Annual Report — [x] Reg. S-K Item 405 — Form 10-K
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1995
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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
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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)
910-229-1127
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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
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Common Stock, $0.01 par value 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.
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: $477,240,862 at
February 26, 1996.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date: 122,908,722 shares at
February 26, 1996, of which 61,329,256 shares are held by indirect wholly
owned subsidiaries of Roche Holding Ltd. The number of warrants outstanding to
purchase shares of the issuer's common stock is 22,151,308 as of February 26,
1996, of which 8,325,000 are held by an indirect wholly owned subsidiary of
Roche Holding Ltd.
PART I
Item 1. DESCRIPTION OF BUSINESS
Laboratory Corporation of America Holdings ("Company") is one of
the leading clinical laboratory companies in the United States.
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. The Company's principal executive offices are located at 358
South Main Street, Burlington, North Carolina 27215, and its
telephone number is 910-229-1127.
Prior to April 28, 1995, the Company's name was National Health
Laboratories Holdings Inc. ("NHL"). On April 28, 1995, following
approval at a special meeting of the stockholders of the Company, the
name was changed to Laboratory Corporation of America Holdings. On
April 28, 1995 the Company also completed a merger with Roche
Biomedical Laboratories, Inc. ("RBL") pursuant to an Agreement and
Plan of Merger (the "Merger Agreement") dated as of December 13, 1994
(the "Merger").
Pursuant to the Merger Agreement, each outstanding share of
common stock, par value $0.01 per share of the Company ("Common
Stock), was converted (the "Share Conversion") into (i) 0.72 of a
share of Common Stock of the Company and (ii) a distribution of $5.60
in cash per share, without interest. The aggregate number of shares
issued and outstanding following the Share Conversion was 61,041,159.
Also, an aggregate of 538,307 shares of Common Stock were issued in
connection with the cancellation of certain employee stock options.
In addition, pursuant to the Merger Agreement, an aggregate of
61,329,256 shares of Common Stock were issued to HLR Holdings, Inc.
("HLR") and its designee, Roche Holdings, Inc. in exchange for all
shares of common stock, no par value, of RBL outstanding immediately
prior to the effective date of the Merger (other than treasury
shares, which were canceled) and a cash contribution of $135.7
million. The issuance of such shares of Common Stock constituted
approximately 49.9% of the total outstanding shares of Common Stock
outstanding immediately after the Merger.
The Company also made a distribution (the "Warrant
Distribution") to holders of record as of April 21, 1995, of 0.16308
of a warrant per outstanding share of Common Stock, each such warrant
representing the right to purchase one newly issued share of Common
Stock for $22.00 (subject to adjustment) on April 28, 2000 (each such
warrant, a "Warrant"). Approximately 13,826,000 Warrants were issued
to stockholders entitled to receive Warrants in the Warrant
Distribution. In addition, pursuant to the Merger Agreement on April
28, 1995 the Company issued to Hoffmann-La Roche Inc., for a purchase
price of approximately $51.0 million, 8,325,000 Warrants to purchase
shares of Common Stock, which Warrants have the terms described
above.
Until the initial public offering of approximately 5% of the
Company's common stock in July 1988, the Company was a subsidiary of
Revlon Holdings Inc. ("Revlon"), then known as Revlon, Inc., which,
in turn, is a subsidiary of Mafco Holdings Inc. ("Mafco"), a
corporation that is 100% owned by Ronald O. Perelman. Mafco's
indirect ownership as of December 31, 1995 is approximately 12% of
the outstanding shares of Company Common Stock.
On June 23, 1994, the Company acquired Allied Clinical
Laboratories, Inc. ("Allied"), then the sixth largest independent
clinical laboratory testing company in the United States (in terms of
net revenues), as a wholly owned subsidiary for approximately $191.5
million in cash plus the assumption of $24.0 million of Allied
indebtedness and the recognition of approximately $5.0 million of
Allied net liabilities (the "Allied Acquisition").
Since its founding in 1971 and with the Merger and Allied
Acquisition, the Company has grown into a network of 31 major
laboratories and approximately 1,500 service sites consisting of
branches, patient service centers and STAT laboratories, serving
customers in 48 states.
The Clinical Laboratory Testing Industry
Laboratory tests and procedures are used generally by hospitals,
physicians and other health care providers to assist in the
diagnosis, evaluation, 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 1995 approximately 46 percent of
the clinical testing revenues in the United States were derived by
hospital-based laboratories, approximately 15 percent was derived by
physicians in their offices and laboratories and approximately 39
percent went to independent clinical laboratories. The Health Care
Financing Administration ("HCFA") of the Department of Health and
Human Services ("HHS") has estimated that there are approximately
5,700 independent clinical laboratories in the United States. The
Company believes that the volume of clinical laboratory testing has
grown over the past few years due to several factors, including
primarily: an expanded base of scientific knowledge which has led to
the development of more sophisticated specialized tests and an
increase in the awareness of physicians of the value of clinical
laboratory testing as a cost-effective means of prevention, early
detection of disease and monitoring of treatment. Additional factors
which have contributed to the recent 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.
Laboratory Testing Operations and Services
The Company has 31 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. 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 processes approximately 255,000 patient specimens on
an average day. 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.
Services Offered
The following discussion describes the different types of tests
performed by the Company:
Testing for Physician Offices and Clinics
The Company currently offers over 1,700 different clinical
laboratory tests or procedures. Several hundred of these are
frequently used in general patient care by physicians to establish or
support a diagnosis, to monitor treatment or medication or to search
for an otherwise undiagnosed condition. 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 31 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.
Testing for Hospitals
Hospitals generally maintain an on-site laboratory to perform
immediately needed testing on patients receiving care. However, they
also refer less frequently needed procedures to outside facilities,
including independent clinical laboratories and larger medical
centers. Since some hospitals actively encourage community
physicians to send their testing to the hospital, such medical
facilities can be both client and competitor for independent
laboratories such as the Company.
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. The following are
niche businesses in which the Company offers testing and related
services:
Allergy Testing. The Company offers an extensive range of
allergen testing services as well as computerized analysis and a
treatment program that enables primary care physicians to diagnose
and treat many kinds of allergic disorders.
Ambulatory Monitoring. The Company performs a computer assisted
analysis of electrocardiograms and blood pressure measurements.
Many of these analyses are submitted by physicians who require
extended (up to 24 hours) monitoring of these parameters for
patients.
Clinical Research Testing. The Company regularly performs
clinical laboratory testing for pharmaceutical companies
conducting clinical research trials on new drugs. This testing
often involves periodic testing of patients participating in the
trial over several years.
Diagnostic Genetics. The Company offers cytogenetic biochemical
and molecular genetic tests.
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.
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.
Substance Abuse Testing. The Company provides urinalysis testing
for the detection of drugs of abuse for private and government
customers, and also provides blood testing services for the
detection of drugs of abuse and alcohol. These testing services
are designed to produce "forensic" quality test results that
satisfy the rigorous requirements for admissibility as evidence in
legal proceedings.
Veterinary Testing. The Company offers clinical laboratory
testing of animal specimens for veterinarians which require
specialized testing procedures and handling due to their differing
characteristics.
Specialty Testing Centers
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 in Research Triangle Park, North Carolina, also
specializes in new test development and education and training
related thereto.
Contract Management Services
The Company provides management services in a variety of health
care settings. The Company generally supplies the laboratory manager
and other laboratory personnel, as well as, equipment and testing
supplies to manage a laboratory that is owned by a hospital, managed
care organization or other health care provider. In addition, the
Company maintains a data processing system to organize and report
test results and to provide billing and other pertinent information
related to the tests performed in the managed laboratory. Under the
typical laboratory management agreement, the laboratory manager, who
is employed by the Company, reports to the hospital or clinic
administration. Thus, the hospital or clinic ("Provider") maintains
control of the laboratory. A pathologist designated by the Provider
serves as medical director for the laboratory.
An important advantage the Company offers to its clients is the
flexibility of the Company's information systems used in contract
management services. In addition to the ability to be customized for
a particular user's needs, the Company's information systems also
interface with several hospital and clinic systems, giving the user
more efficient and effective information flow.
The Company's management service contracts typically have terms
between three and five years. However, most contracts contain a
clause that permits termination prior to the contract expiration
date. The termination terms vary but they generally fall into one of
the following categories: (i) termination without cause by either the
Company or the contracted Provider after written notice (generally 60
to 90 days prior to termination); (ii) termination by the contracted
Provider only if there are uncorrected deficiencies in the Company's
performance under the contract after notice by the contracted
Provider; or (iii) termination by the contracted Provider if there is
a loss of accreditation held by any Company laboratory that services
the contracted Provider, which accreditation is not reinstated within
30 days of the loss, or up to 30 days' notice if there is a decline
in the quality of services provided under such contract which remains
uncorrected after a 15-day period. While the Company believes that
it will maintain and renew its existing contracts, there can be no
assurance of such maintenance or renewal.
As part of its marketing efforts, and as a way to focus on a
contract management client's particular needs, the Company has
developed several different pricing formulas for its management
services agreements. In certain cases, profitability may depend on
the Company's ability to accurately predict test volumes, patient
encounters or the number of admissions in the case of an inpatient
facility.
Clients and Payees
In 1995, no single client or group of clients under the same
contract accounted for more than two percent of the Company's net
sales. The Company believes that the loss of any one of its
laboratory service agreements would be unlikely to have a material
adverse effect on the Company's financial results. For the year
ended December 31, 1995, billings to private patients or their
insurance carriers accounted for approximately 34% of the Company's
net sales, billings to Medicare and Medicaid accounted for
approximately 28% of net sales and billings paid directly by
physicians and other commercial clients accounted for approximately
38% of the Company's net sales.
Sales and Marketing
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, 1995, the Company
employed approximately 290 generalists and 120 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 ("CSA's")
to interact with clients on an ongoing basis. CSA's 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, 1995, the Company employed approximately 370 CSA's. CSA's are
compensated with a combination of salaries and bonuses commensurate
with each individual's qualifications and responsibilities.
The Company believes that the clinical laboratory service
business is shifting away from the traditional direct sales structure
and into one in which the purchasing decisions for laboratory
services are increasingly made by managed care organizations,
insurance plans, employers and increasingly by patients themselves.
In view of these changes, the Company has adapted its sales and
marketing structure to more appropriately address the new
opportunities. For example, the Company has expanded its specialists
sales positions in both its primary business and its niche businesses
in order to maximize the Company's competitive strengths of advanced
technology and marketing focus. Additionally, the Company has begun
to integrate traditional sales and customer support functions into a
new position, the Account Manager, which will have responsibility for
certain sales, service and daily operational contact with physician-
clients.
The Company believes that given the increasing complexity of the
clinical laboratory marketplace, training of its sales force is of
paramount importance. With this goal in mind, during 1995 the
Company enhanced its comprehensive sales training program. This
project involved a complete revision of the sales training material.
Potential New Markets
Health care reform, the shift to managed care and increased
competition by hospitals all had an impact on the clinical laboratory
testing industry in 1995. The Company expects these trends to
continue and plans to respond by shifting additional sales staff to
support the managed care market segment.
The Company believes that sales of testing and related services
for use in clinical trials, detection of drugs of abuse and hospital
reference testing will also continue to offer opportunities for
additional revenue growth in 1996. The Company views hospitals in
general as a major competitive force in the marketplace today. To
that end, a hospital business venture group has been formed whose
primary goal is to identify potential hospital joint venture
arrangements. These arrangements are likely to include management
agreements, hospital laboratory operations ventures and hospital
laboratory purchases. The Company views this market as having
exceptional future potential for 1996 and beyond.
Information Systems
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. In 1995, the Company created the Corporate
Information Systems Division to manage 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 hired a Chief Information
Officer, whose responsibility is to integrate, manage and develop the
Company's information systems.
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.
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.
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.
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 the HCFA to inspect clinical laboratories to determine
Clinical Laboratory Improvement Act of 1967, and the Clinical
Laboratory Improvement Amendments of 1988 (collectively, as amended
"CLIA") standards. A laboratory's receipt of accreditation by the
CAP satisfies the Medicare requirement for participation in
proficiency testing programs administered by an external source. All
of the Company's major laboratories are accredited by the CAP.
Employees
At December 31, 1995, the Company employed approximately 24,600
people. These include approximately 20,900 full-time employees and
approximately 3,700 part-time employees, which represents the
equivalent of approximately 22,000 persons full-time. Of the
approximately 22,000 full-time equivalent employees, approximately
450 are sales personnel, approximately 19,150 are laboratory and
distribution personnel and approximately 2,400 are administrative and
data processing personnel. The Company has no collective bargaining
agreements with any unions and believes that its overall relations
with its employees are excellent.
Effect of the Growth of the Managed Care Sector on the Clinical
Laboratory Business
Many market-based changes in the clinical laboratory business
have occurred, most involving the shift away from traditional, fee-
for-service medicine to managed-cost health care. The growth of the
managed care sector presents various challenges to the Company and
other independent clinical laboratories. Managed care providers
typically contract with a limited number of clinical laboratories and
negotiate discounts to the fees charged by such laboratories in an
effort to control costs. In addition, managed care providers have
used capitated payment contracts in an attempt to promote more
efficient use of laboratory testing services. Under a capitated
payment contract, the clinical laboratory and the managed care
provider agree to a per month payment to cover all laboratory tests
during the month, regardless of the number or cost of the tests
actually performed. Such contracts shift the risks of additional
testing beyond that covered by the capitated payment to the clinical
laboratory.
For the last several years, the Company has had a strong
presence in the managed care sector and has designed its sales
efforts to expand its presence in that sector. There can be no
assurance, however, that the Company will be successful in expanding
its share of this market sector, or that the Company will not
experience additional declines in test utilization or per-test
revenue in the future as a result of managed care growth or
otherwise.
In response to the growth of the managed care sector and the
developments described above, many health care providers have
established new alliances. Hospital-physician networks are emerging
in many markets in order to offer comprehensive, integrated service
capabilities, either to the managed care plans or directly to
employers. While adapting to these changes, the clinical laboratory
industry is also facing a significantly intensified level of
regulatory and investigative scrutiny, in many cases in areas that
have been left without, until recently, clear regulatory guidance
for providers. There is currently uncertainty in the industry
regarding the impact of these factors on the clinical laboratory
business.
Competition
The clinical laboratory business is highly fragmented and
intensely competitive. In recent years, certain independent
laboratories have engaged in acquisitions of other laboratories and
taken advantage of opportunities for cost efficiencies afforded by
larger scale, automated testing operations. In 1995, the Company
completed the Merger and in 1994 acquired Allied. Also, in June
1994, Corning Inc. ("Corning") and Nichols Institute entered into a
merger agreement pursuant to which Corning acquired Nichols Institute
in exchange for Corning common stock. In 1993, Corning acquired the
stock of Damon Corporation. The Company believes that acquisition
activity will continue in the clinical laboratory business. Several
factors are contributing to this activity, including legislative
initiatives such as restrictions on physician referrals and ownership
of laboratories, increasing demand for higher quality services and
more stringent service requirements, the growth of managed health
care entities which require low-cost testing services and, generally,
the demands by health care providers and payors for faster reporting
of test results and lower prices.
The Company competes primarily on the basis of the quality of
its testing, reporting and information services, its reputation in
the medical community, the pricing of its services and its ability to
employ qualified laboratory personnel. The Company also believes
that its ability to compete also depends on its ability to make
investments in equipment and management information systems and offer
testing services on a broad regional geographic basis.
Regulation and Reimbursement
Overview. 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 also must 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 eight 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 must accept the scheduled amount as
payment in full for most tests performed on behalf of Medicare
beneficiaries and must bill the program directly. 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 1995, the Company derived approximately 28%
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. 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 and Medicaid on August 1, 1993. The
CPT changes have altered the way the Company bills Medicare and
Medicaid for some of its services, thereby reducing the reimbursement
the Company receives from those programs for some of its services.
For example, certain codes for calculations, such as LDL cholesterol,
were deleted and are no longer a payable service under Medicare and
Medicaid.
Moreover, Medicare denied reimbursement to NHL for claims
submitted for HDL cholesterol and serum ferritin (a measure of iron
in the blood) tests from September 1993 to December 1993, at which
time NHL removed such tests from its basic test profiles.
In March 1996, the HCFA implemented changes in the policies used
to administer Medicare payments to clinical laboratories for the most
frequently performed automated blood chemistry profiles. Among other
things, the changes established a consistent standard nationwide for
the content of the automated chemistry profiles. Another change
incorporated in the HCFA proposal requires laboratories performing
certain automated blood chemistry profiles to obtain and provide
documentation of the medical necessity of tests included in the
profiles for each Medicare beneficiary. The Company expects to incur
additional costs associated with the implementation of these
requirements. The amount of additional costs and the impact on the
Company's financial condition and results of operations have not yet
been determined.
Future changes in Federal, state and local regulations (or in
the interpretation of current regulations) affecting governmental
reimbursement for clinical laboratory testing could have a material
adverse effect on the Company. The Company is unable to predict,
however, whether and what type of legislation will be enacted into
law.
Fraud and Abuse Regulations. The Medicare and Medicaid anti-
kickback laws prohibit intentionally paying anything of value to
influence the referral of Medicare and Medicaid business. HHS has
published safe harbor regulations which specify certain business
activities that, although literally covered by the laws, will not
violate the Medicare/Medicaid anti-kickback laws. Failure to fall
within a safe harbor does not constitute a violation of the anti-
kickback laws if all conditions of the safe harbor are met; rather,
the arrangement would remain subject to scrutiny by HHS.
In October 1994, the Office of 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 pickup and disposal of bio-hazardous waste for
physicians for items unrelated to a laboratory's testing services;
providing facsimile machines or computers to physicians that are not
exclusively used in connection with the laboratory services
performed; and providing free testing for health care providers,
their families and their employees (professional courtesy testing).
The OIG stressed in the Fraud Alert that when one purpose of the
arrangements is to induce referral of program-reimbursed laboratory
testing, both the clinical laboratory and the health care provider or
physician may be liable under the anti-kickback laws and may be
subject to criminal prosecution and exclusion from participation in
the Medicare and Medicaid programs.
According to the 1995 work plan of the OIG, its recently
established Office of Civil Fraud and Administrative Adjudication
("OCFAA") will be responsible for protecting the government-funded
health care programs and deterring fraudulent conduct by health care
providers through the negotiation and imposition of civil monetary
penalties, assessments and program exclusions. The OCFAA works very
closely with the Department of Justice, the Office of General Counsel
and the OIG investigative and audit offices in combating fraud and
abuse. In addition, the OIG has stated in its 1995 work plan that it
will determine the extent to which laboratories supply physicians'
offices with phlebotomists (blood-drawing technicians), offer
management services or medical waste pick-up to physicians, provide
training to physicians or engage in other financial arrangements with
purchasers of laboratories' services. The OIG will assess the
potential benefits of such arrangements as well as the extent to
which such arrangements might be unlawful.
