Amendment to Annual Report — [x] Reg. S-K Item 405 — Form 10-K
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1: 10-K405/A Amendment to Annual Report -- [x] Reg. S-K Item 83 361K
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2: EX-10.34 Material Contract 7 34K
3: EX-10.35 Material Contract 1 10K
4: EX-10.36 Material Contract 2 14K
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7: EX-12.1 Statement re: Computation of Ratios 2 11K
8: EX-23.1 Consent of Experts or Counsel 1 9K
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10: EX-24.1 Power of Attorney 6 24K
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10-K405/A — Amendment to Annual Report — [x] Reg. S-K Item 405
Document Table of Contents
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
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EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1998
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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
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LABORATORY CORPORATION OF AMERICA HOLDINGS
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3757370
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
358 SOUTH MAIN STREET, BURLINGTON, NORTH CAROLINA 27215
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(Address of principal executive offices) (Zip Code)
336-229-1127
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(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, $0.01 par value New York Stock Exchange
Common Stock Purchase Warrants Currently not listed
Preferred Stock,$.10 par value-Series A New York Stock Exchange
Preferred Stock $.10 par value-Series B 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: $117,669,240 at February 28, 1999.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 126,250,216
shares at February 28, 1999, of which 61,329,256 shares are held by
indirect wholly owned subsidiaries of Roche Holdings Ltd. The number of
warrants outstanding to purchase shares of the issuer's common stock is
22,151,308 as of February 28, 1999, of which 8,325,000 are held by an
indirect wholly owned subsidiary of Roche Holdings Ltd.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Laboratory Corporation of America Holdings (the "Company"),
headquartered in Burlington, North Carolina, is the largest
independent clinical laboratory company in the United States based
on 1998 net revenues. Through a national network of laboratories,
the Company offers more than 2,000 different clinical laboratory
tests which are used by the medical profession in routine testing,
patient diagnosis, and in the monitoring and treatment of disease.
Since its founding in 1971, the Company has grown into a network of
25 major laboratories and approximately 1,500 service sites
consisting of branches, patient service centers and STAT
laboratories, serving clients in 50 states.
The Company was formerly known as National Health Laboratories
Holdings, Inc. ("NHL"). In conjunction with a merger ("Merger") in
1995 with Roche Biomedical Laboratories, Inc. ("RBL"), an indirect
subsidiary of Roche Holdings, Inc. ("Roche"), the Company changed
its name to Laboratory Corporation of America Holdings.
RECENT DEVELOPMENTS
See "General" section of "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
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 1998 approximately 48% of the
clinical testing revenues in the United States were derived by
hospital-based laboratories, approximately 13% were derived by
physicians in their offices and laboratories and approximately 39%
were derived by independent clinical laboratories. The Health Care
Financing Administration ("HCFA") of the Department of Health and
Human Services ("HHS") has estimated that in 1998 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 over the past three to five years, 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 organizations 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
organizations have used capitated payment contracts in an attempt to
fix the cost of laboratory testing services for their enrollees.
Under a capitated payment contract, the clinical laboratory and the
managed care organization 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, 1998 such contracts accounted for approximately $90.0
million in net sales. The increase in managed care and insurance
companies attempts to control utilization of medical services overall
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, added costs and
decreased 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. 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 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 may lead to future 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 25 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 234,000 patient specimens per day in 1998. 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 2,000 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 25 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 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. The
following are specialty and niche businesses in which the Company
offers testing and related services:
Infectious Disease. The Company provides complete viral load
testing as well as HIV genotyping and phenotyping. The Company's
exclusive rights to this technology, in partnership with Belgian-
based Virco, puts it in the forefront of HIV drug resistance
testing-one of the most important issues surrounding the
treatment of HIV.
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. Management believes it is now the largest
provider of identity testing services in the United States.
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.
Occupational Testing Services. 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 drug 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. The Company also provides other
analytical testing and a variety of management support services.
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, 1998, 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 frequently reimbursed 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 for each covered member. The tests covered under
agreements of this type are negotiated for each contract, but
usually include 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, 1998 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
1998 Accession
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Private Patients 3 - 5% $70 - 80
Medicare, Medicaid and
Insurance 20 - 25% $20 - 30
Commercial Clients 40 - 45% $15 - 25
Managed Care 30 - 35% $10 - 40
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 for 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 hospitals to achieve their 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 1998, the Company added 58 alliance
agreements with hospitals, physician groups and other health care
provider organizations representing approximately $23 million of
annual sales.
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,
1998, the Company employed 216 generalists and 52 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, 1998, the Company employed 213 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 specialist 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. During 1998, one of the Company's
goals has been 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 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 1998, information systems activities have been focused on
consolidation of the Company's multiple laboratory and billing
systems to standardized laboratory testing and billing systems. The
Company has established regional data centers to more effectively
handle 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. Implementation of the
billing systems conversion began in 1997 and is expected to be
completed over the next two to three years. During 1998, the
Company capitalized approximately $15.8 million in information
systems development and implementation costs related directly or
indirectly to billing systems. The Company anticipates capitalizing
an additional $5.0 to $10.0 million in such development and
implementation costs during 1999.
See "Impact of the Year 2000 Issue" section of "Management's
Discussion and Analysis of Financial Condition and Results of
Operations".
BILLING
Billing for laboratory services is a complex 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
intricate 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.
The Company's bad debt expense has increased in the last few
years principally due to three developments that have further
complicated the billing process: i) increased complexities in the
billing process due to requirements of managed care payors; ii)
increased medical necessity and diagnosis code requirements; and iii)
existence of multiple billing information systems. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Although there can be no assurance of success, the Company has
developed a number of initiatives to address the complexity of the
billing process and to improve collection rates. These initiatives
include: i) installation of personal computer based products in
client offices and Company locations to help with the accuracy and
completeness of billing information captured on the front-end; ii)
establishment of a project group to focus on improvements in order
entry; and iii) development and implementation of enhanced eligibility
checking to compare information to payor records before billing.
Additionally, the Company believes that it can benefit from the
conversion of its multiple billing systems into a centralized
system. Currently, 55% of the Company's billing is performed on
this centralized system. By the end of 1999, the Company plans to
have approximately 70% of its billing performed on the centralized
system.
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
adherence to the 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.
During 1998, the Company's forensic crime laboratory, located
at the Company's Center for Molecular Biology and Pathology in
Research Triangle Park, North Carolina, was accredited by the
American Society of Crime Laboratory Directors, Laboratory
Accreditation Board ("ASCLD/LAB") in the category of DNA testing.
Under the Crime Laboratory Accreditation Program managed by the
ASCLD/LAB, a crime laboratory undergoes a comprehensive and in-depth
inspection to demonstrate that its management, operations,
employees, procedures and instruments, physical plant and security,
and personnel safety procedures meet stringent quality standards.
The Company is one of 174 ASCLD accredited crime laboratories
worldwide, and is one of only three private crime laboratories
holding the accreditation. Accreditation is granted for a period of
five years provided that a laboratory continues to meet the
standards during that period.
COMPETITION
The clinical laboratory business is intensely competitive. The
Company believes that in 1998 the entire United States clinical
laboratory testing industry had revenues exceeding $32 billion;
approximately 48% of such revenues were attributable to hospital-
affiliated laboratories, approximately 39% were attributable to
independent clinical laboratories and approximately 13% were
attributable to physicians in their offices and laboratories. There
are presently three national independent clinical laboratories: the
Company; Quest, which had approximately $1.5 billion in revenues
from clinical laboratory testing in 1998; and SmithKline, which had
approximately $1.6 billion in revenues from clinical laboratory
testing in 1998.
During February, 1999, Quest announced that it had signed a
definitive agreement to acquire the clinical laboratory operations
of SmithKline. The transaction is expected to be completed early in
the second half of 1999.
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 laboratory 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 February 28, 1999, the Company employed approximately 18,800
people. These include approximately 18,300 full-time equivalent
employees and approximately 500 part-time employees. A subsidiary
of the Company has one collective bargaining agreement which covers
approximately 36 employees. The Company 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 twenty-five to thirty 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 1998 and 1997, the Company
derived approximately 22% and 20%, 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. In August 1997, Congress passed and the
President signed the Balanced Budget Act of 1997 ("BBA"), which
included a provision that reduced, effective January 1, 1998, the
Medicare national limitations from 76% of the 1984 national median
to 74% of the 1984 national median. An additional provision in the
BBA freezes the Consumer Price Index update for five years. 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.
On April 1, 1997, the Health Care Financing Administration's
("HCFA") new Automated Chemistry Profile Rules went into effect.
The policy, which was developed by HCFA working with the American
Medical Association, eliminates the old commonly used "19-22 test"
automated chemistry profile, sometimes referred to as a "SMAC" and
replaces it with four new panels of "clinically relevant" automated
tests (each containing from four to twelve chemistry tests). As a
result of these new requirements, all major laboratory companies,
including the Company, were required to eliminate the old chemistry
profiles from their standard test requisition forms and standard
test offerings by July 1, 1998. The Company developed and
implemented a new "universal" test requisition and "standard test
offerings" which successfully incorporated all required changes by
the July 1, 1998 deadline. Estimated out-of-pocket costs associated
with these changes are over $5.0 million. The Company is unable to
estimate the indirect costs associated with these changes. However,
personnel time and effort to roll-out the new forms to clients has
been significant.
These new rules are intended to reduce the number of non-
Medicare covered "screening tests" which Medicare believes have in
the past been inappropriately billed to Medicare. Due to the
variety of new rules (including limited coverage rules) which have
been adopted recently to address this issue, the Company does not
believe a meaningful estimate of the potential revenue impact of
this new rule can be made at this time. The Company's analysis to
date does not indicate a currently measurable impact on revenues.
The Company will continue to monitor this issue going forward.
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. However, based on currently
available information, the Company is unable to predict what type of
legislation, if any, will be enacted into law.
Fraud and Abuse Regulations
The Medicare and Medicaid anti-kickback laws prohibit
intentionally providing 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 Office of the Inspector General ("OIG") of
HHS 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 pick-up 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, the 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-
compliance 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 Department of Justice ("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 Clinical Laboratories, Inc.
("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 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 acquisition of Allied
by NHL. 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.
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.
The Company is involved in litigation which purports to be a
class action brought on behalf of certain patients, private insurers
and benefit plans that paid for laboratory testing services during
the time frame covered by the 1996 Government Settlement. The
Company has also received certain similar claims brought on behalf
of certain other insurance companies, some of which have been
resolved for immaterial amounts. These claims for private
reimbursement are similar to the government claims settled in 1996.
However, no amount of damages has been specified at this time and,
with the exception of the above, no settlement discussions have
taken place. The Company is carefully evaluating these claims,
however, due to the early stage of the claims, the ultimate outcome
of these claims cannot presently be predicted.
