<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1997 Commission File Number 34-0-20400
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
Michigan 38-2986640
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
ATTN: Alan S. Ker, Chief Financial Officer
26500 Northwestern Hwy., Suite 400, Southfield, Michigan 48076
(Address of principal offices) (Zip Code)
Registrant's telephone number, including area code: (248) 358-0810
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
---- ----
Number of shares of common stock, no par value, outstanding as of July 31,
1997: 6,560,772.
<PAGE> 2
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
INDEX
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
at June 30, 1997 and December 31, 1996
Condensed Consolidated Statements of 4
Income for the three and six months ended
June 30, 1997 and 1996
Condensed Consolidated Statements of 5
Cash Flows for the six months ended
June 30, 1997 and 1996
Notes to Condensed Consolidated Financial 6
Statements
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risks 14
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
-2-
<PAGE> 3
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,477 $ 2,227
Accounts receivable, net of allowance for
contractual adjustments and uncollectible
accounts of $8,848 and $8,157 at June 30, 1997
and December 31, 1996, respectively 8,616 7,296
Inventory 1,207 1,053
Prepaid expenses and other 1,627 1,762
------- -------
Total current assets 13,927 12,338
Property and equipment, net 9,245 9,695
Intangible assets, net 33,020 33,547
Other assets 1,611 1,492
------- -------
Total assets $57,803 $57,072
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $1,244 $1,534
Accounts payable 5,333 4,348
Accrued liabilities 4,874 5,329
------- -------
Total current liabilities 11,451 11,211
Long-term debt, net of current portion 20,231 19,013
Other liabilities 3 9
------- -------
Total liabilities 31,685 30,233
------- -------
Common stock, no par; 20,000,000 shares authorized;
6,578,135 shares issued and outstanding 32,864 32,864
Retained earnings (deficit) (6,746) (6,025)
------- -------
Total stockholders' equity 26,118 26,839
------- -------
Total liabilities and stockholders' equity $57,803 $57,072
======= =======
</TABLE>
The accompanying notes are integral part of the
condensed consolidated financial statements.
3
<PAGE> 4
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net laboratory service revenue:
Fee-for-service $ 9,298 $10,217 $18,720 $21,103
Managed care 4,769 4,598 8,849 9,266
------- ------- ------- -------
Total net revenue 14,067 14,815 27,569 30,369
Operating expenses:
Laboratory 9,566 10,493 18,647 20,790
Selling, general and administrative 2,718 3,297 5,442 6,569
Provision for doubtful accounts 627 1,057 1,440 1,971
Special Charge 0 2,407 0 2,407
Depreciation 618 570 1,234 1,143
Amortization 353 560 693 1,098
------- ------- ------- -------
Total operating expenses 13,882 18,384 27,456 33,978
------- ------- ------- -------
Operating income (loss) 185 (3,569) 113 (3,609)
Interest expense 454 480 870 893
Other income, net (19) (41) (36) (74)
------- ------- ------- -------
Income (loss) before income taxes (250) (4,008) (721) (4,428)
Income taxes (benefit) (38) (1,330) 0 (1,430)
------- ------- ------- -------
Net income (loss) $ (212) $(2,678) $ (721) $(2,998)
======= ======= ======= =======
Net income per share $ (0.03) $ (0.40) $ (0.11) $ (0.45)
Average shares outstanding and common
equivalent shares 6,578 6,716 6,578 6,621
EBITDA $ 1,156 $(2,439) $ 2,040 $(1,368)
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
<PAGE> 5
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
------ ------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 327 $ 124
------- -------
Cash flows from investing activities:
Purchase of property and equipment (453) (1,114)
Restricted cash investment (1,013)
Other investing activities (75) (7)
------- -------
Net cash used in investing activities (528) (2,134)
------- -------
Cash flows from financing activities:
Payments on long-term debt (6,422) (8,167)
Long-term/Short-term borrowings 7,016 1,000
Proceeds from issuance of Convertible Debenture -- 12,000
Payments of financing costs (137) (919)
Other financing activities (6) (13)
------- -------
Net cash provided by (used in) financing activities 451 3,901
------- -------
Net increase (decrease) in cash and cash equivalents 250 1,891
Cash and cash equivalents, beginning of period 2,227 999
------- -------
Cash and cash equivalents, end of period $ 2,477 $ 2,890
======= =======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
<PAGE> 6
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
In the opinion of management, the condensed consolidated financial statements
include all adjustments, consisting of normal recurring items, necessary for a
fair presentation of financial position and results of operations. The results
of operations are not necessarily indicative of the results which may be
expected for the full year.
