SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-22758
UNILAB CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 95-4415490
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
18448 Oxnard Street, Tarzana, California 91356
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(Address of principal executive offices) (Zip code)
(818) 996-7300
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.01 par value American Stock Exchange
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 requirement for the past 90 days. Yes __X__ No__
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
At February 10, 1997, 39,189,693 shares of Registrant's Common Stock, par
value $.01 per share were outstanding. The aggregate market value of the
Common Stock, based on the closing price on the American Stock Exchange
as of February 10, 1997, held by nonaffiliates of the Registrant was
approximately $28.2 million.
DOCUMENTS INCORPORATED BY REFERENCE
Part II - Portions of the Annual Report to shareholders for the year
ended December 31, 1996
Part III - Proxy Statement for Annual Meeting of Stockholders to be held
June 17, 1997
Page 1 of 40 pages.
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TABLE OF CONTENTS
Item PAGE
- ---- ----
Part I. 1 Business.................................................... 3
2 Properties.................................................. 19
3 Legal Proceedings........................................... 19
4 Submission of Matters to a Vote
of Security Holders......................................... 22
Part II. 5 Market for the Registrant's Common Equity and
Related Stockholder Matters................................. 26
6 Selected Financial Data..................................... 27
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 28
8 Financial Statements and Supplementary Data................. 28
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 28
Part III. 10 Directors and Executive Officers of the Registrant.......... 29
11 Executive Compensation...................................... 29
12 Security Ownership of Certain Beneficial Owners
and Management and Directors................................ 29
13 Certain Relationships and Transactions with Related
Persons..................................................... 29
Part IV. 14 Exhibits, Financial Statements, Financial Statement
Schedules and Reports on Form 8-K........................... 30
Signatures ............................................................ 32
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PART I
Item 1. Business
General
Unilab Corporation ("Unilab" or the "Company") is the largest
independent clinical laboratory testing company in California, providing
laboratory testing services to physicians, managed care groups, hospitals and
other health care providers. The Company believes that its revenues in
California for the year ended December 31, 1996 were approximately twice the
annual sales in California of the next largest independent clinical laboratory
in that market. During such period, Unilab had approximately 15% of California's
independent clinical laboratory market, which is the largest state clinical
laboratory market in the United States. As of December 31, 1996, the Company
operated three centrally-located full-service laboratories, approximately 35
strategically-located short turn around ("STAT") laboratories and approximately
238 conveniently-located patient service centers ("PSC")s.
Unilab was created in 1988 as a spin-off of the western United
States ("U.S.") clinical laboratory business of the MetPath division ("MetPath")
of Corning Incorporated ("Corning"). Pursuant to certain transactions
consummated in November 1993 (the "Reorganization"), the Company's U.S.
operations were restructured to focus almost exclusively on California.
Facilities and Testing
Unilab currently operates three full-service clinical
laboratories in San Jose, Tarzana (Los Angeles) and Sacramento, California which
offer over 1,000 clinical testing procedures, ranging from routine screening to
advanced technical procedures, used in the diagnosis, monitoring and treatment
of diseases and other medical conditions. Unilab operates 24 hours a day, 365
days a year, utilizing a fully integrated collection and processing system.
Patient specimens are collected from client offices or Unilab's own collecting
stations and efficiently transported to full-service or STAT laboratories, where
each specimen and related test request form is checked for completeness, bar
coded and logged for testing and billing purposes into Unilab's computer system.
Laboratory technicians then perform the requested tests, with results generally
available to clients the next morning. Unilab's clinical computer program keeps
track of patients' samples, reports test results in a readable format and
maintains records and billing information. As of December 31, 1996, on an
average work day, Unilab processed approximately 31,000 patient specimens and
performed over 58,000 clinical tests.
Tests performed by Unilab measure the levels of, and analyze
chemical and cellular components in, human body fluids and tissue and are used
in the diagnosis, monitoring and treatment of disease. They include procedures
in the areas of blood chemistry, hematology, urine chemistry, tissue pathology
and cytology, among others. Commonly ordered individual tests include red and
white blood cell counts, PAP smears, blood cholesterol level tests, urinalysis
and procedures to measure blood sugar levels and to determine pregnancy. Routine
test groups include tests to determine the function of the kidney, heart, liver
and thyroid, as well as other organs, and a general health screen that measures
several important body health parameters. Many of the routine tests are
performed by automated equipment and are capable of being performed and reported
within a 24-hour period. Approximately 85% of the tests conducted by
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Unilab are considered to be routine. Reports are frequently sent via
telecommunications to equipment installed by Unilab in the physicians' offices
or are delivered by hard copy.
Unilab also conducts esoteric testing services. Esoteric tests
generally require complex manual techniques, a higher degree of technical skill
and knowledge and sophisticated equipment. As a consequence, esoteric tests are
priced higher than routine tests. Two examples of esoteric tests provided by
Unilab include immunoelectrophoresis, used for the diagnosis of autoimmune
disorders and myelomas, and hepatitis markers, used for the diagnosis of acute
hepatitis A and B and for identification of chronic carriers of these diseases.
The number of esoteric tests performed by the Company has been increasing as new
medical discoveries are made and testing procedures developed. Unilab performs
more than 98% of the tests requested by its clients, with less than 2% performed
by third party reference laboratories with whom Unilab contracts. On a revenue
basis, approximately 6% of testing fees collected by Unilab are paid to third
party reference laboratories or pathology services.
Customers
Unilab provides testing services to a broad range of health
care providers. The following factors, among others, are often used by health
care providers in selecting a laboratory: (i) accuracy, timeliness and
consistency in reporting test results; (ii) number and type of testing services
performed; (iii) service capability and convenience offered by the laboratory;
(iv) pricing of the laboratory's testing services; and (v) reputation of the
laboratory for the foregoing.
The primary types of customers that Unilab services are as
follows:
o Independent Physicians and Physician Groups. Physician
performing testing for their patients who are unaffiliated with a pre-paid
health plan are the principal source of Unilab's clinical laboratory business.
Unilab markets its services to physicians through its sales force and competes
primarily on the basis of the accuracy of testing, convenient locations for
patient specimen collection, rapid test result reporting and informational
services, and its competitive pricing. Fees for clinical laboratory testing
services rendered for physicians are billed either to the physician, to the
patient, or to the patient's third-party payor such as Blue Cross, Medicare and
Medicaid.
o HMOs and Other Managed Care Groups. HMOs and other managed care
groups (which designate the laboratory to be used for tests ordered by the
physician) generally select an independent laboratory based on competitive
pricing offered to high volume customers, capability of the laboratory to
effectively service incremental blocks of business, field distribution system,
including couriers and PSCs to service their networks of physician providers,
and the reputation of the laboratory in the medical community.
o Hospitals. Unilab provides esoteric testing for hospitals which
are not equipped to perform such sophisticated tests and general reference
testing for hospitals which have reduced or eliminated their in-hospital
laboratory testing in an attempt to reduce their cost of delivering patient
care. The selection of an independent laboratory by hospitals is usually based
on reputation of the laboratory in the medical community, type of services
offered, accuracy, timeliness and consistency of test results and competitive
pricing.
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o Independent Laboratories. Unilab also provides reference
testing services to independent clinical laboratories which do not have the
full range of Unilab's testing capabilities.
California has the highest enrollment rate (approximately 40% of
the population) in managed care plans of any state in the country and, as a
result, delivery of health care to participants in such plans has become
integral to the health care delivery system throughout the state. The
proliferation of managed care providers in the healthcare industry has altered
the customer base of healthcare service providers, especially in California.
From 1993 to 1994, Unilab more than doubled its number of covered lives (i.e.,
individuals covered by contracts between pre-paid health plans and Unilab for
the provision of laboratory services) to over 2 million lives. During 1995 the
Company continued to serve a similar number of covered lives, and during the
first half of 1996, increased its managed care coverage to over 2 1/2 million
lives. This business has historically been viewed as having substantial value,
in large part because of the economies of scale inherent in its considerable
volume. It was also viewed as a competitive advantage in obtaining additional
non-managed care business generated from many of the same offices which were
serving managed care patients. Increasingly, Unilab, like other major laboratory
companies, has come to recognize that the pricing received in relation to the
cost of services provided to managed care patients was disproportionately low,
and the Company has undertaken a concerted effort to improve the situation.
Unilab is committed to providing high quality laboratory testing at profitable
pricing levels.
Specimen Collection and Processing
Unilab utilizes an extensive distribution and collection system
of approximately 340 couriers, approximately 238 PSCs and approximately 20
courier hubs to achieve efficient and integrated collection and testing. Courier
routes are logically designed based on lab location, geographic density and
specimen volume. Strategically located full service labs and satellite courier
"hubs" serve as control centers to ensure courier routing is efficient and
tightly controlled. In addition, PSCs act as initial specimen processing centers
effectively putting control of the specimen in Unilab's possession earlier in
the process. The Company believes this distribution infrastructure is integral
to providing efficient, convenient and reliable service to its clients.
Quality Assurance
Unilab believes that its quality assurance procedures meet the
highest standards in the industry. Unilab has established a comprehensive
quality assurance program for all of its laboratories and other facilities to
ensure that specimens are collected and transported properly, tests are
performed accurately, and client, patient and test information are reported,
billed and filed correctly. Unilab's quality assurance programs include (i)
preventive maintenance of laboratory testing equipment, (ii) maintenance of high
personnel standards and training which ensure that only qualified personnel
perform testing and (iii) testing of control specimens in order to ensure
accuracy and precision of test equipment. In addition, all laboratories
certified by the Health Care Financing Administration ("HCFA") for participation
in the Medicare program under the Clinical Laboratory Improvement Amendments of
1988 ("CLIA") must participate in basic quality assurance programs. Each of
Unilab's laboratories is licensed (or has licensure pending) by its respective
state authorities and certified by HCFA for participation in the Medicare
program under CLIA.
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In addition, Unilab participates in a number of independent
proficiency testing programs. Participation in a federally recognized
proficiency testing program is a requirement of CLIA. Under these programs, an
independent testing authority submits pre-tested samples to a laboratory. These
tests measure the laboratory's test results against known proficiency test
values. Unilab also participates in a number of proficiency testing programs
which generally entail submitting pre-tested samples to a laboratory to verify
the laboratory test results against the known proficiency test value. These
proficiency programs are conducted both by Unilab on its own and in conjunction
with groups such as the College of American Pathologists ("CAP"), and state and
Federal government regulatory agencies. CAP is an independent non-governmental
organization of board certified pathologists which offers an accreditation
program to which laboratories can voluntarily subscribe. CAP accreditation
program involves both on-site inspections of the laboratory and participation in
CAP's proficiency testing program for all categories in which the laboratory is
accredited by CAP. CAP's proficiency testing program is federally recognized for
purposes of CLIA. A laboratory's receipt of accreditation by CAP satisfies the
Medicare requirement for participation in proficiency testing programs
administered by an external source. Each of Unilab's full-service laboratories
in Sacramento, San Jose and Tarzana has earned full accreditation by CAP. In the
1996 External Proficiency Testing Program conducted by CAP at the Company's
three primary laboratories, the total accuracy rate for all sections of the
laboratories was 99.4%, slightly better than the 1995 cumulative accuracy rate
of 99.3% and the 1994 rate of 99.2%.
Sales and Marketing
As of March 1, 1997, Unilab employed a full-time sales and
marketing staff of approximately 65 people. Members of the sales and marketing
staff are selected based upon their skill and experience. In addition, all sales
and marketing personnel participate in training programs developed to provide
detailed and specialized knowledge of the requirements of Unilab's varied market
segments. Compensation packages for such persons contain a significant element
of commission-based income and are designed to reward individual performance for
increasing collectible revenue through expanding the Company's client base with
the addition of quality business.
Unilab continuously monitors existing accounts and assesses
service levels in order to maintain client relationships and identify and
resolve any potential client dissatisfaction. Unilab's account service managers
also monitor advances in testing technologies and notify physician clients of
the availability of such advances. Compensation packages for account service
managers are designed to reward individual performance for retaining existing
client accounts.
Acquisitions
Unilab's management, while employed by the Company or its
predecessor, has successfully executed and integrated a number of acquisitions
in the clinical laboratory industry, which have accounted for a substantial
portion of the Company's growth. Since 1989, the Company or its predecessor has
completed eight acquisitions in California, including four since 1994 with
aggregate revenues in excess of $50 million. While the Company does not intend
to focus in the short term on growth through acquisition, Unilab may selectively
seek acquisitions designed to result in cost savings and other benefits
resulting from the elimination or reduction of (i) redundancies in testing
equipment and personnel, (ii) overlapping courier routes, (iii) overlapping PSCs
and STAT laboratories, (iv) duplicative administrative personnel and (v)
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redundant marketing efforts and personnel. The Company seeks to achieve
consolidation efficiencies within six to eighteen months after completion of an
acquisition.
MLN Acquisition
On May 16, 1995, Unilab acquired MLN Holding Acquisition Co.,
the parent company of Medical Laboratory Network, Inc. ("MLN"), a Ventura,
California based clinical laboratory company. The acquisition of MLN, which
operated a network of one regional laboratory, five STAT laboratories and 31
PSCs in California, significantly increased Unilab's market share in several
regions of California (Ventura County, Santa Barbara County, Sonoma County and
Fresno). The operations of MLN were substantially integrated with those of the
Company during the period from June to September 1995. As a result of such
integration, the Company benefitted from annualized cost savings primarily
related to the reduction in headcount of approximately 100 employees, closure of
11 PSCs and downsizing of the main MLN laboratory in Ventura, California, the
disposition of laboratory equipment, furniture and fixtures, courier vehicles
and leasehold improvements due to the downsizing of the main MLN laboratory and
consolidation of other overlapping operations.
PathLab/Premier Acquisition
In January 1994, Unilab acquired Premier Laboratory Services,
Inc. ("Premier"), which operated in the San Jose/San Francisco clinical
laboratory market under the name PathLab. The consolidation of PathLab's
business into the slightly larger Unilab operations in San Jose enabled the
Company to become the largest provider of laboratory services in the San
Francisco Bay area. In addition, the Company also achieved significant operating
efficiencies by consolidating the two operations within one year of the closing
of the PathLab acquisition. These operating efficiencies arose in part from
reducing the work force, closing unnecessary facilities (including PathLab's
central testing laboratory), consolidating courier services and eliminating
overlapping operations.
Other Significant Acquisitions
From April 1989 to January 1991, the Company completed the
following significant acquisitions: Y. Uchida & Co., Inc. ("Y. Uchida") (April
1989); Central Diagnostic Laboratories, Inc. ("CDL") (October 1989) and Roche
Biomedical Western Region ("Roche") (January 1991). Y. Uchida, which had
approximately $20 million in annual sales, was the Company's first significant
acquisition and formed the foundation for Unilab's San Jose operations. CDL, at
the time the largest privately-owned laboratory in the country, sold its western
operations to the Company for $91 million. CDL, based in Los Angeles, also had
support operations in Santa Rosa, California, Phoenix, Arizona and Dallas,
Texas. (The Phoenix and Dallas operations were sold in 1993). Merging the
Company's much smaller Southern California operations into CDL's resulted in
Unilab becoming the largest provider of independent laboratory testing in
Southern California. Roche, which had approximately $33 million of annual sales
in California, was based in Sacramento, California. This acquisition formed the
base for the Company's operations in the central part of California.
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The Clinical Laboratory Industry
Overview and Trends
Unilab believes based on published industry reports that the
total U.S. clinical laboratory market during 1996 was approximately $30 billion
in annual revenue, of which the California market accounted for approximately $4
billion. The clinical laboratory market nationally, and particularly in
California, is highly fragmented and composed of three segments: (i)
laboratories located in hospitals; (ii) laboratories located in physicians'
offices and physician-owned laboratories; and (iii) independent clinical
laboratories. Industry sources estimate that there are currently fewer than
4,500 independent clinical labs in the United States, with as many as 750
located in California. The Company believes that approximately 50% of clinical
laboratory testing revenues in California result from tests performed by
hospitals, 20% from tests performed by physicians in their offices and
physician-owned laboratories and 30% from tests performed by independent
laboratories. The Company believes that the consolidation trend of the last
several years is likely to continue, resulting in fewer independent clinical
labs both nationally and in California.
Clinical laboratory testing has become an integral part of the
delivery of health care services in the United States due to a number of
factors, including: (i) the aging of the U.S. population, resulting in increased
utilization of testing services; (ii) an increase in the number of routine tests
and esoteric tests due to advances in technology and scientific knowledge; (iii)
increased automation in testing procedures due to the development of highly
automated laboratory testing equipment which has resulted in greater
efficiencies in testing operations; (iv) increased awareness among physicians
and the general public concerning the importance of preventive medicine and
early detection; and (v) increased use of tests by physicians as protection
against potential malpractice suits. Unilab believes that there will be further
opportunities for independent laboratories to capture certain testing from the
market currently served by hospital and physician office laboratories by
focusing on the cost and service advantages which large independent laboratories
like Unilab have with respect to high volume, non-emergency testing. However,
the number of clinical laboratories has declined as hospitals and physicians
have exited the clinical laboratory business and consolidation has occurred in
the independent laboratory segment.
California Market
California is the single largest state clinical laboratory
market in the U.S., accounting for approximately 13% of the country's laboratory
testing revenues. The Company believes that consolidation in California has
occurred and will continue for reasons similar to those which have caused the
industry nationwide to consolidate, such as: (i) the cost of compliance with
increasingly stringent regulatory requirements; (ii) the cost efficiencies
afforded by large-scale automation of routine testing; (iii) legislative
developments, such as restrictions on physician self-referrals and ownership of
laboratories; (iv) reductions in Medicare reimbursements; (v) the growth of HMOs
and other managed care groups which require efficient testing services from
high-capacity laboratories; (vi) the increasing demand for sophisticated
equipment and management information systems that tend to be prohibitively
expensive for small laboratories; and (vii) the competition for a limited supply
of qualified laboratory personnel. The Company has focused on the California
clinical laboratory market because of (1) its size and density, (2) the high
degree of fragmentation and prospects of continued consolidation and (3)
Unilab's current leadership position in the market and the prospects of
leveraging this status across the state.
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Strategy
Unilab's objective is to build upon its position as the largest
and lowest-cost provider of clinical laboratory testing services in California
both to provide quality and valued services to its customers and to earn a
profitable return for its stake-holders. The Company's business strategy for
achieving this objective is to maintain superior quality and service, provide
ancillary services commensurate with the value which its customers place on
them, and conduct its billing and business practices in an appropriate,
efficient, effective, and responsible manner. The Company also intends to
closely monitor and, where appropriate, reduce its expense base, while
simultaneously taking steps to increase its revenue stream through higher
pricing.
Governmental Regulation
Numerous aspects of Unilab's operations, including its testing
processes, its business practices and in some instances, the amount and methods
by which it is paid, are subject to governmental regulation at the Federal,
state and local levels.
Federal and State Clinical Laboratory Licensing
All clinical laboratories operating in the United States, with
limited exceptions, are required to obtain Federal certification pursuant to
CLIA and its implementing regulations. The law and its implementing regulations
impose, as conditions for such certification, requirements relating to test
processes, personnel qualifications, facilities and equipment, recordkeeping,
quality control, quality assurance and participation in proficiency testing. The
same regulatory requirements also apply as conditions for participation in the
Medicare and Medicaid programs. CLIA regulations vary depending on the
complexity of the methodologies performed by the laboratory. Compliance is
verified by periodic on-site inspections. Sanctions for failure to meet
CLIA/Medicare certification requirements include suspension or revocation of
certification, criminal penalties, injunctive actions to close the laboratory,
civil penalties or imposition of specific plans of correction to remedy alleged
deficiencies.
Licensing requirements similar to those imposed pursuant to
CLIA also apply at the state level, with similar sanctions for noncompliance.
Effective January 1, 1996, California Senate Bill 113 ("SB 113") became law and
amended the California laws governing clinical laboratories to make them at
least as stringent as CLIA was as of January 1, 1994. Since Unilab must comply
with CLIA in any event, SB 113 is likely to have little practical effect on the
Company. The new law could, however, impose additional regulatory burdens on
California-based physician office laboratories ("POL's") by increasing the
responsibilities of directors at POL's for oversight and supervision.
Additionally, in California specific proficiency testing participation is
required for those laboratories, like Unilab, that perform testing to detect the
presence of the human immunodeficiency virus ("HIV").
Notwithstanding compliance costs, Unilab regards these
licensing requirements as beneficial to the industry and favorable to its
business because the CLIA certification requirements apply not only to
independent laboratories but to all clinical laboratories, with only narrow
exceptions for those facilities performing a limited number of simple
procedures.
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Federal and State Billing and Fraud and Abuse Laws
The Federal Medicare laws impose specific billing requirements
on clinical laboratories. Generally, laboratories are required to bill the
Medicare program directly rather than billing physicians or beneficiaries.
Exceptions to this "direct billing" requirement permit a referring laboratory to
bill Medicare for testing performed by another laboratory if at least 70% of the
tests for which the referring laboratory receives requisitions are performed
on-site. This so-called "shell lab" exception is expected to benefit the
independent laboratory industry by limiting incentives for physician-owned
laboratories.
Additionally, a wide array of Medicare/Medicaid fraud and abuse
provisions apply to those clinical laboratories participating in these programs.
These laws prohibit, among other things, (i) the submission of false claims or
false information to the programs, (ii) deceptive or fraudulent conduct, (iii)
the provision of excessive or unnecessary services or services at excessive
prices and (iv) the offer or receipt of broadly defined inducements for the
referral of Medicare, Medicaid or other federal health care program patients or
business. Penalties for violations of these Federal laws include exclusion from
participation in the Medicare/Medicaid programs, asset forfeitures, civil
penalties and criminal penalties. Civil penalties for a wide range of offenses
may be up to $10,000 per item and twice the amount claimed. In the case of
certain offenses, exclusion from participation in Medicare and Medicaid is a
mandatory penalty. These fraud and abuse provisions are interpreted liberally
and enforced aggressively by the various enforcing agencies of the federal
government.
Several Federal agencies are charged with the responsibility of
investigating allegations of fraudulent and abusive conduct by health care
providers. These agencies include, without limitation, the Department of Justice
("DOJ"), Federal Bureau of Investigation ("FBI") and the Office of Inspector
General ("OIG") of the Department of Health and Human Services ("HHS").
Additionally, Medicare carriers and Medicaid state agencies now have certain
fraud and abuse control authority. According to public statements by the DOJ,
health care fraud has been elevated to the second-highest priority of the DOJ,
and FBI agents have been transferred from investigating counterintelligence
activities to health care provider fraud. The OIG also is involved in such
investigations and has, according to recent Workplans, targeted certain
laboratory practices for study, investigation and prosecution. Pursuant to one
such project in the fiscal 1992/1993 Workplan, entitled "Laboratory Unbundle,"
laboratories that offer packages of tests to physicians and "unbundle" them into
"several tests to get higher reimbursement when billing Medicare and Medicaid"
were to be identified and "suitable cases will be presented for prosecution".
Under another project in the fiscal 1992/1993 Workplan, laboratories "that link
price discounts to the volume of physician referrals, `unbundle' tests in order
to bill Medicare at a higher total rate, and conduct unnecessary tests, ... will
be identified to coordinate investigations throughout the country". Such
projects culminated in the industry-wide governmental "Lab Scam" investigations
that have resulted in approximately $800 million of aggregate settlement
payments being made by a number of independent clinical labs in the past several
years. The Lab Scam investigation appears to be ongoing.
The OIG's fiscal year 1994/1995 Workplan also targeted a wide
range of clinical laboratory practices for study and investigation. In fiscal
years 1994-1995, the OIG planned to "continue to investigate potential fraud in
Part B of the Medicare program", targeting certain specific areas including
"laboratory fraud". In October 1994 the OIG issued a "Fraud Alert" targeting
certain specific practices in the clinical laboratory industry, including the
provision of
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free computers or fax machines to ordering physicians; the provision of free
laboratory testing for health care providers, their families and employees; the
provision of phlebotomy services to physicians; the collection by laboratories
of bio-hazardous waste from physician offices; and certain other practices. The
Fraud Alert, entitled "Arrangements for the Provision of Clinical Laboratory
Services," was disseminated widely to physicians and other providers of
Medicare/Medicaid services. In this document, the OIG asked persons who become
aware of any of the identified practices to contact OIG Regional Offices around
the U.S. Additionally, the Fraud Alert announced the OIG's plan to "actively
investigate and prosecute" the practices described in the document.
The OIG's 1996/97 Workplan also proposed targeting a wide range
of laboratory practices for investigation, including HCFA's enforcement of CLIA;
duplicate claims from physician office and independent laboratories for the same
tests; and billing by hospital laboratories for outpatient services. In
addition, in 1997 the OIG released a "Model Compliance Plan" for clinical
laboratories, which set out certain voluntary standards laboratories were to
follow to comply with federal fraud and abuse laws.
In addition, a Federal "self-referral" law commonly referred to
as the "Stark" law prohibits Medicare payments for laboratory tests referred by
physicians who (personally or through a family member) have a financial interest
(including "ownership interests" and "compensation arrangements") in the testing
laboratory. There are certain exceptions, the most significant being in-office
testing personally performed by or under the supervision of the physician or the
group practice to which the physician belongs. Another exception would permit a
physician to refer specimens to a laboratory owned by a company, the stock of
which is traded on a public exchange and which has shareholders' equity of at
least $75 million in the most recently completed year or an average of $75
million over the prior three years even if the physician owns stock of that
company. Sanctions for laboratory violations of the prohibition include denial
of Medicare payment, refunds, civil money penalties of up to $15,000 for each
service billed in violation of the prohibition and exclusion from the Medicare
program. These restrictions, which became effective January 1, 1992, may benefit
the independent clinical laboratory industry by restricting physicians from
"self-referring" Medicare testing to physician-owned entities. As of January 1,
1995, as a result of the adoption of the "Stark II" law, these restrictions
applied to Medicaid-covered services as well, with similar expected benefits for
the independent laboratory industry.
The 1995 House Medicare reform proposal contained, and the
House-Senate report adopted, provisions that would have, if passed,
significantly narrowed the scope of the Stark anti-referral laws. That proposal
would have ended the ban on physician referrals to laboratories based on any
"compensation arrangements" between the lab and the physician. Such compensatory
arrangements would have remained subject to the federal anti-kickback laws. The
President vetoed this bill on December 5, 1995. The President's Medicare reform
proposal would not have narrowed the scope of the Stark laws. While the
proposals to narrow the scope of the self-referral law were not passed in 1995
or 1996, it is possible that similar proposals will be introduced in 1997 in
Congress.
