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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
_________________________________
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the year ended December 31, 1996
Commission File Number: 34-0-20400
________________________________________
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
(Exact name of Registrant as specified in its charter)
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MICHIGAN 38-2986640
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
26500 NORTHWESTERN HIGHWAY, SOUTHFIELD, MICHIGAN 48076
(Address of principal executive offices) (Zip Code)
Registrant's telephone no. including area code: (810) 353-1450
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
8.25% CONVERTIBLE SUBORDINATED
DEBENTURES DUE 2006
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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
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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.[ ]
The aggregate market value of the voting stock of the Registrant held by
non-affiliates 2,397,855 shares on March 10, 1997 was $9,135,828. For purposes
of this computation only, all directors, executive officers and owners of more
than 5% of the Registrant's voting stock are assumed to be affiliates.
Indicate the number of shares outstanding of each of the Registrant's classes
of Common Stock as of the latest practicable date: 6,552,768 shares of Common
Stock outstanding as of March 10, 1997.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive
Proxy Statement pertaining to the 1997 Annual Meeting of Shareholders (the
"Proxy Statement") filed pursuant to Regulation 14A are incorporated herein by
reference into Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
Universal Standard Medical Laboratories, Inc. (the "Company")
provides clinical laboratory testing services on a traditional fee-for-service
basis and, through its specialty managed care programs (the "Managed Care
Programs"), offers clinical laboratory testing services and home medical
services to employer, employer group -, union - and government-sponsored health
care benefit plans and other groups for a fixed payment per participating
employee or retiree ("capitated rate"). All home medical services, and
virtually all of the clinical laboratory services provided outside of Michigan,
are provided by the Company under arrangements through subcontracting
agreements with qualified providers.
BACKGROUND
The Company was incorporated in Michigan in 1990 to acquire the
business of the Company's predecessor, MML, Inc. (the "Predecessor"), and the
stock of T.P.A., Inc. In the first half of 1992, the Company acquired clinical
laboratory businesses based in Mid- and Northern Lower Michigan, significantly
expanding its customer and service base. The Company later completed its
initial public offering of Common Stock in October 1992 and became listed and
qualified for trading on The Nasdaq National Market. In 1993, the Company
acquired certain assets of Michigan Clinical Laboratory based in Flint,
Michigan and completed certain other transactions pursuant to which the Company
assumed the customer account base of other smaller clinical laboratories
located in Michigan.
In February 1996, the Company completed its public offering of $12.0
million principal amount of its 8.25% Convertible Subordinated Debentures Due
2006 (the "Debentures"). For a more detailed discussion of the Debentures and
the use of the net proceeds from the offering of the Debentures, see Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
References herein to the Company mean the Company, the Predecessor and
their respective consolidated subsidiaries.
FEDERAL LAW PROHIBITS A PHYSICIAN FROM REFERRING MEDICARE - OR
MEDICAID - COVERED BUSINESS TO THE COMPANY IF THE PHYSICIAN OR ANY OF THE
PHYSICIAN'S IMMEDIATE FAMILY MEMBERS HAVE CERTAIN PROSCRIBED FINANCIAL
RELATIONSHIPS WITH THE COMPANY, INCLUDING OWNERSHIP OF ITS COMMON STOCK OR
DEBENTURES. ACCORDINGLY, AN INVESTMENT IN THE COMPANY'S COMMON STOCK OR
DEBENTURES BY A PHYSICIAN OR ANY OF THE PHYSICIAN'S IMMEDIATE FAMILY MEMBERS IS
PROHIBITED IF THE PHYSICIAN IS REFERRING MEDICARE - OR MEDICAID - COVERED
BUSINESS TO THE COMPANY.
FEDERAL LAW REQUIRES THAT ALL PERSONS ACQUIRING COMMON STOCK OR
DEBENTURES WHO ARE PHYSICIANS OR WHO HAVE PHYSICIANS IN THEIR IMMEDIATE FAMILY
MUST REPORT THE PHYSICIAN'S NAME AND PHYSICIAN ID NUMBER TO THE COMPANY
PROMPTLY AFTER SUCH ACQUISITION.
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BUSINESS STRATEGY
The Company's business strategy is to become a national leader in the
development and delivery of innovative health care management programs. In
connection with the implementation of this business strategy, beginning in
1996, the Company initiated a series of revenue enhancement, reengineering and
cost reduction programs designed to increase revenues, reduce expenses and
improve overall profitability in both its laboratory fee-for-service and
managed care businesses.
In its laboratory business, the Company has implemented reengineering
and cost reduction programs designed to reduce costs while increasing service
levels. The Company's reengineering programs involve the use of process
engineering and TQM processes to improve productivity and reduce laboratory
operating costs. In addition, these programs are designed to improve quality
and service levels and contribute to the Company's customer retention efforts.
These reengineering programs have facilitated the Company's cost reduction
programs which include reductions in laboratory personnel and facility costs.
Revenue enhancement programs have also been implemented by the Company in its
laboratory business, including an expanded sales force, the use of
telemarketing efforts to assist and supplement sales efforts and a renewed
focus on the retention of the Company's most profitable accounts. The Company
also seeks to improve profitability in its laboratory operations by automating
its information exchange with its customers, improving its cash collections and
reducing its accounts receivable and the costs associated with maintaining cash
management. Reengineering and cost reduction programs implemented to date are
expected to eliminate over $6 million of annualized operating costs.
In its managed care business, the Company has implemented a business
strategy designed to leverage its expertise in the managed care area to expand
its business and become a national competitor in the managed care industry.
This strategy includes the development of new managed care products to
complement its laboratory programs, such as the home medical services program
introduced in 1995 and the imaging services program currently under
development. These new programs will be offered to existing customers and as a
means of attracting new customers. In addition, the Company intends to expand
its business geographically through the establishment of managed care sales
offices in other states, beginning with new offices established or to be
established in 1997 in Ohio, Delaware, Illinois and California.
The foregoing statements regarding the Company's business strategy and
programs implemented in connection with such business strategy may be "forward
looking statements" within the meaning of the Securities Exchange Act of 1934.
The ability of the Company to successfully execute the strategies set forth
above involves a number of uncertainties, including, but not limited to, the
degree to which the Company's revenue enhancement initiatives will generate new
revenues, whether any such new revenues will be at levels required to offset
decreases in revenues, particularly if third party reimbursement levels
continue to decrease or the Company continues to experience declines in patient
visits or fee-for-service revenue per patient visit, the impact of
reengineering/cost reduction efforts on revenues, potential offsetting
increases in operating expenses, variations in cost savings from, and timing
of, the Company's reengineering/cost reduction efforts from those anticipated,
the impact on revenues and expenses of governmental and third-party payor
requirements and reimbursement levels, the ability of the Company to develop
new managed care products, the level of interest that existing and potential new
customers may have in managed care products offered by the Company, the ability
of the Company to identify and satisfy market needs, the impact on the Company
of recent and continuing changes in the health care industry, and the
competitive nature of the laboratory and managed care industries.
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FEE-FOR-SERVICE BUSINESS
OVERVIEW. Clinical laboratories, such as the Company in its
fee-for-service business, traditionally are reimbursed for laboratory testing
services performed based upon the specific test or tests requested, commonly
referred to as "fee-for-service". During 1996, the Company performed testing
services for over 9,000 accounts, including office-based physicians, hospitals,
long-term care facilities (including both nursing homes and adult foster care
homes) and preferred provider organizations ("PPOs") and health maintenance
organizations ("HMOs"). Fee-for-service business accounted for 77.8%, 72.4%
and 69.6% of the Company's net revenues during 1994, 1995 and 1996,
respectively.
LABORATORY OPERATIONS AND TESTING SERVICES. The Company currently
operates one full-service laboratory located in Southfield, Michigan, and
operates or manages eight limited-service laboratories in Michigan. The
Southfield laboratory was relocated in December 1995 to a more modern and
efficient facility which also houses the Company's headquarters and
administrative offices.
The full-service laboratory provides a complete range of routine and
esoteric testing services. The limited-service laboratories provide a limited
number of routine testing services. Esoteric tests are generally those tests
which are not commonly requested or which require specialized equipment or
training to perform, such as HIV, DNA ploidy, allergy, flow cytometry, prostate
specific antigen ("PSA") and cancer or tumor tests. Routine tests are
generally those tests which are commonly requested or do not require special
training or equipment, such as automated chemistries, glucose, cholesterol and
complete blood count ("CBC") tests.
The Company's limited-service laboratories refer virtually all
esoteric and routine tests which are not performed by such laboratories to the
Company's full-service laboratory. While some clinical laboratories refer less
common tests to other reference laboratories, in 1996 the Company's
laboratories performed in-house over 99% of the tests for which the Company
received requests.
There are two general categories of tests that the Company regularly
performs: clinical tests and anatomical tests. Clinical tests are performed
for diagnostic purposes on body fluids such as blood or urine. Anatomical
tests involve the visual or microscopic examination of tissue specimens to
detect abnormalities in cell composition and structure to diagnose diseases
such as cancer. In 1996, the Company performed clinical and anatomical tests
for approximately 1.7 million patients.
While specimens are delivered to the Company's laboratories throughout
the day, most specimens are delivered to the Company's laboratories beginning
in the early evening. Each specimen is accompanied by a request form that is
checked for accuracy and completeness. The specimen and related form are given
a specific number to ensure that the results are attributed to the appropriate
patient (an "accession" number). The test request information is entered into
the Company's computer system, where a file for testing and billing information
is established for each patient. This file is maintained for repeat patients
in the Company's PatientLink data system. Once the information is entered, the
tests are performed by one of the Company's medical technologists or laboratory
professionals. Test results are entered into the computer system either
automatically or manually, depending upon the test and the type of equipment
used to conduct the test. Much of the Company's testing equipment, including
the autochemistry and hematology equipment, is interfaced with and reports
results electronically to the Company's computer system, increasing operational
efficiency and reducing the possibility of errors from manual data entry. In
addition, the Company maintains certain duplicate testing equipment as a
back-up to enable timely processing of laboratory tests.
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CUSTOMER SERVICES. The Company's full-service and limited-service
laboratories operate 24 hours a day, seven days a week. The Company maintains
its own courier fleet to retrieve specimens and transport them to its
laboratories. The courier system is flexible, enabling the pick-up of
specimens from a physician on an emergency basis or several times per day if
required. Moreover, the Company maintains its own extensive network of patient
service centers throughout the State of Michigan and has established
relationships with numerous affiliate centers in Michigan and other states in
which the Company provides services. A patient service center is typically a
small, leased facility located in a medical office building established to
provide specimen collection services for patients.
The Company provides many of its customers with an electronic
reporting system consisting of a printer and modem connected to the Company's
computer system. Customers equipped with this system can have results for most
routine tests transmitted directly to their office the morning after the tests
are performed. The Company believes that during 1996 a majority of its test
results were reported using this system. Routine testing results which are not
delivered electronically are delivered by the Company's couriers beginning in
the morning after the tests are performed. The Company also offers certain of
its customers an interactive computer system through which physicians may
receive laboratory test results and retrieve other information relating to
tests performed by the Company.
The Company also provides rapid processing and reporting for tests that
are required as quickly as possible ("Stat tests"). The Company's full-service
and certain of its limited-service laboratories are capable of performing Stat
tests for up to 80 procedures. Upon receipt of a request for a Stat test, a
courier is dispatched to retrieve and transport to the laboratory the specimen
to be tested. Within certain service areas, the Company uses its best efforts
to assure that Stat tests are performed and the results communicated to the
requesting physician within two hours after the Company is contacted to pick-up
the specimen for testing.
The Company maintains a customer response unit to provide prompt
responses to questions or concerns from physicians and other customers, verbal
test results, assistance in interpreting tests, technical information regarding
specific tests and billing information. The Company also employs 45 full-time
sales and customer service representatives. Under the Company's customer
satisfaction program, the Company will repeat any test, including Stat tests,
at a physician's request for any reason at no charge and, upon request, send a
specimen to a customer-designated reference laboratory for a second opinion.
QUALITY ASSURANCE. The Company believes it has developed high
standards for the provision of accurate, prompt and reliable testing services.
The Company's quality assurance programs are intended to determine if specimens
are collected and transported properly, tests are performed accurately, and
client, patient and test information is reported, billed and filed correctly.
The quality assurance programs include testing quality control specimens of
known concentration or reactivity to check for accuracy and precision, routine
checks and preventive maintenance of laboratory testing equipment, and
personnel standards which ensure that only qualified personnel perform testing.
The Company routinely reviews the effectiveness of its quality assurance
programs.
The Company's full-service laboratory and two of its other
laboratories have been accredited by the College of American Pathologists
("CAP") for purposes of compliance with the Clinical Laboratory Improvement
Amendments of 1988, as amended. All of the Company's laboratories are
certified by all required agencies of the federal government. See Item 1 -
"Business -- Government Regulation".
REIMBURSEMENT; IMPACT OF INDUSTRY TRENDS. The amount of the fee
charged for any test depends on a number of factors, including the complexity
of the testing procedure, the type of equipment required and the frequency with
which the test is requested.
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The Company's fee-for-service charges are reimbursed by a number of
payors. In 1996, the Company's net revenues from fee-for-service business were
derived approximately 35% from governmental payors, approximately 25% from
various private insurance companies and other similar programs, approximately
25% from private payors and approximately 15% from hospitals and physicians.
Under various governmental regulations and insurance provider agreements to
which the Company is a party, the Company is required to accept as payment in
full the reimbursement paid by governmental and certain insurance payors for
services provided to patients covered under such programs. Beginning August 1,
1993, third-party payors have been instituting changes in reimbursement
policies which have negatively affected the Company's fee-for-service revenue
and overall profitability. Further significant changes in reimbursement
policies are under consideration by a number of third-party payors such as
Medicare, Medicaid and insurance companies. Such changes, if instituted, could
further negatively affect the Company's fee-for-service revenue and overall
profitability by reducing amounts received for the Company's services,
increasing testing costs and increasing collection costs and bad debt expenses.
For a more detailed discussion of the regulation of reimbursements from
governmental payors, see "Business -- Government Regulation -- Third Party
Reimbursement Regulation". For a discussion of the impact of changes in
reimbursement policies on the Company's results of operations for 1995 and
1996, see Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
The Company's fee-for-service revenues have also been negatively
affected by changes in payor and test mixes being experienced by the Company
and the clinical laboratory industry generally. These changes result from a
variety of factors, including the shift from traditional fee-for-service to
discounted or managed care arrangements and the level and nature of tests
ordered. For a discussion of the impact of changes in test and payor mixes on
the Company's results of operations for 1995 and 1996, see Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Increasing numbers of patients, including Medicaid and Medicare
recipients, are participating in managed health care delivery systems such as
HMOs and PPOs, employer-, employer group-, union- and government-sponsored
programs and various managed health care organizations. These organizations
often contract with one or a limited number of laboratories to provide all
laboratory services for their members, at significantly discounted or capitated
rates. While this change creates new opportunities for the Company's Managed
Care Programs, its fee-for-service revenues are being negatively affected. In
addition, such change is causing the Company to become increasingly dependent
on contracts with a few large managed care organizations.
MANAGED CARE PROGRAMS
OVERVIEW. Since 1985, the Company has also offered Managed Care
Programs for employer-, employer group-, union- and government-sponsored health
care benefit plans and other groups. Under its Managed Care Programs, in
exchange for a capitated rate, the Company is required to provide, or to
coordinate the provision of, substantially all of the services specified in the
Managed Care Program contract to all Covered Persons. Depending on the Managed
Care Program involved, those services currently include any one or more of the
following ordered by physicians for Covered Persons: non-hospital clinical
laboratory testing, durable medical equipment, respiratory therapy and orthotic
and prosthetic appliances; and, in the future, may include diagnostic imaging
services. The Company provides some of the required clinical laboratory
testing services directly in Michigan and arranges through subcontracting
agreements with other qualified providers to provide the remaining services.
The Company currently has 36 Managed Care Program contracts, two of which began
in 1996, covering over 800,000 Covered Persons located in all 50 states. A
"Covered Person" is a person who is entitled to benefits under a specific
Managed Care Program Contract. Individuals participating in more than one
Managed Care Program are treated as a separate Covered Person under each
program. The Company's Managed Care Programs are designed to permit customers
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to reduce costs while maintaining the quality and availability of the specialty
health care services offered by the Company. The Company's Managed Care
Programs are also designed to lessen physicians' incentive to order unnecessary
health care services. The Managed Care Programs implemented to date have
resulted in first-year plan costs which were at least 20% less than the plan
sponsor's projected costs for that year. The Company's Managed Care Programs
are also designed so that Covered Persons can continue to use the physicians of
their choice.
During 1994, 1995 and 1996, revenues from the Company's Managed Care
Programs accounted for 22.2%, 27.6% and 30.4%, respectively, of the Company's
net revenues.
CUSTOMERS. The principal customers for which the Company has
established Managed Care Programs are large employers, union-sponsored and
government-sponsored health care benefit plans, as well as HMOs and PPOs.
Although many of the Company's new Managed Care Programs are with groups not
affiliated with the automobile industry, during 1995 and 1996 a majority of the
Company's Managed Care Program revenues were derived from contracts with unions
and companies affiliated with the automobile industry, with revenues derived
from contracts with two of these customers collectively accounting for
virtually all of these automobile industry-related Managed Care Program
revenues. A decrease in the number of employees and retirees under these
programs, downsizing in the automobile industry or an adverse change in the
Company's relationships with the employers and unions with whom it has Managed
Care Programs could have a material adverse effect on the Company's business,
financial condition, including working capital, and results of operations.
During 1996, the Company had one customer, Ford Motor Company, which accounted
for 11% of its consolidated net revenues.
SERVICES PROVIDED. The Company offers two basic services under its
Managed Care Programs: laboratory services and home medical services. Most of
the Company's managed care revenues are generated from its laboratory services
programs.
Laboratory Services. The Company's basic laboratory services Managed
Care Program covers generally all non-hospital clinical laboratory services
ordered by physicians for Covered Persons on a "carve-out" basis, i.e.,
independent from the other health care benefits and programs provided by the
employer or group for the Covered Persons. Under this program, the Company is
paid a fixed monthly payment by the customer. The fixed monthly payments
established by the Company are generally guaranteed by the Company for two
years, while the contracts governing the Managed Care Programs are generally
renewable on an annual basis and terminable upon 30 or 60 days prior written
notice (depending on the program) by the customer. For Managed Care Programs
covering Covered Persons located in Michigan, the Company's laboratories are
designated as the provider of substantially all covered laboratory services for
such Covered Persons. For Managed Care Programs covering Covered Persons
located elsewhere, the Company subcontracts on a discounted fee-for-service
basis with other clinical laboratories, principally Laboratory Corporation of
America ("LCA") and, to a lesser extent, SmithKline Beecham Clinical
Laboratories, Inc. ("SmithKline"), to provide all laboratory services to
Covered Persons located in those markets. The Company's subcontracts with LCA
are generally terminable by either party on short notice. In the event that
LCA terminates these subcontracts or is unable or unwilling to perform its
services under these subcontracts, the Company would be required to locate
another national clinical laboratory or a group of smaller laboratories
throughout the United States to provide such services on short notice and,
potentially, at a significantly greater cost. While the Company believes it
could replace LCA's services without a significant increase in cost, there can
be no assurance to that effect.
Home Medical Services. The Company's Managed Care Subsidiary in
Michigan (the "Michigan Managed Care Subsidiary") is the nationwide
administrator of Ford Motor Company's and the United Auto Workers'
comprehensive home medical services ("HMS") program. The HMS program provides
all durable medical
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equipment (such as hospital beds, wheelchairs and canes), respiratory therapy,
and orthotic and prosthetic appliances for employees enrolled in the
traditional health plan at a prepaid, capitated rate. The multi-year contract
became effective June 1, 1995 and covers approximately 200,000 Ford hourly
workers, non-Medicare retirees and their dependents in 50 states. The HMS
program resulted in first-year annual employer expenditures for these services
which were at least 30% less than the plan sponsor's projected costs for that
year. The Company has subcontracted with third parties, to provide services
under its HMS agreements. The subcontracts generally run for the term of the
Ford HMS Program contract and cannot be terminated earlier by the subcontractor
without penalty. The fixed monthly fee established by the Company for the Ford
HMS Program is guaranteed by the Company through December 31, 1997, while the
program is terminable by Ford upon 30 days prior written notice. The Michigan
Managed Care Subsidiary performs risk management and administrative functions,
retaining a portion of the annual capitated fees.
While the subcontractors under the HMS program will generally receive
a capitated rate under the program, if a subcontractor did not or was not able
to provide services, the Company would be obligated to locate other providers
to do so, potentially at a significantly greater cost. In addition, the
Company is required to indemnify Ford Motor Company ("Ford") for any expenses
incurred by Ford in replacing the HMS program in the event that Ford cancels
such program due to the Company's or any of its subcontractors'
non-performance. While the subcontractors under the HMS program have
indemnified the Company for liability arising from their non-performance, there
can be no assurance that these subcontractors will be able to satisfy such
indemnification liability or that the Company will not have liability to Ford
in a situation where the subcontractors' indemnification is not applicable.
Diagnostic Imaging Services. The Company also has under development a
Managed Care Program for diagnostic imaging services. Imaging services under
such a Program would be subcontracted to one or more third parties and the
Company would perform all associated administrative services.
ACQUISITION STRATEGY
The Company continues to examine new acquisition and joint venture
opportunities. The Company continues to review selective new acquisition and
joint venture opportunities in the State of Michigan, as they arise, as a means
of increasing its Michigan-based revenue. The Company is also examining
acquisition opportunities in other markets where the progress of laboratory
consolidation is not as advanced as a means of entering new markets. In
evaluating an acquisition candidate, the Company analyzes several strategic
characteristics, including the candidate's client and payor mix, the
candidate's geographic location, the nature of testing services required in the
market and currently provided by the candidate, the presence and strength of
local competition, the net revenues and testing volume of the candidate, the
opportunities for economies of scale and the structure of the transaction. The
purchase consideration for these acquisitions may be cash, equity or debt
securities or a combination of the foregoing. A portion of the total purchase
price may be contingent or adjustable based upon the achievement of
post-acquisition financial targets. Financing may be obtained from the seller
or from a financial institution or other lender. Additional borrowings require
the consent of the Company's principal bank lender and may be secured or
unsecured. There can be no assurance that the bank will permit acquisition
borrowings or that the Company's future financial performance will permit it to
obtain financing for acquisitions. The Company currently is not a party to a
letter of intent or definitive agreement with any material acquisition
candidates. There can be no assurance that the Company will enter into any
such agreements or acquire any acquisition candidates. The Company's ability to
consummate additional acquisitions will be limited by available acquisition
opportunities, the Company's financial resources and operation limitations. In
addition, there can be no assurance that the Company will be able to profitably
integrate any acquired company into the Company's operations. For a discussion
of limitations on the
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availability of financing for acquisitions, see Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources".
SALES AND MARKETING
The Company has established fee-for-service sales territories covering
the entire State of Michigan, Indiana and Ohio. As of December 31, 1996, the
Company employed 18 direct sales representatives who market its services
principally to physician offices, clinics, PPOs, HMOs and institutions such as
hospitals, nursing homes and drug recovery centers. In addition, the sales
representatives call upon physicians who are first exposed to the Company's
testing services as a result of its Managed Care Programs. As of December 31,
1996, the Company also employed 27 additional customer service representatives
who work together with the sales representatives under a team approach to
provide support services to the Company's customers.
The Company is focusing its fee-for-service sales efforts on margin
enhancement. The Company's strategy is to increase the volume of its
fee-for-service clinical laboratory testing services to realize economies of
scale available from increased use of its automated testing capacity and to
increase revenues. Selective analysis of new accounts will also be performed
to keep revenue levels in line with the cost of services provided. The Company
plans to concentrate its sales activities in selected geographic regions where
a minimum of infrastructure expansion is required to provide services.
With respect to its Managed Care Programs, as of December 31, 1996,
the Company employed 10 sales and service representatives to market the Managed
Care Programs primarily to large employer-, employer group-, union- and
government-sponsored health care benefit plans, HMOs, PPOs, health care
alliances and other groups. The establishment of a Managed Care Program for a
large employer or other group often requires the involvement of multiple
departments within the employer or group, as well as participation of that
company's unions. As a result, Managed Care Programs may take six months to a
year or more to negotiate and implement.
The Company also markets its Managed Care Programs through other
managers of health care benefits. The Company has a Teaming Agreement to sell
its Managed Care Programs with programs offered by a manager of health care
benefits to offer overall programs with greater potential savings for potential
customers and also uses the sales and marketing networks of this manager to
reach a broader group of potential customers.
The Company believes there are synergies between its Managed Care
business and its fee-for-service business. For example, the growth in the
number of Covered Persons covered by the Company's Managed Care Programs has
increased the exposure of the Company's services and capabilities to physicians
serving Covered Persons, which the Company believes has resulted in additional
fee-for-service business through referrals of non-Covered Persons to the
Company by these physicians. In addition, the Company believes that its strong
reputation for providing fee-for-service laboratory testing, its extensive
network of patient service centers and the wide range of physician offices and
institutions regularly served through its fee-for-service business have a
positive effect on the Company's ability to market its Managed Care Programs.