2. Income Taxes
The effective income tax rate of (15.2%) and 0% for the three month and six
months ended June 30, 1997, respectively, is less than the statutory rate of
34% principally due to non-deductible goodwill and other permanent non
deductible expenses. Under applicable accounting rules, no tax benefits
relating to the first six months of the 1997 loss are recorded. This loss is
treated as a net operating loss carry forward for accounting purposes and may
be used to offset future profits of the Company.
3. Earnings Per Share
Earnings 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.
Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings per
Share", was issued in February 1997. Adoption of SFAS 128, effective for
periods ending after December 31, 1997, is not expected to have a significant
effect on reported earnings.
4. Intangible Assets
Certain assets classified as goodwill in the Company's financial
statements for the year ended December 31, 1996 as included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996
have been reclassified to customer lists. Intangible assets consist of
the following (in thousands):
<TABLE>
<CAPTION>
June 30
1997 1996
<S> <C> <C>
Goodwill $ 16,179 $ 28,470
Covenants not to compete 346 5,427
Customer Lists 22,546 10,456
-------- --------
$ 39,071 $ 44,353
Less accumulated amortization $ (6,051) (8,602)
-------- --------
Intangible assets, net $ 33,020 $ 35,751
======== ========
</TABLE>
6
<PAGE> 7
5. Long-Term Debt
On April 30, 1997, the Company replaced its existing credit facility with
a new credit facility which includes a $9.5 million revolving line of
credit, a $3.0 million acquisition line and a $2.5 million letter of
credit facility. Borrowing levels under the revolving line of credit are
based on accounts receivable, inventory and fixed asset balances. As of
June 30, 1997, permitted borrowings under the new revolving line of
credit were $7,015,000, all of which was outstanding under the line.
Under the credit facility the Company is required to maintain certain
financial covenants including a current ratio of 1.1 to 1 through June
29, 1997, and 1.25 to 1 thereafter; a consolidated leverage ratio of 9.5
to 1 through June 29, 1997, 7 to 1 through September 29, 1997, 5 to 1
through June 29, 1998 and 3 to 1 thereafter; a consolidated funded debt
to total capitalization ratio of .75 to 1 through September 29, 1997, .70
to 1 through December 30, 1997 and .60 to 1 thereafter; and a
consolidated debt service coverage ratio of .9 to 1 through June 30,
1997, 1 to 1 through September 30, 1997 and 1.25 to 1 thereafter. The
Bank has waived compliance with the current ratio covenant through June
30, 1997. Borrowing under the acquisition line was at the discretion of
the bank. The line of credit bears interest from .5% below to 1.00%
above the prime rate or from 2% to 3.75% above the LIBOR rate. The
interest rate on the line of credit at June 30, 1997 was 9.5%.
Borrowings under the credit facility are collateralized by substantially
all of the assets of the Company and its subsidiaries (including the
stock of the Company's managed care subsidiaries), except for the assets
of the Company's managed care subsidiaries. The revolving line of credit
expires on August 31, 1998. The acquisition line and letter of credit
facility expired on June 30, 1997, although outstanding letters of credit
will continue for the remainder of their terms. The Company is currently
negotiating an extension of these facilities.
6. Contingencies
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
revenues cannot 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.