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 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, 1998.
Approximate
Area Nature of
Location (in square feet) Occupancy
--------------------- ---------------- -----------
Operating Facilities:
Birmingham, Alabama 100,000 Lease expires 2005
Phoenix, Arizona 55,000 Lease expires 2009;
two 5 year renewal
options
San Diego, California 72,000 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
Approximate
Area Nature of
Location (in square feet) Occupancy
------------------------ ---------------- ---------
Operating Facilities cont.:
Reno, Nevada 16,000 Owned
14,000 Lease expires 2003;
2 year renewal
options
Raritan, New Jersey 187,000 Owned
Uniondale, New York 108,000 Lease expires 2007;
two 5 year renewal
options
Burlington, North Carolina 275,000 Owned
Charlotte, North Carolina 25,000 Lease expires 1999;
two 1 year renewal
options
Research Triangle Park, 71,000 Lease expires 2008,
North Carolina three 5 year renewal
options
111,000 Lease expires 2011;
three 5 year renewal
options
Winston-Salem, 10,000 Lease expires 2009;
North Carolina one 5 year renewal
option
Dublin, Ohio 82,000 Owned
Memphis, Tennessee 30,000 Lease expires 1999;
one 5 year renewal
option
Dallas, Texas 56,000 Lease expires 2004;
one 5 year renewal
option
Houston, Texas 70,000 Lease expires 2012;
two 5 year renewal
options
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;
three 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
Kent, Washington 42,000 Lease expires 2000;
two 5 year renewal
options
Fairmont, West Virginia 25,000 Lease expires 2005;
three 5 year renewal
options
Administrative facilities:
Burlington, North Carolina 237,000 Owned
208,000 Leases expire 1999-
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 is involved in litigation which purports to be a
class action brought on behalf of certain patients, private insurers
and benefit plans that paid for laboratory testing services during
the time frame covered by the 1996 Government Settlement. The
Company has also received certain similar claims brought on behalf
of certain other insurance companies, some of which have been
resolved for immaterial amounts. These claims for private
reimbursement are similar to the government claims settled in 1996.
However, no amount of damages has been specified at this time and,
with the exception of the above, no settlement discussions have
taken place. The Company is carefully evaluating these claims.
However, due to the early stage of the claims, the ultimate outcome
of these claims cannot presently be predicted.
The Company is also involved in certain claims and legal
actions arising in the ordinary course of business. These matters
include, but are not limited to, inquiries from governmental
agencies and Medicare or Medicaid carriers requesting comment on
allegations of billing irregularities that are brought to their
attention through billing audits or third parties. In the opinion
of management, based upon the advice of counsel and consideration of
all facts available at this time, the ultimate disposition of these
matters will not have a material adverse effect on the financial
position, results of operations or liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
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
----- -----
1997
First Quarter 4 2 1/2
Second Quarter 3 7/8 2 3/8
Third Quarter 2 3/4 2 1/2
Fourth Quarter 2 7/8 1 5/16
High Low
----- ------
1998
First Quarter 2 3/16 1 9/16
Second Quarter 2 3/4 1 13/16
Third Quarter 2 7/16 1 1/8
Fourth Quarter 1 7/8 1 3/16
High Low
----- -----
1999
First Quarter (through February 28, 1999) 2 5/16 1 1/4
On February 28, 1999 there were 1,055 holders of record of the
Common Stock.
In 1994, the Company 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 the years ended December 31, 1998 and December 31, 1997 are
derived from consolidated financial statements of the Company, which
have been audited by PricewaterhouseCoopers LLP, independent
accountants. 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 three-year period ended December
31, 1996 are derived from consolidated financial statements of the
Company, which have been audited by KPMG LLP, independent
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.
Year Ended December 31,
--------------------------------------
1998 1997 1996
--------------------------------------
(Dollars in millions, except per share amounts)
Statement of Operations Data:
Net sales (c) $ 1,612.6 $ 1,579.9 $ 1,676.2
Gross profit 563.4 499.4 492.3
Operating income (loss) 127.6 (92.0)(i) (118.8)(d)
Earnings (loss) before
extraordinary loss 68.8 (106.9) (153.5)
Extraordinary loss -- -- --
--------- --------- ---------
Net earnings (loss) $ 68.8 $ (106.9) $ (153.5)
========= ========= =========
Earnings (loss)per common share
before extraordinary loss $ 0.20 $ (1.06) $ (1.25)
Extraordinary loss per common
share -- -- --
---------- ---------- ----------
Net earnings (loss) per common
share $ 0.20 $ (1.06) $ (1.25)
========== ========== ==========
Dividends per common share $ -- $ -- $ --
Weighted average common shares
outstanding (in thousands) 124,847 123,241 122,920
Ratio of earnings to combined
fixed charges and preferred
stock dividends (j) 1.11 NA NA
Balance Sheet Data:
Cash and cash equivalents $ 22.7 $ 23.3 $ 29.3
Intangible assets, net 836.2 851.3 891.1
Total assets 1,640.9 1,658.5 1,917.0
Long-term obligations and
redeemable preferred stock (g) 1,136.1 1,200.1 1,089.4
Due to affiliates (h) 1.7 2.2 190.5
Total shareholders' equity 154.4 129.1 258.1
YEAR ENDED DECEMBER 31,
------------------------------
1995 (a) 1994(b)
------------------------------
(Dollars in millions, except per share amounts)
Statement of Operations Data:
Net sales (c) $ 1,513.5 $ 929.4
Gross profit 489.2 332.4
Operating income (loss) 67.2(e) 109.9
Earnings (loss) before
extraordinary loss (4.0) 30.1
Extraordinary loss (8.3)(f) --
--------- ---------
Net earnings (loss) $ (12.3) $ 30.1
========= =========
Earnings (loss) per common share
before extraordinary loss $ (0.03) $ 0.36
Extraordinary loss per common
share (0.08) --
---------- ---------
Net earnings (loss) per common
share $ (0.11) $ 0.36
========== ==========
Dividends per common share $ -- $ 0.08
Weighted average common shares
outstanding (in thousands) 110,579 84,754
Ratio of earnings to combined
fixed charges and preferred
stock dividends (j) 1.04 2.20
Balance Sheet Data:
Cash and cash equivalents $ 16.4 $ 26.8
Intangible assets, net 916.7 551.9
Total assets 1,837.2 1,012.7
Long-term obligations and
redeemable preferred stock (g) 948.6 583.0
Due to affiliates (h) 0.9 --
Total shareholders' equity 411.6 166.0
(a) In April 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"). RBL's results
of operations have been included in the Company's results of
operations since April 28, 1995. In connection with the Merger, the
Company changed its name from National Health Laboratories Holdings,
Inc. ("NHL") to Laboratory Corporation of America Holdings.
(b) In June 1994, the Company completed the acquisition of Allied
Clinical Laboratories, Inc., then the sixth largest independent
clinical laboratory testing company in the United States. Allied's
results of operations have been included in the Company's results of
operations since June 23, 1994.
(c) In 1998, the Company reclassified the following amounts to
selling, general and administrative expenses from net sales
adjustments to be consistent with the 1998 classification: $61.0,
1997; $68.5, 1996; $81.5, 1995, and $56.9 for 1994. The
reclassification had no effect on operating income.
(d) In the second quarter of 1996, the Company recorded certain pre-
tax 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 2 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.
(e) 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 pre-tax restructuring charges of
$65.0 million in connection with these plans. See Note 2 of the
Notes to Consolidated Financial Statements which sets forth the
Company's restructuring activities for the years ended December 31,
1998 and 1997. 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, 1998, the majority of these
disputes have been settled.
(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 capital lease obligations of $4.2
million, $5.8 million, $9.8 million, $9.6 million and $9.8 million
at December 31, 1998, 1997, 1996, 1995 and 1994, respectively. Long-
term obligations also include the long-term portion of the expected
value of future contractual amounts to be paid to the
former 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, 1998, 1997, 1996, 1995 and 1994,
such amounts were $7.7 million, $9.6 million, $14.8 million, $14.7
million and $8.5 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 bore interest at a rate of 6.625% per annum and was repaid in
June, 1997 with proceeds from the Preferred Stock Offering. The
remaining amounts shown represent trade payables to affiliated
companies.
(i) During the fourth quarter of 1997 the Company recorded a
provision for doubtful accounts of $182.0 million, which was
approximately $160.0 million greater than the amount recorded in the
fourth quarter of 1996 and a $22.7 million provision for
restructuring certain laboratory operations.
(j) For the purpose of calculating the ratio of earnings to
combined fixed charges and preferred stock dividends (i) earnings
consist of income before provision for income taxes and fixed
charges and (ii) fixed charges consist of interest expense and one-
third of rental expense which is deemed representative of an
interest factor. For the years ended December 31, 1997 and 1996,
earnings were insufficient to cover fixed charges and preferred stock
dividends by $196.8 million and $188.3 million, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
In 1998, the Company expanded its testing services through
various strategic growth initiatives. The Company acquired the
clinical laboratory division of Michigan-based Universal Standard
Healthcare, Inc. (UHCI), Delaware-based Medlab, and Florida-based
Coastal Medical. The acquisition of UHCI makes the Company one of
the largest clinical laboratories operating in Michigan (UHCI's
laboratory had 1997 revenue of approximately $37 million). The
Company also acquired an equity position in UHCI and has become
UHCI's clinical laboratory testing provider under a two-year
marketing agreement. The acquisition of Medlab makes the Company
the largest provider of clinical laboratory testing services in
Delaware (prior to the acquisition, Medlab had annual revenue of
approximately $22 million) and the acquisition of Coastal Medical
represents approximately $3 million in annual preacquisition
revenues.
For the 1998 year, the Company estimates these three
acquisitions contributed approximately $18 million to net sales.
Going forward, annualized revenues from these acquisitions are
projected to be in the range of $38 to $40 million.
In the second quarter of 1998, the Company signed a multi-year
agreement with Health Options, Inc., Blue Cross and Blue Shield of
Florida's health maintenance organization (HMO), to provide
laboratory services to more than 700,000 HMO members. Further
enhancing its presence in Florida, the Company agreed to provide
clinical laboratory testing and other services to more than 800,000
members of Humana Medical Plans, Inc. covered by designated Humana
commercial HMO's, insurance plans, and Medicaid and Medicare HMO's
beginning July 1, 1998.
Also in the second quarter of 1998, the Company announced an
exclusive partnership with Virco, a Belgian-based biotechnology
company, to offer important new tests that will provide physicians
with data to evaluate resistance of HIV to antiretroviral drugs.