COMPETITION
The clinical laboratory testing industry is characterized by intense
competition. The Company faces competition from numerous national and local
independent clinical laboratories, hospital-based laboratories, insurance
companies, HMOs, PPOs, third party administrators and managed health care
organizations. The
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Company also faces increasing competition from hospitals, particularly those
which control HMOs, PPOs or other managed health care organizations.
With respect to the Company's fee-for-service business, the Company
competes primarily on the basis of the quality of its testing, reporting and
information services, its reputation in the medical community, the introduction
of new testing procedures and its ability to perform virtually all clinical
laboratory tests in-house. Under federal and Michigan law, physicians are
prohibited from marking-up the cost of third-party laboratory tests.
Accordingly, the Company competes for fee-for-service business primarily on the
basis of quality and service, with a particular emphasis on rapid reporting of
test results and responsiveness to customer requests, as well as its ability
to perform virtually all clinical laboratory tests in-house. Some of the
independent laboratories which compete with the Company have a national
presence and have substantially greater financial resources than the Company.
The Company must also maintain competitive pricing for both its fee-for-service
and Managed Care operations.
With respect to its Managed Care Programs, the Company competes on the
basis of price, service and its experience in providing this type of health
care program. The Company believes its experience, reputation and
long-standing relationships offer it a competitive advantage with respect to
maintaining its existing Managed Care Programs and establishing new Managed
Care Programs. The Company is experiencing increased competition with regard
to its Managed Care Programs from insurance companies, HMOs, PPOs, third-party
administrators and other managed health care companies which offer similar
programs. In particular, the Company is facing aggressive pricing of these
programs by its principal competitors.
In addition to competition for customers, the Company faces increasing
competition for obtaining the services of qualified personnel. These personnel
are difficult to recruit and retain, and there can be no assurance that the
Company will be successful in attracting and retaining these employees.
SEASONALITY
The volume of tests performed by the Company tends to decrease during
the summer months, year-end holiday periods and periods of inclement weather.
Although these seasonal effects are partially offset by the Company's Managed
Care Programs, which provide monthly revenues based upon capitated rates rather
than based upon testing volume, these seasonal decreases in testing volume tend
to reduce net revenue and net income for the third and fourth quarters each
year. As a result, comparisons of the results of successive quarters may not
accurately reflect trends or results for the full year. See Item 7 -
"Management Discussion and Analysis of Financial Condition and Results of
Operations".
GOVERNMENT REGULATION
The Company's operations are subject to governmental regulations at
the federal, state and local levels.
CERTIFICATION REGULATION. The Company's laboratories are certified
under the federal Medicare and Medicaid programs and have been issued the
registration certificates required by the federal Clinical Laboratory
Improvements Amendments of 1988, as amended ("CLIA"). CLIA has established
periodic reporting requirements, performance and operational standards and
procedures, and periodic inspection and testing programs. Any failure of the
Company's laboratories to meet the requirements of CLIA and the regulations
promulgated thereunder could result in significant fines, civil and criminal
penalties, third-party liability, and loss of the Company's licenses,
certifications or other approvals required to continue operations, which could
have a material adverse effect on the
10
<PAGE> 11
Company's business, financial condition, including working capital, and results
of operations. State laws and regulations applicable to the Company's
laboratories may have requirements exceeding federal requirements.
ANTI-FRAUD AND ABUSE REGULATION; MEDICARE AND MEDICAID AUDITS AND
REVIEWS. The Medicare and Medicaid Patient and Program Protection Act of 1987
and various other federal and state statutes (the "Fraud and Abuse Statutes")
prohibit laboratories from soliciting, offering, paying, receiving or accepting
any remuneration as an inducement for the referral or the arrangement of
referral of laboratory work for which payment is made in whole or in part under
the Medicare or Medicaid and other government third-party payor programs.
Contravention of the federal Fraud and Abuse Statutes is a criminal and civil
violation and can subject the laboratory and persons acting on behalf of the
laboratory to significant fines, penalties, imprisonment and exclusion from the
Medicare and Medicaid and other government third-party payor programs. The
Fraud and Abuse Statutes also prohibit bribes and kickbacks in connection with
the furnishing of goods or services under Medicare or Medicaid or other
third-party payors and prohibit offers of rebates or other benefits to persons
referring test specimens to a laboratory. The Company is also subject to other
federal and state statutes that impose civil and criminal penalties for claims
upon federal or state authorities for payment or reimbursement for services, or
any related statements made to induce payment, if such claims or statements are
found to be false, misleading or otherwise fraudulent.
The Company may be excluded from participation in Medicare and
Medicaid for a variety of reasons, including, but not limited to, if any of its
health care licenses are revoked or suspended, if it is suspended under a state
health care program or any federal government program (whether or not related
to health care), if it is found to have submitted false or fraudulent claims or
related statements to authorities or engaged in kickbacks or other prohibited
activities, if it is found to have failed to provide necessary information to
regulatory authorities or to comply with administrative orders, or it is
otherwise found to be in violation of federal or state laws applicable to
clinical laboratory services. Exclusion also can occur if the Company, or any
of its officers, directors, agents, managing employees or any person with a
five percent or greater share of ownership or control is convicted of certain
criminal offenses related to Medicare, Medicaid or controlled substances.
Combined Medicare and Medicaid reimbursements accounted for 26.7%, 24.8% and
21.9% of the Company's net revenues during 1994, 1995 and 1996, respectively.
Exclusion from Medicare or Medicaid would have a material adverse effect on the
Company's business, financial condition, including working capital, and results
of operations.
Medicare and Medicaid from time to time conduct compliance reviews of
the Company's activities to determine compliance with these laws, regulations
and restrictions. In recent years, these governmental payors have
significantly expanded their efforts to detect instances of non-compliance and
related enforcement activities. The Company has from time to time experienced
compliance reviews, including reviews of its billing practices, by its
third-party payors and, from time to time, has been required to return monies
paid to it by such payors. The Company has not yet received final
determination notices or decision letters relating to compliance reviews
conducted by two of its largest third-party payors.
Failure to comply with these laws, regulations and restrictions could
result in the imposition of significant fines, civil and criminal penalties,
third-party liability, exclusion from Medicare and Medicaid, and loss of
licenses and approvals necessary for the Company to conduct its business
operations.
REGULATION OF RELATIONSHIPS WITH PHYSICIANS. Section 1877 of the
Social Security Act, as amended (42 U.S.C. Section 1395nn) (the "Stark Law"),
prohibits (i) a physician from making a referral to the Company for any
designated health service, including laboratory services, for which Medicare or
Medicaid reimbursement may be received if the physician or any member of the
physician's immediate family (including the physician's spouse, parents,
grandparents, children, grandchildren, siblings, spouse's parents, and the
spouse of the physician's children,
11
<PAGE> 12
siblings, grandparents and grandchildren) has a financial relationship (i.e.,
ownership or investment interest or compensation arrangement, subject to
certain exceptions) with the Company and (ii) the Company from billing Medicare
or Medicaid for any designated health service based on such a referral. An
ownership or investment interest may be in the form of equity or debt and
owners of Debentures or Common Stock would be considered to have a "financial
relationship" (as defined in the Stark Law) with the Company. Accordingly,
subject to certain exceptions, a physician is prohibited from making a referral
to the Company for a Medicare- or Medicaid-covered designated health service if
the physician or any of the physician's immediate family members have an
investment in the Company's Common Stock or the Debentures or have a
compensation arrangement with the Company.
In addition, the Stark Law requires the Company to report to the
United States Department of Health and Human Services the identity of all
persons who have a financial relationship with the Company and who are
physicians or immediate family members of physicians. The Stark Law imposes
civil penalties for improper claims for payment, for the creation of
arrangements to circumvent the law and for failure to comply with the reporting
requirements. Failure to comply with the Stark Law may also result in the
Company's exclusion from the Medicare and Medicaid programs. The Stark Law
sets forth a number of exceptions to the statute. The Health Care Financing
Administration of the United States Department of Health and Human Services has
promulgated regulations under the Stark Law, which regulations became effective
September 12, 1995. The Company does not believe the regulations promulgated
under the Stark Law have significantly changed the impact of the Stark Law on
the Company.
THIRD-PARTY REIMBURSEMENT REGULATION. For most of the tests performed
for Medicare or Medicaid recipients, laboratories are required to bill Medicare
or Medicaid directly and, for all tests, laboratories are required to accept
Medicare or Medicaid approved amounts as payment in full. In addition, state
Medicaid programs are prohibited from paying more than the Medicare fee
schedule amount for testing for Medicaid recipients. The Omnibus Budget
Reconciliation Acts of 1989 and 1990 provide that clinical laboratories which
do not perform on-site at least 70% of the testing procedures billed to
Medicare may not bill Medicare for tests not performed on-site and that 70% of
the tests for which the laboratory receives requests must be performed on-site.
The Company has historically exceeded these levels and, during 1996, over 99%
of the tests it was requested to perform were performed in-house.
Medicare and Medicaid reimbursements account for a significant portion
of the Company's net revenues. Medicare, Medicaid and other third-party
reimbursements are subject to periodic review and adjustment. Government
reimbursements to the clinical laboratory industry have been the subject of
heightened legislative and regulatory scrutiny in recent years. Medicare and
Medicaid reimbursement programs contain various restrictions on prices that can
be charged by laboratories. Medicare reimbursement for services provided by
clinical laboratories was reduced several times in recent years from previously
authorized levels. Further changes in Medicare reimbursement policies are
under consideration and such changes, if instituted, could negatively affect
the Company's fee-for-service revenue and overall profitability.
The Company's liquidity may be affected by how promptly the Company is
reimbursed by Medicare, Medicaid and other third-party payors. The Company
from time to time has experienced a slowdown in payments from such third-party
payors.
Legislation has been passed in different forms by the Senate and the
House of Representatives to reform both the Medicare and Medicaid programs. To
date, this proposed legislation has not been enacted into law and, therefore,
the Company is unable to determine at this time what the reforms will be and
what, if any, impact the
12
<PAGE> 13
reforms will have on the Company. However, if laboratory service costs are
shifted to Medicare recipients, the Company believes its costs and
noncollectibles relating to such services would increase.
For a discussion of the impact of changes in reimbursement policies on
the Company's results of operations for 1995 and 1996, see Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
ENVIRONMENTAL REGULATION. The Company has registered with and holds
licenses and certificates issued by federal and state authorities concerning
controlled substances and radioactive materials that are purchased, handled and
disposed of in connection with certain tests conducted at the Company's
facilities. The Company is also subject to certain laws relating to protection
of the environment and public safety and health, including federal and state
laws governing the containment, storage, decontamination and disposal of
certain defined medical wastes and hazardous wastes.
SAFETY AND HEALTH REGULATION. Pursuant to the Federal Occupational
Safety and Health Act and the Michigan Occupational Safety and Health Act,
laboratories have a general duty to provide a workplace for employees that is
safe from hazard. The United States Occupational Safety and Health
Administration ("OSHA") has issued rules relevant to certain hazards that are
found in the laboratory. In addition, OSHA has promulgated regulations
specifically applicable to occupational exposures to blood borne pathogens in
the workplace. These regulations currently require evaluation of potential
workplace exposures, employee training and development of an exposure control
plan, and include engineering and workplace controls, workplace practices, and
the offering of certain vaccinations to applicable employees. The Company also
has and intends to bid on contracts for laboratory testing services with
agencies of local, state and federal governments. Such contracts may require
compliance with certain government-mandated restrictions concerning the conduct
of the Company's business and may subject the Company to penalties in excess of
the value of the services for any non-compliance or false certification of
compliance.
MANAGED CARE REGULATION. The Company's Managed Care Programs require
that the Company and the Managed Care Subsidiaries be licensed under various
laws in certain states in which they operate.
Most of the Company's Managed Care Program revenues during 1996 were
derived from the Michigan Managed Care Subsidiary. The Michigan Managed Care
Subsidiary is licensed as an Alternative Health Care Financing and Delivery
System ("AFDS") by the Insurance Bureau of the Michigan Department of Consumer
and Industry Services (the "Michigan Insurance Bureau") and the Michigan
Department of Community Health pursuant to the Michigan Health Maintenance
Organization Act (the "HMO Act"). The AFDS license and the HMO Act specify
terms and conditions with which the Michigan Managed Care Subsidiary must
comply in order to retain its AFDS license, including certain financial
requirements.
The HMO Act requires that the Michigan Managed Care Subsidiary
maintain: (i) a net worth of $500,000; (ii) a deposit of $100,000 (consisting
of cash or securities, as defined in the HMO Act and the Michigan Insurance
Code) with the state treasurer or with a federally or state chartered financial
institution held solely for the benefit of Covered Persons in the event of
insolvency of the Michigan Managed Care Subsidiary; (iii) working capital of
$250,000 or such greater amount as the State of Michigan Insurance Bureau may,
in the future, deem to be adequate for the Michigan Managed Care Subsidiary,
(iv) a minimum deposit of 5% of the Michigan Managed Care Subsidiary's annual
subscription income (consisting of cash or securities) with the state treasurer
or with a federally or state chartered financial institution held solely for
the benefit of Covered Persons in the event of insolvency of the Michigan
Managed Care Subsidiary. The minimum deposit described in (iv) is subject to a
maximum of
13
<PAGE> 14
$500,000, if the Michigan Managed Care Subsidiary has a positive net worth, or
$1,000,000, if the Michigan Managed Care Subsidiary has a negative net worth.
The Company met the maximum $500,000 requirement at December 31, 1996.
The Michigan Insurance Bureau has responsibility under the HMO Act for
ensuring that the Michigan Managed Care Subsidiary is financially and
actuarially sound and has adequate working capital and statutory deposits and
reserves. The HMO Act grants to the Michigan Insurance Bureau discretion to
establish additional financial reserve requirements and to impose restrictions
on the distribution of funds from the Michigan Managed Care Subsidiary. The
Michigan Insurance Bureau requires the Michigan Managed Care Subsidiary to file
quarterly and annual reports detailing all transactions, including cash
disbursements, with its affiliates.
The Michigan Managed Care Subsidiary is generally permitted to make
cash distributions to the Company out of such subsidiary's earned surplus, but
only to the extent such distributions do not cause the subsidiary to fail to
satisfy the minimum net worth, working capital and other reserve requirements
of the Michigan Insurance Bureau or the Michigan Insurance Bureau has not
otherwise limited such distributions.
The other states in which the Company's other Managed Care
subsidiaries have Managed Care Programs regulate such subsidiaries to varying
degrees and, in some instances, require licenses. Loss of these licenses could
result in the Company being prohibited from continuing to offer its Managed
Care Programs in one or more states. The Company's Managed Care subsidiary in
Ohio is also subject to certain limitations on cash distributions. As the
Company expands its Managed Care Programs into other states, it may experience
similar limitations on cash distributions in certain of those states as well.
If the Company were not able to transfer adequate levels of cash from
its Managed Care Subsidiaries, it is possible that the Company would not have
sufficient cash available to fund its working capital needs and debt service
requirements.
GENERAL. The laws and regulations affecting the clinical laboratory
industry and third party reimbursement change frequently. There can be no
assurance that changes to such laws and regulations will not have a material
adverse effect on the Company's business, financial condition, including
working capital, and results of operations. In addition, legislation may be
introduced in Congress or by one or more state legislatures to reform certain
facets of the health care delivery system. The Company cannot predict whether
any of these possible proposals will become law or the effect such legislation
would have on the Company. Several health care reforms have been proposed both
at the federal and state levels, including controls on health care spending,
price controls and fundamental changes in the health care delivery system.
While the Company cannot predict whether any of these proposals will become
law, changes in the level of support by federal and state governments of health
care services, the methods by which such services may be delivered and the
prices which may be charged for such services may all have a material adverse
impact on the Company's business, financial condition, including working
capital, and results of operations. A national health care delivery system
could eliminate the need for the Company's Managed Care Programs. In addition,
even consideration of reform proposals can have an adverse effect on the
Company's Managed Care Programs because the Company believes health care plan
sponsors are less willing to consider changes in their plans when they think
the government will mandate the types of benefits that must be provided or the
method of delivery of benefits. The Company cannot predict which, if any,
health care reform proposals will be adopted or, if adopted, their effect on
the Company's business.
The Company's failure to comply with any of the above-described laws,
regulations, restrictions or licenses could subject the Company to fines and
penalties, exclusion from Medicare and Medicaid, loss of licenses and
14
<PAGE> 15
approvals and compliance orders or other remedies which could have a material
adverse effect on the Company's business, financial condition, including
working capital, and results of operations.
15
<PAGE> 16
EMPLOYEES
As of December 31, 1996, the Company had approximately 698 employees,
approximately 564 of whom were full-time employees. In February , 1997 the
Company entered into an agreement with a professional employer organization
("PEO") the result of which is that substantially all of the Company's
personnel are now leased from the PEO. None of the Company's personnel are
represented by a labor union or are subject to a collective bargaining
agreement and the Company has never experienced a work stoppage as a result of
its personnel relations.
ITEM 2. PROPERTIES
The Company's full service laboratory, headquarters and administrative
offices are located in Southfield, Michigan. The Company substantially
completed the relocation of its full service laboratory to this site in
December 1995. The Company occupies approximately 87,000 square feet at this
site under a lease which expires in November 2009. The Company also operates a
limited-service laboratory in Clare, Michigan, which occupies approximately
6,000 square feet under a newly negotiated lease whose term expires on December
31, 1998. The Company also operates six "stat" laboratories and 54 patient
service centers, which typically occupy 500 to 2,000 square feet under leases
with terms ranging from one to five years, except for the Lansing, Michigan
"stat" laboratory which occupies approximately 11,500 of the 31,000 square feet
leased by the Company under a lease terminating in June 2002. The Company's
Lansing, Michigan facility has an additional 20,000 square feet of unused
space, 15,000 square feet of which have been sublet and 5,000 square feet of
which the Company is currently attempting to sublet.
Borrowings under the Company's credit facility with its principal
lender are collateralized by substantially all of the Company's assets, except
for assets of the Company's Managed Care subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
In connection with the acquisition of the business of the Predecessor
in 1991, the Company agreed to indemnify the Predecessor and its shareholders
(including certain officers, directors and shareholders of the Company) under
certain circumstances for federal and state income tax liabilities arising from
such acquisition, as well as federal and state income tax liabilities arising
from such indemnification, including tax deficiencies that would arise if the
acquisition was not treated as a tax-free transaction. The Predecessor and its
shareholders have received notices of deficiency, dated July 13, 1995, from the
Internal Revenue Service. The IRS deficiency assessments relating to the
acquisition total approximately $4.9 million, excluding interest and penalties
which could be assessed. In October 1995, the Company (pursuant to its rights
under the related acquisition agreement) filed petitions with the United States
Tax Court contesting the deficiency. The Company believes that the acquisition
has been treated properly for federal income tax purposes and will defend
vigorously its position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE> 17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on The Nasdaq National Market
under the symbol USML. The following table sets forth for the periods
indicated the high and low sales prices for the Common Stock as reported on The
Nasdaq National Market.
<TABLE>
<CAPTION>
1995 HIGH LOW
<S> <C> <C>
First Quarter 7 4 1/2
Second Quarter 6 1/2 5 1/2
Third Quarter 6 3/8 5 3/4
Fourth Quarter 6 3 15/16
1996
First Quarter 4 1/4 2 3/4
Second Quarter 6 1/8 3 1/8
Third Quarter 5 3/8 3 3/8
Fourth Quarter 4 1/4 2
</TABLE>
As of March 4, 1997, there were approximately 66 record holders of the
Common Stock based upon the records of Company's transfer agent.
The Company has not paid any cash dividends on the Common Stock in
1995 or 1996, and it does not intend to pay any cash dividends on the Common
Stock in the foreseeable future. In addition, certain covenants in the
Company's credit facility, including a covenant requiring the Company to
maintain a current ratio, may restrict the Company's ability to pay cash
dividends. See Item 7- "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." The
Company currently anticipates that it will retain all of its earnings for use
in the operation and expansion of its business.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial information set forth below is derived from the
Company's audited consolidated financial statements and should be read in
conjunction with Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and with the consolidated financial
statements and notes thereto included elsewhere herein.
17
<PAGE> 18
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS DATA:
Fee-for-service revenue $40,042 $48,367 $54,264 $53,679 $35,313
Managed care revenue 17,522 18,406 15,451 12,102 9,305
------- ------- ------- ------- -------
Total net revenue(1) 57,564 66,773 69,715 65,781 44,618
Laboratory expenses 39,260 42,842 43,820 38,703 24,878
Selling, general and admini-
strative expenses 11,961 14,960 16,061 15,129 11,640
Provision for doubtful
accounts(1)(2) 4,141 4,489 2,879 2,928 -
Special charge(3) 5,255 - 287 - -
Restructuring charge(4) - - 4,142 - -
Depreciation and amortization 4,517 4,239 3,995 3,498 2,065
------- ------- ------- ------- -------
Operating income (loss) (7,570) 243 (1,469) 5,523 6,035
Interest expense 1,790 1,591 1,396 1,202 1,420
Other (income) expense,
net(5) (142) (90) (145) (1,242) 58
------- ------- ------- ------- -------
Income (loss) before income
taxes and extraordinary
item (9,218) (1,258) (2,720) 5,563 4,557
Income taxes (benefit)(6) (1,467) (277) (766) 1,245 1,128
------- ------- ------- ------- -------
Income (loss) before extra-
ordinary item(6) (7,751) (981) (1,954) 4,318 3,429
Extraordinary item, net (7) - - 167 - 680
------- ------- ------- ------- -------
Net income (loss)(6) ($7,751) ($981) ($2,121) $ 4,318 $ 2,749
======= ======= ======= ======= =======
Income (loss) per share
before extraordinary item(6) ($1.20) ($0.15) ($0.30) $0.66 $0.68
Net income (loss) per share(6) ($1.20) ($0.15) ($0.33) $0.66 $0.55
Average shares outstanding
and common equivalent shares 6,462 6,392 6,417 6,518 5,011
BALANCE SHEET DATA: (AT END
OF PERIOD)
Working capital $ 1,127 $ 3,130 $ 3,857 $ 1,900 $ 2,240
Total assets 57,072 64,566 65,816 69,086 50,117
Long term debt (net of current
portion) 19,013 12,443 13,669 14,133 7,071
Stockholders' equity (8) 26,839 33,968 34,171 36,392 32,288
OTHER DATA:
EBITDA (9) ($3,053) $ 4,482 $ 2,526 $ 9,021 $8,100
EBITDA before restructuring and
special charge (9) 2,202 4,482 6,995 9,021 8,100
Net cash provided by
operating activities (10) 878 4,267 3,992 4,669 3,284
Net cash used in investing activities (1,604) (1,797) (1,644) (8,749) (11,668)
Net cash provided by (used in)
financing activities 1,954 (2,761) (2,156) 3,517 9,225
</TABLE>
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<PAGE> 19
(1) Effective July 1, 1993 the provision for doubtful accounts is
included in operating expenses. Prior to July 1, 1993, the provision
for doubtful accounts was included in revenue.
(2) Includes charges in 1993 of $1.5 million following the conversion to
a new Company-wide computer system.
(3) The 1994 special charge reflects expenses incurred in connection with
a review of strategic alternatives undertaken by the Company in 1994.
The 1996 special charges, totaling $5.3 million, reflect expenses
incurred in connection with actions designed to reduce costs, improve
operating effectiveness and increase overall profitability. See Item
7- "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results of Operations - Special Charge" and
Item 8 - Note 2 to the Notes to Consolidated Financial Statements,
"Special Charges - 1996."
(4) Reflects charges in connection with the Company's restructuring
program.
(5) Includes $1.1 million of life insurance proceeds, net of related
costs and expenses, in 1993.
(6) Does not include $2.1 million of tax benefits relating to the 1996
loss which, under applicable accounting rules, could not be
recognized in 1996. These losses are treated as net operating loss
carry forwards for accounting purposes and may be used to offset
future profits of the Company. See Item 8- Note 11 to Notes to
Consolidated Financial Statements, "Income Taxes" and Item 7-
"Management's Discussion and Analysis of Financial Condition and
Results of Operations-Results of Operations-Income Taxes."
(7) Reflects write-off of financing costs in connection with refinancings
of debt in 1992 and 1994, net of income tax benefits.
(8) The Company has paid no dividends on Common Stock during the periods
presented.
(9) EBITDA represents earnings before interest, taxes, depreciation,
amortization, other (income) expense, extraordinary item and
acquisition expense but after restructuring and special charge.
EBITDA before restructuring and special charge represent earnings
before interest, taxes, depreciation, amortization, other (income)
expense, extraordinary item, acquisition expense and restructuring
and special charge. The Company and laboratory industry analysts use
EBITDA as a method of measuring and comparing the financial
performance of clinical laboratory companies, many of which were
formed by combining with and acquiring other clinical laboratory
companies, because it eliminates the effects of goodwill amortization
and acquisition expenses on net income. EBITDA before restructuring
and special charge is included in the table to permit a year to year
comparison of EBITDA data exclusive of those charges not expected to
be recurring. See Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Results of
Operations-Income Taxes." Neither EBITDA nor EBITDA before
restructuring and special charge should be considered as an
alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of the Company's liquidity.