In 1996, Congress passed and the President signed into law the
Health Insurance Portability and Accountability Act of 1996, frequently referred
to as the "Kennedy-Kassebaum Act", after its principal sponsors. The law made
major changes in federal fraud and abuse laws applicable to health care
providers. First, it established a new federal program designed to
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coordinate federal, state and local fraud and abuse control programs. The law
permits the DOJ and the OIG to conduct audits and investigations relating to the
delivery of health care in the United States, without limitation to Medicare and
Medicaid and established a Fraud and Abuse Trust Fund. The law also expands the
federal antikickback law so that it applies not only to situations involving
Medicare and Medicaid, but to almost all federally funded health care programs.
In addition, the law for the first time permits providers to obtain advisory
opinions from the government concerning the legality of certain contemplated
practices. The Kennedy-Kassebaum law also significantly increases the penalties
for certain civil violations of the Medicare law and increases the offenses for
which a provider could be excluded from Medicare/Medicaid. Finally, the law
establishes a number of new criminal provisions applicable to health care fraud.
The Clinton Administration has proposed repeal of the advisory opinion
provisions and certain other provisions related to the change in the intent
standard for civil money penalties.
At the state level, laboratory operations are affected by
billing requirements applicable to all laboratory services and state fraud and
abuse and anti-inducement laws that similarly apply to all laboratory services.
California, where the Company conducts the vast majority of its business, has
adopted especially stringent laws of this type, including the Physician
Ownership and Referral Act, known as the "Speier Bill", which became effective
January 1, 1995 and which prohibits, under most circumstances, referrals of
laboratory testing business by physicians to laboratories in which the physician
has a "financial interest". Penalties for violation of these provisions can
include fines, criminal penalties and disciplinary action against referring
physicians. In addition, California has adopted the "Calderon" law, which
prohibits physicians from "marking up" laboratory bills. The Company believes
the Calderon law benefits independent laboratories by reducing the financial
incentives for physician-owned laboratories.
In August 1993, Unilab received a subpoena from HHS in
connection with an investigation and internal review relating to the possible
submission of false or improper claims under the Medicare and Medicaid programs.
The HHS subpoena required production of a broad range of documents, including
those relating to Unilab's selling, pricing and billing practices. The HHS
subpoena concerned fourteen tests, including five tests that were the subject of
the civil claims Settlements. Unilab completed production of these documents in
February 1994.
In August 1995, the Company received a subpoena from HHS
requesting certain information with respect to the Company's marketing and
billing practices for a complete blood count (CBC), a diagnostic test which was
not included in any prior subpoena or the subject of any of the settlements
entered into by the Company in September 1993 (the "Settlements"). See, "Legal
Proceedings--Department of Justice Settlement". Unilab promptly completed
production of all documents in response to the HHS subpoena and cooperated fully
in the HHS investigation. The Company reached an agreement with the Federal
government in September 1996 to pay $4.0 million to conclude this investigation.
The payments are to be made in semi-annual installments over three years with
approximately $500,000 paid in 1996. In addition, the Company paid the
California MediCal program approximately $160,000 to settle all their claims
regarding the same issue. The settlement did not constitute an admission by the
Company with respect to any allegation, issue of law or fact arising from the
investigation and the Company received a full civil and administrative release
from all claims by the government with respect to these billings through the
date of the settlement agreement.
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Professional Ethics
The American Medical Association's (AMA's) view regarding
referrals by physicians to businesses in which they hold ownership interests is
that "in general, physicians should not refer patients to a health care facility
outside their office practice at which they do not directly provide care or
services when they have an investment interest in the facility". Under the AMA
guidelines physicians are expected to refer patients to independent laboratories
rather than to laboratories in which they have an investment interest. The AMA
guidelines do not have the force of law. The management of Unilab believes that
such AMA policy against physician self-referrals may have a positive effect on
Unilab by further facilitating referrals away from physician-owned laboratories
to independent laboratory concerns such as Unilab.
Reimbursement
Medicare reimbursement for clinical laboratory services is made
pursuant to Medicare fee schedules, subject to a national limitation amount
("cap") that is based upon the median of all the Medicare fee schedules. During
the late 1980s and the 1990s, that cap dropped from 115% of the median to 100%
of the median, to 93% of the median, to 88% of the median, to 84% of the median
to 80% of the median and effective January 1, 1996 to 76% of the median.
In 1997, the Clinton Administration proposed a number of new
provisions to revise government reimbursement for clinical laboratory services.
The proposal urges the adoption of a competitive bidding program for laboratory
services, which would, if adopted, effect a reduction in Medicare payments of as
much as 20% after the year 2001. In addition, the plan proposes to adopt a
national fee schedule for certain automated tests, and would add additional
tests to those for which Medicare pays on a "bundled" basis. Finally, the plan
would also require laboratories to bill nursing homes, rather than Medicare, for
laboratory tests provided to nursing home residents covered by Medicare.
Effective August 1, 1993, the levels of Medicare reimbursement
for certain clinical laboratory tests pursuant to the Medicare laboratory fee
schedule were affected by a substantial change in the Current Procedural
Terminology ("CPT") codes, which is the basis for billing to Medicare/Medicaid
and many private payors. The CPT code forms the basis for the coding of tests
billed to Medicare and Medicaid, as well as to some third-party payors, and,
thus, coding changes may substantially affect reimbursement levels. One of the
areas of the CPT code revision that has most affected laboratory reimbursement
levels is a change in the codes that designate panel and profile tests, so that
numerous panel codes have been eliminated entirely and those remaining have been
given specific definitions for constituent tests for the first time. This coding
change reduced laboratory reimbursement for Unilab and the clinical laboratory
industry generally. Other codes have been eliminated or superseded by new codes,
and codes have been added for new, previously uncoded procedures. In late 1994,
HCFA issued a draft document revising Medicare policies concerning the
reimbursement of panel tests. The draft document expanded the list of clinical
laboratory tests that are considered to be parts of automated panels and are to
be reimbursed by Medicare using panel codes. In November 1995, HCFA adopted a
final revised policy on reimbursement of panel tests. As of January 1, 1996, 22
automated tests (rather than 19 tests) became reimbursable by Medicare as part
of an automated chemistry profile. An additional allowance of 50 cents per test
is authorized when more than 19 tests are billed in a profile. HCFA retains the
authority to expand in the future the list of tests included in a profile. In
addition, the new HCFA policy requires laboratory providers to submit
documentation of the
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medical necessity for panel tests. Medicare will reimburse laboratories only for
the tests in a profile it determines to be medically necessary. This policy
could have an adverse effect on the revenues and operating costs of the clinical
laboratory industry, including Unilab. In a related change of policy, effective
as of March 1, 1996, HCFA eliminated its prior policy of permitting payment for
all tests contained in an automated chemistry profile when at least one of the
tests in the profile is covered. Instead, where only some of the tests in a
profile are covered, Medicare payment will not exceed the amount that would have
been paid if only the covered tests (determined on the basis of "medical
necessity") had been ordered.
Additionally, laboratory pricing practices in general have
received substantial scrutiny from the Federal government. Under its "Lab Scam"
inquiry, the federal government, through numerous of its agencies, including
DOJ, OIG, FBI and HCFA, has investigated the sales and billing practices of many
of the country's independent clinical laboratories. A number of these
laboratories, including Damon Clinical Labs, Corning Clinical Labs (now Quest
Diagnostics), Laboratory Corporation of America Holdings and SmithKline Beecham
Clinical Laboratories, as well as the Company, have in the past year entered
into agreements with the government to settle the government's allegations of
wrongdoing, in certain cases for hundreds of millions of dollars.
Proposals have also been developed to procure Medicare and
Medicaid laboratory testing services through competitive bidding mechanisms. To
date, neither Congress nor the State of California has acted to mandate or
authorize such procurement methodologies. However, President Clinton's 1997
Medicare reform proposal would establish competitive bidding for clinical
laboratory services. If competitive bidding were implemented, such action could
materially adversely affect the business of Unilab.
Drug Testing
Drug testing for public sector employees is regulated by the
National Institute on Drug Abuse ("NIDA"), which has established detailed
performance and quality standards that laboratories must meet in order to be
approved to perform drug testing on employees of the Federal government, Federal
government contractors and certain other entities. To the extent that Unilab
performs such testing, it must be certified as meeting NIDA standards. Unilab's
Tarzana (Los Angeles) laboratory is NIDA-certified.
Occupational Safety
In addition to its comprehensive regulation of safety in the
workplace, the Federal Occupational Safety and Health Administration ("OSHA")
has adopted rules that establish extensive requirements related to workplace
safety for health care employers, including clinical laboratories, whose workers
may be exposed to bloodborne pathogens. These regulations, among other things,
require work practice controls, protective clothing and equipment, training,
medical follow-up, vaccinations and other measures designed to minimize exposure
to, and transmission of, bloodborne pathogens such as HIV and the hepatitis B
virus. OSHA has also adopted rules establishing safety requirements for the use
of chemicals as reagents and for other purposes.
At the state level, California imposes occupational safety and
health requirements administered by the California Occupational Safety and
Health Administration.
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Food and Drug Regulation
The Federal Food and Drug Administration ("FDA") administers
laws that require pre-marketing approval for medical devices, including test
kits used in performing clinical laboratory procedures. The FDA's pre-marketing
approval requirements can affect the availability of test kits to clinical
laboratories such as Unilab.
Controlled Substances
The use of controlled substances in testing for drugs-of-abuse
is regulated by the Federal Drug Enforcement Administration.
Specimen Transportation
Regulations of the Department of Transportation, the Public
Health Service, and the Postal Service apply to the transportation of clinical
laboratory specimens.
Radioimmunoassay Testing
Radioimmunoassay testing, which is performed by certain of
Unilab's laboratories, is subject to regulation and licensing by the Federal
Nuclear Regulatory Commission.
Other Recent Legislation
Clinical laboratory legislation introduced in 1994 in both
Houses of Congress contained laboratory "direct billing" bills. These bills
would have required laboratories to bill the payor directly for all clinical
laboratory services in the nation, whether reimbursed by Medicare, Medicaid,
other federal or state programs, or private third-party payors, rather than
billing a test-ordering physician or other practitioner. Such direct billing
legislation is intended to eliminate the mark-up associated with billing doctors
who may bill patients on a mark-up basis. Such legislation has been advocated
for many years by the independent laboratory industry and is viewed by
independent laboratories as advantageous. In 1995 the House Medicare proposal
contained an all-payor direct billing provision; however that provision was not
included in the House-Senate conference report approved in late November 1995
and no similar provision has been proposed to date in 1997. If enacted, direct
billing legislation would likely be favorable for the revenues and competitive
position of Unilab.
Both houses of Congress introduced significant Medicare and
healthcare reform proposals in 1995 which were vetoed by President Clinton who
proposed his own Medicare reform package. As noted above, new proposals have
been made by the Clinton Administration for 1997.
The various legislative proposals introduced in 1995 would have
affected a wide array of laboratory services and reimbursement. While comparable
provisions have not been introduced during the 1997 session of Congress, or
proposed by the President, similar provisions could be proposed at some point in
the future. Proposals considered during 1995 included the following:
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Lab Fee Schedule Cuts: In 1995 Under the Senate House and
Medicare proposal and the House-Senate conference report, the fee schedule cap
on laboratory reimbursement for Medicare beneficiaries would have been reduced
to 65% of the median national limitation amount beginning in 1997 and there
would have been no CPI adjustments through 2002. The President's proposal would
not have reduced the laboratory reimbursement rate below the current 76% level.
So far in 1997, no comparable cuts have been proposed.
POL Exemption from CLIA: The Medicare reform bill passed by the
House of Representatives in September 1995 exempted POL's from CLIA oversight
and compliance, except for PAP smear tests. A similar bill was introduced in the
Senate by Senator Hutchinson, also in 1995, but was not included in the Senate
Medicare reform bill. Subsequently, this provision was dropped in the
House-Senate conference report. No similar provision has been proposed to date
in 1997.
Stark Anti-Referral Legislation: In August 1995, HHS issued
formal regulations implementing the Stark law (which became effective January 1,
1992). The Stark law prohibits in many circumstances self-referral of
Medicare-covered laboratory tests by a physician to a laboratory in which the
physician has an ownership interest or with which the physician has a
compensation arrangement. The House Medicare bill passed in 1995 included a
provision that would have ended the application of the anti-referral ban for
compensation arrangements and this relaxation of the Stark anti-referral
prohibitions was included in the House-Senate conference report. The President's
1997 proposal did not relax the Stark requirement; however, some proposals being
considered in the House would enact a relaxation of the Stark requirement.
Coinsurance: No coinsurance proposal was included in either the
1995 or 1997 legislative proposals.
Competitive Bidding: No competitive bidding proposal for
clinical laboratory tests was introduced in Congress in 1995. However, the
President's 1997 Medicare reform package includes competitive bidding for
laboratory services.
Direct Billing: The all-payor direct billing proposal that was
included in the 1995 House Medicare proposal was dropped from the House-Senate
conference report. No similar provision has been proposed to date in 1997.
Fraud and Abuse: As discussed above, new fraud and abuse
provisions were enacted in 1996, as part of the Kennedy-Kassebaum Act. The
Administration's 1997 Medicare proposal would repeal certain provisions included
in that law, related to advisory opinions and the intent standard required for
civil money penalties.
Environmental Compliance
As with all clinical laboratories, each of Unilab's
laboratories must comply with the provisions of numerous federal, state and
local statutes and regulations relating to public health and the environment,
including: practices and procedures regarding the proper storage and labeling of
hazardous and toxic materials or other substances associated with the operation
of clinical laboratories and the proper management of medical waste, hazardous
waste and low-level radioactive waste generated by operation of clinical
laboratories; public disclosure requirements
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regarding certain hazardous and toxic materials or other substances associated
with the operation of clinical laboratories; employee training and notification;
environmental protection requirements, such as standards relating to the
discharge of pollutants into the air, water and land; emergency response and
remediation or cleanup in connection with hazardous and toxic materials or other
substances associated with operation of clinical laboratories; operation and
remediation, if necessary, of underground storage tank sites; the removal,
encapsulation or disturbance of asbestos-containing materials when such
materials are in poor condition or in the event of construction, remodeling,
renovation or demolition of a building; and other safety and health standards.
As regulated entities, Unilab's facilities are subject to
compliance investigations from numerous governmental agencies. From time to
time, such inspections have resulted in a notice of violation being issued to a
laboratory in connection with certain regulatory requirements, e.g. labeling of
regulated substances. In each such case, Unilab has responded to the inspecting
agency and the alleged violation has been addressed without the imposition of
substantial fines or penalties. Unilab is not aware of any past or present
violation which it believes could have a material adverse effect on Unilab or
its financial conditions or results of operations.
Competition
The independent clinical laboratory industry in the U.S. and in
California is highly fragmented and is characterized by intense competition.
According to HCFA, there are in the neighborhood of 4,500 independent clinical
laboratories in the U.S., as many as 750 of which are in California. These
independent clinical laboratories fall into two separate categories, the first
of which are the smaller, local laboratories that generally offer fewer tests
and services and have less capital than the larger laboratories. These
laboratories seek to differentiate themselves by maintaining a close working
relationship with their physician clients by providing a high level of personal
and localized services.
The second group, which includes laboratories such as Unilab,
consists of the larger regional or national laboratories that provide a broader
range of tests and services. In California, Unilab's four largest independent
clinical laboratory competitors are SmithKline Beecham Clinical Laboratories,
Inc., Physicians Clinical Laboratories, Inc., Laboratory Corporation of America
(formerly National Health Laboratories) and Meris Laboratories, Inc.
Unilab competes primarily on the basis of the quality of its
testing, reporting and information services, its reputation in the medical
community, price, the introduction of new testing procedures and its ability to
perform a comprehensive range of tests. Competition for qualified personnel is
also intensifying as statutory requirements for the licensing of personnel
become more stringent. Unilab believes that its extensive California facilities
provide easy access to its clients and quick reporting of results at competitive
prices. It is expected that Unilab will be able to provide the full range of
required testing, either through its own testing capabilities or by utilizing
outside reference testing services contracted from third parties.
Employees
As of December 31, 1996, Unilab employed approximately 2,200 full-time employees
and approximately 400 part-time or temporary employees, none of whom were under
union contract. The Company believes that its relations with employees are good.
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Seasonality
The Company's operations experience seasonal trends that it
believes affect all clinical laboratory companies. Testing volume tends to be
lower during holiday seasons and inclement weather. As a result, because a
substantial portion of the Company's expenses are relatively fixed over the
short term, Unilab's operating income as a percentage of revenue tends to
decrease during the fourth quarter of each year, mainly due to the Christmas and
Thanksgiving holidays.
THE REORGANIZATION AND RELATED TRANSACTIONS
Unilab was created in 1988 as a spin-off of the western U.S.
clinical laboratory business of MetPath. Until November 1993, Unilab was managed
by MetPath and Corning owned varying percentages of Unilab common stock, at
times constituting a majority of the outstanding Unilab common stock.
On January 19, 1993, the Company entered into an Agreement and
Plan of Merger and Reorganization (the "Merger Agreement") with, among other
parties, Corning and Corning Lab Services, Inc., a wholly-owned subsidiary of
Corning ("CLSI"). The Merger Agreement and the transactions contemplated by an
agreement with Unilabs Holdings S.A. (Panama) ("Holdings"), which is discussed
below, were approved by shareholders of the Company at a special meeting held on
November 1, 1993 and the transactions were consummated at that date.
Under the Merger Agreement, the Company's shareholders
exchanged their shares of capital stock in the Company ("Old Unilab") for shares
of capital stock in MetCal Inc. ("New Unilab"). MetCal Inc. subsequently changed
its name to Unilab Corporation. New Unilab owns operations throughout the State
of California and operates full-service laboratories in Los Angeles (Tarzana),
San Jose and Sacramento, California. Corning acquired 100% ownership of the
Company's clinical laboratory operations in Denver, Dallas and Phoenix and
retained approximately $70.0 million of the Company's $95.3 million of then
outstanding long-term indebtedness. In addition, Corning transferred 100%
ownership of J.S. Pathology plc ("JSP"), a clinical laboratory in the United
Kingdom, to New Unilab.
Also, as part of the Reorganization, on January 19, 1993, the
Company entered into a Stock Purchase Agreement with, among others, Holdings,
whereby New Unilab and Holdings agreed to jointly participate in UGL, a new
European-based clinical laboratory company, to which New Unilab contributed 100%
of JSP and issued approximately 3.5 million shares of New Unilab common stock in
exchange for 40% of the stock of UGL. Holdings contributed 70% of Unilabs S.A.,
a Swiss limited liability clinical laboratory company, in exchange for 60% of
the stock of UGL. In March 1994, Holdings transferred its 60% ownership position
in UGL to its affiliate, UniHolding Corp., a Delaware corporation
("UniHolding"). At the time of the Company's investment in UGL, the Company's
Board of Directors reviewed a number of factors and concluded that investment in
such a venture would provide the Company with the opportunity to capitalize on
growth in the European clinical laboratory industry while limiting the expenses
that normally arise from the penetration of a new market.
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In the summer of 1994, the Company began exploring strategic
alternatives with respect to its equity investment in UGL because it believed
that an investment in the Company's core California business and a reduction of
its leverage would be more beneficial than an equity investment in a company in
which (i) the Company had no management control, (ii) the Company had no ability
to receive any cash flow from the business and (iii) equity earnings were under
downward pressure in the short-term due to weakening results, especially in the
United Kingdom operations. On July 14, 1995, the Company agreed to sell UGL the
Company's 40 percent equity investment in UGL for $30.0 million, effective as of
June 30, 1995, payable $13 million in cash, $2 million through assumption of
debt and a $15 million promissory note. The sale resulted in a one-time non-cash
charge by the Company in 1995 of approximately $36.5 million. The purchase price
was determined in negotiations between the Company and UGL. At the time of the
negotiation of the sale of the Company's interest in UGL, Edgard Zwirn, the
Chief Executive Officer of UniHolding was a director of the Company. Mr. Zwirn
did not attend any of the meetings of the Company's Board of Directors at which
the sale of the interest in UGL was discussed. On the closing of the sale, Mr.
Zwirn resigned as a director of the Company. In November 1996, the Company sold
a 100% participation interest in the $15 million promissory note to a financial
entity for $11 million in cash. As a result of that sale, the Company took a
non-recurring charge in the fourth quarter of 1996 of approximately $4.5
million.
As a result of the transactions described above, substantially
all of the Company's assets and operations are now located in California.
Item 2. Properties
Unilab's corporate headquarters are located in leased offices
at 18448 Oxnard Street, Tarzana, California 91356. Unilab's major regional
laboratories are located in the following metropolitan areas: Los Angeles
(Tarzana), California; San Jose, California; and Sacramento, California.
Unilab leases its laboratory facilities and PSCs. All of the
major laboratory facilities have been built or improved for the purpose of
providing clinical laboratory testing services. The Company believes its
facilities are suitable, adequate and have sufficient production capacity for
its operations as currently conducted and as anticipated to be conducted. Unilab
believes that if it were to lose the lease on any of its facilities, it could
find alternate space at competitive market rates and relocate its operations to
such new locations.
Item 3. Legal Proceedings
Unilab is a party to various legal proceedings arising in the ordinary course of
its business. Although the ultimate disposition of these proceedings is not
determinable, management does not believe that adverse determinations in any or
all of such proceedings will have a material adverse effect upon the financial
condition, liquidity or results of operations of Unilab.
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Trylon Arbitration
Unilab, MetWest Inc., formerly a wholly-owned subsidiary of
Unilab ("MetWest") and certain unnamed persons or entities were named as
defendants in The Trylon Corporation v. MetWest Inc., Unilab Corporation and
Does 1 through 30, filed on or about December 8, 1993 in the Superior Court of
the State of California for the County of Los Angeles. The plaintiff alleged
that MetWest and Unilab breached a contract, and the implied covenants of good
faith and fair dealing in connection with that contract with respect to the
sales, marketing and distribution by MetWest and Unilab of Blue-White Speculite
Lightsticks, a Trylon product designed for use in connection with PAP smears to
screen for cervical cancer and precancerous conditions in women. Plaintiff
sought an unspecified amount of damages. In February 1994, the case was referred
to arbitration before the American Arbitration Association in Los Angeles County
in accordance with the arbitration clause of the contract between the parties.
The Company recorded a $1.2 million non-recurring charge during the first
quarter of 1995 related to the expected cost, consisting primarily of legal
fees, of resolving such matter. In September 1995, the arbitrator rendered an
award in favor of Trylon of approximately $437,000. In November 1995, the
arbitrator reduced the award to Trylon to approximately $374,000 (comprised of
approximately $313,000 principal award plus interest of approximately $61,000)
and granted Trylon's request for reimbursement of legal fees of approximately
$1.4 million. The Company's appeal of that award of legal fees was rejected by
the California Superior Court. The Company took an approximately $2.0 million
nonrecurring charge in the fourth quarter of 1995, reflecting the costs
associated with the conclusion of this arbitration, including the amount of the
principal award plus the legal fees of counsel for Trylon and Unilab.
Department of Justice Settlement
In 1991, the DOJ contacted Unilab concerning an investigation
of certain of its sales, marketing, pricing and billing practices. During 1993,
Unilab learned that a "qui tam" complaint was filed approximately two years
earlier by a former employee.
A qui tam action, under the Federal "whistleblower" statute, is
a private action brought on behalf of the U.S. government in connection with
claims for payments submitted to the U.S. The private individual(s) bringing the
qui tam action may be entitled to 15% to 30% of any amounts recovered as a
consequence of the qui tam action. By law, the DOJ is required to investigate
the matters raised by the qui tam complaint to determine whether to "intervene"
(i.e., pursue the action itself) or to permit the private plaintiff to pursue
the action.
In September 1993, Unilab entered into settlements, which
included Corning with regard to its subsidiary, MetPath, pursuant to which
Unilab made payments to the DOJ (the "DOJ Settlement") and to the State of
California (the "California Settlement" and, together with the DOJ Settlement,
the "Settlements") to settle certain civil claims relating to the investigation.
Unilab's portion of the Settlements was approximately $3.0 million, which
included approximately $2.2 million of the DOJ Settlement and the entire $0.5
million amount of the California Settlement.
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By their terms, the Settlements reserved the rights of the
government agencies involved to pursue criminal prosecutions in connection with
certain related claims. Criminal convictions in these matters could have
resulted in mandatory exclusion of the Company from Medicare and state health
programs, including Medicaid. In May 1995, the Company was informed by the DOJ
that its criminal investigation concerning the allegations at issue in the 1993
investigation and in the Settlements has been closed without prosecution.
The Settlements did not constitute an admission of wrongdoing
with respect to any issue of law or fact arising from the civil action brought
on behalf of the United States, that gave rise to the DOJ investigation. The DOJ
Settlement addresses the U.S. government's contention that Unilab submitted
improper Medicare claims for unnecessary blood tests with respect to five tests
(HDL, LDL, TIBC, PBG and serum ferritin) offered in conjunction with basic blood
chemistry profiles. The California Settlement addresses the State of
California's contention that improper MediCal claims were submitted with respect
to the same five tests.
The government's allegations involved a series of laboratory
tests conducted at the time on a "sequential multiple analysis computer"
("SMAC") for which Medicare reimbursed laboratories on a flat fee basis for any
19 or more blood chemistry tests. The government alleged that some or all of the
five tests that were the subject of the investigation were added routinely to
the SMAC for a "nominal" additional price or as part of annual across-the-board
price increases to the physicians, while the fact that Medicare would be billed
separately for each test at retail prices often was not revealed to the doctors.
The government contended that as a result of this marketing approach, some
doctors ordered blood chemistry profiles (which covered the SMAC plus the
additional tests) even if they needed only the SMAC, not realizing that the
additional tests were being billed to Medicare.
Unilab historically has made and continues to make available to
its clients test profiles which provide the choice of incorporating as few or as
many of these additional tests in the basic blood chemistry profile as its
physician-clients feel appropriate for a full diagnostic evaluation.