The Company is planning to offer Virco's new phenotyping technology
in addition to genotyping testing, which identifies genetic
mutations that can signify drug resistance. The Company will have
exclusive access to the first HIV resistance database that directly
relates genotypic analysis to phenotypic interpretation. Developed
by Virco, the Company believes the database provides the most useful
guide for AIDS-treating physicians to date.
The decision to sell the Company's veterinary testing business
to Antech Diagnostics in the first quarter of 1998 was consistent
with the Company's strategy to reposition resources to optimize
growth and profitability. Under the terms of the sales agreement,
the Company retained the animal studies portion of the business for
clinical trials testing, which continues to be one of the Company's
targeted opportunities for growth. The veterinary testing business
had historically generated annual revenues of approximately $11
million to $12 million.
The Company's industry continues to be affected by significant
government regulation, price competition and increased influence of
managed care organizations. 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 such as increased discounts and the use of capitated
payment contracts. These practices negatively impact the Company's
operating margins. The increase in managed care has also resulted
in declines in the utilization of laboratory testing services. As a
result of these challenges, the Company continues to seek new growth
opportunities in an effort to increase profitability.
As of April 1, 1997, the Health Care Financing Administration
put into effect new policies which affect Medicare payments to
clinical laboratories for the most frequently performed automated
blood chemistry profiles. These changes established a new coding
standard for the content of the automated chemistry profiles. To
comply with these changes, the Company developed and implemented a
new universal test requisition and standard test offerings which
successfully incorporated all required changes by the July 1, 1998
deadline. Estimated direct costs associated with these changes are
over $5.0 million. The Company is unable to estimate the indirect
costs associated with these changes. However, personnel time and
effort to introduce the new forms to clients and provide training
and support has been significant.
These new rules are intended to reduce the number of non-
Medicare covered "screening tests" which Medicare believes have in
the past been inappropriately billed to Medicare. The Company does
not believe it has experienced any significant revenue impact from
this new rule. The Company will continue to monitor this issue
going forward.
IMPACT OF THE YEAR 2000 ISSUE
The Company has an ongoing work effort to identify and
remediate data recognition problems that will be caused in computer
systems, software, and lab equipment by the change in date from the
year 1999 to the year 2000. The Company is also working to address
potential problems in systems and equipment that contain imbedded
hardware or software that may have a time element (referred to as
"non-IT" systems). The Company's Year 2000 project has five phases:
i) inventory of the business critical functional equipment and
systems affected by the Year 2000 issue; ii) assessment of the key
elements identified by the inventory including development of
strategies to address affected critical equipment and systems; iii)
contingency planning; iv) remediation of affected equipment and
systems; and v) testing and validation of its systems for Year 2000
date recognition.
Contingency planning is scheduled to be completed during the
second quarter of 1999. Completion of all material phases for
remediation for business critical equipment is scheduled for June
30, 1999. All material phases for testing and validation for
business critical equipment and systems is scheduled to be completed
by the end of the third quarter of 1999.
The Company is also working to assess Year 2000 readiness on
the part of its significant service providers, vendors, suppliers,
customers and governmental entities. There can be no guarantee that
the failure by these other companies to successfully and timely
achieve Year 2000 compliance would not have an adverse effect on the
Company's operations.
The total cost associated with required Year 2000 modifications
and related activities is not expected to be material to the
Company's financial position and is expected to be funded through
capital and operating cash flows. It is currently estimated that
the total future expenditures specifically relating to the Year 2000
project will be between $20 and $25 with approximately $3.0 having
been spent through December 31, 1998. The amounts required to
address Year 2000 readiness do not include significant investments
in new systems which have been and are being incurred in the normal
course of business and are Year 2000 compliant.
The estimates and conclusions herein contain forward-looking
statements and are based on management's best estimates of future
events. The failure to correct a material Year 2000 problem could
result in an interruption in, or a failure of, certain normal
business activities or operations. Such failures could materially
and adversely affect the Company's results of operation, liquidity
and financial condition. Due to the general uncertainty inherent in
the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third-party suppliers and customers, the
Company is unable to determine at this time whether the consequences
of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition.
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, 1998 compared with Year ended December 31,
1997.
Net sales for 1998 were $1,612.6 million, an increase of
approximately 2.0% from $1,579.9 million reported in the comparable
1997 period. Sales increased 3.2% due to an increase in price per
accession, which was a direct result of the Company's effort to
negotiate better pricing on new contracts, raising prices on
existing contracts that do not meet Company profitability targets
and other pricing initiatives discussed in the "General" section
above. This increase was offset by a 1.2% decline in sales as a
result of lower testing volume, resulting from industry-wide trends
as well as the Company's program of selectively eliminating
unprofitable accounts and carefully evaluating the acceptability of
new business.
Cost of sales, which includes primarily laboratory and
distribution costs, was $1,049.2 million for 1998 compared to
$1,080.5 million in the corresponding 1997 period, a decrease of
2.9%. Cost of sales decreased approximately $22.4 million due to a
decrease in testing supplies, approximately $12.9 million due to the
decrease in volume, and approximately $4.6 million due to a decrease
in consulting fees. These decreases were partially offset by an
increase in salaries due to scheduled salary increases as well as
the Michigan and Delaware acquisitions. The reduction in testing
supplies is the result of ongoing efforts by the Company to
consolidate suppliers and inventory item usage. There can be no
assurance that the Company can achieve this level of reduction in the
future. Cost of sales as a percentage of net sales was 65.1% for 1998
and 68.4% in the corresponding 1997 period. The decrease in the cost of
sales percentage of net sales primarily resulted from the cost reduction
efforts mentioned above.
Selling, general and administrative expenses decreased to
$405.0 million in 1998 from $538.1 million in the same period in
1997 representing a decrease of $133.1 million or 24.7%. Selling,
general and administrative expenses were 25.1% and 34.1% as a
percentage of net sales in 1998 and 1997, respectively. The
decrease in selling, general and administrative expenses is primarily
the result of the decrease in the provision for doubtful accounts of $146.8
million from the amount recorded in 1997. This decrease was partially
offset by increases in 1998 in personnel expenses ($13.0 million), bad debt
expense ($11.3 million) and telephone ($2.0 million).
Net interest expense was $46.1 million in 1998 compared to
$69.3 million in 1997. See "Liquidity and Capital Resources."
Provision for income taxes was a benefit of $12.7 million in
1998 compared to a tax expense of $54.4 million in 1997. See "Note
11 to Consolidated Financial Statements" for a further discussion of
income taxes.
Year ended December 31, 1997 compared with Year ended December 31,
1996.
Net sales for 1997 were $1,579.9 million, a decrease of
approximately 5.7% from $1,676.2 million reported in the comparable
1996 period. Sales declined approximately 6.5% as a result of lower
testing volume, which was a result of industry-wide trends as well
as the Company's program of selectively eliminating unprofitable
accounts and carefully evaluating the acceptability of new business.
The decline in sales resulting from volume declines was partially
offset by an increase in price per accession of approximately 1.0%
from the comparable 1996 period. The increase in the price per
accession was a direct result of the Company's effort to negotiate
better pricing on new contracts, raising prices on existing
contracts that do not meet Company profitability targets and other
pricing initiatives discussed in the "General" section above.
Cost of sales, which includes primarily laboratory and
distribution costs, was $1,080.5 million for 1997 compared to
$1,183.9 million in the corresponding 1996 period, a decrease of
8.7%. Cost of sales decreased approximately $76.1 million due to the
decrease in volume, approximately $21.3 million due to a decrease in
salaries and benefits and approximately $13.8 million primarily
relating to data processing supplies, request forms and freight
expense as a result of the Company's cost reduction programs and
lower volume. These decreases were partially offset by an increase
in salaries due to scheduled salary increases and supply costs
resulting primarily from an increase in volume in the Company's
specialty and niche testing areas. Cost of sales as a percentage of
net sales was 68.4% for 1997 and 70.6% in the corresponding 1996
period. The decrease in the cost of sales percentage of net sales
primarily resulted from the cost reduction efforts mentioned above.
Selling, general and administrative expenses increased to
$538.1 million in 1997 from $373.5 million in the same period in
1996 representing an increase of $164.6 million or 44.1%. The
increase in 1997 was partially offset by decreases in telephone and
insurance categories aggregating approximately $33.4 million. During
the fourth quarter of 1997, the Company recorded a provision for
doubtful accounts of $182.0 million, which was approximately $160.0
million greater than the amount recorded in the fourth quarter of
1996. This charge was made to increase the allowance for doubtful
accounts to a level that management believes is appropriate to
reduce its accounts receivable to the net amount that management
believes will ultimately be collected.
Selling, general and administrative expenses were 34.1% and
22.3% as a percentage of net sales in 1997 and 1996, respectively.
The increase in the selling, general and administrative percentage
primarily resulted from increased employee and consulting 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 utilization declines,
which provided little corresponding reduction in costs.
The Company has experienced a deterioration in the timeliness
of cash collections and a corresponding increase in accounts
receivable. The primary causes of this situation are the increased
medical necessity and related diagnosis code requirements from third-
party payors and the complexities in the billing process (data
capture) arising from changing requirements of private insurance
companies (managed care). Management previously believed that this
deterioration in the timeliness of cash collections would not have
any significant impact on the ultimate collectability of the
receivables.
In late 1996, to address the deteriorating cash collections,
management developed various short-term improvement projects
("initiatives") that it anticipated would improve the timeliness of
collections by the end of 1997. Initially, it appeared that these
initiatives were having a positive impact, as the growth in the
Company's Days' Sales Outstanding (DSO) stabilized in the first and
second quarters of 1997. However, during the third quarter of 1997,
despite continuing focused efforts on the initiatives, the Company's
DSO began increasing again. In response, management intensified its
efforts on the aforementioned initiatives and added new initiatives
for the purpose of significantly lowering the DSO by December 31,
1997.
In the fourth quarter of 1997, management evaluated the
initiatives' overall effect and concluded that, while helpful in
improving certain processes, they had not had any significant impact
on improving the Company's cash collections on aged receivables. In
recognition of the Company's inability to enhance collections on a
sustained basis, an increase in the allowance for doubtful accounts
was considered necessary by management.
The Company also recorded pre-tax charges in the fourth quarter
of 1997 of $22.7 million, related primarily to the downsizing of its
Long Island, New York facility and the future consolidation into its
Raritan, New Jersey facility.
In the second quarter of 1996, the Company recorded additional
pre-tax 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 designed 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.
Net interest expense was $69.3 million in 1997 compared to
$69.5 million in 1996. See "Liquidity and Capital Resources."
As a result of the bad debt and restructuring and non-recurring
charges taken in 1997 and 1996, the provision for income taxes is
not comparable between periods. However, before charges, the
Company's effective income tax rate in 1997 increased from 1996 as a
result of net loss carry back limitations. See "Note 11 to
Consolidated Financial Statements" for a further discussion of
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used for)operating activities was $125.1
million, $144.4 million and $(174.5) million, in 1998, 1997 and
1996, respectively. The decrease in cash flow from operations in
1998 primarily resulted from increases in accounts receivable,
offset by changes in income taxes.