(10) Net cash provided by operating activities is determined in accordance
with generally accepted accounting principles and is included in the
Company's Consolidated Statements of Cash Flows. The amount for each
period is determined by adjusting net income for the period for
non-cash expense items, including restructuring and special charge,
depreciation and amortization, extraordinary item and deferred income
19
<PAGE> 20
taxes, and for increases and decreases in asset and liability items
other than those relating to financing and investing activities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis of financial results covers the
three years ended December 31, 1996. The following table sets forth, for the
periods indicated, the percentage of net revenue represented by items in the
statements of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fee-for-service 69.6 % 72.4 % 77.8 %
Managed care 30.4 27.6 22.2
----- ----- -----
Total net revenue 100.0 100.0 100.0
Laboratory expenses 68.2 64.2 62.9
Selling, general and
administrative expenses 20.8 22.4 23.0
Provision for doubtful accounts 7.2 6.7 4.1
Special charge 9.1 -- 0.4
Restructuring charge -- -- 6.0
Depreciation and amortization 7.9 6.3 5.7
----- ----- -----
Operating income (loss) (13.2) 0.4 (2.1)
Interest expense 3.1 2.4 2.0
Other (income) expense, net (0.3) (0.1) (0.2)
----- ----- -----
Income (loss) before income
taxes and extraordinary item (16.0) (1.9) (3.9)
Income taxes (benefit) (2.5) (0.4) (1.1)
----- ----- -----
Income (loss) before
extraordinary item (13.5) (1.5) (2.8)
Extraordinary item, net -- -- 0.2
----- ----- -----
Net income (loss) (13.5)% (1.5)% (3.0)%
===== ===== =====
EBITDA* (5.3)% 6.7 % 3.6 %
EBITDA before restructuring
and special charge* 3.8 % 6.7 % 10.0 %
Net cash provided by operating
activities** 1.5 % 6.4 % 5.7 %
</TABLE>
_________________________________________
* EBITDA represents earnings before interest, taxes, depreciation,
amortization, other (income) expense and extraordinary item, but after
restructuring and special charge. EBITDA before restructuring and
special charge represents earnings before interest, taxes,
depreciation, amortization, other (income) expense, extraordinary item
and restructuring and special charge. The Company and laboratory
industry analysts use
20
<PAGE> 21
EBITDA as a method of measuring and comparing the financial
performance of clinical laboratory companies, many of which were
formed by combining with and acquiring other clinical laboratory
companies, because it eliminates the effects of goodwill amortization
and acquisition expenses on net income. EBITDA before restructuring
and special charge is included in the table to permit a year to year
comparison of EBITDA data exclusive of those charges not expected to
be recurring. See Item 7- "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Results of
Operations-Income Taxes." Neither EBITDA nor EBITDA before
restructuring and special charge should be considered as an
alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of the Company's liquidity.
** Net cash provided by operating activities is determined in accordance
with generally accepted accounting principles and is included in the
Company's Consolidated Statements of Cash Flows. The amount for each
period is determined by adjusting net income for the period for
non-cash expense items, including restructuring and special charge,
depreciation and amortization, extraordinary item and deferred income
taxes, and for increases and decreases in asset and liability items
other than those relating to financing and investing activities.
NET REVENUE. The Company's net revenue is generated from managed care
programs, primarily laboratory, with major employers, union and government
benefit plans, and from traditional laboratory fee-for-service business. In
the Managed Care Programs, for a fixed monthly payment, the Company is the
designated provider of substantially all non-hospital clinical laboratory
testing which may be ordered by a Covered Person's physician of choice and, in
some cases, equipment and appliances. In the fee-for-service business, the
Company charges a fee based upon the type of test requested by the patient's
physician.
Total net revenue in 1995 was $66.8 million, a decrease of $2.9
million from 1994. An increase in managed care revenue in 1995 was more than
offset by a $5.9 million decrease in fee-for-service revenue. Total net
revenue in 1996 was $57.6 million, a decrease of $9.2 million from 1995. This
decrease principally results from an $8.3 million decrease in fee-for-service
revenues.
Managed care revenue totaled $15.5 million, $18.4 million and $17.5
million for fiscal years 1994, 1995 and 1996, respectively. All of the $2.9
million, or 18.7%, increase from 1994 to 1995 was due to an entire year of
revenue from new programs commenced in 1994 and five new programs that
commenced in 1995 and was offset in part by a decrease in the number of
employees and retirees covered by existing Managed Care Programs. The decrease
in revenue for 1996 was primarily due to a program that expired during August
1996 and was renewed two months later at a reduced level, and to a lesser
extent, decreases in participation levels, fee reductions in a program and
program terminations. Managed Care Programs with United Auto Workers
("UAW")/Ford Motor Company ("Ford") and UAW/Chrysler Corporation ("Chrysler")
collectively accounted for 59.0%, 57.0% and 61.6% of managed care revenue for
1994, 1995 and 1996, respectively. The increase in 1996 is principally due to
the impact of a full year of revenues from the UAW/Ford home medical services
program implemented June 1, 1995. As a percentage of total net revenue,
managed care revenue has increased from 22.2% in 1994 to 27.6% in 1995 to 30.4%
in 1996, due primarily in 1995 to new Managed Care Programs and in 1996 to
decreases in the Company's fee-for-service revenue.
Fee-for-service revenue was $48.4 million in 1995, a decrease of $5.9
million, or 10.9%, from $54.3 million in 1994. This decrease is principally
due to a 7.0% decline in fee-for-service patient visits as compared to 1994.
The decline in fee-for-service patient visits was primarily the result of a
shift by two HMOs of laboratory testing to affiliated hospitals and the
implementation in 1995 of a new PPO by Blue Cross/Blue Shield of Michigan in
21
<PAGE> 22
which the Company is not a participating provider. Declines in fee-for-service
revenue per accession, principally due to changes in payor and test mix, also
contributed to the decline in fee-for-service revenue for 1995.
Fee-for-service revenue was $40.0 million in 1996, a decrease of $8.3
million, or 17.2%, from 1995. The decrease was primarily the result of a 12.2%
decline in fee-for-service patient visits as compared to 1995. The decline in
fee-for-service patient visits was primarily due to the previously announced
shift of laboratory testing to exclusive service health maintenance
organizations, the reduction in testing facilities and lost accounts. Declines
in fee-for-service revenue per accession, principally due to changes in payor
and test mix, also contributed to the decline in fee-for-service revenue for
1996.
The Company's fee-for-service net revenue continues to be negatively
impacted in 1997 by a number of factors, including customer attrition, the
shift toward managed care alternatives, such as those described above,
reductions in reimbursement levels on certain of its laboratory tests primarily
due to reimbursement changes instituted by the Company's third-party payors
beginning in August 1993 and changes in payor and test mixes being experienced
by the Company and the clinical laboratory industry generally.
The Company's long-lived assets total approximately $43.2 million at
December 31, 1996. No impairment of these assets existed at December 31, 1996,
however, the analysis of potential impairment is based on management's estimate
of future cash flows and the management programs discussed in Item 8 - Note 15
to Notes to Consolidated Financial Statements, "Management Programs." No
estimate can be made of a range of amounts of loss that are reasonably possible
should management's plans not be successful.
LABORATORY EXPENSES. Laboratory expenses were $42.8 million in 1995,
a decrease of $1.0 million, or 2.2% from $43.8 million in 1994. The decrease
was primarily the result of the restructuring initiative launched in the third
quarter of 1994 and, to a lesser extent, lower accessions discussed above.
This decrease was partially offset by higher managed care claims expense,
principally due to higher managed care revenue. Laboratory expenses were $39.3
million in 1996, a decrease of $3.6 million, or 8.4% from 1995. This decrease
was primarily the result of fewer patient visits and, to a lesser extent, the
Company's reengineering and cost reduction programs initiated during 1996.
As a percentage of net revenue, laboratory expenses were 62.9%, 64.2%
and 68.2% for 1994, 1995 and 1996, respectively. The Company attributes the
increase in 1995 principally to higher expenses associated with new Managed
Care Programs. The increase in 1996 is principally due to the decrease in
fee-for-service revenue and patient visits discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $15.0 million in 1995, a decrease of $1.1 million,
or 6.8%, from $16.1 million in 1994. The decrease was principally due to the
restructuring initiative launched in the third quarter of 1994 and other cost
reduction efforts. Selling, general and administrative expenses were $12.0
million in 1996, a decrease of $3.0 million, or 20%, from 1995. The decrease
was principally due to the reengineering and cost reduction programs which were
implemented in 1996. As a result of these factors, selling, general and
administrative expenses decreased as a percentage of net revenue from 23.0% in
1994 to 22.4% in 1995 to 20.8% in 1996.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts
were $2.9 million, $4.5 million and $4.1 million for 1994, 1995 and 1996,
respectively. As a percentage of total revenue, the provision for doubtful
accounts increased from 4.1% in 1994, to 6.7% in 1995 and to 7.2% in 1996. The
increase in 1995 is principally due to increased allowance levels following a
detailed examination of the Company's accounts receivable
22
<PAGE> 23
undertaken in the fall of 1995. In addition, because third-party payors
increased the portion of laboratory billings for which patients are responsible
during 1995, the Company believes it is experiencing an increased level of
uncollectible patient accounts receivable. The 1996 increase as a percentage of
net revenue is principally due to increases in uncollectible direct patient
billings.
RESTRUCTURING. In response to changes in the health care industry
discussed above, the Company initiated a restructuring program during 1994
designed to reduce costs. The program included the consolidation of facilities
into a new facility located in Southfield, Michigan, termination of long-term
consulting and employment contracts entered into in connection with
acquisitions, and severance of approximately 150 full-time equivalent
employees. A provision of $4.1 million for the estimated costs associated with
implementation of the program was charged to 1994 operations. The program was
substantially completed in 1995.
SPECIAL CHARGES. During 1994 the Company recorded a special charge of
$0.3 million related to expenses incurred in connection with a review of
strategic alternatives undertaken by the Company.
During 1996 the Company incurred $5.3 million in special charges
designed to reduce costs, improve operating efficiencies and increase the
overall profitability of the Company. The special charges include $0.7 million
in consolidation of locations, $1.4 million in employee related expenses and
$2.2 million in reengineering, consulting, legal and other expenses, as well as
a $1.0 million write-off of certain tangible assets. The Company began its
reengineering process with a $2.4 million special charge in the second quarter
of 1996 and completed the special charge in the fourth quarter of 1996 by
recording an additional $2.9 million special charge. Approximately $0.3
million in consolidation of locations, $0.5 million in employee related
expenses, $1.7 million in reengineering and other, and $1.0 million in
intangible assets have been paid or charged against the special charge reserve
at December 31, 1996. At December 31, 1996 a special charge reserve of $1.8
million is included in other accrued liabilities. These liabilities are
expected to be paid or settled in 1997. See Item 8 - Note 15 to Notes to
Consolidated Financial Statements, "Management Programs."
EBITDA. EBITDA were $2.5 million and $4.5 million for 1994 and 1995,
respectively. Without the restructuring and special charges, EBITDA would have
been $7.0 million, or 10.0% of net revenue, for 1994. The Company attributes
the decrease in 1995 EBITDA principally to the decline in fee-for-service net
revenue per accession discussed above. EBITDA for 1996 was a negative $3.1
million. Without the special charges, earnings before interest, taxes,
depreciation, amortization, other (income) expense and extraordinary item
("EBITDA") would have been $2.2 million, or 3.8% of net revenue, for 1996. The
decrease in 1996 EBITDA is principally attributable to declines in revenues,
which are only partially offset by decreases in operating expenses.
DEPRECIATION AND AMORTIZATION. The increases in depreciation and
amortization expense in 1995 and 1996 relates primarily to depreciation on
property and equipment additions. Amortization expense during 1997 will be
reduced by approximately $.6 million due to the write-off of the covenant not
to compete in the fourth quarter of 1996.
INTEREST EXPENSE. Interest expenses were $1.4 million, $1.6 million
and $1.8 million in 1994, 1995 and 1996, respectively. The increase in
interest expense in 1995 was principally due to the increased levels of bank
debt outstanding during 1995. The increase in interest expense in 1996 was
principally due to the issuance of $12 million principal amount of 8.25%
Convertible Subordinated Debentures due 2006 (the "Debentures") in February
1996, partially offset by reduced levels of bank debt during 1996.
23
<PAGE> 24
INCOME TAXES. The effective income tax rates were 28.2%, 22.0% and
15.9% for 1994, 1995 and 1996, respectively. The effective tax rate is less
than the statutory rate in 1994 and 1995 due to non-deductible goodwill
amortization. The effective tax rate is less than the statutory rate in 1996
because, under applicable accounting rules, $2.1 million of tax benefits
relating to the 1996 loss could not be recorded in 1996. These losses are
treated as net operating loss carry forwards for accounting purposes and may be
used to offset future profits of the Company. See Item 8 - Note 11 to Notes to
Consolidated Financial Statements. In 1996, the Company established a valuation
allowance against the net deferred tax assets which reduced deferred tax assets
on the Company's consolidated balance sheet to zero. See Item 8 - Note 11 to
Notes to Consolidated Financial Statements, "Income Taxes", for an explanation
of the potential future tax benefit.
EXTRAORDINARY ITEM. In connection with obtaining a new credit
facility in July 1994, the Company incurred a non-cash charge of $0.3 million
due to the write-off of financing costs associated with the replaced facility.
This charge was presented as an extraordinary item, net of an income tax
benefit of $0.1 million, in the accompanying consolidated statement of
operations.
NET INCOME (LOSS). For 1994, the Company reported a net loss of $2.1
million, or $.33 per share. Before special charges and extraordinary charges,
the Company had net income for 1994 of $1.1 million, or $.15 per share. For
1995, the Company reported a net loss of $1.0 million, or $.15 per share. For
1996, the Company reported a net loss of $7.8 million, or $1.20 per share.
Before the special charges, the Company's net loss for 1996 would have been
$2.7 million, or $.41 per share, if the Company had been able to recognize the
full tax benefit of the loss in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital ratio was 1.2 to 1 at December 31, 1995
compared to 1.1 to 1 at December 31, 1996. Working capital decreased from $3.1
million at December 31, 1995 to $1.1 million at December 31, 1996. The
decrease in working capital is principally due to a reduction in accounts
receivable and a reduction in deferred tax assets, partially offset by the
application of the proceeds of the Debentures, reductions in accounts payable,
reductions in the current portion of long-term debt through pay downs of bank
debt during 1996 and increases in accrued liabilities as a result of expenses
incurred in connection with the special charges recorded in 1996. In 1996, the
Company established a valuation allowance against the net deferred tax assets
which reduced deferred tax assets on the Company's consolidated balance sheet
to zero. See Item 8 - Note 11 to Notes to Consolidated Financial Statements,
"Income Taxes", for an explanation of the potential future tax benefit.
Included in cash and cash equivalents at December 31, 1996 is $2.5 million in
cash deposits of one of the Company's wholly owned managed care subsidiaries,
which is generally permitted to make distributions to the Company only out of
the subsidiary's earned surplus and to the extent certain other regulatory
requirements are satisfied.
Net cash flow from operating activities was $4.0 million, $4.3 million
and $0.9 million in 1994, 1995, and 1996, respectively. The reduction in net
cash flow from operating activities in 1996 was principally due to reductions
in operating income during the period, reductions in deferred income taxes and
accounts payable and accruals, partially offset by increased collections of
accounts receivable. The average number of days outstanding in accounts
receivable decreased from 97 days at December 31, 1995 to 66 days at December
31, 1996. This decline and the decline in accounts receivable is principally
due to improved collections and, to a lesser extent, increased accounts
receivable allowance. The Company is continuing its efforts to reduce days
outstanding, principally by working its aged and unbilled accounts receivable.
24
<PAGE> 25
The ratio of debt to capital increased from 33.2% at December 31, 1995
to 43.4% at December 31, 1996, primarily as a result of the $12 million
Debenture Offering completed during 1996 and the net loss during 1996.
On February 20, 1996, the Company completed the public offering of
$12.0 million principal amount of Debentures (the "Debenture Offering"). The
Debentures bear interest at a rate of 8.25% per annum, payable semi-annually
beginning August 1, 1996, and the principal amount of the Debentures is payable
in full on February 1, 2006. The Debentures are redeemable by the Company
during their term, but may be redeemed by the Company prior to February 1, 1999
only under certain circumstances. In addition, under certain circumstances
(generally involving a change in control of the Company or a sale of the
Company's managed care business), the Company may be required to redeem the
Debentures. The Debentures are convertible into shares of Common Stock at a
price of $4.375 per share.
The Company realized net proceeds of approximately $11.0 million from
the Debenture Offering, which was used as follows: $2.5 million was used to
repay an intercompany note to the Michigan Managed Care Subsidiary, $2.0
million was used to reduce the amount outstanding under the term loan, $0.5
million was used to repay the amount outstanding under the supplemental line of
credit and the remainder was used to reduce the amount outstanding on the
revolving line of credit and for general working capital purposes.
As of December 31, 1996, the Company had a credit facility which
included a term loan, with a remaining principal balance of $250,000 due on
March 31, 1997, and a $5.5 million revolving line of credit, reducing to $5.3
million on October 2, 1997. Borrowing levels permitted under the revolving
line of credit are based on accounts receivable balances. All available
borrowings under the revolving line of credit were utilized at December 31,
1996. The credit facility requires the maintenance of certain financial
ratios. The Company was not in compliance with these ratios at the end of each
quarter of 1996 and the bank either waived compliance with such covenants or
revised such covenants following the end of each such quarter. In February
1997, the Company and the bank amended the credit facility to provide for a
maturity date on the revolving line of credit of January 5, 1998, revised the
financial covenants, and revised the interest rate to 0.5 above the prime rate.
In March 1997, the Company and the bank further modified the financial
covenants to require the Company to maintain a cash flow coverage ratio of
(2.50) to 1 through December 31, 1996, .70 to 1 through March 31, 1997, 1.50 to
1 through June 30, 1997, 1.75 to 1 through September 30, 1997 and 2.00 to 1
through December 31, 1997; funded debt (excluding the Debentures) to cash flow
of not greater than (.75) to 1 through December 31, 1996 and 3.0 to 1
thereafter; and a working capital ratio of 1.0 to 1.0. The Company was in
compliance with the amended covenants as of December 31, 1996. In addition,
during 1996, the Company was required to maintain a $1.0 million restricted
account with the lender, all of which was withdrawn by the lender during 1996
to make payments to the lender and interest payments on the Debenture. At
December 31, 1996, the interest rate under the facility was 8.25%.
Borrowings under the Company's credit facility are collateralized by
substantially all of the Company's assets, except for assets of the Company's
Managed Care subsidiaries.
Capital expenditures, including capital leases, were $2.4 million in
1994, $3.3 million in 1995 and $3.0 million in 1996 and consisted principally
of new laboratory and data processing equipment and in 1995 and 1996 also
included leasehold improvements. The Company expects to incur approximately
$2.0 million of capital expenditures during 1997.
The Company expects to fund its working capital needs, capital
expenditures required for the operation of its business and debt service
requirements from its operating cash flow, including cash flow from its
subsidiary conducting managed care operations in Michigan, and capitalized
leases. The Company believes that it will
25
<PAGE> 26
continue to generate operating cash flow in future periods as a result of the
revenue enhancement initiatives and the reengineering and cost reduction
efforts implemented to date and in the future. The foregoing statement may be
a "forward looking statement" within the meaning of the Securities Exchange Act
of 1934. The Company's ability to generate additional operating cash flow
involves a number of uncertainties. For example, the Company's revenue
enhancement initiatives may not be successful in generating new revenues or, if
successful, such new revenues may not be at the level required to offset
decreases in revenues, particularly if third party reimbursement levels
continue to decrease or the Company continues to experience declines in patient
visits or fee-for-service revenue per patient visit as described above under
"--Results of Operations - Net Revenue". In addition, the Company's operating
cash flow could be negatively affected by a number of other factors, including
the impact of reengineering/cost reduction efforts on revenues, potential
offsetting increases in operating expenses, variations in cost savings from,
and timing of, the Company's reengineering/cost reduction efforts from those
anticipated, the impact on revenues and expenses of governmental and
third-party payor requirements and reimbursement levels, the impact on the
Company of recent and continuing changes in the health care industry, and the
competitive nature of the laboratory industry. From time to time the Company's
managed care subsidiary in Michigan may not be able to make cash distributions
to the Company at levels required to fully fund the Company's operating cash
flow requirement without violating applicable regulatory requirements. In the
event that the Company is not able to generate additional operating cash flow
or to receive cash distributions from its managed care subsidiary in Michigan
to the extent required to fund the Company's operating cash flow requirements,
the Company may need to obtain additional financing to meet its operating cash
needs.
The Company periodically explores opportunities to acquire other
companies, including through joint ventures. The purchase consideration for
these acquisitions may be cash, equity or debt securities or a combination of
the foregoing, including payments contingent upon the achievement of future
financial targets. Future acquisitions may be financed through additional
borrowings, if available to Company.
The Company recognizes revenue from its customers at the estimated net
realizable amount. Agreements with third-party payors, such as Medicare,
Medicaid, hospitals, HMOs, PPOs and nursing homes provide for payments at
amounts different from established rates. Accounts receivable are recorded net
of an allowance for contractual adjustments and doubtful amounts. See Item 8-
Note 3 to Notes to the Consolidated Financial Statements, "Net Laboratory
Service Revenue."
The Company has from time to time experienced compliance reviews,
including reviews of its billing practices, by its third-party payors. The
Company has not yet received final determination notices or decision letters
relating to compliance reviews conducted by two of its largest third-party
payors. The ultimate effect, if any, of these compliance reviews can not be
determined at this time and no liability has been accrued by the Company.
In connection with the acquisition of the Predecessor, the Company has
agreed to indemnify the Predecessor and its shareholders (including certain
officers, directors and shareholders of the Company) under certain
circumstances for income tax liabilities arising from such acquisition and
indemnification. On July 13, 1995, the Predecessor and its shareholders
received notices of deficiency from the Internal Revenue Service (IRS). The
IRS deficiency assessments relating to the acquisition total approximately $4.9
million, excluding interest and penalties which could be assessed. In October
1995, the Company (pursuant to its rights under the related acquisition
agreement) filed petitions with the United States Tax Court contesting the
deficiency. The Company believes that the acquisition has been treated
properly for federal income tax purposes and intends to vigorously defend its
position.
26
<PAGE> 27
The Company had received a thirty-day demand letter from the IRS
proposing adjustments to the Company's federal income taxes for the years
1991-1994 totaling $3.3 million. The proposed adjustments principally relate
to the timing of certain bad debt deductions and claim expense accruals and the
deductibility of certain sign on bonus and non-compete payments made in
connection with the Predecessor acquisition. The Company has filed a written
protest with the IRS appeals office regarding this matter.
There can be no assurance that the Company will resolve these disputes
with the IRS in a manner favorable to the Company. The failure to resolve the
disputes with the IRS in a manner favorable to the Company would result in a
current period charge to earnings and would have a material adverse effect on
the business, financial condition, including working capital, and results of
operations of the Company. While management believes its liability relating
to these matters, if any, will not be material to the Company, the ultimate
effect, if any, cannot be determined at this time. The foregoing statement may
be a "forward looking statement" within the meaning of the Securities Exchange
Act of 1934. The outcome of these disputes with the IRS involves a number of
uncertainties, including those inherent in interpreting and applying the
Internal Revenue Code and other federal income tax authority and precedent to
actual transactions, those relating to the valuation of various assets at the
time of the acquisition and those inherent in pursuing any legal action of the
type instituted by the Company. The Company has not accrued a liability
relating to the deficiency assessments or proposed tax adjustments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
Index to Consolidated Financial Statements
and Financial Statement Schedule
Reports of Independent Accountants
Consolidated Balance Sheets at December 31, 1996 and 1995.
Consolidated Statements of Operations for the years ended December 31, 1996,
1995 and 1994.
Consolidated Statements of Stockholders' Equity for the years ended December
31, 1996, 1995, and 1994.
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994.
Notes to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or are not
required, or the information is included in the respective statements or notes
thereto.
27
<PAGE> 28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Universal Standard Medical Laboratories, Inc.
We have audited the accompanying consolidated balance sheet of Universal
Standard Medical Laboratories, Inc. and its subsidiaries as of December 31,
1996 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended. We have also audited the
schedule listed in the accompanying index as of and for the year ended December
31, 1996. These financial statements and the schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and the schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the schedule are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements and the
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and the schedule. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Universal Standard
Medical Laboratories, Inc. and its subsidiaries as of December 31, 1996, and
the results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein as of and for the year ended December 31,
1996.
