized;
none issued -- --
Common stock, $0.01 par value;
220,000,000 shares authorized;
122,935,080 and 122,908,722 shares
issued and outstanding at
December 31, 1996 and 1995, respectively 1.2 1.2
Additional paid-in capital 411.0 411.0
Accumulated deficit (154.1) (0.6)
------- -------
Total stockholders' equity 258.1 411.6
------- -------
$ 1,917.0 $1,837.2
======== =======
<FN>
See notes to consolidated financial statements.
</FN>
[Download Table]
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
Years Ended December 31,
-------------------------------
1996 1995 1994
-------- ------- --------
Net Sales $1,607.7 $1,432.0 $ 872.5
Cost of sales 1,183.9 1,024.3 597.0
------- ------- ------
Gross profit 423.8 407.7 275.5
Selling, general and
administrative expenses 305.0 238.5 149.3
Amortization of intangibles
and other assets 29.6 27.0 16.3
Restructuring and non-recurring charges 23.0 65.0 --
Provision for settlements
and related expenses 185.0 10.0 --
------ ------- ------
Operating income (loss) (118.8) 67.2 109.9
Other income (expenses):
Litigation settlement and
related expenses -- -- (21.0)
Investment income 2.2 1.4 1.0
Interest expense (71.7) (65.5) (34.5)
------ ------- ------
Earnings (loss) before income taxes
and extraordinary loss (188.3) 3.1 55.4
Provision for income taxes (34.8) 7.1 25.3
------- ------- ------
Earnings (loss) before extraordinary
loss (153.5) (4.0) 30.1
Extraordinary loss from early
extinguishment of debt, net of
income tax benefit of $5.2 -- (8.3) --
Net earnings (loss) $ (153.5) $ (12.3) $ 30.1
======= ======= ======
Earnings (loss) per common share:
Earnings (loss) per common share
before extraordinary item $ (1.25) $ (0.03) $ 0.36
Extraordinary loss per common share -- (0.08) --
------- ------- ------
Net earnings (loss) per common share $ (1.25) $ (0.11) $ 0.36
======= ======= ======
Dividends per common share $ -- $ -- $ 0.08
======= ======= ======
<FN>
See notes to consolidated financial statements.
</FN>
[Download Table]
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in millions, except per share data)
Common
Stock Minimum
$0.01 Additional Pension
Par Paid-in Retained Liability Treasury
Value Capital Earnings Adjustment Stock Total
----- ---------- -------- ---------- -------- -----
Balance, December 31, 1993 $ 1.0 $ 226.3 $ 202.0 $ (2.4) $(286.1) $140.8
Net earnings -- -- 30.1 -- -- 30.1
Exercise of stock options -- 0.1 -- -- -- 0.1
Dividends to stockholders -- -- (6.8) -- -- (6.8)
Retirement of treasury
stock (0.2) (72.3) (213.6) -- 286.1 --
Adjustment for minimum
pension liability -- -- -- 2.4 -- 2.4
Other -- (0.6) -- -- -- (0.6)
----- ------- ------ ----- ------ ------
Balance, December 31, 1994 0.8 153.5 11.7 -- -- 166.0
Net loss -- -- (12.3) -- -- (12.3)
Exercise of stock options -- 0.2 -- -- -- 0.2
Cancellation of stock
options -- 6.9 -- -- -- 6.9
Distribution to
stockholders (0.2) (474.5) -- -- -- (474.7)
Issuance of common stock 0.6 674.6 -- -- -- 675.2
Issuance of warrants -- 51.0 -- -- -- 51.0
Other -- (0.7) -- -- -- (0.7)
----- ------- ------ ----- ------ ------
Balance, December 31, 1995 1.2 411.0 (0.6) -- -- 411.6
Net loss -- -- (153.5) -- -- (153.5)
----- ------- ------ ----- ------ ------
Balance, December 31, 1996 $ 1.2 $ 411.0 $(154.1) $ -- $ -- $ 258.1
===== ======= ====== ===== ====== ======
<FN>
See notes to consolidated financial statements.
</FN>
[Download Table]
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions, except per share data)
Years Ended December 31,
------------------------------
1996 1995 1994
-------- ------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (153.5) $(12.3) $ 30.1
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Restructuring and non-recurring
charges 23.0 65.0 --
Provision for settlements and
related expenses 185.0 10.0 21.0
Extraordinary loss, net of
income tax benefit -- 8.3 --
Depreciation and amortization,
net 84.5 72.4 44.4
Deferred income taxes, net 30.3 (21.6) 11.0
Provision for doubtul accounts,
net 22.2 12.4 (1.4)
Change in assets and liabilities,
net of effects of acquisitions:
Increase in accounts receivable (102.2) (58.6) (54.0)
Decrease(increase)in inventories 8.0 5.1 (0.9)
Decrease(increase)in prepaid
expenses and other (3.1) 1.0 5.1
Change in income taxes
receivable/payable, net (32.4) (11.7) 5.5
Increase(decrease)in accounts
payable, accrued expenses
and other (33.4) 27.9 (13.1)
Payments for restructuring and
non-recurring charges (18.8) (13.4) --
Payments for settlement and
related expenses (188.9) (32.1) (29.8)
Other, net (7.5) (5.4) (3.2)
------- ------- -------
Net cash provided by (used for)
operating activities (186.8) 47.0 14.7
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (54.1) (75.4) (48.9)
Proceeds from sale of subsidiary -- -- 10.1
Acquisitions of businesses (5.0) (39.6) (254.8)
------- ------- -------
Net cash used for investing
activities (59.1) (115.0) (293.6)
------- ------- -------
(continued)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(Dollars in millions, except per share data)
Years Ended December 31,
-------------------------------
1996 1995 1994
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit
facilities $ 293.0 $ 308.0 $ 308.0
Payments on revolving credit
facilities (140.0) (303.0) (373.0)
Proceeds from long-term debt -- 800.0 400.0
Loan from affiliate 187.0 -- --
Payments on long-term debt (70.8) (446.7) (20.0)
Deferred payments on acquisitions (10.4) (12.9) (7.6)
Dividends paid on common stock -- -- (13.6)
Distribution to stockholders -- (474.7) --
Cash received for issuance of common
stock -- 135.7 --
Cash received for issuance of warrants -- 51.0 --
Other -- 0.2 (0.4)
------- ------- -------
Net cash provided by
financing activities 258.8 57.6 293.4
------- ------- -------
Net increase (decrease) in cash
and cash equivalents 12.9 (10.4) 14.5
Cash and cash equivalents at
beginning of year 16.4 26.8 12.3
------- ------- -------
Cash and cash equivalents at
end of year $ 29.3 $ 16.4 $ 26.8
======= ======= =======
Supplemental schedule of cash
flow information:
Cash paid during the period for:
Interest $ 65.1 $ 58.6 $ 34.2
Income taxes (15.2) 27.2 14.8
Disclosure of non-cash financing
and investing activities:
Common stock issued in connection
with acquisition -- 539.5 --
Common stock issued in connection
with the cancellation of employee
stock options -- 6.9 --
In connection with business
acquisitions, liabilities were
assumed as follows:
Fair value of assets acquired $ 23.4 $ 777.7 $ 399.4
Cash paid (5.0) (39.6) (254.8)
Stock issued -- (539.5) --
------- ------- ------
Liabilities assumed $ 18.4 $ 198.6 $ 144.6
======= ======= =======
<FN>
See notes to consolidated financial statements.