Capital expenditures were $58.7 million, $34.5 million and
$69.9 million for 1998, 1997 and 1996, respectively. The Company
expects capital expenditures to be approximately $72.5 million in
1999. These expenditures are intended to continue to improve
billing systems and further automate laboratory processes. Such
expenditures are expected to be funded by cash flow from operations
as well as borrowings under the Company's credit facilities.
The Company's days sales outstanding (DSO) at the end of 1998
was 83 days, compared to 79 days at the end of 1997. The DSO
increase is primarily related to anticipated billing delays in
connection with the acquisitions in Michigan and Delaware. Obtaining
required licenses and private certifications, as well as
transitioning accounts onto the Company's systems, caused delays by
several months in billing customers. All bills were out to
customers by the end of the year.
During the fourth quarter of 1998, the Company increased its
bad debt expense in response to a fourth quarter decline in cash
collection rates. The decline was related to delays in payment from
several large managed care and hospital payors, as well as claim
submission issues which are now being rectified. In addition, the
Company has two specific locations that have poorer than average
performance in the area of cash collections which represent
approximately 20% of total outstanding accounts receivable. The
Company is taking necessary steps to improve DSO and cash
collections in these locations by:
- Converting both locations to a centralized billing system. The
New York facility was converted one month ahead of schedule on
February 1, 1999 and the northern Virginia facility is scheduled to
be converted during 1999;
- Assigning focused, cross functional billing operations teams to
implement best practices throughout the company, with particular
emphasis on areas with higher DSOs; and
- Identifying solutions to improve payment by slow managed care
and hospital payors.
With the completion of the New York facility conversion,
approximately 55% of the Company's billings are performed on the
Company's centralized system. By the end of the year, Management
anticipates that approximately 70% of billings will be performed on
that system.
The Company expects that these conversions will lower DSO and
have a positive impact on the timing of cash collections. The positive
effects of these conversions will most likely be realized some time after
the completion of the conversions. There can be no assurance that the
planned billing conversions will improve the Company's DSO and cash
collections.
Based on current and projected levels of operations, coupled
with availability under its revolving credit facility, the Company
believes it has sufficient liquidity to meet both its short-term and
long-term cash needs. For a discussion of the Company's long-term
debt and revolving credit facility, see "Note 9 to Consolidated
Financial Statements."
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 evidences
Congress' determination that the disclosure of forward-looking
information is desirable for investors and encourages such
disclosure by providing a safe harbor for forward-looking statements
by corporate management. This Annual Report, including the Letter
to Our Shareholders and the Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-
looking statements that involve risk and uncertainty. In order to
comply with the terms of the safe harbor, the Company notes that a
variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking
statements.
The risks and uncertainties that may affect the operations,
performance, development, growth projections and results of the
Company's business include, but are not limited to, the growth of
the economy, interest rate movements, timely development by the
Company of technology enhancements of its operating systems, the
impact of competitive services and pricing, customer business
requirements, Congressional legislation and similar matters.
Readers of this report are cautioned not to place undue reliance on
forward-looking statements which are subject to influence by the
named risk factors and unanticipated future events. Actual results,
accordingly, may differ materially from management expectations.
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 1999 annual meeting of
stockholders, which is to be filed pursuant to Regulation 14A not
later than April 30, 1999.
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' Reports 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 Severance 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* - Second Amendment to the Amended and Restated Credit Agreement
dated as of February 25, 1998 among the Company, the banks
named therein and Credit Suisse First Boston as
Administrative Agent.
10.30 - 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).
10.31 - 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.
10.32 - Promissory note dated December 30, 1996 between the Company
and Roche Holdings Inc. (incorporated herein by reference to
the January 6, 1997 8-K).
10.33 - First Amendment to promissory note given by the Company to
Roche Holdings Inc.
10.34* - Support Agreement between Roche Biomedical Laboratories, Inc.
and Hoffmann-La Roche Inc., dated as of April 27, 1995.
10.35* - First Amendment to Support Agreement between Roche Biomedical
Laboratories, Inc. and Hoffmann-La Roche Inc., dated as of
July 26, 1995.
10.36* - Second Amendment to Support Agreement between Laboratory
Corporation of America Holdings, Hoffmann-La Roche Inc.,
Roche Molecular Systems, Inc. and Roche Diagnostic Systems,
Inc., dated as of January 1, 1997.
10.37* - Third Amendment to Support Agreement between Laboratory
Corporation of America Holdings, Hoffmann-La Roche Inc.,
Roche Molecular Systems, Inc. and Roche Diagnostic Systems,
Inc., dated as of October 1, 1997.
10.38* - Consulting Agreement between Laboratory Corporation of
America Holdings and its subsidiaries and affiliates and
Larry L. Leonard, dated as of September 1, 1998.
12.1* - Statement regarding Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividends
21.1 - List of Subsidiaries of the Company
23.1* - Consent of PricewaterhouseCoopers LLP
23.2* - Consent of KPMG 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.
27.1 - Financial Data Schedule (electronically filed version only).
27.2 - Restated Financial Data Schedule for September 30, 1998
(electronically filed version only).
27.3 - Restated Financial Data Schedule for June 30, 1998
(electronically filed version only).
27.4 - Restated Financial Data Schedule for March 31, 1998
(electronically filed version only).
27.5 - Restated Financial Data Schedule for December 31, 1997
(electronically filed version only).
27.6 - Restated Financial Data Schedule for September 30, 1997
(electronically filed version only).
27.7 - Restated Financial Data Schedule for June 30, 1997
(electronically filed version only).
27.8 - Restated Financial Data Schedule for March 31, 1997
(electronically filed version only).
27.9 - Restated Financial Data Schedule for December 31, 1996
(electronically filed version only).
(b) Reports on Form 8-K
(1) A current report on Form 8-K dated October 27, 1998 was
filed on November 23, 1998, by the registrant, in
connection with the press release dated October 27, 1998 announcing
operating results of the Company for the quarter and nine months
ended September 30, 1998.
(2) A current report on Form 8-K dated December 16, 1998 was
filed on December 30, 1998, by the registrant, in connection
with the press release dated December 16, 1998, announcing that its
Board of Directors has declared dividends on the Company's 8 1/2%
Series A Convertible Exchangeable Preferred Stock and the Company's
8 1/2% Series B Convertible Pay-in-Kind Preferred Stock.
* 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: March 8, 1999
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on March
8, 1999 in the capacities indicated.
Signature Title
--------- -----
/s/ THOMAS P. MAC MAHON
------------------------------------- Chairman of the Board,
Thomas P. Mac Mahon President and Chief
Executive Officer
(Principal Executive Officer)
/s/ WESLEY R. ELINGBURG
------------------------------------- Executive Vice President,
Wesley R. Elingburg Chief Financial Officer
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 AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page
Report of Independent Accountants.............................. F-2
Report of Independent Accountants...............................F-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of
December 31, 1998 and 1997...................................F-4
Consolidated Statements of Operations for
the three-year period ended December 31, 1998................F-5
Consolidated Statements of Changes in Shareholders'
Equity for the three-year period ended
December 31, 1998............................................F-6
Consolidated Statements of Cash Flows for the
three-year period ended December 31, 1998....................F-7
Notes to Consolidated Financial Statements......................F-9
Financial Statement Schedule:
II - Valuation and Qualifying Accounts and Reserves............F-33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Laboratory Corporation of America Holdings
In our opinion, the consolidated financial statements
presented in the accompanying index present fairly, in all
material respects, the consolidated financial position of
Laboratory Corporation of America Holdings and its subsidiaries
(the Company) at December 31, 1998 and 1997, and the consolidated results
of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles. In addition,
in our opinion, the financial statement schedule, included in the index, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects the information required to be
included therein. These financial statements and financial statement schedule
are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which
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, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Charlotte, North Carolina
February 12, 1999
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Laboratory Corporation of America Holdings:
We have audited the accompanying consolidated statement of
operations, changes in shareholders' equity and cash flows of
Laboratory Corporation of America Holdings and subsidiaries for
the period ended December 31, 1996. In connection with our audit
of the consolidated financial statements, we also have audited the
accompanying financial statement schedule for the period ended
December 31, 1996. 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 audit.