/s/ BDO SEIDMAN, LLP
Troy, Michigan
February 21, 1997, except for Note 7, which is as of March 21, 1997
28
<PAGE> 29
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the accompanying consolidated balance sheet of Universal
Standard Medical Laboratories, Inc. as of December 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1995 and 1994, and the financial statement
schedule for the years ended December 31, 1995 and 1994, as listed in item 8
of this Form 10-K. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Universal Standard
Medical Laboratories, Inc. as of December 31, 1995, and the consolidated results
of its operations and its cash flows for the years ended December 31, 1995 and
1994. In addition, in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein for the years ended December 31, 1995 and 1994.
The Company has incurred losses in each of the last three years and at December
31, 1996, has negative tangible net worth. Management's plan to address these
and other operating issues is discussed in Note 15 to the 1996 consolidated
financial statement.
COOPERS & LYBRAND LLP
Detroit, Michigan
February 24, 1996
except for Note 15
as to which the date is
February 21, 1997
29
<PAGE> 30
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1995
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,227 $ 999
Accounts receivable, net 7,296 12,405
Inventory 1,053 1,072
Prepaid expenses and other 1,762 3,660
------- -------
Total current assets 12,338 18,136
Property and equipment, net 9,695 9,062
Intangible assets, net 33,547 36,790
Other assets 1,492 578
------- -------
Total assets $57,072 $64,566
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,534 $ 4,412
Accounts payable 4,348 5,739
Accrued compensation and benefits 1,150 1,619
Accrued claims 1,269 2,087
Other accrued liabilities 2,910 1,149
------- -------
Total current liabilities 11,211 15,006
Long-term debt, net of current portion 19,013 12,443
Other liabilities 9 3,149
------- -------
Total liabilities 30,233 30,598
------- -------
Common stock, no par; 20,000,000
shares authorized 6,552,768 and 6,355,032
shares issued and outstanding at
December 31, 1996 and 1995,
respectively 32,864 32,242
Retained earnings (deficit) (6,025) 1,726
-------- -------
Total stockholders' equity 26,839 33,968
------- -------
Total liabilities and
stockholders' equity $57,072 $64,566
======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
30
<PAGE> 31
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1996 1995 1994
--------- ---------- --------
<S> <C> <C> <C>
Net laboratory service revenue:
Fee-for-service $40,042 $48,367 $54,264
Managed care 17,522 18,406 15,451
------- ------- -------
Total net revenue 57,564 $66,773 $69,715
Operating expenses:
Laboratory 39,260 42,842 43,820
Selling, general and
administrative 11,961 14,960 16,061
Provision for doubtful accounts 4,141 4,489 2,879
Special charges 5,255 -- 287
Restructuring charge -- -- 4,142
Depreciation 2,297 2,157 1,877
Amortization 2,220 2,082 2,118
------- ------- -------
Total operating expenses 65,134 66,530 71,184
------- ------- -------
Operating income (loss) (7,570) 243 (1,469)
Interest expense 1,790 1,591 1,396
Other income, net (142) (90) (145)
------- ------- -------
Income (loss) before income
taxes and extraordinary item (9,218) (1,258) (2,720)
Income taxes (benefit) (1,467) (277) (766)
------- ------- -------
Income (loss) before extra-
ordinary item (7,751) (981) (1,954)
Extraordinary item, net -- -- 167
------- ------- -------
Net income (loss) ($7,751) ($981) ($2,121)
======= ======= =======
Earnings per share:
Income (loss)
before extraordinary item ($1.20) ($0.15) ($0.30)
Extraordinary item -- -- ($0.03)
------- ------- -------
Net income (loss) ($1.20) ($0.15) ($0.33)
======= ======= =======
Average shares outstanding
and common equivalent shares 6,462 6,392 6,417
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
31
<PAGE> 32
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands except share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
COMMON STOCK:
Balance at beginning of year $32,242 $31,464 $31,564
Reacquisition of 10,013
shares of common stock in 1994 -- -- (100)
Stock issued in exchange for
note payable -- 478 --
Stock issued for acquisition of
customer list 300 --
Stock issued for conversion of
Debenture debt 397 -- --
Stock issued for employee stock
purchase plan 225 -- --
------- ------- -------
Balance at end of year 32,864 $32,242 $31,464
======= ======= =======
RETAINED EARNINGS (DEFICIT):
Balance at beginning of year $ 1,726 $ 2,707 $ 4,828
Net income (loss) for the year (7,751) (981) (2,121)
------- ------- -------
Balance at end of year ($ 6,025) $ 1,726 $ 2,707
======= ======= =======
TOTAL STOCKHOLDERS' EQUITY $26,839 $33,968 $34,171
======= ======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
32
<PAGE> 33
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($7,751) ($981) ($2,121)
------- ------ ------
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Restructuring charge -- -- 3,107
Special charge 4,151 -- --
Depreciation and amortization 4,517 4,239 3,995
Extraordinary item, net -- -- 167
Deferred income taxes (1,122) 617 (773)
Other 23 118 275
(Increase) decrease in:
Accounts receivable, net 4,129 2,001 555
Inventory 18 150 (203)
Prepaid expenses and other 448 (270) (923)
Other assets (15) 361 (57)
Increase (decrease) in:
Accounts payable (1,391) 104 727
Accrued liabilities (1,595) (1,841) (757)
Other liabilities (534) (231) --
------- ------ ------
Total adjustments 8,629 5,248 6,113
------- ------ ------
Net cash provided by operating activities 878 4,267 3,992
------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,596) (1,684) (1,499)
Other investing activities (8) (113) (145)
------- ------ ------
Net cash used in investing activities (1,604) (1,797) (1,644)
------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt (10,204) (3,670) (15,885)
Proceeds from issuance of long-term debt 1,000 1,100 14,075
Proceeds from convertible debenture 12,000 -- --
Payment of financing costs (1,034) (253) (39)
Issuance of common stock-employee purchase plan 225 -- --
Other (33) 62 (307)
------- ------ ------
Net cash provided by (used in) financing activities 1,954 (2,761) (2,156)
------- ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,228 (291) 192
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 999 1,290 1,098
------- ------ ------
CASH AND CASH EQUIVALENTS, END OF YEAR $2,227 $ 999 $1,290
======= ====== ======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest payments $1,513 $1,472 $1,142
Income tax payments -- -- $ 670
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
and financing activities:
Capital lease obligations $1,345 $1,545 $ 894
Conversion of note payable to common stock -- $ 478 --
Conversion of debenture to common stock $ 397 -- --
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
33
<PAGE> 34
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Universal Standard Medical Laboratories, Inc. (the "Company") provides clinical
laboratory testing services on a traditional fee-for-service basis and, through
its specialty managed care programs (the "Managed Care Programs"), offers
clinical laboratory testing services and home medical services to employer,
employer group-, union- and government-sponsored health care benefit plans and
other groups for a fixed payment per participating employee or retiree
("capitated rate"). All home medical services, and virtually all of the
clinical laboratory services provided outside of Michigan, are provided by the
Company under arrangements through subcontracting agreements with qualified
providers.
CONSOLIDATION PRINCIPLES
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenue for fee-for-service laboratory testing services is recognized on the
accrual basis at the time test results are reported, which approximates when
services are provided. Revenue from Managed Care Programs, generated primarily
by laboratory programs, is recognized monthly when billed or when due under the
terms of the related contracts.
INVENTORY
Inventory, consisting of laboratory supplies, is stated at the lower of cost or
market, principally determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major improvements and replacements
are capitalized while ordinary maintenance and repairs are expensed. Upon
retirement or disposal, the asset's cost and related accumulated depreciation
are eliminated from the respective accounts and the resulting gain or loss is
included in the statement of operations.
Property and equipment are depreciated over their estimated useful lives, using
the straight-line method. Estimated useful lives are as follows: furniture
and fixtures - 7 years; machinery and equipment 5 - 7 years; transportation
equipment - 3 years; and computer equipment - 7 years.
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful life, using the straight-line method.
34
<PAGE> 35
Depreciation expense was $2.3 million, $2.2 million and $1.9 million for the
years ended December 31 1996, 1995 and 1994, respectively.
INTANGIBLES
Intangibles consist principally of goodwill, covenants not-to-compete and
customer lists. Goodwill is amortized using the straight-line method
principally over a period of 40 years. Covenants not-to-compete are amortized
using the straight-line method over the terms of the agreements (up to 8
years). Customer lists are amortized using the straight-line method over a
period of 20 years. At each balance sheet date management assesses whether
there has been an impairment in goodwill by comparing anticipated undiscounted
future cash flows from operating activities with the carrying amount of the
related assets. The factors considered by management in performing this
assessment include current operating results, business prospects, market
trends, competitive activities and other economic factors.
LONG-LIVED ASSETS
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121 "Accounting for the Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed Of" during the year ended December 31,
1996. SFAS 121 establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and related goodwill to be
held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The effect of adopting this standard was not material.
The Company reviews the carrying values of its long-lived assets for possible
impairment whenever events or changes in circumstance indicate that the
carrying amount of the assets may not be recoverable. The Company evaluates
whether impairment exists on the basis of undiscounted future cash flows from
operations before interest for the remaining useful life of the assets. Any
long-lived assets held for disposal are reported at the lower of these carrying
amounts or fair value less costs to sell.
The Company's long-lived assets total approximately $43.2 million at December
31, 1996. No impairment of these assets existed at December 31, 1996, however,
the analysis of potential impairment is based on management's estimate of
future cash flows and the management programs discussed in Item 8 - Note 15 to
Notes to Consolidated Financial Statements, "Management Programs." No estimate
can be made of a range of amounts of loss that are reasonably possible should
management's plans not be successful.
INCOME TAXES
Income Taxes are calculated using the asset and liability method under
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes."
35
<PAGE> 36
FAIR VALUE OF FINANCIAL INSTRUMENTS
Due to the short-term nature of the Company's financial instruments, other than
debt, fair values are not materially different from their carrying values.
Based on the borrowing rates currently available to the Company, the carrying
value of debt approximates fair value.
CASH FLOWS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share has been computed using the weighted average number
of shares of common stock and common stock equivalents outstanding. Common
stock equivalents represent the assumed exercise of outstanding stock options
and warrants, and are included in the computation of earnings (loss) per share
if the assumed exercise has a dilutive effect.
STOCK-BASED COMPENSATION
The Company uses the intrinsic value method to account for stock-based
compensation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 reporting period.
Actual results could differ from those estimates.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents. At times such
cash and equivalents in banks are in excess of the respective financial
institution's FDIC insurance limit. Also, See Item 8 - Note 3 to Notes to
Consolidated Financial Statements, "Net Laboratory Service Revenue."
2. SPECIAL CHARGES - 1996
During 1996 the Company recognized special charges of $5.3 million to reflect
expenses incurred in connection with actions designed to reduce costs, improve
operating efficiencies and increase the overall profitability of the Company.
The special charge includes $0.7 million in consolidation of locations, $1.4
million in employee-related expenses and $2.2 million in reengineering,
consulting, legal and other expenses, as well as a $1.0 million write-off of
certain intangible assets. The Company began its reengineering process with a
$2.4 million special
36
<PAGE> 37
charge in the second quarter of 1996 and completed the special charge in the
fourth quarter of 1996 by recording an additional $2.9 million special charge.
Approximately $0.3 million in consolidation of locations, $0.5 million in
employee-related expenses, $1.7 million in reengineering and other, and $1.0
million in intangible assets have been paid or charged against the special
charge reserve at December 31, 1996. At December 31, 1996 a special charge
reserve of $1.8 million is included in other accrued liabilities. These
liabilities are expected to be paid or settled in 1997. See Item 8 - Note 15
to Notes to Consolidated Financial Statements, "Management Programs."
3. NET LABORATORY SERVICE REVENUE
FEE-FOR-SERVICE
Fee-for-service revenue represents the estimated net realizable amounts from
patients, third-party payors and others for laboratory services rendered. The
Company has agreements with third-party payors, hospitals, health maintenance
organizations and preferred provider organizations that provide for payments to
the Company at amounts different from its established rates. Revenue is
recorded net of contractual adjustments. Three of the third party payors
accounted for approximately 32%, 35% and 39% of the Company's consolidated net
revenues during 1996, 1995 and 1994, respectively. Accounts receivable are
recorded net of an allowance for contractual adjustments and doubtful accounts
of $8.2 million and $9.2 million at December 31, 1996 and 1995, respectively.
These allowances are subject to management estimates and actual amounts could
differ from these estimates.
MANAGED CARE
The Company has entered into fixed monthly fee agreements with automotive
companies, union and government benefit plans, and other entities to provide
laboratory services. These agreements are subject to cancellation by the
customer on 30 or 60 days written notice. Managed Care expenses are recognized
in the period in which the service is rendered. Two customers accounted for
62%, 57% and 60% of Managed Care revenue for 1996, 1995 and 1994, respectively.
One of these customers, Ford Motor Company, accounted for 11% of consolidated
net revenues in 1996; neither of these two customers individually contributed
more than 10% of consolidated net revenue in 1995 or 1994.
4. RESTRICTED CASH
The Company is required to maintain a $0.5 million cash balance in accordance
with state requirements for the managed care programs. The restricted cash is
included in cash equivalents on the accompanying balance sheets at December 31,
1996.
37
<PAGE> 38
5. PROPERTY AND EQUIPMENT
Property and equipment is as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
----- -----
<S> <C> <C>
Furniture and fixtures $ 1,519 $ 1,496
Machinery and equipment 6,388 5,407
Transportation equipment 257 351
Computer equipment 6,898 6,153
Leasehold improvements 2,354 1,247
------- -------
$17,416 $14,654
Less accumulated depreciation
and amortization 7,721 5,592
------- -------
Property and equipment, net $ 9,695 $ 9,062
======= =======
</TABLE>
6. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
---- ----
<S> <C> <C>
Goodwill $28,470 $28,470
Covenants not-to-compete 271 5,427
Customer lists 10,255 10,448
------- -------
$38,996 $44,345
Less accumulated amortization 5,449 7,555
------- -------
Intangible assets, net $33,547 $36,790
======= =======
</TABLE>
See Item 8 - Note 2 to Notes to Consolidated Financial Statements, " Special
Charges -- 1996" regarding the write-off of portions of covenants
not-to-compete.
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
---- ------
<S> <C> <C>
Convertible Subordinated Debentures
8.25% interest payable semi-annually $11,603 ---
Term bank loan at 8.5% at
December 31, 1995, 8.25% at
December 31, 1996 250 $4,125
Revolving line of credit
at 8.5% at December 31, 1995,
8.25% at December 31, 1996 5,475 8,975
Acquisition and assumed account
</TABLE>
38
<PAGE> 39
<TABLE>
<S> <C> <C>
obligations, non-interest bearing
interest rate imputed at rates ranging
from 7% - 9%, payable in monthly
installments due through 1998 145 805
Obligations under capital leases
(Note 8) 3,074 2,950
------- -------
$20,547 $16,855
Less amounts due within one year 1,534 4,412
------- -------
Amounts due after one year $19,013 $12,443
======= =======
</TABLE>
On February 20, 1996, the Company completed an offering of $12,000,000
principal amount of 8.25% Convertible Subordinated Debentures (the
"Debentures") due February 1, 2006. Interest is payable semi-annually on each
February 1 and August 1, commencing August 1, 1996. The Debentures are
convertible, at any time prior to maturity, unless previously redeemed or
repurchased, into shares of common stock of the Company at a conversion price
of $4.375 per share, subject to adjustment in certain events. The net proceeds
received by the Company from the sale of the Debentures was approximately $11
million after deducting offering fees and expenses. The Company used $2.5
million of the net proceeds to repay a $2.5 million note payable to a wholly
owned subsidiary, pursuant to a repayment plan with the State of Michigan
Insurance Bureau. The Company used the remainder of the net proceeds as
follows: $2.0 million was used to reduce the amount outstanding under the term
loan, $0.5 million was used to repay the amounts outstanding under the
supplement line of credit and the remainder was used to reduce the amount
outstanding on the revolving line of credit and for general working capital
purposes. During 1996, $397,000 of debentures were converted to common stock.
As of December 31, 1996, the Company had a credit facility which included a
term loan, with a remaining principal balance of $250,000 due on March 31,
1997, and a $5.5 million revolving line of credit, reducing to $5.3 million on
October 2, 1997. Borrowing levels permitted under the revolving line of credit
are based on accounts receivable balances. All available borrowings under the
revolving line of credit were utilized at December 31, 1996. The credit
facility requires the maintenance of certain financial ratios. Borrowings
under the Company's credit facility are collateralized by substantially all of
the Company's assets, except for assets of the Company's managed care
subsidiaries. The Company was not in compliance with these ratios at the end
of each quarter of 1996 and the bank either waived compliance with such
covenants or revised such covenants following the end of each such quarter. In
February 1997, the Company and the bank amended the credit facility to provide
for a maturity date on the revolving line of credit of January 5, 1998, revised
the financial covenants, and revised the interest rate to 0.5 above the prime
rate. In March 1997, the Company and the bank further modified the financial
covenants to require the Company to maintain a cash flow coverage ratio of
(2.50) to 1 through December 31, 1996, .70 to 1 through March 31, 1997, 1.50 to
1 through June 30, 1997, 1.75 to 1 through September 30, 1997 and 2.00 to 1
through December 31, 1997; funded debt (excluding the Debentures) to cash flow
of not greater than (.75) to 1 through December 31, 1996 and 3.0 to 1
thereafter; and a working capital ratio of 1.0 to 1.0. In addition, during
1996, the Company was required to maintain a $1.0 million restricted account
with the lender, all of which was withdrawn by the lender during 1996 to make
payments to the lender and interest payments on the Debenture. At December 31,
1996, the interest rate under the facility was 8.25%. The Company was in
compliance with the amended covenants as of December 31, 1996.
39
<PAGE> 40
Required annual principal payments of long-term debt at December 31, 1996, are
as follows (in thousands): 1997, $1,534; 1998, $6,367; 1999, $639; 2000, $330
and $74 in 2001.
40
<PAGE> 41
8. LEASES
The Company leases its main facility, other laboratory and warehouse
facilities, patient service center facilities and certain transportation and
laboratory equipment under operating lease agreements. The leases expire on
various dates through 2010. Rent expenses for operating leases were as follows
(in thousands): $1,856 for 1996, $1,766 for 1995 and $2,013 for 1994.
The Company's former principal laboratory was leased under a noncancelable
operating lease which expired on September 30, 1996 from a partnership whose
partners are stockholders and/or former officers of the Company. Rent expense
under this lease amounted to $333,000, $445,000 and $450,000 in 1996, 1995 and
1994, respectively. The Company's Lansing laboratory facility and warehouse
are leased under noncancelable operating leases with terms through June 2002
from partnerships whose partners include stockholders and former officers of
the Company. Rent expense under these leases amounted to $187,000, $177,000
and $492,000 in 1996, 1995 and 1994 respectively.
The Company also leases laboratory equipment under capital leases. Most of the
capital leases for the laboratory equipment contain one of the following
options: (a) the Company can, after the initial lease term, purchase the
equipment at amounts ranging from $1 to the then fair market value of the
property or (b) the Company can, at the end of the initial lease term, renew
the lease for a period ranging from one month to one year. Equipment held
under capital leases and included in machinery and equipment and computer
equipment in the balance sheet totaled $3.9 million and $3.6 million at
December 31, 1996 and 1995, respectively, net of accumulated depreciation.
Following is a schedule of future minimum rental payments under capital leases
and noncancelable operating leases with initial or remaining lease terms in
excess of one year from December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
Noncancelable
Capitalized Operating
Leases Leases
----------- -------------
<S> <C> <C>
1997 $1,378 $ 2,068
1998 967 1,398
1999 695 1,297
2000 346 1,294
2001 76 1,277
Thereafter -- 6,678
------ -------
Total minimum lease payments $3,462 $14,012
=======
Less amount representing
interest 388
------
Present value of net minimum
lease payments $3,074
======
</TABLE>
In addition, future noncancellable sublease rental income will be $0.5 million.
41
<PAGE> 42
9. UNUSUAL ITEMS
RESTRUCTURING
During 1994 the Company initiated a restructuring program designed to reduce
costs. The program included the consolidation of facilities into a new facility
located in Southfield, Michigan, termination of long-term consulting and
employment contracts entered into in connection with acquisitions, and
severance of employees.
A provision of $4.1 million ($2.7 million after taxes, or $.42 per share) for
the estimated costs associated with implementation of the program was charged
to 1994 operations. The provision included $2.8 million of facilities costs,
including lease obligations and the write-off of leasehold improvements for
vacated facilities, $0.9 million related to the termination of long-term
consulting and employment contracts entered into in connection with
acquisitions, and $0.4 million related to the severance of approximately 150
full time equivalent employees as a result of the consolidation of laboratory
and administrative functions. Amounts paid or charged to the restructuring
accrual were $.7 million (this amount was accrued at December 31, 1995) in
1996, $1.6 million in 1995 and $1.8 million in 1994, relating primarily to
employee severance and facility charges.
SPECIAL CHARGE - 1994
During 1994 the Company recorded a special charge of $287,000 ($189,000 after
taxes, or $.03 per share) related to expenses incurred in connection with a
review of strategic alternatives undertaken by the Company.
10. EXTRAORDINARY ITEM, LOSS ON EARLY EXTINGUISHMENT OF DEBT
In connection with obtaining the new credit facility in 1994, the Company
incurred a non-cash charge of $253,000 due to the write-off of financing costs
associated with the replaced facility. This charge is presented as an
extraordinary item, net of an income tax benefit of $86,000, in the
accompanying consolidated statement of operations.
11. INCOME TAXES
The income tax benefits consists of (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current $( 345) $(894) $ 7
Deferred (1,122) 617 (773)
------- ----- -----
$(1,467) $(277) $(766)
======= ===== ======
</TABLE>
42
<PAGE> 43
Deferred income tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
----- -----
<S> <C> <C>
Deferred tax assets:
Accounts receivable allowance $ 826 $ 457
Accrued benefits --- 131
Restructuring accrual --- 194
Special Charge accrual 609 --
Net operating loss carryforward 2,811 --
Other, net 295 740
------ ----
Total deferred tax assets $4,541 $ 1,522
------ ------
Deferred tax liabilities:
Property and equipment $ 935 $ 977
Intangible assets 1,114 1,303
Other, net 358 364
------ -----
Total deferred tax liabilities $2,407 $ 2,644
------ ------
Net Deferred Taxes 2,134 (1,122)
Less: Valuation allowance (2,134) -0-
------- ------
Adjusted Deferred Taxes $ -0- $(1,122)
======= ========
</TABLE>
The Company established a 100% valuation allowance against the net deferred tax
assets in 1996, based on uncertainty surrounding the expected realization of
this asset. The Company will recognize the deferred tax asset within its
income tax provision as income is earned and the benefits are realized.
A reconciliation of the statutory federal income tax rate to the effective rate
is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory rate (benefit) (34.0%) (34.0%) (34.0%)
Valuation allowance adjustment 23.2 -- --
Goodwill amortization 1.2 8.3 3.9
Other (6.3) 3.7 1.9
----- ----- -----
Effective rate (15.9%) (22.0%) (28.2%)
===== ===== =====
</TABLE>
The Company has a net operating loss carryforward of $8.3 million which expires
in 2011.
12. STOCK OPTIONS
A total of 1,570,000 shares of common stock are reserved for issuance under the
1992 Stock Option Plan and Directors Stock Option Plan (the "Plans"). The
exercise price of the options granted under the Plans must equal at least the
fair market value of the Company's common stock on the date of the grant. The
options granted under the Plans generally vest annually at 25% on each of the
first four anniversaries of the grant date, and expire ten years after the
grant date.
43
<PAGE> 44
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123 - "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
Plans. If the Company had elected to recognize compensation cost based on the
fair value of the options granted at grant date as prescribed by SFAS No. 123,
net loss and loss per share amounts would have been the pro forma amounts
indicated below in thousands (except per share amounts):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Net loss - as reported $ (7,751) $ (981)
Net loss - pro forma (8,251) (1,116)
Net loss per share - as reported ( 1.20) (0.15)
Net loss per share - pro forma ( 1.28) (0.17)
</TABLE>
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for 1996 and 1995, respectively: dividend yield of 0% for both
years; expected volatility of 60% and 54%; risk-free interest rate of 5.6% and
5.4%; and expected lives of 2.5 years and 2.5 years.
The effects of applying SFAS No. 123 in the above pro forma disclosure are not
necessarily indicative of future amounts. SFAS No. 123 does not apply to
options granted prior to 1995, and the Company anticipates that options will be
granted in future years.
A summary of the status of the Company's stock options is as follows:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding at January 1, 1995 689,449 $ 6.94
Granted 200,000 5.20
Expired (30,500) (7.05)
Exercised (30,426) (3.62)
--------- -----
Outstanding at December 31, 1995 828,523 6.64
Granted 735,200 3.77
Expired (128,000) (11.93)
--------- -----
Outstanding at December 31, 1996 1,435,723 4.70
--------- -----
</TABLE>
The weighted-average grant date fair value of options during 1996 and 1995 was
approximately $1.24 and $1.43, respectively.