Notwithstanding such policy, the government contended that it was not made
sufficiently clear to physician-clients the financial consequences to the
Medicare program of their choice in ordering such tests as "add-ons" to the
basic blood chemistry profile, thereby resulting in physicians' ordering certain
of these tests, and Medicare or MediCal, as the case may be, being billed for
such tests, when not medically necessary.
The government did not question the quality, reliability or
validity of any tests or test results. The tests for HDL cholesterol (High
Density Lipoprotein, or "good" cholesterol) and LDL cholesterol (Low Density
Lipoprotein, or "bad" cholesterol) are classic established diagnostic
measurements used in assessing the risk for cardiovascular disease. TIBC (Total
Iron Binding Capacity) and serum ferritin (a test which Unilab offered, when
requested by the physician-client, as a reflex when indicated by abnormal
results in other panel tests) are useful indicators of iron deficiency or iron
overload. PBG (Protein Bound Glucose), used in conjunction with the glucose
test, is a test that aids in the diagnosis of diabetes, a disease which affects
almost 10% of the general population, and can have severe detrimental effects if
not promptly identified and treated. While the Settlements did not require any
specific changes to policies or practices with regard to these tests, Unilab
nevertheless has re-emphasized to its clients the financial consequences to them
and to third party payors of their profile component test choices.
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CHAMPUS Settlement
In February 1994, as part of a joint settlement with MetPath
related to the same activities that were the subject of the DOJ Settlement, a
payment of $1.1 million was made by MetPath to the Office of Civilian Health and
Medical Program of the Uniformed Services ("CHAMPUS") to settle all civil claims
of CHAMPUS against MetPath and Unilab with respect to the same issues and same
five tests that were the subject of the DOJ Settlement and California
Settlement. Unilab's portion of such payment was approximately $25,000, with the
remainder being paid by MetPath. As with the DOJ Settlement and California
Settlement, the CHAMPUS settlement includes a reservation of rights with respect
to certain criminal prosecutions which could result in mandatory exclusion of
the Company from Medicare and State health programs should any criminal
convictions result. The Champus settlement, however, does not constitute an
admission by Unilab of any wrongdoing with respect to any issue of law or fact
arising from the civil action brought by the U.S. government that gave rise to
CHAMPUS' inquiry. The Company was informed in May 1995 of the government's
closure of its criminal inquiry without prosecution.
HHS Subpoenas
In August 1993, Unilab received a subpoena from HHS in
connection with an investigation and internal review relating to the possible
submission of false or improper claims under the Medicare and Medicaid programs.
The HHS subpoena required production of a broad range of documents, including
those relating to Unilab's selling, pricing and billing practices. The HHS
subpoena concerns fourteen tests, including the five tests that were the subject
of the civil claims Settlements. Unilab completed production of these documents
in February 1994. Other independent clinical laboratories have received similar
requests for production as part of what the Company believes to be an
industry-wide investigation of certain practices in the clinical laboratory
industry. In July 1994, Unilab was informed that jurisdiction for this
investigation had been transferred to the United States Attorney's Office in
Newark, New Jersey. In May 1995, the Company was informed by the DOJ that its
criminal investigation concerning the allegations at issue in the 1993
investigation and in the Settlements had been closed without prosecution.
In August 1995, the Company received a subpoena from HHS
requesting certain information with respect to the Company's marketing and
billing practices for a CBC, a diagnostic test which was not included in any
prior subpoena or the subject of any of the Settlements. Unilab promptly
completed production of all documents in response to the HHS subpoena and
cooperated fully in the HHS investigation. The Company reached an agreement with
the Federal government in September 1996 to pay $4.0 million to conclude this
investigation. The payments are to be made in semi-annual installments over
three years with approximately $500,000 paid in 1996. In addition, the Company
paid the California MediCal program approximately $160,000 to settle all their
claims regarding the same issue. The settlement did not constitute an admission
by the Company with respect to any allegation, issue of law or fact arising from
the investigation and the Company received a full civil and administrative
release from all claims by the government with respect to these billings through
the date of the settlement agreement.
Item 4. Submission Of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during
the fourth quarter of the year covered by this report.
22
<PAGE>
Executive Officers and Key Management Personnel of the Registrant
The following table sets forth certain information as of
January 20, 1997 regarding the directors, executive officers and key management
personnel of Unilab.
Name Age Position
- ---- --- --------
David C. Weavil.............46 Chairman of the Board, President and
Chief Executive Officer
Kirby L. Cramer.............60 Director
Michael B. Hoffman..........46 Director
Walker Lewis................52 Director
Thomas O. Pyle..............56 Director
Gabriel B. Thomas...........55 Director
Mark L. Bibi................38 Vice President, Secretary and General Counsel
Ian J. Brotchie.............57 Division President, Unilab San Jose
Michael Danley..............42 Division President, Unilab Santa Barbara
R. Jeffrey Lanzolatta.......44 Division President, Unilab Southern California
Richard A. Michaelson.......45 Senior Vice President-Finance, Treasurer and
Chief Financial Officer
Ralph Monterosa.............48 Division President, Unilab Sacramento
Brian D. Urban..............34 Vice President and Controller
Paul T. Wertlake............61 Vice President, Chief Medical Officer
David C. Weavil has been Chairman, President and Chief
Executive Officer of the Company since January 1997. He served as Executive Vice
President of Laboratory Corporation of America Holdings ("LabCorp") since the
April 1995 merger of Roche Biomedical Laboratories, Inc. ("RBL") and National
Health Laboratories, Inc., which created LabCorp. He was appointed Chief
Operating Officer of LabCorp in September 1995. Previously, Mr. Weavil served as
Senior Vice President and Chief Operating Officer of RBL from 1989 to April
1995. From 1988 through 1989, Mr. Weavil was Regional Senior Vice
President-Mid-Atlantic of RBL. Prior to that, he served as Senior Vice President
and Chief Financial Officer of RBL from 1982.
Kirby L. Cramer has been a member of Unilab's Board of
Directors since March 1990. Mr. Cramer is the Chairman Emeritus of the Board of
Directors of Hazleton Corporation (a subsidiary of Corning and formerly Hazleton
Laboratories Corp.), a biological research company. Mr. Cramer served as Chief
Executive Officer of Hazleton Laboratories Corp. from 1968 through 1987, when it
was sold to Corning, and as Chairman of the Board of Directors of Hazleton
Laboratories Corp. from 1987 through 1991. Mr. Cramer also currently serves as a
director of each of Immunex Corp., Commerce Bancorporation, Advanced Technology
Laboratories, Inc., Northwestern Trust Company, Intellicoat Corp., and
Pharmaceutical Product Development, Inc.
23
<PAGE>
Michael B. Hoffman has been a member of Unilab's Board of
Directors since October 1992. Mr. Hoffman has been a General Partner of The
Blackstone Group, an investment banking firm, since 1989. From 1982 through
1989, Mr. Hoffman served as a Partner and as Co-head of Mergers and Acquisitions
at Smith Barney, Harris Upham & Co. Mr. Hoffman also currently serves as a
director of Harvard Industries.
Walker Lewis has been a member of Unilab's Board of Directors
since September 1994. Mr. Lewis has been a Senior Advisor to Dillon, Read & Co.
Inc., a brokerage and investment banking firm, since December 1994. Mr. Lewis
served as Managing Director, Strategic Services of Kidder, Peabody & Co.,
Incorporated, a brokerage and investment banking firm, from April 1994 to
December 1994. Prior thereto, Mr. Lewis served as President of Avon North
America and Executive Vice President of Avon Products, Inc., a consumer products
company, and was a member of the Office of the Chairman of such company from
March 1992 through January 1994. Mr. Lewis served as Chairman of Mercer
Management Consulting, Inc., a wholly-owned subsidiary of Marsh & McLennan, from
August 1991 until February 1992. For more than two years prior thereto, he
served as Chairman of Strategic Planning Associates, which was merged into
Mercer Management Consulting in August 1991. Mr. Lewis also serves as a director
of Owens Corning Fiberglass and American Management Systems.
Thomas O. Pyle has been a member of Unilab's Board of Directors
since February 1995. Mr. Pyle has been a Senior Advisor on health care to Boston
Consulting Group from January 1995 to the present and from 1992 to 1993. Mr.
Pyle was a consultant to MetLife Insurance Co. and Chief Executive Officer of
MetLife Health Care from October 1993 to September 1994. Prior thereto, Mr. Pyle
was a Special Consultant to the White House on health care issues from February
1993 to April 1993. Mr. Pyle was the Chairman of Interstudy, a research
organization, from March 1992 to March 1993. Mr. Pyle was the Chief Executive
Officer of the Harvard Community Health Plan from 1978 through November 1991. He
is currently a director of Millipore Corporation, Amisys, Lincare Holdings and
several private companies.
Gabriel B. Thomas has been a member of Unilab's Board of
Directors since December 1986. Mr. Thomas has been a consultant in international
marketing and management since 1971 and served as a consultant to Unilabs
Holdings S.A. from October 1987 to May 1992. Mr. Thomas served as President of
Unilab from 1989 through January 1992. Since 1985, Mr. Thomas has served as a
consultant to Frankfurt Consult, the merger/acquisition subsidiary of BHF-Bank,
Frankfurt, Germany and is also currently a director of Decora Industries, Inc.
Mark L. Bibi has been Vice President, Secretary and General
Counsel of Unilab since June 1993. Mr. Bibi was associated with the New York
City law firm of Schulte Roth & Zabel from May 1989 through June 1993. Prior
thereto, he was associated with Sullivan & Cromwell, New York, New York.
Ian J. Brotchie has been Division President of Unilab San Jose
since February 1994. He was President of PathLab from November 1991 to September
1995. Mr. Brotchie served as President of Lab Concepts Inc. from February 1990
to November 1991. Prior thereto, Mr. Brotchie served as Business Development
Director with SmithKline Bio-Science Laboratories in Dublin, California from
January 1989 to February 1990.
24
<PAGE>
Michael M. Danley became Division President of the newly
created Unilab Santa Barbara division in June 1996. Prior thereto he served as
Vice President of Client Integration and Marketing, Unilab Southern California,
from May 1995 to June 1996. Mr. Danley was Director of Sales, Marketing and
Managed Care for Mayo Laboratory Network and its successor, Medical Laboratory
Network, during 1994 and until it was acquired by Unilab in May 1995. He held
the position of Regional Laboratory Manager at Mayo Laboratory Network in 1992
and 1993. Before that he was President and CEO of Medical Arts Laboratories in
Santa Barbara from 1981 until it was sold in 1991 to Mayo Laboratory Network.
R. Jeffrey Lanzolatta has been Division President, Unilab
Southern California since July 1996. He was Senior Vice President, Sales and
Marketing of Unilab Southern California from December 1994 to July 1996. He
served as Vice President, Sales and Marketing for Unilab from November 1993 to
December 1994. He served as Vice President, Sales and Marketing of MetWest from
January 1993 to November 1993. Prior thereto Mr. Lanzolatta served as Regional
Vice President and General Manager of MetWest's Southern California operations
from July 1990 to December 1992. From April 1990 to June 1990, Mr. Lanzolatta
served as Director of Sales and Marketing for MetWest's Northern California
operations. Mr. Lanzolatta was Vice President, Business Development of
International Clinical Laboratories' Western Operations from July 1985 through
January 1989.
Richard A. Michaelson has been Senior Vice President-Finance,
Treasurer and Chief Financial Officer of Unilab since February 1994 and served
as Vice President-Finance, Treasurer and Chief Financial Officer of Unilab from
November 1993 to February 1994. Mr. Michaelson also served as Vice President of
Unilab beginning in October 1990. Mr. Michaelson joined MetPath in 1980 and
served as Vice President of MetPath from 1983 and Treasurer of CLSI from 1990
through, in each case, September 1992. From 1977 to 1980, Mr. Michaelson held
various financial positions at International Business Machines Corp.
Ralph Monterosa has been Division President, Unilab Sacramento
since February 1994. Prior thereto, he was Director, Sales and Marketing for
Allied Clinical Laboratories in Sacramento, California from January 1993 to
February 1994 and served as General Manager of Allied's San Diego, California
laboratory operations from 1991 to December 1992. From 1987 to 1991 Mr.
Monterosa was Senior Vice President, Operations of the Northern Region of Roche
Biomedical Laboratories.
Brian D. Urban has been Vice President and Controller of Unilab
since November 1993. Mr. Urban served as Assistant Controller of Unilab from
October 1992 to November 1993. He was Manager of External Reporting of MetPath
from July 1992 to October 1992. Prior thereto, Mr. Urban was senior audit
manager at Price Waterhouse where he worked from November 1986 to July 1992.
Paul T. Wertlake, M.D., has been Vice President and Chief
Medical Officer of the Company since January 1994. Since October 1989, Dr.
Wertlake has served as the Senior Medical Officer for Southern California and
Medical Director of Unilab's Tarzana Laboratory. Prior thereto, Dr. Wertlake has
served in the academic, hospital and reference laboratory sectors.
25
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Market information for the Registrant's common stock is contained in Note 15
(Unaudited Quarterly Financial Data) of the Notes to Consolidated Financial
Statements at page 23 of the Company's 1996 Annual Report to shareholders, and
such information is incorporated herein by reference.
The Company's common stock trades on the American Stock Exchange under the
symbol "ULB". As of February 10, 1997, there were 39,189,693 shares of Common
Stock outstanding held by 858 holders of record.
The Company has not paid any cash dividends with respect to its common stock and
does not expect to do so in the foreseeable future.
26
<PAGE>
Item 6. Selected Financial Data
The selected financial data for each of the five years in the period ended
December 31, 1996 is as follows:
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue 205,217 $189,042 $151,820 $207,399 $213,924
- ----------------------------------------------------------------------------------------------------------
Legal, acquisition and restructuring
related charges 70,595 4,400 1,282 5,612 90,377
- ----------------------------------------------------------------------------------------------------------
Operating income (loss) (72,842) 4,539 9,137 12,117 (89,594)
- ----------------------------------------------------------------------------------------------------------
Loss on sale of equity investment/ 4,529 36,499 ---- ---- ----
promissory note
- ----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes,
extraordinary item and cumulative
effect of accounting change (89,493) (40,043) 4,515 6,711 (97,916)
- ----------------------------------------------------------------------------------------------------------
Income tax provision ---- ---- ---- 200 2,221
- ----------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item
and cumulative effect of accounting
change (89,493) (40,043) 4,515 6,511 (100,137)
- ----------------------------------------------------------------------------------------------------------
Extraordinary item 3,451 1,732 ---- ---- ----
- ----------------------------------------------------------------------------------------------------------
Cumulative effect of accounting change ---- ---- ---- ---- 2,121
- ----------------------------------------------------------------------------------------------------------
Net income (loss) (92,944) (41,775) 4,515 6,511 (98,016)
- ----------------------------------------------------------------------------------------------------------
Preferred stock dividends 144 144 144 20 1,607
- ----------------------------------------------------------------------------------------------------------
Net income (loss) available to
common shareholders (93,088) (41,919) 4,371 6,491 (99,623)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) before extraordinary
item and cumulative effect of accounting
change per common share (2.43) (1.12) 0.12 0.15 (2.59)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) per common share (2.53) (1.17) 0.12 0.15 (2.54)
- ----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 36,831 35,918 35,069 44,219 39,159
- ----------------------------------------------------------------------------------------------------------
At December 31,
- ----------------------------------------------------------------------------------------------------------
Total assets 125,919 196,174 196,407 134,106 125,458
- ----------------------------------------------------------------------------------------------------------
Long-term debt, net of current portion 126,120 87,207 67,660 31,659 81,393
- ----------------------------------------------------------------------------------------------------------
Shareholders' equity (deficit) (34,688) 56,330 95,334 78,339 8,890
- ----------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
Note: The variations in the year-to-year comparisons are due
primarily to the acquisition of MLN Holding Acquisition Co.,
effective May 16, 1995 and the acquisition of Premier
Laboratory Services, Inc., effective January 24, 1994. In
addition, see Notes 4, 5 and 8 of the Notes to Financial
Statements at page 16 of the Company's 1996 Annual Report to
shareholders for a more detailed discussion of the legal and
acquisition related charges and loss on sale of equity
investment/promissory note recorded in 1996, 1995 and 1994, and
such information is incorporated herein by reference. The $5.6
million legal charge recorded in 1993 relates to a settlement
reached with the U.S. Government and State of California into
certain of the Company's sales, marketing and billing
practices. The $90.4 million restructuring charge recorded in
1992 relates to the write-off of certain customer lists,
covenants not-to-compete and goodwill, write-offs and
additional reserves for estimated uncollectible accounts
receivable and a reserve for operational and managerial
restructuring expenses. Furthermore, due to the Reorganization,
the Company's results of operations, assets and liabilities
from November 10, 1993 primarily include the California
operations and the Company's 40% equity interest in UGL (until
its disposition effective June 30, 1995) and are not comparable
to the Company's results of operations, assets and liabilities
prior to November 10, 1993, which include the results of the
non-California operations and do not include UGL.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
"Management's Discussion and Analysis" at pages 4 through 8 of
the Company's 1996 Annual Report to shareholders is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The Company's financial statements, together with the report
thereon of Arthur Andersen LLP ("AA") dated February 17, 1997, appearing on
pages 9 through 25 of the Company's 1996 Annual Report to shareholders, are
incorporated herein by reference. With the exception of the aforementioned
information in this Item 8 and the information incorporated by reference in
Items 5, 6 and 7, the 1996 Annual Report to shareholders is not to be deemed
filed as part of this Form 10-K Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
28
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information relating to directors of the Registrant will be
contained in a definitive Proxy Statement involving the election of directors
which the Registrant will file with the Securities and Exchange Commission
pursuant to Regulation 14A not later than 120 days after December 31, 1996, and
such information is incorporated herein by reference. Certain other information
relating to Executive Officers and Key Management Personnel of the Registrant
appears at pages 23 to 25 of this Form 10-K Annual Report.
Item 11 Executive Compensation
Information relating to executive compensation will be
contained in the Proxy Statement referred to above in "Item 10. Directors and
Executive Officers of the Registrant", and such information is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Directors
Information relating to security ownership of certain
beneficial owners and management and directors will be contained in the Proxy
Statement referred to above in "Item 10. Directors and Executive Officers of the
Registrant", and such information is incorporated herein by reference.
Item 13. Certain Relationships and Transactions with Related Persons
Information relating to certain relationships and transactions
with related persons will be contained in the Proxy Statement referred to above
in "Item 10. Directors and Executive Officers of the Registrant", and such
information is incorporated herein by reference.
29
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement Schedules
and Reports on Form 8-K
Reference
-----------------------------
Form 10-K Annual Report to
Annual Report Shareholders
Page Page
---- ----
(a)(1) Index to Financial
Statements:
Incorporated by reference to the 1996
Annual Report to shareholders:
Statements of Operations
for the years ended December 31, 1996,
1995, 1994 --- 9
Balance Sheets at
December 31, 1996 and 1995 --- 10
Statements of Shareholders'
Equity (Deficit) for the years ended
December 31, 1996, 1995, 1994 --- 11
Statements of Cash Flows
for the years ended December 31,
1996, 1995, 1994 --- 13
Notes to Financial Statements --- 14
Report of Independent Public Accountants --- 25
(2) Index to Consolidated Financial
Statement Schedule:
Report of Independent Public Accountants on
Financial Statement Schedule 33 ---
II - Valuation and Qualifying
Accounts for the years ended
December 31, 1996, 1995 and 1994 34 ---
The financial statement schedule should be read in conjunction with the
financial statements incorporated by reference in Item 8 of this Form 10-K
Annual Report. Schedules other than those listed above have been omitted because
of the absence of the conditions under which they are required or because the
information required is shown in the financial statements or the notes thereto.
30
<PAGE>
(3) Exhibits required to be filed by Item 601 of Regulation S-K.
The information called for by this paragraph is incorporated
herein by reference to the Exhibit Index of this report.
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the fourth
quarter of 1996.
31
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Unilab
Corporation has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: 3/28/97 UNILAB CORPORATION
By: /s/ Brian D. Urban
--------------------
Name: Brian D. Urban
Title: Vice President and Controller
32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To Unilab Corporation
We have audited in accordance with generally accepted auditing standards, the
balance sheets as of December 31, 1996 and 1995, and the related statements of
operations, shareholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1996 included in Unilab Corporation's
annual report to shareholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated February 17, 1997. Our audits were made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in Item 14a(2) for the years ended December 31, 1996,
1995 and 1994 is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 17, 1997
33
<PAGE>
Schedule II
UNILAB CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
<TABLE>
<CAPTION>
Amount
Balance at Charged to Acquired Balance
Beginning Costs and through End of
of Period Expenses Acquisitions Deductions Period
--------- -------- ------------ ---------- ------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
- ------------------
DECEMBER 31, 1994;
- ------------------
Allowance for doubtful accounts $ 5,904 $ 8,287 $ 1,291 $ (9,654) $5,828
FOR THE YEAR ENDED
- ------------------
DECEMBER 31, 1995;
- -----------------
Allowance for doubtful accounts $ 5,828 $12,017 $ 200 $ (9,591) $8,454
FOR THE YEAR ENDED
- ------------------
DECEMBER 31, 1996;
- ------------------
Allowance for doubtful accounts $ 8,454 $14,180 $ -- $(13,296) $9,338
</TABLE>
34
<PAGE>
Index
-----
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger and Reorganization, dated as of
January 19, 1993, among Corning Incorporated, Corning Lab
Services, Inc. UL Sub Inc., the Company, MetWest Inc. and MetCal
Inc. (Incorporated by reference to Exhibit No. 10.1 to the
Company's Current Report on Form 8-K dated January 19, 1993).
2.2 Stock Purchase Agreement, dated December 20, 1993, by and among
Premier Laboratory Services, Inc., the stockholders of Premier and
the Company (Incorporated by Reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K dated January 3, 1994).
2.3 Stock Purchase Agreement, dated as of April 13, 1995, among MLN
Equity Ltd., Paul Beyer, Paribas Principal Inc., MLN Holding
Acquisition Co., MLN Holding, Inc., Medical Laboratory Network,
Inc., and the Company (Incorporated by reference to Exhibit No.
2.1 to the Company's Current Report on Form 8-K dated May 24,
1995).
2.4 Stock Purchase Agreement, dated as of June 30, 1995, by and
between the Company, Unilabs Group Limited and UniHolding Corp.
(Incorporated by Reference to Exhibit No. 2.1 to the Company's
Current Report on Form 8-K dated July 27, 1995).
3.1 Amended and Restated Certificate of Incorporation of the Company
(Incorporated by Reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, dated November 30, 1993).
3.2 Amendment to the Company's Certificate of Incorporation, dated May
14, 1996 (Incorporated by Reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended June
30, 1996, dated August 6, 1996).
3.3 Second Amended and Restated By-laws of the Company, as amended as
of February 27, 1996 (Incorporated by Reference to Exhibit 3.1 to
the Company's Current Report on Form 8-K dated March 19, 1996).
35
<PAGE>
4.1 Rights Agreement dated as of February 25, 1994, between the
Company and Mellon Securities Trust Company as Rights Agent
(Incorporated by Reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K dated March 1, 1994).
4.2 Amended and Restated Rights Agreement dated as of March 15, 1996
between the Company and Chemical Mellon Shareholder Services as
Rights Agent (Incorporated by Reference to Exhibit 4.2 to the
Company's Amendment No. 1 to Registration Statement on Form 8-A
dated March 18, 1996).
4.3 Indenture, dated as of March 14, 1996, with respect to the 11%
Senior Notes due 2006, between the Company and Marine Midland
Bank, as Trustee (Incorporated by reference to Exhibit 4.2 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended
March 31, 1996, dated May 1, 1996).
10.1 Amended and Restated Stock Purchase Agreement, dated as of June
30, 1993, by and between the Company and MetCal Inc. and Unilabs
Holdings S.A. (Panama) (Incorporated by Reference to Exhibit 10.2
to the Company's Form S-1 Registration Statement dated November
30, 1993).
10.2 Credit Agreement, Dated as of March 14, 1996, among the Company,
various Banks and Banque Paribas, as Agent (Incorporated by
Reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the Quarter ended March 31, 1996, dated May 1,
1996).
10.3 Termination and Release Agreement, dated as of December 20, 1996,
among the Company, various Banks and Banque Paribas, as agent,
terminating the Credit Agreement, dated as of March 14, 1996 among
the Company, various banks and Banque Paribas, as Agent.
10.4 Healthcare Receivables Purchase Agreement dated as of July
31, 1996 between the Company and Daiwa Healthco-2 LLC
(Incorporated by Reference to Exhibit 10.1 to the Company's
Quarterly Report on 10-Q for the Quarter ended September 30, 1996,
dated November 4, 1996).
10.5 Employment Agreement, dated as of November 10, 1993 between
Richard A. Michaelson and the Company (Incorporated by Reference
to Exhibit No. 10.7 to the Company's Form S-1 Registration
Statement dated November 30, 1993).
36
<PAGE>
10.6 Stock Option Agreement, dated as of October 20, 1992, between the
Company and Richard A. Michaelson (Incorporated by Reference to
Exhibit No. 10.9 to the Company's Annual Report on Form 10-K dated
April 13, 1993).
10.7 Stock Option Agreement, dated as of February 25, 1994 between the
Company and Richard A. Michaelson (Incorporated by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-K dated
March 11, 1996).
10.8 Stock Option Agreement, dated as of January 1, 1995, between the
Company and Richard A. Michaelson (Incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on form 10-K dated
March 11, 1996).
10.9 Stock Option Agreement, dated as of May 1, 1995, between the
Company and Richard A. Michaelson (Incorporated by reference to
Exhibit 10.13 to the Company's Annual Report on Form 10-K dated
March 11, 1996).
10.10 Restricted Stock Agreement, dated as of May 1, 1995, between the
Company and Richard A. Michaelson (Incorporated by reference to
Exhibit 10.14 to the Company's Annual Report on Form 10-K dated
March 11, 1996).
10.11 Stock Option Agreement, dated as of February 27, 1996, between the
Company and Richard A. Michaelson (Incorporated by Reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for
the Quarter ended March 31, 1996, dated May 1, 1996).
10.12 Employment Agreement, dated as of January 20, 1997 between David
C. Weavil and the Company.
10.13 Stock Option Agreement, dated as of January 20, 1997 between David
C. Weavil and the Company.
10.14 Promissory Note, dated January 20, 1997, payable by David C.
Weavil to the Company.