In March 1992, HCFA published proposed regulations to implement
the Medicare statute's prohibition (with certain exceptions) on
referrals by physicians who have an investment interest in or a
compensation arrangement with laboratories. The prohibition on
referrals also applies where an immediate family member of a
physician has an investment interest or compensation arrangement with
a laboratory. The proposed regulations would define remuneration
that gives rise to a compensation arrangement as including discounts
granted by a laboratory to a physician who sends testing business to
the laboratory and who pays the laboratory for such services. If
that definition of remuneration were to have become effective, it
could have had an impact on the way the Company prices its services
to physicians. However, in August 1993, the referenced Medicare
statute was amended by OBRA '93. One of these amendments makes it
clear that day-to-day transactions between laboratories and their
customers, including, but not limited to, discounts granted by
laboratories to their customers, are not affected by the compensation
arrangement provisions of the Medicare statute.
Infectious Wastes and Radioactive Materials. The Company is
subject to licensing and regulation under Federal, state and local
laws relating to the handling 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 operated in accordance with 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. Although the Company believes that it is
currently in compliance in all material respects with such Federal,
state and local laws, failure to comply could subject the Company to
denial of the right to conduct business, fines, criminal penalties
and/or other enforcement actions.
Occupational Safety. In addition to its comprehensive
regulation of safety in the workplace, the Federal Occupational
Safety and Health Administration ("OSHA") 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.
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.
Specimen Transportation. Regulations of the Department of
Transportation, the Public Health Service and the Postal Service
apply to the transportation of clinical laboratory specimens.
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 and the OIG.
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."
1992 NHL Government Settlement. In November 1990, NHL became
aware of a grand jury inquiry relating to its pricing practices being
conducted by the United States Attorney for the San Diego area (the
Southern District of California) with the assistance of the OIG. On
December 18, 1992, NHL entered into the 1992 NHL Government
Settlement, which related to the government's contention that NHL
improperly included tests for HDL cholesterol and serum ferritin in
its basic test profile, without clearly offering an alternative
profile that did not include these medical tests. The government
also contended that, in certain instances, physicians were told that
these additional tests would be included in the basic test profile at
no extra charge. As a result, the government contended, NHL's
marketing activities denied physicians the ability to exercise their
judgment as to the medical necessity of these tests.
Pursuant to the 1992 Government Settlement, NHL pleaded guilty
to the charge of presenting two false claims to the Civilian Health
and Medical Program of the Uniformed Services ("CHAMPUS") and paid a
$1 million fine. In connection with pending and threatened civil
claims, NHL also agreed to pay $100 million to the Federal Government
in installments. At December 31, 1995, all such payments due to the
government under the 1992 NHL Government Settlement have been made.
Concurrent with the 1992 NHL Government Settlement, NHL settled
related Medicaid claims with states that account for over 99.5% of
its Medicaid business and paid $10.4 million to the settling states.
1993 OIG Investigation. In August 1993, RBL and Allied each
received a subpoena from the OIG requesting documents and information
concerning pricing and billing practices. According to published
reports, other independent clinical laboratories have received
similar subpoenas as part of a nationwide OIG audit and
investigation. In September 1993, NHL received a subpoena from the
OIG which required NHL to provide documents to the OIG concerning its
regulatory compliance procedures. Each of NHL, RBL and Allied has
complied with, or the Company is in the process of complying with the
respective subpoenas and cooperating with the related OIG
investigation. 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 which tests that can be performed together on a single
specimen and that Medicare and Medicaid pay under the Medicare fee
schedule.
Based on published reports, the Company believes that the OIG's
investigation is primarily focused on two alleged practices. The
first alleged practice consists of offering the automated chemistry
profile as a part of a "standard" blood chemistry profile that also
includes one or more of the 14 tests referenced in the OIG subpoena
in a manner which is misleading to the ordering physician or which
fails to provide the physician with the choice of ordering only the
automated chemistry profile. Representatives of the OIG have
publicly stated that this practice may lead to the ordering of
"unnecessary" tests. The second alleged practice involves the
failure to disclose to physicians that the prices charged by those
laboratories to Medicare and Medicaid for many of these tests
referenced in the OIG subpoena were greater than the prices the
laboratories charged to the physicians for those same tests where the
tests were performed in conjunction with an automated chemistry
profile. Representatives of the OIG have publicly stated that
undisclosed pricing differences may cause physicians to believe
incorrectly that they are ordering tests at little or no cost to the
Medicare and Medicaid programs, possibly causing tests to be ordered
which are not medically necessary. RBL's and Allied's laboratories
have included some of the 14 tests in their respective "standard"
blood chemistry profiles, and also in "custom" profiles created for
individual physicians at their request. Tests performed for Medicare
and Medicaid patients are, in accordance with applicable laws, billed
directly to the Medicare and Medicaid programs.
If the OIG were to pursue and successfully prove a violation of
the laws related to the Medicare and Medicaid programs, potential
sanctions may include significant fines, recovery of the amounts paid
to the clinical laboratory for the tests involved and, in the case of
a criminal conviction, mandatory exclusion from the Medicare and
Medicaid programs for a period of at least five years. If the OIG
asserts a claim against RBL or Allied and is successful in pursuing
such a claim, the Company's business and financial condition could be
adversely affected. Although neither the 1992 Government Settlement
nor, based on published reports, any settlement agreements with the
OIG entered into by other major clinical laboratory companies,
provided for exclusion from participation in the Medicare and
Medicaid programs, there can be no assurance that the Company will be
able to negotiate settlement agreements with similar terms if the
government asserts (or threatens to assert) a claim. In addition, a
criminal conviction or the successful prosecution of a civil fraud or
false claims action could result in the exclusion of the defendant
from the Medicare and Medicaid programs. Any such exclusion would
likely have a material adverse effect on the Company's non-Medicare
and non-Medicaid testing business. No prediction, however, can be
made as to the outcome of the OIG investigations or the impact of any
such outcomes on the Company's financial condition or results of
operations.
1994 OIG Investigation of Allied. In April 1994, Allied
received a subpoena from the OIG requesting documents and certain
information regarding the Medicare billing practices of its
Cincinnati, Ohio clinical laboratory with respect to certain cancer
screening tests. In March 1995, Allied resolved the issues raised by
the April 1994 subpoena and a related qui tam action commenced in
Cincinnati, Ohio Federal court by entering into agreements with,
among others, HHS, the United States Department of Justice and the
relators in the qui tam action pursuant to which it agreed to pay
$4.9 million to settle all pending claims and inquiries regarding
these billing practices and certain others. NHL had previously
established reserves that were adequate to cover such settlement
payments. In connection with the settlement, Allied agreed with HHS,
among other things, to implement a corporate integrity program to
ensure that Allied and its representatives remain in compliance with
applicable laws and regulations and to provide certain reports and
information to HHS regarding such compliance efforts. During 1995,
Allied met all of its obligations assumed under the corporate
integrity agreement.
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 began the implementation of a new compliance
program in late 1992 and early 1993. The objective of the program
is to develop aggressive and reliable compliance safeguards. Emphasis
is placed on developing training programs for personnel to attempt to
assure the strict implementation of all rules and regulations.
Further, in-depth reviews of procedures, personnel and facilities are
conducted to assure regulatory compliance throughout the Company.
Such sharpened focus on regulatory standards and procedures will
continue to be a priority for the Company in the future.
The Company believes that it is in compliance in all material
respects with all statutes, regulations and other requirements
applicable to its clinical laboratory operations. The clinical
laboratory testing industry is, however, subject to extensive
regulation, and many of these statutes and regulations have not been
interpreted by the courts. There can be no assurance therefore that
applicable statutes and regulations might not be interpreted or
applied by a prosecutorial, regulatory or judicial authority in a
manner that would adversely affect the Company. Potential sanctions
for violation of these statutes and regulations include significant
fines and the loss of various licenses, certificates and
authorizations.
This program was consolidated with an existing RBL compliance
program at the time of the Merger.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 provides a
new "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about their companies
without fear of litigation so long as those statements are identified
as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual
results to differ materially from those projected in the statement.
The Company desires to take advantage of the new "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995
and is including this section herein in order to do so. Accordingly,
the Company hereby identifies the following important factors that
could cause the Company's actual financial results to differ
materially from those projected, forecast, estimated, or budgeted by
the Company in forward-looking statements.
(a) Heightened competition, including the intensification of
price competition.
(b) Impact of changes in payor mix, including the shift from
traditional, fee-for-service medicine to managed-cost health
care.
(c) Adverse actions by governmental or other third-party
payors, including unilateral reduction of fee schedules
payable to the Company.
(d) The impact upon the Company's collection rates or general or
administrative expenses resulting from compliance with
Medicare administrative policies including specifically the
HCFA's recent requirement that laboratories performing
certain automated blood chemistry profiles to obtain and
provide documentation of the medical necessity of tests
included in the profiles for each Medicare beneficiary.
(e) Adverse results from investigations of clinical laboratories
by the Federal Bureau of Investigation and the OIG including
specifically significant monetary damages and/or exclusion
from the Medicare and Medicaid programs.
(f) Failure to obtain new customers, retain existing customers
or reduction in tests ordered or specimens submitted by
existing customers.
(g) Adverse results in significant litigation matters.
(h) Denial of certification or licensure of any of the Company's
clinical laboratories under CLIA, by Medicare and Medicaid
programs or other Federal, state or local agencies.
(i) Adverse publicity and news coverage about the Company or the
clinical laboratory industry.
(j) Inability to carry out marketing and sales plans.
(k) Inability to successfully integrate the operations of or
fully realize the costs savings expected from the
consolidation of certain operations and the elimination of
duplicative expenses resulting from the April 28, 1995
merger of the Company and RBL or risk that declining
revenues or increases in other expenses will offset such
savings.
(l) Loss or retirement of key executives.
(m) Changes in interest rates causing an increase in the
Company's effective borrowing rate.
Item 2. PROPERTIES
The following table summarizes certain information as to
the Company's principal operating and administrative facilities as of
December 31, 1995.
Approximate
Area Nature of
Location (in square feet) Occupancy
---------------------- ------------------ -----------------
Operating Facilities:
Birmingham, Alabama 100,000 Lease expires 2005
Phoenix, Arizona 43,000 Lease expires 2001; one
5 year renewal option
San Diego, California 40,000 Lease expires 2000
Denver, Colorado 20,000 Lease expires 2001; two
5 year renewal options
Approximate
Area Nature of
Location (in square feet) Occupancy
------------------------ ------------------ -----------------------
Operating Facilities cont:
Hollywood, Florida 47,000 Lease expires 1997; three
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
Southhaven, Mississippi 25,000 Owned
16,000 Leases expire 1996-
1997;various renewal
options
Kansas City, Missouri 78,000 Owned
Reno, Nevada 12,000 Owned
14,000 Leases expire 1998-2003;
2 year renewal options
Cranford, New Jersey 81,000 Lease expires 2009
Raritan, New Jersey 186,000 Owned
Uniondale, New York 108,000 Lease expires 2007; two
5 year renewal options
Burlington, North Carolina 205,000 Owned
Charlotte, North Carolina 25,000 Lease expires 1997;renewal
option every 3 years
Research Triangle Park,
North Carolina 71,000 Lease expires 2008, three
5 year renewal options
70,000 Lease expires 1996; one
5 year renewal options
Winston-Salem, 73,000 Lease expires 2004; one
North Carolina 5 year renewal option
Dublin, Ohio 82,000 Owned
Memphis, Tennessee 30,000 Lease expires 1999; one
5 year renewal option
Dallas, Texas 54,000 Lease expires 2004; one
5 year renewal option
Houston, Texas 32,000 Lease expires 1997
San Antonio, Texas 44,000 Lease expires 2004; two
5 year renewal options
Salt Lake City, Utah 21,000 Lease expires 2002; two
Chesapeake, Virginia 21,000 Lease expires 2002; two
5 year renewal options
Herndon, Virginia 64,000 Lease expires 2004; one
5 year renewal option
Richmond, Virginia 57,000 Lease Expires 2001; one
5 year renewal option
Seattle, Washington 42,000 Lease expires 1998; two
5 year renewal options
Fairmont, West Virginia 25,000 Lease expires 2005;three
5 year renewal options
Administrative facilities:
Burlington, North Carolina 127,000 Owned
98,000 Leases expire 1997-
2008;various options
to purchase or renew
La Jolla, California 29,000 Lease expires 2000
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 certain claims and legal actions
arising in the ordinary course of business. In the opinion of
management, based upon the advice of counsel, the ultimate
disposition of these matters will not have a material adverse effect
on the financial position or results of operations of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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 National Market System of the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ") 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.
Dividends
Declared
High Low Per Share
------ ----- ------------
1994
First Quarter 15 1/4 12 7/8 0.08
Second Quarter 13 3/4 10 5/8 --
Third Quarter 13 3/8 10 7/8 --
Fourth Quarter 15 3/4 11 3/8 --
1995
First Quarter 15 1/2 12 5/8 --
Second Quarter 15 1/4 11 3/4 --
Third Quarter 14 9 1/8 --
Fourth Quarter 10 8 1/8 --
1996
First Quarter 9 3/8 7 1/4 --
(through February 26, 1996)
On February 26, 1996 there were approximately 600 holders of
record of the Common Stock.
The Company, in connection with the Allied Acquisition in 1994,
discontinued its dividend payments for the foreseeable future in
order to increase its flexibility with respect to its acquisition
strategy. In addition, the Company's credit agreement (the "Credit
Agreement") entered into on April 28, 1995 in connection with the
Merger contains, among other provisions, a covenant prohibiting the
payment of cash dividends for the first year following the date of
the Credit Agreement and places certain restrictions, as defined in
the Credit Agreement, on the payment of such dividends after that
date.
Item 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the captions
"Statement of Operations Data" and "Balance Sheet Data" as of and for
each of the years in the five-year period ended December 31, 1995 are
derived from consolidated financial statements of the Company, which
financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. This data should be read
in conjunction with the accompanying notes, the Company's
consolidated financial statements and the related notes thereto, and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," all included elsewhere herein.
[Download Table]
Year Ended December 31,
-------------------------------------------------
1995(a) 1994(f) 1993 1992 1991
--------- ---------- -------- ------ -------
(Dollars in millions, except per share amounts)
Statement of Operations Data:
Net sales $1,432.0 $ 872.5 $ 760.5 $ 721.4 $ 603.9
Gross profit 407.7 275.5 316.0 326.3 271.4
Operating income (b)(d)(e) 67.2 109.9 185.5 64.1 165.8
Earnings (loss) before
extraordinary loss (b)(d) (4.0) 30.1 112.7 40.6 103.9
Extraordinary loss (c) (8.3) -- -- -- --
-------- -------- ------- ------- -------
Net earnings(loss) $ (12.3) $ 30.1 $ 112.7 $ 40.6 $ 103.9
========= ======== ======= ======= =======
Earnings (loss) per common
share before extraordinary
loss $ (0.03) $ 0.36 $ 1.26 $ 0.43 $ 1.05
Extraordinary loss per
common share (0.08) -- -- -- --
--------- ------- ------- ------- -------
Net earnings (loss) per
common share $ (0.11) $ 0.36 $ 1.26 $ 0.43 $ 1.05
========= ======= ======= ======= =======
Dividends per common
share $ -- $ 0.08 $ 0.32 $ 0.31 $ 0.27
Weighted average
common shares outstanding
(in thousands) 110,579 84,754 89,439 94,468 99,096
December 31,
-------------------------------------------------
1995(a) 1994(f) 1993 1992 1991
-------- ---------- -------- ------- -------
Balance Sheet Data:
Cash and cash equivalents $ 16.4 $ 26.8 $ 12.3 $ 33.4 $ 51.3
Intangible assets, net 916.7 551.9 281.5 188.3 193.1
Total assets 1,837.2 1,012.7 585.5 477.4 411.3
Long-term obligations 948.6 583.0 314.6 114.2 2.9
Due to affiliates 0.9 -- 0.1 0.9 --
Total stockholders'
equity 411.6 166.0 140.8 212.5 330.8
<FN>
(a) In 1995, the Company completed the Merger with RBL. In
connection with the Merger, the Company issued 61,329,256 shares
of Common Stock to HLR and Roche Holdings, Inc. in exchange for
all outstanding shares of RBL and $135.7 million in cash. The
exchange consideration of approximately $558.0 for the purchase
of RBL consisted of the value of the stock issued to HLR and
Roche Holdings, Inc., as well as other cash costs of the Merger,
net of cash received from HLR. The Merger has been accounted
for under the purchase method of accounting; as such RBL's
assets and liabilities were recorded at their estimated fair
values on the date of acquisition. The exchange consideration
exceeded the fair value of acquired net tangible assets by
approximately $371.9 and is included under the caption
"Intangible assets, net." In connection with the Merger, each
outstanding share of Common Stock (other than as provided in the
Merger Agreement), was converted into (i) 0.72 of a share of
Common Stock of the Company and (ii) a distribution of $5.60 in
cash per share, without interest. The aggregate number of
shares issued and outstanding following the conversion was
61,041,159. Also, an aggregate of 538,307 shares of Common
Stock were issued in connection with the cancellation of certain
employee stock options. The cash portion of the share
conversion was financed with borrowings under the Credit
Agreement. RBL's results of operations have been included in
the Company's results of operations since April 28, 1995.
(b) In 1995, following the Merger, the Company determined that it
would be beneficial to close Company laboratory facilities and
eliminate duplicate functions in certain geographic regions
where duplicate Company and RBL facilities or functions existed
at the time of the Merger. The Company recorded restructuring
charges of $65.0 million in connection with these plans. See
note 3 of the Notes to Consolidated Finanacial Statements which
sets forth the Company's restructuring activities for the year
ended December 31, 1995. Also in 1995, the Company took a pre-
tax special charge of $10.0 million in connection with the
estimated costs of settling various claims pending against the
Company, substantially all of which are billing disputes, in
which the Company believes it is probable that settlements will
be made by the Company.
(c) In connection with the repayment in 1995 of existing revolving
credit and term loan facilities, 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.
(d) In 1994, the Company approved a settlement of previously
disclosed shareholder class and derivative litigation. In
connection with the settlement, the Company took a pre-tax
special charge of $15.0 million and a $6.0 million charge for
expenses related to the settled litigation. Insurance payments
and payments from other defendants amounted to $55.0 million
plus expenses. As previously disclosed, the litigation
consisted of two consolidated class action suits filed in
December 1992 and November 1993 and a consolidated shareholder
derivative action brought in Federal and state courts in San
Diego, California. The settlement involved no admission of
wrongdoing and all payments under the settlement agreement have
been paid.
(e) In the fourth quarter of 1992, the Company took a one-time
charge against operating income of $136.0 million related to the
1992 Government Settlement.
(f) On June 23, 1994, the Company acquired Allied as a wholly owned
subsidiary for approximately $191.5 million in cash plus the
assumption of $24.0 million of Allied indebtedness and the
recognition of approximately $5.0 million of Allied net
liabilities. The purchase was financed with borrowings under
an existing credit agreement. The excess of cost over the fair
value of net tangible assets acquired was $220.5 million and is
included under the caption "Intangible assets, net." Allied's
results of operations have been included in the Company's
results of operations since June 23, 1994.
</FN>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company derived approximately 28% of its 1995 net sales from
tests performed for beneficiaries of Medicare and Medicaid programs.