We conducted our audit 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
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
results of operations and cash flows of Laboratory Corporation of
America Holdings and subsidiaries for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
Also in our opinion, the related financial statement schedule
for the year ended December 31, 1996, 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 LLP
Raleigh, North Carolina
February 14, 1997 except for
Note 9 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,
-----------------------------
1998 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 22.7 $ 23.3
Accounts receivable, net 375.4 330.6
Inventories 30.7 36.0
Prepaid expenses and other 12.3 16.9
Deferred income taxes 78.0 112.0
Income taxes receivable -- 8.8
--------- ---------
Total current assets 519.1 527.6
Property, plant and equipment, net 259.1 254.9
Intangible assets, net 836.2 851.3
Other assets, net 26.5 24.7
--------- ---------
$ 1,640.9 $ 1,658.5
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 50.2 $ 55.9
Accrued expenses and other 128.7 140.7
Current portion of long-term debt 72.5 --
--------- ---------
Total current liabilities 251.4 196.6
Revolving credit facility -- 40.0
Long-term debt, less current portion 571.3 643.8
Capital lease obligation 4.2 5.8
Other liabilities 132.8 142.3
Commitments and contingent liabilities -- --
Mandatorily redeemable preferred stock
(30,000,000 shares authorized):
Series A 8 1/2% Convertible
Exchangeable Preferred Stock, $0.10
par value, 4,363,178 and 4,363,202
shares issued and outstanding at
December 31, 1998 and 1997,
respectively (aggregate preference
value of $218.2 at December 31, 1998
and 1997) 213.0 212.6
Series B 8 1/2% Convertible Pay-in-Kind
Preferred Stock, $0.10 par value,
6,409,548 and 5,892,495 shares issued
and outstanding at December 31, 1998
and 1997, respectively (aggregate
preference value of $320.5 and $294.6
at December 31, 1998 and 1997,
respectively) 313.8 288.3
Shareholders' equity:
Common stock, $0.01 par value;
520,000,000 shares authorized;
125,280,346 and 123,542,614
shares issued and outstanding
at December 31, 1998 and 1997,
respectively 1.2 1.2
Additional paid-in capital 415.7 412.8
Accumulated deficit (260.5) (284.9)
Accumulated other comprehensive income (2.0) --
--------- ---------
Total shareholders' equity 154.4 129.1
--------- ---------
$ 1,640.9 $ 1,658.5
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
[Download Table]
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Net sales $ 1,612.6 $ 1,579.9 $ 1,676.2
Cost of sales 1,049.2 1,080.5 1,183.9
--------- --------- ---------
Gross profit 563.4 499.4 492.3
Selling, general and
administrative expenses 405.0 538.1 373.5
Amortization of intangibles
and other assets 30.8 30.6 29.6
Restructuring and non-recurring charges -- 22.7 23.0
Provision for settlements and related
expenses -- -- 185.0
--------- --------- ---------
Operating income (loss) 127.6 (92.0) (118.8)
Other income (expenses):
Investment income 2.6 2.4 2.2
Interest expense (48.7) (71.7) (71.7)
--------- --------- ---------
Earnings (loss) before income taxes 81.5 (161.3) (188.3)
Provision for income taxes 12.7 (54.4) (34.8)
--------- --------- ---------
Net income (loss) 68.8 (106.9) (153.5)
Less preferred stock dividends (43.6) (23.4) --
Less accretion of mandatorily
redeemable preferred stock (0.8) (0.5) --
--------- --------- ---------
Net income (loss) attributable to
common shareholders $ 24.4 $ (130.8) $ (153.5)
========= ========= =========
Basic and diluted income (loss)
per common share: $ 0.20 $ (1.06) $ (1.25)
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
[Download Table]
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
For the three-year period ended December 31, 1998
Additional
Common Paid-in Accumulated
Stock Capital Deficit
------- ---------- -----------
BALANCE, JANUARY 1, 1996 $ 1.2 $ 411.0 $ (0.6)
Comprehensive loss -- -- (153.5)
------- ------- --------
BALANCE, DECEMBER 31, 1996 $ 1.2 $ 411.0 $ (154.1)
Comprehensive loss -- -- (106.9)
Issuance of common stock -- 1.8 --
Preferred stock dividends -- -- (23.4)
Accretion of mandatorily
redeemable preferred stock -- -- (0.5)
------- ------- --------
BALANCE, DECEMBER 31, 1997 $ 1.2 $ 412.8 $ (284.9)
Comprehensive income:
Net income -- -- 68.8
Other comprehensive income:
Unrealized loss on securities,
net of tax -- -- --
--------
Comprehensive income 68.8
Issuance of common stock -- 2.9 --
Preferred stock dividends -- -- (43.6)
Accretion of mandatorily
redeemable preferred stock -- -- (0.8)
------- ------- --------
BALANCE, DECEMBER 31, 1998 $ 1.2 $ 415.7 $ (260.5)
======= ======= ========
For the three-year period ended December 31, 1998
Accumulated
Other Total
Comprehensive Shareholders'
Income Equity
------------- ------------
BALANCE, JANUARY 1, 1996 $ -- $ 411.6
Comprehensive loss -- (153.5)
-------- --------
BALANCE, DECEMBER 31, 1996 $ -- $ 258.1
Comprehensive loss -- (106.9)
Issuance of common stock -- 1.8
Preferred stock dividends -- (23.4)
Accretion of mandatorily
redeemable preferred stock -- (0.5)
-------- --------
BALANCE, DECEMBER 31, 1997 $ -- $ 129.1
Comprehensive income:
Net income -- 68.8
Other comprehensive income:
Unrealized loss on securities,
net of tax (2.0) (2.0)
-------- --------
Comprehensive income (2.0) 66.8
Issuance of common stock -- 2.9
Preferred stock dividends -- (43.6)
Accretion of mandatorily
redeemable preferred stock -- (0.8)
-------- --------
BALANCE, DECEMBER 31, 1998 $ (2.0) $ 154.4
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
[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,
---------------------------------
1998 1997 1996
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 68.8 $ (106.9) $ (153.5)
Adjustments to reconcile net loss
to net cash provided by (used for)
operating activities:
Provision for settlements and
related expenses -- -- 185.0
Net gain on disposals (1.3) (0.3) --
Depreciation and amortization 84.2 86.8 97.5
Deferred income taxes, net 30.6 (43.0) 30.3
Payments for settlement and
related expenses -- -- (188.9)
Change in assets and liabilities,
net of effects of acquisitions:
Net change in restructuring
reserves (5.6) 5.6 4.2
Decrease(increase)in accounts
receivable, net (46.6) 175.0 (78.8)
Decrease in inventories 5.2 8.3 8.0
Decrease(increase)in prepaid
expenses and other 4.7 4.5 (3.1)
Change in income taxes
receivable/payable, net (2.4) 45.5 (32.4)
Decrease in accounts payable (5.7) (9.9) (40.4)
Increase (decrease)in accrued
expenses and other (5.0) (20.4) 6.3
Other, net (1.8) (0.8) (8.7)
-------- -------- --------
Net cash provided by (used for)
operating activities 125.1 144.4 (174.5)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (58.7) (34.5) (69.9)
Proceeds from sale of assets 12.6 1.6 3.5
Acquisitions of businesses (23.7) -- (5.0)
Refund of lease guaranty 8.0 -- --
-------- -------- --------
Net cash used for investing
activities (61.8) (32.9) (71.4)
-------- -------- --------
(continued)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit
facilities $ 40.0 $ 35.0 $ 293.0
Payments on revolving credit
facilities (80.0) (366.0) (140.0)
Payment on affiliate loan -- (187.0) --
Loan from affiliate -- -- 187.0
Payments on long-term debt -- (68.7) (70.8)
Payments on long-term lease obligations (1.5) -- --
Deferred financing fees -- (4.6) --
Deferred payments on acquisitions (6.8) (5.2) (10.4)
Sale of redeemable preferred stock, net
of issuance costs -- 486.9 --
Payment of preferred stock dividends (18.5) (9.7) --
Cash received for issuance of common
stock 2.9 1.8 --
------- ------- -------
Net cash provided by (used for)
financing activities (63.9) (117.5) 258.8
------ ------ ------
Net increase (decrease) in cash
and cash equivalents (0.6) (6.0) 12.9
Cash and cash equivalents at
beginning of year 23.3 29.3 16.4
------ ------ ------
Cash and cash equivalents at
end of year $ 22.7 $ 23.3 $ 29.3
======= ======= =======
Supplemental schedule of cash
flow information:
Cash paid (received)during the year
for:
Interest $ 47.5 $ 69.2 $ 65.1
Income taxes, net of refunds (12.2) (55.0) (15.2)
Disclosure of non-cash financing
and investing activities:
Preferred stock dividends 25.1 13.7 --
Accretion of mandatorily redeemable
preferred stock 0.8 0.5 --
Acquisition liabilities assumed 1.3 -- 18.4
Unrealized loss on securities available-
for-sale (net of tax) 2.0 -- --
Obligations incurred under capital leases -- 4.6 --
The accompanying notes are an integral part of these consolidated financial
statements.
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 and its subsidiaries
("Company") is the largest independent clinical laboratory company in the
United States based on 1998 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 25 major laboratories and approximately 1,500 service sites
consisting of branches, patient service centers and STAT laboratories, serving
clients in 50 states.
The consolidated financial statements include the accounts of Laboratory
Corporation of America Holdings and its subsidiaries after elimination of all
material intercompany accounts and transactions.
CASH EQUIVALENTS:
Cash equivalents (primarily investments in money market funds, time
deposits, commercial paper and eurodollars 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 purchased 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.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
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 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
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 are charged to operations as incurred.
Retirements, sales and other disposals of assets are recorded by removing the
cost and accumulated depreciation from the related accounts with any resulting
gain or loss reflected in income.
CAPITALIZED SOFTWARE COSTS:
The Company capitalizes purchased software which is ready for service and
capitalizes software development costs incurred on significant projects
starting from the time management commits to funding a project until the
project is substantially complete and the software is ready for its intended
use. Research and development costs and other computer software maintenance
costs related to software development are expensed as incurred. Capitalized
software costs are amortized using the straight-line method over the estimated
useful life of the underlying system, generally five years.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents, accounts receivable,
income taxes receivable and accounts payable are considered to be representative
of their respective fair values due to their short-term nature. The carrying
amounts 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.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
CONCENTRATION OF CREDIT RISK:
Substantially all of the Company's accounts receivable are with companies
and individuals in the health care industry. However, concentrations of
credit risk are limited due to the number 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
contractual discounts and 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 as a charge to revenue. In 1998, 1997 and 1996, approximately 22%,
20% and 23%, 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 utilizing the asset and liability
method. Under this method 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 and for tax loss carryforwards. 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. 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. Future tax benefits, such as net operating
loss carryforwards, are recognized to the extent that realization of such
benefits are more likely than not.
STOCK COMPENSATION PLANS:
The Company accounts for its employee stock option plans using the
intrinsic method under APB Opinion No. 25 and related Interpretations. The
Company's employee stock purchase plan is also accounted for under APB Opinion
No. 25 and is treated as non-compensatory. The Company provides supplementary
disclosures using the fair value method under SFAS No. 123.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
EARNINGS PER SHARE:
Basic earnings per share is computed by dividing net income (loss), less
preferred stock dividends, by the weighted average number of common shares
outstanding. Dilutive earnings per share is computed by dividing net income
(loss), by the weighted average number of common shares outstanding plus
potentially dilutive shares, as if they had been issued at the beginning of
the period presented. Potentially dilutive common shares result primarily
from the Company's Mandatorily Redeemable Preferred Stock and outstanding
stock options and warrants. However, the effect of conversion of the
Company's redeemable preferred stock, or exercise of the Company's stock
options or warrants was not included in the computation of diluted earnings
per common share as it would have been anti-dilutive for all periods
presented, except for the fourth quarter of 1998.
For the years ended December 31, 1998, 1997 and 1996, basic and diluted
earnings per common share is calculated based on the weighted average number
of shares outstanding during each year (124,846,812, 123,241,222, and
122,919,767 shares, respectively).
INVESTMENTS:
Investments in equity securities are reported at fair value with
unrealized gains or losses, net of tax, recorded as a separate component of
shareholders' equity. At December 31, 1998, the Company recorded an
unrealized loss on equity investments of $2.0, net of related deferred tax
benefit of $1.3.
REPORTING COMPREHENSIVE INCOME:
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" was issued and establishes standards for
reporting and displaying comprehensive income and its components. SFAS No.
130 requires comprehensive income and its components, as recognized under
accounting standards, to be displayed in a financial statement with the same
prominence as other financial statements. The disclosure requirements of SFAS
No. 130 have been included in the Company's Consolidated Statements of
Shareholders' Equity.