</FN>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
Laboratory Corporation of America Holdings is one of the three largest
independent clinical laboratory companies in the United States based on 1996
net revenues. Through a national network of laboratories, the Company
offers a broad range of testing services used by the medical profession in
the diagnosis, monitoring and treatment of disease and other clinical
states. Since its founding in 1971, the Company has grown into a network of
28 major laboratories and approximately 1,500 service sites consisting of
branches, patient service centers and STAT laboratories, serving clients in
48 states.
The consolidated financial statements include the accounts of
Laboratory Corporation of America Holdings and its subsidiaries ("Company")
after elimination of all material intercompany accounts and transactions.
Prior to April 28, 1995, the Company's name was National Health Laboratories
Holdings Inc. ("NHL"). On April 28, 1995, following approval at a special
meeting of the stockholders of the Company, the name of the Company was
changed to Laboratory Corporation of America Holdings.
Cash Equivalents:
Cash equivalents (primarily investments in money market funds, time
deposits and commercial paper which have original maturities of three months
or less at the date of purchase) are carried at cost which approximates
market.
Inventories:
Inventories, consisting primarily of laboratory supplies, are stated at
the lower of cost (first-in, first-out) or market.
Financial Instruments:
Interest rate swap agreements, which are used by the Company in the
management of interest rate exposure, are accounted for on an accrual basis.
Amounts to be paid or received under such agreements are recognized as
interest income or expense in the periods in which they accrue.
Property, Plant and Equipment:
Property, plant and equipment are recorded at cost. The cost of
properties held under capital leases is equal to the lower of the net
present value of the minimum lease payments or the fair value of the
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
leased property at the inception of the lease. Depreciation and
amortization expense is computed on all classes of assets based on their
estimated useful lives, as indicated below, using principally the
straight-line method.
Years
-----
Buildings and building improvements 35-40
Machinery and equipment 3-10
Furniture and fixtures 5-10
Leasehold improvements and assets held under capital leases are
amortized over the shorter of their estimated lives or the period of the
related leases. Expenditures for repairs and maintenance charged against
earnings in 1996, 1995 and 1994 were $34.2, $28.3 and $16.5, respectively.
Fair Value of Financial Instruments:
Statement of Financial Accounting Standards ("SFAS") No. 107,
"Disclosures About Fair Value of Financial Instruments", requires that fair
values be disclosed for most of the Company's financial instruments. The
carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses are considered to be representative of their
respective fair values. The carrying amount of the revolving credit
facility and long-term debt are considered to be representative of their
respective fair values as their interest rates are based on market rates.
The carrying value of the loan from affiliate is considered to be
representative of its fair value due to the related party nature of the
obligation.
Concentration of Credit Risk:
Concentrations of credit risk with respect to accounts receivable are
limited due to the diversity of the Company's clients as well as their
dispersion across many different geographic regions.
Revenue Recognition:
Sales are recognized on the accrual basis at the time test results are
reported, which approximates when services are provided. Services are
provided to certain patients covered by various third-party payor programs
including the Medicare and Medicaid programs. Billings for services under
third-party payor programs are included in sales net of allowances for
differences between the amounts billed and estimated program payment
amounts. Adjustments to the estimated payment amounts based on final
settlement with the programs are recorded upon settlement. In 1996, 1995
and 1994, approximately 23%,
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
28% and 35%, respectively, of the Company's revenues were derived from tests
performed for beneficiaries of Medicare and Medicaid programs.
Income Taxes:
The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes" ("Statement 109"). Under the asset and liability method
of Statement 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Under Statement 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Stock Option Plans:
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board
(OAPBO) Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. As such, compensation expense would be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted SFAS
No. 123, "Accounting for Stock-Based Compensation", which permits entities
to recognize as expense over the vesting period the fair value of all stock-
based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma earnings per share disclosures
for employee stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123.
Earnings per Common Share:
For the years ended December 31, 1996, 1995 and 1994, earnings per
common share is calculated based on the weighted average number of shares
outstanding during each year (122,919,767, 110,579,096, and 84,754,183
shares, respectively).
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Actual results could differ from
those estimates.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of:
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
on January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net
cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value
of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. Adoption of this
Statement did not have a material impact on the Company's financial
position, results of operations, or liquidity.
Intangible assets, consisting of goodwill, net of amortization, of
$696.1 and $700.1 at December 31, 1996 and 1995, respectively, and other
intangibles (i.e., customer lists and non-compete agreements), net of
amortization, of $195.0 and $216.6 at December 31, 1996 and 1995,
respectively, are being amortized on a straight-line basis over a period of
40 years and 3-25 years, respectively. Total accumulated amortization for
intangible assets aggregated $116.9 and $87.4 at December 31, 1996 and 1995,
respectively.
Reclassifications:
Certain amounts in the prior years' financial statements have been
reclassified to conform with the 1996 presentation.