10.15 Secured Promissory Note, dated January 20, 1997, payable by David
C. Weavil to the Company.
10.16 Stock Option Agreement, dated as of February 27, 1996, between the
Company and Andrew H. Baker (Incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended March 31, 1996, dated May 1, 1996).
37
<PAGE>
10.17 Letter Agreement, dated January 20, 1997, between Andrew H. Baker
and the Company.
10.18 Restricted Stock Agreement, dated as of January 20, 1997, between
Andrew H. Baker and the Company.
10.19 Amendment No. 1, dated as of January 20, 1997, to Stock Option
Agreement dated as of October 20, 1992, between Andrew H. Baker
and the Company.
10.20 Amendment No. 1, dated as of January 20, 1997, to Stock Option
Agreement, dated as of January 1, 1995, between Andrew H. Baker
and the Company with respect to options to purchase 120,000 shares
of Unilab Common Stock.
10.21 Amendment No. 1, dated as of January 20, 1997 to Stock Option
Agreement, dated as of January 1, 1995, between Andrew H. Baker
and the Company with respect to options to purchase 60,000 shares
of Unilab Common Stock.
10.22 Amendment No. 1, dated as of January 20, 1997, to Stock Option
Agreement, dated as of February 27, 1996, between Andrew H. Baker
and the Company.
10.23 Non-Compete Agreement, dated as of January 20, 1997, between
Andrew H. Baker and the Company.
10.24 Consulting Agreement, dated as of January 20, 1997, between the
Company and Hartill Ltd.
10.25 General Assignment and Assumption, dated as of November 10, 1993,
by and among the Company, MetWest and MetCal Inc. (Incorporated by
Reference to Exhibit No. 10.3 to the Company's Forms S-1
Registration Statement dated November 30, 1993).
10.26 Stockholders' Agreement, dated as of November 10, 1993, by and
among MetCal Inc., Unilabs Holdings S.A. (Panama) and Unilabs
Group Limited (Incorporated by Reference to Exhibit No. 10.4 to
the Company's Form S-1 Registration Statement dated November 30,
1993).
10.27 Form of Employee Stock Option Agreement (Incorporated by Reference
to Exhibit No. 10.5 to the Company's Form S-1 Registration
Statement dated November 30, 1993).
38
<PAGE>
10.28 Form of Key Management Personnel Employment Agreement
(Incorporated by Reference to Exhibit No. 10.5 to Amendment No. 1,
dated December 23, 1993, to the Company's Form S-1 Registration
Statement dated November 30, 1993).
10.29 Settlement Agreement, dated September 13, 1993, by and among the
United States Department of Justice, the Office of Inspector
General of the United States Department of Health and Human
Services; MetPath, a division of Corning Lab Services Inc; MetWest
Inc.; the Company; and C. Jack Dowden (Incorporated by Reference
to Exhibit No. 99.2 to the Company's Current Report on Form 8-K
dated September 13, 1993).
10.30 Settlement Agreement, dated September 22, 1993, by and among the
State of California; MetPath, a division of Corning Lab Services,
Inc.; MetWest Inc.; the Company and C. Jack Dowden (Incorporated
by Reference to Exhibit No. 99.1 to the Company's Current Report
on Form 8-K dated September 27, 1993).
10.31 Settlement Agreement, dated as of February 17, 1994, by and among
the United States Department of Justice; the Office of the
Civilian Health and Medical Program of the Uniformed Services;
MetPath Inc; and the Company (Incorporated by Reference to Exhibit
10.18 to the Company's Annual Report on Form 10-K dated March 30,
1994).
10.32 Settlement Agreement, dated September 19, 1996, among the Company,
Corning Inc., the Office of Inspector General of the Department of
Health and Human Services, the State of California and certain
other governmental entities (Incorporated by Reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1996, dated November 4, 1996).
10.33 Participation Agreement, dated as of November 7, 1996, by and
between the Company and Donaldsosn, Lufkin and Jenrette Securities
Corporation.
13.1 Annual Report to Shareholders
21.1 Subsidiaries of the Company
22.1 Proxy Statement, dated April ___, 1997, for Annual Meeting of
Stockholders held on June 17, 1997.
24.1 Power of Attorney of David C. Weavil
24.2 Power of Attorney of Kirby L. Cramer
39
<PAGE>
24.3 Power of Attorney of Michael B. Hoffman
24.4 Power of Attorney of Walker Lewis
24.5 Power of Attorney of Thomas O. Pyle
24.6 Power of Attorney of Gabriel B. Thomas
99.1 Press Release, dated March 3, 1997, announcing fourth quarter and
full year 1996 earnings results.
27 Financial Data Schedule
40
Exhibit 10.3
TERMINATION AND RELEASE AGREEMENT
TERMINATION AND RELEASE AGREEMENT, dated as of December 20,
1996 (this "Agreement"), among Unilab Corporation (the "Borrower"), a Delaware
corporation, the financial institutions listed on the signature pages hereto
(the "Lenders") and Banque Paribas, as the agent (the "Agent") and the
collateral agent (the "Collateral Agent"). All capitalized terms used herein and
not otherwise defined shall have the respective meanings provided such terms in
the Credit Agreement referred to below.
W I T N E S S E T H :
WHEREAS, the Borrower, the Lenders listed on the signature
pages thereto and the Agent are parties to a Credit Agreement, dated as of March
14, 1996 (as modified, supplemented and amended to the date hereof, the "Credit
Agreement") pursuant to which certain loans were available and certain letters
of credit were issued to the Borrower;
WHEREAS, in connection with the Credit Agreement, the Borrower
entered into the Security Agreement, dated as of March 14, 1996 (as modified,
supplemented and amended to the date hereof, the "Security Agreement") in favor
of and for the benefit of, inter alia, the Collateral Agent;
WHEREAS, (a) no loans were made pursuant to the Credit
Agreement and the Borrower has paid all accrued and unpaid fees and all other
amounts owing under the Credit Agreement and (b) all Commitments under the
Credit Agreement are being terminated hereunder;
WHEREAS, in connection with the payments and termination of
Commitments referred to in the immediately preceding paragraph, the Borrower has
requested Banque Paribas, as Agent and as Collateral Agent, to enter into this
Agreement, and Banque Paribas in each such capacity has agreed to enter into
this Agreement;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Repayment and Termination of Commitments. The Agent hereby
acknowledges receipt of $27,582.76 (DOLLARS) in full payment of all amounts due
and owing to the Agent and/or the Lenders under the Credit Agreement, the Notes
issued pursuant thereto and all related documents and termination of all the
Commitments under the Credit Agreement. Notwithstanding anything to the contrary
contained in the preceding sentence, all indemnity and expense obligations
contained in the Credit Agreement shall survive the termination of the Credit
Agreement to the extent provided therein.
2. Release of Liens. (a) The Security Agreement is hereby
terminated and the Collateral Agent hereby (i) releases, assigns, transfers and
delivers to the Borrower without recourse and without representation or
warranty, all of the Collateral (as defined in the Security Agreement) and (ii)
delivers UCC-3 termination statements to be filed in the jurisdictions set forth
on Schedule A hereto. Notwithstanding anything to the contrary contained in the
preceding sentence, all indemnity and expense obligations contained in the
Security Agreement shall survive the termination of the Security Agreement and
the release of the security interests created thereunder if, and to the extent,
set forth therein.
<PAGE>
3. Further Assurances. From time to time, upon request by the
Borrower, the Agent shall, without further consideration other than
reimbursement for any reasonable and necessary costs and expenses, execute,
deliver and acknowledge all such further documents, agreements, certificates and
instruments and do such further acts (together with all such acts regarding such
further documents, "Further Acts") as the Borrower may reasonably require to
more effectively evidence or effectuate the transactions contemplated by this
Agreement, including, but not limited to, the termination of the Credit
Agreement, the release and termination of the Security Agreement and the release
and discharge of all security interests and all other rights and interests that
the Agent, the Collateral Agent, the Issuing Bank or the Lenders has or may have
had in the Collateral (as defined in the Security Agreement), unless such
requested Further Act (i) would expose the Agent or an officer of the Agent to
personal liability or (ii) would be contrary to applicable law.
4. Miscellaneous. This Agreement may not be amended, modified
or waived except in a writing signed by the party against whom enforcement of
such amendment, modification or waiver is sought. THIS AGREEMENT SHALL BE
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
This Agreement may be executed in one or more counterparts, each of which shall
be deemed an original, but all of which, when taken together, shall constitute
one and the same instrument.
5. Effectiveness. This Agreement shall become effective when
(i) all parties hereto shall have executed and delivered a counterpart hereof
(including by way of facsimile transmission) and (ii) the Borrower shall have
paid all amounts due and owing to White & Case for fees and disbursements under
the Credit Agreement.
IN WITNESS WHEREOF, the undersigned have entered into this
Agreement as of the day and year first above written.
UNILAB CORPORATION
By_____________________________________
Title:
BANQUE PARIBAS,
as Agent and Collateral Agent
By_____________________________________
Title:
By_____________________________________
Title:
<PAGE>
SCHEDULE A
----------
================================================================================
Index of UCC-3 Terminations
Banque Paribas/Unilab
1104101-0054
________________________________________________________________________________
DEBTOR JURISDICTION
____________________________________ __________________________________________
Unilab Corp. Alameda Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Butte Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Contra Costa Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Fresno Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Imperial Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Kern Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Kings Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Kitsap Co., WA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Los Angeles Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Marin Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Mendecino Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Merced Co., CA
18448 Oxnard Street
Tarzana, CA 91356
<PAGE>
____________________________________ __________________________________________
Unilab Corp. Mercer Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Monterey, Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Napa Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Placer Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Riverside Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Sacramento, CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. San Luis Obispo Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. San Bernadino, CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. San Joaquin Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. San Francisco Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. San Diego Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. San Mateo Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Santa Barbara Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Santa Clara Co., CA
18448 Oxnard Street
Tarzana, CA 91356
-2-
<PAGE>
____________________________________ __________________________________________
Unilab Corp. Santa Cruz Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Sec. of State, NV
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Sec. of State, CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Sec. of State, WA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Sec. of State, NJ
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Sec. of State, DE
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Shasta Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Solano Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Sonoma Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Stanislaus Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Tulare Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Ventura Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
Unilab Corp. Washoe Co., NV
18448 Oxnard Street
Tarzana, CA 91356
-3-
<PAGE>
____________________________________ __________________________________________
Unilab Corp. Yolo Co., CA
18448 Oxnard Street
Tarzana, CA 91356
____________________________________ __________________________________________
-4-
Exhibit 10.12
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated and effective as of the 20th day of January,
1997, by and among Unilab Corporation, a Delaware corporation ("The Company")
and David Weavil ("Executive").
WHEREAS, The Company desires to have the benefits of Executive's
knowledge and experience as a full-time employee and considers such employment a
vital element in protecting and enhancing the best interests of The Company and
its shareholders, and Executive desires to be employed full-time with The
Company; and
WHEREAS, The Company and Executive desire to enter into an agreement
reflecting the terms under which Executive will be employed by The Company;
NOW, THEREFORE, in consideration of the promises and the mutual
covenants set forth herein, the parties hereto agree as follows:
1. TERM.
(a) The Company hereby agrees to employ Executive for the period
commencing the date hereof and continuing until the first anniversary hereof,
unless sooner terminated as provided in Sections 5 and 6. Commencing on January
20, 1998 and each January 20 thereafter (the "Renewal Date"), the term of this
Agreement shall automatically be extended for one additional year unless a
Change of Control (as defined in Section 6) occurs. In the event a Change of
Control occurs, this Agreement shall be automatically renewed for a term of two
years from the date of such Change of Control (the "Extended Term").
(b) This Agreement may be terminated by The Company in accordance
with Section 5 or by the Executive in accordance with Section 6; provided that
in the event of termination without Cause (as defined in Section 5) or without
Good Reason (as defined in Section 6), the terminating party shall be required
to give the other party at least six (6) months notice prior to the Renewal
Date; provided, further that in the event of a Change of Control the Agreement
is automatically extended for the two year Extended Term. Following a Change of
Control either party to the Agreement can terminate the Agreement provided they
give the other party at least six (6) months notice prior to the end of the
Extended Term or such period beyond the Extended Term as the Agreement may from
time to time be extended.
2. DUTIES.
(a) From and after the date of this Agreement, Executive will serve
as Chairman, President and Chief Executive Officer of The Company. Executive
shall have such duties, responsibilities and authority as may from time to time
be assigned to Executive by the Board of Directors of The Company.
<PAGE>
(b) Executive agrees to devote his full time, attention, and best
efforts to the performance of his duties. During his employment, Executive
agrees that he will not, either directly or indirectly, without the express
written consent of The Company, render any personal service as a director,
employee, independent contractor, consultant, or otherwise to any clinical or
reference laboratory, regardless of its size or location. Executive also agrees
not to have any ownership, direct or indirect, in any private or publicly traded
clinical or reference laboratory; provided that Executive shall be permitted to
beneficially own as an investment, up to 1.0% of a class of publicly traded
equity securities issued by any such firm or institution.
3. COMPENSATION. The Company shall compensate Executive for the
services rendered under this Agreement as follows:
(a) Base Salary. $400,000 per year as base salary, payable in
accordance with the customary payroll practices of The Company for the payment
of officers.
(b) Bonus and Incentive Compensation.
(i) For 1997, Executive shall receive (A) a guaranteed bonus of
$100,000, payable in shares of the Company's common stock based on the closing
market price of such common stock on the American Stock Exchange on January 17,
1997, the last trading day prior to the date hereof and (B) an additional bonus
of $100,000, payable in cash, if The Company meets cash flow objectives for the
third and fourth quarters of 1997 as agreed upon between Executive and the Board
of Directors of The Company no later than March 31, 1997.
(ii) From and after January 1, 1998, Executive shall be entitled
to such bonuses and other incentive compensation, if any, as shall be determined
by the Board of Directors of The Company.
(c) Executive Retirement Plan. Executive shall become a participant
in the Executive Retirement Plan of The Company, effective immediately.
(d) Deferred Compensation. For each fiscal year during the term of
this Agreement, The Company shall establish and maintain for Executive a
deferred compensation account which shall be credited each year during the
period Executive is employed by The Company with an amount equal to 8% of
Executive's total cash compensation (inclusive of bonuses) for that year.
(e) Annual Compensation Review. The Board of Directors shall review
the compensation of Executive annually to determine whether an adjustment in
Executive's compensation is called for. At no time during the term of this
2
<PAGE>
Agreement shall Executive's annual compensation be less than the amount
specified as the base salary set forth in Section 3 (a) above.
4. EMPLOYEE BENEFITS.
(a) Insurance. Executive shall be entitled to full participation, on
a basis commensurate with his position with The Company, in all life, accident,
disability and health insurance plans that generally are made available to
employees of The Company.
(b) Automobile Allowance. The Company shall provide Executive with an
automobile allowance of $1,000 per month.
(c) Expense Reimbursement. Executive shall be entitled to
reimbursement for all reasonable and necessary documented expenses incurred by
him in connection with the performance of his duties hereunder.
(d) Vacation. Executive shall be entitled to an annual vacation leave
at full pay in accordance with the Company's standard vacation policies
applicable to senior executives.
(e) Relocation Benefits. Executive currently resides in Burlington,
North Carolina. Executive agrees to relocate as promptly as practicable to the
Los Angeles, California metropolitan area. In connection with such relocation,
Executive shall receive the following:
(i) The Company shall pay for, or reimburse Executive for, rent,
utilities and related temporary living expenses incurred by Executive
and his immediate family in the Tarzana, California area while
Executive is searching for a permanent California residence, up to a
maximum monthly amount of $4,000 for a maximum period of six months
from the date hereof.
(ii) From and after the date Executive closes on the purchase of
a permanent California residence, through and including the date that
is six months after the date hereof, Executive shall be paid, as an
offset to Executive's mortgage and other carrying costs of the
California house purchased by Executive, an amount equal to the rental
payment paid by The Company for Executive's temporary California
housing pursuant to paragraph 4 (e)(i) above.
(iii) The Company shall pay for, or reimburse Executive for, all
documented moving costs incurred by Executive in moving himself and
his immediate family from North Carolina to California, with an
appropriate tax gross-up.
(iv) Until such time as Executive's immediate family has
relocated to California, Executive shall be reimbursed for all
reasonable travel costs incurred by Executive in traveling back and
forth between California and North Carolina.
3
<PAGE>
(f) Stock Options. In order to induce the Executive to enter into this
Agreement, subject to obtaining all required corporate and regulatory approvals,
if any, the Company will grant to the Executive options (the "Options") to
acquire 500,000 shares of the Company's common stock, par value $.01 per share.
The Options shall have ten year terms. Such 500,000 share option grant shall be
made as follows: Executive will be granted on the date hereof Options to
purchase 250,000 shares of common stock at an exercise price equal to the
closing market price of the common stock on the American Stock Exchange on
January 17, 1997 and will be granted on January 2, 1998 additional Options to
purchase 250,000 shares of The Company's common stock at an exercise price equal
to the closing market price of the common stock on the American Stock Exchange
on January 2, 1998. Such options shall vest in equal installments over five
years: 20% on the first anniversary of the grant date, 20% on the second
anniversary, 20% on the third anniversary, 20% on the fourth anniversary and 20%
on the fifth anniversary (the "Vesting Schedule"), in accordance with the terms
of, and as more fully set forth in, the Stock Option Agreements, dated of even
date herewith, between the Executive and The Company.
(g) Stock Purchase Obligation.
(i) Executive shall purchase from The Company such number of
newly issued shares of The Company's common stock as can be purchased
for $500,000, based on the closing market price of The Company's stock
on The American Stock Exchange as of January 17, 1997, which shall be
issued promptly after execution of this Agreement.
(ii) The Company shall extend to Executive a $250,000 bridge loan
of up to 180 days duration in order to finance Executive's purchase of
$250,000 worth of Unilab common stock pursuant to Section 4(g)(i).
Such loan shall bear interest at the rate of 6% through the date of
repayment.
(iii) The Company shall loan an additional $250,000 to Executive
in order to finance Executive's purchase of an additional $250,000
worth of Unilab common stock pursuant to Section 4(g)(i). Such loan
shall be evidenced by a written promissory note (the "Note"), which
shall be secured and collateralized by the shares of Unilab common
stock acquired with such loan proceeds (the "Collateral"). The Note
shall be due and payable on the fifth anniversary of the date of the
Note and shall bear interest at the rate of 6%, payable quarterly in
arrears. The Note shall be secured only by the Collateral and shall be
non-recourse to Executive personally.
(h) Registration Rights. Executive shall be granted demand
registration rights with respect to the shares underlying the Options and the
shares purchased pursuant to Section 4(g) above, entitling him to require the
Company to register all or some of such shares once each fiscal year.
4
<PAGE>
5. TERMINATION BY THE COMPANY. Executive's employment hereunder can be
terminated by The Company without any breach of this Agreement only under the
following circumstances:
(a) DEATH OR DISABILITY. Executive's employment shall terminate on his
death. If Executive shall become totally disabled within the meaning of the
Long-Term Disability Income Benefits Plan of The Company, as in effect on the
date of this Agreement, this Agreement shall terminate as of the date on which
Executive is determined to be totally disabled and disability insurance benefits
become payable to Executive.
(b) CAUSE. The Company can terminate Executive's employment hereunder
for Cause at any time, without advance notice, which shall include termination
because of (i) breach of fiduciary duty involving personal profit, (ii)
violation of Section 9 of this Agreement, (iii) intentional failure to perform
stated duties or abide by The Company's policies that materially adversely
affect The Company's interests, (iv) conviction of a felony, (v) commitment of
an act that would disqualify The Company or any subsidiary of The Company from
maintaining or obtaining a license, permit or other governmental approval
material to the operations of The Company or any such subsidiary, or (vi)
material breach by Executive of any provision of this Agreement. Upon
termination for Cause all of Executive's rights to compensation, fringe
benefits, and other payments shall terminate immediately to the extent permitted
by applicable law.
The termination of Executive's employment for reasons other than those
specified above shall be deemed to be a termination without Cause.
6. TERMINATION BY EXECUTIVE. Executive shall be entitled to terminate
his employment without any breach of this Agreement only for Good Reason.
Termination for "Good Reason" shall mean his resignation within two years of,
the following:
(a) After a Change of Control of The Company shall have occurred, and
without the express written consent of Executive, he is given a title or
assigned any duties materially inconsistent with his position, duties,
responsibilities, and status with The Company as in effect immediately prior to
such Change of Control;
(b) The base salary of Executive, and/or incentive compensation
opportunity under Section 3 above, is reduced below that in effect at the date
hereof or at the time of the Change of Control, as applicable;
(c) Without the express written consent of Executive, he is required
after a Change of Control to be permanently based anywhere other than within a
30 mile radius of his office location immediately prior to Change of Control,
except for required travel on The Company's business to an extent consistent
with his duties hereunder;
5
<PAGE>
(d) Failure to honor the automatic renewal of this Agreement for the
Extended Term following a Change of Control.
For the purposes of this Agreement, a "Change of Control" of The
Company shall be defined to mean, notwithstanding the prior occurrence of any
other event constituting a "change of control" (a) the acquisition by any person
of, or the entering into of any agreement by any person to acquire by purchase,
merger, consolidation or otherwise of shares resulting in the beneficial
ownership of thirty percent or more of the total number of votes which may be
cast for the election of directors (the "Triggering Percentage"), or (b) the
acquisition of by any person or the entering into of any agreement by any person
to acquire all or substantially all of the assets of the Company, or (c) the
persons who were directors of the Company prior to any contested or other
election, or their successors duly nominated by a majority of such directors,
cease to constitute at least a majority of the Board following any such
election, or (d) any other change in control of a nature that would be required
to be reported (assuming such event has not been previously reported) in
response to Item 1(a) of the Current Report on Form 8-K, as in effect on the
date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended.
The Executive's termination of his employment for reasons other than
those specified above shall be deemed to be a termination without Good Reason.
7. SEVERANCE PAYMENT.
(a) If the Executive's employment is terminated by The Company without
Cause and not associated with a Change of Control, the Executive will receive
(i) 18 months of compensation as defined in Sections 3(a), (b) and (d) payable
on the same basis and in the same manner as base salary was paid prior to
termination and (ii) continued participation for 18 months following the date of
such termination in The Company's life, accident, disability and health
insurance programs on the same terms and conditions as in effect on the date of
termination, or if continued participation in The Company's programs is not
available, participation in comparable, alternate programs.
(b) If (i) Executive's employment is terminated by The Company without
Cause in association with a Change of Control, or (ii) Executive shall terminate
his employment for Good Reason then Executive shall be entitled to receive (A)
the lump sum severance payment provided for in subsection (c) below (the "Lump
Sum Severance Payment"), plus (B) continued coverage under, or entitlement to,
all of the benefits set forth in Section 4 above for a period of two years
following the date of termination, at no cost to the Executive.
(c) The Lump Sum Severance Payment shall be equal to Executive's Total
Compensation for the Extended Term (two years) as set forth in Section 1 above.
"Total Compensation" for purposes of this Agreement shall be defined as all
compensation specified in Section 3. Executive's bonus for this purpose will be
defined as the average of the bonus actually paid by The Company for the two
years prior to termination. The Lump Sum Severance Payment shall be made in cash
within 30 days after termination of employment and
6
<PAGE>
shall not be discounted by reason of the fact that the time of payment is
accelerated in advance of the ordinary course under this Agreement. Executive
shall be under no duty to mitigate damages and the Lump Sum Severance Payment
shall not be reduced by any earnings of Executive subsequent to the termination
that gives rise to the Severance Payment.
(d) If the Executive's employment is terminated due to Cause, death or
disability, or is voluntarily terminated for other than Good Reason, base salary
will be continued through the date of termination, the amounts accrued in
Executive's deferred compensation account will be paid at termination and
eligibility for incentive compensation and/or benefits will be in accordance
with the respective provisions of those plans.
(e) Executive agrees that the remedies for employment termination under
this Section 7 and Sections 5 and 6 hereof reasonably reflect liquidation
damages for such termination and that such provisions state his entire and
exclusive claim, rights, entitlements, and remedies against The Company and its
successors, assigns, affiliates, and representatives.
8. NON COMPETE. Executive agrees that following termination of
Executive's employment pursuant to Section 7(a) and during the 18 month period
specified in Section 7(a), Executive will not beneficially own securities (other
than 1.0% of a class of publicly traded equity securities) of, or render
directly or indirectly any personal service as a director, employee, independent
contractor, or consultant for, any clinical or reference laboratory located
within 100 miles of any laboratory location of The Company at the time of
termination. If Executive violates the provisions of this Section 8, Executive
will without limiting other remedies available to the Company, forfeit the
severance payments under Section 7(a) for such period of time that Executive is
in violation hereof.
9. DISCLOSURE OF INFORMATION. Executive recognizes that as an executive
of The Company he occupies a position of trust with respect to business
information of a secret or confidential nature that is the property of The
Company and that will be imparted to him from time to time in the course of his
duties. He therefore agrees that he shall not at any time, whether in the course
of his employment or thereafter, use or disclose directly or indirectly to any
person outside The Company any of such information, except as required in the
ordinary course of his duties under this Agreement.
10. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
California, in accordance with the rules of the American Arbitration Association
then in effect. Judgment may be entered on the arbitrator's award in any court
having jurisdiction. Each party shall bear its own cost of such arbitration,
including attorneys' fees.
11. NOTICES. All notices, requests, demands, and other communication
called for or contemplated hereunder shall be in writing and shall be deemed to
have been fully given when delivered personally or when mailed by United States
certified or registered mail, postage prepaid, addressed to the parties, their
successors in interest, or assignees at the following addresses or such other
addresses as the parties may designate by notice in the
7
<PAGE>
manner aforementioned.
THE COMPANY:
Unilab Corporation
18448 Oxnard Street
Tarzana, California 91356
Attn: Corporate Secretary
EMPLOYEE:
David Weavil
514 Parkview Drive
Burlington, NC 27215
12. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California.
13. VALIDITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision or provisions of this Agreement, which shall remain in full
force and effect.
14. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding between the parties with respect to the subject matter hereof,
superseding all negotiations, prior discussions, and preliminary agreements.
This Agreement may not be amended except in a writing executed by the parties
hereto.