During 1993, provisions were included in OBRA '93 which reduced
Medicare reimbursement schedules by lowering payments under the fee
schedule methodology from 88% to 84% of the 1984 national median,
effective January 1, 1994 and from 84% to 80% of the national median,
effective January 1, 1995. A further reduction in payments to 76% of
the 1984 national median became effective on January 1, 1996. The
Company estimates that the change effective January 1, 1996 would
have decreased 1995 net sales by approximately $18 million had it
been implemented as of January 1, 1995. OBRA '93 also eliminated,
for 1994 and 1995, the provision for annual fee schedule increases
based upon the consumer price index.
The health care industry is undergoing significant change as
third-party payors, such as Medicare and Medicaid 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 was not enacted, such a 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 may 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.
Also, in recent years there has been a significant shift away
from traditional, fee-for-service medicine to managed-cost health
care. Managed care providers typically contract with a limited
number of clinical laboratories and negotiate discounts to the fees
charged by such laboratories in an effort to control costs. In
addition, managed care providers have used capitated payment
contracts which function to shift the risks of additional testing
beyond that covered by the capitated payment to the clinical
laboratory. For competitive reasons, the Company has continued to
expand its share of this market sector, which has resulted in
declines in test utilization and per-test revenue. The Company
cannot predict if it will experience additional declines in test
utilization or per-test revenue in the future as a result of managed
care growth or otherwise.
Year Ended December 31, 1995 compared with Year Ended December 31,
------------------------------------------------------------------
1994.
----
Net sales increased by $559.5 million to $1,432.0 million in
1995, an increase of 64.1% from $872.5 million reported in 1994. Net
sales from the inclusion of Roche Biomedical Laboratories, Inc.
("RBL"), which was acquired on April 28, 1995 (the "Merger"),
increased net sales by approximately $514.7 million or 59.0%. Also,
net sales from the inclusion of Allied Clinical Laboratories, Inc.
("Allied"), which was acquired on June 23, 1994, increased net sales
by approximately $56.6 million or 6.5%. Growth in new accounts and
acquisitions of small clinical laboratory companies increased net
sales by approximately 8.6% and 2.8%, respectively. Lower utilization
of laboratory testing and price erosion in the industry as a whole
decreased net sales by approximately 5.0%. A reduction in Medicare
fee schedules from 84% to 80% of the national limitation amounts on
January 1, 1995, plus changes in reimbursement policies of various
third-party payors, reduced net sales by approximately 1.5%. Other
factors, including accounts terminated by management, comprised the
remaining reduction in net sales.
Cost of sales, which includes primarily laboratory and
distribution costs, increased to $1,024.3 million in 1995 from $597.0
million in 1994. Of the $427.3 million increase, approximately
$368.8 million was due to the inclusion of the cost of sales of RBL
and approximately $44.8 million was due to the inclusion of the cost
of sales of Allied. Cost of sales increased by approximately $26.1
million due to higher testing volume unrelated to the Merger or
acquisition of Allied and approximately $4.5 million due to
increases in other expenses. Reductions in compensation and benefit
expense of $9.2 million, insurance of $4.8 million, and other expense
categories of $2.9 million decreased cost of sales an aggregate of
approximately $16.9 million. These decreases resulted from the
consolidation of operations as a result of the Merger and the
Company's on-going cost-reduction program. As a percentage of net
sales, cost of sales increased to 71.5% in 1995 from 68.4% in 1994.
The increase in the cost of sales percentage primarily resulted from
a reduction in net sales due to a reduction in Medicare fee
schedules, pricing pressures and utilization declines, each of which
provided little corresponding reduction in costs.
Selling, general and administrative expenses increased to $238.5
million in 1995 from $149.3 million in 1994, an increase of $89.2
million. Approximately $74.3 million of the increase was due to the
inclusion of the selling, general and administrative expenses of RBL
and approximately $7.7 million due to the inclusion of the selling,
general and administrative expenses of Allied. In the fourth quarter
of 1995, the Company recorded an additional $15.0 million of
provision for doubtful accounts which reflects the Company's
determination, based on trends that became evident in the fourth
quarter, that additional reserves were needed primarily to cover
potentially lower collection rates from several third-party payors.
The increase in selling, general and administrative expenses was
partially offset by decreases in other expense categories, including
reductions in selling expenses, as a result the elimination of
duplicative functions in connection with the Merger and the Company's
on-going cost-reduction program. Before the increase to the provision
for doubtful accounts, selling, general and administrative expenses
as a percentage of net sales was 15.6% in 1995 and 17.1% in 1994. The
decrease in the selling, general and administrative percentage
primarily resulted from reductions in expenses as discussed above.
Management expects net sales to continue to grow through
strategic acquisitions and the addition of new accounts, although
there can be no assurance that the Company will experience such
growth. A reduction in Medicare fee schedules, pursuant to the
Omnibus Budget Reconciliation Act of 1993 ("OBRA '93"), to 76% of the
median fee amounts, effective January 1, 1996 is expected to
negatively impact net sales, cost of sales as a percentage of net
sales and selling, general and administrative expenses as a
percentage of net sales in the future. Management expects that price
erosion and utilization declines will continue to negatively impact
net sales and the results of operations for the foreseeable future.
It is the objective of management to partially offset the increases
in cost of sales as a percentage of net sales and selling, general
and administrative expenses as a percentage of net sales through
comprehensive cost reduction programs at each of the Company's
regional laboratories, although there can be no assurance of the
timing or success of such programs. Congress is also considering
changes to the Medicare fee schedules in conjunction with certain
budgetary bills pending in Congress. The ultimate outcome of these
deliberations on pending legislation cannot be predicted at this time
and management, therefore, cannot predict the impact, if any, such
proposals, if enacted, would have on the results of operations of the
Company. In addition, severe weather in the first two months of 1996
will negatively impact net sales and results of operations in the
first quarter of 1996.
The increase in amortization of intangibles and other assets to
$27.0 million in 1995 from $16.3 million in 1994 primarily resulted
from the Merger in April 1995 and the acquisition of Allied in June
1994.
See Note 3 of the Notes to Consolidated Financial Statements
which sets forth the Company's restructuring activities for the year
ended December 31, 1995.
In the second quarter of 1995, the Company took a pre-tax
special charge of $10.0 million in connection with the estimated
costs of settling various claims pending against the Company,
substantially all of which are billing disputes, in which the Company
believes it is probable that settlements will be made by the Company.
Net interest expense was $64.1 million in 1995 compared to $33.5
million in 1994. The change resulted primarily from increased
borrowings used to finance the Merger with RBL and the acquisition of
Allied and, to a lesser extent, due to a higher effective borrowing
rate in the first four months of 1995.
In connection with the repayment of the Company's existing
revolving credit and term loan facilities at the time of the Merger,
the Company recorded an extraordinary loss from the early
extinguishment of debt of approximately $13.5 million ($8.3 million
net of tax) consisting of the write-off of deferred financing costs.
As a result of the restructuring charges and extraordinary loss,
the provision for income taxes as a percentage of earnings before
income taxes for 1995 is not comparable to prior periods.
As discussed above and in Notes 2, 3 and 8 of the Notes to
Consolidated Financial Statements, reported results in 1995 were
impacted by the extraordinary loss, restructuring charges and
provision for settlements. Excluding the impact of these non-
recurring items, net earnings would have increased to $42.8 million
in 1995 compared to $30.1 million in 1994.
Year Ended December 31, 1994 compared with Year Ended December 31,
------------------------------------------------------------------
1993.
----
Net sales increased by $112.0 million to $872.5 million in 1994,
an increase of 14.7% over 1993. The inclusion of Allied since June
23, 1994 increased net sales by approximately $96.8 million or 12.7%.
Revenues generated by new accounts and numerous acquisitions of small
clinical laboratory companies increased net sales by approximately
9.6% and 11.4%, respectively. In addition, a price increase,
effective April 1, 1994, increased net sales for 1994 by
approximately 1.8%. A reduction in Medicare's fee schedules from 88%
to 84% of the 1984 national median effective on January 1, 1994, plus
changes in reimbursement policies of various third party payors,
reduced net sales by approximately 3.1%. Other factors, in order of
decreasing magnitude, comprised the remaining reduction in net sales
as follows: declines in the level of HDL cholesterol and serum
ferritin testing, lower utilization of laboratory testing, price
erosion in the industry as a whole and severe weather in the first
quarter of 1994. The Company believes that the decline in
utilization was due to fewer patient visits to physicians' offices
since the number of tests ordered per patient remained relatively
constant. Revenues derived from tests performed for beneficiaries of
Medicare and Medicaid programs were approximately 35% and 41% of net
sales in 1994 and 1993, respectively.
Cost of sales, which primarily includes laboratory and
distribution costs, increased to $597.0 million in 1994 from $444.5
million in 1993. Of the $152.5 million increase, approximately $66.6
million was due to the inclusion of the cost of sales of Allied since
June 23, 1994, approximately $62.3 million was a result of higher
testing volume, and approximately $7.0 million was due to an increase
in phlebotomy staffing to improve client service and meet competitive
demand. Rental of premises increased approximately $2.7 million due
to the expansion and/or relocation of existing facilities to
accommodate increased volume and the full year impact of expanding
the number of patient service centers by 50% during 1993. The
remaining increase resulted primarily from higher compensation and
insurance expenses. As a percentage of net sales, cost of sales
increased to 68.4% in 1994 from 58.4% in 1993. The increase in the
cost of sales percentage primarily resulted from a reduction in net
sales due to a reduction in Medicare fee schedules, pricing pressures
and utilization declines, each of which provide little corresponding
reduction in costs.
Selling, general and administrative expenses increased to $149.3
million in 1994 from $121.4 million in 1993, an increase of $27.9
million. Approximately $21.7 million of the increase was due to the
inclusion of the selling, general and administrative expenses of
Allied since June 23, 1994. Approximately $3.9 million of the
increase was a result of a non-recurring charge in the fourth quarter
of 1994 for lease costs and the write-off of leasehold improvements
related to the relocation of certain of the Company's regional
laboratories. The remaining increase was primarily due to expansion
of data processing and billing departments due to increased volume
and to improve client service. As a percentage of net sales,
selling, general and administrative expenses increased to 17.1% in
1994 compared with 16.0% in 1993. The increase in the selling,
general and administrative percentage primarily resulted from a
reduction in net sales, as discussed above, that provided little
corresponding reduction in costs.
The increase in amortization of intangibles and other assets to
$16.3 million in 1994 from $9.1 million in 1993 primarily resulted
from the acquisition of Allied and several small clinical laboratory
companies during 1994 and 1993.
In the third quarter of 1994, the Company approved a settlement
of previously disclosed shareholder class and derivative litigation.
As previously disclosed, the litigation consisted of two consolidated
class action suits and a consolidated shareholder derivative action
brought in Federal and state courts in San Diego, California. The
settlement involved no admission of wrongdoing. In connection with
the settlement, the Company took a pre-tax special charge of $15.0
million and a $6.0 million charge for expenses related to the settled
litigation. Insurance payments and payments from other defendants
aggregate $55.0 million plus expenses.
Other gains and expenses in 1993 include expense reimbursement
and termination fees of $21.6 million received in connection with the
Company's attempt to purchase Damon Corporation, less related
expenses and the write-off of certain bank financing costs
aggregating $6.3 million, resulting in a one-time pre-tax gain of
$15.3 million.
Net interest expense was $33.5 million in 1994 compared to $9.7
million in 1993. The increase resulted primarily from increased
borrowings used to finance the Allied Acquisition in June 1994, the
acquisition of numerous small laboratory companies during both 1994
and 1993 and repurchases of the Company's common stock in 1993.
Higher average interest rates also contributed to the increase in net
interest expense.
The provision for income taxes as a percentage of earnings
before income taxes increased to 45.7% in 1994 from 41.0% in 1993,
primarily due to a higher effective tax rate for both Federal and
state income taxes.
Liquidity and Capital Resources
Net cash provided by operating activities (after payment of
settlement and related expenses of $32.1 million and $29.8 million in
1995 and 1994, respectively) was $47.0 million and $14.7 million,
respectively. Capital expenditures were $75.4 million and $48.9
million for 1995 and 1994, respectively. The Company expects capital
expenditures to be approximately $65.0 million in 1996 to continue
the Merger related integration, to accommodate expected growth, to
further automate laboratory processes and to improve efficiency.
On April 28, 1995, the Company completed its merger with RBL
pursuant to an agreement and plan of merger dated as of December 13,
1994. The Merger was accounted for under the purchase method of
accounting. See note 2 of the Notes to Consolidated Financial
Statements which describes the Merger.
The Company acquired nine small laboratory companies during 1995
for an aggregate amount of $32.0 million in cash and the recognition
of $9.7 million of liabilities. These laboratories, on an annual
basis, are expected to generate approximately $30.0 million in net
sales. During 1994, the Company acquired eleven small laboratory
companies for a total of $46.4 million in cash and the recognition of
$32.9 million of liabilities.
The Company entered into a credit agreement dated as of April
28, 1995 (the "Credit Agreement"), with the banks named therein (the
"Banks") and Credit Suisse (New York Branch), as administrative agent
(the "Bank Agent"), which made available to the Company a senior term
loan facility of $800.0 million (the "Term Loan Facility") and a
revolving credit facility of $450.0 million (the "Revolving Credit
Facility" and, together with the Term Loan Facility, the "Bank
Facility"). The Bank Facility provided funds for cash payment to
shareholders in connection with the Merger, for the refinancing of
certain existing debt of the Company and its subsidiaries and RBL,
for related fees and expenses of the Merger and for general corporate
purposes of the Company and its subsidiaries, in each case subject to
the terms and conditions set forth in the Credit Agreement.
The Company pays a facility fee based on the total Revolving
Credit Facility commitment (regardless of usage) of 0.125% per annum.
Availability of funds under the Bank Facility is conditioned on
certain customary conditions, and the Credit Agreement, as amended,
contains customary representations, warranties, covenants and events
of default.
The Revolving Credit Facility matures in April 2000. The Term
Loan Facility matures in April 2001, with repayments in each quarter
prior to maturity based on a specified amortization schedule. For as
long as HLR Holdings Inc. and its affiliates' ownership of Company
Common Stock (the "HLR Group Interest") remains at least 25%, the
Revolving Credit Facility bears interest, at the option of the
Company, at (i) Credit Suisse's Base Rate (as defined in the Credit
Agreement) or (ii) the Eurodollar Rate (as defined in the Credit
Agreement) plus a margin of 0.25% and the Term Loan Facility bears
interest, at the option of the Company, at (i) Credit Suisse's Base
Rate (as defined in the Credit Agreement) or (ii) the Eurodollar Rate
(as defined in the Credit Agreement) plus a margin of 0.375%. In the
event there is a reduction in the HLR Group Interest to below 25%,
applicable interest margins will not be determined as set forth
above, but instead will be determined based upon the Company's
financial performance as described in the Credit Agreement. The
Company's weighted average borrowing rate, including the effects of
interest rate swap agreements discussed below, was 6.23% at December
31, 1995.
At December 31, 1995, the Company was a party to interest rate
swap agreements with certain major financial institutions, rated A or
better by Moody's Investor Service, solely to manage its interest
rate exposure with respect to $600.0 million of its floating rate
debt under the Term Loan Facility. The agreements effectively
changed the interest rate exposure on $600.0 million of floating rate
debt to a weighted average fixed interest rate of 6.01%, through
requiring that the Company pay a fixed rate amount in exchange for
the financial institutions paying a floating rate amount. Amounts
paid by the Company in 1995 were not significant. The notional
amounts of the agreements are used to measure the interest to be paid
or received and do not represent the amount of exposure to credit
loss. These agreements mature in September 1998. The estimated cost
at which the Company could terminate such agreements was $9.5 million
at December 31, 1995.
On April 28, 1995, the Company borrowed $800.0 million under the
Term Loan Facility and $184.0 million under the Revolving Credit
Facility (i) to pay the cash payment to shareholders in connection
with the Merger; (ii) to repay in full the existing revolving credit
and term loan facilities of a wholly owned subsidiary of the Company
of approximately $640.0 million including interest and fees; (iii) to
repay approximately $50.0 million of existing indebtedness of RBL;
and (iv) for other transaction costs in connection with the Merger
and for use as working capital and general corporate purposes of the
Company and its subsidiaries.
See Note 3 of the Notes to Consolidated Financial Statements
which sets forth the Company's restructuring activities for 1995.
Future cash payments under the restructuring plan are expected to be
$13.7 million over the next year and $18.0 million thereafter.
As a result of the Merger, the Company is expected to achieve
substantial savings in operating costs through the consolidation of
certain operations and the elimination of redundant expenses. Such
savings are expected to be realized over time as the consolidation
process is completed. The Company expects to realize annualized net
savings of approximately $110.0 million within two years following
the Merger. The synergies expected to be realized by the Company
will be derived from several sources, including corporate, general
and administrative expenses, including the consolidation of
administrative staff. Other reductions in sales staff where
duplicate territories exist, operational savings, including the
closing of overlapping laboratories and other facilities, and savings
to be realized from the additional buying power of the larger
Company, are expected to generate significant savings. It is also
expected that savings will be realized from certain changes in
employee benefits. These estimated savings are anticipated to be
partially offset by a loss of existing business during the conversion
process. Realization of improvements in profitability is dependent,
in part, on the extent to which the revenues of the combined
companies are maintained and will be influenced by many factors,
including factors outside the control of the Company. There can be
no assurance that the estimated cost savings described above will be
realized or achieved in a timely manner or that improvements, if any,
in profitability will be achieved or that such savings will not be
offset by increases in other expenses.
The Company expects that its cash needs for working capital,
capital expenditures and the cash costs of the restructuring and
operations of the Company after the Merger will be met by its cash
flow from operations and borrowings under the Revolving Credit
Facility.
Impact of Statement of Financial Accounting Standards No. 121 --
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of ("SFAS No. 121")," was issued in 1995 and established
accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those
assets held and used and for long-lived assets and certain
indentifiable intangibles to be disposed of. SFAS No. 121 is
effective for fiscal years beginning after December 15, 1995. As a
result of acquisitions in recent years, the Company has signficant
amounts of intangible assets. The Company is currently evaluating
the impact of the implementation of SFAS No. 121.
In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
effective for fiscal years beginning after December 15, 1995. SFAS
123 establishes the fair value based method of accounting for stock-
based compensation arrangements, under which compensation cost is
determined using the fair value of the stock option at the grant date
and the number of options vested, and is recognized over the periods
in which the related services are rendered. If the Company were to
retain its current intrinsic value based method, as allowed by SFAS
123, it will be required to disclose the pro forma effect of adopting
the fair value based method. The Company anticipates adopting the
pro forma disclosure method of accounting for stock-based
compensation.