SEGMENT REPORTING:
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information", also issued in June 1997,
establishes new standards for reporting information about operating segments
in annual and interim financial statements. The standard also requires
descriptive information about the way the operating segments are determined,
the products and services provided
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
by the segments and the nature of differences between reportable
segment measurements and those used for the consolidated enterprise. This
standard is effective for fiscal years beginning after December 15, 1997. As
of December 31, 1998, the Company's organization has no identifiable
reportable operating segments.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make 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. Significant estimates include the allowances for doubtful
accounts and deferred tax assets, amortization lives for intangible assets and
accruals for self-insurance reserves. Actual results could differ from those
estimates.
LONG-LIVED ASSETS:
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amounts may not be recoverable.
Recoverability of assets to be held and used is determined by the Company at
the entity level by a comparison of the carrying amount of the assets to
future undiscounted net cash flows expected to be generated by the assets.
Impairment, if any, 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.
INTANGIBLE ASSETS:
Intangible assets, consisting of goodwill and other intangibles (i.e.,
customer lists and non-compete agreements), are amortized on a straight-line
basis over the expected periods to be benefited, generally ranging from 25 to
40 years for goodwill, 10 to 25 years for customer lists and approximately 5
years for non-compete agreements.
RECLASSIFICATIONS:
In 1998, the Company reclassified $61.0 and $68.5 for the years ended
December 31, 1997 and 1996, respectively to selling, general and administrative
expenses from net sales adjustments to be consistent with the 1998
classification. The reclassification had no effect on operating income.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
2. RESTRUCTURING AND NON-RECURRING CHARGES
During the fourth quarter of 1997, the Company recorded pre-tax charges
of $22.7, related primarily to the downsizing of its Long Island, New York
facility and the future consolidation into its Raritan, New Jersey facility.
This amount includes approximately $5.2 for severance and $12.5 for the future
lease obligation and other facilities related charges. The net workforce
reduction as a result of this activity is expected to be approximately 260
employees, primarily in the laboratory's operations.
In the second quarter of 1997, the Company determined that approximately
$12.6 of existing reserves were excessive due largely to proceeds from
subleases and asset disposals. Also, in the second quarter of 1997, the
Company decided to downsize the Winston-Salem, North Carolina laboratory and
redirect specimen volumes to other company facilities in order to realize
operational efficiencies. Restructuring charges related to the closing of the
Winston-Salem laboratory totaled $12.6.
In the second quarter of 1996, 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 included
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 workforce reduction as a result of these activities
was approximately 250 employees. Payments for severance were substantially
complete by the end of 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 incurred 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 for various
other items including the write-off of certain supplies which were not
compatible with new testing methods designed to increase efficiency.
There were estimate revisions made in 1997 and 1996 between
classifications of the restructuring charge amounts, which were reclassified
in quarters in which it was determined the reclassification was appropriate.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
[Download Table]
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
January 1, 1996 $ 12.8 $ 18.6 $ 18.9 $ 50.3
Restructuring charges 8.1 1.4 3.5 13.0
Reclassifications and
non-cash items 1.6 (10.6) (2.3) (11.3)
Cash payments (14.2) -- (3.2) (17.4)
------- ------- ------- -------
Balance at
December 31, 1996 8.3 9.4 16.9 34.6
Long Island downsizing 5.2 5.0 12.5 22.7
Winston-Salem closure 2.7 2.6 7.3 12.6
Adjustments (1.7) (5.6) (5.3) (12.6)
Reclassifications and
non-cash items 3.2 (6.7) 1.9 (1.6)
Cash payments (14.0) (0.7) (2.4) (17.1)
------- ------- ------- -------
Balance at
December 31, 1997 3.7 4.0 30.9 38.6
Cash payments (1.2) (0.5) (3.9) (5.6)
------- ------- ------- -------
Balance at
December 31, 1998 $ 2.5 $ 3.5 $ 27.0 $ 33.0
======= ======= ======= =======
Current $ 17.5
Non-current 15.5
-------
$ 33.0
=======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
3. ACCOUNTS RECEIVABLE, NET
December 31, December 31,
1998 1997
------------ -----------
Gross accounts receivable $ 569.4 $ 526.0
Less allowance for doubtful accounts (194.0) (195.4)
------- -------
$ 375.4 $ 330.6
======= =======
The provision for doubtful accounts was $164.7, $311.5 and $150.0 in
1998, 1997 and 1996, respectively.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
4. PROPERTY, PLANT AND EQUIPMENT, NET
December 31, December 31,
1998 1997
----------- -----------
Land $ 9.7 $ 9.4
Buildings and building improvements 64.6 62.9
Machinery and equipment 306.6 277.4
Leasehold improvements 57.3 53.3
Furniture and fixtures 26.1 25.9
Construction in progress 32.7 20.9
Buildings under capital leases 5.4 5.4
Equipment under capital leases 4.6 4.6
-------- --------
507.0 459.8
Less accumulated depreciation
and amortization of capital lease assets (247.9) (204.9)
-------- --------
$ 259.1 $ 254.9
======== ========
5. INTANGIBLE ASSETS, NET
December 31, December 31,
1998 1997
----------- -----------
Goodwill $ 782.9 $ 774.0
Other intangibles, principally customer
lists and non-compete agreements 231.2 224.7
-------- --------
1,014.1 998.7
Less accumulated amortization (177.9) (147.4)
-------- --------
$ 836.2 $ 851.3
======== ========
Amortization of intangible assets was $30.8, $30.6 and $29.6 in 1998,
1997 and 1996, respectively.
6. ACCRUED EXPENSES AND OTHER
December 31, December 31,
1998 1997
----------- -----------
Employee compensation and benefits $ 45.9 $ 50.4
Acquisition related accruals 16.7 20.6
Restructuring reserves 17.5 21.8
Accrued taxes 11.2 13.1
Self-insurance reserves 22.6 24.1
Interest payable 5.7 6.0
Other 9.1 4.7
-------- --------
$ 128.7 $ 140.7
======== ========
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
7. OTHER LIABILITIES
December 31, December 31,
1998 1997
----------- -----------
Acquisition related accruals $ 16.8 $ 20.2
Restructuring reserves 15.5 16.8
Deferred income taxes 29.4 34.3
Post-retirement benefit obligation 32.5 29.4
Self-insurance reserves 37.8 41.1
Other 0.8 0.5
------- -------
$ 132.8 $ 142.3
======= =======
8. SETTLEMENTS
As previously discussed in the Company's public filings, the Office of
Inspector General ("OIG") of the Department 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. 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 Holdings, Inc.("Roche"). 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.
9. LONG-TERM DEBT
The Company entered into an Amended and Restated Credit Agreement dated
as of March 31, 1997 (the "Amended 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 $693.8 (the "Amended Term Loan Facility") and a
revolving credit facility of $450.0 (the "Amended Revolving Credit Facility"
and, together with the Term Loan Facility, the "Bank Facility") which includes
a $50.0 letter of credit sublimit. The Bank Facility is unconditionally and
irrevocably guaranteed by certain of the Company's subsidiaries.
Under the Amended Credit Agreement, maturities under the Amended Term
Loan Facility were extended in aggregate to $46.4 in 1999 (to be paid in
quarterly installments of $11.6), $92.8 in 2000, $139.2 in 2001 through 2003
and $87.0 in 2004 (paid in quarterly installments).
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The maturities of the Amended Revolving Credit Facility were also extended
approximately two years to March 31, 2002. The Company will also make a
special payment on its Amended Term Loan Facility during the second quarter of
1999 of approximately $26.1, based on a contractual formula contained on the
Amended 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
(the higher of the Bank Agent's base commercial loan rate or 50 basis points
above the Federal Funds 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 Roche and its 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. In addition, pursuant to the Amended Credit
Agreement, the applicable interest margins on borrowings outstanding
thereunder are based upon the leverage ratio.
In February 1998, the Company negotiated an amendment to the Amended
Credit Agreement, covering both long-term and revolving credit, of certain
covenants contained in the agreement. The amendment excludes certain actual
expenses incurred during the fourth quarter of 1997 from interest coverage and
leverage ratio calculations applicable to the quarters ended December 31, 1997
through September 30, 1998. The amendment also excludes these expenses from
certain other covenant calculations applicable to the quarter ending December
31, 1997 and the quarterly periods thereafter.
At December 31, 1998 and 1997 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 $500.0 and $600.0, respectively, of its floating rate debt. This
effectively fixed the interest rate exposure on the floating rate debt to a
weighted-average fixed interest rate of 6.20% and 6.95%, respectively. These
swaps require that the Company pay a fixed rate amount in exchange for the
financial institutions paying a floating rate amount. The amounts paid by the
Company in 1998 and 1997 were $.3 and $1.7, respectively. 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. The
current agreements mature in September 2002 and January 2003. The estimated
cost at which the Company could have terminated these agreements as of
December 31, 1998 and 1997 was approximately $6.9 and $0.4, respectively. This
fair value was estimated by discounting the expected cash flows using rates
currently available for interest rate swaps with similar terms and
maturities. Interest rates in
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
effect for both the long-term and revolving credit agreement as of December
31, 1998 and 1997 were 5.8% and 6.9%, respectively.
10. ISSUANCE OF MANDATORILY REDEEMABLE PREFERRED STOCK
On May 19, 1997 the Board of Directors of the Company declared a dividend
of 10,000,000 transferable subscription rights which were then issued pro rata
to holders of its common stock on May 29, 1997 entitling them to purchase up
to an aggregate of $500.0 of redeemable convertible preferred stock issuable
in two series at a subscription price of $50 per share (the "Preferred Stock
Offering"). The subscription period ended on June 16, 1997. On that date,
rights were exercised to purchase 4,363,202 shares of Series A 8 1/2%
Convertible Exchangeable Preferred Stock ("Series A") and 5,636,798 shares
of Series B 8 1/2% Convertible Pay-in-Kind Preferred Stock ("Series B"),
each at a subscription price of $50 per share. Roche exercised its basic
subscription privilege in full for 4,988,751 shares of Series B and other rights
holders purchased the remaining 5,011,249 shares.
The Series A is convertible at the option of the holder after September
30, 1997 into common stock, will pay cash dividends and will be exchangeable
on or after June 30, 2000 at the Company's option for 8 1/2% Convertible
Subordinated Notes due June 30, 2012. The Series B will be convertible at the
option of the holder after June 30, 2000 into common stock, will pay dividends
in-kind until June 30, 2003, and in cash thereafter, and will not be
exchangeable for notes. The conversion rate for both series of preferred
stock is 18.1818 shares of common stock per share of preferred stock. Each
series of preferred stock will be mandatorily redeemable after June 30, 2012
at $50 per share and will be redeemable at the option of the Company after
July 7, 2000 at prices declining from $52.83 to $50.00 in 2006 and thereafter.
Neither series of preferred stock entitles the holder to any voting rights in
the Company. Net proceeds from the Preferred Stock Offering were $486.9 and
were used to repay a loan from Roche, including accrued interest, and to
reduce amounts outstanding under the Company's term loan and revolving credit
facilities.