Options exercisable at year-end, together with the weighted-average exercise
price, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- -------------------------
Shares Price Shares Price
-------- ------- ------- --------
<S> <C> <C> <C>
456,523 $5.52 343,147 $5.12
</TABLE>
44
<PAGE> 45
The following table summarizes information regarding stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Range of Number Weighted Average Options
Exercise Prices Outstanding Remaining Contractual Life Exercisable
- --------------- ----------- -------------------------- -----------
<S> <C> <C> <C>
$ 2.82 - 3.19 206,523 6 years 206,523
$ 3.36 - 4.95 919,200 8 years 97,250
$ 5.47 - 12.28 310,000 7 years 152,750
--------- -------
1,435,723 456,523
========= =======
</TABLE>
In addition to the above, the Company has a warrant outstanding held by a
shareholder that entitles the holder to purchase 83,117 shares of common stock
at $3.19 per share. The warrant, which may be exercised at any time in whole
or in part, expires in the year 2002.
In 1995, the Company adopted an Employee Stock Purchase Plan. Substantially
all full-time employees are eligible to participate in the plan and are granted
the opportunity to purchase common stock at 85% of market value, as defined. A
total of 750,000 shares of common stock have been reserved for issuance under
the plan. During 1996 approximately 74,000 shares were purchased under the
plan; no purchases occurred during 1995. As a result of the purchases during
1996, the fair value of the benefits received by participating employees was
approximately $40,000.
13. RELATED PARTY TRANSACTIONS
In July 1993, the Company entered into an agreement with a professional
corporation to purchase the pathology and certain other services of four
pathologists through June 1996. A former officer of the Company was a
shareholder of the professional corporation through mid-1994. Under the
agreement, the Company is obligated to pay annually the greater of $80,000 per
pathologist, or an amount calculated based on a percentage of net revenues
collected by the Company related to pathology services provided under the
agreement. The Company incurred $459,000, $510,000 and $250,000 of expenses
during 1996, 1995, and 1994 respectively, to the professional corporation.
In August 1994, the Company entered into a settlement arrangement with WAJ2,
Inc. ("WAJ2"), John Kateley, Jr. and Wilford Maldonado pursuant to which a
promissory note due in 1996, which had been issued by the Company to WAJ2 in
connection with the acquisition of WAJ2's business, was canceled. Payments
totaling $117,875 were made in 1994 under such note and $530,438 remained to be
paid thereunder prior to its cancellation. In addition, the Company retained
$89,292 collected by the Company with respect to certain accounts receivable
which had been retained by WAJ2, all surviving contingent payment obligations
of the Company under the acquisition agreement were terminated and the
remaining escrow funds from the acquisition were disbursed. The Company
received $100,000 of these escrowed funds in the form of Company Common Stock
and WAJ2 received $406,435 in cash. Also in connection with the settlement,
Dr. Maldonado's employment agreement was canceled with no further payment due
from the Company other than for insurance premiums for one year (not to exceed
$6,000), his non-competition and option agreements were modified to permit him
to obtain certain employment and to permit exercise of existing stock options
until September 1994, and Dr. Kateley's employment agreement was modified to
specify certain performance criteria on which his
45
<PAGE> 46
bonus would be based. Dr. Maldonado and Dr. Kateley, former executive officers
of the Company, own 75.1% and 11.5% of WAJ2, respectively.
In connection with the acquisition of MML, the Company entered into an
agreement with an affiliate to purchase management advisory and consulting
services at an annual amount of $140,000. This agreement was terminated on
December 31, 1992. At December 31, 1996 and 1995 an unpaid balance of $210,000
for services rendered under such agreement is included in other accrued
liabilities. In addition, included in other accrued liabilities at December
31, 1996 and 1995 is approximately $185,000 owed to the affiliate, primarily
related to expenses paid by the affiliate on behalf of the Company to a third
party.
14. COMMITMENTS AND CONTINGENCIES
The Company has employment contracts with certain of its officers and
stockholders for remaining terms of up to three years providing for
compensation, excluding performance bonuses, aggregating $1.6 million at
December 31, 1996.
The Company has from time to time experienced compliance reviews, including
reviews of its billing practices, by its third-party payors. The Company has
not yet received final determination notices or decision letters relating to
compliance reviews conducted by two of its largest third-party payors. The
ultimate effect, if any, of these compliance reviews can not be determined at
this time and no liability has been accrued by the Company.
In connection with the acquisition of MML, the Company has agreed to indemnify
MML and its shareholders (including certain officers, directors and
shareholders of the Company) under certain circumstances for income tax
liabilities arising from such acquisition and indemnification. On July 13,
1995, MML and its shareholders received notices of deficiency from the Internal
Revenue Service (IRS). The IRS deficiency assessments relating to the
acquisition total approximately $4.9 million, excluding interest and penalties
which could be assessed. In October 1995, the Company (pursuant to its rights
under the related acquisition agreement) filed petitions with the United States
Tax Court contesting the deficiency. The Company believes that the acquisition
has been treated properly for federal income tax purposes and intends to
vigorously defend its position.
The Company has received a thirty-day demand letter from the IRS proposing
adjustments to the Company's federal income taxes for the years 1991 - 1994
totaling $3.3 million. The proposed adjustments related to the timing of
certain bad debt deductions and claim expense accruals and the deductibility of
certain sign on bonus and non-compete payments made in connection with the MML
acquisition. The Company has filed a written protest with the IRS appeals
office regarding this matter.
There can be no assurance that the Company will resolve these disputes with the
IRS in a manner favorable to the Company. The failure to resolve these
disputes with the IRS in a manner favorable to the Company would result in a
current period charge to earnings and would have a material adverse effect on
the business, financial condition, including working capital, and results of
operations of the Company. While management believes its liability relating to
these matters, if any, will not be material to the Company, the ultimate
effect, if any, cannot be determined at this time. The foregoing statement may
be a "forward looking statement" within the meaning of the Securities Exchange
Act of 1934. The outcome of these disputes with the IRS involves a number
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<PAGE> 47
of uncertainties, including those inherent in interpreting and applying
Internal Revenue Code and other federal income tax authority and precedent to
actual transactions, those relating to the valuation of various assets at the
time of the acquisition and those inherent in pursuing any legal action of the
type instituted by the Company. The Company has not accrued a liability
relating to the deficiency assessments or proposed tax adjustments.
15. MANAGEMENT PROGRAMS.
Beginning in 1996, the Company initiated a series of revenue enhancement,
reengineering and cost reduction programs designed to increase revenues, reduce
expenses and improve overall profitability in both its laboratory
fee-for-service and managed care businesses. In its laboratory business, the
Company has implemented reengineering and cost reduction programs designed to
reduce costs while increasing service levels. These programs include process
engineering and TQM processes to improve productivity, quality and service,
reduce costs and contribute to customer retention. The Company has also
implemented programs to reduce laboratory personnel and facility costs.
Revenue enhancement efforts implemented include an expanded sales force and a
renewed focus on the retention of profitable accounts. Reengineering and cost
reduction programs implemented to date are expected to eliminate over $6
million of annualized operating costs. In its managed care business, the
Company is developing new managed care products to complement its laboratory
programs, such as the home medical services program introduced in 1995 and the
imaging services program currently under development, as a means of increasing
revenues from its existing customers and attracting new customers. The Company
also plans to expand its business geographically through the establishment of
managed care sales offices in a number of states in addition to Michigan. The
foregoing statements regarding the programs implemented by the Company may be
"forward looking statements" within the meaning of the Securities Exchange Act
of 1934. The ability of the Company to successfully execute the programs
described above involves a number of uncertainties, including, but not limited
to, the degree to which the Company's revenue enhancement initiatives will
generate new revenues, whether any such new revenues will be at levels required
to offset decreases in revenues, particularly if third party reimbursement
levels continue to decrease or the Company continues to experience declines in
patient visits or fee-for-service revenue per patient visit, the impact of
reengineering/cost reduction efforts on revenues, potential offsetting
increases in operating expenses, variations in cost savings from, and timing
of, the Company's reengineering/cost reduction efforts from those anticipated,
the impact on revenues and expenses of governmental and third-party payor
requirements and reimbursement levels, the ability of the Company to develop
new managed care products, the level of interest of existing and potential new
customers may have in managed care products offered by the Company, the ability
of the Company to identify and satisfy market needs, the impact on the Company
of recent and continuing changes in the health care industry, and the
competitive nature of the laboratory and managed care industries.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On December 31, 1996, the Audit Committee of the Board of Directors of
Universal Standard Medical Laboratories, Inc. (the "Company") determined not to
retain the firm of Coopers & Lybrand LLP to audit the Company's financial
statements for the year ended December 31, 1996. Coopers & Lybrand LLP had
been the Company's principal accountants for the purpose of auditing its
financial statements since the organization of the Company. On December 31,
1996, the Company engaged the accounting firm of BDO Seidman, LLP as its
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<PAGE> 48
principal accountants to audit the Company's financial statements for the
fiscal year ending December 31, 1996. The information required by Item 304 of
Regulation S-K was previously reported in a Current Report on Form 8-K dated
January 4, 1996. There were no disagreements with the accountants reported in
such Form 8-K.
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<PAGE> 49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information is contained under the captions "Nominees For Election
As Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's Proxy Statement and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information is contained under the caption "Executive Compensation"
(excluding the Compensation Committee Report, the stock performance
graph and the information under the subheading "Option Repricing")
in the Company's Proxy Statement and is incorporated herein by
reference.
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information is contained under the caption "Information on
Securities" in the Company's Proxy Statement and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information is contained under the caption "Committee Interlocks
and Certain Transactions" in the Company's Proxy Statement and is
incorporated herein by reference.
49
<PAGE> 50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) A list of the financial statements required to be filed as part
of this Form 10-K is included under the heading "Item 8.
Financial Statements and Supplementary Data" in this Form 10-K
and incorporated herein by reference.
(2) The financial statement schedule required to be filed as part of
this Form 10-K is included under the heading "Item 8. Financial
Statements and Supplementary Data" in this Form 10-K and
incorporated herein by reference. Such schedule is filed with
this Form 10-K.
(3) A list of the exhibits required to be filed as part of this Form
10-K is included under the heading "Exhibit Index" in this Form
10-K and incorporated herein by reference. The list identifies
each management contract and compensatory plan or arrangement
required to be filed as an exhibit hereto.
(b) On January 4, 1997, the Company filed a Current Report on Form 8-K
which disclosed information under Item 4.
(c) See "Exhibit Index" in this Form 10-K for a description of the
exhibits filed with this Form 10-K.
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<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereto duly authorized.
UNIVERSAL STANDARD MEDICAL
LABORATORIES, INC.
By: /s/ Eugene E. Jennings
-------------------------------------
Eugene E. Jennings
President and Chief Executive Officer
Dated March 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated as of March 25, 1997.
/s/Eugene E. Jennings President, Chief Executive
- ----------------------------------- Officer and Director (principal
Eugene E. Jennings executive officer)
/s/ Alan S. Ker Vice President, Finance,
- ----------------------------------- Chief Financial Officer and
Alan S. Ker Treasurer (principal financial
and accounting officer)
/s/ Eduardo Bohorquez, Ph.D. Director
- -----------------------------------
Eduardo Bohorquez, Ph.D.
/s/ Anthony A. Bonelli Director
- -----------------------------------
Anthony A. Bonelli
Director
- -----------------------------------
Robert P. DeCresce, M.D.
/s/ Thomas R. Donahue Director
- -----------------------------------
Thomas R. Donahue
/s/ Thomas W. Gorman Director
- -----------------------------------
Thomas W. Gorman
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<PAGE> 52
/s/ P. Thomas Hirsch Director
- -----------------------------------
P. Thomas Hirsch
/s/ Joseph J. Vadapalas Director
- -----------------------------------
Joseph J. Vadapalas
/s/ John T. Watkins Director
- -----------------------------------
John T. Watkins
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<PAGE> 53
SCHEDULE II
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C - ADDITIONS COLUMN D COLUMN E
- -------- ------------ ----------------------------- ----------- ---------
Balance Charges to Charges to Additions Balance
at Beginning Costs and Other Accounts (Deductions) at End
Description of Period Expenses Describe Describe(A) of Period
- ----------- ------------ ---------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for contractual
adjustments and doubtful
accounts:
Year Ended December 31,:
1996 $9,239 $4,141 --- ($5,223) $8,157
1995 9,517 4,489 --- ( 4,767) 9,239
1994 8,820 2,879 --- ( 2,182) 9,517
</TABLE>
__________________________________
(A) Write-offs charged to reserve
53
<PAGE> 54
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------- -----------
<S> <C>
3.1(a) Amended and Restated Articles of Incorporation of the Company (2)
3.2(a) Amended and Restated By-Laws of the Company (2)
4.3(a) Amended and Restated Business Loan Agreement, dated
January 17, 1996, between the Company and Michigan National
Bank, together with related addenda dated January 17, 1996 and
related promissory notes dated January 17, 1996 (11)
4.3 (b) Modification, dated February 13, 1996, of Business Loan Agreement
and Waiver of Cash Flow Coverage Covenant Default between
the Company and Michigan National Bank (12)
4.3 (b)(1) Second Amended and Restated Business Loan Agreement between
Michigan National Bank and the Company, dated February 6, 1997, and
related promissory notes dated February 6, 1997 (1)
4.3 (b)(2) Modification to Second Amended and Restated Business Loan
Agreement and related documents dated February 6, 1997 (1)
4.3 (c) Letter Agreement, dated March 28, 1996, between the
Company and Michigan National Bank (12)
4.3(d) Amendment of Business Loan Agreement between Michigan National
Bank and the Company dated May 14, 1996 (13)
4.3(e) Addendum to Business Loan Agreement between Michigan National
Bank and the Company dated May 14, 1996 (13)
4.3(f) Promissory Note between Michigan National Bank and the Company
dated May 14, 1996 (13)
4.3(g) Waiver of Loan Agreement Covenants between Michigan National
Bank and the Company dated August 8, 1996 (13)
4.3(h) Waiver of Loan Agreement Covenants between Michigan National
Bank and the Company dated November 6, 1996 (14)
4.3 (i) Waiver of Loan Agreement Covenants between Michigan National
Bank and the Company dated February 6, 1997 (1)
4.6 Indenture, dated February 20, 1996, relating to 8.25%
Convertible Subordinated Debentures due February 1, 2006,
</TABLE>
54
<PAGE> 55
<TABLE>
<S> <C>
including form of Convertible Subordinated Debenture, table of
contents and cross reference sheet (12)
Other instruments, notes or extracts from agreements defining the rights
of holders of long-term debt of the Company or its subsidiaries have not
been filed because (i) in each case the total amount of long-term debt
permitted thereunder does not exceed 10% of the Company's consolidated
assets, and (ii) the Company hereby agrees that it will furnish such
instruments, notes and extracts to the Securities and Exchange Commission
upon its request.
10.1 Agreement and Plan of Merger and Recapitalization dated as of August 31,
1992 (2)
10.4(b) Asset Purchase Agreement, dated as of March 2, 1993, among Michigan
Clinical Laboratory, Buckles Management Company, Beecher-Ballenger
Services Clinical Laboratory, Inc., David Buckles, Max Dubrinsky, Genesys
Health System and the Company (4)
10.5(a)* Employment Agreement, dated June 28, 1991, by and between the Company
and John T. Watkins (2)
10.5(b)(1)* Form of Amendment to the Watkins Employment Agreement (2)
10.5(b)(2)* Second Amendment dated as of February 17, 1993 to Employment
Agreement dated as of June 28, 1991 between the Company and John T.
Watkins (4)
10.5(b)(3)* Third Amendment dated as of September 1, 1994 to Employment Agreement
dated as of June 28, 1991 between the Company and John T. Watkins (6)
10.5(b)(4)* Fourth Amendment dated as of September 30, 1994 to Employment
Agreement dated as of June 28, 1991 between the Company and John T.
Watkins (7)
10.5(b)(5)* Fifth Amendment dated as of March 28, 1996 to Employment
Agreement dated as of June 28, 1991 between the Company and
John T. Watkins (12)
10.5(c)* Employment Agreement, dated June 28, 1991, by and between the Company
and Perry C. McClung (2)
10.5(c)(1)* Form of Amendment to the McClung Employment Agreement (2)
10.5(c)(2)* Second Amendment dated as of September 1, 1994 to Employment
Agreement dated as of June 28, 1991 between the Company and Perry C.
</TABLE>
55
<PAGE> 56
<TABLE>
<S> <C>
McClung (6)
10.5(c)(3)* Third Amendment dated as of September 30, 1994 to Employment
Agreement dated as of June 28, 1991 between the Company and Perry C.
McClung (7)
10.5(c)(4)* Employment Agreement, dated June 28, 1996, by and between the
Company and Perry C. McClung. (13)
10.5(d)* Employment Agreement, dated July 30, 1991, by and among the Company
and Alan S. Ker (2)
10.5(d)(1)* Form of Amendment to the Ker Employment Agreement (2)
10.5(d)(2)* Fifth Amendment dated as of September 30, 1994 to Employment
Agreement dated as of July 30, 1991 between the Company and Alan
Ker (7)
10.5(e)* 1994 - 1996 Executive Compensation Plan (6)
10.5(f)* Employment Agreement dated as of September 11, 1995 between
Lou Gorga and the Company (10)
10.5(g)* Employment Agreement dated as of January 1, 1996
between Thomas Marquard and the Company (12)
10.5(h)* Employment Agreements dated as of March 12, 1996 between
Eugene Jennings and the Company, with exhibits (12)
10.6(a)* 1992 Stock Option Plan, as Amended and Restated October 24, 1996 (14)
10.6(b)* 1994 Performance Stock Option - Executive Officer (7)
10.6(b)(1)* First Amendment to 1994 Performance Stock Option
Agreement with John Watkins (12)
10.6(c)* Incentive Stock Option - Management (7)
10.6(d)* Incentive Stock Option - Executive Officers, as amended (12)
10.6(e)* Incentive Stock Option - General Form (7)
10.6(e)(1)* Incentive Stock Option Award Program (14)
10.6(f)* Employee Stock Purchase Plan (8)
</TABLE>
56
<PAGE> 57
<TABLE>
<S> <C>
10.6(g)* First Amendment to Employee Stock Purchase Plan (9)
10.6(g)(1)* Employee Stock Purchase Plan, as Amended and Restated October 24,
1996 (14)
10.6(h)* First Amendment of 1994 Performance Stock Option - Executive
Officers Agreement by and between Perry C. McClung and the
Company (13)
10.6(i)* Stock Option Agreements by and between Perry C. McClung and the
Company, dated November 5, 1992, August 2, 1993, December 6, 1994
and December 5, 1995 and related amendments thereto (13)
10.6(j)* First Amendment to 1994 Performance Stock Option - Executive
Officers Agreement by and between Alan S. Ker and the Company (13)
10.6(k)* Stock Option Agreements by and between Alan S. Ker and the Company,
dated November 5, 1992, August 2, 1993, December 6, 1994 and
December 5, 1995 and related amendments thereto (13)
10.6(l)* First Amendment to Incentive Stock Option - Executive Officers
Agreement, dated September 11, 1995, by and between Lou Gorga and
the Company (13)
10.6(m)* Stock Option Agreement, dated December 5, 1995, by and between Lou
Gorga and the Company and related amendments thereto. (13)
10.7 Stockholders Agreement dated June 28, 1991, by and among
Elan Holdings Corp. and certain shareholders (2)
10.8 Registration Rights Agreement among Elan Holdings Corp.
and certain shareholders (2)
10.9 Stock Purchase Warrant dated June 18, 1992 granted to
WestSphere Funding, Ltd. (2)
10.10* USML, Inc. Tax Deferred Savings Plan and Trust Agreement
of the Company (2)
10.10(a)* Amendment No. 1 to the Equitable Life Assurance Society of
the United States Defined Contribution Plan and Trust Basic Plan
Document No. 03. (1)
10.10(b)* Second Amendment To The USML Tax Deferred Savings And Trust Plan (1)
10.10(c)* Third Amendment To The USML, Inc. Tax Deferred Savings Plan (1)
</TABLE>
57
<PAGE> 58
<TABLE>
<S> <C>
10.10(d)* Fourth Amendment to the USML, Inc. Tax Deferred Savings Plan and
Trust Agreement (1)
10.11(a) Lease Agreement by and between Brace Place Associates
and the Company (formerly the Predecessor) (2)
10.11(b) Form of Lease Agreements by and between WRJ Company,
JWJ Company and the Company (formerly LCM/Universal
Standard, Inc.) (2)
10.11(c)(1) Lease Agreement dated as of January 1, 1996 between Mid-Michigan
Regional Medical Center-Clare and the Company (13)
10.11(d) Lease Agreement dated as of November 18, 1994 between
Jan-Jo Development Corporation and the Company (7)
10.11(d)(1) First Amendment to Lease, dated as of April 3, 1995, between
Jan-Jo Development Corporation and the Company (11)
10.11(d)(2) Second Amendment to Lease, dated October 19, 1995, between
Jan-Jo Development Corporation and the Company (11)
10.11(d)(3) Third Amendment to Lease, dated November 14, 1995, between
Jan-Jo Development Corporation and the Company (11)
10.11(d)(4) Acknowledgment Agreement to Lease, dated November 16,
1996, between Jan-Jo Development Corporation, the Company
and Wispark Corporation (11)
10.11(d)(5) Fourth Amendment to Lease, dated December 15, 1995, between
Jan-Jo Development Corporation and the Company (11)
10.14 Management Advisory and Consulting Services Agreement
dated as of June 28, 1991 between WestSphere Capital
Associates, L.P. and the Company (2)
10.18* Non-Qualified Stock Option Agreement, dated June 20, 1992,
with Marvin Eisner (3)
10.20* Non-Qualified Stock Option Agreement, dated May 31, 1992,
with Alan Ker (3)
10.21* Non-Qualified Stock Option Agreement, dated May 31, 1992,
with Thomas Marquard (3)
10.22* Non-Qualified Stock Option Agreement, dated February 13, 1992,
with Robert DeCresce (3)
</TABLE>
58
<PAGE> 59
<TABLE>
<S> <C>
10.23* Non-Qualified Stock Option Agreement, dated June 24, 1992,
with Anthony Bonelli (3)
10.24* Non-Qualified Stock Option Agreement, dated April 13, 1993,
with Robert DeCresce, M.D. (5)
10.25* Non-Qualified Stock Option Agreement, dated April 13, 1993,
with Anthony Bonelli (5)
10.26* Directors Stock Option Plan (7)
10.26(a)* Directors Stock Option Plan, as Amended and Restated October 24,
1996 (14)
10.27* Executive and Key Manager Compensation Plan (14)
11.1 Computation of Consolidated Net Income Per Common Share (1)
16.1 Letter from Coopers & Lybrand (15)
21.1 Subsidiaries of the Company (1)
23.1 Consent of Coopers & Lybrand, L.L.P. (1)
23.2 Consent of BDO Seidman, L.L.P. (1)
27 Financial Data Schedule (EDGAR version only) (1)
</TABLE>
* Management contract or compensatory plan or arrangement.
_____________________________________
(1) Filed herewith.
(2) Incorporated by reference from the Company's Registration Statement on
Form S-1, No. 33-49092, as amended.
(3) Incorporated by reference from the Company's 1992 Annual Report on Form
10-K.
(4) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the Fiscal Quarter ended March 31, 1993.
(5) Incorporated by reference from the Company's 1993 Annual Report on Form
10-K.
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<PAGE> 60
(6) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the Fiscal Quarter ended September 30, 1994.
(7) Incorporated by reference from the Company's 1994 Annual Report on Form
10-K.
(8) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the Fiscal Quarter ended March 31, 1995.
(9) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the Fiscal Quarter ended June 30, 1995.
(10) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the Fiscal Quarter ended September 30, 1995.
(11) Incorporated by reference from the Company's Registration Statement on
Form S-2, No. 33-80187, as amended.
(12) Incorporated by reference from the Company's 1995 Annual Report on Form
10-K.
(13) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the Fiscal Quarter ended June 30, 1996.
(14) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the Fiscal Quarter ended September 30, 1996.
(15) Incorporated by reference from the Company's Current Report on Form 8-K
filed January 4, 1997.
60
<PAGE> 1
EXHIBIT 4.3(b)(1)
SECOND AMENDED AND RESTATED BUSINESS LOAN AGREEMENT
The undersigned UNIVERSAL STANDARD MEDICAL LABORATORIES, INC., a
Michigan corporation, with its chief executive offices located at 26500
Northwestern Highway, Southfield, Ml 48037 (the "Borrower"), has requested from
MICHIGAN NATIONAL BANK, a national banking association, of 27777 Inkster Road,
Farmington Hills, MI 48333-9065 (the "Bank"), and Bank agrees to make, or has
made, the loan(s) described below (the "Loans") under the terms and conditions
set forth in this Business Loan Agreement ("Agreement").
This Second Amended and Restated Business Loan Agreement amends and
restates in its entirety, that certain Amended and Restated Business Loan
Agreement dated January 17, 1996, as subsequently amended by letter agreements
on February 13, 1996, March 28, 1996, August 8, 1996 and November 8, 1996 and
by an Amendment to Business Loan Agreement dated May 14, 1996.