15. EFFECT ON SUCCESSORS IN INTEREST. This Agreement shall inure to
the benefit of and be binding on successors and assigns of The Company. This
Agreement may not be assigned or transferred by the Executive.
16. WITHHOLDING. Any payments made in accordance with this Agreement
will be net of applicable federal, state and local taxes required to be withheld
on such payments.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first above written.
UNILAB CORPORATION EXECUTIVE
By: _______________________ ___________________________
Name: Name: David Weavil
Title:
8
Exhibit 10.13
STOCK OPTION AGREEMENT
----------------------
THIS STOCK OPTION AGREEMENT is made as of the 20th day of January,
1997, between Unilab Corporation, a Delaware corporation (hereinafter called the
"Corporation"), and David C. Weavil, a key employee of the Corporation
(hereinafter called the "Option Holder").
1. Grant of Option. Pursuant to the provisions of that certain
Employment Agreement, dated January 20, 1997, between the Corporation and Option
Holder, the Corporation hereby grants to the Option Holder the right and option,
hereinafter called the "Option", to purchase an aggregate of Two Hundred
Fifty-Thousand (250,000) shares (the "Shares") of the Corporation's $0.01 par
value common stock (such number being subject to adjustment as provided in
paragraph 7 hereof), on the terms and conditions herein set forth. Such Option
shall vest as follows: Twenty (20%) Percent of the Option herein granted (for up
to 50,000 shares) shall vest and may be exercised on or after January 20, 1998;
Twenty (20%) Percent of the Option herein granted (for up to 50,000 shares)
shall vest and may be exercised on or after January 20, 1999; Twenty (20%)
Percent of the Option herein granted (for up to 50,000 shares) shall vest and
may be exercised on or after January 20, 2000; Twenty (20%) Percent of the
Option herein granted (for up to 50,000 shares) shall vest and may be exercised
on or after January 20, 2001; Twenty (20%) Percent of the Option herein granted
(for up to 50,000 shares) shall vest and may be exercised on or after January
20, 2002 (unless terminated earlier pursuant to paragraph 6 hereof).
2. Purchase Price. The purchase price of the Shares covered by the
Option shall be Seven-sixteenths of a dollar ($0.4375) per Share.
3. Term of Option. Subject to paragraph 8 hereof, the Option granted
hereby shall be exercisable as to a portion of the total Shares in accordance
with paragraph 1. The Option Holder's right to exercise the aforementioned
Option shall expire ten (10) years from the date hereof. Unless terminated
earlier pursuant to paragraph 6 hereof, any Option not exercised within such
time specified of the date hereof shall terminate.
4. Nontransferability. The Option shall not be transferable otherwise
than (i) by will or the laws of descent and distribution and (ii) to parents,
siblings, spouses or children of the Option Holder or to any trust or similar
device intended for any of such persons' respective benefit (a "Permitted
Transferee"), and the Option may be exercised, during the lifetime of the Option
Holder, only by him or such Permittee Transferree. More particularly (but
without limiting the generality of the foregoing), the Option may not be
assigned, transferred (except as provided herein), pledged, or hypothecated in
any way, shall not be assignable by operation of law, and shall not be subject
to execution, attachment, or similar process. Any attempted assignment,
transfer, pledge, hypothecation or other disposition of the Option contrary to
the provisions hereof, and the levy of any execution, attachment, or similar
process upon the Option shall be null and void and without effect.
<PAGE>
5. Disclosure and Risk. The Option Holder represents and warrants to
the Corporation as follows:
(a) The Shares will be acquired by the Option Holder for the Option
Holder's own account, for investment and not with a view to, or for
resale in connection with, any distribution or public offering thereof
within the meaning of the Securities Act of 1933, as amended (the
"Securities Act").
(b) As of the date of the grant and of exercise, because of his
position with the Corporation, and as a result of inquiries made by him
and information furnished to him by the Corporation, Option Holder has
and will have all information necessary for him to make an informed
investment decision.
Each certificate representing the Shares shall, if applicable, be
endorsed with the following or a substantially similar legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE `SECURITIES ACT'),
AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE
IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH
SECURITIES, OR THE CORPORATION RECEIVES AN OPINION OF COUNSEL FOR THE
HOLDER OF THESE SECURITIES, REASONABLY SATISFACTORY TO THE CORPORATION,
STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION MAY BE
MADE PURSUANT TO RULE 144, PROMULGATED UNDER THE SECURITIES ACT, OR IS
OTHERWISE EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF SUCH ACT AND APPLICABLE STATE SECURITIES LAWS."
The Corporation need not allow a transfer of any of the Shares unless
one of the conditions specified in the foregoing legend is satisfied. The
Corporation may also instruct its transfer agent not to allow the transfer of
any of the Shares unless one of the conditions specified in the foregoing legend
is satisfied.
Any legend endorsed on a certificate pursuant to the foregoing language
and the stop transfer instructions with respect to such Shares shall be removed
and the Corporation shall promptly issue a certificate without such legend to
the holder thereof if the Shares are registered under the Securities Act and a
prospectus meeting the requirements of Section 10 of the Securities Act is
available or if the holder provides the Corporation with an opinion of counsel
for such holder of the Shares reasonably satisfactory to the Corporation, to the
effect that a public sale, transfer or assignment of such Shares may be made
without registration.
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<PAGE>
6. Termination of Employment; Death.
(a) In the event that the Option Holder shall cease to be an employee
of the Corporation or any of its subsidiaries for any reason
whatsoever, the Option may be exercised by the Option Holder (to the
extent that the Option Holder shall have been entitled to do so as of
the date of his termination of employment with the Corporation or any
of its subsidiaries) at any time within 365 days after such termination
but in any event not later than the date of expiration of the Option
term. So long as the Option Holder shall continue to be an employee of
the Corporation or any of its subsidiaries, the Option shall not be
affected by any change of duties or position. Nothing in this Option
Agreement shall confer upon the Option Holder any right to continue as
an employee of the Corporation or any of its subsidiaries.
(b) In the event that the Option Holder dies prior to exercising all or
any portion of the Option, the Option may be exercised by the estate of
the Option Holder (to the extent that the Option Holder shall have been
entitled to do so) at any time within 365 days after the death of the
Option Holder, but in any event not later than the date of expiration
of the Option term.
7. Changes in Capital Structure. If all or any portion of the Option
shall be exercised subsequent to any share dividend, split-up, recapitalization,
merger, consolidation, combination or exchange of shares, separation,
reorganization, or liquidation occurring after the date hereof, as a result of
which shares of any class shall be issued in respect of outstanding Shares or
Shares shall be changed into the same or a different number of shares of the
same or another class or classes, the person or persons exercising the Option
shall receive, for the aggregate price paid upon such exercise, the aggregate
number and class of shares which, if the Shares (as authorized at the date
hereof) had been purchased at the date hereof for the same aggregate price (on
the basis of the price per share set forth in paragraph 2 hereof) and had not
been disposed of, such person or persons would be holding at the time of such
exercise as a result of such purchase and all such share dividends, split-ups,
recapitalizations, mergers, consolidations, combinations or exchanges of shares,
separations, reorganizations, or liquidations; provided, however, that no
fractional shares shall be issued upon any such exercise, and the aggregate
price paid shall be appropriately reduced on account of any fractional share not
issued. In no event shall any adjustments be made to the Option as a result of
the issuance or redemption of securities of the Corporation for cash or other
consideration, or upon the exercise of any conversion rights of any securities
of the Corporation.
8. Method of Exercising Option. Subject to the terms and conditions of
this Option Agreement, the Option may be exercised by written notice to the
Secretary of the Corporation, at its principal office or such other location as
may be designated by the Secretary of the Corporation. Such notice shall state
the election to exercise the Option and the number of Shares in respect of which
it is being exercised, and shall be signed by the person or persons so
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<PAGE>
exercising the Option. The notice of election shall be accompanied by this
Agreement and payment of the full purchase price for the Shares being purchased.
The Corporation shall deliver a certificate or certificates representing Shares
as soon as practicable after the notice of election has been received. In the
event the Option shall be exercised by any person or persons other than the
Option Holder, the notice of election shall be accompanied by appropriate proof
of the right of such person or persons to exercise the Option. All Shares that
shall be purchased upon the exercise of the Option as provided herein shall be
fully paid and nonassessable.
9. Mergers, Recapitalizations and Dissolutions. As long as Optionee is
an employee of the Corporation or any of its subsidiaries, the "acquisition" of
the Corporation by another entity or a "change in control" of the Corporation
shall cause each outstanding option: (i) in the event of an acquisition, to
become an option to purchase shares of the acquiring entity, for the balance of
the term of the option without regard to any nonsatisfied vesting provisions or
condition precedent which may be contained in paragraph 1 of this Agreement, at
a price and for a number of shares as is consistent with the acquisition terms;
and (ii) in the event of a change in control, to become exercisable in whole or
in part, without regard to any vesting provisions or condition precedent which
may be contained in paragraph 1 of this Agreement. The "acquisition" of the
Corporation by another entity shall be defined to be either a merger or
consolidation with an acquiring entity (or subsidiary or affiliate thereof) in
which the Corporation is not the surviving entity or in which the Corporation
becomes a subsidiary of an acquiring entity; the sale of substantially all of
the Corporation's assets; or the dissolution or liquidation of the Corporation.
For purposes of this paragraph, a "change in control" shall mean a change of
control of a nature that would be required to be reported in response to Item
1(a) of the Current Report on Form 8-K, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"); provided that, without
limitation, such a change in control shall be deemed to have occurred at such
time as any "person", within the meaning of Section 14(d) of the Exchange Act,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of 30% or more of the outstanding capital
stock of the Corporation.
10. Optionee Not a Shareholder. The Option Holder under this Option,
as such, shall not be entitled by any reason of this Option to any rights
whatsoever as a shareholder of the Corporation.
11. General Provisions.
(a) The Corporation shall at all times during the term of the Option
reserve and keep available such number of Shares as will be sufficient
to satisfy the requirements of this Option Agreement, shall pay all
fees and expenses necessarily incurred by the Corporation in connection
therewith, and shall use its best efforts to comply with all laws and
regulations which, in the reasonable opinion of counsel for the
Corporation, are applicable thereto.
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<PAGE>
(b) This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware other than its conflicts of laws
provisions.
(c) Any notice to be given hereunder by either party to the other shall
be in writing and shall be given either by personal delivery or by
mail, registered or certified, postage prepaid, return receipt
requested, addressed to the other party at the respective addresses set
forth below their signatures to this Agreement, or at any other address
as such party may hereafter specify in writing.
(d) This Agreement sets forth the entire agreement of the parties
concerning the subject matter hereto, and no other representations or
warranties, express or implied, other than those contained herein, and
no amendments or modifications hereto, shall be binding unless made in
writing and signed by the parties hereto.
(e) The waiver by either party of a breach of any term or provision of
this Agreement shall not operate or be construed as a waiver of a
subsequent breach of the same provision or of the breach of any other
term or provision of this Agreement.
(f) As used herein, the masculine gender shall include the feminine and
the neuter genders, the neuter shall include the masculine and the
feminine genders, the singular shall include the plural, and the plural
shall include the singular.
(g) The headings in this Agreement are solely for convenience of
reference and shall be given no effect in the construction or
interpretation of this Agreement.
(h) The invalidity or enforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
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<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Option Agreement to
be duly executed by its officer thereunto duly authorized, and the Option Holder
has hereunto set his hand and seal, all as of the day and year first above
written.
OPTION HOLDER
------------------------------
Name: David Weavil
Address: 514 Parkview Drive
Burlington, NC
UNILAB CORPORATION
By:_______________________________
Name:
Title:
Address:
6
Exhibit 10.14
PROMISSORY NOTE
$250,000.00 Tarzana, California
January 20, 1997
The undersigned, David C. Weavil, a resident of the State of North
Carolina (the "Borrower"), hereby promises to pay to Unilab Corporation, a
Delaware corporation ("Unilab"), the principal sum of $250,000.00, payable in
lawful money of the United States and in immediately available funds, plus
interest at the rate of 6% per annum, payable quarterly in arrears.
The principal sum shall be due on July 20, 1997 ("Maturity Date") and
on such date the Borrower shall (or if such day is a day on which banks in Los
Angeles are not open for business, on the immediately following banking day),
pay to Unilab in immediately available funds, the full principal sum of
$250,000.00 plus accrued and unpaid interest thereon.
The Borrower represents and warrants as follows: (a) the Borrower is a
resident of the State of North Carolina and (b) this Note constitutes the legal,
valid and binding obligation of the Borrower, enforceable against the Borrower
in accordance with its terms.
The Borrower may, at its option and upon written notice to Unilab,
prepay the outstanding principal amount of this Note in whole or in part,
without penalty or premium.
Upon default in Borrower's payment of this Note, Unilab shall have the
right to exercise any and all of its rights under this Note and applicable law.
All notices or other communications provided for hereunder shall be in
writing (including telecommunications) and shall be mailed, telecopied or
delivered to (a) the Borrower at the address of the Borrower set forth
underneath his signature, or at such other address as may hereafter be specified
by the Borrower to Unilab, or (b) Unilab, at its principal executive offices at
18448 Oxnard Street, Tarzana, California 91356, Attention: Corporate Secretary.
All notices and communications shall be effective (i) if mailed, when received
or three days after mailing, whichever is earlier, (ii) if telecopied, when
transmitted, and (iii) if delivered, upon delivery.
No failure on the part of Unilab to exercise, and no delay in
exercising, any right, power, privilege or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof by Unilab
preclude any other or further exercise thereof or the exercise of any other
right, power, privilege or remedy of Unilab. No amendment or waiver of any
provision of this Note, nor consent to any departure by the Borrower therefrom,
shall in any event be effective unless the same shall be in writing and signed
by Unilab and then such
<PAGE>
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. This Note shall be governed by, and construed
in accordance with, the laws of the State of California, without regard to
principles of conflicts of law.
The Borrower hereby agrees to pay on demand all costs and expenses
(including, without limitation, all fees, expenses and other client charges of
counsel to Unilab) incurred by Unilab in connection with the enforcement of
Unilab's rights, and in the collection of all amounts due, hereunder.
DAVID C. WEAVIL
By: ___________________________________
Address:
Exhibit 10.15
SECURED PROMISSORY NOTE
$250,000.00 Tarzana, California
January 20, 1997
The undersigned, David C. Weavil, a resident of the State of North
Carolina (the "Borrower"), hereby promises to pay to Unilab Corporation, a
Delaware corporation ("Unilab"), the principal sum of $250,000.00, payable in
lawful money of the United States and in immediately available funds, plus
interest at the rate of 6% per annum, payable quarterly in arrears.
The principal sum shall be due on January 20, 2002 ("Maturity Date")
and on such date the Borrower shall (or if such day is a day on which banks in
Los Angeles are not open for business, on the immediately following banking
day), pay to Unilab in immediately available funds, the full principal sum of
$250,000.00 plus accrued and unpaid interest thereon.
This Note and the obligation created hereunder is secured and
collateralized by the shares of Unilab common stock ("Shares") purchased by the
Borrower with the proceeds hereof pursuant to that certain Employment Agreement,
dated January 20, 1997, between Unilab and the Borrower (the "Employment
Agreement"). If the principal sum of $250,000.00, plus accrued and unpaid
interest thereon, is not paid by the Borrower to Unilab on or before the
Maturity Date as set forth in the immediately preceding paragraph, Unilab shall
have the right to take, liquidate withhold or cancel such number of Shares sold
to the Borrower under the Employment Agreement as shall have a value (based upon
the closing market price of Unilab common stock on the Maturity Date) equal to
the amount remaining unpaid under this Note at such date. Except as set forth in
this paragraph, Unilab shall have no recourse against the Borrower for the
Borrower's default hereunder.
The Borrower represents and warrants as follows: (a) the Borrower is a
resident of the State of North Carolina and (b) this Note constitutes the legal,
valid and binding obligation of the Borrower, enforceable against the Borrower
in accordance with its terms.
The Borrower may, at its option and upon written notice to Unilab,
prepay the outstanding principal amount of this Note in whole or in part,
without penalty or premium.
Upon default in Borrower's payment of this Note, Unilab shall have the
right to exercise any and all of its rights under this Note.
<PAGE>
All notices or other communications provided for hereunder shall be in
writing (including telecommunications) and shall be mailed, telecopied or
delivered to (a) the Borrower at the address of the Borrower set forth
underneath his signature, or at such other address as may hereafter be specified
by the Borrower to Unilab, or (b) Unilab, at its principal executive offices at
18448 Oxnard Street, Tarzana, California 91356, Attention: Corporate Secretary.
All notices and communications shall be effective (i) if mailed, when received
or three days after mailing, whichever is earlier, (ii) if telecopied, when
transmitted, and (iii) if delivered, upon delivery.
No failure on the part of Unilab to exercise, and no delay in
exercising, any right, power, privilege or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise thereof by Unilab
preclude any other or further exercise thereof or the exercise of any other
right, power, privilege or remedy of Unilab. No amendment or waiver of any
provision of this Note, nor consent to any departure by the Borrower therefrom,
shall in any event be effective unless the same shall be in writing and signed
by Unilab and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given. This Note shall
be governed by, and construed in accordance with, the laws of the State of
California, without regard to principles of conflicts of law.
The Borrower hereby agrees to pay on demand all costs and expenses
(including, without limitation, all fees, expenses and other client charges of
counsel to Unilab) incurred by Unilab in connection with the enforcement of
Unilab's rights, and in the collection of all amounts due, hereunder.
DAVID C. WEAVIL
By: ___________________________________
Address:
Exhibit 10.17
January 20, 1997
Mr. Andrew H. Baker
636 Winding Hollow Road
Franklin Lakes, NJ 07417
Dear Andrew:
This letter will confirm our agreement with respect to the transition of your
responsibilities for, and your continued relationship as a consultant to, Unilab
Corporation ("Unilab" or the "Company").
You will step down as the Company's Chairman, Chief Executive Officer and
President, and will also resign as a director, effective as of the date hereof
(the "Effective Date"). After the Effective Date, you will receive the
following, in consideration for, among other things, your agreement not to
compete with the Company, as described in more detail below, and in full
satisfaction of all payments or obligations due or owed to you under the terms
of your Employment Agreement, dated November 10, 1993, as amended by Amendment
No. 1 thereto dated as of November 1, 1996 (collectively, the "Employment
Agreement"):
1. Five Hundred Thousand (500,000) restricted shares (the "Restricted Shares")
of the Company's common stock, par value $.01 per share ("Unilab Common
Stock"), in lieu of your rights and payment under the Company's Executive
Retirement Plan, which shall be issued on the terms and subject to the
conditions set forth in the Restricted Stock Agreement, dated as of the
Effective Date, such restrictions to lapse upon the earliest to occur of
(i) a Change of Control of the Company (as such term is defined in the
Restricted Stock Agreement), (ii) your attainment of age 65 and (iii) your
death or Disability (as such term is defined in the Restricted Stock
Agreement).
2. The expiration dates of the options to purchase 480,000 shares of Unilab
Common Stock pursuant to the Stock Option Agreements between you and the
Company dated October 20, 1992 (with respect to 300,000 shares), January 1,
1995 (with respect to 120,000 shares) and February 27, 1996 (with respect
to 60,000 shares) (collectively, the "Options") shall be extended to the
date that is ten years after the date hereof, and all such Options shall be
deemed fully vested and freely transferable to your immediate family or
trusts for their benefit as of the Effective Date in accordance with the
amendments to such Stock Option Agreements dated as of the Effective Date.
<PAGE>
3. As more fully set forth in the consulting agreement, dated as of the
Effective Date, between Hartill Ltd. (a company controlled by you)
("Hartill") and the Company (the "Consulting Agreement"), Hartill will be
paid a consulting fee in the aggregate sum of $900,000, payable $600,000
promptly after the Effective Date and One Hundred Thousand Dollars
($100,000) per year for the three year period ending on the third
anniversary of the Effective Date, as compensation for consulting services
rendered to the Company. The $100,000 per year annual fee shall be payable
$25,000 per quarter in advance at the beginning of each quarterly period
commencing on the Effective Date.
4. Use of executive office space at the Company's offices located at 401
Hackensack Avenue, Hackensack, New Jersey through the October 14, 1998
termination date of the lease for such office space (or comparable office
space, comparably priced, in New Jersey or New York, if that office is
closed prior to October 14, 1998).
5. Secretarial and administrative services at Unilab's expense (through the
continued use of your current secretary) for a three-year period ending on
the third anniversary of the Effective Date.
6. Continuation for three years from and after the Effective Date of your
current family medical, hospitalization, dental, life, short- and long-term
disability insurance coverage and accidental death and dismemberment travel
accident coverage or, if such continued coverage under the Company's
benefit plans is not available, comparable coverage under alternate plans,
or reimbursement of your costs incurred if you independently enroll in
comparable, alternate plans.
7. Reimbursement of business expenses incurred in connection with your Unilab
related business activities, provided such expenses are approved by the
Company's Chief Executive Officer (except as set forth in Paragraph 9
below); and further provided that any travel expenses shall be pre-approved
by the Company's Chief Executive Officer.
8. At the Company's request, you hereby agree to sell the residence owned by
you and located at 2324 Sunset Plaza Drive, Hollywood, California (the
"California House") using your best efforts to sell such house as soon as
possible. The fair market value of the California House shall be determined
by at least two independent appraisals to be obtained by you and delivered
to the Company within 30 days hereof. The Company shall have the right to
determine the acceptability of any bid to acquire the California House and
you shall follow the Company's reasonable instructions in connection with
the effort to sell the house. Five Hundred Thousand Dollars ($500,000) of
the proceeds from the sale of the California House shall be used to pay the
outstanding mortgage on the house held by Citibank. The proceeds from the
sale of the California House in excess of $500,000 shall be paid to you, in
cash, promptly after closing of the sale of the house. From and after the
Effective Date through the closing date of the sale of the California
House, you may continue to live in the house and
2
<PAGE>
will keep the house furnished and maintained in good order. You shall be
responsible for all costs incurred in connection with maintenance of the
California House.
9. Continued use through the third anniversary of the Effective Date of the
1994 Jaguar XJR owned by the Company and currently driven by you (or, if
necessary, a comparable replacement car) and reimbursement of expenses in
connection with the use, maintenance, and repair of that car (such expense
reimbursement not to require approval of the Company's Chief Executive
Officer). On the third anniversary of the Effective Date, title and
ownership of the car shall be transferred by the Company to you without any
payment by you and free and clear of all liens and encumbrances.
10. You agree to abide by the terms of the Non-Compete Agreement, dated as of
the Effective Date, with respect to your agreement not to engage in the
clinical laboratory business in the State of California for three years
from the date hereof.
This letter agreement will be governed by, and construed in accordance with, the
laws of the State of California. Any dispute or controversy arising under or in
connection with this letter agreement shall be settled exclusively by
arbitration in California, in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction. Each party shall bear its
own costs of such arbitration, including attorneys' fees.
In consideration for the foregoing, and other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, you agree to the
following:
For yourself and your heirs, executors, administrators, representatives,
attorneys, successors and assigns (hereinafter collectively referred to as
"Releasor"), you hereby release and forever discharge Unilab, its divisions,
subsidiary corporations, affiliates, successors, and assigns, and its and their
respective present and former directors, officers, employees, stockholders,
agents, representatives, attorneys, and accountants (collectively referred to as
"Releasees") from all manner of action, cause, and causes of action and suits
which Releasor now has, ever had, or may have against Releasees, for, upon or by
reason of any matter, cause, omission, act or thing whatsoever, including,
without limitation, any cause of action you have, may have or will have under
your Employment Agreement (including your rights to accrued and unpaid amounts
in your deferred compensation account; your right to 90 days' advance notice of
termination; and your right to seek repayment of amounts attributable to your
voluntary 10% reduction in base salary, as reflected in your July 25, 1996
letter agreement with the Company, or repayment in cash of salary taken in
shares of Unilab Common Stock during the months of August, September and October
1996) occurring in whole or in part on or at any time from the commencement of
your employment with Unilab through the date hereof, that directly or indirectly
arises out of or is related to your employment with Releasees, including,
without limitation, any claim for age discrimination arising out of 29 U.S.C.
sections 621, et seq. or Cal. Gov't. Code sections 12940 et seq. For the purpose
of implementing a full and complete release and discharge of Releasees, you
expressly
3
<PAGE>
acknowledge that this letter agreement is intended to include in its
effect, without limitation, all claims and actions which you do not know or
suspect to exist in your favor at the time of execution hereof, that this letter
agreement contemplates the extinguishment of any such claim, claims or action,
and that all rights under Section 1542 of the California Civil Code are hereby
expressly waived. Section 1542 of the Civil Code provides:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
The foregoing release will not, however, constitute a release of Unilab's
obligations under this letter agreement or under the Consulting Agreement, your
Stock Option Agreements, as amended, or the Restricted Stock Agreement nor will
it constitute a release of any indemnification obligations that Unilab may have
in respect of events occurring prior to the Effective Date.
The Company's obligations to indemnify you and to advance expenses, as provided
in Section 13 of the Employment Agreement and the Company's by-laws and charter
as of the date hereof shall remain in full force and effect. The Company agrees
that you shall be covered to the same extent as the executive officers and
directors of the Company in all director and officer liability insurance
coverage the Company maintains from time to time.
For itself and its divisions, subsidiary corporations, affiliates, successors
and assigns, the Company hereby releases and forever discharges you and your
heirs, executors, administrators, representatives, successors and assigns from
all manner of action, cause and causes of action and suits which it now has,
ever had or may have against you and such other persons, for, upon or by reason
of any matter, cause, omission, act or thing whatsoever occurring in whole or in
part, on or at any time prior to the date hereof, that directly or indirectly
arises out of or is related to your employment with the Company.
This letter agreement shall not in any way be construed as an admission by
Unilab that it or any of its agents, employees or representatives have acted
wrongfully with respect to you in violation of the common law or in violation of
any federal, state or local statute or regulation or of any of your rights or of
any other person, and Unilab specifically disclaims any liability to or improper
conduct toward you or any other person on the part of itself and its employees,
agents and representatives.
You acknowledge and agree that you have been advised to consult with an attorney
prior to executing this waiver and release; that to the extent you have desired
you have availed yourself of that right; that you have carefully read and
understand all of the provisions of this waiver and release; that you were given
at least twenty-one (21) days in which to consider this agreement; that you may
revoke this waiver and release within seven (7) days after you have executed it;
and that you are voluntarily entering into the agreements set forth herein.