Offering costs of $13.1 were recorded against the aggregate preference
value of the preferred stock and will be accreted up to the date of mandatory
redemption. Accretion for the year ended December 31, 1998 was $0.8.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
11. INCOME TAXES
The provisions for income taxes in the accompanying consolidated
statements of operations consist of the following:
Years Ended December 31,
---------------------------------
1998 1997 1996
-------- -------- --------
Current:
Federal $ (17.6) $ (12.3) $ (54.4)
State 1.0 0.9 2.3
------- ------- -------
(16.6) (11.4) (52.1)
------- ------- -------
Deferred:
Federal 45.2 (35.5) 15.2
State (15.9) (7.5) 2.1
------- ------- -------
29.3 (43.0) 17.3
------- ------- -------
$ 12.7 $ (54.4) $ (34.8)
======= ======= =======
The effective tax rates on earnings (loss) before income taxes is
reconciled to statutory federal income tax rates as follows:
Years Ended December 31,
---------------------------------
1998 1997 1996
------- ------- --------
Statutory federal rate 35.0% (35.0)% (35.0)%
State and local income taxes,
net of federal income tax effect 8.5 (2.4) (3.0)
Non deductible amortization of
intangible assets 8.6 4.3 3.0
Change in valuation allowance (33.8) 6.2 17.0
Adjustments of deferred tax balances -- (6.2) --
Other (2.7) (0.6) (0.5)
------ ------ ------
Effective rate 15.6% (33.7)% (18.5)%
====== ====== ======
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 are as
follows:
December 31, December 31,
1998 1997
------------ -----------
Deferred tax assets:
Settlement and related expenses $ 13.0 $ 13.0
Accounts receivable 23.0 86.9
Self insurance reserves 6.0 4.6
Postretirement benefit obligation 13.7 10.6
Acquisition and restructuring reserves 37.2 34.3
State net operating loss carryforwards 15.7 11.8
Other 22.7 23.8
------- -------
131.3 185.0
Less valuation allowance (14.5) (42.0)
------- -------
Net deferred tax assets 116.8 143.0
------- -------
Deferred tax liabilities:
Intangible assets (54.3) (51.2)
Property, plant and equipment (12.2) (13.0)
Other (1.7) (1.1)
------- -------
Total gross deferred tax liabilities (68.2) (65.3)
------- -------
Net deferred tax assets $ 48.6 $ 77.7
======= =======
In 1996, a valuation allowance of $32.0 was established because at the
time the realization of the deferred tax asset related to the state net
operating loss carryforwards, the postretirement benefit obligation as well as
certain other temporary differences was considered less likely than not. The
increase in the valuation allowance of $10.0 from December 31, 1996 to
December 31, 1997 was due to the uncertain realization of the state tax effect
of certain temporary differences. Based on improved current and projected
operating results, the Company reduced its valuation allowance applied against
its deferred tax assets relating to state net operating loss carryforwards and
certain acquisition and restructuring reserves by approximately $27.5 million
during the fourth quarter of 1998. This was reflected as a reduction in the
provision for income taxes. This adjustment brings the Company's net deferred
tax assets to a level where management believes that it is more likely than
not the tax benefits will be realized.
During 1998, the Company received a Revenue Agents Report (RAR) from
the Internal Revenue Service, concluding audits of the tax years ended 1993,
1994, and 1995. Concurrent with the audits of these years, the Company has
filed amended Federal income tax returns for the years 1993-1997,
recalculating deductible amounts relating to
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
the allowance for doubtful accounts under Internal Revenue Code Section 475.
The amended returns, coupled with adjustments agreed-upon from the RAR,
produced a net tax refund receivable of approximately $13.6 which has been
recorded in the accompanying Consolidated Balance Sheet as of December 31,
1998. As a result of these amended returns and generation of taxable income
during 1998, the Company reduced the amount of its net deferred tax assets
related to accounts receivable and net operating loss carryforwards by
approximately $51.0.
The RAR also contained certain adjustments for additional taxes of $14.6
plus interest. The Company disagrees with these adjustments and believes it
has sound legal defenses to those items. It is the opinion of management that
the ultimate outcome of the case will not result in a material impact on the
Company's consolidated results of operation or financial position.
The Company has state tax loss carryforwards of approximately $307.3
which expire, starting in 2001, through 2018.
12. STOCK COMPENSATION PLANS
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. 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.
In 1997, the Company adopted the 1997 Stock Option Plan, reserving
6,000,000 shares of common stock for issuance pursuant to
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
options and stock appreciation rights that may be granted under the plan.
During 1998, there were 5,249,880 options granted to officers and key
employees of the company. Exercise prices for these options ranged from $1.94
to $2.50.
At December 31, 1998, there were 629,083 additional shares available for
grant under the Company's Stock Option Plans. The per share weighted-average
fair value of stock options granted during 1998 was $1.10 per share on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: - expected dividend yield 0.0%, volatility of
0.5, risk-free interest rate of 4.4%, and an expected life of five years.
In 1997, the Company adopted the 1997 Employee Stock Purchase Plan (the
"Plan"), reserving 3,500,000 shares of common stock for issuance.
Substantially all employees of the Company are eligible to participate in the
Plan through periodic payroll withholdings. For each six-month period,
eligible employees will receive options to purchase shares at 85% of the
lesser of the fair market value of a share of common stock at the beginning or
end of the withholding period. In July of 1998, the Company issued 732,255
shares of common stock to participating employees with payroll withholdings of
$1.1. In January of 1999, the Company issued 961,122 shares of common stock to
participating employees with payroll withholdings of $1.1.
The per share weighted-average grant date fair value of the benefits
granted under the Employee Stock Purchase Plan for the first six months and
second six months of 1998 was $0.50 and $0.78, respectively, using the Black-
Scholes option pricing model with the following weighted-average assumptions:
first six months-expected dividend yield 0.0%, volatility of 0.6, risk-free
interest rate of 5.3%, expected life of 181 days; second six months-expected
dividend yield 0.0%, volatility of 0.8, risk-free interest rate of 5.1%,
expected life of 184 days.
The Company applies the provisions of APB Opinion No. 25 in accounting
for its plans and, accordingly, no compensation cost has been recognized for
its stock compensation plans in the financial statements. Had the Company
determined compensation cost based on the fair value method as defined in SFAS
No. 123, the impact on the Company's net income (loss) on a pro forma basis is
indicated below:
Years ended
December 31,
1998 1997 1996
-------- -------- --------
Net income (loss) As reported $ 68.8 $ (106.9) $ (153.5)
Pro forma 66.1 (108.8) (154.7)
Net income (loss) per
common share As reported $ 0.20 $ (1.06) $ (1.25)
Pro forma 0.17 (1.07) (1.26)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Pro forma net income (loss) reflects only options granted in 1998, 1997
and 1996. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma amounts
presented above because compensation cost is reflected over the options'
vesting period of two to three years and compensation cost for options granted
prior to January 1, 1996 is not considered.
The following table summarizes grants of non-qualified options made by
the Company to officers and key employees under all 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, options
vest ratably over a period of two to three years on the anniversaries of the
grant date, subject to their earlier expiration or termination.
Changes in options outstanding under the plans for the periods indicated
were as follows:
Weighted-Average
Number Exercise Price
of Options per Option
---------- ---------------
Outstanding at January 1, 1996 1,741,245 $14.637
Canceled (443,027) $14.104
---------
Outstanding at December 31, 1996 1,298,218 $14.637
(993,429 exercisable)
Granted 4,080,000 $ 2.900
Canceled (589,500) $ 9.508
---------
Outstanding at December 31, 1997 4,788,718 $ 4.963
(1,769,893 exercisable)
Granted 5,249,880 $ 1.939
Canceled (323,891) $ 7.149
---------
Outstanding at December 31, 1998 9,714,707 $ 3.256
=========
Exercisable at December 31, 1998 2,825,940 $ 5.934
=========
The weighted average remaining life of options outstanding at December
31, 1998 is approximately 9.0 years.
The following table summarizes information concerning currently
outstanding and exercisable options.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------------------------------------------- ---------------------
$ 1.938 - 3.125 8,912,648 8.9 2.337 2,023,881 2.947
$11.293 - 16.481 802,059 6.5 13.472 802,059 13.472
--------- ---------
9,714,707 2,825,940
========= =========
13. RELATED PARTY TRANSACTIONS
At December 31, 1998 and 1997, 61,329,256 shares of the Company's
outstanding common stock, or approximately 49.0% at December 31, 1998 and
49.6% at December 31, 1997, were owned by Roche. In addition, Roche owned
5,672,399 shares of the Company's redeemable convertible preferred stock at
December 31, 1998, or approximately 52.7%. No voting rights are associated
with the redeemable preferred shares.
The Company purchases certain items, primarily laboratory testing
supplies from various affiliates of Roche. Total purchases from these
affiliates, which are recorded in cost of sales, were $33.0, $25.2 and $19.6
in 1998, 1997 and 1996, respectively. In addition, the Company made royalty
payments to Roche in the amounts of $2.9 in 1998, $3.7 in 1997 and $1.4 in
1996. Revenue received from Roche for laboratory services was $0.5 in 1998,
$1.6 in 1997 and $2.0 in 1996. Amounts owed to affiliates at December
31, 1998 and 1997 were $1.7 and $2.2, respectively.
A member of the Company's Board of Directors is President, Chief
Executive Officer and Chairman of Autocyte, Inc. and has a beneficial
ownership of 15.5% of Autocyte's common stock. The Company's Chief Executive
Officer serves on the Board of Autocyte and has a beneficial ownership of less
than 1% of Autocyte's common stock.
The Company has certain on-going arrangements with Autocyte for the
purchase by the Company of certain products with an aggregate value of
approximately $0.7 in 1998, less than $0.1 in 1997 and $2.2 in 1996.
As of December 31, 1998 and 1997, the number of warrants outstanding to
purchase the Company's common stock was 22,151,308, of which 8,325,000
warrants were held by an affiliate of Roche. These warrants are exercisable
at a price of $22.00 per share and expire on April 28, 2000.
14. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in litigation which purports to be a class action
brought on behalf of certain patients, private insurers and benefit plans that
paid for laboratory testing services during the time frame covered by the 1996
Government Settlement. The Company
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
has also received certain similar claims brought on behalf of certain other
insurance companies, some of which have been resolved for immaterial amounts.
These claims for private reimbursement are similar to the government claims
settled in 1996. However, no amount of damages has been specified at this
time and, with the exception of the above, no settlement discussions have
taken place. The Company is carefully evaluating these claims. However, due
to the early stage of the claims, the ultimate outcome of these claims cannot
presently be predicted.