2. MERGER AND ACQUISITIONS
In April 1995, the Company completed a merger (the "Merger") with Roche
Biomedical Laboratories, Inc. ("RBL"). In connection with the Merger, the
Company issued 61,329,256 shares of Common Stock to HLR Holdings Inc.
("HLR") and Roche Holdings Inc. ("Roche") in exchange for all outstanding
shares of RBL and $135.7 in cash. The exchange consideration of
approximately $558.0 for the purchase of RBL consisted of the value of the
stock issued to HLR and Roche, as
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
well as other cash costs of the Merger, net of cash received from HLR. In
June 1994, the Company acquired Allied Clinical Laboratories, Inc.
("Allied") for approximately $191.5 in cash plus the assumption of $24.0 of
Allied indebtedness (the "Allied Acquisition"). The Allied Acquisition and
the Merger have been accounted for under the purchase method of accounting;
as such, the acquired assets and liabilities were recorded at their
estimated fair values on the date of acquisition. RBL's and Allied's results
of operations have been included in the Company's results of operations
since April 28, 1995 and June 23, 1994, respectively.
During 1996, the Company acquired four small clinical laboratory
companies for an aggregate purchase price, including assumption of
liabilities, of $23.4. During 1995 and 1994, the Company acquired nine and
eleven laboratories, respectively, for an aggregate purchase price,
including assumption of liabilities, of $41.7 and $79.3, respectively. The
acquisitions were accounted for as purchase transactions. The excess of
cost over the fair value of net tangible assets acquired during 1996, 1995
and 1994 was $22.5, $28.2, and $72.1, respectively, which is included under
the caption "Intangible assets, net" in the accompanying consolidated
balance sheets. The consolidated statements of operations reflect the
results of operations of these purchased businesses from dates of
acquisition.
3. RESTRUCTURING AND NON-RECURRING CHARGES
In the second quarter of 1996, the Company recorded certain charges of
a non-recurring nature including additional charges related to the
restructuring of operations. The Company recorded a restructuring charge
totaling $13.0 for the shutdown of its La Jolla, California administrative
facility and other workforce reductions. This amount includes approximately
$8.1 for severance, $3.5 for the future lease obligation of the La Jolla
facility and $1.4 for the write down of leasehold improvements and fixed
assets that will be abandoned or disposed of. The La Jolla facility was
substantially closed by the end of 1996. The remaining workforce reductions
took place in other areas of the Company and were substantially completed by
the end of 1996. The net work force reduction as a result of these
activities was approximately 250 employees. Payments for severance are
expected to continue through 1997.
In addition, the Company recorded certain non-recurring charges in the
second quarter of 1996 related to further integration after the Merger. The
Company decided to abandon certain data processing systems and therefore
wrote off approximately $6.7 in capitalized software costs. In addition,
the Company relocated its principal drug testing facility to accommodate
consolidation of the RBL and Company operations and will incur approximately
$1.3 in costs primarily related to the write-off of leasehold improvements
and building clean up. Finally, the Company recorded a charge of $2.0
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
for various other items including the write-off of certain supplies related
to changes in testing methodologies to increase efficiency. As a result of
these changes, some supplies were not compatible with the new testing
methods and were disposed of.
Following the Merger in 1995, the Company determined that it would be
beneficial to close Company laboratory facilities in certain geographic
regions where duplicate Company and RBL facilities existed at the time of
the Merger. As a result, the Company recorded a restructuring charge of
$65.0 in the second quarter of 1995. As part of the Company's evaluation of
its future obligations under these restructuring activities, certain changes
in the estimates were made during the quarter ended June 30, 1996. These
resulted in the reclassification of certain accruals in the categories
listed below although the total liability did not change. These
restructuring activities have been substantially completed as of December
31, 1996 and have resulted in a net reduction of approximately 1,600
employees.
[Download Table]
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
The following represents the Company's restructuring activities for the
period indicated:
Asset Lease and
Severance revaluations other facility
Costs and write-offs obligations Total
--------- -------------- -------------- -----
Balance at
December 31, 1994 $ -- $ -- $ -- $ --
Restructuring charges 24.2 21.3 19.5 65.0
Non cash items (0.3) (2.7) -- (3.0)
Cash payments (11.1) -- (0.6) (11.7)
------ ------ ----- ------
Balance at
December 31, 1995 $ 12.8 $ 18.6 $ 18.9 $ 50.3
Restructuring charges 8.1 1.4 3.5 13.0
Reclassifications 1.6 0.7 (2.3) --
Non cash items -- (11.3) -- (11.3)
Cash payments (14.2) -- (3.2) (17.4)
------ ----- ------ -----
Balance at
December 31, 1996 $ 8.3 $ 9.4 $ 16.9 $ 34.6
===== ====== ===== =====
Current $ 25.5
Non-current 9.1
-----
$ 34.6
=====
4. ACCOUNTS RECEIVABLE, NET
December 31, December 31,
1996 1995
----------- -----------
Gross accounts receivable $ 617.2 $ 517.2
Less contractual allowances and
allowance for doubtful accounts (111.6) (90.4)
------ ------
$ 505.6 $ 426.8
====== ======
5. PROPERTY, PLANT AND EQUIPMENT, NET
December 31, December 31,
1996 1995
----------- -----------
Land $ 9.2 $ 7.0
Buildings and building improvements 64.2 54.7
Machinery and equipment 289.3 268.1
Leasehold improvements 58.3 70.3
Furniture and fixtures 27.0 27.3
Buildings under capital leases 9.6 9.6
------ ------
457.6 437.0
Less accumulated depreciation
and amortization (174.7) (132.2)
------ ------
$ 282.9 $ 304.8
====== ======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
6. ACCRUED EXPENSES AND OTHER
December 31, December 31,
1996 1995
----------- -----------
Employee compensation and benefits $ 49.5 $ 50.5
Deferred acquisition related payments 12.9 14.8
Acquisition related reserves 17.2 39.4
Restructuring reserves 25.5 32.3
Accrued taxes 15.4 14.0
Interest payable 12.8 7.4
Other 35.1 15.1
------ ------
$ 168.4 $ 173.5
====== ======
7. OTHER LIABILITIES
December 31, December 31,
1996 1995
----------- -----------
Deferred acquisition related payments $ 14.8 $ 8.5
Acquisition related reserves 12.3 68.2
Restructuring reserves 9.1 18.0
Deferred income taxes 38.7 5.1
Post-retirement benefit obligation 27.0 25.1
Other 42.6 10.1
------ ------
$ 144.5 $ 135.0
====== ======
8. SETTLEMENTS
As previously discussed in the Company's December 31, 1995 10-K, the
Office of Inspector General ("OIG") of Health and Human Services and the
Department of Justice ("DOJ") had been investigating certain past laboratory
practices of the predecessor companies of the Company - NHL, RBL and Allied.