I. LOANS.
The following Loans and any amendments, extensions, renewals or
refinancings thereof are subject to this Agreement:
<TABLE>
<CAPTION>
TYPE OF INTEREST AMENDED ORIGINAL ORIGINAL ORIGINAL
LOAN RATE MATURITY NOTE MATURITY LOAN
DATE AMOUNT DATE DATE
<S> <C> <C> <C> <C> <C>
A. Line of Credit * 1/5/98 $5,500,000.00 7/26/98 1/17/96
B. Term Loan ** --- $6,000,000.00 6/30/98 1/17/96
</TABLE>
*Interest shall be variable at the MNB Prime Rate plus one-half
percent, on October 2, 1997 the Line of Credit shall be reduced to
$5,300,000.00
**Interest shall be variable at the MNB Prime plus or minus the
Applicable Margin.
Purpose of Loans listed above:
A. Working capital liquidity and payoff outstanding debt to Fleet Bank.
B. Payoff existing term loan to Fleet Bank.
II. BORROWER'S REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants to Bank, all of which representations
and warranties shall be continuing until all of the Indebtedness is
fully paid to Bank and Borrower's obligations
<PAGE> 2
under this Agreement and the Related Documents are fully performed, as
follows:
A. Borrower's Existence and Authority. Borrower is a Michigan
corporation, and the Person executing this Agreement has full power
and complete authority to execute this Agreement and all Related
Documents.
B. Validity of Indebtedness and Agreement. Borrower's Indebtedness to
Bank, this Agreement, and all Related Documents are valid, binding
upon, and fully enforceable against Borrower in accordance with their
respective terms.
C. Nature of Borrower's Business. The nature of Borrower's business is
to provide clinical laboratory services.
D. Financial Information. All financial information provided to Bank has
been prepared and will continue to be prepared in accordance with
generally accepted accounting principles ("GAAP"), consistently
applied, and fully and fairly present the financial condition of
Borrower. There has been no material adverse change in Borrower's
business, Property, or financial condition since the date of
Borrower's latest Financial Statements provided to Bank.
E. Title and Encumbrances. Borrower owns and has good title to all of
its Property, and there are no liens or encumbrances on any of the
Property except as have been disclosed to Bank in writing prior to the
date of this Agreement and as are identified and listed in an
attachment to this Agreement (the "Permitted Encumbrances") and as
permitted under Section IV.B. of this Agreement. Borrower agrees that
Borrower shall not obtain further loans, leases, or extensions of
credit from any Person identified in the Permitted Encumbrances list
or otherwise without Bank's prior written consent; provided however,
that Borrower may obtain financing secured by purchase money security
interests in equipment or under capitalized leases without Bank's the
prior written consent.
F. No Litigation. Except as disclosed by Borrower to Bank in writing
prior to the date of the execution and delivery of this Second Amended
and Restated Business Loan Agreement, there are no suits or
proceedings pending before any court, government agency, arbitration
panel, or administrative tribunal, or, to Borrower's knowledge,
threatened against Borrower, which may result in any material adverse
chance in the business, Property or financial condition of Borrower.
G. No Misrepresentations. All representations and warranties in this
Agreement and the Related Documents are true and correct in all
material respects and no material fact necessary to make such
representations and warranties no misleading has been omitted.
H. Employee Benefit Plans. Borrower has not incurred any material
accumulated funding deficiency within the meaning of ERISA, has not
incurred any material liability to the
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PBGC in connection with any employee benefit plan established or
maintained by Borrower, and no reportable event or prohibited
transaction, as defined in ERISA, has occurred with respect to such
plans.
I. Environmental Compliance. To the best of its knowledge, Borrower is
in full compliance and conformity with all applicable Environmental
Laws and Borrower agrees to indemnify and hold Bank harmless from all
costs and expenses, including reasonable attorney fees, incurred by
Bank related to any Borrower violation of any Environmental Laws.
III. AFFIRMATIVE COVENANTS.
As of the date of this Agreement and continuing until Borrower's
Obligations under this Agreement and the Related Documents are fully
performed and the Indebtedness is fully repaid to Bank, Borrower shall
at all times:
A. Financial Requirements.
1. Maintain a Cash Flow Coverage Ratio at the end of each of the
following calendar quarters, of:
(a) 10/1/96 through.12/31/96 - .54 to 1
(b) 1/1/97 through 3/31/97 - .95 to 1
(c) 4/1/97 through 6/30/97 - 1.50 to 1
(d) 7/1/97 through 9/30/97 - 1.75 to 1
(e) 10/1/97 through 12/31/97 - 2.00 to 1
2 . At the end of each of the above calendar quarters, Borrower's
total funded debt excluding debt subordinated to the Bank and
approximately $20,000 of quarterly Seller note interest
payments to cash flow shall at no time be greater than 3.0 to
1. This ratio shall be calculated with a numerator equal to
total funded debt and a denominator equal to EBITDA for the
quarter multiplied by 4.
3. Maintain a Current Ratio of not less than 1.50 to 1 .
All financial requirements described in this Section III.A. shall be
calculated in accordance with GAAP.
B. Financial Statements.
1. Within one hundred twenty (120) days after the end of each
fiscal year, provide Bank, in form acceptable to Bank, audited
Financial Statements prepared and certified by a certified
public accountant reasonably acceptable to Bank.
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2. Within twenty-five (25) days after the end of each month,
provide Bank, in form acceptable to Bank, management prepared
Financial Statements for the prior month.
3. Provide Bank by December 15, 1996, with updated consolidating
management projections for calendar year 1997, which
projections shall include a balance sheet, income statement,
cash flow statement and covenant compliance projections.
4. Promptly provide Bank with each of Borrower's reports filed on
Form 10-K or 10-Q at the time said reports are filed.
5. Promptly provide Bank such other information and reports
concerning Borrower's business, Property, and financial
condition as are provided to Borrower's owners or as Bank
shall request, and permit Bank to inspect, confirm, and copy
Borrower's books and records, following reasonable advance
notice, at any time during Borrower's normal business hours.
C. Notice of Adverse Events. Promptly notify Bank in writing of any
litigation, governmental proceeding, default or any other occurrence
which is reasonably likely to have a material adverse effect on
Borrower's business, Property or financial condition.
D. Maintain Business Existence and Operations. Do all things necessary
to keep in full force and effect Borrower's corporate, partnership,
proprietorship, trust, or other existence, as the case may be, and to
continue its business described in Paragraph II C. as presently
conducted. Until the Indebtedness is fully repaid to Bank, Borrower
shall not change its corporate, partnership, proprietorship, trust, or
other existence, nor sell or merge Borrower's business, in whole or in
part, to or with any other Person, without the Bank's prior written
consent.
E. Insurance. Maintain adequate fire and extended risk coverage,
business interruption, workers disability compensation, public
liability, environmental, flood, and such other insurance coverages as
may be required by law or as may reasonably be required by Bank. All
insurance policies shall be in such amounts, upon such terms, in form,
and carried with such insurers, as are acceptable to Bank. Borrower
shall provide evidence satisfactory to Bank of all insurance coverages
and that the policies are in full force and effect and for all
insurance coverages upon any Property which is Collateral, the
insurance policy shall be endorsed to provide Bank with a standard
loss payable clause insuring Bank regardless of any act, fault or
neglect of Borrower, with not less than thirty (30) days advance
written notice to Bank by the insurer of any cancellation or
modification of coverage (CF12181185). Any failure by Borrower to
maintain insurance as provided in this Agreement shall be an Event of
Default and Bank may in its discretion obtain insurance, without
obligation to do so, with such coverages and in such amounts as Bank
deems advisable to protect Bank's interest, and all amounts so
expended by Bank shall be added to the Indebtedness or shall be
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payable on demand, at Bank's option.
F. Payment of Taxes. Promptly pay all taxes, levies and assessments due
to all local, State and Federal agencies. Except to the extent that
Borrower has established a cash reserve for the full amount thereof
and is actively pursuing a tax appeal, any Borrower failure by to
promptly pay any taxes, levies and assessments due shall be an Event
of Default.
G. Employee Benefit Plans.
1. At all times meet the minimum funding requirements of ERISA
concerning all of Borrower's employee benefit plans subject to
ERISA and at no time allow any event or condition to occur
concerning any employee benefit plan subject to ERISA which
might constitute grounds for termination of the plan or for
the appointment of a trustee to administer the plan.
2. At no time allow any employee benefit plan subject to ERISA to
be the subject of voluntary or involuntary termination
proceeding.
H. Environmental Laws Compliance/Notices/Indemnity. Strictly comply in
all material respects with all Environmental Laws applicable to
Borrower's business. Borrower agrees to notify Bank, not later than
ten (10) days after Borrower's receipt, of any summons, notice,
lawsuit, citation, letter, or other communication received by Borrower
from any Federal, State, or local agency or unit of government or
other Person, which asserts that Borrower is in violation of any
Environmental Laws. Borrower agrees to indemnify and hold Bank
harmless from all violations by Borrower of any Environmental Laws,
which indemnity shall include all costs and expenses incurred by Bank,
including reasonable attorney fees, which are related to any violation
by Borrower of any Environmental Laws, whether or not the Indebtedness
has been paid at the time any such proceeding, claim, or action is
instituted against Bank. Borrower further agrees that Bank may at any
time, at Borrower's sole cost and expense, hire or require Borrower to
hire and provide Bank with an environmental audit prepared by an
independent environmental engineering firm acceptable to Bank to
confirm the continuing truth and accuracy of Borrower's environmental
representations, warranties, and agreements set forth in this
Agreement.
At the time of the execution and delivery of the initial Business Loan
Agreement dated July 26, 1994, Borrower provided certain disclosures
and information to Bank concerning discharges of mercury in the
wastewater from its facility located at 5656 S. Cedar Street, Lansing,
MI (the "Lansing Laboratory"). Borrower represents and warrants to
the Bank that Borrower has not been informed of any further required
action or threatened liability concerning the Lansing Laboratory.
I. Use of Proceeds; Purpose of Loans. Use the proceeds of the Loan(s)
only for Borrower's business described in Paragraph II C, and only for
those purposes stated in Paragraph I.
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J. Maintenance of Records; Change in Place of Business or Name. Keep all
of its books and records at the address set forth in this Agreement,
and give the Bank prompt written notice of any change in its principal
place of business, in the location of Borrower's books and records or
in Borrower's name.
K. Employment Laws. Strictly comply with all material provisions of
Federal and State laws pertaining to Borrower's employees, including
by way of illustration but not of limitation, the Michigan Worker's
Disability Compensation Act, MCL 418.101 et seq, as amended, Michigan
Employment Security Act, MCL 42 1.1 et seq., as amended, and the Fair
Labor Standards Act, 29 USC 201 et seq, as amended.
L. General Compliance with Law. At all times operate Borrower's business
in strict compliance with all applicable Federal, State, and local
laws, ordinances and regulations, and refrain from and prevent
Borrower's partners, owners, directors, officers, employees and agents
from engaging in any civil or criminal activity proscribed by Federal,
State or local law.
M. Licensure. Borrower agrees to maintain all material licensures
required to operate its business as described in Paragraph II.C.,
including the maintenance of appropriate provider numbers required to
obtain reimbursement for Medicare and Medicaid receivables.
N. Third Party Payors. At all times operate Borrower's business in
strict compliance with all material provisions of third party policies
and guidelines applicable to Borrower for which the failure to comply
will have a material adverse affect on Borrower's business, Property
or financial condition.
IV. NEGATIVE COVENANTS.
Until all of Borrower's obligations under this Agreement and the
Related Documents are fully performed and the Indebtedness is fully
repaid, Borrower shall not:
A. No Borrowings, Guarantees, or Loans. Borrow money or act as guarantor
of any loan or other obligation or lend any money to any Person
without Bank's prior written consent other than loans, other
obligations, or guaranties in existence as of the date hereof, the
existence of which have been disclosed to Bank in writing, and up to
$13,800,000.00 of convertible subordinated debentures which are
subordinated to the Indebtedness (the "Debentures"). Any sale of
Borrower's accounts receivable shall be deemed the borrowing of money.
B. Liens and Encumbrances; Transfer of Assets. Mortgage, assign, or
encumber any of its Property except to Bank, nor sell, transfer or
assign any Property except in the ordinary course of business and
except for liens on automobiles, any purchase money security
interests, liens under capital leases, liens related to taxes, levies
or assessments being appealed as provided under Section III.F. of this
Agreement, any Permitted Encumbrances, carriers, warehousemen's and
mechanics liens incurred in the ordinary course of business,
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deposits under workers compensation, unemployment insurance and social
security laws, liens or deposits to secure performance of bids,
tenders, contracts or leases, to secure statutory obligations or
surety appeal bonds, or to secure indemnity performance or other
similar bonds issued in the ordinary course of Borrower's business or
liens securing judgments which do not cause the occurrence of an Event
of Default under Section VI.E. of this Agreement.
C. Capital Structure. Borrower shall not purchase, sell, or retire any
of its shares, nor alter or amend its capital structure without Bank's
prior written consent except that Bank consents to the issuance of
shares of Borrower's common stock upon conversion of the Debentures
into common stock and to the issuance of Borrower's common stock
pursuant to the terms of Borrower's 1992 Stock Option Plan, Directors
Stock Option Plan, and Employees Stock Purchase Plan.
V. SECURITY FOR LOANS.
A. Security/Mortgage Interests. Borrower has granted or agrees to grant
to Bank on the date of this Agreement, security/mortgage interests in
certain Property as collateral security for the Loans and repayment of
the Indebtedness, among which are the following Related Documents:
Security Agreement(s) dated: March 20, 1995
VI. EVENTS OF DEFAULT.
The occurrence of any of the following events shall constitute an
Event of Default under this Agreement:
A. Failure to Pay Amounts Due. Any principal or interest on any
Indebtedness to Bank is not paid within ten (10) days of when due.
B. Misrepresentation; False Financial Information. Any warranty or
representation of Borrower in connection with or contained in this
Agreement, or any Financial Statements now or hereafter furnished to
the Bank by or on behalf of the Borrower, is false or misleading in
any material respect.
C. Noncompliance with Bank Agreements. Borrower shall fail to perform
any of its obligations and agreements under this Agreement or any
other agreement with Bank, including but not limited to the Related
Documents.
D. Other Lender Default. Any non-Bank indebtedness of Borrower in a
principal amount in excess of $500,000.00 is declared to be due and
payable prior to the stated maturity thereof.
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E. Bankruptcy or Receivership. Any conveyance is made of substantially
all of Borrower's assets, any assignment is made for the benefit of
creditors, any receiver is appointed, or any insolvency, liquidation
or reorganization proceeding under the Bankruptcy Code or otherwise
shall be filed by or against Borrower.
F. Judgments; Attachments; Tax Liens. There shall be entered against
Borrower any judgment which materially affects Borrower's business,
Property or financial condition or if any tax lien, levy, attachment,
forfeiture, seizure, garnishment, execution or similar writ or process
shall be issued which materially affects Borrower's business, Property
or financial condition, and which remain unpaid, unstayed on appeal,
undischarged, unbonded, or undismissed for a period of thirty (30)
days after the date thereof.
G . Indictment. The institution of any felony criminal proceeding wherein
forfeiture of a material portion of Borrower's Property is a potential
penalty and such proceeding is not dismissed within thirty (30) days.
H. Material Adverse Change. Any material adverse change in Borrower's
business, Property or financial condition has occurred or is imminent.
I. Cure Period. Except for an Event of Default described in Section
VI.A., B., E. or G., Bank shall provide Borrower with written notice
describing such Event of Default, including those referred to in the
Addendum hereto, and shall grant Borrower thirty (30) days to cure any
such Event of Default.
VII. REMEDIES ON DEFAULT.
A. Acceleration. Upon the occurrence of any Event of Default, the
delivery of any required notice and the expiration of any applicable
cure period, the Loans and all Indebtedness to Bank may, at the option
of Bank, and without demand or notice of any kind, be declared to be
immediately due and payable.
B. Remedies Cumulative. The remedies provided for in this Agreement are
cumulative and not exclusive, and Bank may exercise any remedies
available to it at law or in equity, and as are provided in this
Agreement, the Related Documents, and any other agreement between
Borrower and Bank.
C. No Waiver. No delay or failure of Bank in exercising any right,
remedy, power or privilege hereunder shall affect that right, remedy,
power or privilege, nor shall any single or partial exercise thereof
preclude the exercise of any other right, remedy, power or privilege.
No delay or failure of Bank to demand strict adherence to the terms of
this Agreement shall be deemed to constitute a course of conduct
inconsistent with the Bank's right to at any time, before or after any
Event of Default, demand strict adherence to the terms of this
Agreement
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and the Related Documents.
D. Bank's Right of Set-off. Upon the occurrence and continuance of any
Event of Default after, the delivery of any required notice and the
expiration of any applicable cure period, Bank shall have the right to
apply any or all of Borrower's and any Obligor's bank accounts or any
other Property held by Bank against any Indebtedness of Borrower to
Bank.
VIII. CROSS-COLLATERALIZATION/CROSS-DEFAULT.
Borrower agrees that all of the Collateral is security for the Loans
and for all other Indebtedness of Borrower to Bank, whether or not
such Indebtedness is related by class or kind and whether or not
contemplated by the parties at the time of executing each evidence of
Indebtedness, and for all Indebtedness to Bank of Borrower's
subsidiary, Universal Standard Managed Care, Inc. Any Borrower
default under the terms of any Indebtedness to Bank shall constitute
an Event of Default under this Agreement and shall be an Event of
Default under the Indebtedness of Universal Managed Care, Inc. and any
Event of Default of Universal Managed Care, Inc. under its
Indebtedness shall be an Event of Default under this Agreement.
IX. MISCELLANEOUS.
A. Compliance with Bank Agreements. Borrower acknowledges that it has
read, and agrees to fully comply with this Agreement, the Related
Documents, and all other agreements between Borrower and Bank.
B. Expenses. Borrower agrees to pay all of Bank's expenses incidental to
perfecting Bank's security interests and liens, the Bank's payment of
any insurance premiums, Uniform Commercial Code search fees,
Environmental Laws inspections and audits, appraisals, and fees
incurred by Bank for audits, inspection, and copying of Borrower's
books and records. Borrower also agrees to pay all costs and expenses
of Bank, including reasonable attorney fees, in connection with the
enforcement of the Bank's rights and remedies under this Agreement,
the Related Documents and any other agreement, and in connection with
the preparation of any amendments, modifications, waivers or consents
with respect to this Agreement.
C. Further Action. Borrower agrees, from time to time upon Bank's
request, to make, execute, acknowledge, and deliver to Bank such
further and additional instruments, documents, and agreements, and to
take such further action as may be required to carry out the intent
and purpose of this Agreement and repayment of the Loans.
D. Governing Law, Partial Illegality. This Agreement and the Related
Documents shall be interpreted and the rights of the parties
determined under the laws of the State of Michigan.
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Should any part, term, or provision of this Agreement be adjudged
illegal or in conflict with any law of the United States or State of
Michigan, the validity of the remaining portion or provisions of the
Agreement shall not be affected.
E. Writings Constitute Entire Agreement; Modifications Only in Writing.
This Agreement, the Related Documents and all other written agreements
between Borrower and Bank, constitute the entire agreement of the
parties, and there are no other agreements, express or implied. This
Agreement supersedes any and all commitment letters or term sheets
heretofore issued in connection with this Loan. None of the parties
shall be bound by anything not expressed in writing, and neither this
Agreement, the Related Documents, nor any other agreement can be
modified except by a writing executed by Borrower and by the Bank.
This Agreement shall inure to the benefit of and shall be binding upon
all of the parties to this Agreement and their respective successors,
estate representatives, and assigns, provided however, that Borrower
cannot assign or transfer its rights or obligations under this
Agreement without Bank's prior written consent.
F. Credit Inquiries. Borrower hereby authorizes Bank to respond to any
credit inquiries received by Bank from trade creditors or other credit
granting institutions.
G. Release of Claims Against Bank. In consideration of the Bank's making
the Loans described in this Agreement, Borrower and the Obligor(s) do
each hereby release and discharge Bank of and from any and all claims,
harm, injury, and damage of any and every kind, known or unknown,
legal or equitable, which Borrower or any of the Obligor(s) have
against the Bank from the date of their respective first contact with
Bank up to the date of this Agreement. Borrower and the Obligor(s)
confirm to Bank that they have reviewed the effect of this release
with competent legal counsel of their choice, or have been afforded
the opportunity to do so, prior to execution of this Agreement and the
Related Documents and do each acknowledge and agree that Bank is
relying upon this release in extending the Loans to Borrower.
H. Waiver of Jury Trial. Borrower and the Obligor(s) do each knowingly,
voluntarily and intelligently waive their Constitutional right to a
trial by jury with respect to any claim, dispute, conflict, or
contention, if any, as may arise under this Agreement or under the
Related Documents, and agree that any litigation between the parties
concerning this Agreement and the Related Documents shall be heard by
a court of competent jurisdiction sitting without a jury. Borrower
and the Obligor(s) hereby confirm to Bank that they have reviewed the
effect of this waiver of jury trial with competent legal counsel of
their choice, or have been afforded the opportunity to do so, prior to
signing this Agreement and the Related Documents and do each
acknowledge and agree that Bank is relying upon this waiver in
extending the Loans to Borrower.
I. Headings. All section and paragraph headings in this Agreement are
included for convenience only and do not constitute a part of this
Agreement.
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J. Term of Agreement. Unless superseded by a later Business Loan
Agreement, this Agreement shall continue in full force and effect
until all of Borrower's Obligations to Bank are fully satisfied and
the Loans and Indebtedness are fully repaid.
X. DEFINITIONS.
The following words shall have the following meanings in this
Agreement:
A. "Bank" shall mean Michigan National Bank, a national banking
association, and any successor or assign.
B. "Cash Flow Coverage Ratio" shall mean Borrower's EBITDA for each of
the calendar quarters specified in Section III.A.1. of this Agreement,
divided by all principal and interest payments made to Bank, on
capital leases, and on subordinated debt during the same calendar
quarter.
C. "Collateral" shall mean that Property which Borrower and any other
Obligor has pledged, mortgaged, or granted Bank a security interest
in, wherever located and whether now owned or hereafter acquired,
together with all replacements, substitutions, proceeds and products
thereof.
D. "Current Ratio" shall mean that ratio obtained by dividing total
current assets by total current liabilities as determined under GAAP.
E. "EBITDA" shall mean Borrower's earnings before interest, taxes,
depreciation and amortization expense, as determined in accordance
with GAAP.
F. "Environmental Laws" shall mean all laws, regulations, and rules of
the United States of America, State of Michigan, and local authorities
which pertain to the environment, including but not limited to, the
Clean Air Act (42 USC 7401 et seq.), Clean Water Act (33 USC 1251 et
seq.) Resource Conservation and Recovery Act of 1976 (42 USC 6901 et
seq.), Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 (42 USC 9601 et seq.), Hazardous Materials
Transportation Act (49 USC 1 801 et seq.), Solid Waste Disposal Act
(42 USC 6901 et seq.), Toxic Substances Control Act (15 USC 2601 et
seq.), Michigan Resource Recovery Act (MCL 299.501 et seq.),
Environmental Response Act (MCL 299.601), and Underground Storage Tank
Regulatory Act (MCL 299.701 et seq. and 299.801 et seq.), as each of
said statutes have been or are hereafter amended, together with all
rules and regulations promulgated by the Environmental Protection
Agency and Michigan Department of Natural Resources and all additional
environmental laws, rules, and regulations in effect on the date of
this Agreement and as may be enacted and effective.
G. "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended,
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and any successor act.
H. "Event of Default" shall mean any of the events described in Section
VI of this Agreement or in the Related Documents.
I. "Financial Statements" shall mean all balance sheets, cash flows,
earnings statements, and other financial information (whether of the
Borrower or an Obligor) which have been, are now, or are in the future
furnished to Bank, including financial information provided in
conjunction with the reports filed on Form 10-K or 10-Q
J. "GAAP" shall mean generally accepted accounting principles'
consistently applied, as set forth from time to time in the Opinion of
the Accounting Principles Board of the American Institute of Certified
Public Accountants and the Financial Accounting Standards Board, or
which have other substantial authoritative support.
K. "Indebtedness" or "Obligations" shall mean all Loans, indebtedness,
and obligations of Borrower to the Bank, including but not limited to,
any Bank advances for payments of insurance, taxes, amounts advanced
by Bank to protect its interest in the Collateral, overdrafts in
deposit accounts with Bank, and all other indebtedness, obligations
and liabilities of Borrower to Bank, whether matured or unmatured,
liquidated or unliquidated, direct or indirect, absolute or
contingent, joint or several, due or to become due, now existing or
hereafter arising.
L. "Michigan National Bank Prime Rate" or "MNB Prime" shall mean that
variable rate of interest so designated and from time to time
established as the Michigan National Bank prime commercial lending
rate or such prime commercial lending rate.
M. "Obligor" shall mean any person having any obligation to Bank, whether
for the payment of money or otherwise, under this Agreement or under
the Related Documents, including but not limited to any guarantors of
Borrower's Indebtedness.
N. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any
Person succeeding to the powers and functions of the Pension Benefit
Guaranty Corporation.