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
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth as of March 15, 1996 the
executive officers and directors of the Company:
Name Position
-------------------- -----------------------------------
James R. Maher Chairman of the Board and
Director
Thomas P. Mac Mahon Vice Chairman of the Board and
Director
James B. Powell, M.D. President, Chief Executive
Officer and Director
Jean-Luc Belingard Director
Linda Gosden Robinson Director
David B. Skinner, M.D. Director
Andrew G. Wallace, M.D. Director
Timothy J. Brodnik Executive Vice President, Sales
and Marketing
Haywood D. Cochrane, Jr. Executive Vice President, Chief
Financial Officer and Treasurer
Larry L. Leonard Executive Vice President
John F. Markus Executive Vice President,
Corporate Compliance
Bradford T. Smith Executive Vice President, General
Counsel and Secretary
David C. Weavil Executive Vice President and Chief
Operating Officer
Robert E. Whalen Executive Vice President and
Chief Administrative Officer
Wesley R. Elingburg Senior Vice President, Finance
James R. Maher (45) has been Chairman of the Board and a
Director since April 28, 1995. Prior to such date and since 1992,
Mr. Maher was President, Chief Executive Officer and a Director of
NHL. Since July 1995, Mr. Maher has been President and Chief
Executive Officer of MAFCO Consolidated Group Inc., an affiliate
of National Health Care Group ("NHCG"). NHCG owns approximately
12% of the outstanding common stock of the Company. Mr. Maher
was Vice Chairman of The First Boston Corporation from 1990 to 1992
and Managing Director of The First Boston Corporation from 1982 to
1992. Mr. Maher also is a Director of First Brands Corporation.
Thomas P. Mac Mahon (49) has served as Vice Chairman and a
Director of the Company since the Merger. Mr. Mac Mahon has been
Senior Vice President of Hoffmann-La Roche Inc. since 1993 and
President of Roche Diagnostics Group and a Director and member of the
Executive Committee of Hoffmann-La Roche since 1988. Mr. Mac Mahon
is also a Director of HLR. As Senior Vice President of Hoffmann-La
Roche Inc. and President of Roche Diagnostics Group, Mr. Mac Mahon is
responsible for the management of all United States operations of the
diagnostic business of Hoffmann-La Roche. Mr. Mac Mahon is also
currently a member of the Worldwide Diagnostics Executive Committee
of Roche Holdings.
James B. Powell, M.D.(57) has served as President and Chief
Executive Officer and as a Director of the Company since the Merger.
Previously, Dr. Powell was President of RBL from 1982 until the
Merger. He is a medical doctor and became certified in anatomic and
clinical pathology in 1969. Dr. Powell is a member of the management
committee of the Company.
Jean-Luc Belingard (47) has served as a Director of the Company
since the Merger. Mr. Belingard is Director General of the
Diagnostics Division and member of the Executive Committee of F.
Hoffmann-La Roche Ltd ("F. Hoffmann-La Roche"), Basel, Switzerland, a
subsidiary of Roche Holding. He joined F. Hoffmann-La Roche in 1982,
and held various positions prior to being named to his current
positions in 1990. His current responsibilities include the
management of the worldwide diagnostic business of Roche. Mr.
Belingard is also a director of Perkin-Elmer Corporation, Norwalk,
Connecticut and a Foreign Trade Advisor to the French Government.
Linda Gosden Robinson (43) has served as a Director of the
Company since 1990. Ms. Robinson is Chairman and Chief Executive
Officer of Robinson Lerer Sawyer Miller since 1986 and was Senior
Vice President, Corporate Affairs, of Warner Cable Communications,
Inc. from 1983 to 1986. She is also a Director of Revlon Group
Incorporated ("Revlon Group"), an affiliate of NHCG, and of Bozell,
Jacobs, Kenyon & Eckhardt, Inc. and is a trustee of New York
University Medical Center.
David B. Skinner, M.D. (60) has served as a Director of the
Company since the Merger. Dr. Skinner has been President and Chief
Executive Officer of New York Hospital and Professor of Surgery at
Cornell Medical School since 1987. He was the Chairman of the
Department of Surgery and Professor of Surgery at the University of
Chicago Hospitals and Clinics from 1972 to 1987.
Andrew G. Wallace, M.D. (61) has served as a Director of the
Company since the Merger. Dr. Wallace has served as both the Dean of
Dartmouth Medical School and Vice President for Health Affairs at
Dartmouth College since 1987. He was the Vice Chancellor for Health
Affairs at Duke University and the Chief Executive Officer of Duke
Hospital from 1981 to 1987.
Timothy J. Brodnik (48) has served as Executive Vice President,
Sales and Marketing since the Merger. He joined the Company in 1971.
He was appointed Executive Vice President of the Company in 1993 and
was Senior Vice President from 1991 to 1993 and Vice President-
Division Manager from 1979 until 1991. Mr. Brodnik oversees the
Company's sales operations including managed care, business
ventures/alliances and new business development. Mr. Brodnik is a
member of the management committee of the Company.
Haywood D. Cochrane, Jr. (47) has served as Executive Vice
President, Chief Financial Officer and Treasurer since the Merger and
has been an executive of the Company since June 1994 following the
acquisition by the Company of Allied Clinical Laboratories, Inc.
("Allied"). Mr. Cochrane was President, Chief Executive Officer and
a Director of Allied from its formation in 1989 until its acquisition
by the Company in 1994. Mr. Cochrane serves as a Director of JDN
Realty Corp., Atlanta, Georgia. Mr. Cochrane is a member of the
management committee of the Company.
Larry L. Leonard (54) has served as Executive Vice President of
the Company since 1993. He joined the Company in 1978. Dr. Leonard,
who holds a Ph.D degree in microbiology, was named Senior Vice
President of the Company in 1991 and previously was Vice President-
Division Manager. Dr. Leonard oversees major regional laboratories
in Arizona, Texas and Colorado.
John F. Markus (44) has served as Executive Vice President,
Corporate Compliance since the Merger. From 1990, when he joined the
Company, he has been responsible for quality, operations review,
pathology/cytology, compliance and the Company's phlebotomy program.
He served as Executive Vice President and Director of Compliance from
1993 and was Vice President-Managing Director from 1990 to 1993.
Previously, Mr. Markus was an attorney in the law firm of Akin, Gump,
Strauss, Haur and Feld in Washington, D.C. for more than five years
and was a partner in such firm in 1989. Mr. Markus is a member of
the management committee of the Company.
Bradford T. Smith (42) has served as Executive Vice President,
General Counsel and Secretary since the Merger. Previously, Mr.
Smith served as Assistant General Counsel of HLR, Division Counsel of
RBL and Assistant Secretary and member of RBL's Senior Management
Committee from 1988 until April 1995. Mr. Smith served as Assistant
Secretary of HLR from 1989 until the Merger and as an Assistant Vice
President of HLR during 1992 and 1993. Mr. Smith is a member of the
management committee of the Company.
David C. Weavil (45) has served as Executive Vice President
since the Merger and was appointed Chief Operating Officer in
September 1995. Previously, Mr. Weavil served as Senior Vice
President and Chief Operating Officer of RBL beginning in 1989. From
1988 through 1989, Mr. Weavil was Regional Senior Vice President-Mid-
Atlantic of RBL. Prior to that, he served as Senior Vice President
and Chief Financial Officer of RBL from 1982. Mr. Weavil is a member
of the management committee of the Company.
Robert E. Whalen (53) has served as Executive Vice President
since the Merger. He was appointed Chief Administrative Officer in
September 1995. Mr. Whalen joined the Company in 1976. He was named
Executive Vice President of the Company in 1993 and was Senior Vice
President from 1991 to 1993 and Vice President-Administration from
1985 to 1993. From 1979 to 1985, he was Vice President-Division
Manager of the Company. Mr. Whalen oversees human resources, client
service and major regional laboratories in California, Washington,
Nevada and Utah. Mr. Whalen is a member of the management committee
of the Company.
Wesley R. Elingburg (39) has served as Senior Vice President,
Finance since the Merger. Mr. Elingburg is responsible for the day
to day supervision of the finance function of the Company, including
treasury functions, and reports to the Chief Financial Officer.
Previously, Mr. Elingburg served as Senior Vice President-Finance and
Treasurer of RBL from 1988 through April 1995 and Assistant Vice
President of Hoffmann-La Roche from 1989 until the Merger in April
1995. Mr. Elingburg is a member of the management committee of the
Company.
Board of Directors and its Committees
The Board of Directors has an Audit Committee, an Employee
Benefits Committee, an Ethics and Quality Assurance Committee and a
Nominating Committee. During 1994 and prior to the Merger in April
1995, the Board of Directors also had an Executive Committee.
The Audit Committee, currently consisting of Dr. Skinner and Dr.
Wallace, makes recommendations, among other things, to the Board
regarding the engagement of the Company's independent auditors,
reviews the plan, scope and results of the audit, reviews with the
auditors and management the Company's policies and procedures with
respect to internal accounting and financial controls and reviews
changes in accounting policy and the scope of the non-audit services
which may be performed by the Company's independent auditors.
Pursuant to the Stockholder Agreement (See "Item 13: Certain
Relationships and Related Transactions"), the Audit Committee is
comprised entirely of Independent Directors. During 1994 and prior
to the Merger in April 1995, the Audit Committee consisted of Dr.
Saul J. Farber, Anne Dibble Jordan and Dr. Paul A. Marks.
The Ethics and Quality Assurance Committee, currently consisting
of Mr. Maher, Dr. Powell, Dr. Wallace and Dr. Skinner, is responsible
for ensuring that the Company adopts and implements procedures that
require the Company's employees to act in accordance with high
ethical standards and to deliver high quality services. During 1994
and prior to the Merger, the Ethics and Quality Assurance Committee
consisted of Howard Gittis, Dr. Farber and Ms. Jordan.
The Employee Benefits Committee, currently consisting of Mr.
Belingard, Ms. Robinson and Dr. Skinner, makes recommendations to the
Board regarding compensation and benefit policies and practices and
incentive arrangements for executive officers and key managerial
employees of the Company. The Employee Benefits Committee also
considers and grants awards under the Company's incentive plans,
subject to a Special Majority Vote of the Board as described in "Item
13: Certain Relationships and Related Transactions". Pursuant to the
Stockholder Agreement, the Employee Benefits Committee is comprised
of a majority of Independent Directors. During 1994 and prior to the
Merger, the Employee Benefits Committee consisted of Dr. Farber, Mr.
Gittis, David J. Mahoney, Ms. Robinson and Dr. Samuel O. Thier.
The Nominating Committee, currently consisting of Mr. Mac Mahon,
Dr. Wallace and Ms. Robinson, is responsible for recommending the
nomination of directors. Pursuant to the Stockholder Agreement, the
Nominating Committee is comprised of one HLR Director and two
Independent Directors and acts by a majority vote of the entire
committee. During 1994 and prior to the Merger in April 1995, the
Nominating Committee consisted of Ronald O. Perelman, Ms. Jordan, Ms.
Robinson and Dr. Thier.
During 1994 and prior to the Merger, the Board had an Executive
Committee, consisting of Messrs. Perelman, Gittis and Maher, which
was empowered to exercise all the powers and authority of the Board
except as otherwise provided under applicable Delaware corporation
law. The Executive Committee was dissolved immediately following the
Merger.
During 1995, the Board of Directors held seven meetings and
acted five times by unanimous written consent of all members thereof,
each in accordance with the Company's By-laws and applicable Delaware
corporation law. The Employee Benefits Committee held two meetings;
the Audit Committee held two meetings; and the Ethics and Quality
Assurance Committee held one meeting in 1995. The Nominating
Committee did not meet in 1995. During 1995, none of the directors
attended fewer than 75% of the meetings of the Board and the
committees of which he or she was a member.
Compliance With Section 16(A) Of The Exchange Act
On the basis of reports and representations submitted by the
directors and executive officers of the Company, all Forms 3, 4 and 5
showing ownership of and changes of ownership in the Company's equity
securities during 1995 were timely filed with the Securities and
Exchange Commission as required by Section 16(a) of the Securities
and Exchange Act of 1934, except that Dr. Skinner sold 720 shares of
Common Stock on December 22, 1995, which should have been reported on
Form 4 but which instead was reported on Form 5 for year-end 1995.
Item 11. EXECUTIVE COMPENSATION
The compensation paid by the Company during the year ended
December 31, 1995 to certain executive officers is set forth below.
The executive officers named are the two who served as chief
executive officer during the year, the four other most highly
compensated executive officers serving at year end, and an officer
who would have been one of such four had he not resigned before year
end.
[Download Table]
Summary Compensation Table
| Long-Term |
| Compensa- |
| tion |
Annual Compensation | Awards |
| | All
|Securities | Other
|Underlying |Compen-
Salary(1) Bonus(2) |Options(3)/|sation(4)
Name and Principal Position Year ($) ($) | SARs(#) | ($)
--------------------------- ---- -------- -------- ------------- --------
James B. Powell, M.D., 1995 $ 350,000 $ 367,500 | 100,000 |$ --
President and Chief 1994 -- -- | -- | --
Executive Officer(5) 1993 -- -- | -- | --
| |
Timothy J. Brodnik, 1995 325,000 162,500 | 64,130 | 861,965
Executive Vice President, 1994 325,000 246,250 | 150,000 | 8,853
Sales and Marketing 1993 325,000 262,500 | 50,000 | 11,334
| |
Haywood D. Cochrane, Jr. 1995 500,000 175,000 | 50,000 |2,531,658
Executive Vice President, 1994 263,014 225,000 | 331,250 | 870
Chief Financial Officer 1993 -- -- | -- | --
and Treasurer(6) | |
| |
John F. Markus, 1995 325,000 162,500 | 50,273 | 651,447
Executive Vice President, 1994 325,000 236,250 | 115,000 | 7,052
Corporate Compliance 1993 325,000 252,500 | 50,000 | 9,586
| |
Robert E. Whalen, 1995 325,000 162,500 | 70,273 | 864,812
Executive Vice President 1994 325,000 246,250 | 150,000 | 11,700
and Chief Administrative 1993 323,751 262,500 | 50,000 | 14,120
Officer | |
| |
James R. Maher, Former 1995 333,334 1,000,000 | -- |5,362,662
President and Chief 1994 1,000,001 450,000 | 350,000 | 20,066
Executive Officer(7) 1993 1,000,000 500,000 | -- | 29,136
| |
| |
David C. Flaugh, Former 1995 312,491 187,500 | 95,273 |2,181,779
Executive Vice President 1994 499,991 375,000 | 200,000 | 14,154
and Chief Operating | |
Officer(8) 1993 507,683 400,000 | 125,000 | 13,865
<FN>
_________________________________________
(1) Includes salary paid or accrued for each indicated year.
(2) Includes bonus accrued or paid for each indicated year and other payments,
excluding severance, made pursuant to employment agreements.
(3) In connection with the Merger in 1995, certain employee stock options were
canceled and reissued ("Roll-Over Options") according to a formula set
forth in the Merger Agreement. Roll-Over Options canceled and reissued
in 1995 were 16,500 at $20.25 and 20,273 at $16.481, respectively, for
Mr. Whalen, 11,500 at $20.25 and 14,130 at $16.481, respectively, for
Mr. Brodnik, 16,500 at $20.25 and 20,273 at $16.481, respectively, for
Mr. Markus, 16,500 at $20.25 and 20,273 at $16.481, respectively, for
Mr. Flaugh.
(4) Reflects the following: (i) payment of cash and the fair value of shares of
Common Stock of the Company issued for NHL employee stock options canceled
in connection with the Merger at the election of each individual in 1995 of
$2,348,162 for Mr. Maher, $2,494,627 for Mr. Cochrane, $853,112 for Mr.
Whalen, $853,112 for Mr. Brodnik, $640,258 for Mr. Markus, and $1,236,026
for Mr. Flaugh; (ii) life insurance premiums of $15,566 in 1994 and $8,060
in 1993 for Mr. Maher, $30,569 in 1995 and $870 in 1994 for Mr. Cochrane,
$7,200 in 1995 and 1994 and $7,044 in 1993 for Mr. Whalen, $4,353 in 1995
and 1994 and $4,259 in 1993 for Mr. Brodnik, $2,552 in 1995 and 1994, and
$2,511 in 1993 for Mr. Markus and $9,790 in 1995, $9,654 in 1994 and $6,790
in 1993 for Mr. Flaugh; (iii) 401(a) and (k) contributions in 1995 of
$4,500 for each individual named in the table, except Dr. Powell,
contributions of $4,500 in 1994 and $7,075 in 1993 for each of Mr. Maher,
Mr. Whalen, Mr. Brodnik, Mr. Markus and Mr. Flaugh; (iv) relocation
expenses in 1993 for Mr. Maher of $14,001, in 1995 of $1,962
for Mr. Cochrane and $4,137 for Mr. Markus.
(5) Dr. Powell was appointed President and Chief Executive Officer effective
with the Merger. Dr. Powell's salary from the date of the Merger is
included herein.
(6) Mr. Cochrane's employment with the Company commenced on June 23, 1994 in
connection with the acquisition of Allied.
(7) Mr. Maher resigned his position as President and Chief Executive Officer
and his employment agreement was terminated with effect as of April 28,
1995. In connection with the termination of Mr. Maher's employment
agreement, a termination payment of $3,000,000 was paid to him and is
included under the caption "All Other Compensation."
(8) Mr. Flaugh resigned his position as Executive Vice President and Chief
Operating Officer and his employment agreement was terminated with effect
as of September 19, 1995. Mr. Flaugh had an employment agreement which
required payment, in monthly installments, of his annual salary and bonus
through December 31, 1996. Payments totaling $937,500 will be made to
Mr. Flaugh through such date. This amount is included under the caption
"All Other Compensation."
</FN>
Stock Option Transactions in 1995
During 1995, the following grants, excluding Roll-Over Options,
were made under the 1994 Stock Option Plan for the executive officers
named in the Summary Compensation Table:
[Download Table]
Option/SAR Grants in 1995
Grant
Date
Individual Grants Value
Percen-
tage of
Total
Options/
Number of SARs
Securities Granted Exercise Grant
Underlying to Em- or Base Date
Options/SARs ployees Price Expiration Present
Name Granted(1) in 1995 ($/Sh) Date Value ($)(2)
-------------------- ------------- --------- --------- ---------- -------------
James B. Powell, M.D. 100,000 7% $13.00 5/08/05 $854,100
Timothy J. Brodnik 50,000 4 $13.00 5/08/05 $427,050
Haywood D. Cochrane, Jr. 50,000 4 $13.00 5/08/05 $427,050
John F. Markus 30,000 2 $13.00 5/08/05- $256,230
9/20/05
Robert E. Whalen 50,000 4 $13.00 5/08/05 $427,050
James R. Maher -- -- $ -- -- $ --
David C. Flaugh(3) 75,000 5 $13.00 5/08/05 $ --
<FN>
(1) No tandem SARs were granted in 1995. For each grant of non-qualified
options made in 1995, the exercise price is equivalent to the fair
market price per share on the date of grant (as provided in the 1994
Stock Option Plan). The options vested with respect to one third of
the shares covered hereby on the date of grant and an additional one
third will vest on each of the first and second anniversaries of such
date, subject to their earlier expiration or termination.
(2) Valuation based upon the Black-Scholes option pricing model assuming a
volatility of 0.4243 (based on the weekly closing stock prices from
May 1, 1995 to March 8, 1996; a risk free interest rate of 6.86% (the
asking yield on the 10-year U.S. Treasury Strip maturing May 2005); and
a dividend yield of 0.0%. The valuation assumptions have made no
adjustments for non-transferability.
(3) As provided in the 1994 Stock Option Plan, all unexercised options owned
by Mr. Flaugh were canceled on December 19, 1995, ninety days after the
effective date of his resignation.