On November 21, 1996, the Company reached a settlement with the OIG and the
DOJ regarding the prior billing practices of these predecessor companies
(the "1996 Government Settlement"). Consistent with this overall settlement,
the Company paid $187.0 to the Federal Government in December 1996 (the
"Settlement Payment") with proceeds from a loan from Roche (the "Roche
Loan"). As a result of negotiations related to the 1996 Government
Settlement, the Company recorded a charge of $185.0 in the third quarter of
1996 (the "Settlement Charge") to increase reserves for the 1996 Government
Settlement described above, and other related expenses of government and
private claims resulting therefrom.
In the second quarter of 1995, the Company took a pre-tax special
charge of $10.0 in connection with the estimated costs of settling various
claims pending against the Company, substantially all of which were billing
disputes with various third party payors
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
relating to the contention that NHL improperly included tests for HDL
cholesterol and serum ferritin in its basic test profile without clearly
offering an alternative profile that did not include these medical tests.
As of December 31, 1996, the majority of these disputes have been settled.
In the third quarter of 1994, the Company approved a settlement of
previously disclosed shareholder class and derivative litigation. The
litigation consisted of two consolidated class action suits and a
consolidated shareholder derivative action brought in Federal and state
courts in San Diego, California. The settlement involved no admission of
wrongdoing. In connection with the settlement, the Company took a pre-tax
special charge of $15.0 and a $6.0 charge for expenses related to the
settled litigation. Insurance payments and payments from other defendants
aggregated $55.0 plus expenses.
9. LONG-TERM DEBT
The Company entered into a credit agreement dated as of April 28, 1995
(the "Existing Credit Agreement"), with the banks named therein (the
"Banks") and Credit Suisse First Boston, as administrative agent (the "Bank
Agent"), under which the Banks made available to the Company a senior term
loan facility of $800.0 (the "Term Loan Facility") and a revolving credit
facility of $450.0 (the "Revolving Credit Facility" and, together with the
Term Loan Facility, the "Bank Facility"). The Bank Facility is
unconditionally and irrevocably guaranteed by certain of the Company's
subsidiaries.
As a result of potential defaults under the Existing Credit Agreement,
resulting from, among other things, the Company's performance and higher
than projected debt levels, the Settlement Charge and the Roche Loan, the
Company has obtained several amendments and waivers to the Existing Credit
Agreement. In September 1996, the Company negotiated an amendment (the
"Fourth Amendment") to the Existing Credit Agreement. The Fourth Amendment
modified the interest coverage and leverage ratios applicable to the
quarters ending September 30 and December 31, 1996. The Fourth Amendment
also increased the interest rate margin on its revolving credit facility
from 0.25% to 0.875% and increased the interest rate margin on its term loan
facility from 0.375% to 1.00%. As a result of the Settlement Charge in the
third quarter of 1996, as described above, the Company obtained a waiver
(the "Third Waiver") which excluded the special charge from covenant
calculations for the periods covered by the most recent amendment until 30
days after the 1996 Government Settlement. As a result of the Roche Loan
and the 1996 Government Settlement, the Company negotiated a Fifth Amendment
and Fourth Waiver (the "Fifth Amendment") to the Existing Credit Agreement.
The Fifth Amendment extended the Third Waiver until January 31, 1997 and
excluded the Roche Loan from covenant calculations for the quarters ending
December 31, 1996 and March 31,
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
1997. On January 27, 1997, the Company negotiated a waiver (the "Fifth
Waiver") which further extended the Third Waiver until March 31, 1997.
In March 1997, the Company entered into the Sixth Amendment and Waiver
(the "Sixth Amendment") which eliminates amortization payments on the Term
Loan Facility for 1997 and modifies the interest coverage and leverage
ratios for the quarterly periods through December 31, 1997. As a result of
the Sixth Amendment certain amounts outstanding under the Revolving Credit
Facility and Term Loan Facility that were classified as current liabilities
in the September 30, 1996 financial statements have been reclassified to
long-term debt in the December 31, 1996 financial statements. Pursuant to
this amendment, the Company paid an amendment fee of 37.5 basis points on
commitments and will pay an additional fee of 62.5 basis points if the
Rights Offering, as described in Note 17, is not completed by June 30, 1997.
Under the Sixth Amendment, maturities under the Term Loan Facility aggregate
$243.8, $162.5, $187.5 and $100.0 in 1998 through 2001, respectively.
In March 1997, the Company also entered into an amended and restated
credit agreement (the "Amended Credit Agreement") which will become
effective upon completion of the Rights Offering following satisfaction of
certain conditions precedent. The Amended Credit Agreement makes available
to the Company a term loan facility of $693.8 (the "Amended Term Loan
Facility") and a $450.0 revolving credit facility (the "Amended Revolving
Credit Facility"). The Amended Revolving Credit Facility will include a
$50.0 letter of credit sublimit. The maturities under the Amended Credit
Agreement are extended approximately three years for the Amended Term Loan
Facility to March 31, 2004 and approximately two years for the Amended
Revolving Credit Facility to March 31, 2002.
As in the Existing Credit Agreement, both the Amended Term Loan
Facility and the Amended Revolving Credit Facility bear interest, at the
option of the Company, at (i) the base rate plus the applicable base rate
margin or (ii) the eurodollar rate plus the applicable eurodollar rate
margin. The Amended Credit Agreement provides that in the event of a
reduction of the percentage of Common Stock held by HLR, Roche Holdings and
their affiliates (other than the Company and its subsidiaries) below 25%,
the applicable interest margins and facility fees on borrowings outstanding
under the Amended Credit Agreement will increase. The amount of the
increase will depend, in part, on the leverage ratio of the Company at the
time of such reduction. In addition, pursuant to the Amended Credit
Agreement, the applicable interest margins on borrowings outstanding
thereunder are based upon the leverage ratio.