O. "Person" shall mean any individual, corporation, partnership, joint
venture, association, trust, unincorporated association, joint stock
company, government, municipality, political subdivision, agency or
other entity.
P. "Property" shall mean all of Borrower's (or other Obligor's, as
applicable) assets, tangible and intangible, real and personal.
Q. "Related Documents" shall mean any and all documents, promissory
notes, security agreements, leases, mortgages, guaranties, pledges,
and any other documents or agreements
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executed in connection with this Agreement. The term shall include
documents existing before, at the time of execution of, this
Agreement, and documents executed after the date of this Agreement.
IN WITNESS WHEREOF the parties have executed this Agreement on this
day of February, 1997.
BORROWER:
UNIVERSAL STANDARD MEDICAL
LABORATORIES, INC.,
a Michigan corporation,
By: /s/ Alan S. Ker
----------------------------------
Alan S. Ker
Its: Vice President - Finance and
Treasurer
BANK
MICHIGAN NATIONAL BANK
a national banking association
By: /s/ Eric Johnson
----------------------------------
Eric Johnson
Its: Special Asset Officer
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SCHEDULE OF "PERMITTED ENCUMBRANCES"
ATTACHED TO AND FORMING A PART OF BUSINESS LOAN AGREEMENT BETWEEN UNIVERSAL
STANDARD MEDICAL LABORATORIES, INC. AND MICHIGAN NATIONAL BANK, DATED FEBRUARY
6, 1997
Various equipment lease filings of record with Michigan Secretary of State.
<PAGE> 15
ADDENDUM TO
BUSINESS LOAN AGREEMENT
(Line of Credit)
This Addendum Agreement ("Addendum") is an integral part of the
Business Loan Agreement executed by Borrower, and each and all of the terms,
conditions, provisions and agreements set forth in the Business Loan Agreement
are incorporated by this reference into this Addendum.
I. LINE OF CREDIT LOAN
Under those terms and conditions set forth in the Business Loan
Agreement and in this Addendum, and provided there shall exist no Event of
Default, until October 1, 1997 Bank agrees to loan to Borrower, from time to
time at Borrower's request, up to but not to exceed the lesser of the principal
sum of FIVE MILLION FIVE HUNDRED THOUSAND and 00/100 DOLLARS ($5,500,000.00)
and from October 2,1997 until January 5, 1998, FIVE MILLION THREE HUNDRED
THOUSAND and 00/1 00 DOLLARS ($5,300,000.00) or the maximum of Advances
allowable under the Advance Formula set forth in Section IV of this Addendum
(the "Line of Credit Loan").
II. LINE OF CREDIT NOTE
The Line of Credit Loan shall be signified by Borrower's execution and
delivery to Bank of a promissory note in the amount of the Line of Credit Loan
(the "Line of Credit Note").
III. EXPIRATION OR SUSPENSION OF BANK'S COMMITMENT
Bank's obligation to Advance any sum to Borrower under the Line of
Credit Loan and Line of Credit Note shall automatically (a) cease and terminate
upon the maturity date stated in the Line of Credit Note and (b) suspend upon
any earlier occurrence of an Event of Default unless and until waived by Bank
in writing. No subsequent Advance by Bank shall be construed, nor shall Bank
be estopped as the result of having made any subsequent Advance, to refuse a
subsequent Borrower request for Advance.
IV. ADVANCE FORMULA
All Advances to Borrower under the Line of Credit Note shall be made
under the following Loan Advance Formula:
Seventy five percent (75%) of Borrower's Eligible Accounts.
<PAGE> 16
V. BORROWING PROCEDURE
A. Borrower may request an Advance on any day the Bank is open for
business, and Bank will promptly make the Advance available to
Borrower by crediting Borrower's general deposit account number
6857-10326-8 in the amount requested, or in such other manner as
Borrower shall request in writing, unless:
(1) Bank's commitment to Borrower under the Line of Credit Loan has
expired; or
(2) The requested Advance, when aggregated with all of Borrower's
previous unpaid Advances, would cause the unpaid principal
balance of the Line of Credit Note to exceed the lesser of the
Line of Credit Loan Amount or the maximum Advance amount
determined by use of the above Advance Formula.
VI. BORROWER REPORTS
Until all Advances under the Line of Credit Note, together with
accrued interest thereon, are fully repaid to Bank, Borrower agrees
promptly to provide Bank with the following periodic reports:
A. Account Aging Report. Borrower shall furnish to Bank, not later than
the fifteenth (15th) day of each calendar month, a report signed by
Borrower's Treasurer or chief financial officer, showing the number
and dollar sum of all of Borrower's Accounts outstanding and unpaid at
the end of Borrower's preceding month, together with an aging schedule
showing the number and dollar amounts of all Accounts outstanding and
unpaid for more than 30, 60, and 90 days. All of Borrower's Account
reports shall be in form satisfactory to the Bank, and upon Bank's
request Borrower agrees immediately to provide to Bank such additional
Accounts information as Bank shall request, including but not limited
to, a list of the name, address, and amount of each Account Debtor's
indebtedness to Borrower to the extent permitted by applicable law.
VII. DETERMINATION OF ELIGIBLE ACCOUNTS
Upon receipt of Borrower's above Accounts reports, Bank shall
determine which Accounts shall be eligible for inclusion in the
Advance Formula.
A. Eligible Accounts. For an Account to be eligible for an Advance, it
must have the characteristics listed in this sub-paragraph VII-A.
Borrower represents, warrants to, and agrees with Bank, as of the date
of this Addendum and continuing until all of Borrower's obligations
under this Addendum and the Business Loan Agreement are fully
satisfied and all Advances and accrued interest due under the Line of
Credit Note are fully repaid, that:
1. Each Account arose in the ordinary course of Borrower's business from
the sale or lease of
2
<PAGE> 17
goods or services which have been delivered to and accepted by the
Account Debtor, and will be represented by an invoice delivered to the
Account Debtor;
2. Accounts outstanding for ninety (90) days or more after the original
invoice date, shall be excluded from the Advance Formula;
3. Each Account is an unconditional, valid, legal and enforceable claim
due and owing to Borrower by the Account Debtor in the amount
represented on the Accounts report(s);
4. The unpaid balance of each Account is not subject to any defense,
counterclaim, setoff, credit, or adjustment for returned or damaged
goods or inferior services and there is no agreement between Borrower
and the Account Debtor or any other person for any rebate, concession,
discount, or release of liability, in whole or in part, except as has
been disclosed to Bank in writing.
5. Each Account is subject to no security interest or claim other than
Bank's security interest;
6. Borrower has no knowledge of the insolvency of any Account Debtor or
of any proceeding with respect to bankruptcy or other debtor relief by
or against any Account Debtor;
7. The Account Debtor is not an Affiliate of the Borrower;
8. The Account Debtor is not an Account Debtor whom Bank has, in the
exercise of Bank's reasonable discretion, determined to be an
ineligible Account Debtor, and as to whom the Bank has given notice to
Borrower that such Account Debtor shall be considered ineligible.
VIII. EVENTS OF DEFAULT
The occurrence of any of the following events shall constitute an
Event of Default under this Addendum:
A. Any Event of Default under the Business Loan Agreement or any Related
Documents together with the delivery of any required notice and the
expiration of any applicable cure period.
B. The aggregate unpaid principal amount of all Advances under the Line
of Credit Note exceeds the maximum Advances available as determined
under the Advance Formula.
IX. REMEDIES ON DEFAULT
Upon the occurrence of any Event of Default under this Addendum, Bank
shall have all remedies as are provided by law or by the Business Loan
Agreement, the Line of Credit Note, or any mortgage, security or other
collateral agreement.
3
<PAGE> 18
X. DEFINITIONS
As used in this Addendum the following terms shall have the following
meanings:
A. "Accounts" and "Account Debtor" shall each have the meanings
statutorily provided in Article 9 of the Michigan Uniform Commercial
Code.
B. "Advance" or "Advances" shall mean a loan or loans of money from Bank
to Borrower.
C. "Advance Formula" shall mean Bank's computation of the maximum
aggregate Advances to which Borrower from time to time will be
entitled under the Line of Credit Loan, by application of the
percentages set forth in Section IV above to Borrower's Eligible
Accounts determined under Section VI above.
D. "Affiliate" shall mean any Person which directly or indirectly
controls or is controlled by, or is under common control with
Borrower, and all shareholders, directors, and officers of Borrower.
IN WITNESS WHEREOF, the parties have executed this Addendum on this
6th day of February, 1997.
BORROWER
UNIVERSAL STANDARD MEDICAL
LABORATORIES, INC.
a Michigan corporation
By: /s/ Alan S. Ker
- ------------------------- --------------------------------
Alan S. Ker
- ------------------------- Its: Vice President - Finance and
Treasurer
BANK
MICHIGAN NATIONAL BANK,
a national banking association
4
<PAGE> 19
By: /s/ Eric Johnson
- ------------------------- ------------------------------
Eric Johnson
- ------------------------- Its: Special Assets Officer
5
<PAGE> 20
This Note amends and restates without satisfaction or novation Note No:
2089916-01102 dated January 17, 1996.
AMENDED AND RESTATED PROMISSORY NOTE
(Line of Credit)
$5,500,000.00 Note No.:
Farmington Hills, Michigan
Due Date: January 5, 1998 Dated: February 6, 1997
FOR VALUE RECEIVED on the Due Date, the undersigned, jointly and
severally (the "Borrower"), promise to pay to the order of MICHIGAN NATIONAL
BANK, a national banking association (the "Bank"), at its office set forth
below or at such other place as Bank may designate in writing, the principal
sum of FIVE MILLION FIVE HUNDRED THOUSAND AND 00/1 00 DOLLARS ($5,500,000.00)
or such lesser sum as shall have been advanced by Bank to Borrower under the
loan account hereinafter described, plus interest as hereinafter provided, all
in lawful money of the United States of America. The unpaid principal balance
of this promissory note ("Note") shall bear interest computed upon the basis of
a year of 360 days for the actual number of days elapsed in a month, at a rate
of interest (the "Effective Interest Rate") which is equal to One Half Percent
(1/2%) in excess of the Michigan National Bank Prime Rate (the "Index"), as
such Index may vary from time to time. Borrower understands and agrees that
the Effective Interest Rate payable to Bank under this Note shall be determined
by reference to the Index and not by reference to the actual rate of interest
charged by the Bank to any particular borrowers). If the Index shall be
increased or decreased, the Effective Interest Rate under this Note shall be
increased or decreased by the same amount, effective upon the day of each
increase or decrease in the Index.
Interest on all principal amounts advanced by Bank from time to time
and unpaid by Borrower shall be paid on the lost day of December, 1996, and on
the last day of each month thereafter.
Advances of principal, repayment, and readvances may be made under
this Note from time to time, but Bank, in its sole discretion, may refuse to
make advances or readvances hereunder during any period(s) this Note is in
default. All advances made hereunder shall be charged to a loan account in
Borrower's name on Bank's books, and Bank shall debit to such account the
amount of each advance made to, and credit to such account the amount of each
repayment made by Borrower. From time to time, Bank shall furnish Borrower a
statement of Borrower's loan account, which statement shall be deemed to be
correct, accepted by, and binding upon Borrower, unless Bank receives a written
statement of exceptions from Borrower within ten (10) days after such statement
has been furnished.
<PAGE> 21
This Note may be paid in full or in part at any time without payment
of any prepayment fee. All payments received shall, at the option of the Bank,
first be applied against accrued and unpaid interest and the balance against
principal. Borrower expressly assumes all risks of loss or delay in the
delivery of any payments made by mail, and no course of conduct or dealing
shall affect Borrower's assumption of these risks. If Bank shall determine
that the Effective Interest Rate under this Note is, or may be, usurious or
otherwise limited by law, the unpaid balance of this Note, with accrued
interest at the highest rate then permitted by law shall, at the option of the
Bank, become immediately due and payable.
Upon the occurrence of any of the events of default described in the
Business Loan Agreement, as amended from time to time thereafter, together with
the delivery of any required notice and the expiration of any applicable cure
period, Bank, at its option and without notice to Borrower, may declare the
entire unpaid principal balance of this Note and all accrued interest, together
with all other indebtedness of Borrower to Bank, to be immediately due and
payable.
Upon the occurrence of any event of default, together with the
delivery of any required notice and the expiration of any applicable cure
period, or upon non-payment of this Note after demand, the unpaid principal
balance of this Note shall bear interest at a rate which is two percent (2%)
greater than the Effective Interest Rate otherwise applicable. If any payment
under this Note is not paid within ten (110) days after the date due, at the
option of Bank a late charge of not more than five cents ($.05) for each dollar
of the installment past due may be charged by Bank. In addition to any other
security interest granted, Borrower hereby grants Bank a security interest in
all of Borrower's bank deposits, instruments, negotiable documents, and chattel
paper which at any time are in the possession or control of Bank, and after the
occurrence of any event of default, Bank may apply its own indebtedness or
liability to Borrower or any guarantor to any indebtedness due under this Note.
Borrower agrees to pay all of the Bank's costs incurred in the collection of
this Note, including reasonable attorney fees.
Acceptance by Bank of any payment in an amount less than the amount
then due shall be deemed an acceptance on account only, and Bank's acceptance
of any such partial payment shall not constitute a waiver of Bank's right to
receive the entire amount due. Borrower and all guarantors of this Note do
hereby jointly and severally waive presentment for payment, demand, notice of
non-payment, notice of protest or protest of this Note, and Bank diligence in
collection or bringing suit, and do hereby consent to any and all extensions of
time, renewals, waivers or modifications as may be granted by Bank with respect
to payment or any other provisions of this Note, and to the release of any
collateral or any part thereof, with or without substitution. The liability of
the Borrower under this Note shall be absolute and unconditional, without
regard to the liability of any other party. This Note shall be deemed to have
been executed in Michigan, and all rights and obligations hereunder shall be
governed by the laws of the State of Michigan.
This Note is secured by:
Amended and Restated Business Loan Agreement dated February __, 1997
2
<PAGE> 22
Addendum To Business Loan Agreement dated February _, 1997
Security Agreement dated March 20, 1995
Reference is hereby made to the documents and agreements described
above for additional terms and conditions relating to this Note.
BORROWER
UNIVERSAL STANDARD MEDICAL
LABORATORIES, INC.,
a Michigan corporation
BORROWER ADDRESS:
26500 Northwestern Highway By: /s/ Alan S. Ker
Southfield, MI 48037 -----------------------------
Alan S. Ker
Its: Vice President - Finance and
Treasurer
Tax Identification No.: 38-2986640
Bank Address:
27777 Inkster Road
Farmington Hills, MI 48333-9065
3
<PAGE> 1
EXHIBIT 4.3(b)(2)
Michigan Corporate Special Assets (10-60)
National 27777 Inkster Road
Bank Farmington Hills, MI 48333-9065
March 21, 1997
Mr. Alan S. Ker
Chief Financial Officer
Universal Standard Medical Laboratories, Inc.
26500 Northwestern Highway
Southfield, Michigan 48076
RE: MODIFICATION TO SECOND AMENDED AND RESTATED BUSINESS LOAN
AGREEMENT AND RELATED DOCUMENTS DATED FEBRUARY 6, 1997
Dear Mr. Ker:
On February 6, 1997, Michigan National Bank, a national banking
association (the "Bank") and Universal Standard Medical Laboratories, Inc., a
Michigan corporation (the "Borrower") entered into a Second Amended and
Restated Business Loan Agreement. Pursuant to the Loan Agreement, Bank has
extended to Borrower the following loans:
1. Line of Credit in the amount of Five Million, Five Hundred
Thousand and 00/100 Dollars ($5,500,000.00);
2. Term Loan in the amount of Six Million and 00/100 Dollars
($6,000,000.00);
3. Letter/Line of Credit-B in the amount Fifty Thousand and
00/100 Dollars ($50,000.00).
The loans described in the Loan Agreement shall be referred to in this letter
as the "Loans." The Loans are secured by certain collateral described in
Section V of the Loan Agreement.
The Borrower has requested that the Bank agree to certain modifications in the
Second Amended and Restated Business Loan Agreement and Related Documents.
Bank is willing to make the modifications, subject to the terms and conditions
contained in this letter. Therefore, for good and valuable consideration, the
receipt and sufficiency of which is expressly acknowledged, the parties agree
as follows:
1. Capitalized terms not defined in this Letter shall have the
same meaning given to them in the Second Amended and Restated
Business Loan Agreement.
2. Section III.A. of the Second Amended and Restated Business
Loan Agreement is amended to reach in its entirety as follows:
<PAGE> 2
USML
March 21, 1997
Page 2
"A. FINANCIAL REQUIREMENTS.
1. Maintain a Cash Flow Coverage Ratio at the
end of each of the following calendar
quarters, of:
(a) 10/1/96 through 12/31/96 - (2.50) to 1
(b) 1/1/97 through 3/31/97 - .70 to 1
(a) 4/1/97 through 6/30/97 - 1.50 to 1
(a) 7/1/97 through 9/30/97 - 1.75 to 1
(a) 10/1/97 through 12/31/97 - 2.00 to 1
2. At the end of each of the above calendar
quarters, Borrower's total funded debt
excluding debt subordinated to the Bank and
approximately $20,000.00 if quarterly Seller
note interest payments to cash flow shall at
no time be greater than:
(a) 10/1/96 through 12/31/96 - (0.75) to 1
(b) 1/1/97 through 3/31/97 - 3.0 to 1
(a) 4/1/97 through 6/30/97 - 3.0 to 1
(a) 7/1/97 through 9/30/97 - 3.0 to 1
(a) 10/1/97 through 12/31/97 - 3.0 to 1
This ratio shall be calculated with a
numerator equal to total funded debt and a
denominator equal to EBITDA for the quarter
multiplied by 4.
3. Maintain a Current Ratio of not less than 1.0
to 1.0.
All financial requirements described in this
Section III.A. shall be calculated in
accordance with GAAP.
3. Except as described in this letter, the Loan Agreement and
Related Documents will remain in full force and effect. All
collateral securing the Loans will continue to secure the
Loans.
4. The modifications described in this letter shall not
constitute the establishment of a course of dealing between
the parties. Bank reserves, and Borrower expressly
acknowledges that Bank has the right to deny any future
request for modification or waiver of any of the provisions of
the Loan Agreement or the Related Documents.
<PAGE> 3
USML
March 21, 1997
Page 2
5. The effectiveness of the modifications contained in this
letter are expressly conditioned on the receipt of a
modification fee in the amount of $5,000.00. However, Bank
agrees to refund the modification fee if Borrower is not in
default and makes payment in full of all outstanding
Indebtedness of Borrower by April 22, 1997.
6. Section IX.B. of the Second Amended and Restated Business Loan
Agreement provides for the payment by the Borrower of
reasonable expenses in connection with the preparation of any
amendments, modifications, waivers or consents with respect to
the Agreement. Michigan National Bank has expended $4,490.00
for internal legal costs for the preparation, review, waiver
and modification of the Second Amended and Restated Business
Loan Agreement. Bank requests payment of $4,490.00 as
reimbursement of internal legal costs.
7. This letter agreement shall be governed by and construed in
accordance with the laws of the State of Michigan. This
letter may be modified only by written instrument signed by
both parties to this letter.
If this letter accurately reflects the understanding of the parties,
please execute the letter in the indicated place and return it to me.
Very truly yours,
/s/ Eric L. Johnson
Eric L. Johnson
Corporate Asset Manager
This letter accurately reflects the understanding of the parties.
Universal Standard Medical Laboratories, Inc.
By: /s/ Alan S. Ker Date: 3/21/
----------------------------------------- ---------------------
Alan S. Ker
Its: Vice President - Finance and Treasurer
<PAGE> 1
EXHIBIT 4.3(i)
Michigan Corporate Special Assets (10-60)
National 27777 Inkster Road
Bank Farmington Hills, MI 48333-9065
February 26, 1997
Mr. Alan S. Ker
Chief Financial Officer
Universal Standard Medical Laboratories, Inc.
26500 Northwestern Highway
Southfield, Michigan 48076
Re: Waiver of December 31, 1996 Loan Covenants
Dear Mr. Ker:
On February 6, 1997, Michigan National Bank, a national banking
association (the "Bank") and Universal Standard Medical Laboratories, Inc., a
Michigan corporation (the "Borrower") entered into a Second Amended and
Restated Business Loan Agreement. Pursuant to the Loan Agreement, Bank has
extended to Borrower the following loans:
1. Line of Credit in the amount of Five Million, Five Hundred
Thousand and 00/100 Dollars ($5,500,000.00);
2. Term Loan in the amount of Six Million and 00/100 Dollars
($6,000,000.00);
3. Letter/Line of Credit-B in the amount Fifty Thousand and
00/100 Dollars ($50,000.00).
The loans described in the Loan Agreement shall be referred to in this letter
as the "Loans." The Loans are secured by certain collateral described in
Section V of the Loan Agreement.
Section III.A.2 of the Loan Agreement requires Borrower to maintain
its ratio of Funded Debt to Cash Flow to be not more than 3.0 to 1.0. Section
III.A.3. of the Loan Agreement requires Borrower to maintain a Current Ratio of
not less than 1.50 to 1.00. Borrower has notified Bank that it expects to
violate each of these financial covenants for the fourth quarter of 1996 due to
special restructuring charges and treatment of Deferred Taxes under GAAP
requirements. Borrower has requested that Bank waive the defaults caused by
the violation of these covenants. Bank is willing to waive these defaults,
subject to the terms and conditions of this letter.
1. Capitalized terms not defined herein shall have the meaning
given to them in the Loan Agreement.
2. Subject to the Borrower's consent to the conditions in this
letter, Bank waives the defaults which are described in this
letter. Nothing in this letter shall be deemed to constitute
a waiver of (i) any future defaults in the financial covenants
contained in Section III.A. of the Loan Agreement or (ii) of a
default in any other provision of the Loan Agreement or any
Related Documents.
<PAGE> 2
3. Except as described in this letter, the Loan Agreement and
Related Documents will remain in full force and effect. All
collateral securing the Loans will continue to secure the
Loans.
4. The modifications described in this letter shall not
constitute the establishment of a course of dealing between
the parties. Bank reserves, and Borrower expressly
acknowledges that Bank has the right to deny any future
request for modification or waiver of any of the provisions of
the Loan Agreement or the Related Documents.
5. The effectiveness of the modifications contained in this
letter are expressly conditioned on the receipt of a waiver
fee in the amount of $5,000 or payment in full of all
outstanding Indebtedness of Borrower by March 7, 1997.
6. This letter agreement shall be governed by and construed in
accordance with the laws of the State of Michigan. This
letter may be modified only by a written instrument signed by
both parties to this letter.
If this letter accurately reflects the understanding of the parties,
please execute the letter in the indicated place and return it to me.
Very truly yours,
/s/ Eric L. Johnson
Eric L. Johnson
Corporate Asset Manager
This letter accurately reflects the understanding of the parties.
Universal Standard Medical Laboratories, Inc.
By: /s/ Alan S. Ker Date: 2/26/97
-------------------------------------- --------------------
Alan S. Ker
Its: Vice President - Finance and Treasurer
<PAGE> 1
EXHIBIT 10.10(a)
AMENDMENT NO. 1 TO
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
DEFINED CONTRIBUTION PLAN AND TRUST
BASIC PLAN DOCUMENT NO. 03
The Equitable Life Assurance Society of the United States Defined Contribution
Plan and Trust is hereby amended as follows:
If, in connection with the adoption of this or any other amendment,
the definition of Compensation has been modified, them, for Plan Years prior to
the Plan Year which includes the adoption date of such amendment, Compensation
means compensation determined pursuant to the Plan then in effect.
1. SECTION 1.15 is amended in its entirety to read as follows:
"ELECTIVE CONTRIBUTION" means the Employer's contributions to the Plan that are
made pursuant to the Participant's deferral election pursuant to Section 11.2,
excluding any such amounts distributed as "excess annual additions" pursuant to
Section 4.4. In addition, if selected in E3 of the Adoption Agreement, the
Employer's matching contribution shall or shall not be considered an Elective
Contribution for purposes of the Plan, as provided in Section 11.1(b).
Elective Contributions shall be subject to the requirements of Sections 11.2(b)
and 11.2(c) and shall further be required to satisfy the discrimination
requirements of Regulation 1.401(k)-1(b)(3), the provisions of which are
specifically incorporated herein by reference.
2. SECTION 1.21 is amended in its entirety to read as follows:
"EXCESS DEFERRED COMPENSATION" means, with respect to any taxable year of a
Participant, the excess of the aggregate amount of such Participant's Deferred
Compensation and the elective deferrals pursuant to Section 11.2(f) actually
made on behalf of such Participant for such taxable year, over the dollar
limitation provided for in Code Section 402(g), which is incorporated herein by
reference. Excess Deferred Compensation shall be treated as an "annual
addition" pursuant to Section 4.4 when contributed to the Plan unless
distributed to the affected Participant not later than the first April 15th
following the close of the Participant's taxable year.