</FN>
The following chart shows, for 1995, the number of stock options
exercised and the 1995 year-end value of the options held by the
executive officers named in the Summary Compensation Table:
[Download Table]
Aggregated Option/SAR Exercises in 1995
and Year-End 1995 Option/SAR Values
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs
Options/SARs at Year-
at Year-End End ($)(1)
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized($) Unexercisable Unexercisable
------------------- ------------ ----------- ------------- -------------
James B. Powell, M.D. 0 $ 0 33,333 $ 0
66,667 0
Haywood D. Cochrane, Jr. 0 0 16,667 0
33,333 0
Robert E. Whalen 0 0 36,940 0
33,333 0
Timothy J. Brodnik 0 0 28,167 0
33,333 0
John F. Markus 0 0 30,273 0
20,000 0
James R. Maher 0 0 0 0
David C. Flaugh 0 0 0 0
<FN>
_________________________________________
(1)Calculated using actual December 29, 1995 closing price per common share on
the NYSE Composite Tape of $9.375
</FN>
Retirement Benefits and Savings Plan
The following table sets forth the estimated annual retirement
benefits payable at age 65 to persons retiring with the indicated
average direct compensation and years of credited service, on a
straight life annuity basis after Social Security offset, under the
Company's Employees' Retirement Plan or RBL's Employee Retirement
Plan which was assumed by the Company in connection with the Merger,
as supplemented by the Company's Pension Equalization Plan and RBL's
Supplemental Employee Retirement Plan.
Pension Plan Table
James B. Powell, M.D.
---------------------
Five year
average
Compensation(1) 10 Years(2) 15 Years(2) 20 Years(2) 25 Years(2) 30 Years(2)
---------------- ----------- ---------- ----------- ---------- ----------
$ 50,000 $ 7,917 $ 11,676 $ 15,434 $ 19,193 $ 19,193
100,000 17,522 26,064 34,645 43,206 43,206
150,000 27,522 41,084 54,645 68,206 68,206
Pension Plan Table
Haywood D. Cochrane, Jr., Timothy J. Brodnik, John F. Markus
------------------------------------------------------------
Five year
average
Compensation(1) 10 Years(2) 15 Years(2) 20 Years(2) 25 Years(2) 30 Years(2)
-------------- ---------- ----------- ----------- ---------- -----------
$ 50,000 $ 1,413 $ 2,510 $ 3,882 $ 5,528 $ 7,174
100,000 2,626 5,021 7,764 11,056 14,348
150,000 4,239 7,531 11,646 16,584 21,522
200,000 5,652 10,041 15,528 22,112 28,695
250,000 7,065 12,551 19,409 27,639 35,869
300,000 8,477 15,061 23,291 33,167 43,043
Pension Plan Table
Robert E. Whalen
------------------
Five year
average
Compensation(1) 10 Years(2) 15 Years(2) 20 Years(2) 25 Years(2) 30 Years(2)
--------------- ----------- ----------- ----------- ----------- -----------
$ 50,000 $ 6,790 $ 10,184 $ 13,579 $ 16,974 $ 20,369
100,000 16,130 24,195 32,268 40,325 48,390
150,000 25,490 38,235 50,980 63,725 76,470
200,000 34,850 52,275 69,700 87,125 104,550
250,000 44,210 66,315 88,420 110,525 132,630
300,000 53,570 80,355 107,140 133,925 160,710
(1) Highest consecutive five year average base compensation
during final ten years. Compensation considered for this
five year average is reflected in the Summary Compensation
Table under the heading "salary." Under the Equalization
Plan, a maximum of $300,000 final average compensation is
considered for benefit calculation. Under the Supplemental
Plan, a maximum of $150,000 final average compensation is
considered for benefit calculation. No bonuses are consid-
ered.
(2) Under the plans, the normal form of benefit for an unmarried
participant is a life annuity with a guaranteed minimum pay-
ment of ten years. Payments in other optional forms, in-
cluding the 50% joint and survivor normal form for married
participants, are actuarially equivalent to the normal form
for an unmarried participant. The above tables are
determined with regard to a life only form of payment; thus,
payment using a ten year guarantee would produce a lower
annual benefit.
The Retirement Plan, which is intended to qualify under Section
401 of the Internal Revenue Code of 1986, as amended (the "Code"), is
a defined benefit pension plan designed to provide an employee having
30 years of credited service with an annuity equal to 52% of final
average compensation less 50% of estimated individual Social Security
benefits. Credited service is defined generally as all periods of
employment with the Company, a participating subsidiary or with
Revlon prior to 1992, or RBL after attainment of age 21 and
completion of one year of service. Final average compensation is
defined as average annual base salary during the five consecutive
calendar years in which base salary was highest out of the last ten
years prior to normal retirement age or earlier termination. The
Employment Retirement Income Security Act of 1974, as amended, places
certain maximum limitations upon the annual benefit payable under all
qualified plans of an employer to any one individual. Such
limitation for defined benefit pension plans was $120,000 for 1995
(except to the extent a larger benefit had accrued as of December 31,
1982) and 1996, and will be subject to cost of living adjustments for
future years. In addition, the Tax Reform Act of 1986 limits the
amount of compensation that can be considered in determining the
level of benefits under qualified plans. The applicable limit for
1995 and 1996 will remain at $150,000. The Company believes that,
with respect to certain employees, annual retirement benefits
computed in accordance with the Retirement Plan's benefit formula may
be greater than such qualified plan limitation. The Company's non-
qualified, unfunded, Equalization and Supplemental Plans are designed
to provide for the payment of the difference, if any, between the
amount of such maximum limitation and the annual benefit that would
be payable under the Retirement Plans but for such limitation.
As of December 31, 1995, credited years of service under the
retirement plans for the following individuals are for Dr. Powell-13
years, Mr. Cochrane-none, Mr. Whalen-18 years, Mr. Brodnik-23 years
and Mr. Markus-4 years.
Compensation of Directors
Effective on April 28, 1995, directors who are not receiving
compensation as officers or employees of the Company are paid an
annual retainer of $30,000, payable in monthly installments and a fee
of $1,000 for each meeting of the Board of Directors or of any
Committee thereof they attend and receive reimbursement of expenses
they incur for attending any meeting. Pursuant to the Non-Employee
Director Stock Plan, 50% of such annual retainer is payable in cash
and 50% shall be payable in Common Stock of the Company. Prior to
April 28, 1995 and during the year ended December 31, 1994, directors
were paid an annual retainer of $25,000, payable in monthly
installments, and a fee of $1,000 for each meeting of the Board of
Directors or any committee thereof attended.
Compensation Plans and Arrangements
The Company has amended employment agreements with Robert E.
Whalen and Timothy J. Brodnik which provide for each of them to be
employed as an Executive Vice President through December 31, 1996 at
an annual salary of $325,000 with an annual bonus equal to 50% of the
annual salary then in effect and an additional discretionary bonus as
may be awarded at the discretion of the Board of Directors. The
employment agreements also provide that the duties assigned to Mr.
Whalen and Mr. Brodnik will be performed primarily at the offices of
the Company in San Diego, California and Fairfax County, Virginia,
respectively. If the respective employment agreement is terminated
by Mr. Whalen or Mr. Brodnik for certain specified reasons,
including, (i) the assignment of duties materially inconsistent with
the status of the office of Executive Vice President of the Company
or resulting in an adverse alteration in the nature of the
responsibilities associated therewith, (ii) a reduction by the
Company in the annual salary or annual bonus or a failure by the
Company to pay any such amount when due or (iii) a material breach of
any of the terms of the employment agreement by the Company, then the
Company will be required to pay, in monthly installments, (i) the
annual salary and annual bonus Mr. Whalen and Mr. Brodnik would have
otherwise received during the remainder of their respective
employment periods and (ii) for a period of one year following the
respective dates of expiration of their respective employment terms,
in consideration of the performance of specified noncompetition
obligations, an amount equal to one-half the annual salary at the
rate in effect on the date of expiration of their respective
employment terms.
The Company has an amended employment agreement with John F.
Markus which provides for him to be employed as an Executive Vice
President through December 31, 1996 at an annual salary of $325,000
with an annual bonus equal to 50% of the annual salary then in effect
and an additional discretionary bonus as may be awarded at the
discretion of the Board of Directors. If the employment agreement is
terminated by Mr. Markus for certain specified reasons, including,
(i) the assignment of duties materially inconsistent with the status
of the office of Executive Vice President of the Company or resulting
in an adverse alteration in the nature of the responsibilities
associated therewith, (ii) a reduction by the Company in the annual
salary or annual bonus or a failure by the Company to pay any such
amount when due or (iii) a material breach of any of the terms of the
employment agreement by the Company, then the Company will be
required to pay, in monthly installments, (i) the annual salary and
annual bonus Mr. Markus would have otherwise received during the
remainder of his employment period and (ii) for a period of one year
following the date of expiration of his employment term, in
consideration of the performance of specified noncompetition
obligations, an amount equal to one-half the annual salary at the
rate in effect on the date of expiration his employment term.
The Company had an amemded employment agreement with David C.
Flaugh which provided for his employment as Executive Vice President
and Chief Operating Officer of the Company through December 31, 1996
at an annual salary of $500,000 with an annual bonus of 50% of the
annual salary then in effect and an additional discretionary bonus to
be awarded at the discretion of the Board of Directors. The
employment agreement also provided that the duties assigned to Mr.
Flaugh would be performed primarily at the offices of the Company in
San Diego County, California. If the employment agreement was
terminated by Mr. Flaugh for certain specified reasons ("Good
Reason") including (i) the assignment of duties materially
inconsistent with Mr. Flaugh's status as Executive Vice President and
Chief Operating Officer, (ii) a reduction by the Company in the
annual salary or annual bonus or a failure by the Company to pay any
such amount when due or (iii) a material breach of any of the terms
of the employment agreement by the Company, then the Company will be
required to pay, in monthly installments, (i) the annual salary Mr.
Flaugh would have otherwise received during the remainder of the
employment period and (ii) for a period of one year following the
date of the expiration of the employment term, in consideration of
the performance of specified noncompetition obligations, an amount
equal to one-half the annual salary at the rate in effect on the date
of expiration of the employment term. The Company had acknowledged
that the change to Mr. Flaugh's position following the Merger
constituted an event of Good Reason. Mr. Flaugh had agreed not to
terminate his employment prior to December 31, 1995 due to his new
position. However, on September 19, 1995, Mr. Flaugh decided to
terminate his employment agreement and therefore the Company is
required to pay in monthly installments, the amounts as described
above.
Employee Benefits Committee Interlocks and Insider Participation
The members of the Employee Benefits Committee prior to the
Merger on April 28, 1995 were Saul J. Farber, M.D., Howard Gittis,
David J. Mahoney, Ms. Robinson and Samuel O. Thier, M.D. Subsequent
to the Merger, the members of the Employee Benefits Committee are Mr.
Belingard, Ms. Robinson, and Dr. Skinner. No member of the Employee
Benefits Committee is an officer or employee of the Company.
Certain Director Relationships. Robinson Lerer Sawyer Miller,
the corporate communications firm of which Ms. Robinson is President
and Chief Executive Officer, performs corporate communications
services for the Company. The amount paid to Robinson Lerer Sawyer
Miller for services to the Company in 1995 was $151,207.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS
The following table sets forth as of February 15, 1996, the
total number of shares of common stock beneficially owned, and the
percent so owned, by each director of the Company who is a beneficial
owner of any shares of common stock, by each person known to the
Company to be the beneficial owner of more than 5% of the outstanding
common stock, by the officers named in the summary compensation table
and by all directors and officers as a group. The number of shares
owned are those "beneficially owned," as determined under the rules
of the Commission, and such information is not necessarily indicative
of beneficial ownership for any other purpose. Under such rules,
beneficial ownership includes any shares as to which a person has
sole or shared voting power or investment power and any shares of
common stock which the person has the right to acquire within 60 days
through the exercise of any option, warrant or right, through
conversion of any security, or pursuant to the automatic termination
of power of attorney or revocation of trust, discretionary account or
similar arrangement.
Amount and Nature
of Beneficial Percent of
Ownership Class
------------------- -------------
Roche Holdings, Inc. 61,329,256(1) 49.9%
15 East North Street
Dover, DE 19901
Ronald O. Perelman 14,527,244(2) 11.8%
35 East 62nd Street
New York, NY 10021
James R. Maher 203,223 *
James B. Powell, M.D. 66,667(3) *
Haywood D. Cochrane, Jr. 141,069(3) *
Robert E. Whalen 53,607(3) *
Timothy J. Brodnik 47,464(3) *
John F. Markus 66,256(3) *
Jean-Luc Belingard 1,023 *
Linda Gosden Robinson 1,023 *
David Bernt Skinner, M.D. 1,023 *
Andrew G. Wallace, M.D. 1,023 *
All directors and executive 683,525(3) *
officers as a group (17 persons)
_________________________________________
* Less than 1%
(1) As reported on the Schedule 13D filed with the Commission on May
8, 1995, on behalf of Roche Holdings, Inc., 49,008,538 of these
shares are directly held by HLR, and 12,320,718 of these shares
are directly held by Roche Holdings, Inc. Both HLR and Roche
Holdings, Inc. are indirect wholly-owned subsidiaries of Roche
Holding. Dr. h.c. Paul Sacher, an individual and citizen of
Switzerland has, pursuant to an agreement, the power to vote a
majority of the voting shares of Roche Holding.
(2) As reported in the Schedule 13G/A filed with the Commission on
February 13, 1996, on behalf of Mafco Holdings Inc. ("Mafco"),
all shares are owned by NHCG, an indirect wholly-owned
subsidiary of Mafco. All of the capital stock of Mafco is owned
by Mr. Ronald O. Perelman.
(3) Beneficial ownership by officers of the Company includes shares
of common stock which such officers have the right to acquire
upon the exercise of options which either are vested or which
may vest within 60 days. The number of shares of common stock
included in the table as beneficially owned which are subject to
such options is as follows: Dr. Powell - 66,667; Mr. Cochrane -
33,334; Mr. Whalen - 53,607, Mr. Brodnik - 47,464; Mr. Markus -
38,607; all directors and executive officers as a group (not
including Mr. Flaugh, who resigned effective September 19, 1995)
- 332,144.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Merger Agreement and The Stockholder Agreement
In connection with the Merger, the Company, HLR, Hoffmann-La
Roche Inc. and Holdings entered into a stockholder agreement dated as
of April 28, 1995 (the "Stockholder Agreement"). The Stockholder
Agreement contains certain provisions relating to (i) the governance
of the Company following the Merger, including but not limited to the
composition of the Board of Directors, (ii) the issuance, sale and
transfer of the Company's Equity Securities (as defined in the
Stockholder Agreement) by the Company and Roche, (iii) the
acquisition of additional Equity Securities of the Company's Equity
Securities and (iv) the registration rights granted by the Company to
Roche with respect to the Company's Equity Securities. A copy of the
Stockholder Agreement was included as an exhibit to the current
report on Form 8-K of the Company filed with the Commission on May
12, 1995 in connection with the consummation of the Merger.
The governance provisions of the Stockholder Agreement provide,
among other things, that immediately after April 28, 1995, and for a
period of one year thereafter (the "Initial Period"), the Board of
Directors of the Company is to be comprised of seven members,
consisting of Mr. Maher, three designees of HLR (each, an "HLR
Director") and three Independent Directors (as defined therein). The
HLR Directors currently are Mr. Belingard, Mr. Mac Mahon and Dr.
Powell. The persons nominated to serve as the Independent Directors
for the Initial Period, who are Mr. Robinson, Dr. Skinner and Dr.
Wallace, were required pursuant to the Stockholder Agreement to be
mutually acceptable to a majority of the members of the Company's
Board of Directors in office immediately prior to April 28, 1995 and
to HLR. Pursuant to the Stockholder Agreement, following the Initial
Period, the Board of Directors of the Company will (subject to
specified exceptions) be comprised of seven members, consisting of
three HLR Directors and four Independent Directors nominated by the
Nominating Committee of the Board of Directors.
The Stockholder Agreement also provides that Mr. Maher will
serve as Chairman of the Board and Mr. Mac Mahon will serve as Vice
Chairman of the Board of the Company for the Initial Period.
Following the Initial Period, Mr. Maher will resign his Board and
committee positions, Mr. Mac Mahon will become Chairman of the Board
and the position of Vice Chairman will be eliminated. The
Stockholder Agreement also provides that, among other things, certain
actions by the Company will require approval by a majority of the HLR
Directors and at least one Independent Director (a "Special Majority
Vote"). Included in these items is any change in the size or
composition of the Board of Directors or any committee thereof and
the establishment of a new committee of the Board of Directors.
The Sharing and Call Option Agreement
In connection with the Merger Agreement, HLR, Mafco, NHCG, and
the Company entered into the Sharing and Call Option Agreement dated
as of December 13, 1994 (the "Sharing and Call Option Agreement").
The Sharing and Call Option Agreement provides, among other things,
that at any time after the third anniversary of the Merger, HLR or
one of its affiliates (other than the Company) may exercise the
right, which right may only be exercised once, to purchase all, but
not less than all, the shares of Common Stock then owned by NHCG,
Mafco or any of their controlled affiliates. The Sharing and Call
Option Agreement provides that a member of the Investor Group will,
if it elects to exercise this purchase right, pay a price per share
for the shares to be purchased equal to 102% of the average closing
price per share of such security as reported on the National
Association of Securities Dealers, Inc. Automated Quotation System-
National Market System, for the 30 trading days before the date of
such exercise.
In addition, in accordance with the Sharing and Call Option
Agreement, the Company has filed with the Commission a registration
statement on Form S-3 (the "Registration Statement") which has been
declared effective by the Commission and includes a resale prospectus
that permits NHCG (or any of its pledgees) to sell shares of Common
Stock and Warrants received by NHCG in the Merger without
restriction. The Company has agreed to use its best efforts to
prepare and file with the Commission such post-effective amendments
to the Registration Statement or other filings as may be necessary to
keep such Registration Statement continuously effective for a period
ending on the third anniversary of the date of the Sharing and Call
Option Agreement and during such period to use its best efforts to
cause the resale prospectus to be supplemented by any required
prospectus supplement. The Company has also agreed to pay all the
Registration Expenses (as defined therein) arising from exercise of
the registration rights set forth in the Sharing and Call Option
Agreement. A copy of the Sharing and Call Option Agreement was filed
with the Commission by the Company as an exhibit to the Company's
December 31, 1994 Form 10-K.
Registration Rights Agreement
In addition to those registration rights granted to NHCG under
the Sharing and Call Option Agreement, the Company and NHCG also are
parties to a registration rights agreement dated as of April 30, 1991
(the "Registration Rights Agreement") pursuant to which the Company
is obligated, upon the request of NHCG, to file registration
statements ("Demand Registration Statements") from time to time with
the Commission covering the sale of any shares of Common Stock owned
by NHCG upon the completion of certain public offerings by the
Company of shares of Common Stock in 1991. Such Demand Registration
Statements may also cover the resale from time to time of any shares
of Common Stock that NHCG may purchase in the open market at a time
when it is deemed to be an affiliate (as such term is defined under
Rule 144 under the Securities Act of 1933, as amended), and certain
securities issued in connection with a combination of shares,
recapitalization, reclassification, merger or consolidation, or other
pro rata distribution. NHCG will also have the right to include such
Common Stock and other securities in any registration statement filed
by the Company for the underwritten public offering of shares of
Common Stock (whether or not for the Company's account), subject to
certain reductions in the amount of such Common Stock and securities
if the managing underwriters of such offering determine that the
inclusion thereof would materially interfere with the offering. The
Company agreed not to effect any public or private sale, distribution
or purchase of any of its securities which are the same as or similar
to the securities covered by any Demand Registration Statement during
the 15-day period prior to, and during the 45-day period beginning
on, the closing date of each underwritten offering under such
registration statement and NHCG agreed to a similar restriction with
respect to underwritten offerings by the Company. NHCG's rights
under the Registration Rights Agreement are transferable as provided
therein.