Total amortization of the Amended Term Loan Facility for each twelve-
month period following the closing date of the Rights Offering will be
reduced significantly for the first three years, and will be
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
made (in quarterly installments) in accordance with the following table:
Year Amount
---- -------
1997 $ --
1998 --
1999 50.0
2000 100.0
2001 150.0
2002 150.0
2003 150.0
3/31/2004 93.8
Conditions precedent to effectiveness of the Amended Credit Agreement
include, without limitation, gross cash proceeds from the Rights Offering in
an aggregate amount equal to at least $250.0, receipt of appropriate
certificates and legal opinions, accuracy in all material respects of
representations and warranties, including absence of material adverse change
in the Company and its subsidiaries (taken as a whole) since December 31,
1996, absence of defaults and material litigation, evidence of authority,
and payment of transaction fees.
The Amended Credit Agreement contains customary covenants similar to,
and in the case of limitations on acquisitions and incurrence of additional
debt more restrictive than, the covenants set forth in the Existing Credit
Agreement.
Like the Existing Credit Agreement, the Amended Credit Agreement
contains financial covenants with respect to a leverage ratio, an interest
coverage ratio and minimum stockholders' equity. The covenant levels are
less restrictive than under the Existing Credit Agreement, and will be
tested quarterly.
At December 31, 1996, the Company was a party to interest rate swap
agreements with certain major financial institutions, rated A or better by
Moody's Investor Service, solely to manage its interest rate exposure with
respect to $600.0 of its floating rate debt under the Term Loan Facility.
The agreements effectively changed the interest rate exposure on $600.0 of
floating rate debt to a weighted average fixed interest rate of 6.01%,
through requiring that the Company pay a fixed rate amount in exchange for
the financial institutions paying a floating rate amount. Amounts paid by
the Company in 1996 were $2.0. The notional amounts of the agreements are
used to measure the interest to be paid or received and do not represent the
amount of exposure to credit loss. These agreements mature in September
1998. The estimated cost at which the Company could terminate these
agreements as of December 31, 1996 was approximately $0.9. The fair value
was estimated by discounting the
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
expected cash flows using rates currently available for interest rate swaps
with similar terms and maturities.
In connection with the repayment of existing revolving credit and term
loan facilities in 1995, the Company recorded an extraordinary loss of
approximately $13.5 ($8.3 net of tax), consisting of the write-off of
deferred financing costs, related to the early extinguishment of debt.
Prior to April 28, 1995, the Company had a credit agreement with a
group of banks which provided the Company with a $400.0 term loan facility
and a revolving credit facility of $350.0. This credit agreement provided
funds for the Allied Acquisition, to refinance certain existing debt of
Allied and the Company, and for general corporate purposes. The credit
agreement was repaid in full on April 28, 1995. At December 31, 1994, the
Company's effective borrowing rate on this credit agreement was 8.16%.
10. LOAN FROM AFFILIATE
In December 1996, the Company financed the Settlement Payment with the
proceeds of a $187.0 loan from Roche. The promissory note bears interest at
6.625% per annum and was originally due March 31, 1997. In March 1997, the
Company renegotiated the term of the note and it is now due March 31, 1998.
The note is unsecured and ranks pari passu with the Company's bank
obligations. The Company subsequently made the Settlement Payment in
December 1996.
11. STOCKHOLDERS' EQUITY
In connection with a corporate reorganization on June 7, 1994, all of
the 14,603,800 treasury shares held by National Health Laboratories
Incorporated were canceled. As a result, the $286.1 cost of such treasury
shares was eliminated with corresponding decreases in the par value,
additional paid-in capital and retained earnings accounts of $0.2, $72.3 and
$213.6, respectively.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
12. INCOME TAXES
[Download Table]
The provisions for income taxes in the accompanying consolidated
statements of operations consist of the following:
Years Ended December 31,
------------------------------
1996 1995 1994
-------- -------- --------
Current:
Federal $ (54.4) $ 10.4 $ 16.2
State 2.3 1.5 3.0
------ ------ ------
(52.1) 11.9 19.2
------ ------ ------
Deferred:
Federal 15.2 (4.6) 4.9
State 2.1 (0.2) 1.2
------ ------ ------
17.3 (4.8) 6.1
------ ------ ------
$ (34.8) $ 7.1 $ 25.3
====== ====== ======
The effective tax rates on earnings before income taxes is reconciled
to statutory federal income tax rates as follows:
[Download Table]
Years Ended December 31,
------------------------------
1996 1995 1994
-------- ------- ------
Statutory federal rate (35.0)% 35.0% 35.0%
State and local income taxes,
net of federal income tax benefit (3.0) 28.0 4.9
Non deductible amortization of
intangible assets 3.0 166.0 4.9
Change in valuation allowance 17.0 -- --
Other (0.5) 7.0 0.9
----- ----- -----
Effective rate (18.5)% 236.0% 45.7%
===== ===== =====
The significant components of deferred income tax expense are as
follows:
[Download Table]
Years Ended December 31,
------------------------------
1996 1995 1994
-------- -------- ---------
Acquisition related reserves $ 2.7 $ (17.7) $ (1.2)
Settlement and related expenses -- 8.8 2.5
Reserve for doubtful accounts (9.5) (4.3) 0.9
Insurance accrual (1.9) -- --
Change in valuation allowance 32.0 -- --
Other (6.0) 8.4 3.9
----- ------ -----
$ 17.3 $ (4.8) $ 6.1
===== ====== =====
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1995 are as follows:
[Download Table]
December 31, December 31,
1996 1995
----------- ----------
Deferred tax assets:
Settlement and related expenses,
principally due to accrual for
financial reporting purposes $ 19.2 $ 1.8
Accounts receivable, principally due
to allowance for doubtful accounts 31.1 21.9
Self insurance reserves, principally
due to accrual for financial
reporting purposes 7.9 4.8
Postretirement benefit obligation,
principally due to accrual for
financial reporting purposes 10.7 9.9
Compensated absences, principally due
to accrual for financial reporting
purposes -- --
Acquisition related reserves,
principally due to accrual for
financial reporting purposes 43.1 81.0
State net operating loss carryforwards 11.8 7.4
Other 18.1 13.7
------ ------
141.9 140.5
Less valuation allowance (32.0) --
------ ------
Net deferred tax asset 109.9 140.5
Deferred tax liabilities:
Intangible assets, principally due to
differences in amortization (60.2) (59.5)
Property, plant and equipment,
principally due to differences in
depreciation (20.9) (16.4)
Other (1.3) (6.4)
------ ------
Total gross deferred tax liabilities (82.4) (82.3)
------ ------
Net deferred tax asset $ 27.5 $ 58.2
====== ======
There was no valuation allowance for deferred tax assets as of December
31, 1995 and 1994. At December 31, 1996 the valuation allowance for
deferred tax assets was $32.0. Realization of the deferred tax assets
related to the state net operating loss carry forwards, the post retirement
benefit obligation as well as certain other temporary differences is
considered uncertain, and therefore a valuation allowance has been
established for these items. The
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
Company believes that it is more likely than not that the results of future
operations and carry back availability will generate sufficient taxable
income to realize the remaining deferred tax assets.