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<PAGE>
The Company agrees to prepare, execute, deliver and file all documents and
instruments as may be necessary or advisable to effect the terms of this
agreement.
The Company covenants and agrees that, if at any time from and after the date
hereof, it shall prepare and file with the Securities and Exchange Commission
(and state securities commissions to the extent required) and cause to remain
effective a registration statement for the registration of securities, you (and
any permitted transferees under the Restricted Stock Agreement and the Option
Agreements, as amended, as may be permitted from time to time by the pertinent
regulations) shall be entitled to "piggyback" on such registration statement and
to sell the Restricted Shares following the lapse of the restrictions thereon
and the shares issuable upon exercise of the Options. If by the third
anniversary of the date hereof such shares shall not have been registered, you
shall have the right to demand that the Company prepare and file a registration
statement to register such shares.
This agreement, together with the Restricted Stock Agreement, the Stock Option
Agreements, as amended, the Consulting Agreement and the Non-Compete Agreement,
shall constitute the entire agreement and understanding between you and the
Company with respect to your employment by the Company and shall supersede all
prior agreements and understandings, including, without limitation, the
Employment Agreement; provided, however, that after the Effective Date, Sections
9 and 13 and the first sentence of Section 8 shall continue to remain in full
force and effect.
This agreement may only be amended or modified in a writing signed by the
Company and you.
This letter agreement shall be binding upon and shall inure to the benefit of
any successors or assigns of Unilab, whether by merger, consolidation, sale of
all or substantially all of the assets or otherwise..
You and Unilab each agrees to keep the terms, amount and existence of this
letter agreement completely confidential to the greatest extent consistent with
the law.
This Company agrees to pay your reasonable legal fees and expenses incurred in
connection with negotiating this agreement and the agreements related hereto.
5
<PAGE>
Please sign both copies of this letter on the line below to acknowledge your
agreement, retain one for your files and return the other to Unilab to the
attention of the Corporate Secretary.
I greatly appreciate all your efforts on Unilab's behalf and look forward to our
continuing relationship.
Sincerely yours, Acknowledged and agreed:
Mark L. Bibi ________________________
Andrew H. Baker
6
Exhibit 10.18
RESTRICTED STOCK AGREEMENT
--------------------------
This Restricted Stock Agreement (the "Agreement") is made as of January 20,
1997, between Unilab Corporation, a Delaware corporation (the "Corporation"),
and Andrew H. Baker ("Baker"), for the grant by the Corporation to Baker of
restricted shares of the Corporation's common stock, par value $.01 per share
(the "Common Stock"). This Agreement is entered into pursuant to and in
connection with that certain letter agreement of even date herewith (the "Letter
Agreement") regarding Baker's resignation as a director and as Chairman,
President and Chief Executive Officer of the Corporation.
1. Grant of Shares. In accordance with the terms of the Letter Agreement,
and in consideration of valuable services heretofore rendered and of the
agreements hereinafter set forth, the Corporation hereby grants to Baker Five
Hundred Thousand (500,000) shares of Common Stock of the Corporation (the
"Shares"). As soon as reasonably practicable following Baker's execution of this
Agreement, a certificate or certificates representing the Shares and bearing the
legend described in Section 6 shall be issued in the name of Baker. The
Corporation, at the direction of the Board of Directors, shall hold such
certificate or certificates, properly endorsed for transfer, for Baker's benefit
until the restrictions herein set forth have lapsed. The Shares, shall be issued
from the Corporation's available treasury shares or from authorized but unissued
shares. Upon issuance of the certificates representing the Shares, Baker shall
have all the rights of a stockholder with respect to the Shares, including the
right to vote and to receive all dividends or other distributions paid or made
with respect to the Shares. However, the Shares (and any securities of the
Corporation which may be issued with respect to the Shares by virtue of any
stock split, combination, stock dividend or recapitalization, which securities
shall be deemed to be "Shares" hereunder) shall be subject to all the
restrictions hereinafter set forth.
2. Restriction. The Shares shall not be sold or exchanged until the
restriction imposed by this Section 2 (the "Restriction") has lapsed pursuant to
Sections 3 or 4 below; provided, however, nothing herein shall restrict the
transfer of the shares to immediate family members or trusts for their benefit.
3. Lapse of Restriction upon Certain Events. The Restriction shall lapse
and have no further force or effect with respect to the Shares upon the earlier
to occur of (a) a Change of Control of the Corporation (as hereinafter defined)
and (b) Baker reaching age 65. For purposes of this Agreement, a "Change of
Control" of the Corporation shall be defined to mean, notwithstanding the prior
occurrence of any other event constituting a "change of control" (a) the
acquisition by any "person" of, or the entering into of any agreement by any
"person" to acquire by purchase, merger, consolidation or otherwise "beneficial
ownership" (within the meaning of Section 13 and/or Rule 13d-3 promulgated under
the Securities Exchange Act of 1934, as amended) of shares resulting in the
beneficial ownership of more than fifty percent (50%) of the total number of
votes which may be cast for the election of directors, or (b) the acquisition by
any person of, or the entering into of any agreement by any person to acquire,
all or substantially all of the assets of the Corporation. Notwithstanding any
other provision of this Section 3, the Restriction shall lapse and be of no
further force and effect as of immediately prior to, but subject to, the Change
of Control and in the event of a Change of Control as a result of a tender offer
or other multi-staged transaction, the Restriction shall lapse in a timely
manner such that Baker may participate in such transaction at any stage.
4. Lapse of Restriction by Death or Disability. In addition to the
circumstances under which the Restriction shall lapse as described in Section 3,
the Restriction shall lapse and have no further force or effect upon Baker's
death or Disability (as such term is defined in the Corporation's Long-Term
Disability Plan).
<PAGE>
5. Delivery of Restricted Shares. Promptly upon the lapse of the
Restriction pursuant to Sections 3 or 4, a stock certificate for the number of
Shares with respect to which the Restriction has lapsed shall be delivered, free
of all restrictions, to Baker or Baker's representative, beneficiary or estate
(collectively referred to as the "Representative"), as the case may be.
6. Legend on Certificates. All certificates representing the Shares shall
be endorsed on the face thereof with the following legend:
"The shares of stock represented by this certificate, and the
transferability thereof are restricted by and subject to a Restricted Stock
Agreement dated as of January 20, 1997, a copy of which is on file with the
Secretary of the Corporation."
7. Withholding Taxes. Notwithstanding any other provision of this
Agreement, the lapse of the Restriction on the Shares pursuant to Sections 3 or
4 shall be conditioned on Baker or the Representative having made appropriate
arrangements with the Corporation to provide for the withholding of any taxes
required to be withheld by Federal, state or local law with respect to such
lapse, if any.
8. Registration Rights. Baker shall be granted for a three-year period
commencing on the date hereof "piggyback" registration rights to request the
Corporation to register the Shares as part of a registration statement filed by
the Corporation. If the Corporation shall not have filed a registration
statement of the end of such three-year period, Baker shall have the right from
and after that date to demand that the Corporation prepare and file a
registration statement to register the Shares.
1. General Provisions.
(a) To the extent not preempted by Federal law, this Agreement shall be
construed in accordance with and governed by the laws of the State of
California.
(b) Notices required or permitted to be made under this Agreement shall be
sufficiently made if personally delivered to Baker or his Representative or
sent by regular mail addressed (a) to Baker or his Representative at
Baker's address as set forth in the books and records of the Corporation,
or (b) to the Corporation at the principal office of the Corporation
clearly marked "Attention: Corporate Secretary."
(c) The Letter Agreement and this Agreement set forth the entire agreement
of the parties concerning the subject matter hereto, and no other
representations or warranties, express or implied, other than those
contained herein, and no amendments or modifications hereto, shall be
binding unless made in writing and signed by the parties hereto.
(d) The waiver by either party of a breach of any term or provision of
this Agreement shall not operate or be construed as a waiver of a
subsequent breach of the same provision or of the breach of any other term
or provision of this Agreement.
(e) The headings in this Agreement are solely for convenience of reference
and shall be given no effect in the construction or interpretation of this
Agreement.
2
<PAGE>
(f) In the event that any provision of this Agreement shall be held illegal
or invalid for any reason, such illegality or invalidity shall not affect
the remaining parts of this Agreement, and this Agreement shall be
construed and enforced as if the illegal or invalid provision had not been
included.
(g) Nothing in the Letter Agreement or this Agreement confers on Baker any
right to be employed by the Corporation or to be entitled to any
remuneration or benefits not set forth in the Letter Agreement or this
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement, as of the
date first above written.
UNILAB CORPORATION
By: ______________________________
Name:
Title:
BAKER
__________________________________
Name: Andrew H. Baker
Address: 636 Winding Hollow Road
Franklin Lakes, NJ 07417
3
Exhibit 10.19
Amendment No. 1 to Stock Option Agreement
This Amendment No. 1, dated as of January 20, 1997, to the Stock Option
Agreement dated as of October 20, 1992 (the "Stock Option Agreement"), is
entered into by and between Unilab Corporation, a Delaware corporation (the
"Corporation") and Andrew H. Baker (the "Option Holder").
The Stock Option Agreement is hereby amended as follows:
1. Section 1 is amended by deleting the final sentence thereof, with the
effect of immediately vesting all options.
2. Section 3 is amended by (i) adding to the first sentence thereof, after
the word "to" and before the word "a", the words "all or"; and (ii)
deleting the second sentence thereof in its entirety and replacing it
with the following sentence: "The Option Holder's right to exercise the
aforementioned Option shall expire on January 20, 2007 (the "Expiration
Date").
3. Section 4(ii) is amended by adding the word "siblings" after the word
"parents" and before the word "spouses".
4. Section 5 is deleted in its entirety and the section numbers thereafter
are renumbered appropriately.
5. Sections 6(a) and 6(b) are deleted in their entirety and replaced by
the following: "Option Holder shall be entitled to exercise the Option
through the Expiration Date notwithstanding termination of Option
Holder's employment by the Corporation prior to the Expiration Date".
6. Section 9 is hereby deleted in its entirety and replaced with the
following:
8. Mergers, Recapitalizations and Dissolutions. The "acquisition" of
the Corporation by another entity shall cause each outstanding
option to become an option to purchase shares of the acquiring
entity, for the balance of the term of the option, at a price and
for a number of shares as is consistent with the acquisition terms,
notwithstanding any contrary provision in the Stock Option Program
in accordance with which this option was granted. The "acquisition"
of the Corporation by another entity shall be defined to be either a
merger or consolidation with an acquiring entity (or subsidiary or
affiliate thereof) in which the Corporation is not the surviving
entity or in which the Corporation becomes a subsidiary of an
acquiring entity;
<PAGE>
the sale of substantially all of the Corporation's assets; or the
dissolution or liquidation of the Corporation.
Except as expressly provided above, the Stock Option Agreement shall
remain in full force and effect.
This Amendment No. 1 shall be governed by and construed in accordance with
the laws of the State of Delaware, other than its conflicts of laws provisions.
OPTION HOLDER UNILAB CORPORATION
__________________________ By: ___________________________
Name: Andrew H. Baker Name:
Title:
Exhibit 10.20
Amendment No. 1 to Stock Option Agreement
This Amendment No. 1, dated as of January 20, 1997, to the Stock Option
Agreement dated as of January 1, 1995 (the "Stock Option Agreement"), with
respect to options to purchase 120,000 shares of Unilab common stock is entered
into by and between Unilab Corporation, a Delaware corporation (the
"Corporation") and Andrew H. Baker (the "Option Holder").
The Stock Option Agreement is hereby amended as follows:
1. Section 1 is amended by deleting the final sentence thereof, with the
effect of immediately vesting all options.
2. Section 3 is amended by (i) adding to the first sentence thereof, after
the word "to" and before the word "a", the words "all or"; and (ii)
deleting the second sentence thereof in its entirety and replacing it
with the following sentence: "The Option Holder's right to exercise the
aforementioned Option shall expire on January 20, 2007 (the "Expiration
Date").
3. Section 5 is deleted in its entirety and the section numbers thereafter
are renumbered appropriately.
4. Sections 6(a) and 6(b) are deleted in their entirety and replaced by
the following: "Option Holder shall be entitled to exercise the Option
through the Expiration Date notwithstanding termination of Option
Holder's employment by the Corporation prior to the Expiration Date".
5. Section 9 is hereby deleted in its entirety and replaced with the
following:
8. Mergers, Recapitalizations and Dissolutions. The "acquisition" of
the Corporation by another entity shall cause each outstanding
option to become an option to purchase shares of the acquiring
entity, for the balance of the term of the option, at a price and
for a number of shares as is consistent with the acquisition terms
notwithstanding any contrary provision in the Stock Option Program
in accordance with which this option was granted. The "acquisition"
of the Corporation by another entity shall be defined to be either a
merger or consolidation with an acquiring entity (or subsidiary or
affiliate thereof) in which the Corporation is not the surviving
entity or in which the Corporation becomes a subsidiary of an
acquiring entity; the sale of substantially all of the Corporation's
assets; or the dissolution or liquidation of the Corporation.
<PAGE>
Except as expressly provided above, the Stock Option Agreement shall
remain in full force and effect.
This Amendment No. 1 shall be governed by and construed in accordance with
the laws of the State of Delaware, other than its conflicts of laws provisions.
OPTION HOLDER UNILAB CORPORATION
__________________________ By: __________________________________
Name: Andrew H. Baker Name:
Title:
Exhibit 10.21
Amendment No. 1 to Stock Option Agreement
This Amendment No. 1, dated as of January 20, 1997, to the Stock Option
Agreement dated as of January 1, 1995 (the "Stock Option Agreement"), with
respect to options to purchase 60,000 shares of Unilab common stock is entered
into by and between Unilab Corporation, a Delaware corporation (the
"Corporation") and Andrew H. Baker (the "Option Holder").
The Stock Option Agreement is hereby amended as follows:
1. Section 1 is amended by deleting the final sentence thereof, with the
effect of immediately vesting all options.
2. Section 3 is amended by (i) adding to the first sentence thereof, after
the word "to" and before the word "a", the words "all or"; and (ii)
deleting the second sentence thereof in its entirety and replacing it
with the following sentence: "The Option Holder's right to exercise the
aforementioned Option shall expire on January 20, 2007 (the "Expiration
Date").
3. Section 5 is deleted in its entirety and the section numbers thereafter
are renumbered appropriately.
4. Sections 6(a) and 6(b) are deleted in their entirety and replaced by
the following: "Option Holder shall be entitled to exercise the Option
through the Expiration Date notwithstanding termination of Option
Holder's employment by the Corporation prior to the Expiration Date".
5. Section 9 is hereby deleted in its entirety and replaced with the
following:
8. Mergers, Recapitalizations and Dissolutions. The "acquisition" of
the Corporation by another entity shall cause each outstanding
option to become an option to purchase shares of the acquiring
entity, for the balance of the term of the option, at a price and
for a number of shares as is consistent with the acquisition terms
notwithstanding any contrary provision in the Stock Option Program
in accordance with which this option was granted. The "acquisition"
of the Corporation by another entity shall be defined to be either a
merger or consolidation with an acquiring entity (or subsidiary or
affiliate thereof) in which the Corporation is not the surviving
entity or in which the Corporation becomes a subsidiary of an
acquiring entity; the sale of substantially all of the Corporation's
assets; or the dissolution or liquidation of the Corporation.
<PAGE>
Except as expressly provided above, the Stock Option Agreement shall
remain in full force and effect.
This Amendment No. 1 shall be governed by and construed in accordance with
the laws of the State of Delaware, other than its conflicts of laws provisions.
OPTION HOLDER UNILAB CORPORATION
__________________________ By: ________________________
Name: Andrew H. Baker Name:
Title:
Exhibit 10.22
Amendment No. 1 to Stock Option Agreement
This Amendment No. 1, dated as of January 20, 1997, to the Stock Option
Agreement dated as of February 27, 1996 (the "Stock Option Agreement"), is
entered into by and between Unilab Corporation, a Delaware corporation (the
"Corporation") and Andrew H. Baker (the "Option Holder").
The Stock Option Agreement is hereby amended as follows:
1. Section 1 is amended by deleting the final sentence thereof, with the
effect of immediately vesting all options.
2. Section 3 is amended by (i) adding to the first sentence thereof, after
the word "to" and before the word "a", the words "all or"; and (ii)
deleting the second sentence thereof in its entirety and replacing it
with the following sentence: "The Option Holder's right to exercise the
aforementioned Option shall expire on January 20, 2007 (the "Expiration
Date").
3. Section 5 is deleted in its entirety and the section numbers thereafter
are renumbered appropriately.
4. Sections 6(a) and 6(b) are deleted in their entirety and replaced by
the following: "Option Holder shall be entitled to exercise the Option
through the Expiration Date notwithstanding termination of Option
Holder's employment by the Corporation prior to the Expiration Date".
5. Section 9 is hereby deleted in its entirety and replaced with the
following:
8. Mergers, Recapitalizations and Dissolutions. The "acquisition" of
the Corporation by another entity shall cause each outstanding
option to become an option to purchase shares of the acquiring
entity, for the balance of the term of the option, at a price and
for a number of shares as is consistent with the acquisition terms,
notwithstanding any contrary provision in the Stock Option Program
in accordance with which this option was granted. The "acquisition"
of the Corporation by another entity shall be defined to be either a
merger or consolidation with an acquiring entity (or subsidiary or
affiliate thereof) in which the Corporation is not the surviving
entity or in which the Corporation becomes a subsidiary of an
acquiring entity; the sale of substantially all of the Corporation's
assets; or the dissolution or liquidation of the Corporation.
<PAGE>
Except as expressly provided above, the Stock Option Agreement shall
remain in full force and effect.
This Amendment No. 1 shall be governed by and construed in accordance with
the laws of the State of Delaware, other than its conflicts of laws provisions.
OPTION HOLDER UNILAB CORPORATION
__________________________ By: ________________________
Name: Andrew H. Baker Name:
Title:
Exhibit 10.23
NON-COMPETE AGREEMENT
This Non-Compete Agreement is dated as of January 20, 1997, by and between
Unilab Corporation, a Delaware corporation with its executive office located at
18448 Oxnard Street, Tarzana, California 91356 ("Unilab" or the "Company") and
Andrew H. Baker, an individual residing at 636 Winding Hollow Drive, Franklin
Lakes, New Jersey 07417 ("Baker").
W I T N E S S E T H:
--------------------
WHEREAS, pursuant to that certain Letter Agreement, dated January 20, 1997
(the "Letter Agreement"), by and between Unilab and Baker and that certain
Consulting Agreement dated as of January 20, 1997 (the "Consulting Agreement")
between Unilab and Hartill Ltd., a company controlled by Baker, Baker has agreed
to step down as Chairman, President and Chief Executive Officer of Unilab and to
continue, through Hartill Ltd. ("Hartill"), as a consultant to the Company for a
three-year period;
WHEREAS, Baker is obligated pursuant to Page 3, Paragraph 10 of the Letter
Agreement to enter into this Agreement and to not compete with Unilab under any
of the circumstances described herein;
WHEREAS, Baker recognizes that the consummation of the matters
contemplated by the Letter Agreement and Consulting Agreement will inure to the
benefit of Baker, Hartill and Unilab and such matters would not have been
consummated without Baker's agreement to enter into this Agreement;
WHEREAS, Unilab wishes to be assured that Baker will not compete with
Unilab and will not solicit Unilab's clients for the purposes of clinical
laboratory testing for the periods and upon and subject to the terms herein
provided.
NOW, THEREFORE, in consideration of the mutual covenants and the
agreements hereinafter set forth, and in consideration of Unilab consummating
the transactions contemplated by the Letter Agreement and Consulting Agreement,
the parties hereto covenant and agree as follows:
1. Covenant Against Competition.
Baker acknowledges that (i) the principal business of Unilab is the
operation of an independent clinical laboratory testing company (such business
being referred to as the "Unilab Business"); (ii) Baker is one of the limited
number of persons who has developed such business and has been a key employee of
Unilab; (iii) the Unilab Business is primarily conducted within the State of
California; (iv) Baker's work for Unilab has brought him into close contact with
many confidential affairs not readily available to the public; and (v) Unilab
<PAGE>
would not have entered into the Letter Agreement and the Consulting Agreement
unless Baker entered into this Agreement. Accordingly, Baker covenants and
agrees, that:
(a) Until the third anniversary date hereof (the "Restricted Period")
Baker shall not, within the State of California, without the prior written
consent of Unilab, compete directly or indirectly, or participate, directly or
indirectly, as agent, employee, consultant, representative or otherwise, or as a
stockholder, partner or joint venturer, or have any direct or indirect financial
interest, including, without limitation, the interest of a creditor, in any
enterprise (other than Unilab) engaging within the State of California in any
Unilab Business; provided however, Baker may own, directly or indirectly, solely
as an investment, securities of any entity which is traded on any national
securities exchange or national automated quotation system if Baker, (A) is not
a controlling person of or a member of a group which controls such entity and
(B) does not, directly or indirectly, own 5% or more of any class of securities
of such entity.
(b) During the Restricted Period, Baker shall not, directly or
indirectly, (i) solicit or encourage to leave the employment or service of
Unilab or its affiliates, any employee or consultant of Unilab or any of its
affiliates, for the purpose of engaging in the clinical laboratory testing
business in the State of California or (ii) hire or retain any employee or
consultant who is employed or retained by, or who, within one year of any
particular time, has left the employment or service of, Unilab or any of its
affiliates to engage in any Unilab Business or any business substantially
similar to the Unilab Business in the State of California.
(c) Notwithstanding anything in Section 1(a) and 1(b) to the contrary,
nothing herein shall be deemed to preclude, prohibit, limit or restrict Baker's
rights to engage in the preferred provider organization business conducted by
Medical Diagnostic Management, Inc. ("MDM"), so long as MDM does not own or
operate a clinical laboratory testing facility.
(d) In consideration for Baker's execution of this Agreement Unilab is
providing to Baker concurrently with the execution by Baker of this Agreement a
portion of the consideration provided to Baker under the Letter Agreement (the
"Non-Compete Consideration"). Such Non-Compete Consideration is not conditioned
upon or related to the performance of any current or future services by Baker.
2. Rights and Remedies Upon Breach of the Restrictive Covenants.
(a) Baker recognizes that Unilab does not have an adequate remedy at
law to protect its rights hereunder. Baker agrees that Unilab shall have the
right to an injunction without bond in any court of competent jurisdiction
permanently enjoining Baker from a violation of Section 1 hereof during the term
thereof (the "Restrictive Covenants").
2
<PAGE>
(b) Baker recognizes and agrees that in the event of a violation of any
of the Restrictive Covenants, the period during which he shall not compete shall
be suspended during the period he engaged in conduct constituting such violation
and shall resume after such violation has been remedied.
(c) The remedies set forth in subsection 2(a) above shall not limit,
eliminate, prohibit or restrict any other rights that Unilab may have under law
for violation by Baker of this Agreement and shall not be mutually exclusive and
any one or all may be pursued without the pursuit of one impairing or precluding
the pursuit of another.
3. Severability of Restrictive Covenants.
It is understood and agreed by the parties hereto that the provisions
of each of the preceding sections of this Agreement are independent of and
severable from each other and the invalidity of any section or any portion
thereof shall not affect the validity or hinder the enforceability of the
remaining provisions of this Agreement. The parties expressly agree and declare
that the time limitation and geographic scope set forth in Section 1 hereof are
reasonable, are properly required for the adequate protection of the business of
Unilab and that in the event such time limitation and/or geographic scope is
deemed to be unreasonable by the final decision of a court of competent
jurisdiction, Unilab and Baker agree to submit to such revision or modification
thereof as said court shall deem reasonable.
4. Notices.
Any notice or other communication hereunder shall be given in writing
or by facsimile or other means of instantaneous communication and such notice
shall be deemed to have been given, if by mail, three days after it has been
mailed by certified mail, return receipt requested, postage prepaid, and if by
instantaneous communication, upon certification of receipt of transmission, as
follows: (a) if to Baker at the address shown at the beginning of this Agreement
or the fax number shown on the signature page hereof or to such other person(s)
or address(es) as Baker shall have furnished to Unilab in writing, (b) if to
Unilab at the address shown at the beginning of this Agreement, attention of
Corporate Secretary, or the fax number shown on the signature page hereof, with
copies to Unilab Corporation, 401 Hackensack Avenue, 9th Floor, Hackensack, New
Jersey 07601, Attention Mark L. Bibi, Esq., General Counsel, or to such other
person(s) or address(es) as Unilab shall have furnished to Baker in writing.
5. Assignability.
This Agreement shall be binding upon and inure to the benefit of
Unilab, its assigns and successors (by purchase of substantially all of its
assets, by merger, reorganization or spin-off or otherwise). This Agreement
shall not be assignable by Baker.
3
<PAGE>
6. Entire Agreement.
This Agreement contains the entire agreement between Baker and Unilab
with respect to the subject matter hereof.
7. Waivers, Amendments and Further Agreements.
Neither this Agreement nor any term or condition hereof, including
without limitation the terms and conditions of this Section 7, may be waived,
modified or amended in whole or in part as against Unilab or Baker except by
written instrument executed by each of the parties expressly stating that it is
intended to operate as a waiver, modification or amendment of this Agreement or
the applicable term or condition hereof.
8. Governing Law.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have executed or caused to be
executed this Agreement as of the date first above written.
UNILAB CORPORATION
By: _____________________________
Name:
Title:
Fax No.:(818)757-3809
ANDREW H. BAKER
----------------------------
Fax No.:
4
Exhibit 10.24
CONSULTING AGREEMENT
AGREEMENT, dated as of January 20, 1997 between Unilab Corporation, a
Delaware corporation with its executive offices located at 18448 Oxnard Street,
Tarzana, California 91356 (hereinafter "Unilab" or the "Company") and Hartill
Ltd., with its executive offices located at 401 Hackensack Avenue, Hackensack,
New Jersey 07601 (hereinafter the "Consultant"):
WHEREAS, Andrew H. Baker ("Baker") served as Chairman, President and
Chief Executive Officer of Unilab from October 1992 through the date hereof;
WHEREAS, Baker has been a leading executive in the clinical laboratory
industry for more than a decade;
WHEREAS, Baker is the owner and President of Consultant;
WHEREAS, Unilab desires to continue to have the benefit of Baker's and
Consultant's experience and knowledge of the clinical laboratory industry
following Baker's resignation on the date hereof from his positions as Chairman,
President and Chief Executive Officer of Unilab, and Consultant desires to be
retained by Unilab as a Consultant;
NOW, THEREFORE, in consideration of the material covenants and
agreements set forth herein, the parties hereto covenant and agree as follows:
Engagement of Consultant. Unilab hereby engages the Consultant to
advise and consult with Unilab's senior management and Board of Directors with
respect to laboratory industry developments; investment opportunities; financing
possibilities; client development; and laboratory operations (collectively, the
"Consulting Services"). The Consultant represents and warrants to Unilab that it
has no commitments, arrangements or other agreements with any other clinical
laboratory companies, and there are no restrictions under applicable law or
licensing regulations, which might preclude the carrying out of his obligations
under this Agreement.