Until the third anniversary of the Sharing and Call Option
Agreement, when the Company's obligation to keep the Registration
Statement effective expires, the registration rights granted to NHCG
pursuant to the Registration Rights Agreement are substantially
duplicative of those granted pursuant to the Sharing and Call Option
Agreement. After such date and only to the extent that NHCG still
holds shares of Common Stock or Warrants that it held as of or
received in the Merger, NHCG will continue to be entitled to the
registration rights described in the proceding paragraph, unless the
Registration Rights Agreement has been otherwise amended or
terminated.
Tax Allocation Arrangement
Until May 7, 1991, the Company was included in the consolidated
federal income tax returns, and in certain state income tax returns,
of Mafco, M&F Holdings, Revlon Group and Revlon. As a result of the
reduction of M&F Holdings' indirect ownership interest in the Company
on May 7, 1991, the Company is no longer a member of the Mafco
consolidated tax group. For periods subsequent to May 7, 1991, the
Company files its own separate Federal, state and local income tax
returns. Nevertheless, the Company will remain obligated to pay to M&F
Holdings (or other members of the consolidated group of which M&F
Holdings is a member) any income taxes the Company would have had to
pay (in excess of those which it has already paid) if it had filed
separate income tax returns for taxable periods beginning on or after
January 1, 1985 (but computed without regard to (i) the effect of
timing differences (i.e., the liability or benefit that otherwise could
be deferred will be, instead, includible in the determination of
current taxable income) and (ii) any gain recognized on the sale of any
asset not in the ordinary course of business). In addition, despite
the reduction of M&F Holdings' indirect ownership of the Company, the
Company will continue to be subject under existing federal regulations
to several liability for the consolidated federal income taxes for any
consolidated return year in which it was a member of any consolidated
group of which Mafco, M&F Holdings, Revlon Group or Revlon was the
common parent. However, Mafco, M&F Holdings, Revlon Group and Revlon
have agreed to indemnify the Company for any federal income tax
liability (or any similar state or local income tax liability) of
Mafco, M&F Holdings, Revlon Group, Revlon or any of their subsidiaries
(other than that which is attributable to the Company or any of its
subsidiaries) that the Company would be required to pay.
Certain Other Transactions with Roche
The Company has certain on-going arrangements with Roche for the
purchase by the Company of certain products and the licensing by the
Company from Roche of certain diagnostics technologies, with an
aggregate value of approximately $9.1 million in 1995. The Company
provides certain diagnostic testing and support services to Roche in
connection with Roche's clinical pharmaceutical trials, with an
aggregate value of approximately $2.3 million in 1995. In addition, in
connection with the Merger, the Company and Roche have entered into a
transition services agreement for the provision by Roche to the Company
of certain payroll and other corporate services for a limited
transition period following the Merger. These services are charged to
the Company based on the time involved and the Roche personnel
providing the service. Each of these arrangements was entered into in
the ordinary course of business, on an arm's length basis and on terms
which the Company believes are no less favorable to it than those
obtainable from unaffiliated third parties. The Company paid Roche a
total of $214,597 in 1995 for these services.
Consulting Agreement
Pursuant to a letter agreement, the Company has retained Mr. Maher
as an independent contractor to provide certain consulting services to
the Company for a one year period beginning from April 28, 1995. Mr.
Maher is paid an annual retainer of $160,000 under this agreement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) List of documents filed as part of this Report:
(1) Consolidated Financial Statements and Independent
Auditors' Report included herein:
See Index on page F-1
(2) Financial Statement Schedules:
See Index on page F-1
All other schedules are omitted as they are inapplicable
or the required information is furnished in the
Consolidated Financial Statements or notes thereto.
(3) Index to and List of Exhibits
(a) Exhibits:*
Exhibits 10.2 through 10.4 and 10.6 through 10.45 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
(incorporated herein by reference to the Company's 1994
S-4).
3.2 - By-laws of the Company (incorporated herein by reference
to the Company's 1994 S-4).
3.3 - 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")).
3.4 - 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 - Laboratory Agreement dated February 4, 1983 between the
Company and Humana of Texas, Inc. d/b/a/ Medical City
Dallas Hospital (incorporated herein by reference to the
Company's Registration Statement on Form S-1 filed with
the Commission on May 5, 1988, File No. 33-21708).
10.2 - 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")).
10.3 - 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")).
10.4 - National Health Laboratories Incorporated Pension
Equalization Plan (incorporated herein by reference to
the 1992 10-K).
10.5 - Settlement Agreement dated December 18, 1992 between the
Company and the United States of America (incorporated
herein by reference to the 1992 10-K).
10.6 - Employment Agreement dated May 1, 1991 between the
Company and Robert Whalen (incorporated herein by
reference to the 1991 10-K).
10.7 - Amendment to Employment Agreement dated June 6, 1991
between the Company and Robert Whalen (incorporated
herein by reference to the 1991 10-K).
10.8 - Amendment to Employment Agreement dated January 1, 1993
between the Company and Robert Whalen (incorporated
herein by reference to the 1992 10-K).
10.9 - Amendment to Employment Agreement dated January 1, 1994
between the Company and Robert Whalen (incorporated
herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1993 filed
with the Commission on March 25, 1994, File No. 1-10790
(the "1993 10-K")).
10.10 - Amendment to Employment Agreement dated March 1, 1994
between the Company and Robert Whalen (incorporated
herein by reference to the 1993 10-K).
10.11 - Employment Agreement dated May 1, 1991 between the
Company and Larry L. Leonard (incorporated herein by
reference to the 1991 10-K).
10.12 - Amendment to Employment Agreement dated June 6, 1991
between the Company and Larry L. Leonard (incorporated
herein by reference to the 1991 10-K).
10.13 - Amendment to Employment Agreement dated January 1, 1993
between the Company and Larry L. Leonard (incorporated
herein by reference to the 1992 10-K).
10.14 - Amendment to Employment Agreement dated January 1, 1994
between the Company and Larry L. Leonard (incorporated
herein by reference to the 1993 10-K).
10.15 - Amendment to Employment Agreement dated March 1, 1994
between the Company and Larry L. Leonard (incorporated
herein by reference to the 1993 10-K).
10.16 - Employment Agreement dated May 1, 1991 between the
Company and Timothy Brodnik (incorporated herein by
reference to the 1991 10-K).
10.17 - Amendment to Employment Agreement dated June 6, 1991
between the Company and Timothy Brodnik (incorporated
herein by reference to the 1991 10-K).
10.18 - Amendment to Employment Agreement dated January 1, 1993
between the Company and Timothy Brodnik (incorporated
herein by reference to the 1992 10-K).
10.19 - Amendment to Employment Agreement dated January 1, 1994
between the Company and Timothy Brodnik (incorporated
herein by reference to the 1993 10-K).
10.20 - Amendment to Employment Agreement dated March 1, 1994
between the Company and Timothy Brodnik (incorporated
herein by reference to the 1993 10-K).
10.21 - Employment Agreement dated January 1, 1991 between the
Company and David C. Flaugh (incorporated herein by
reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1990 filed with the
Commission on March 14, 1991, File No. 1-10740** (the
"1990 10-K")).
10.22 - Amendment to Employment Agreement dated April 1, 1991
between the Company and David C. Flaugh (incorporated
herein by reference to the 1991 10-K).
10.23 - Amendment to Employment Agreement dated June 6, 1991
between the Company and David C. Flaugh (incorporated
herein by reference to the 1991 10-K).
10.24 - Amendment to Employment Agreement dated January 1, 1993
between the Company and David C. Flaugh (incorporated
herein by reference to the 1992 10-K).
10.25 - Amendment to Employment Agreement dated April 1, 1994
between the Company and David C. Flaugh (incorporated
herein by reference to the 1994 10-K).
10.26 - Employment Agreement dated January 1, 1991 between the
Company and W. David Slaunwhite (incorporated herein by
reference to the 1990 10-K).
10.27 - Amendment to Employment Agreement dated April 1, 1991
between the Company and David Slaunwhite (incorporated
herein by reference to the 1991 10-K).
10.28 - Amendment to Employment Agreement dated June 6, 1991
between the Company and David Slaunwhite (incorporated
herein by reference to the 1991 10-K).
10.29 - Amendment to Employment Agreement dated January 1, 1993
between the Company and W. David Slaunwhite
(incorporated herein by reference to the 1992 10-K).
10.30 - Amendment to Employment Agreement dated January 1, 1994
between the Company and W. David Slaunwhite
(incorporated herein by reference to the 1993 10-K).
10.31 - Amendment to Employment Agreement dated March 1, 1994
between the Company and W. David Slaunwhite
(incorporated herein by reference to the 1993 10-K).
10.32 - Employment Agreement dated January 1, 1991 between the
Company and John Markus (incorporated herein by
reference to the 1990 10-K).
10.33 - Amendment to Employment Agreement dated April 1, 1991
between the Company and John Markus (incorporated herein
by reference to the 1991 10-K).
10.34 - Amendment to Employment Agreement dated June 6, 1991
between the Company and John Markus (incorporated herein
by reference to the 1991 10-K).
10.35 - Amendment to Employment Agreement dated January 1, 1993
between the Company and John F. Markus (incorporated
herein by reference to the 1992 10-K).
10.36 - Amendment to Employment Agreement dated January 1, 1994
between the Company and John F. Markus (incorporated
herein by reference to the 1993 10-K).
10.37 - Amendment to Employment Agreement dated March 1, 1994
between the Company and John F. Markus (incorporated
herein by reference to the 1993 10-K).
10.38 - Employment Agreement dated as of June 23, 1994 between
the Company and Haywood D. Cochrane, Jr. (incorporated
herein by reference to the 1994 10-K).
10.39 - Amendment dated as of April 28, 1995 to the Employment
Agreement dated as of January 1, 1991, as amended on
April 1, 1991, June 6, 1991 January 1, 1993 and April 1,
1994, between La Jolla Management Corp., a Delaware
corporation and David C. Flaugh (incorporated herein by
reference to the April 28, 1995 Form 8-K).
10.40 - Amendment dated as of September 19, 1995 to the
Employment Agreement dated as of January 1, 1991, as
amended on April 1, 1991, June 6, 1991, January 1, 1993,
April 1, 1994 and April 28, 1995, between La Jolla
Management Corp., a Delaware corporation and a wholly-
owned subsidiary of the Company, and David C. Flaugh.
(Incorporated by reference herein to the report on Form
8-K dated September 19, 1995, filed with the Commission
on September 21, 1995).
10.41 - 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")).
10.42 - 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).
10.43 - 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")).
10.44 - Laboratory Corporation of America Holdings Annual Bonus
Incentive Plan (incorporated by reference to Annex III
of the 1995 Proxy).
10.45*- Letter Agreement dated July 17, 1995 between the Company
and James R. Maher.
10.46 - 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).
10.47 - 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).
10.48 - 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).
10.49 - 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).
10.50 - 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).
10.51 - 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).
10.52 - 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 Quarter's Report on Form 10-Q for the
quarter ended September 30, 1995 filed with the
Commission on November 14, 1995, File No. 1-11353)
10.53 - 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).
10.54*- Second Amendment to Credit Agreement dated as of
February 16, 1996 the Company, the banks named therein,
and Credit Suisse (New York Branch), as Administrative
Agent.
21.1 - List of Subsidiaries of the Company (incorporated by
reference to the April 28, 1995 Form 8-K).
23.1*- Consent of KPMG Peat Marwick LLP.
24.1*- Power of Attorney of James R. Maher.
24.2*- Power of Attorney of Thomas P. Mac Mahon
24.3*- Power of Attorney of Jean-Luc Belingard
24.4*- Power of Attorney of Linda Gosden Robinson.
24.5*- Power of Attorney of David B. Skinner
24.6*- Power of Attorney of Andrew G. Wallace, M.D.
27 - Financial Data Schedule (electronically filed version
only).
28.1 - Form of Collateral Agency Agreement (Bank Obligations)
(incorporated herein by reference to Amendment No. 1 to
the 1990 S-1 filed with the Commission on July 27, 1990,
File No. 33-35785).
(b) Reports on Form 8-K
A current report on Form 8-K dated February 13, 1996 was filed on
February 20, 1996 in connection with the Company's press release dated
February 13, 1996 announcing operating results of the Registrant for
the year ended December 31, 1995 as well as certain other information.
------------------------
* 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/ JAMES B. POWELL
--------------------------------
James B. Powell, M.D.
President and Chief Executive Officer
By:/s/ HAYWOOD D. COCHRANE, JR.
--------------------------------
Haywood D. Cochrane, Jr.
Executive Vice President, Chief
Financial Officer and Treasurer
By:/s/ WESLEY R. ELINGBURG
--------------------------------
Wesley R. Elingburg
Senior Vice President - Finance
(Principal Accounting Officer)
Dated: March 29, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on March 29,
1996 in the capacities indicated.
Signature Title
--------- -----------
/s/ JAMES R. MAHER* Director
--------------------------
(James R. Maher)
/s/ THOMAS P. MAC MAHON* Director
--------------------------
(Thomas P. MacMahon)
/s/ JEAN-LUC BELINGARD* Director
--------------------------
(Jean-Luc Belingard)
/s/ LINDA GOSDEN ROBINSON* Director
--------------------------
(Linda Gosden Robinson)
/s/ DAVID B. SKINNER* Director
--------------------------
(David B. Skinner)
/s/ ANDREW G. WALLACE, M.D.* Director
--------------------------
(Andrew G. Wallace, M.D.)
---------------------
* Bradford T. Smith, by his signing his name hereto, does hereby
sign this report on behalf of the directors of the Registrant after
whose typed names asterisks appear, pursuant to powers of attorney
duly executed by such directors and filed with the Securities and
Exchange Commission.
By:/s/ BRADFORD T. SMITH
-------------------------
Bradford T. Smith
Attorney-in-fact
LABORATORY CORPORATION OF AMERICA HOLDINGS
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULE
Page
-----
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1995 and 1994 F-3
Consolidated Statements of Operations for
each of the years in the three-year
period ended December 31, 1995. F-4
Consolidated Statements of Stockholders'
Equity for each of the years in the
three-year period ended December 31, 1995 F-5
Consolidated Statements of Cash Flows for
each of the years in the three-year
period ended December 31, 1995. F-6
Notes to Consolidated Financial Statements F-8
Financial Statement Schedule:
II - Valuation and Qualifying Accounts and Reserves F-28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Laboratory Corporation of America Holdings:
We have audited the consolidated financial statements of
Laboratory Corporation of America Holdings and subsidiaries as listed
in the accompanying index. In connection with our audits of the
consolidated financial statements, we also have audited the financial
statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Laboratory Corporation of America Holdings and
subsidiaries as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with
generally accepted accounting principles. Also in our opinion, the
related financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
Raleigh, North Carolina
February 16, 1996
[Download Table]
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions, except per share data)
December 31,
---------------------
1995 1994
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 16.4 $ 26.8
Accounts receivable, net 425.6 205.4
Inventories 53.7 20.1
Prepaid expenses and other 19.0 8.3
Deferred income taxes 63.3 29.4
Income taxes receivable 21.9 3.0
-------- --------
Total current assets 599.9 293.0
Property, plant and equipment, net 304.8 140.1
Intangible assets, net 916.7 551.9
Other assets, net 15.8 27.7
-------- --------
$ 1,837.2 $ 1,012.7
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 106.2 $ 44.3
Accrued expenses and other 168.9 92.8
Current portion of long-term debt 70.8 39.0
Current portion of accrued
settlement expenses 4.6 26.7
-------- --------
Total current liabilities 350.5 202.8
Revolving credit facility 218.0 213.0
Long-term debt, less current portion 712.5 341.0
Capital lease obligation 9.6 9.8
Deferred income taxes 5.1 20.6
Other liabilities 129.9 59.5
Stockholders' equity:
Preferred stock, $0.10 par value;
10,000,000 shares authorized;
none issued -- --
Common stock, $0.01 par value;
220,000,000 shares authorized;
122,908,722 and 84,761,817 shares
issued and outstanding at
December 31, 1995 and 1994, respectively 1.2 0.8
Additional paid-in capital 411.0 153.5
Retained earnings (accumulated deficit) (0.6) 11.7
-------- --------
Total stockholders' equity 411.6 166.0
-------- --------
$ 1,837.2 $ 1,012.7
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
[Download Table]
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Millions, except per share data)
Years Ended December 31,
---------------------------------
1995 1994 1993
-------- ------- --------
Net Sales $1,432.0 $ 872.5 $ 760.5
Cost of sales 1,024.3 597.0 444.5
-------- ------- -------
Gross profit 407.7 275.5 316.0
Selling, general and
administrative expenses 238.5 149.3 121.4
Amortization of intangibles
and other assets 27.0 16.3 9.1
Restructuring charges 65.0 -- --
Provision for settlements 10.0 -- --
-------- ------- -------
Operating income 67.2 109.9 185.5
Other income (expenses):
Litigation settlement and
related expenses -- (21.0) --
Other gains and expenses,
net -- -- 15.3
Investment income 1.4 1.0 1.2
Interest expense (65.5) (34.5) (10.9)
-------- ------- -------
Earnings before income taxes
and extraordinary loss 3.1 55.4 191.1
Provision for income taxes 7.1 25.3 78.4
-------- ------- -------
Earnings (loss) before extraordinary
loss (4.0) 30.1 112.7
Extraordinary loss from early
extinguishment of debt, net of
income tax benefit of $5.2 (8.3) -- --
--------- -------- -------
Net earnings (loss) $ (12.3) $ 30.1 $ 112.7
========= ======== =======
Earnings (loss) per common share:
Earnings (loss) per common share
before extraordinary item $ (0.03) $ 0.36 $ 1.26
Extraordinary loss per common share (0.08) -- --
-------- ------- -------
Net earnings (loss) per common share $ (0.11) $ 0.36 $ 1.26
======== ======= =======
Dividends per common share $ -- $ 0.08 $ 0.32
======== ======= =======
<FN>
See notes to consolidated financial statements.