13. STOCK OPTIONS
In 1988, the Company adopted the 1988 Stock Option Plan, reserving
2,000,000 shares of common stock for issuance pursuant to options and stock
appreciation rights that may be granted under the plan. The Stock Option
Plan was amended in 1990 to limit the number of options to be issued under
the Stock Option Plan to 550,000 in the aggregate (including all options
previously granted). In 1991, the number of shares authorized for issuance
under the Stock Option Plan was increased to an aggregate of 2,550,000.
In 1994, the Company adopted the 1994 Stock Option Plan, reserving
3,000,000 shares of common stock for issuance pursuant to options and stock
appreciation rights that may be granted under the plan.
In connection with the Merger, all options outstanding as of December
13, 1994 became vested and employees were given the choice to (i) cancel
options outstanding as of December 13, 1994 and receive cash and shares of
common stock according to a formula included in the merger agreement or (ii)
convert such options into new options based on a formula included in the
merger agreement. The amount of cash and shares of common stock issued was
equal to the product of (i) the number of shares of common stock subject to
such options submitted for cancellation and (ii) the excess of (1) $18.50
over (2) the per share exercise price of such options (such product, the
"Option Value Amount"). The Option Value Amount was paid as follows: 40% of
such amount was paid in cash, and 60% of such amount (the "Option Stock
Amount") was paid in the number of shares of common stock obtained by
dividing the Option Stock Amount by $15.42. In connection with the
cancellation of stock options, the Company paid a total of $5.5 in cash and
issued 538,307 shares of common stock to option holders. The value of such
amounts were considered transaction costs of the merger and therefore were
not treated as compensation expense. Also, a total of 562,532 options were
reissued as a result of option conversions at exercise prices between
$11.293 and $16.481.
At December 31, 1996, there were 3,427,316 additional shares available
for grant under the Company's Stock Option Plans. There were no options
granted in 1996. The per share weighted-average fair value of stock options
granted during 1995 was $8.54 per share on the date of grant using the Black
Scholes option-pricing model with the following weighted-average
assumptions: - expected dividend yield
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
0.0%, risk-free interest rate of 6.86%, and an expected life of ten years.
The Company applies the provisions of APB Opinion No. 25 in accounting
for its Plan and, accordingly, no compensation cost has been recognized for
its stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the CompanyOs net income would have been reduced
to the pro forma amounts indicated below:
[Download Table]
Years ended
December 31,
1996 1995
---------- ---------
Net loss As reported $ (153.5) $ (12.3)
Pro forma (154.7) (14.5)
Earnings per share As reported $ (1.25) $ (0.11)
Pro forma (1.26) (0.13)
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
optionsO vesting period of two years and compensation cost for options
granted prior to January 1, 1995 is not considered.
The following table summarizes grants of non-qualified options made by
the Company to officers and key employees under both plans. Stock options
are generally granted at an exercise price equal to or greater than the fair
market price per share on the date of grant. Also, for each grant,
one-third of the options vested on the date of grant and one-third vest on
each of the first and second anniversaries of such date, subject to their
earlier expiration or termination.
Changes in options outstanding under the plans for the periods indicated
were as follows:
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
Weighted Average
Number Exercise price
of Options per Option
----------- ---------------
Outstanding at January 1, 1994 1,564,336 $17.366
Granted 2,042,000 $12.600
Exercised (11,125) $ 7.717
Canceled or expired (92,498) $16.649
----------
Outstanding at December 31, 1994 3,502,713 $14.637
Granted 1,378,000 $13.000
Merger-related grants 562,532 $15.870
Exercised (20,542) $10.297
Merger-related cancellations (3,459,167) $14.653
Canceled or expired (222,291) $14.816
----------
Outstanding at December 31, 1995 1,741,245 $14.637
Canceled or expired (443,027) $14.104
----------
Outstanding at December 31, 1996 1,298,218 $14.637
==========
Exercisable at December 31, 1996 993,429 $13.748
==========
The weighted average remaining life of options outstanding at December
31, 1996 is approximately 8.4 years.
14. COMMITMENTS AND CONTINGENCIES
The Company is involved in certain claims and legal actions arising in
the ordinary course of business. In the opinion of management, based upon
the advice of counsel, the ultimate disposition of these matters will not
have a material adverse effect on the financial position or results of
operations of the Company.
Under the Company's present insurance programs, coverage is obtained
for catastrophic exposures as well as those risks required to be insured by
law or contract. The Company is responsible for the uninsured portion of
losses related primarily to general, product and vehicle liability and
workers' compensation. The self-insured retentions are on a per occurrence
basis without any aggregate annual limit. Provisions for losses expected
under these programs are recorded based upon the Company's estimates of the
aggregated liability of claims incurred. At December 31, 1996 and 1995, the
Company had provided letters of credit aggregating approximately $17.6 and
$8.6, respectively, primarily in connection with certain insurance programs.