In August, 1996, the Company 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.
7
<PAGE> 8
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. The ultimate
effect of these matters on the Company, if any, cannot be determined at
this time. The outcome of these disputes with the IRS involves a number
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.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
Results of Operations
The following table sets forth, for the periods indicated, the percentage of
net revenue represented by items in the statements of income.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Fee-for-service 66.1% 69.0% 67.9% 69.5%
Managed care 33.9% 31.0% 32.1% 30.5%
-----------------------------------------
Total net revenue 100.0% 100.0% 100.0% 100.0%
Laboratory expenses 68.0% 70.8% 67.6% 68.5%
Selling, general and 19.3% 22.3% 19.7% 21.6%
administrative expenses
Provision for doubtful accounts 4.5% 7.1% 5.2% 6.5%
Special Charge 0.0% 16.3% 0.0% 7.9%
Depreciation and amortization 6.9% 7.6% 7.0% 7.4%
------------------------------------------
Operating income (loss) 1.3% (24.1%) 0.4% (11.9%)
Interest expense 3.2% 3.3% 3.2% 2.9%
Other income, net (0.1%) (0.3%) (0.1%) (0.2%)
Income taxes (0.3%) (9.0%) 0.0% (4.7%)
------------------------------------------
Net income (loss) (1.5%) (18.1%) (2.6%) (9.9%)
=========================================
EBITDA* 8.2% (16.5%) 7.4% (4.5%)
=========================================
Net cash provided by
operating activities** 2.3% 10.6% 1.2% 0.4%
=========================================
</TABLE>
* EBITDA represents earnings before interest, taxes, depreciation, amortization
and other (income) expense. 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 should not 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
Condensed 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.
9
<PAGE> 10
Net Revenue. The Company's net revenue is generated from managed care
laboratory programs 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 Program Member's physician of choice and, in some cases, certain
medical 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 was $14.1 million in the second quarter of 1997, compared to
$14.8 million in the second quarter of 1996. Total net revenue for the first
half of 1997 was $27.6 million, compared to $30.4 million for the first half of
1996. The decrease in total net revenue was principally due to a decline in
fee-for-service revenue resulting from fewer fee-for-service patient visits due
to reduction of unprofitable accounts and attrition.
Managed care revenue increased 4% to $4.8 million for the second quarter of
1997, as compared to $4.6 million for the second quarter of 1996. This
increase in the second quarter of 1997 is principally due to the new nationwide
contracts with Ford and Chrysler initiated during the second quarter. Managed
care revenue for the first half of 1997 decreased 5% to $8.8 million, from $9.3
million in the comparable period of 1996. The decrease in managed care revenue
for the first six months of 1997 was primarily due to a program that expired in
August 1996 and was renewed two months later at a reduced level and, to a
lesser extent, decreases in participation levels, fee reductions in programs
and program terminations.
Fee-for-service revenue was $9.3 million for the second quarter of 1997
compared to $10.2 million for the second quarter of 1996. Fee-for-service
revenue was down 9.0% as compared to the same quarter last year, primarily due
to a 13.9% decline in fee-for-service patient visits. Fee-for-service revenue
for the first six months of 1997 was $18.7 million, compared to $21.1 million
for the first six months of 1996. Fee-for-service revenue was down 11.3% as
compared to the first half of last year, primarily due to a 15.0% decline in
fee-for-service patient visits. The decline in fee-for-service patient visits
was principally due to the reduction in unprofitable accounts and attrition.
Increases in fee-for-service revenue per patient visit, principally due to
changes in payor and test mix, partially offset these declines.
The Company's fee-for-service net revenue continues to be negatively impacted
in 1997 by a number of factors, including customer attrition resulting from
recent cost reduction efforts as described above, the shift toward managed care
alternatives and reductions in reimbursement levels on certain of its
laboratory tests primarily due to reimbursement changes instituted by the
Company's third-party payors.