</FN>
[Download Table]
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Millions, except per share data)
Common
Stock Minimum
$0.01 Additional Pension
Par Paid-in Retained Liability Treasury
Value Capital Earnings Adjustment Stock
-------- ---------- --------- ---------- --------
Balance, January 1, 1993 $1.0 $225.9 $117.5 $ -- $(131.9)
Net earnings -- -- 112.7 -- --
Exercise of stock options -- 0.4 -- -- --
Dividends to stockholders -- -- (28.2) -- --
Acquisition of treasury
stock -- -- -- -- (154.2)
Adjustment for minimum
pension liability -- -- -- (2.4) --
----- ------ ------- ------- -------
Balance, December 31, 1993 1.0 226.3 202.0 (2.4) (286.1)
Net earnings -- -- 30.1 -- --
Exercise of stock options -- 0.1 -- -- --
Dividends to stockholders -- -- (6.8) -- --
Retirement of treasury
stock (0.2) (72.3) (213.6) -- 286.1
Adjustment for minimum
pension liability -- -- -- 2.4 --
Other -- (0.6) -- -- --
----- ------ ------- ------- -------
Balance, December 31, 1994 0.8 153.5 11.7 -- --
Net loss -- -- (12.3) -- --
Exercise of stock options -- 0.2 -- -- --
Cancellation of stock
options -- 6.9 -- -- --
Distribution to
stockholders (0.2) (474.5) -- -- --
Issuance of common stock 0.6 674.6 -- -- --
Issuance of warrants -- 51.0 -- -- --
Other -- (0.7) -- -- --
----- ------ ------- ------- -------
Balance, December 31, 1995 $1.2 $411.0 $(0.6) $ -- $ --
===== ====== ======= ======= =======
<FN>
See notes to consolidated financial statements.
</FN>
[Download Table]
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions, except per share data)
Years Ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (12.3) $ 30.1 $ 112.7
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization 72.4 44.4 32.2
Restructuring charges 65.0 -- --
Extraordinary loss, net of
income tax benefit 8.3 -- --
Provision for doubtful accounts,
net 12.4 (1.4) 0.2
Provision for settlements and
related expenses 10.0 21.0 --
Other gains and expenses, net -- -- (15.3)
Change in assets and liabilities,
net of effects of acquisitions:
Increase in accounts receivable (58.6) (54.0) (35.8)
Decrease(increase)in inventories 5.1 (0.9) (0.9)
Decrease(increase)in prepaid
expenses and other 1.0 5.1 (2.5)
Decrease(increase)in deferred
income taxes, net (21.6) 11.0 19.1
Decrease(increase)in income
taxes receivable (11.7) 5.5 6.5
Increase(decrease)in accounts
payable, accrued expenses
and other 27.9 (13.1) 1.5
Payments for restructuring
charges (13.4) -- --
Payments for settlement and
related expenses (32.1) (29.8) (55.8)
Other, net (5.4) (3.2) (4.7)
-------- ------- --------
Net cash provided by operating
activities 47.0 14.7 57.2
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (75.4) (48.9) (33.6)
Proceeds from sale of subsidiary -- 10.1 --
Acquisitions of businesses (39.6) (254.8) (78.2)
Restricted investment -- -- 0.8
Other gains and expenses, net -- -- 15.3
-------- ------- --------
Net cash used for investing
activities (115.0) (293.6) (95.7)
-------- ------- --------
(continued)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(Dollars in Millions, except per share data)
Years Ended December 31,
---------------------------
1995 1994 1993
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit
facilities $ 308.0 $ 308.0 $ 342.0
Payments on revolving credit
facilities (303.0) (373.0) (139.0)
Proceeds from long-term debt 800.0 400.0 --
Payments on long-term debt (446.7) (20.0) --
Deferred payments on acquisitions (12.9) (7.6) (1.9)
Purchase of treasury stock -- -- (154.2)
Dividends paid on common stock -- (13.6) (29.0)
Distribution to stockholders (474.7) -- --
Cash received for issuance of common
stock 135.7 -- --
Cash received for issuance of warrants 51.0 -- --
Proceeds from exercise of stock options 0.2 0.1 0.4
Other -- (0.5) (0.9)
-------- ------- --------
Net cash provided by
financing activities 57.6 293.4 17.4
-------- ------- --------
Net increase (decrease) in cash
and cash equivalents (10.4) 14.5 (21.1)
Cash and cash equivalents at
beginning of year 26.8 12.3 33.4
-------- ------- --------
Cash and cash equivalents at
end of year $ 16.4 $ 26.8 $ 12.3
======== ======= ========
Supplemental schedule of cash
flow information:
Cash paid during the period for:
Interest $ 58.6 $ 34.2 $ 8.4
Income taxes 27.2 14.8 59.6
Disclosure of non-cash financing
and investing activities:
Dividends declared and unpaid on
common stock $ -- $ -- $ 6.8
Common stock issued in connection
with acquisition 539.5 -- --
Common stock issued in connection
with the cancellation of employee
stock options 6.9 -- --
In connection with business
acquisitions, liabilities were
assumed as follows:
Fair value of assets acquired $ 777.7 $ 399.4 $ 106.9
Cash paid (39.6) (254.8) (78.2)
Stock issued (539.5) -- --
-------- ------- --------
Liabilities assumed $ 198.6 $ 144.6 $ 28.7
======== ======= ========
<FN>
See notes to consolidated financial statements.
</FN>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The consolidated financial statements include the accounts of
Laboratory Corporation of America Holdings and its subsidiaries ("Company")
after elimination of all material intercompany accounts and transactions.
Prior to April 28, 1995, the Company's name was National Health
Laboratories Holdings Inc. ("NHL"). On April 28, 1995, following approval
at a special meeting of the stockholders of the Company, the name of the
Company was changed to Laboratory Corporation of America Holdings.
Cash Equivalents:
Cash equivalents (primarily investments in money market funds, time
deposits and commercial paper which have original maturities of three
months or less at the date of purchase) are carried at cost which
approximates market.
Inventories:
Inventories, consisting primarily of laboratory supplies, are stated
at the lower of cost (first-in, first-out) or market.
Financial Instruments:
Interest rate swap agreements, which are used by the Company in the
management of interest rate exposure, are accounted for on an accrual
basis. Amounts to be paid or received under such agreements are recognized
as interest income or expense in the periods in which they accrue.
Property, Plant and Equipment:
Property, plant and equipment is 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 35-40
Machinery and equipment 3-10
Furniture and fixtures 5-10
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
Leasehold improvements and assets held under capital leases are
amortized over the shorter of their estimated lives or the period of the
related leases. Expenditures for repairs and maintenance charged against
earnings in 1995, 1994 and 1993 were $27.5, $16.5 and $10.8, respectively.
Intangible Assets:
Intangible assets, consisting of goodwill, net of amortization, of
$700.1 and $417.0 at December 31, 1995 and 1994, respectively, and other
intangibles (i.e., customer lists and non-compete agreements), net of
amortization, of $216.6 and $134.9 at December 31, 1995 and 1994,
respectively, are being amortized on a straight-line basis over a period of
40 years and 3-25 years, respectively. Total accumulated amortization for
intangible assets aggregated $87.4 and $60.8 at December 31, 1995 and 1994,
respectively. The Company assesses the recoverability of intangible assets
by determining whether the amortization of the intangibles' balance over
its remaining life can be recovered through undiscounted future operating
cash flows of the acquired operations. The amount of intangible asset
impairment, if any, is measured based on projected undiscounted future
operating cash flows.
Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107, "Disclosures
About Fair Value of Financial Instruments", requires that fair values be
disclosed for most of the Company's financial instruments. The carrying
amount of cash and cash equivalents, accounts receivable, accounts payable
and accrued expenses are considered to be representative of their
respective fair values. The carrying amount of the revolving credit
facility and long-term debt are considered to be representative of their
respective fair values as their interest rates are based on market rates.
Concentration of Credit Risk:
Concentrations of credit risk with respect to accounts receivable are
limited due to the diversity of the Company's clients as well as their
dispersion across many different geographic regions.
Revenue Recognition:
Sales are recognized on the accrual basis at the time test results are
reported, which approximates when services are provided. Services are
provided to certain patients covered by various third-party payor programs
including the Medicare and Medicaid programs. Billings for services under
third-party payor programs are included in sales net of allowances for
differences between the amounts billed
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
and estimated program payment amounts. Adjustments to the estimated payment
amounts based on final settlement with the programs are recorded upon
settlement. In 1995, 1994 and 1993, approximately 28%, 35% and 41%,
respectively, of the Company's revenues were derived from tests performed
for beneficiaries of Medicare and Medicaid programs.
Income Taxes:
The Company accounts for income taxes under Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("Statement 109"). Statement 109 requires
the use of the asset and liability method of accounting for income taxes.
Under the asset and liability method of Statement 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Earnings per Common Share:
For the years ended December 31, 1995, 1994 and 1993, earnings per
common share is calculated based on the weighted average number of shares
outstanding during each year (110,579,096, 84,754,183 and 89,438,764
shares, respectively).
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. Actual results could differ from those
estimates.
Reclassifications:
Certain amounts in the prior years' financial statements have been
reclassified to conform with the 1995 presentation.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
2.MERGER AND ACQUISITIONS
On April 28, 1995, the Company completed its merger with Roche
Biomedical Laboratories, Inc. ("RBL") pursuant to an Agreement and Plan of
Merger (the "Merger Agreement") dated as of December 13, 1994 (the
"Merger").
Pursuant to the Merger Agreement, each outstanding share of common
stock, par value $0.01 per share of the Company ("Common Stock") (other
than as provided in the Merger Agreement), was converted (the "Share
Conversion") into (i) 0.72 of a share of Common Stock of the Company and
(ii) a distribution of $5.60 in cash per share, without interest. The
aggregate number of shares issued and outstanding following the Share
Conversion was 61,041,159. Also, an aggregate of 538,307 shares of Common
Stock were issued in connection with the cancellation of certain employee
stock options.
In addition, pursuant to the Merger Agreement, an aggregate of
61,329,256 shares of Common Stock were issued to HLR Holdings Inc. ("HLR")
and its designee, Roche Holdings, Inc. in exchange for all shares of common
stock, no par value, of RBL outstanding immediately prior to the effective
date of the Merger (other than treasury shares, which were canceled) and a
cash contribution described below. The issuance of such shares of Common
Stock constituted approximately 49.9% of the total outstanding shares of
Common Stock outstanding immediately after the Merger.
The Company also made a distribution (the "Warrant Distribution") to
holders of record as of April 21, 1995, of 0.16308 of a warrant per
outstanding share of Common Stock, each such warrant representing the right
to purchase one newly issued share of Common Stock for $22.00 (subject to
adjustment) on April 28, 2000 (each such warrant, a "Warrant").
Approximately 13,826,000 Warrants were issued in the Warrant Distribution
(including fractional Warrants, which were not distributed, but were
liquidated in sales on the New York Stock Exchange and the proceeds thereof
distributed to such stockholders).
In addition, pursuant to the Merger Agreement on April 28, 1995 the
Company issued to Hoffmann-La Roche Inc. ("Roche"), for a purchase price of
approximately $51.0, 8,325,000 Warrants (the "Roche Warrants") to purchase
shares of Common Stock, which Warrants have the terms described above.
The aggregate cash consideration of approximately $474.7 paid to
stockholders of the Company in the Merger was financed from three sources:
a cash contribution (the "Company Cash Contribution") of approximately
$288.0 out of the proceeds of borrowings under the credit agreement (as
described in note 9), a cash contribution made
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
by HLR to the Company in the amount of approximately $135.7 and the
proceeds from the sale and issuance of the Roche Warrants.
The exchange consideration of approximately $558.0 for the purchase of
RBL consisted of the value of the stock issued to HLR and Roche Holdings,
Inc., as well as other cash costs of the Merger, net of cash received from
HLR. The Merger has been accounted for under the purchase method of
accounting; as such RBL's assets and liabilities were recorded at their
estimated fair values on the date of acquisition. The exchange
consideration exceeded the fair value of acquired net tangible assets by
approximately $371.9. RBL's results of operations have been included in the
Company's results of operations since April 28, 1995.
The Company acquired Allied Clinical Laboratories, Inc. ("Allied") as
a wholly owned subsidiary on June 23, 1994, for approximately $191.5 in
cash, $185.0 of which was borrowed under a revolving credit facility, plus
the assumption of $24.0 of Allied indebtedness and the recognition of
approximately $5.0 of Allied net liabilities (the "Allied Acquisition").
The Allied Acquisition was accounted for using the purchase method of
accounting; as such, Allied's assets and liabilities were recorded at their
fair values on the date of acquisition. The purchase price exceeded the
fair value of acquired net tangible assets by approximately $220.5.
Allied's results of operations have been included in the Company's results
of operations since June 23, 1994.
The following table provides unaudited pro forma operating results as
if the Merger and the acquisition of Allied had been completed at the
beginning of each of the periods presented. The pro forma information does
not include the restructuring charges and the extraordinary item related to
the Merger. The pro forma information has been prepared for comparative
purposes only and does not purport to be indicative of future operating
results.
Year Ended
December 31,
---------------------
1995 1994
---------------------
Net sales $ 1,678.6 $ 1,692.6
Net earnings 48.9 71.3
Net earnings per common share $ 0.40 $ 0.58
During 1995, the Company also acquired nine small clinical laboratory
companies for an aggregate purchase price, including assumption of
liabilities, of $41.7. During 1994 and 1993, the Company acquired eleven
and thirty-four laboratories, respectively, for an aggregate purchase
price, including assumption of liabilities, of $79.3 and $106.9,
respectively. The acquisitions were accounted
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
for as purchase transactions. The excess of cost over the fair value of
net tangible assets acquired during 1995, 1994 and 1993 was $28.2, $72.1,
and $100.1, respectively, which is included under the caption "Intangible
assets, net" in the accompanying consolidated balance sheets. The
consolidated statements of operations reflect the results of operations of
these purchased businesses from their dates of acquisition.
3.RESTRUCTURING CHARGES
Following the Merger, the Company determined that it would be
beneficial to close Company laboratory facilities in certain geographic
regions where duplicate Company and RBL facilities existed at the time of
the Merger. In addition, the Company decided to downsize certain finance
and administrative positions in La Jolla, California in order to eliminate
duplicative functions.
Under the restructuring plan, the Company recorded a restructuring
charge of $65.0 in the second quarter of 1995. The charge includes
approximately $24.2 to reduce the workforce by approximately 2,200
individuals. The plan includes a reduction of approximately 1,520
laboratory operations personnel, approximately 80 sales and marketing
personnel and approximately 600 finance and administrative personnel both
at laboratory locations and in La Jolla, California.
Approximately $21.3 of the restructuring charges consist of the
reduction of certain assets to their net realizable values and primarily
consists of the write-off of approximately $17.7 of leasehold improvements
on facilities to be closed or significantly downsized.
Lease and other facility obligations accounted for approximately $19.5
of the restructuring charge, including the future minimum lease payments
and expenses from the estimated closing or downsizing date to the end of
the contractual lease term for facilities to be significantly downsized or
closed.
As of December 31, 1995, three facilities have either been closed or
significantly downsized. In addition, certain duplicative functions in La
Jolla, California were eliminated. As of December 31, 1995, the net
reduction in the total workforce was approximately 800 employees. The
Company expects that a substantial portion of the remaining restructuring
will be completed in 1996 with the remainder completed in early 1997. The
Company believes that the remaining liabilities are sufficient to complete
such restructuring activities.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
The following represents the Company's restructuring activities for
the period indicated:
Asset Lease and
Severance revaluations other facility
Costs and write-offs obligations Total
------------ --------------- ----------------- ---------
Balance at
December 31, 1994 $ -- $ -- $ -- $ --
Restructuring charges 24.2 21.3 19.5 65.0
Non cash items (0.3) (2.7) -- (3.0)
Cash payments (11.1) -- (0.6) (11.7)
-------- -------- -------- -------
Balance at
December 31, 1995 $ 12.8 $ 18.6 $ 18.9 $ 50.3
======== ======== ======== =======
Current $ 32.3
Non-current 18.0
-------
$ 50.3
=======
4. ACCOUNTS RECEIVABLE, NET
December 31, December 31,
1995 1994
------------ -------------
Gross accounts receivable $ 516.0 $ 270.7
Less contractual allowances and
allowance for doubtful accounts (90.4) (65.3)
------- --------
$ 425.6 $ 205.4
======= ========
5. PROPERTY, PLANT AND EQUIPMENT, NET
December 31, December 31,
1995 1994
------------ -------------
Land $ 7.0 $ 1.3
Buildings and building improvements 54.7 1.8
Machinery and equipment 268.1 154.2
Leasehold improvements 70.3 44.2
Furniture and fixtures 27.3 22.0
Buildings under capital leases 9.6 9.6
------ ------
437.0 233.1
Less accumulated depreciation
and amortization (132.2) (93.0)
------ ------
$304.8 $140.1
====== ======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
6. ACCRUED EXPENSES AND OTHER
December 31, December 31,
1995 1994
------------ ------------
Employee compensation and benefits $ 50.5 $ 38.8
Deferred acquisition related payments 14.8 15.9
Acquisition related reserves 39.4 21.8
Restructuring reserves 32.3 --
Other 31.9 16.3
-------- -------
$ 168.9 $ 92.8
======== =======
7. OTHER LIABILITIES
December 31, December 31,
1995 1994
------------ ------------
Deferred acquisition related payments $ 8.5 $ 19.2
Acquisition related reserves 68.2 31.9
Restructuring reserves 18.0 --
Other 35.2 8.4
-------- -------
$ 129.9 $ 59.5
======== =======
8. PROVISIONS FOR SETTLEMENTS
In the second quarter of 1995, the Company took a pre-tax special
charge of $10.0 in connection with the estimated costs of settling various
claims pending against the Company, substantially all of which are billing
disputes, in which the Company believes it is probable that settlements
will be made by the Company.
In the third quarter of 1994, the Company approved a settlement of
previously disclosed shareholder class and derivative litigation. The
litigation consisted of two consolidated class action suits and a
consolidated shareholder derivative action brought in Federal and state
courts in San Diego, California. The settlement involved no admission of
wrongdoing. In connection with the settlement, the Company took a pre-tax
special charge of $15.0 and a $6.0 charge for expenses related to the
settled litigation. Insurance payments and payments from other defendants
aggregated $55.0 plus expenses.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
9.LONG-TERM DEBT
The Company entered into a credit agreement dated as of April 28, 1995
(the "Credit Agreement"), with the banks named therein (the "Banks") and
Credit Suisse (New York Branch), as administrative agent (the "Bank
Agent"), under which the Banks made available to the Company a senior term
loan facility of $800.0 (the "Term Loan Facility") and a revolving credit
facility of $450.0 (the "Revolving Credit Facility" and, together with the
Term Loan Facility, the "Bank Facility"). The Bank Facility provided funds
for the Company Cash Contribution, for the refinancing of certain existing
debt of the Company and its subsidiaries and RBL, for related fees and
expenses of the Merger and for general corporate purposes of the Company
and its subsidiaries, in each case subject to the terms and conditions set
forth in the Credit Agreement. The Bank Facility is unconditionally and
irrevocably guaranteed by certain of the Company's subsidiaries.
In connection with the Credit Agreement, the Company paid the Banks
and Bank Agent customary underwriting, closing and participation fees,
respectively. In addition, the Credit Agreement includes a facility fee
based on the total Revolving Credit Facility commitment (regardless of
usage) of 0.125% per annum. Availability of funds under the Bank Facility
is conditioned on certain customary conditions, and the Credit Agreement,
as amended, contains customary representations, warranties, covenants and
events of default.