During 1991, the Company guaranteed a $9.0, five-year loan to a third
party for construction of a new laboratory to replace one of the Company's
existing facilities. Following its completion in November of 1992, the
building was leased to the Company by this
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
third party. Such transaction is treated as a capital lease for financial
reporting purposes. The associated lease term continues for a period of 15
years, expiring in 2007. Under the terms of this guarantee, as modified,
the Company is required to maintain 105% of the outstanding loan balance
including any overdue interest as collateral in a custody account
established and maintained at the lending institution. As of December 31,
1996 and 1995, the Company had placed $9.5 of investments in the custody
account. Such investments are included under the caption "Other assets,
net" in the accompanying consolidated balance sheets.
The Company does not anticipate incurring any loss as a result of this
loan guarantee due to protection provided by the terms of the lease.
Accordingly, the Company, if required to repay the loan upon default of the
borrower (and ultimate lessor), is entitled to a rent abatement equivalent
to the amount of repayment made by the Company on the borrower's behalf,
plus interest thereon at a rate equal to 2% over the prime rate.
The Company leases various facilities and equipment under non-
cancelable lease arrangements. Future minimum rental commitments for leases
with noncancellable terms of one year or more at December 31, 1996 are as
follows:
Operating Capital
--------- --------
1997 44.9 1.6
1998 36.3 1.7
1999 29.4 1.8
2000 24.2 1.9
2001 16.5 2.0
Thereafter 65.9 13.1
------ -----
Total minimum lease payments 217.2 22.1
Less amount representing
interest -- 12.3
------ -----
Total minimum operating
lease payments and
present value of minimum
capital lease payments $ 217.2 $ 9.8
====== =====
Rental expense, which includes rent for real estate, equipment and
automobiles under operating leases, amounted to $70.6, $60.4 and
$34.6 for the years ended December 31, 1996, 1995 and 1994, respectively.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
15. PENSION AND POSTRETIREMENT PLANS
The Company maintains a defined contribution pension plan for all
eligible employees. Eligible employees are defined as individuals who are
age 21 or older and have been employed by the Company for at least six
consecutive months and completed 1,000 hours of service. Company
contributions to the plan are based on a percentage of employee
contributions. The cost of this plan was $7.5, $5.8, and $3.6 in 1996,
1995, and 1994, respectively.
In addition, substantially all employees of the Company are covered by
a defined benefit retirement plan (the "Company Plan"). The benefits to be
paid under the Company Plan are based on years of credited service and
average final compensation.
Effective December 31, 1994, the Company adopted certain amendments to
the Company Plan which resulted in a decrease of approximately $9.5 in the
projected benefit obligation.
Under the requirements of SFAS No. 87, "Employers Accounting for
Pensions", the Company recorded an additional minimum pension liability
representing the excess accumulated benefit obligation over plan assets at
December 31, 1993. A corresponding amount was recognized as an intangible
asset to the extent of unrecognized prior service cost, with the balance
recorded as a separate reduction of stockholders' equity.
The Company recorded an additional liability of $3.0, an intangible
asset of $0.6, and a reduction of stockholders' equity of $2.4. Such
amounts were eliminated as a result of the amendments to the Company Plan
effective December 31, 1994.
In connection with the Merger, the Company assumed obligations under
the RBL defined benefit pension plan ("RBL Plan"). Effective July 1, 1995,
the plan was amended to provide benefits similar to the Company Plan, as
amended. Certain employees of RBL were grandfathered so that their benefits
were not affected by the amendment. On January 1, 1996, the two plans were
merged.
The Company's policy is to fund the Company Plan with at least the
minimum amount required by applicable regulations. The components of net
periodic pension cost for each of the RBL plans are summarized as follows:
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
Company Plan RBL Plan
------------------ -------------------
Years ended Eight months ended
December 31, December 31,
1996 1995 1994 1995
------------------- -------------------
Service cost $10.3 $3.2 $5.5 $ 2.6
Interest cost 7.0 2.7 3.5 2.3
Actual return on
plan assets (11.9) (7.6) 0.1 (4.3)
Net amortization and
deferral 3.3 4.2 (1.4) 1.2
----- ---- ---- -----
Net periodic pension cost $ 8.7 $2.5 $7.7 $ 1.8
===== ===== ===== ======
The status of the plans are as follows:
Company Plan RBL Plan
-------------- ------------
December 31, December 31,
1996 1995 1995
-------------- ------------
Actuarial present value
of benefit obligations:
Vested benefits $ 86.2 $ 36.2 $ 38.8
Non-vested benefits 11.2 4.4 6.4
----- ----- -----
Accumulated benefit obligation 97.4 40.6 45.2
Effect of projected future
salary increases 6.3 2.2 1.6
----- ----- -----
Projected benefit obligation 103.7 42.8 46.8
Fair value of plan assets,
principally corporate equity
securities and fixed income
investments 96.2 40.8 46.6
----- ----- -----
Unfunded projected benefit
obligation 7.5 2.0 0.2
Unrecognized prior service cost 17.4 6.6 12.7
Unrecognized net loss (14.9) (7.1) (9.4)
----- ----- -----
Accrued pension cost $ 10.0 $ 1.5 $ 3.5
===== ===== =====
Assumptions used in the accounting for the plans were as follows:
Company Plan RBL Plan
------------- -----------
1996 1995 1995
------------- -----------
Weighted average discount rate 7.75% 7.5% 7.5%
Weighted average rate of increase
in future compensation levels 4.0% 4.0% 5.4%
Weighted average expected long-
term rate of return 9.0% 9.0% 9.5%
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
In addition, the Company assumed obligations under RBL's postretirement
medical plan effective with the Merger. Effective July 1, 1995, coverage
under the plan was restricted to certain existing RBL employees. This plan
is unfunded and the Company's policy is to fund benefits as claims are
incurred. The components of postretirement benefit expense are as follows:
Year ended Eight months ended
December 31, December 31,
1996 1995
------------ ------------------
Service cost $ 0.9 $ 1.1
Interest cost 1.4 1.4
----- -----
Postretirement benefit costs $ 2.3 $ 2.5
====== ======
The status of the plan is as follows:
December 31,
1996 1995
----------------
Accumulated postretirement benefit
obligation $ 28.6 $ 27.2