1. Term. The term of this Agreement shall be for three (3) years from the
date hereof, unless sooner terminated as provided herein.
2. Compensation.
(a) Unilab shall pay the Consultant $900,000 for the Consulting
Services, payable (i) $600,000 in a lump sum payment promptly
after the date hereof and (ii) $100,000 per year, payable
quarterly in advance. Consultant shall
<PAGE>
make itself available to provide up to 30 hours per week of
Consulting Services, at Unilab's request.
(b) Consultant shall be reimbursed for its reasonable and ordinary
business expenses incurred in providing Consulting Services,
provided such expenses are approved by Unilab's Chief Executive
Officer (or, in the case of overseas or cross-continental travel,
pre-approved by the Chief Executive Officer).
3. Indemnification.
(a) Consultant and Baker agree to defend, indemnify, and hold Unilab,
its subsidiaries, directors, officers, employees and agents,
wholly harmless from and against any and all costs (including
reasonable attorney's fees) liabilities, claims, losses,
lawsuits, settlements, demands, causes, judgments and expenses
(collectively, "liabilities") arising from performance of this
Agreement to the extent that such costs and liabilities result
directly from the willful misconduct of Consultant or Baker
constituting fraud against Unilab as determined in a final
finding of a court of competent jurisdiction.
(b) Unilab agrees to defend, indemnify, and hold Consultant and Baker
wholly harmless, to the fullest extent permitted by law (and as
if Baker were still an officer and director of Unilab), from and
against any and all costs (including reasonable attorney's fees),
liabilities, claims, losses, lawsuits, settlements, demands,
causes, judgments and expenses (collectively, "liabilities")
arising from the performance of this Agreement, except to the
extent that such costs and liabilities result directly from the
willful misconduct of Consultant or Baker constituting fraud
against Unilab as determined in a final finding of a court of
competent jurisdiction.
4. Termination. This Agreement shall terminate on the occurrence of any
of the following conditions.
(a) Three (3) years from the date of this Agreement.
(b) In the event of a Default (as defined below) of this Agreement by
either party hereto, the other party shall have the right to
immediately begin cancellation proceedings of this agreement by
giving written notice of cancellation to the defaulting party
(the "Default Notice"). The non-defaulting party will give a
30-day cure period during which the defaulting party may have the
opportunity to cure the breach to the satisfaction of the
non-defaulting party. Nothing herein shall eliminate the
non-defaulting party's right to damages for the Default, in
addition to the remedies described herein.
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(i) For the purposes of this Agreement, Consultant shall be deemed to
be in Default hereunder upon (1) Consultant or Baker having been
convicted by a court of competent jurisdiction of any felony
involving moral turpitude; (2) the material violation by
Consultant or Baker of Sections 3 or 5 of this Agreement; or (3)
Consultant or Baker having been finally found by a court of
competent jurisdiction to have engaged in willful misconduct
constituting fraud against Unilab.
(ii) For the purposes of this Agreement, Unilab shall be deemed to be
in Default hereunder upon (1) Unilab or any of its officers or
directors having been convicted by a court of competent
jurisdiction of any felony involving moral turpitude; (2) the
willful malfeasance or gross negligence by Unilab in the
performance of its duties hereunder; (3) the material violation
by Unilab of any material provision of this Agreement; or (4)
Unilab or any of its officers or directors having been found to
have engaged in conduct constituting fraud against Consultant or
Baker. In the event of a termination by Consultant hereunder,
Consultant shall be entitled immediately to payment of all
compensation that otherwise would have been payable during the
three-year term hereof.
5. Confidential Information.
(a) The Consultant and Baker shall not directly or indirectly
disclose to anyone who is not authorized by the Company to
receive such information, or use or appropriate for its or his
own benefit or the benefit of anyone other than the Company, any
documents or materials relating to the Company's clinical
laboratory business (the "Business") or its customers which Baker
obtained during his employment or which the Consultant or Baker
obtain during the term of this Agreement, including files,
Business descriptions, Business relationships and accounts,
pricing policies, customer lists, computer software and hardware,
or any other materials relating to the Business or its customers
or any trade secrets or confidential information including,
without limitation, any Business methods, know-how, processes,
financial or other performance data, plans, policies and/or
personnel of the Company, whether generated by the Consultant or
Baker or by any employee of the Company; provided, however, that
confidential information shall not include any information
generally known to the public (other than as a direct or indirect
result of unauthorized disclosure by the Consultant or Baker), or
any information of a type not otherwise considered confidential
by persons engaged in the same business or a business similar to
that conducted by the Company.
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(b) At no time during or after the term of this Agreement shall the
Consultant or Baker remove or cause to be removed from the
premises of the Company any record, file, memorandum, document,
equipment or any like item relating to the business of the Company
except in furtherance of its or his duties hereunder or with the
permission of the Company.
6. Severability. Each provision of this Agreement shall be treated as a
separate and independent clause, and the unenforceability of any one clause
shall in no way impair the enforceability of any of the other clauses herein. If
one or more of the provisions contained in this Agreement shall, for any reason,
be held to be unenforceable, such provision or provisions shall be construed by
an appropriate judicial body by limiting and reducing it or them, so that this
Agreement shall be enforceable to the maximum extent compatible with the
applicable law as it shall then appear.
7. Injunctive Relief. Both parties recognize that a breach of Section 5
of this Agreement may cause irreparable damage, the exact amount of which would
or may be difficult or impossible to ascertain, and that remedies at law for any
such breach would be inadequate. Accordingly, either party shall be entitled, in
addition to any other rights or remedies existing in its favor, to obtain
specific performance or injunctive relief in order to enforce Section 6 of this
Agreement or prevent a breach or further breach of any provision hereof.
8. No Waiver. No waiver of any breach or failure by any party to
enforce any of the terms or conditions of this Agreement at any time shall, in
any manner, limit or waive such party's right thereafter to enforce and to
compel strict compliance with every term and condition thereof.
9. Independent Contractor. It is understood that Consultant's services
hereunder are to be rendered in the capacity of an independent contractor, and
that Consultant is not in any respect or under any circumstances an employee of
Unilab. Neither party has authority to enter into contracts or assume any
obligations for or on behalf of the other party or to make any warranties or
representations for or on behalf of the other party. Consultant shall be solely
responsible for any taxes imposed on the performance of services or the payment
for such services, including withholding of state and federal income, sales or
ad valorem, unemployment compensation, worker's compensation, Federal Insurance
Contributions Act, Federal Unemployment Tax Act or other taxes, costs or
expenses incurred in the performance of any engagement hereunder. Consultant
expressly indemnifies and holds Unilab harmless from any such liabilities.
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10. Assignment. This Agreement is not assignable in whole or in part by
either party without the prior written consent of the other party. This
Agreement shall be binding upon and shall inure to the benefit of any successors
or permitted assigns of Unilab, whether by merger, consolidation, sale of all or
substantially all of the assets or otherwise.
11. Entire Agreement; Captions. This instrument contains the entire
agreement of the parties with respect to the subject matter contained herein,
and may not be changed orally but only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension or
discharge is sought. The captions of the sections of this Agreement are inserted
as a matter of convenience only, and in no way define, limit or describe the
scope of this Agreement or any provision thereof.
12. Notices. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand, by nationally recognized overnight delivery service, or
mailed by certified or registered mail, postage prepaid, addressed as follows:
If to the Consultant: Andrew H. Baker
636 Winding Hollow Drive
Franklin Lakes, NJ 07417
If to Unilab: Unilab Corporation
18448 Oxnard Street
Tarzana, CA 91356
Attn: Corporate Secretary
With a copy to: Unilab Corporation
401 Hackensack Avenue
Hackensack, NJ 07601
Attn: Legal Department
The above addresses for the purpose of receiving notices hereunder may
be changed by giving written notice of such change in the manner provided herein
for giving notices.
13. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of California.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day first hereinabove written. HARTILL, LTD.
By: ____________________________
Name: Andrew H. Baker
Title: President
UNILAB CORPORATION
By: ____________________________
Name:
Title:
6
Exhibit 10.33
EXECUTION COPY
PARTICIPATION AGREEMENT
THIS PARTICIPATION AGREEMENT, dated as of November 7, 1996, is by and
between Unilab Corporation (the "Seller") and Donaldson, Lufkin & Jenrette
Securities Corporation (together with its successors and assigns, "DLJ").
RECITALS
WHEREAS:
A. All capitalized terms used in this Participation Agreement without
definition shall have the respective meanings ascribed to such terms in the
Stock Purchase Agreement (as defined below).
B. Seller entered into a Stock Purchase Agreement with Unilabs Group
Limited ("UGL") and UniHolding Corp. ("UniHolding"), dated as of June 30, 1995,
a copy of which is attached hereto as Exhibit "A" (the "Stock Purchase
Agreement"). Pursuant to the Stock Purchase Agreement, Seller sold to UGL, and
UGL purchased from Seller, 400 shares of capital stock of UGL, par value $1.00
per share (the "UGL Shares").
C. Upon closing the Stock Purchase Agreement, UGL, in payment for the
UGL Shares, (i) paid Unilab the Cash Consideration and (ii) delivered to Unilab
a promissory note, dated June 30, 1995, in the principal amount of $15,000,000
(the "Note"), a copy of which is attached hereto as Exhibit "B".
D. As collateral security for the payment of the Note, 200 of the UGL
Shares were placed in Escrow pursuant to the terms of an Escrow Agreement, dated
June 30, 1995, among Seller, UGL, UniHolding and Bankers Trust Company, as
escrow agent. A copy of the Escrow Agreement is attached hereto as Exhibit "C".
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises herein contained and
for good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
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SECTION 1. Purchase and Sale
.Seller and DLJ, as the case may be, each covenant and agree as follows:
(a) Subject to the terms and conditions of this Agreement, Seller
wishes to sell to DLJ and DLJ wishes to purchase from Seller, an undivided 100%
participation interest (the "Participation") in all of Seller's right, title and
interest in and to the Note (including the registration rights granted therein),
the Escrow Agreement, and, to the extent the rights conferred thereunder relate
to the enforcement and collection of the Note or Escrow Agreement, the Stock
Purchase Agreement (collectively, the "Agreements") and all rights associated
therewith, including, without limitation:
(i) any right or claim (collectively, the "Related Claims")
relating to the Agreements which Seller now has or hereafter acquires
against any party to any Agreement (a "Party") retained by any Party
in connection with the Agreements or any transaction contemplated
therein; and
(ii) all cash, securities, interest, dividends or other
property which may be distributed or exchanged for or collected in
respect of the foregoing (including in connection with any
restructuring of UGL or UniHolding), and the proceeds thereof,
including, without limitation, distributions in respect of principal,
interest, fees, costs and expenses relating thereto (collectively, the
"Proceeds");
(all such right, title and interest of Seller in and to the Agreements, the
Related Claims and the Proceeds being referred to herein as the "Participation
Interest").
(b) Nature of Participation. Upon the occurrence of the Closing
pursuant to Section 2 below, Seller hereby sells and transfers to DLJ the
Participation. The Participation conveyed hereunder is a true sale of an
undivided 100% beneficial interest in the Note and the Agreements and, in
accordance with the terms hereof, there shall exist an agency relationship
between Seller, as agent, and DLJ, as beneficiary.
(c) No Assumption of Obligations or Liabilities. Seller and DLJ intend
and agree that DLJ is not assuming any of Seller's obligations or liabilities
arising under or relating to the Agreements.
(d) Security Interest. Effective upon Seller's receipt of the Purchase
Price (as defined below), Seller hereby grants and conveys to DLJ a security
interest in the Note as security for Seller's obligations hereunder. To perfect
such security interest, concurrently with the execution and delivery of this
Participation Agreement, Seller is delivering to DLJ the Note as collateral
security.
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SECTION 2. Closing
.The sale of the Participation is expressly conditioned upon and shall not
be deemed to have occurred unless and until:
(i) Each of Seller and DLJ shall have executed and delivered
to the other a copy of this Participation Agreement and shall have
received the same;
(ii) Seller shall have delivered to DLJ the Note as
collateral security in accordance with Section 1(d) above; and
(iii) DLJ shall have wired the Purchase Price (the "Purchase
Price" as defined in that certain letter agreement, dated as of the
date hereof, between Seller and DLJ (the "Pricing Letter")), in
immediately available funds to:
Unilab Corporation
Bank Name: Citibank
ABA #: 021000089
Account #: 4060-3893
Reference: Sale of UGL Note
and Seller shall have received the Purchase Price (the date on which Seller
receives the Purchase Price being referred to herein as the "Closing Date").
SECTION 3. Administration
. Seller and DLJ, as the case may be, each covenant and agree as follows:
(a) Expenses. Seller has paid, or will pay, any costs or expenses, if
any, arising under or in connection with the Agreements that arise prior to, or
are attributable to the period prior to, the Closing Date. DLJ shall reimburse
Seller for costs and expenses under the Escrow Agreement that are attributable
to the period from and after the Closing Date. Each party hereto shall be
responsible for its own costs and expenses (including, without limitation, fees
and disbursements of its counsel) in connection with entering into this
Participation Agreement and consummating the transactions contemplated
hereunder.
(b) Distributions. Whenever Seller receives any Proceeds in respect
of the Participation Interest, Seller shall promptly pay (in no event later than
two business days after receipt) the same over to DLJ in accordance with the
wire instructions set forth on the signature page hereto. Until any such
Proceeds are paid to DLJ, Seller shall segregate and hold the same as agent for
the sole economic benefit of DLJ. Unless otherwise instructed in writing by DLJ
and as otherwise provided in this Participation Agreement, Seller shall use
commercially
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reasonable efforts to cause any Proceeds issued in the form of securities to be
registered in the name of DLJ or in such name or names as DLJ may direct, at
DLJ's sole cost and expense.
(c) Documents. Seller shall promptly upon the receipt thereof deliver
to DLJ, at DLJ's sole cost and expense, any documents and notices that relate to
the Agreements.
(d) Acts and Decisions. Seller shall act as DLJ's agent and at DLJ's
direction in DLJ's sole discretion and at DLJ's sole cost and expense, for all
purposes under the Agreements, including, without limitation, for purposes of
voting (to the extent permitted under the Agreements), distribution, and
exercise of any rights under the Agreements including, without limitation,
Seller's rights with respect to demand and other registration rights in respect
of the resale by Seller on behalf of DLJ or directly by DLJ any securities to be
issued in exchange for, or in payment of, the Note as directed by DLJ in
writing. Without limiting the foregoing, DLJ, at its sole cost and expense,
shall be entitled (i) to designate all attorneys to be retained by Seller (who
shall be reasonably satisfactory to Seller) in connection with all matters
relating to the Agreements including, without limitation, Seller's rights of
enforcement thereunder and (ii) to direct all actions to be taken by such
counsel, within the scope of its representation of Seller. DLJ shall have the
exclusive right to direct the settlement of any litigation or restructuring
affecting the Participation Interest. Notwithstanding the foregoing, DLJ, at its
sole option, and at DLJ's sole cost and expense, may as Seller's agent or
attorney-in-fact in Seller's name, as necessary or appropriate, take all actions
it deems necessary to collect or enforce rights in respect of the Participation
Interest and the Agreements and Seller shall execute any documents necessary so
to authorize DLJ.
(e) Seller to Act at DLJ's Request. Upon DLJ's request, and at DLJ's
sole cost and expense, Seller shall take any actions reasonably requested by DLJ
and not inconsistent with the terms of the Agreements with respect to the
Agreements and the Participation Interest including, without limitation, the
sale, in accordance with DLJ's instructions, of any securities issued by UGL or
UniHolding in exchange for, or in payment of, the Note and the prompt payment to
DLJ of the Proceeds thereof.
(f) Transfer by Seller. Seller covenants and agrees that it shall not
sell, grant, convey or transfer participation or subparticipation interests in,
or otherwise transfer or encumber, in whole or in part, any of its right, title
and interest in the Participation Interest or the Agreements other than as
contemplated herein.
(g) Acknowledgment of Relationship. DLJ and Seller each acknowledge
that Seller has sold DLJ all equitable and beneficial interests of Seller in the
Participation Interest and Seller shall retain legal title thereto in trust for
DLJ.
SECTION 4. Seller's Representations and Warranties
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.Seller hereby represents and warrants as follows:
(a) Good Standing. Seller is a Delaware corporation duly organized,
validly existing and with requisite power and authority to execute and deliver
this Participation Agreement and the Pricing Letter and consummate the
transactions contemplated hereby.
(b) Authority. The execution, delivery and performance of this
Participation Agreement, the Pricing Letter and all other instruments and
documents executed and delivered by Seller in connection herewith (i) have been
duly authorized by all necessary action and do not and will not require any
consent or approval of Seller's shareholders; (ii) have been duly authorized by
Seller; and (iii) do not violate any law, rule, regulation, order, writ,
judgment, injunction, decree, or determination presently in effect having
applicability to Seller or any provision of Seller's charter or by-laws.
(c) Validity. This Participation Agreement is binding upon and is
enforceable against Seller in accordance with its terms.
(d) Power to Grant. Seller has the full power and legal right to grant
the security interest to DLJ pursuant to this Participation Agreement free and
clear of any and all liens, claims and encumbrances.
(e) Title. Seller is the sole owner of the Participation Interest,
free and clear of any liens, claims, encumbrances or other charges whatsoever.
Neither the Note nor the Participation is subject to any prior assignment,
conveyance, transfer or participation or agreement to assign, convey, transfer
or participate, in whole or in part.
(f) Sophisticated Seller. Seller is a sophisticated seller with
respect to the participation, has adequate information concerning the business
and financial condition of UGL and UniHolding to make informed decisions
regarding the sale of the Participation and has independently and without
reliance upon DLJ and based upon such information as Seller has deemed
appropriate, made its own independent decision to enter into this Participation
Agreement. Seller acknowledges that DLJ may be in possession of material
non-public information not known to Seller, and Seller covenants not to sue DLJ
due to its lack of such information; provided, however, that such information,
if any, does not contradict any of the representations made by DLJ herein.
(g) Not an Insider. Seller is not an "insider" (as that term is
defined in Section 101(31) of the Bankruptcy Code) with respect to UGL or
UniHolding.
(h) Actions by Seller. Seller has not engaged in any action, omission
or conduct that could result in the Note being subject to any defense, right of
setoff, recoupment,
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avoidance, disallowance, or subordination, in whole or in part, whether on
contractual, legal or equitable grounds.
(i) Offsets. Neither UGL or UniHolding nor any of their affiliated
entities maintains any deposit accounts with Seller.
(j) Judgments; Principal Amount. No judgment has been entered upon the
Note, no part of the original principal amount of the Note has been paid, and no
challenge to the validity or enforceability of the Note has been asserted, or,
to the best of Seller's knowledge, threatened, as of the date hereof.
(k) No Defenses. Payment by UGL and UniHolding under the Note is not
subject to any defense, right of setoff, recoupment, avoidance, disallowance, or
subordination, in whole or in part.
(l) Proceedings. No proceedings are pending or, to the best of
Seller's knowledge, threatened against or affecting Seller, which, in the
aggregate, could adversely affect the Participation or the Participation
Interest.
(m) Documents. There are no documents or agreements to which Seller is
a party that would materially adversely affect the Agreements. Seller has
delivered to DLJ true and complete copies of the Agreements, copies of which are
annexed hereto as Exhibits A, B and C. None of the Agreements has been amended
or modified.
(n) Unfunded Obligations. Seller has no obligation to extend credit or
any other financial accommodation to UGL or UniHolding.
(o) Prior Representations True and Correct. Seller has complied with
all of its agreements and covenants in the Agreements.
(p) Release is Valid. Annexed hereto as Exhibit "D" is a true and
correct copy of the Termination and Release Agreement and such agreement has not
been amended or modified.
SECTION 5. DLJ's Representations
.DLJ hereby represents and warrants as follows:
(a) Good Standing. DLJ is validly existing and in good standing under
the laws of its jurisdiction, and has all requisite power and authority to
execute and deliver this Participation Agreement and the Pricing Letter and
consummate the transactions contemplated hereby, and has obtained all consents
and approvals, and made all registrations, required to be made or obtained by it
in connection herewith.
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(b) Authority. The execution, delivery and performance of this
Participation Agreement, the Pricing Letter and all other instruments and
documents executed and delivered by DLJ in connection herewith (i) have been
duly authorized by all necessary action and do not and will not require any
consents or approvals; (ii) have been duly authorized by DLJ; and (iii) do not
violate any law, rule, regulation, order, writ, judgment, injunction, decree, or
determination presently in effect having applicability to DLJ or any provision
of DLJ's charter or by-laws.
(c) No Investment Advice. DLJ acknowledges that Seller has not given
any investment advice, credit information or rendered any opinion as to whether
the purchase of the Participation is prudent. DLJ acknowledges that Seller may
be in possession of material non-public information not known to DLJ, and DLJ
covenants not to sue Seller due to its lack of such information; provided,
however, that such information, if any, does not contradict any of the
representations made by Seller herein.
(d) Purchase for Investment. Without creating any implication that the
Participation is a security, DLJ represents that it (i) is an "accredited
investor" within the meaning of Section 2(15) of the Securities Act of 1933 (the
"Securities Act"), and the rules and regulations of the Securities and Exchange
Commission thereunder, and (ii) is not purchasing the Participation, or any part
thereof, with a view to the sale or distribution thereof in violation of the
Securities Act; provided, however, that DLJ may resell the Participation if such
resale is effected in accordance with the Securities Act and in compliance with
Section 7 hereof.
(e) ERISA. DLJ is not purchasing the Participation on behalf of one or
more employee benefit plans with proceeds which, directly or indirectly,
constitute plan assets, as defined in the Employee Retirement Income Security
Act of 1974, as amended.
(f) Sophisticated Purchaser. DLJ is a sophisticated purchaser with
respect to the Participation, has adequate information concerning the business
and financial condition of UGL and UniHolding to make informed decisions
regarding the purchase of the Participation and has independently and without
reliance upon Seller and based upon such information as DLJ has deemed
appropriate, made its own independent decision to enter into this Participation
Agreement.
SECTION 6. Indemnities
. (a) Seller's Indemnities. Seller hereby agrees to indemnify and hold
DLJ and its agents, affiliates, controlling persons, officers, directors, and
employees (collectively, the "DLJ Indemnitees") harmless from and against any
and all expenses (including, without limitation, reasonable attorneys' fees and
disbursements), losses (including lost profit), claims, damages or liabilities
(collectively, "Liabilities") which are incurred by DLJ Indemnitees or any of
them, caused by, or in any way resulting from or relating to, (i) Seller's
failure to carry out
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any or all of its obligations under the Agreements or (ii) Seller's breach of
any of its representations, warranties, covenants or agreements set forth
herein.
(b) DLJ's Indemnities. DLJ hereby agrees to indemnify and hold Seller,
its agents, affiliates, controlling persons, officers, directors and employees
(collectively, "Seller Indemnitees") harmless from and against any and all
Liabilities which are incurred by Seller Indemnitees or any of them, including,
but not limited to, reasonable attorneys' fees and expenses, caused by, or in
any way resulting from or relating to, (i) DLJ's breach of any of its
representations, warranties, covenants or agreements set forth herein, (ii) any
action taken by Seller in accordance with DLJ's direction pursuant to this
Participation Agreement; or (iii) any action taken by DLJ as agent or
attorney-in-fact of Seller.
SECTION 7. Transfer
. (a) Further Assignments, Participations. This Participation
Agreement including, without limitation, the representations, warranties,
covenants and agreements contained herein, shall inure to the benefit of and be
enforceable by the respective parties hereto and their respective successors,
assigns and transferees. DLJ may sell, assign, or transfer or participate the
Participation or any portion thereof or any interest therein without Seller's
consent; provided, however, that, absent Seller's consent, which consent shall
not be unreasonably withheld or delayed, any such sale, assignment or transfer,
the obligations of DLJ and Seller hereunder shall remain in full force and
effect until fully paid, performed and satisfied. Seller shall not assign, sell
or otherwise transfer its obligations under this Agreement without the consent
of DLJ.
(b) Conversion to Direct Assignment. At any time after the date
hereof, upon DLJ's request, Seller shall take all steps reasonably necessary to
convert the Participation Interest into a direct assignment of the Note (rather
than as a participation). At DLJ's sole cost and expense, Seller and DLJ shall
use commercially reasonable efforts to obtain any necessary consents to transfer
Seller's rights under the Agreements; provided, however, that, notwithstanding
any such conversion of the Participation Interest to a direct assignment, this
Participation Agreement shall not terminate upon such assignment. DLJ shall
promptly reimburse Seller for all reasonable out-of-pocket costs and expenses
(including reasonable attorneys' fees) incurred by Seller in connection
therewith.
SECTION 8. Miscellaneous
. (a) Notices. All notices between parties shall be in writing. Notices
delivered personally or by telecopier shall be deemed received on the same
business day if delivered personally or by telecopier before 3:00 p.m. on such
day, and otherwise on the next day. Notices deposited with an overnight courier
service prior to its deadline on any business day shall be deemed received on
the next business day. Notices deposited in the mail, postage prepaid, on
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any business day shall be deemed received on the seventh business bay following
such deposit. All notices to Seller shall be given to:
Unilab Corporation
401 Hackensack Avenue
9th Floor
Hackensack, New Jersey 07601
Attention: Mark Bibi
Telephone: 201-525-1000
Telecopier: 201-525-1331
All notices to DLJ shall be given to:
Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
9th Floor
New York, New York 10172
Attn: Daniel Travers
Telephone: (212) 892-3017
Telecopier: (212) 892-5231
(b) Final Integration. This Participation Agreement and the Pricing
Letter shall serve as a final integration and expression of all agreements
between Seller and DLJ with respect to the subject matter hereof, and any
previous agreement representation or warranty, whether oral or written, shall
have no force and effect.