The Revolving Credit Facility matures in April 2000. The Term Loan
Facility matures in April 2001, with payments in each quarter prior to
maturity based on a specified amortization schedule. For as long as HLR
and its affiliates' ownership of outstanding Company common stock (the "HLR
Group Interest") remains at least 25%, the Revolving Credit Facility bears
interest, at the option of the Company, at (i) Credit Suisse's Base Rate
(as defined in the Credit Agreement) or (ii) the Eurodollar Rate (as
defined in the Credit Agreement) plus a margin of 0.25% and the Term Loan
Facility bears interest, at the option of the Company, at (i) Credit
Suisse's Base Rate (as defined in the Credit Agreement) or (ii) the
Eurodollar Rate (as defined in the Credit Agreement) plus a margin of
0.375%. In the event there is a reduction in the HLR Group interest to
below 25%, applicable interest margins will not be determined as set forth
above, but instead will be determined based upon the Company's financial
performance as described in the Credit Agreement. The Company's weighted
average borrowing rate, including the effects of interest rate swap
agreements discussed below, was 6.23% at December 31, 1995.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
Aggregate maturities on long-term debt are $70.8, $112.5, $150.0,
$162.5, and $187.5 for the years 1996 through 2000, respectively.
At December 31, 1995, the Company was a party to interest rate swap
agreements with certain major financial institutions, rated A or better by
Moody's Investor Service, solely to manage its interest rate exposure with
respect to $600.0 of its floating rate debt under the Term Loan Facility.
The agreements effectively changed the interest rate exposure on $600.0 of
floating rate debt to a weighted average fixed interest rate of 6.01%,
through requiring that the Company pay a fixed rate amount in exchange for
the financial institutions paying a floating rate amount. Amounts paid by
the Company in 1995 were not significant. The notional amounts of the
agreements are used to measure the interest to be paid or received and do
not represent the amount of exposure to credit loss. These agreements
mature in September 1998. The estimated cost at which the Company could
terminate these agreements as of December 31, 1995 was $9.5. The fair
value was estimated by discounting the expected cash flows using rates
currently available for interest rate swaps with similar terms and
maturities.
In connection with the repayment of existing revolving credit and term
loan facilities, the Company recorded an extraordinary loss of
approximately $13.5 ($8.3 net of tax), consisting of the write-off of
deferred financing costs, related to the early extinguishment of debt.
Prior to April 28, 1995, the Company had a credit agreement with a
group of banks which provided the Company with a $400.0 term loan facility
and a revolving credit facility of $350.0. This credit agreement provided
funds for the Allied Acquisition, to refinance certain existing debt of
Allied and the Company, and for general corporate purposes. The credit
agreement was repaid in full on April 28, 1995. At December 31, 1994, the
Company's effective borrowing rate on this credit agreement was 8.16%.
10. STOCKHOLDERS' EQUITY
In connection with a corporate reorganization on June 7, 1994, all of
the 14,603,800 treasury shares held by National Health Laboratories
Incorporated were canceled. As a result, the $286.1 cost of such treasury
shares was eliminated with corresponding decreases in the par value,
additional paid-in capital and retained earnings accounts of $0.2, $72.3
and $213.6, respectively.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
11. INCOME TAXES
The provisions for income taxes in the accompanying consolidated
statements of operations consist of the following:
Years Ended December 31,
1995 1994 1993
------- ------- -------
Current:
Federal $ 10.4 $ 16.2 $ 48.9
State 1.5 3.0 10.4
------ ------ ------
11.9 19.2 59.3
------ ------ ------
Deferred:
Federal (4.6) 4.9 14.9
State (0.2) 1.2 4.2
------ ------ ------
(4.8) 6.1 19.1
------ ------ ------
$ 7.1 $ 25.3 $ 78.4
====== ====== ======
The effective tax rates on earnings before income taxes is reconciled
to statutory federal income tax rates as follows:
Years Ended December 31,
1995 1994 1993
------- ------- -------
Statutory federal rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal income tax benefit 28.0 4.9 4.9
Non deductible amortization of
intangible assets 166.0 4.9 0.9
Other 7.0 0.9 0.2
----- ----- -----
Effective rate 236.0% 45.7% 41.0%
===== ===== =====
The significant components of deferred income tax expense are as
follows:
Years Ended December 31,
1995 1994 1993
------- ------- -------
Acquisition related reserves $ (17.7) $ (1.2) $ --
Settlement and related expenses 8.8 2.5 22.2
Reserve for doubtful accounts (4.3) 0.9 0.4
Other 8.4 3.9 (3.5)
------- ------ -------
$ (4.8) $ 6.1 $ 19.1
======= ====== =======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1995 and 1994 are as follows:
December 31, December 31,
1995 1994
----------- -----------
Deferred tax assets:
Settlement and related expenses,
principally due to accrual for
financial reporting purposes $ 1.8 $ 10.7
Accounts receivable, principally due
to allowance for doubtful accounts 21.9 8.4
Self insurance reserves, principally
due to accrual for financial
reporting purposes 4.8 2.4
Postretirement benefit obligation,
principally due to accrual for
financial reporting purposes 9.9 --
Compensated absences, principally due
to accrual for financial reporting
purposes -- 2.8
Acquisition related reserves,
principally due to accrual for
financial reporting purposes 81.0 8.0
State net operating loss carryforwards 7.4 --
Other 13.7 4.4
-------- --------
Total gross deferred tax assets 140.5 36.7
Deferred tax liabilities:
Intangible assets, principally due to
differences in amortization (59.5) (22.1)
Property, plant and equipment,
principally due to differences in
depreciation (16.4) (0.8)
Other (6.4) (5.0)
-------- --------
Total gross deferred tax liabilities (82.3) (27.9)
-------- --------
Net deferred tax asset $ 58.2 $ 8.8
======= ========
A valuation allowance was deemed unnecessary at December 31, 1995,
1994 and 1993. Based on the Company's history of taxable income, exclusive
of one-time charges, and its projection of future earnings, it believes
that it is more likely than not that sufficient taxable income will be
generated in the foreseeable future to realize the deferred tax asset.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
12. STOCK OPTIONS
In 1988, the Company adopted the 1988 Stock Option Plan, reserving
2,000,000 shares of common stock for issuance pursuant to options and stock
appreciation rights that may be granted under the plan. The Stock Option
Plan was amended in 1990 to limit the number of options to be issued under
the Stock Option Plan to 550,000 in the aggregate (including all options
previously granted). In 1991, the number of shares authorized for issuance
under the Stock Option Plan was increased to an aggregate of 2,550,000.
In 1994, the Company adopted the 1994 Stock Option Plan, reserving
3,000,000 shares of common stock for issuance pursuant to options and stock
appreciation rights that may be granted under the plan.
In connection with the Merger, all options outstanding as of December
13, 1994 became vested and employees were given the choice to (i) cancel
options outstanding as of December 13, 1994 and receive cash and shares of
common stock according to a formula included in the Merger Agreement or
(ii) convert such options into new options based on a formula included in
the Merger Agreement. 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. Also, a total of 562,532 options were
reissued as a result of option conversions at exercise prices between
$11.293 and $16.481.
The following table summarizes grants of non-qualified options made by
the Company to officers and key employees under both plans. Stock options
are generally granted at an exercise price equal to or greater than the
fair market price per share on the date of grant. Also, for each grant,
one-third of the options vested on the date of grant and one-third vest on
each of the first and second anniversaries of such date, subject to their
earlier expiration or termination.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
Changes during 1993, 1994 and 1995 in options outstanding under the
plans were as follows:
Number Exercise Price
of Options per Option
-------------- ------------------
Outstanding at January 1, 1993 864,071 $ 7.750-$20.250
Granted 818,500 $16.625-$17.875
Exercised (33,400) $ 7.750
Canceled or expired (84,835) $16.625-$20.250
---------
Outstanding at December 31, 1993 1,564,336 $ 7.750-$20.250
Granted 2,042,000 $ 7.690-$13.875
Exercised (11,125) $ 7.690-$ 7.750
Canceled or expired (92,498) $13.875-$20.250
---------
Outstanding at December 31, 1994 3,502,713 $ 7.690-$20.250
Granted 1,378,000 $13.000
Merger-related grants 562,532 $11.293-$16.481
Exercised (20,542) $ 7.690-$13.875
Merger-related cancellations (3,425,667) $ 7.690-$20.250
Canceled or expired (254,125) $ 7.690-$20.250
---------
Outstanding at December 31, 1995 1,742,911 $11.293-$16.481
=========
Exercisable at December 31, 1995 886,973 $11.293-$16.481
=========
13. COMMITMENTS AND CONTINGENCIES
The Company is involved in certain claims and legal actions arising in
the ordinary course of business. In the opinion of management, based upon
the advice of counsel, the ultimate disposition of these matters will not
have a material adverse effect on the financial position or results of
operations of the Company.
Under the Company's present insurance programs, coverage is obtained
for catastrophic exposures as well as those risks required to be insured by
law or contract. The Company is responsible for the uninsured portion of
losses related primarily to general, product and vehicle liability and
workers' compensation. The self-insured retentions are on a per occurrence
basis without any aggregate annual limit. Provisions for losses expected
under these programs are recorded based upon the Company's estimates of the
aggregated liability of claims incurred. At December 31, 1995 and 1994,
the Company had provided letters of credit aggregating approximately $8.6
and $4.9, 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)
During 1991, the Company guaranteed a $9.0, five-year loan to a third
party for construction of a new laboratory to replace one of the Company's
existing facilities. Following its completion in November of 1992, the
building was leased to the Company by this third party. Such transaction
is treated as a capital lease for financial reporting purposes. The
associated lease term continues for a period of 15 years, expiring in 2007.
Under the terms of this guarantee, as modified, the Company is required to
maintain 105% of the outstanding loan balance including any overdue
interest as collateral in a custody account established and maintained at
the lending institution. As of December 31, 1995 and 1994, the Company had
placed $9.5 of investments in the custody account. Such investments are
included under the caption "Other assets, net" in the accompanying
consolidated balance sheets.
The Company does not anticipate incurring any loss as a result of this
loan guarantee due to protection provided by the terms of the lease.
Accordingly, the Company, if required to repay the loan upon default of the
borrower (and ultimate lessor), is entitled to a rent abatement equivalent
to the amount of repayment made by the Company on the borrower's behalf,
plus interest thereon at a rate equal to 2% over the prime rate.
The Company leases various facilities and equipment under non-
cancelable lease arrangements. Future minimum rental commitments for
leases with noncancellable terms of one year or more at December 31, 1995
are as follows:
Operating Capital
--------- -------
1996 $ 38.1 $ 1.3
1997 29.8 1.4
1998 23.5 1.5
1999 19.5 1.6
2000 16.2 1.7
Thereafter 47.0 15.0
------- ------
Total minimum lease payments 174.1 22.5
Less amount representing
interest -- 12.9
------- ------
Total minimum operating
lease payments and
present value of minimum
capital lease payments $ 174.1 $ 9.6
======= ======
Rental expense, which includes rent for real estate, equipment and
automobiles under operating leases, amounted to $60.4, $34.6 and $29.9 for
the years ended December 31, 1995, 1994 and 1993, respectively.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
14. 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 $5.8, $3.6, and $3.0 in 1995,
1994, and 1993, respectively.
In addition, substantially all employees of the Company are covered by
a defined benefit retirement plan (the "NHL Plan"). The benefits to be
paid under the NHL Plan are based on years of credited service and average
final compensation. Employees of Allied became eligible under the NHL Plan
effective January 1, 1995.
Effective December 31, 1994, the Company adopted certain amendments to
the NHL Plan which resulted in a decrease of approximately $9.5 million in
the projected benefit obligation.
Under the requirements of Statement of Financial Accounting Standards
No. 87, "Employers Accounting for Pensions", the Company recorded an
additional minimum pension liability representing the excess accumulated
benefit obligation over plan assets at December 31, 1993. A corresponding
amount was recognized as an intangible asset to the extent of unrecognized
prior service cost, with the balance recorded as a separate reduction of
stockholders' equity. The Company recorded an additional liability of
$3.0, an intangible asset of $0.6, and a reduction of stockholders' equity
of $2.4. Such amounts were eliminated as a result of the amendments to the
NHL Plan effective December 31, 1994.
In connection with the Merger, the Company assumed obligations under
the RBL defined benefit pension plan ("RBL Plan"). Effective July 1, 1995,
the plan was amended to provide benefits similar to the NHL Plan, as
amended. Certain employees of RBL were grandfathered so that their
benefits were not affected by the amendment. On January 1, 1996, the two
plans were merged.
The Company's policy is to fund both the NHL Plan and RBL Plan with at
least the minimum amount required by applicable regulations. The
components of net periodic pension cost for each of the NHL and RBL plans
are summarized as follows:
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
NHL Plan RBL Plan
Years ended Eight months ended
December 31, December 31,
1995 1994 1993 1995
---------------------- -----------------
Service cost $ 3.2 $ 5.5 $ 3.7 $ 2.6
Interest cost 2.7 3.5 2.6 2.3
Actual return on
plan assets (7.6) 0.1 (1.3) (4.3)
Net amortization and
deferral 4.2 (1.4) 0.4 1.2
----- ----- ----- -----
Net periodic pension cost $ 2.5 $ 7.7 $ 5.4 $ 1.8
===== ===== ===== =====
The status of the plans are as follows:
NHL Plan RBL Plan
December 31, December 31,
1995 1994 1995
------------------ --------------
Actuarial present value
of benefit obligations:
Vested benefits $36.2 $26.6 $38.8
Non-vested benefits 4.4 3.5 6.4
------ ------ ------
Accumulated benefit obligation 40.6 30.1 45.2
Effect of projected future
salary increases 2.2 1.9 1.6
------ ------ ------
Projected benefit obligation 42.8 32.0 46.8
Fair value of plan assets,
principally corporate equity
securities and fixed income
investments 40.8 31.6 46.6
------ ------ ------
Unfunded projected benefit
obligation 2.0 0.4 0.2
Unrecognized prior service cost 6.6 9.7 12.7
Unrecognized net loss (7.1) (8.4) (9.4)
------ ------ ------
Accrued pension cost $ 1.5 $ 1.7 $ 3.5
====== ====== ======
Assumptions used in the accounting for the plans were as follows:
NHL Plan RBL Plan
1995 1994 1995
----------------- ------------
Weighted average discount rate 7.5% 8.5% 7.5%
Weighted average rate of increase
in future compensation levels 4.0% 4.0% 5.4%
Weighted average expected long-
term rate of return 9.0% 9.0% 9.5%
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
In addition, the Company assumed obligations under RBL's
postretirement medical plan. Effective 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:
Eight months ended
December 31,
1995
------------------
Service cost $ 1.1
Interest cost 1.4
-----
Postretirement benefit costs $ 2.5
=====
The status of the plan is as follows:
December 31,
1995
---------------
Accumulated postretirement benefit
obligation $ 27.2
Unrecognized net loss (2.1)
------
Accrued post retirement benefit obligation $ 25.1
======
The weighted average discount rate used in the calculation of the
accumulated postretirement benefit obligation and the net
postretirement benefit costs was 7.6% and 8.1%, respectively. The
health care cost trend rate was assumed to be 9.0%, declining
gradually to 5.1% in the year 2005, then remaining level to the year
2020 in which it declines to 5.0%, and remaining level thereafter.
The health care cost trend rate has a significant effect on the
amounts reported. To illustrate, a one percentage point increase in
the assumed health care cost trend rate would increase the accumulated
postretirement benefit obligation as of December 31, 1995 by
approximately $5.1, and the aggregate of the service and interest
components of 1995 net periodic postretirement benefit cost by
approximately $0.2.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
15. QUARTERLY DATA (UNAUDITED)
The following is a summary of unaudited quarterly data:
Year ended December 31, 1995
------------------------------------------
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- --------
Net sales $ 243.8 $ 367.3 $ 417.5 $ 403.4 $1,432.0
Gross profit 79.5 108.9 117.8 101.5 407.7
Earnings (loss) before
extraordinary item 12.8 (31.6) 14.4 0.4 (4.0)
Extraordinary item -- (8.3) -- -- (8.3)
Net earnings (loss) 12.8 (39.9) 14.4 0.4 (12.3)
Earnings (loss) per
common share before
extraordinary loss 0.15 (0.28) 0.12 -- (0.03)
Extraordinary loss
per common share -- (0.08) -- -- (0.08)
Earnings (loss) per
common share 0.15 (0.36) 0.12 -- (0.11)
Year ended December 31, 1994
-------------------------------------------
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- --------
Net sales $ 185.0 $ 203.9 $ 248.7 $ 234.9 $ 872.5
Gross profit 52.7 67.4 81.0 74.4 275.5
Net earnings 8.1 14.1 0.2 7.7 30.1
Earnings per
common share 0.10 0.16 -- 0.10 0.36
In the fourth quarter of 1995, the Company recorded an additional
$15.0 of provision for doubtful accounts which reflects the Company's
determination, based on trends that became evident in the fourth
quarter, that additional reserves were needed primarily to cover
potentially lower collection rates from several third-party payors.
In the second quarter of 1995, the Company took a pre-tax special
charge of $65.0 to cover the costs of the restructuring plan related to the
Merger. The charge includes approximately $24.2 to reduce the workforce,
$21.3 to reduce certain assets to their net realizable values, and $19.5
for lease and other facility obligations. Also in the second quarter of
1995, the Company took a
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
pre-tax special charge of $10.0 in connection with the estimated costs of
settling various claims pending against the Company, substantially all of
which are billing disputes, in which the Company believes it is probable
that settlements will be made by the Company.
In connection with the repayment of existing revolving credit and term
loan facilities, the Company recorded an extraordinary loss of
approximately $13.5 ($8.3 net of tax) in the second quarter of 1995,
consisting of the write-off of deferred financing costs, related to the
early extinguishment of debt.
In the third quarter of 1994, the Company approved a settlement of
previously disclosed shareholder class and derivative litigation. In
connection with the settlement, the Company took a pre-tax special charge
of $15.0 and a $6.0 charge for expenses related to the settled litigation.
In the fourth quarter of 1994, the Company took a non-recurring charge
of approximately $3.9 for lease costs and the write-off of leasehold
improvements related to the relocation of certain of the Company's regional
laboratories.
[Download Table]
Schedule II
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 31, 1995, 1994 and 1993
(Dollars in Millions)
-------------------------------------------------------------------------------
Balance Charged Other
at to costs (Deduct- Balance
beginning Acquis- and ions) at end
of year itions expenses Additions of year
-------------------------------------------------------------------------------
Year ended December 31, 1995:
Applied against asset
accounts:
Contractual allowances
and allowance for
doubtful accounts $65.3 $33.2 $147.6 $(155.7) $90.4
===== ===== ====== ======== =====
Year ended December 31, 1994:
Applied against asset
accounts:
Contractual allowances
and allowance for
doubtful accounts $51.0 $18.5 $91.5 $ (95.7) $65.3
===== ===== ===== ======== =====
Year ended December 31, 1993
Applied against asset
accounts:
Contractual allowances
and allowance for
doubtful accounts $72.9 $ -- $55.1 $ (77.0) $51.0
===== ===== ===== ======== =====
Dates Referenced Herein and Documents Incorporated by Reference
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