The Company's clinical laboratory testing operations are partially affected by
seasonal trends common to the clinical laboratory industry. Testing volume is
lower during the summer months and the year-end holiday periods. These
seasonal effects are partially offset by the Managed Care revenues which are
not affected by seasonal trends.
Laboratory Expenses. Laboratory expenses were $9.6 million and $10.5 million
in the second quarter of 1997 and 1996, respectively. Laboratory expenses for
the first six months of 1997 were $18.6 million compared to $20.8 million for
the first six months of 1996. Laboratory expenses for the three and six months
ended June 30, 1997 were lower than the comparable periods of 1996 primarily as
a result of the cost reduction programs, as well as fewer fee-for-service
patient visits discussed above. As a percentage of net revenue, laboratory
expenses decreased from 70.8% and 68.5% for the three and six months ended
June 30, 1996, respectively, to 68.0% and 67.6 for the three and six months
ended June 30, 1997, respectively. This decrease is principally due to cost
reductions and process improvement as well as improvements in payor and test
mix.
10
<PAGE> 11
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three and six months ended June 30, 1997
decreased $.6 million and $1.1 million, respectively, or 17.6% and 17.2%, from
the comparable 1996 periods. These decreases are primarily due to the
Company's reengineering/cost reduction programs. As a percentage of net
revenue, selling, general and administrative expenses was 22.3% and 21.6% for
the three and six months ended June 30, 1996, respectively, as compared to
19.2% and 19.7% for the three and six months ended June 30, 1997.
Provision for Doubtful Accounts. The provision for doubtful accounts
decreased from $1 million in the second quarter of 1996 to $.6 million in the
second quarter of 1997, a decrease of $.4 million. The provision decreased to
$1.4 million in the first half of 1997 from $2.0 million in the first half of
1996. These decreases are principally due to increases in collectible direct
patient billings.
As a percentage of total revenue, the provision for doubtful accounts decreased
from 7.1% and 6.5% for the three and six months ended June 30, 1996 to 4.5% and
5.2% for the comparable 1997 periods. This decrease is mainly due to improved
patient collection and a more current account receivable balance.
Special Charge. The Company recorded a special charge of $2.4 million in the
second quarter of 1996. This charge principally reflects the
Reengineering/Cost Reduction Plan initiated during the quarter, which includes
the addition of key management personnel, the implementation of process
engineering and TQM processes and personnel and facility cost reductions.
EBITDA. EBITDA was a $1.2 million, or 8.2% of net revenue for the second
quarter of 1997, compared to a loss of $2.4 million, or 16.5% of net revenue
for the second quarter of 1996. Without the $2.4 million special charge,
EBITDA for the second quarter 1996 would have been zero. EBITDA for the first
six months of 1997 was $2.0 million, or 7.4% of net revenue, compared to a loss
of $1.4 million, or 4.5% for the year-ago period. EBITDA for the first six
months of 1996 would have been $1.0 million or 3.4% of net revenue without the
special charge. The Company attributes these increases principally to the
reengineering/cost reduction programs and improved test and payor mix.
Income Taxes. The effective income tax rate of (15.2%) and 0% for the three and
six months ended June 30, 1997, respectively, is less than the statutory rate
of 34% principally due to non-deductible goodwill and other permanent
nondeductible expenses. Under applicable accounting rules, no tax benefit
relating to the 1997 loss are recorded. This loss is treated as a net
operating loss carry forward and may be used to offset future profits of the
Company.
Liquidity and Capital Resources. The Company's working capital ratio increased
to 1.2 to 1 at June 30, 1997 from 1.1 to 1 at December 31, 1996. Working
capital increased to $2.5 million at June 30, 1997 from $1.1 million at
December 31, 1996. Included in cash and cash equivalents at June 30, 1997 is
$750,000 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 $327,000 for the six months ended
June 30, 1997, compared to $.1 million for the year-earlier period. This
increase is principally due to the reengineering/cost reduction programs and
improved test and payor mix described above. Days outstanding in accounts
receivable were 78 days at June 30, 1997, compared to 66 days at December 31,
1996. Days outstanding in accounts receivable are higher than normal primarily
as a result of unbilled edits due to missing patient information caused
principally by required medical necessity documentation. The Company is
continuing its efforts to reduce days outstanding, principally by working its
aged and unbilled accounts receivable.