Unrecognized net loss (1.6) (2.1)
------ -----
Accrued post retirement benefit obligation $ 27.0 $ 25.1
====== =====
The weighted average discount rate used in the calculation of the
accumulated postretirement benefit obligation and the net postretirement
benefit cost was 7.85% and 7.6%, respectively. The health care cost trend
rate was assumed to be 8.5%, declining gradually to 5.0% in the year 2006,
remaining level thereafter. The health care cost trend rate has a
significant effect on the amounts reported. To illustrate, a one percentage
point increase in the assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation as of December 31, 1996 by
approximately $5.2, and the aggregate of the service and interest components
of 1996 net periodic postretirement benefit cost by approximately $0.5.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
16. QUARTERLY DATA (UNAUDITED)
[Download Table]
The following is a summary of unaudited quarterly data:
Year ended December 31, 1996
-------------------------------------------------
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----------
Net sales $ 403.9 $ 410.0 $ 402.6 $ 391.2 $1,607.7
Gross profit 100.6 109.5 102.5 111.2 423.8
Net earnings 5.9 (14.2) (146.4) 1.2 (153.5)
Earnings per
common share 0.05 (0.12) (1.19) 0.01 (1.25)
Year ended December 31, 1995
------------------------------------------------
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----------
Net sales $ 243.8 $ 367.3 $ 417.5 $ 403.4 $1,432.0
Gross profit 79.5 108.9 117.8 101.5 407.7
Earnings (loss) before
extraordinary item 12.8 (31.6) 14.4 0.4 (4.0)
Extraordinary item -- (8.3) -- -- (8.3)
Net earnings (loss) 12.8 (39.9) 14.4 0.4 (12.3)
Earnings (loss) per
common share before
extraordinary loss 0.15 (0.28) 0.12 -- (0.03)
Extraordinary loss
per common share -- (0.08) -- -- (0.08)
Earnings (loss) per
common share 0.15 (0.36) 0.12 -- (0.11)
In the third quarter of 1996, the Company recorded a charge of
$185.0 to increase reserves related to the 1996 Government Settlement and
other related expenses of government and private claims resulting therefrom.
In the second quarter of 1996, the Company recorded a charge of $23.0
relating to the shutdown of its La Jolla administrative facility and other
non-recurring charges. In addition, the company recorded an additional
$10.0 provision for doubtful accounts which was based on the Company's
determination that additional reserves were needed, based on trends that
became evident in the second quarter, for lower collection rates primarily
from Medicare.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
In the fourth quarter of 1995, the Company recorded an additional $15.0
of provision for doubtful accounts which reflects the Company's
determination, based on trends that became evident in the fourth quarter,
that additional reserves were needed primarily to cover potentially lower
collection rates from several third-party payors.
In the second quarter of 1995, the Company took a pre-tax special
charge of $65.0 to cover the costs of the restructuring plan related to the
Merger. The charge includes approximately $24.2 to reduce the workforce,
$21.3 to reduce certain assets to their net realizable values, and $19.5 for
lease and other facility obligations. Also in the second quarter of 1995,
the Company took a pre-tax special charge of $10.0 in connection with the
estimated costs of settling various claims pending against the Company,
substantially all of which are billing disputes, in which the Company
believes it is probable that settlements will be made by the Company.
In connection with the repayment of existing revolving credit and term
loan facilities, the Company recorded an extraordinary loss of approximately
$13.5 ($8.3 net of tax) in the second quarter of 1995, consisting of the
write-off of deferred financing costs, related to the early extinguishment
of debt.
17. SUBSEQUENT EVENT (UNAUDITED)
In February 1997, the Company filed a registration statement with the
Securities and Exchange Commission (the "Commission") relating to the
proposed offering of an aggregate of $500.0 of convertible preferred stock
issuable in two series pursuant to transferable subscription rights to be
granted on a pro rata basis to each stockholder of the Company (the "Rights
Offering"). Rights holders who exercise their rights in full will also be
entitled to subscribe for additional shares of preferred stock issuable
pursuant to any unexercised rights.
The subscription rights will give the holder thereof the option of
purchase one of two series of preferred stock, each of which will be
convertible at the option of the holder into common stock. One series will
pay cash dividends and will be exchangeable at the Company's option for
convertible subordinated notes due 2012. The other series will pay
dividends in kind and will not be exchangeable for notes. Each series of
preferred stock will be mandatorily redeemable in 2012 and will be
redeemable at the option of the Company after three years.
The Company has recently been contacted by representatives of certain
insurance companies, and individuals in a purported class action, who
have asserted claims for private reimbursement which are similar to the
Government claims recently settled. The Company is carefully evaluating
these claims, however, due to the early stage of the claims, the
ultimate outcome cannot presently be predicted.
| 10-K405 | Last “Page” of 34 | TOC | 1st | Previous | Next | ↓Bottom | Just 34th |
|---|
[Download Table]
Schedule II
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 31, 1996, 1995 and 1994
(Dollars in Millions)
--------------------------------------------------------------------------------
Balance Charged Other
at to costs (Deduct- Balance
beginning Acquis- and ions) at end
of year itions expenses Additions of year
--------------------------------------------------------------------------------
Year ended December 31, 1996:
Applied against asset
accounts:
Contractual allowances
and allowance for
doubtful accounts $ 90.4 $ -- $ 148.8 $ (127.6) $ 111.6
===== ==== ====== ======= ======
Year ended December 31, 1995:
Applied against asset
accounts:
Contractual allowances
and allowance for
doubtful accounts $ 65.3 $ 33.2 $ 147.6 $ (155.7) $ 90.4
===== ===== ====== ======= ======
Year ended December 31, 1994
Applied against asset
accounts:
Contractual allowances
and allowance for
doubtful accounts $ 51.0 $ 18.5 $ 91.5 $ (95.7) $ 65.3
===== ===== ====== ====== ======
Dates Referenced Herein and Documents Incorporated by Reference
↑Top
Filing Submission 0000920148-97-000012 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
About — Privacy — Redactions — Help —
Thu., Apr. 25, 7:12:40.1am ET 