3. SECTION 1.27 is amended in its entirety to read as follows:
"414(s) COMPENSATION" with respect to any Employee means his Compensation as
defined in Section 1.9. However, for purposes of this Section, Compensation
shall be Compensation paid and, if selected in the Adoption Agreement, shall
only be recognized as of an Employee's effective date of participation. If, in
connection with the adoption of this or any other amendment, the definition of
"414(s) Compensation" has been modified, then, for Plan years prior to the Plan
Year which includes the adoption date of such amendment, "414(s) Compensation"
means compensation determined pursuant to the Plan then in effect.
<PAGE> 2
4. SECTION 1.28 ("415 COMPENSATION") is amended by the addition of the
following paragraph:
If, in connection with the adoption of this or any other amendment,
the definition of "415 Compensation" has been modified, then, for Plan years
prior the Plan Year which includes the adoption date of such amendment, "415
Compensation" means compensation determined pursuant to the Plan then in
effect.
5. SECTIONS 4.4(a)(4) AND 4.4(a)(4)(i) are amended to read as follows:
(4) If there is an excess amount pursuant to Section 4.4(a)(2) or
Section 4.5, the excess will be disposed of in one of the
following manners, as uniformly determined by the Plan
Administrator for all Participants similarly situated:
(i) Any Deferred Compensation or nondeductible Voluntary
Employee Contributions, to the extent they would
reduce the Excess Amount will be distributed to the
Participant;
6. SECTIONS 4.4(f)(2) is amended in its entirety to read as follows:
Compensation means a Participant's Compensation as elected in the
Adoption Agreement. However, regardless of any selection made in the Adoption
Agreement, "415 Compensation" shall exclude compensation which is not currently
includible in the Participant's gross income by reason of the application of
Code Sections 125, 402(a)(8), 402(h)(1)(B), or 403(b).
For limitation years beginning after December 31, 1991, for purposes
of applying the limitations of this article, compensation for a limitation year
is the compensation actually paid or made available during such limitation
year.
Notwithstanding the preceding sentence, compensation for a participant
in a defined contribution plan who is permanently and totally disabled (as
defined in section 22(e)(3) of the Internal Revenue Code) is the compensation
such participant would have received for the limitation year if the participant
had been paid at the rate of compensation paid immediately before becoming
permanently and totally disabled; such imputed compensation for the disabled
participant may be taken into account only if the participant is not a Highly
Compensated Employee and contributions made on behalf of such participant are
nonforfeitable when made.
7. SECTION 4.5(a) is amended in its entirety to read as follows:
(a) If as a result of the allocation of Forfeitures, a reasonable
error in estimating a Participant's annual Compensation, a reasonable error in
determining the amount of elective deferrals (within the meaning of Code
Section 402(g)(3)) that may be made with respect to any
2
<PAGE> 3
Participant under the limits of Section 4.4, or other facts and circumstances
to which Regulation 1.415-6(b)(6) shall be applicable, the "annual additions"
under this Plan would cause the maximum provided in Section 4.4 to be exceeded,
the Administrator shall treat the excess in accordance with Section 4.4(a)(4).
8. SECTIONS 6.11(a)(1) AND (a)(4) are amended in their entirety to read
as follows:
(1) Medical expenses described in Code Section 213(d) incurred by
the Participant, his spouse, or any of his dependents (as defined in
Code Section 152) or expenses necessary for these persons to obtain
medical care;
(4) Payment of tuition and related educational fees for the next
12 months of post-secondary education for the Participant, his spouse,
children, or dependents;
9. ARTICLE VII is amended by the addition of Section 7.14 to read as
follows:
Direct Rollover
(a) This Section applies to distributions made on or after January
1, 1993. Notwithstanding any provision of the Plan to the contrary
that would otherwise limit a distributee's election under this
Section, a distributee may elect, at the time and in the manner
prescribed by the Plan Administrator, to have any portion of an
eligible rollover distribution paid directly to an eligible retirement
plan specified by the distributee in a direct rollover.
(b) An eligible rollover distribution is any distribution of all
or any portion of the balance to the credit of the distributee, except
that an eligible rollover distribution does not include: any
distribution that is one of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (or
life expectancy) of the distributee or the joint lives (or joint life
expectancies) of the distributee and the distributee's designated
beneficiary, or for a specified period of ten years or more; any
distribution to the extent such distribution is required under section
401(a)(9) of the Code; and the portion of any distribution that is not
includible in gross income (determined without regard to the exclusion
for net unrealized appreciation with respect to employer securities).
(c) An eligible retirement plan is an individual retirement
account described in section 408(a) of the Code, an individual
retirement annuity described in section 408(b) of the Code, an annuity
plan described in section 403(a) of the Code, or the qualified trust
described in section 401(a) of the Code, that accepts the
distributee's eligible rollover distribution. However, in the case of
an eligible rollover distribution to the surviving spouse, an eligible
retirement plan is an individual retirement account or an individual
retirement annuity.
3
<PAGE> 4
(d) A distributee includes an Employee or former Employee. In
addition, the Employee's or former Employee's surviving spouse and the
Employee's or former Employee's spouse or former spouse who is the
alternate payee under a qualified domestic relations order, as defined
in section 414(p) of the Code, are distributees with regard to the
interest of the spouse or former spouse.
(e) A direct rollover is a payment by the Plan to the eligible
retirement plan specified by the distributee.
10. SECTION 11.2(d) is amended in its entirety to read as follows:
(d) In any Plan Year beginning after December 31, 1986, a
Participant's Deferred Compensation made under this Plan and all other plans,
contracts or arrangements of the Employer maintaining this Plan shall not
exceed the limitation imposed by Code Section 402(g), as in effect for the
calendar year in which such Plan Year began. If such dollar limitation is
exceeded solely from elective deferrals made under this Plan or any other Plan
maintained by the Employer, a Participant will be deemed to have notified the
Administrator of such excess amount which shall be distributed in a manner
consistent with Section 11.2(f). This dollar limitation shall be adjusted
annually pursuant to the method provided in Code Section 415(d) in accordance
with Regulations.
11. SECTION 11.2(f) is amended by the addition of the following paragraph
as the second to last paragraph of (f)(3) to read as follows:
Any distribution under this Section shall be made first from unmatched
Deferred Compensation and, thereafter, simultaneously from Deferred
Compensation which is matched and matching contributions which relate to such
Deferred Compensation. However, any such matching contributions which are not
Vested shall be forfeited in lieu of being distributed.
12. SECTION 11.2(f) is amended by the addition of the following to the
last sentence of the last paragraph of such subsection:
Furthermore, for any distribution under this Section which is made
after August 15, 1991, such distribution shall not include any income for the
"gap period". Further provided, for any distribution under this Section which
is made after August 15, 1991, the amount of income may be computed using a
reasonable method that is consistent with Section 4.3(c), provided such method
is used consistently for all Participants and for all such distributions for
the Plan Year.
13. SECTION 11.5(c) is amended by the addition of the following to the
last sentence of the last paragraph of such subsection:
Furthermore, for any distribution under this Section which is made
after August 15, 1991, such distribution shall not include any income for the
"gap period". Further provided, for any
4
<PAGE> 5
distribution under this Section which is made after August 15, 1991, the amount
of income may be computed using a reasonable method that is consistent with
Section 4.3(c), provided such method is used consistently for all Participants
and for all such distributions for the Plan Year.
14. SECTION 11.6(c) is amended in its entirety to read as follows:
(c) For purposes of determining the "Actual Contribution
Percentage" and the amount of Excess Aggregate Contributions pursuant to
Section 11.7(d), only Employer matching contributions (excluding matching
contributions forfeited or distributed pursuant to Section 11.2(f), 11.5(a), or
11.7(a)) contributed to the Plan prior to the end of the succeeding Plan Year
shall be considered. In addition, the Administrator may elect to take into
account, with respect to Employees eligible to have Employer matching
contributions made pursuant to Section 11.1(b) or voluntary Employee
contributions made pursuant to Section 4.7 allocated to their accounts,
elective deferrals (as defined in Regulation 1.402(g)-1(b)) and qualified
non-elective contributions (as defined in Code Section 401(m)(4)(c))
contributed to any plan maintained by the Employer. Such elective deferrals
and qualified non-elective contributions shall be treated as Employer matching
contributions subject to Regulation 1.401(m)-1(b)(2) which is incorporated
herein by reference. However, for Plan Years beginning after December 31,
1988, the Plan Year must be the same as the plan year of the plan to which the
elective deferrals and the qualified non-elective contributions are made.
15. SECTION 11.7(i) is amended by the addition of the following to the
last sentence of the last paragraph of such subsection:
Furthermore, for any distribution under this Section which is made
after August 15, 1991, such distribution shall not include any income for the
"gap period". Further provided, for any distribution under this Section which
is made after August 15, 1991, the amount of income may be computed using a
reasonable method that is consistent with Section 4.3(c), provided such method
is used consistently for all Participants and for all such distributions for
the Plan Year.
16. SECTIONS 11.8(a)(1) AND (a)(3) are amended in their entirety to read
as follows:
(1) Medical expenses described in Code Section 213(d) incurred by
the Participant, his spouse, or any of his dependents (as defined in Code
Section 152) or expense necessary for these persons to obtain medical care;
(3) Payment of tuition and related educational fees for the next
12 months of post-secondary education for the Participant, his spouse,
children, or dependents; or
17. SECTION 11.8(c)(1) is amended in its entirety to read as follows:
(1) The distribution is not in excess of the amount of the
immediate and heavy financial need of the Participant. The amount of the
immediate and heavy financial need may
5
<PAGE> 6
include any amounts necessary to pay any federal, state or local income taxes
or penalties reasonably anticipated to result from the distribution.
18. ARTICLE XI is amended by the addition of the following:
Notwithstanding anything in this Article to the contrary, effective as
of the Plan Year in which this amendment becomes effective, the Actual Deferral
Percentage Test and the Actual Contribution Percentage Test shall be applied
(and adjusted) by applying the Family Member aggregation rules of Code Section
414(q)(6).
6
<PAGE> 7
AMENDMENT NO. 1 TO
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
DEFINED CONTRIBUTION PLAN AND TRUST
BASIC PLAN DOCUMENT NO. 03
(401(k) PROFIT SHARING PLAN AND TRUST - NOS. 005 AND 006)
19. SECTION E3 OF THE 401(k) ADOPTION AGREEMENT(S) is amended by the
addition to E3 to read as follows:
( ) Notwithstanding anything in the Plan to the contrary, all
matching contributions which relate to distributions of Excess
Deferred Compensation, Excess Contributions and Excess
Aggregate Contributions shall be Forfeited. (Select this
option only if it is applicable.)
EMPLOYER:
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
By:__________________________________________
THE PLAN TRUSTEE HEREBY ACKNOWLEDGES RECEIPT OF A COPY OF THIS FIRST
AMENDMENT AND AGREES TO BE BOUND BY THE AMENDMENT AS IT RELATES TO THE TRUST
CREATED UNDER THE PLAN.
FRONTIER TRUST COMPANY, TRUSTEE UNDER
THE USML, INC. TAX DEFERRED SAVINGS
PLAN AND TRUST
_____________________________ By: __________________________________
Witness
Its:__________________________________
Dated: _____________, 1997
7
<PAGE> 1
EXHIBIT 10.10(b)
SECOND AMENDMENT TO THE
USML TAX DEFERRED SAVINGS PLAN AND TRUST
Pursuant to Section 8.1 of the USML Tax Deferred Savings Plan and
Trust ("Plan") and resolutions adopted by the Board of Directors on May 25,
1994, this Second Amendment to the Plan is hereby adopted as follows:
1. Effective January 1, 1994, paragraph (f) shall be added to
the end of Section 7.14 (direct rollover provision adopted in the First
Amendment to the Plan) to read as follows:
(f) If a distribution is one to which Code Sections 401(a)(11)
and 417 do not apply, such distribution may commence less than 30
days after the notice required under Section 1.41(a)-11(c) of the
Income Tax regulations is given, provided that;
(1) the Plan Administrator clearly informs the
Participant that the Participant has a right to a period of
at least 30 days after receiving the notice to consider the
decision of whether or not to elect a distribution (and, if
applicable, a particular distribution option), and
(2) the Participant, after receiving the notice,
affirmatively elects a distribution.
2. Effective January 1, 1994, the following three paragraphs
shall be added to the end of Section 1.10 "Compensation" to read as follows:
In addition to other applicable limitations set forth in the Plan,
and notwithstanding any other provision of the Plan to the
contrary, for Plan Years beginning on or after January 1, 1994, the
annual compensation of each Employee taken into account under the
Plan shall not exceed the OBRA '93 annual compensation limit. The
OBRA '93 annual compensation limit is $150,000, as adjusted by the
Commissioner for increases in the cost of living in accordance with
Code Section 401(a)(17)(B). The cost-of-living adjustment in
effect for a calendar year applies to any period, not exceeding 12
months, over which compensation is determined (determination
period) beginning in such calendar year. If a determination period
consists of fewer than 12 months, the OBRA '93 annual compensation
limit shall be multiplied by a fraction, the numerator of which is
the number of months in the determination period, and the
denominator of which is 12.
<PAGE> 2
For Plan Years beginning on or after January 1, 1994, any
reference in this Plan to the limitation under Code Section
401(a)(17) shall mean the OBRA '93 annual compensation limit set
forth in this provision.
If compensation for any prior determination period is taken
into account in determining an Employee's benefits accruing in the
current Plan Year, the compensation for that prior determination
period is subject to the OBRA '93 annual compensation limit in
effect for that prior determination period. For this purpose, for
determination periods beginning before the first day of the first
Plan Year beginning on or after January 1, 1994, the OBRA '93
annual compensation limit is $150,000.
3. Effective May 25, 1994, paragraph (e) shall be added to
Section 4.8 of the Plan, entitled "Directed Investments," to read as follows:
(e) The Plan and its operation are intended to comply with the
provisions of ERISA Section 404(c) and the regulations thereunder
applicable to participant directed investments. The Employer may
appoint one or more fiduciaries to assist in compliance with these
provisions, which fiduciary or fiduciaries shall generate and
disseminate to Participants the information required by the
regulations. Except as provided by ERISA Section 404(c) and the
regulations thereunder, the Trustee shall have no fiduciary
responsibility with respect to the selection of the Plan's
investment funds, and neither the Employer, the Trustee, nor any
other fiduciary with respect to the Plan shall have any liability
in connection with any losses that are the direct and necessary
result of the investment choices made by Participants. The
Trustee's only responsibility shall be with respect to the
individual investments of any investment funds that are operated by
the Trustee and made available for Participant investments under
the Plan, and which are not controlled by an independent investment
manager. The only responsibility of the Employer shall be to
review periodically, in its capacity as Plan Administrator, the
performance of the investment funds made available under the Plan
and to change the available funds offered when appropriate.
3. Effective May 25, 1994, a third paragraph shall be added to
Section 7.4(s) to read as follows:
Participants and beneficiaries of the Plan shall have the right to
direct the investment of their individual accounts under the Plan
in accordance with uniform procedures adopted by the Plan
Administrator. It is the intention of the Employer that the Plan
and the administration of these directed investments conform to
ERISA Section 404(c) and the regulations thereunder, and that no
Participant or beneficiary shall be deemed to be a fiduciary by
reason of his or her control over assets in his or her account, and
neither the Trustee nor any other person who is a fiduciary with
respect to the Plan shall be liable for any loss, or by reason of
any breach, which results from
<PAGE> 3
such exercise of control. However, the Trustee shall be obligated
to comply with investment directions by participants and
beneficiaries, except as limited by ERISA Section 404(c) and
regulations thereunder.
4. Effective July 1, 1994, Section 7.13 shall be amended by
the addition of the following two paragraphs:
A Participant may direct no more than one-third of his or her
account into employer stock. Stock rights (including warrants and
options) issued with respect to employer stock held in the Plan
shall be exercised by the Trustee on behalf of Participants to the
extent that cash is available. Rights which cannot be exercised
due to the lack of cash shall be sold and the proceeds invested in
employer stock. Cash dividends paid on employer stock shall be
allocated to participants' accounts as of the record date for the
dividend and shall be invested by the Trustee in shares of employer
stock for the participants' accounts.
Each Participant shall have the right to direct the Trustee as to
the manner in which employer stock held in his or her account shall
be voted, and shall have a similar right with regard to tender
offers.
IN WITNESS WHEREOF, United Standard Medical Laboratories, Inc. Inc.
has caused this Amendment to be executed on June ____, 1994.
UNITED STANDARD MEDICAL
LABORATORIES, INC., Employer
____________________________ By:______________________________
Witness:
Its:__________________________
<PAGE> 4
The Plan Trustee hereby acknowledges receipt of a copy of this
Amendment and agrees to be bound by the terms of the Amendment as it relates to
the Trust created under the Plan.
FRONTIER TRUST COMPANY, TRUSTEE UNDER
THE USML, INC. TAX DEFERRED SAVINGS
PLAN AND TRUST
__________________________ By:___________________________________
Witness: Its:_______________________________
Dated: June ___, 1994
<PAGE> 1
EXHIBIT 10.10(c)
THIRD AMENDMENT TO THE
USML, INC. TAX DEFERRED SAVINGS PLAN
This Third Amendment to the USML, Inc. Tax Deferred Savings Plan is
adopted pursuant to Treasury Regulation 1.401(b)-1(d)(3) and is executed within
91 days following the issuance of a favorable tax-determination letter by the
Internal Revenue Service on the amendment and restatement of the Plan for the
Tax Reform Act of 1986.
1. Section 1.27 of the Plan Document. In the amendment to
Section 1.27 of the Plan by the Equitable Life Assurance Society First
Amendment to the Plan, the reference to Section 1.9 of the Plan shall be
replaced with a reference to Section 1.10 of the Plan.
2. Section 4.4(f)(5) of the Plan Document. In the first
sentence in the second paragraph of Section 4.4(f)(5) of the Plan, the
reference to May 5 shall be replaced with a reference to May 6.
3. Section 9.3(b) of the Plan Document. This first sentence
in Section 9.3(b) of the Plan shall be amended and restated to read as follows:
"This provision shall not apply to the extent a Participant or Beneficiary is
indebted to the Plan as a result of a loan from the Plan."
4. Section 11.7(j) of the Plan Document. Paragraph (j)
(Multiple Use Test) shall be added at the end of Section 11.7(i) of the Plan to
read as follows:
(j) Effective with respect to Plan Years specified in Treasury
regulations, if the high-paid average contribution percentage
computed under Section 11.6 above exceeds 125% of the lower-paid
average contribution percentage and if the high-paid average
deferral percentage computed under Section 11.4 also exceeds 125%
of the lower-paid average deferral percentage computed under that
Section (but in each case, the percentages otherwise satisfy the
test set forth in Section 11.4(a)), then such contributions and
deferrals shall remain in the Plan only if the aggregate limit of
the multiple use test set forth in Treasury Regulation Section
1.401(m)-2(b) (as may be amended from time to time) is met. If
such aggregate limit is exceeded, then the Employer matching
contributions and the Employee after-tax contributions, or the
before-tax Employee contributions made by or on behalf of Highly
Compensated Participants shall be reduced pro-rata as the Plan
Administrator deems necessary in the same manner as set forth in
Sections 11.5 and 11.7, until such aggregate limit is not exceeded.
<PAGE> 2
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC. has caused this Third
Amendment to the USML, Inc. Tax Deferred Savings Plan to be executed on _______
________, 1995.
UNIVERSAL STANDARD MEDICAL
LABORATORIES, INC.
By:___________________________________
Its:__________________________________
<PAGE> 1
EXHIBIT 10.10(d)
FOURTH AMENDMENT TO THE
USML, INC. TAX DEFERRED SAVINGS PLAN
This Fourth Amendment to the USML, Inc. Tax Deferred Savings Plan and
Trust ("Plan") is adopted effective January 1, 1997 pursuant to approval by the
Board of Directors of Universal Standard Medical Laboratories, Inc. at its
December 16, 1996 Board of Directors meeting.
Effective January 1, 1997, Section 7.13 of the Plan shall be amended
by the addition of the following new paragraph:
Notwithstanding the foregoing, effective January 1, 1997 no
additional contributions shall be made to the employer
stock fund.
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC. has caused this Fourth
Amendment to the USML, Inc. Tax Deferred Savings Plan to be executed on
December 31, 1996.
UNIVERSAL STANDARD MEDICAL
LABORATORIES, INC.
By: /s/ Eugene E. Jennings
--------------------------------
Its: President
-------------------------------
<PAGE> 1
EXHIBIT 11.1
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
COMPUTATION OF CONSOLIDATED NET INCOME PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended
December 31,
1996 1995 1994
<S> <C> <C> <C>
Income (loss) before extraordinary loss (a) ($7,751) ($981) ($1,954)
Extraordinary loss (a) * * 167
Net income (loss) (a) ($7,751) ($981) ($2,121)
PRIMARY SHARES
Weighted average common shares outstanding 6,462 6,251 6,225
Effect of assumed exercise of stock options at prices
which are lower than the average market price of
common shares during the period using the
treasury stock method 105 142
Warrants outstanding 36 50
Average shares outstanding and common equivalent
shares for primary earnings per share 6,462 6,392 6,417
PRIMARY EARNINGS PER SHARE (a):
Income (loss) before extraordinary loss ($1.199) ($0.153) ($0.305)
Extraordinary item * * ($0.026)
Net Income (loss) ($1.199) ($0.153) ($0.331)
FULLY DILUTED SHARES
Weighted average common shares outstanding 6,462 6,251 6,225
Effect of assumed exercise of stock options at
prices which are lower than the market price of
common shares at the end of the period, when the
ending price is higher than the average market price 106 151
Warrants outstanding 36 51
Average shares outstanding and common equivalent
shares, assuming full dilution 6,462 6,393 6,427
FULLY DILUTED EARNING PER SHARE:
Income (loss) before extraordinary loss ($1.199) ($0.153) ($0.304)
Extraordinary loss * * ($0.026)
Net Income (loss) ($1.199) ($0.153) ($0.330)
</TABLE>
(a) These amounts agree with the related amounts in the condensed consolidated
statements of income.
* Not applicable
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
The following is a list of subsidiaries as of the date of this filing
of Universal Standard Medical Laboratories, Inc., other than subsidiaries
which, considered in the aggregate as a single subsidiary, would not constitute
a significant subsidiary as defined by Securities and Exchange Commission
Regulation S-X.
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
<S> <C>
A/R Credit, Inc. * Michigan
Universal Standard Managed
Care of Ohio, Inc. ** Ohio
Universal Standard Managed Care
of Michigan, Inc. ** Michigan
Universal Standard Managed Care, Inc. * Delaware
T.P.A., Inc. ** Michigan
</TABLE>
* A wholly owned subsidiary of Universal Standard Medical Laboratories, Inc.
** A wholly owned subsidiary of Universal Standard Managed Care, Inc..
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Universal Standard Medical Laboratories, Inc. on Form S-8 (File Nos. 33-92698,
33-92806, 33-80356, 33-80840, 33-59554 and 33-59560) and on Form S-3 (File Nos.
333-97192, 333-3873 and 333-86406) of our report dated February 24, 1996,
except for Note 15 as to which the date is February 21, 1997, on our audits of
the consolidated financial statements and of the financial statement schedule
of Universal Standard Medical Laboratories, Inc. as of December 31, 1995, and
for the years ended December 31, 1995 and 1994, which report is included in
this Annual Report on Form 10-K.
/s/ Coopers & Lybrand LLP
Detroit, Michigan
February 21, 1997
<PAGE> 1
EXHIBIT 23.2
Consent of Independent Certified Public Accountants
Universal Standard Medical Laboratories, Inc.
26500 Northwestern Highway
Southfield, Michigan 48076
We hereby consent to the incorporation by reference in the registration
statements of Universal Standard Medical Laboratories, Inc. on Form S-8 (File
Nos. 33-92698, 33-92806, 33-80356, 33-80840, 33-59554 and 33-59560) and on Form
S-3 (File Nos. 333-97192, 333-3873 and 333-86406) of our report dated February
21, 1997, except for Note 7 which is as of March 21, 1997, relating to the
consolidated financial statements and schedule of Universal Standard Medical
Laboratories, Inc. appearing in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
/s/ BDO SEIDMAN, LLP
Troy, Michigan
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000889187
<NAME> UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,227
<SECURITIES> 0
<RECEIVABLES> 15,453
<ALLOWANCES> 8,157
<INVENTORY> 1,053
<CURRENT-ASSETS> 12,338
<PP&E> 17,416
<DEPRECIATION> 7,721
<TOTAL-ASSETS> 57,072
<CURRENT-LIABILITIES> 0
<BONDS> 11,603
0
0
<COMMON> 32,242
<OTHER-SE> (6,025)
<TOTAL-LIABILITY-AND-EQUITY> 57,072
<SALES> 57,564
<TOTAL-REVENUES> 57,564
<CGS> 39,260
<TOTAL-COSTS> 39,260
<OTHER-EXPENSES> 17,216
<LOSS-PROVISION> 4,141
<INTEREST-EXPENSE> 1,790
<INCOME-PRETAX> (9,218)
<INCOME-TAX> (1,467)
<INCOME-CONTINUING> (7,751)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,751)
<EPS-PRIMARY> (1.20)
<EPS-DILUTED> (1.20)
</TABLE>