The Company is also involved in certain claims and legal actions arising
in the ordinary course of business. These matters include, but are not
limited to, inquiries from governmental agencies and Medicare or Medicaid
carriers requesting comment on allegations of billing irregularities that have
been brought to their attention through billing audits or third parties. In
the opinion of management, based upon the advice of counsel and consideration
of all facts available at this time, the ultimate disposition of these matters
will not have a material adverse effect on the financial position, results of
operations or liquidity 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, certain medical
costs 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, 1998 and
1997, the Company had provided letters of credit aggregating approximately
$23.0 and $26.1, respectively, primarily in connection with certain insurance
programs.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
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, 1998 are as follows:
Operating Capital
--------- -------
1999 45.6 3.7
2000 35.2 2.8
2001 24.5 2.6
2002 19.5 2.4
2003 15.6 2.5
Thereafter 56.7 9.8
------ ------
Total minimum lease payments 197.1 23.8
Less:
Amounts included in
restructuring accruals -- 13.9
Amount representing interest -- 4.1
------ ------
Total minimum operating
lease payments and
present value of minimum
capital lease payments $ 197.1 $ 5.8
======= ======
Current $ 1.6
Non-current 4.2
------
$ 5.8
======
Rental expense, which includes rent for real estate, equipment and
automobiles under operating leases, amounted to $67.5, $67.9 and $70.6 for the
years ended December 31, 1998, 1997 and 1996, respectively.
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 $7.1, $6.9 and $7.5 in 1998, 1997 and 1996, 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. The Company's policy is to fund the Company Plan with at
least the minimum amount required by applicable regulations.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The Company has a second defined benefit plan which covers its senior
management group that provides for the payment of the difference, if any,
between the amount of any maximum limitation on annual benefit payments under
the Employee Retirement Income Security Act of 1974 and the annual benefit
that would be payable under the Company Plan but for such limitation. This
plan is an unfunded plan.
The components of net periodic pension cost for both of the defined
benefit plans are summarized as follows:
Company Plan
------------------------
Years ended
December 31,
1998 1997 1996
------------------------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 10.5 $ 10.4 $ 10.3
Interest cost 8.6 8.3 7.0
Expected return on plan assets (11.0) (8.7) (7.8)
Net amortization and deferral (1.6) (1.1) (0.8)
------ ------ ------
Net periodic pension cost $ 6.5 $ 8.8 $ 8.7
====== ====== ======
Company Plan
---------------
December 31,
1998 1997
---------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $134.1 $108.0
Service costs 10.5 10.4
Interest cost 8.6 8.3
Actuarial (gain)/loss (4.0) 14.8
Benefits paid (8.9) (7.4)
------ ------
Benefit obligation at end of year 140.3 134.1
------ ------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 118.5 96.2
Actual return on plan assets 9.9 20.2
Employer contributions 16.4 9.5
Benefits paid (8.9) (7.4)
------ ------
Fair value of plan assets at end of year 135.9 118.5
------ ------
Funded status, end of year 4.4 15.6
Unrecognized net actuarial loss (14.3) (20.6)
Unrecognized prior service cost 10.6 15.5
------ ------
Accrued pension liability $ 0.7 $ 10.6
====== ======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Assumptions used in the accounting for the defined benefit plans were as
follows:
Company Plan
----------------
1998 1997
----------------
Weighted average discount rate 6.75% 7.00%
Weighted average rate of increase
in future compensation levels 4.0% 4.0%
Weighted average expected long-
term rate of return 9.0% 9.0%
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 Year ended
December 31, December 31,
1998 1997
------------ ------------
Service cost $ 1.0 $ 1.0
Interest cost 2.7 2.4
Net amortization and deferral 0.1 --
------ ------
Postretirement benefit costs $ 3.8 $ 3.4
====== ======
A summary of the components of the accumulated postretirement benefit
obligation follows:
December 31,
1998 1997
----------------
Retirees $ 9.3 $ 6.2
Fully eligible active plan participants 11.5 14.4
Other active plan participants 18.0 20.0
------ ------
$ 38.8 $ 40.6
====== ======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
RECONCILIATION OF THE FUNDED STATUS OF THE
POSTRETIREMENT BENEFIT PLAN AND ACCRUED LIABILITY:
Accumulated postretirement benefit obligation,
beginning of year $ 40.6 $ 32.1
Changes in benefit obligation due to:
Service cost 1.0 1.0
Interest cost 2.7 2.4
Plan participants contributions 0.1 0.9
Actuarial (gain) loss (3.7) 5.1
Amendments (1.1) --
Benefits paid (0.8) (0.9)
------ ------
Accumulated post retirement benefit obligation,
end of year 38.8 40.6
Unrecognized net actuarial loss (10.5) (14.8)
Unrecognized prior service cost 4.2 3.6
------ ------
Accrued postretirement benefit obligation $ 32.5 $ 29.4
====== ======
The weighted-average discount rates used in the calculation of the
accumulated postretirement benefit obligation were 6.8% and 7.1%,
respectively, as of December 31, 1998 and 1997. The health care cost trend
rate was assumed to be 7.5% and 8.0%, respectively, declining gradually to
5.0% in the year 2006 and thereafter. The health care cost trend rate has a
significant effect on the amounts reported. To illustrate, increasing the
assumed health care cost trend rates by a percentage point in each year would
increase the accumulated postretirement benefit obligation as of December 31,
1998 by $7.0 million. The impact of a percentage point increase on the
aggregate of the service cost and interest cost components of the net periodic
postretirement benefit cost results in an increase of $0.7.
16. QUARTERLY DATA (UNAUDITED)
The following is a summary of unaudited quarterly data:
Year ended December 31, 1998
---------------------------------------------
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
Net sales $ 387.7 $ 402.4 $ 414.7 $ 407.8 $1,612.6
Gross profit 132.0 144.6 144.4 142.4 563.4
Net earnings (loss) 9.3 12.8 11.4 35.3 68.8
Less preferred dividends 11.0 11.3 11.1 10.2 43.6
less accretion of mandatorily
redeemable preferred stock 0.2 0.2 0.2 0.2 0.8
Net earnings (loss)
attributable to common
shareholders (1.9) 1.3 0.1 24.9 24.4
Basic earnings (loss) per
common share (0.01) 0.01 0.00 0.20 0.20
Diluted earnings (loss) per
common share (0.01) 0.01 0.00 0.11 0.20
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Year ended December 31, 1997
---------------------------------------------
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
---------------------------------------------
Net sales $ 406.5 $ 405.3 $ 391.4 $ 376.7 $1,579.9
Gross profit 129.3 133.6 128.7 107.8 499.4
Net earnings (loss) 2.4 4.1 5.4 (118.8) (106.9)
Less preferred dividends -- 1.1 12.0 10.3 23.4
Less accretion of mandatorily
redeemable preferred stock -- -- 0.2 0.3 0.5
Net earnings (loss)
attributable to common
shareholders 2.4 3.0 (6.8) (129.4) (130.8)
Basic and diluted earnings
(loss) per common share 0.02 0.02 (0.05) (1.05) (1.06)
In the fourth quarter of 1998, the Company reclassified certain amounts
for the three quarters ended September 30, 1998, and the four quarters ended
December 31, 1997, to selling, general and administrative expenses from net
sales adjustments to be consistent with the 1998 classification. The
reclassified amounts are as follows: $14.7, first quarter of 1998; $16.3,
second quarter of 1998; $16.4, third quarter of 1998; $15.0, first quarter of
1997; $15.8, second quarter of 1997; $14.9, third quarter of 1997; $15.3, fourth
quarter of 1997; $61.0, full year of 1997.
For the fourth quarter of 1998, basic and diluted earnings per common
share is calculated based on the weighted average number of shares outstanding
for the quarter (125,269,903 and 318,739,501, respectively).
During the fourth quarter of 1997, the Company recorded a provision for
doubtful accounts of $182.0, which was approximately $160.0 greater than the
amount recorded in the fourth quarter of 1996. This pre-tax charge was made to
increase the allowance for doubtful accounts to a level that management
believes is appropriate to reduce its accounts receivable to the net amount
that management believes will ultimately be collected.
In the fourth quarter of 1997, the Company recorded a pre-tax charge of
$22.7, related primarily to a restructuring charge associated with the
downsizing of its Long Island, New York facility and the future consolidation
into its Raritan, New Jersey facility.
In the second quarter of 1997 the Company determined that approximately
$12.6 of existing restructuring reserves were excessive due largely to
expected proceeds from subleases and asset disposals. Also, in the second
quarter of 1997 the Company decided to downsize the Winston-Salem, North
Carolina laboratory and redirect specimen volumes to other company facilities
in order to realize operational efficiencies. Restructuring charges related to
the closing of the Winston-Salem laboratory totaled $12.6.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
17. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued.
This Statement is effective for fiscal years beginning after June 15, 1999,
and standardizes the accounting for derivative instruments by requiring that
and entity recognize those items as assets or liabilities and measure them at
fair value. Adoption is not expected to have a material impact on the
Company's financial position or results of operations.
SCHEDULE II
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 31, 1998, 1997 and 1996
(Dollars in Millions)
-------------------------------------------------------------------------------
Balance Charged Other
at to (Deduct-
beginning Costs and ions
of year Expenses Additions
-------------------------------------------------------------------------------
Year ended December 31, 1998:
Applied against asset
accounts:
Allowance for
doubtful accounts $ 195.4 $ 164.7 $ (166.1)
======= ======== ========
Valuation allowance-
deferred tax assets $ 42.0 $ (27.5) $ --
======= ======== ========
Year ended December 31, 1997:
Applied against asset
accounts:
Allowance for
doubtful accounts $ 111.6 $ 311.5 $ (227.7)
======= ======== ========
Valuation allowance-
deferred tax assets $ 32.0 $ 10.0 $ --
======= ======== ========
Year ended December 31, 1996
Applied against asset
accounts:
Allowance for
doubtful accounts $ 90.4 $ 150.0 $ (128.8)
======= ======== ========
Valuation allowance-
deferred tax assets $ -- $ 32.0 $ --
======= ======== ========
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|---|
-----------------------------------------
Balance
at end
of year
-----------------------------------------
Year ended December 31, 1998:
Applied against asset
accounts:
Allowance for
doubtful accounts $ 194.0
=======
Valuation allowance-
deferred tax assets $ 14.5
=======
Year ended December 31, 1997:
Applied against asset
accounts:
Allowance for
doubtful accounts $ 195.4
=======
Valuation allowance-
deferred tax assets $ 42.0
=======
Year ended December 31, 1996:
Applied against asset
accounts:
Allowance for
doubtful accounts $ 111.6
=======
Valuation allowance-
deferred tax assets $ 32.0
=======
Dates Referenced Herein and Documents Incorporated by Reference
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