11
<PAGE> 12
On April 30, 1997, the Company replaced its existing credit facility with
a new credit facility which includes a $9.5 million revolving line of
credit, a $3.0 million acquisition line and a $2.5 million letter of
credit facility. Borrowing levels under the revolving line of credit are
based on accounts receivable, inventory and fixed asset balances. As of
June 30, 1997, permitted borrowings under the new revolving line of
credit were $7,015,000, all of which was outstanding under the line.
Under the credit facility the Company is required to maintain certain
financial covenants including a current ratio of 1.1 to 1 through June
29, 1997, and 1.25 to 1 thereafter; a consolidated leverage ratio of 9.5
to 1 through June 29, 1997, 7 to 1 through September 29, 1997, 5 to 1
through June 29, 1998 and 3 to 1 thereafter; a consolidated funded debt
to total capitalization ratio of .75 to 1 through September 29, 1997, .70
to 1 through December 30, 1997 and .60 to 1 thereafter; and a
consolidated debt service coverage ratio of .9 to 1 through June 30,
1997, 1 to 1 through September 30, 1997 and 1.25 to 1. thereafter. The
Bank has waived compliance with the current ratio covenant through June
30, 1997. Borrowing under the acquisition line was at the discretion of
the bank. The line of credit bears interest from .5% below to 1.00%
above the prime rate or from 2% to 3.75% above the LIBOR rate. The
interest rate on the line of credit at June 30, 1997 was 9.5%.
Borrowings under the credit facility are collateralized by substantially
all of the assets of the Company and its subsidiaries (including the
stock of the Company's managed care subsidiaries), except for the assets
of the Company's managed care subsidiaries. The revolving line of credit
expires on August 31, 1998. The acquisition line and letter of credit
facility expired on June 30, 1997, although outstanding letters of credit
will continue for the remainder of their terms. The Company is currently
negotiating an extension of these facilities.
The Company expects to incur capital expenditures of approximately
$750,000 million during the remainder of 1997 for new data processing and
laboratory equipment.
The ratio of debt to capital was 43.6% at June 30, 1997 compared to 43.4% at
December 31, 1996.
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 managed care subsidiaries
and capitalized leases. From time to time the Company's managed care
subsidiaries may not be able to make cash distributions to the Company at
levels required to fully fund the Company's operating cash flow needs without
violating applicable regulatory requirements. The Company's managed care
subsidiary operating in the State of Michigan (the "Michigan Managed Care
Subsidiary") proposes to enter into an agreement with the Michigan Insurance
Bureau ("MIB") agreeing not to engage in certain transactions which result in
the transfer of cash to affiliates without thirty (30) days prior notice to the
MIB and provided that the MIB does not disapprove such transactions within such
thirty (30) day period. As a result, future cash transfers from the Michigan
Managed Care to the Company are likely to be limited to payments for services
rendered and dividends payable from the Michigan Managed Care Subsidiary's
earned surplus, which is more limited than cash transfers made in the past.
Accordingly, the cash needs of the Company's laboratory operations will have to
be funded from their own operations and the operation of the Company's
unregulated managed care subsidiaries. As a result of the Company's revenue
enhancement initiatives and the reengineering and cost reduction efforts
implemented to date and in the future by the Company, the Company believes its
laboratory operations will generate increased levels of operating cash flow.
The Company expects its managed care subsidiaries, including the Michigan
Managed Care Subsidiary, to generate sufficient operating cash to fund their
current operations and planned expansion. The foregoing statements may be
"forward looking statements" 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
12
<PAGE> 13
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. In the event that the Company's laboratory operations
and unregulated managed care subsidiaries do not generate cash levels to the
extent required to fund their operations, the Company will need to obtain
additional financing to meet its operating cash needs or consider disposition
of assets or curtailment of operations.
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 Company's predecessor (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 intents to vigorously defend its
position.
In August, 1996, the Company 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. The ultimate effect of these matters on the
Company, 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 adjustment.
13
<PAGE> 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk. Not
Applicable.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on June 17, 1997
(adjourned to and completed on June 20, 1997), at which the shareholders
considered and voted on the election of three directors, the approval of an
amendment to the Company's 1992 Stock Option Plan and the approval of an
amendment to the Company's Articles of Incorporation.
1. Each of the nominees for director at the meeting was an incumbent and
all nominees were elected. The following table sets forth the number of shares
voted for and withheld with respect to each nominee.
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
------- --------- --------------
<S> <C> <C> <C>
Thomas R. Donahue 5,200,883 52,231
Eugene E. Jennings 5,208,883 44,231
P. Thomas Hirsch 5,201,883 51,231
</TABLE>
2. The adoption of an amendment to the Company's 1992 Stock Option Plan
was approved. The results of the voting were as follows:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
<S> <C> <C> <C> <C>
3,994,723 162,238 5,960 1,090,193
</TABLE>
3. The adoption of an amendment to the Company's Articles of Incorporation
was approved to change the Company's name to "Universal Standard HealthCare,
Inc.". The results were as follows:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
<S> <C> <C> <C> <C>
5,255,547 5,131 14,705 0
</TABLE>
14
<PAGE> 15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Covenant Waiver Letter dated July 29, 1997 between NBD Bank and
the Company and its subsidiaries.
11. Computation of Consolidated Net Income Per Common Share
27. Financial Data Schedule
(b) Reports on Form 8-K. None.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
(Registrant)
Date: August 14, 1997 Eugene Jennings
---------------
Eugene Jennings
President and
Chief Executive Officer
Date: August 14, 1997 Alan S. Ker
-----------
Alan S. Ker
Vice President, Finance,
Chief Financial Officer
16
<PAGE> 17
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- - ------- ----------- ------------
4.1 Covenant Waiver Letter dated July 29, 1997 between NBD Bank
and the Company and its subsidiaries.
11. Computation of Consolidated Net Income Per Common Share
27. Financial Data Schedule
<PAGE> 1
Exhibit 4.1
NBD Bank
28660 Northwestern Highway
Southfield, Michigan 48034
Telephone: (248) 799-5817
Fax: (248) 799-5826
Robert B. Greene
First Vice President
July 29, 1997
Mr. Alan S. Ker
Chief Financial Officer
Universal Standard Medical Laboratories, Inc.
26500 Northwestern Highway
Southfield, Michigan 48076
Re: Revolving Credit and Loan Agreement dated April 30, 1997
between NBD Bank (the "Bank") and Universal Standard Medical
Laboratories, Inc., Universal Standard Managed Care of
Michigan, Inc., Universal Standard Managed Care of Ohio,
Inc., Universal Standard Managed Care, Inc., T.P.A., Inc.
and A/R Credit, Inc. (each, an "Obligor" and collectively,
the "Obligors") (as may be amended and further amended from
time to time, the "Agreement"). Capitalized terms used but
not defined in this letter shall have the same meanings as
in the Agreement.
Dear Al:
Based on the covenant calculations exhibit recently submitted, it has come to
my attention that the Obligors are in default of Section 6.1A. of the Agreement
(i.e. minimum consolidated current ratio requirement; 1.22:1 reported is below
the required 1.25:1 minimum) at June 30, 1997. The Bank hereby waives the
above described default through June 30, 1997. This waiver shall not be
construed as an agreement to waive any provision on any future occasion, nor
shall it be construed as a waiver with respect to any matter not specifically
addressed in this letter. Except
<PAGE> 2
as expressly modified by the terms of this letter, all of the other terms and
conditions of the Agreement and the other Loan Documents remain in full force
and effect and are hereby ratified, reaffirmed, confirmed and approved.
The Obligors represent and warrant to the Bank that: a) after giving effect to
the waiver contained herein and effected hereunder, all of the representations
and warranties contained in the Loan Documents are true and correct on and as
of the date hereof with the same force and effect as if made on and as of the
date hereof; and b) no Event of Default or event which would become an Event of
Default after the lapse of time or the giving of notice and the lapse of time,
or both, has occurred and is continuing or will exist under the Loan documents
as of the date hereof.
If the foregoing is acceptable, please return a copy of this letter, executed
by the parties listed below to my attention.
Sincerely,
By: /S/ Robert B. Greene
--------------------------
Robert B. Greene
Its: First Vice President
--------------------------
Accepted and agreed to this 6th day of August, 1997.
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
By: /S/ Alan S. Ker
--------------------------
Alan S. Ker, Vice President Finance and Treasurer
UNIVERSAL STANDARD MANAGED CARE OF OHIO, INC.
By: /S/ Alan S. Ker
--------------------------
Alan S. Ker, Treasurer
UNIVERSAL STANDARD MANAGED CARE, INC.
By: /S/ Alan S. Ker
--------------------------
Alan S. Ker, Treasurer
A/R CREDIT, INC.
By: /S/ Alan S. Ker
--------------------------
Alan S. Ker, Treasurer
T.P.A., INC.
By: /S/ Alan S. Ker
--------------------------
Alan S. Ker, Treasurer
<PAGE> 1
EXHIBIT 11
UNIVERSAL STANDARD MEDICAL LABORATORIES, INC.
COMPUTATION OF CONSOLIDATED NET INCOME PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) (a) ($212) ($2,678) ($721) ($2,998)
------- ------- ------- -------
PRIMARY
Weighted average common shares outstanding 6,561 6,504 6,578 6,504
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 40 181 43 86
Warrants outstanding 7 31 7 31
------- ------- ------- -------
Average shares outstanding and common equivalent
shares for primary earnings per share 6,608 6,716 6,628 6,621
------- ------- ------- -------
Primary earnings per share (a):
Net Income (loss) ($0.03) ($0.40) ($0.11) ($0.45)
FULLY DILUTED
Weighted average common shares outstanding 6,561 6,504 6,578 6,504
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 40 181 43 86
Warrants outstanding 7 31 7 31
------- ------- ------- -------
Average shares outstanding and common equivalent
shares, assuming full dilution 6,608 6,716 6,628 6,621
------- ------- ------- -------
Fully diluted earning per share:
Net Income (loss) ($0.03) ($0.40) ($0.11) ($0.45)
------- ------- ------- -------
</TABLE>
(a) These amounts agree with the related amounts in the condensed consolidated
statements of income.
* Not applicable
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,477
<SECURITIES> 0
<RECEIVABLES> 17,464
<ALLOWANCES> 8,848
<INVENTORY> 1,207
<CURRENT-ASSETS> 13,927
<PP&E> 18,200
<DEPRECIATION> 8,955
<TOTAL-ASSETS> 57,803
<CURRENT-LIABILITIES> 11,451
<BONDS> 20,231
0
0
<COMMON> 32,864
<OTHER-SE> (6,746)
<TOTAL-LIABILITY-AND-EQUITY> 57,803
<SALES> 27,569
<TOTAL-REVENUES> 27,569
<CGS> 18,647
<TOTAL-COSTS> 18,647
<OTHER-EXPENSES> 8,809<F1>
<LOSS-PROVISION> 1,440
<INTEREST-EXPENSE> 870
<INCOME-PRETAX> (721)
<INCOME-TAX> 0
<INCOME-CONTINUING> (721)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (721)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
<FN>
<F1>Includes Provisions for doubtful accounts.
</FN>
</TABLE>