(c) Choice of Law. This Participation Agreement shall be governed by
and interpreted in accordance with the internal laws of the State of New York
without reference to conflict of law principles.
(d) Survival, Successors and Assigns. This Participation Agreement
(except as expressly provided herein), including without limitation, the
representations, warranties, covenants and indemnities contained herein, all of
which shall survive the execution and delivery of this Participation Agreement
(i) shall inure to the benefit of and be enforceable by the respective parties
hereto and their successors, assigns, participants and transferees and (ii)
shall be binding upon and enforceable against the respective parties hereto, and
their respective successors, assigns and transferees.
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(e) Further Assurances. Each of the parties hereto agrees to execute
and deliver or cause to be delivered all such instruments and to take all such
action as the other party may reasonably request in order to effectuate the
intent and purposes of and to carry out the terms of this Participation
Agreement.
(f) Amendments. No amendment of any provision of this Participation
Agreement shall be effective unless it is in writing and signed by Seller and
DLJ, and no waiver of any provision of this Participation Agreement nor consent
to any departure by Seller or DLJ therefrom, shall be effective unless it is in
writing and signed by the other party, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
(g) Headings. The headings of the Sections and subsections of this
Participation Agreement are for informational purposes only, do not constitute a
part of this Participation Agreement and shall not affect the interpretation
hereof.
(h) Counterparts. This Participation Agreement may be executed in
counterparts each of which when so executed shall be original but all such
counterparts shall together constitute but one and the same instrument. Executed
counterparts may be delivered by telecopier, provided that original executed
counterparts are thereafter exchanged by mail or overnight delivery service.
(i) Acknowledgment. Seller and DLJ each hereby acknowledges and agrees
that in no event shall any of the officers, directors, shareholders, employees,
agents or investment managers of either party or any affiliate of either party
(each, a "Related Entity") have any personal obligation or liability to Seller
or DLJ, as the case may be, for any action taken or omitted by or on behalf of
any Related Entity hereunder or in connection herewith. Seller and DLJ each
further acknowledges and agrees that all obligations of the other party under
this Participation Agreement are enforceable solely against such party and such
party's assets and not against the assets of any Related Entity and no Related
Entity shall be held liable or responsible for any obligations of either party
arising out of this Agreement.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute this Participation Agreement on the date first
above written.
UNILAB CORPORATION
By:_________________________
Name:
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
Name:
Title:
DLJ's Wire Instructions:
Citibank, N.A.
ABA #: 021000089
Acct. Name: DLJ Securities Corp.
Acct. No.: 911-125623
11
<PAGE>
EXHIBIT A
STOCK PURCHASE AGREEMENT
12
<PAGE>
EXHIBIT B
PROMISSORY NOTE
13
<PAGE>
EXHIBIT C
ESCROW AGREEMENT
14
<PAGE>
EXHIBIT D
TERMINATION AND RELEASE AGREEMENT
15
UNILAB
CORPORATION
1996
ANNUAL REPORT
[UNILAB LOGO]
(Letter to Shareholder to Come)
1
<PAGE>
Letter to Shareholder to Come
2
<PAGE>
Management's
Discussion & Analysis 4
Financial Statements 9
Notes to
Financial Statements 14
Report of Independent
Accountants 25
Unilab Officers 26
3
<PAGE>
Management's Discussion & Analysis of Financial Condition
and Result of Operations
Unilab Corporation December 31, 1996
Revenue increased to $205.2 million for the year ended December 31, 1996
from $189.0 million from the comparable prior year period, representing an
increase of $16.2 million or 8.6%. Exclusive of an acquired business, as
discussed below, core revenue growth for 1996 increased by $7.6 million or 4.0%.
The increase in revenue of $16.2 million was primarily the result of additional
specimen volume generating $35.4 million offset by changes in payor mix and
decreases in reimbursement levels of $19.2 million. The increase in specimen
volume of 18.3%, which generated the $35.4 million, was primarily attributable
to growth in the Company's core business of $26.8 million and the full year 1996
effect of revenue of $8.6 million generated from the acquisition of Medical
Laboratory Network, Inc. ("MLN") completed in May 1995. The changes in payor mix
and decreases in reimbursement levels is primarily due to a reduction in the
national fee caps for Medicare reimbursement in January 1996, an increase in
managed care business and a general softening in reimbursement levels across
most payor groups, most notably from insurance carriers.
Salaries, wages and benefits increased to $70.9 million for the year ended
December 31, 1996 from $65.0 million for the comparable prior year period. As a
percentage of revenue, salaries wages and benefits were consistent at 34.5% and
34.4% for the years ended December 31, 1996 and 1995, respectively.
Supplies expense increased to $28.6 million for the year ended December 31,
1996 from $24.2 million for the comparable prior year period. As a percentage of
revenue, supplies expense was 14.0% and 12.8% for the years ended December 31,
1996 and 1995, respectively. Such increase was the result of increased specimen
volume as the cost of supplies for each specimen processed has remained
relatively consistent during the respective periods.
Other operating expenses increased to $54.7 million for the year ended
December 31, 1996 from $43.7 million for the comparable prior year period. As a
percentage of revenue, other operating expenses were 26.6% and 23.1% for the
years ended December 31, 1996 and 1995, respectively. Such increase was
primarily due to increases in laboratory subcontracting expenses due to
increases in fees charged by, and volume sent to, outside reference laboratories
and increases in bad debt expenses, both being consistent with the higher trends
recognized by the Company in the second half of 1995.
The Company recorded legal and acquisition related charges of $4.9 million
and $4.4 million during the years ended December 31, 1996 and 1995,
respectively. During the third quarter of 1996, the Company recorded charges of
$4.9 million, primarily related to settlements reached with the United States
("U.S.") Government and certain other entities in connection with the Company's
sales, marketing and billing practices. The Company agreed to pay the U.S.
Government approximately $4.0 million to conclude an investigation of certain of
Unilab's billings to Medicare and certain other governmental entities for
hematology indices being billed in conjunction with complete blood counts.
Unilab also paid the California MediCal program approximately $160,000 in
October 1996 to settle all their claims concerning the same issue.
In December 1993, the Company was named as a defendant in The Trylon
Corporation v. MetWest Inc., Unilab Corporation and Does 1 through 30. The
lawsuit alleged that Unilab breached a contract, and the implied covenants of
good faith and fair dealing in connection with that contract with respect to the
sales, marketing and distribution of blue white speculite lightsticks, a product
designed for use in connection with PAP smears to screen for cervical cancer and
precancerous conditions in women. In September 1995, the arbitrator rendered an
award in favor of Trylon of approximately $437,000. In November 1995, the
arbitrator reduced the award to Trylon to approximately $374,000 (comprised of
approximately $313,000 principal award plus interest of approximately $61,000)
and granted Trylon's request for payment of legal fees of approximately $1.4
million. The Company recorded a $1.2 million charge during the first quarter of
1995 related to the expected cost, consisting primarily of legal fees, in
defending itself against such lawsuit and another $2.0 million charge during the
fourth quarter of 1995 reflecting the costs associated with the conclusion of
this arbitration, including the fees of Trylon's counsel and counsel for the
Company. In addition, the Company recorded an acquisition charge of $1.2 million
in the second quarter of 1995 in connection with the acquisition of MLN. Such
charges related to the integration of the acquired MLN operations with those of
the Company.
During the fourth quarter of 1996, the Company recorded charges of $65.7
million, consisting of the write-off of goodwill and customer lists of $61.7
million and a reserve for managerial restructuring expenses, consisting
primarily of severance related expenses, of $4.0 million. The write-off of
goodwill and customer lists principally related to two of the Company's
laboratory operations, which had seen decreasing operating results and cash
flows throughout 1996. The $4.0 mil-
4
<PAGE>
Management's Discussion & Analysis of Financial Condition
and Result of Operations
Unilab Corporation December 31, 1996
lion managerial restructuring expenses related primarily to a reduction in
headcount of approximately 25 employees, including the termination of the
Company's then Chairman, President and Chief Executive Officer in January 1997.
Most affected employees were terminated in late December through mid January.
Amortization and depreciation expense increased to $11.5 million for the
year ended December 31, 1996 from $9.6 million for the comparable prior year
period primarily due to a full year 1996 effect of amortization resulting from
the acquisition of MLN in May 1995 and certain smaller acquisitions made in late
1995, amortization from several smaller acquisitions made in 1996 and additional
depreciation expense in the second half of 1995 primarily resulting from the
purchase of $3.0 million of computer equipment and software.
Selling, general and administrative expenses increased to $41.8 million for
the year ended December 31, 1996 from $37.6 million for the comparable prior
year period. As a percentage of revenue, selling, general and administrative
expenses were 20.4% and 19.9% for the years ended December 31, 1996 and 1995,
respectively. Such increase was primarily due to the full year 1996 effect of
personnel added in sales and marketing throughout the latter half of 1995;
however, such expenses related to sales and marketing started to decrease in
late 1996.
Third party interest expense increased to $13.4 million for the year ended
December 31, 1996 from $9.0 million for the comparable prior year period
primarily due to the full year 1996 effect of increased borrowings by the
Company under a credit agreement (the "Credit Agreement") used to finance the
acquisition of MLN and to pay related transaction fees and expenses in May 1995
and increased indebtedness incurred by the Company under an offering of $120.0
million of senior notes (the "Senior Notes") in March 1996.
Related party interest income of $1.3 million and $0.7 million for the
years ended December 31, 1996 and 1995, respectively, primarily reflect interest
income from June 30, 1995 through November 1996 on the $15.0 million promissory
note the Company received upon the sale of its 40% equity investment in UGL to
UGL for $30.0 million. The sale was effective June 30, 1995 and the Company
ceased recording equity earnings from UGL after April 30, 1995. The sale
resulted in a one-time non-cash charge by the Company during the year ended
December 31, 1995 of $36.5 million.
In November 1996, the Company sold a 100% participation interest in its
rights under the $15.0 million promissory note described in the preceding
paragraph to a third party for $11.0 million. The Company recorded a $4.5
million loss upon the sale, which reflected the $4.0 million loss in principal
plus the write-off of accrued and unpaid interest from July 1, 1996 through the
sale date of $0.5 million.
No provision for income taxes was recorded in the years ended December 31,
1996 and 1995 due to the Company's loss before income taxes.
Upon completion of the Senior Notes offering, the Company wrote off $3.5
million of deferred financing costs related to the Credit Agreement. In
addition, upon completion of the Credit Agreement in May 1995, the Company
wrote-off $1.7 million of deferred financing costs related to a previous credit
facility.
Results of Operations
Year ended December 31, 1995 compared to
year ended December 31, 1994
Revenue increased to $189.0 million for the year ended December 31, 1995
from $151.8 million for the comparable prior year period, representing an
increase of $37.2 million or 24.5%. Exclusive of acquired businesses, as
discussed below, core revenue growth for 1995 increased by $21.8 million or
14.4% over 1994. The increase in revenue of $37.2 million was primarily the
result of additional specimen volume generating approximately $40.2 million
offset by decreases in reimbursement levels of approximately $3.0 million. The
increase in specimen volume was primarily attributable to growth in the
Company's core business of $24.8 million and revenue from the acquisition of MLN
completed in May 1995 and the full year effect in 1995 of the Premier
acquisition completed in January 1994 of $15.4 million. The decrease in
reimbursement levels is primarily due to a reduction in the national fee caps
for Medicare reimbursements in January 1995.
Salaries, wages and benefits increased to $65.0 million for the year ended
December 31, 1995 from $51.2 million for the comparable prior year period. As a
percentage of revenue, salaries, wages and benefits were 34.4% and 33.8% for the
years ended December 31, 1995 and 1994, respectively. Such increase was the
result of increased headcount and wage increases.
Supplies expense increased to $24.2 million for the year ended December 31,
1995 from $18.2 million for the comparable prior year period. As a percentage of
revenue, supplies expense was 12.8% and 12.0% for the years ended December
5
<PAGE>
Management's Discussion & Analysis of Financial Condition
and Result of Operations
Unilab Corporation December 31, 1996
31, 1995 and 1994, respectively. Such increase was primarily due to temporarily
redundant costs involved in the integration and transfer of specimen processing
from MLN's Ventura laboratory into the Company's Tarzana facility.
Other operating expenses increased to $43.7 million for the year ended
December 31, 1995 from $33.3 million for the comparable prior year period. As a
percentage of revenue, other operating expenses were 23.1% and 21.9% for the
years ended December 31, 1995 and 1994, respectively. Such increase was
primarily due to an increase in lab subcontracting expenses due to increases in
fees charged by, and volume sent to, outside reference laboratories and an
increase in bad debt expenses offset by approximately $0.9 million related to
the reduction of certain accruals established in prior years for insurance
claims and related matters. Bad debt expenses increased to $12.0 million or 6.4%
of revenue in 1995 from $8.3 million or 5.5% of revenue in 1994, reflecting a
weakening in historical collection experience and aging of accounts in 1995. The
collection experience weakened due to some delay in the Company's billing
procedures caused by the set-up and transfer of accounts acquired from MLN to
the Tarzana billing system and the learning and training time in transitioning
to a new billing system at the Company's San Jose location coupled with a
general softening of economic conditions in the California markets serviced by
the Company.
In December 1993, the Company was named as a defendant in The Trylon
Corporation v. MetWest Inc. Unilab Corporation and Does 1 through 30. The
lawsuit alleged that Unilab breached a contract, and the implied covenants of
good faith and fair dealing in connection with that contract with respect to the
sales, marketing and distribution of blue-white speculite lightsticks, a product
designed for use in connection with PAP smears to screen for cervical cancer and
precancerous conditions in women. In September 1995, the arbitrator rendered an
award in favor of Trylon of approximately $437,000. In November 1995, the
arbitrator reduced the award to Trylon to approximately $374,000 (comprised of
approximately $313,000 principal award plus interest of approximately $61,000)
and granted Trylon's request for payment of legal fees of approximately $1.4
million. The Company recorded a $1.2 million charge during the first quarter of
1995 related to the expected cost, consisting primarily of legal fees, in
defending itself against such lawsuit and another $2.0 million charge during the
fourth quarter of 1995, reflecting the costs associated with the conclusion of
this arbitration, including fees for both Trylon's counsel and the Company's
counsel.
In addition, the Company recorded charges of approximately $1.2 million and
$1.3 million in the second quarter of 1995 and the first quarter of 1994,
respectively, in connection with the MLN and Premier Laboratory Services, Inc.
("Premier") acquisitions. In the case of the Premier acquisition, such charges
related primarily to the closure of Unilab patient service centers and related
facilities, reduction in the Unilab workforce and integration of the acquired
Premier operations with those of Unilab. In the case of the MLN acquisition,
such charges related primarily to the integration of the acquired MLN operations
with those of the Company. The integration of Premier was primarily completed in
the fourth quarter of 1994 and the integration of MLN was primarily completed by
the end of the third quarter of 1995.
Amortization and depreciation expense increased to $9.6 million for the
year ended December 31, 1995 from $7.5 million for the comparable prior year
period primarily due to the additional amortization of $1.0 million resulting
from the acquisition of MLN and additional depreciation expense primarily
resulting from approximately $3.0 million of computer equipment and software
placed in service in 1995. Effective January 1, 1995, the Company changed its
estimate of amortization arising from acquisitions completed after that date to
a 20 year period. The Company changed its estimate due to positions communicated
by members of the staff of the Securities and Exchange Commission in response to
changing factors within the health care industry.
Selling, general and administrative expenses increased to $37.6 million for
the year ended December 31, 1995 from $31.2 million for the comparable prior
year period. As a percentage of revenue, selling, general and administrative
expenses were 19.9% and 20.5% for the years ended December 31, 1995 and 1994,
respectively. Such decrease primarily reflects certain efficiencies gained from
the acquisition of MLN offset by an increase in sales and marketing personnel
added during the latter half of 1995.
Third party and related party interest expense, net increased to $8.3
million for the year ended December 31, 1995 from $5.2 million for the
comparable prior year period primarily due to increased borrowings by the
Company under the Credit Agreement used to finance the acquisition of MLN and to
pay related transaction fees and expenses in May 1995 and additional net
borrowings used for working capital purposes offset by a $13.0 million repayment
in July 1995 from the cash proceeds received from the sale of the Company's
equity investment in UGL. In addition, interest expense increased due to
increases in short-term LIBOR interest rates applicable to borrowings under the
6
<PAGE>
Management's Discussion & Analysis of Financial Condition
and Result of Operations
Unilab Corporation December 31, 1996
bank credit facilities and to increases in the spread added to LIBOR when the
Company amended its previous credit facility in January 1995 and again when the
Company entered into the Credit Agreement in May 1995.
In the summer of 1994, the Company began exploring strategic alternatives
with respect to its equity investment in UGL because it believed that an
investment in the Company's core California business and a reduction of its
leverage would be more beneficial than an equity investment in a company in
which the Company had no management control, had no ability to receive any cash
flow from the business and equity earnings were under downward pressure in the
short-term due to weakening results, especially in the United Kingdom
operations. Effective June 30, 1995, the Company sold to UGL the Company's 40
percent equity investment in UGL for $30.0 million. The sale resulted in a
one-time non-cash charge by the Company in 1995 of approximately $36.5 million.
In addition, equity in earnings of affiliate decreased during the year ended
December 31, 1995 versus the prior year both due to decreased operating results
in UGL's United Kingdom subsidiary during the first six months of 1995 versus
the comparable 1994 period and due to the sale of the Company's equity
investment in UGL effective June 30, 1995, whereupon the Company ceased
recording equity earnings from UGL.
No provision for income taxes was recorded in the year ended December 31,
1995 due to the Company's loss before income taxes. No provision for income
taxes was recorded in the year ended December 31, 1994 since the Company did not
need a provision in light of existing deferred tax assets for which a valuation
allowance had been established.
In connection with the MLN acquisition, the Company entered into the Credit
Agreement and wrote off $1.7 million of deferred financing costs related to the
Company's previous credit facility.
Liquidity and Capital Resources
Net cash used by operating activities during the year ending December 31,
1996 was $5.1 million and reflects an improvement of $2.3 million over the
comparable prior year period when net cash used by operating activities was $7.4
million. The improvement in 1996 was primarily due to the timing of interest
payments due on the Senior Notes in 1996 versus the Credit Agreement in 1995 and
a decrease in accounts receivable offset by a reduction in operating results.
Net cash provided by financing activities was $13.8 million for the year
ending December 31, 1996, primarily resulting from $4.4 million of borrowings
under the Credit Agreement and $17.0 million of additional indebtedness incurred
in connection with the Senior Notes offering offset by $2.7 million of scheduled
principal repayments under the Credit Agreement and payments under capital lease
obligations and payment of $4.9 of financing costs incurred in connection with
the Senior Notes offering and accounts receivable based financing agreement.
Net cash provided by investing activities was $4.4 million, which was
comprised of $11.0 million the Company received from the sale of its $15.0
million promissory note to a third party offset by capital expenditures of $3.9
million and payments made on smaller acquisitions completed in 1996 and 1995 of
$2.7 million.
In March 1996, the Company completed an offering of $120.0 million of
Senior Notes. The proceeds from the Senior Notes offering were used to retire
outstanding borrowings under the Credit Agreement in the principal amount of
$102.1 million, plus accrued interest. Interest on the Senior Notes is 11% and
is payable on April 1st and October 1st of each year. The Senior Notes are due
April 2006 and the Company is not required to make any mandatory redemption or
sinking fund payment with the respect to the Senior Notes prior to maturity.
The Senior Notes are not redeemable prior to April 1, 2001, after which the
Senior Notes will be redeemable at any time at the option of the Company, in
whole or in part, at various redemption prices as set forth in the indenture
covering such Senior Notes (the "Indenture"), plus accrued and unpaid interest,
if any, to the date of redemption. In addition, at any time prior to April 1,
1999, the Company may redeem up to $42.0 million in aggregate principal amount
of the Senior Notes with the net proceeds of one or more public offerings of
common stock of the Company, at a redemption price of 110% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the redemption
date.
The Notes are general unsecured obligations of the Company and rank pari
passu in right of payment with all unsubordinated indebtedness of the Company.
In addition, the Indenture limits the ability of the Company to incur additional
indebtedness, under certain circumstances.
In July 1996, the Company entered into an agreement with a financial
institution whereby it can sell accounts receivable up to a maximum of $20.0
million. As collections reduce accounts receivables which have been sold, the
Company may sell new receivables to bring the amount sold up to a maximum of
$20.0 million.
7
<PAGE>
Management's Discussion & Analysis of Financial Condition
and Result of Operations
Unilab Corporation December 31, 1996
As of December 31, 1996, the Company had not sold any accounts receivable
under this agreement. The termination date for the agreement is July 1999. If
the facility terminates prior to July 1999 for any reason, the Company is
obligated to pay a $200,000 early termination fee. A commitment fee of 1/2
percent is required on the unused portion of the available facility. The Company
retains collection and administrative responsibilities on the receivables sold
as agent for the purchaser. In addition, accounts receivable sold, if any, will
be reflected as a reduction of accounts receivable in the balance sheet. The
full amount of the allowance for doubtful accounts will be retained because the
Company will retain substantially the same risk of credit loss as if the
receivables had not been sold.
Sales of receivables, if any, under the facility are subject to a liquidity
and debt service coverage ratio. While the Company was in compliance with such
covenants at December 31, 1996, it is unlikely that the Company will remain in
compliance with the debt service coverage ratio at March 31, 1997. Absent a
waiver to the covenant requirements or an amendment to the covenants or the debt
agreement, the Company may be unable to borrow under this facility after March
31, 1997.
The Company had $12.2 million of unrestricted cash and cash equivalents on
hand at December 31, 1996. Management believes, based on current operations and
internal growth at historical rates, that the amount of unrestricted cash and
cash equivalents available at December 31, 1996 will be sufficient for the
Company to meet anticipated requirements for working capital, interest payments,
capital expenditures, and scheduled principal payments under capital lease
obligations during the next year.
Without improvement in its operating results, and in turn, its operating
cash flows, the Company may not be able to meet its interest obligation under
the Senior Notes of $6.6 million due on April 1, 1998. Management is in the
process of implementing certain actions while continuing to evaluate other
opportunities to increase revenue, reduce operating costs and improve cash
collections. Such areas include:
--Renegotiation of capitated contracts in order to increase fees paid by
clients (primarily managed-care providers) under capitated fee
arrangements.
--Fee increases for client accounts that do not meet certain profitability
guidelines.
--Reduction in the Company's significant field infrastructure expenses,
primarily through a reduction in the number of, and the hours worked at,
patient service centers and stat laboratory facilities and a reduction
in related overhead expenses.
--Renegotiation of prices paid to outside reference laboratories,
reduction in the number of outside reference laboratories used and
continued shift to in-house testing where appropriate.
--Increased collection efforts through tighter controls over securing
accurate and complete billing information at the time of service and
stricter enforcement of delinquent and past due accounts.
--Reevaluation of the level of expenditures incurred in the sales and
marketing area, including incentive programs, staffing level, and
organizational and support expenses.
--Centralization of most accounting functions and tighter control and
coordination between all division and field locations.
--Consolidation or downsizing of field and/or laboratory facilities.
--Targeted reductions in overhead and other operating expenses, such as
reductions in overtime expenses, more restrictive travel and
entertainment policies, consolidation of courier routes and reduction of
independent courier services, consolidation of vendors and a formal
review of all consulting and other outside service relationships.
Seasonality
The Company's operations experience seasonal trends that the Company
believes affect all clinical laboratory companies. Testing volume generally
tends to be lower during the holiday seasons and, to a lesser extent, inclement
weather. As a result, because a substantial portion of the Company's expenses
are relatively fixed over the short term, the Company's operating income as a
percentage of revenue tends to decrease during the fourth quarter of each year,
mainly due to the Christmas and Thanksgiving holidays.
Inflation
Inflation was not a material factor in either revenue or operating expenses
during the periods presented.
8
<PAGE>
Statements of Operations
Unilab Corporation December 31, 1996
(amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
==================================================================================================
For the years ended December 31,
1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $205,217 $189,042 $151,820
- --------------------------------------------------------------------------------------------------
Direct Laboratory and Field Expenses:
Salaries, wages and benefits 70,869 65,002 51,239
Supplies 28,631 24,175 18,218
Other operating expenses 54,672 43,700 33,258
- --------------------------------------------------------------------------------------------------
154,172 132,877 102,715
Legal and acquisition related charges 4,940 4,400 1,282
Restructuring charges 65,655 -- --
Amortization and depreciation 11,491 9,614 7,499
Selling, general and administrative expenses 41,801 37,612 31,187
- --------------------------------------------------------------------------------------------------
Total Operating Expenses 278,059 184,503 142,683
- --------------------------------------------------------------------------------------------------
Operating Income (Loss) (72,842) 4,539 9,137
Other Income (Expenses):
Third party interest, net (13,401) (8,994) (5,059)
Related party interest, net 1,279 661 (133)
Equity in earnings of affiliate -- 250 570
Loss on sale of equity investment -- (36,499) --
Loss on sale of promissory note (4,529) -- --
- --------------------------------------------------------------------------------------------------
Total Other Income (Expenses) (16,651) (44,582) (4,622)
- --------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes and Extraordinary Item (89,493) (40,043) 4,515
Tax provision -- -- --
- --------------------------------------------------------------------------------------------------
Income (Loss) Before Extraordinary Item (89,493) (40,043) 4,515
Extraordinary item - loss on early extinguishment of debt 3,451 1,732 --
- --------------------------------------------------------------------------------------------------
Net Income (Loss) $(92,944) $(41,775) $ 4,515
- --------------------------------------------------------------------------------------------------
Preferred Stock Dividends 144 144 144
Net Income (Loss) Available to Common Shareholders $(93,088) $(41,919) $ 4,371
Weighted Average Common Shares Outstanding 36,831 35,918 35,069
- --------------------------------------------------------------------------------------------------
Net Income (Loss) Per Share:
Income (Loss) Before Extraordinary Item $ (2.43) $ (1.12) $ 0.12
Extraordinary Item (0.10) (0.05) --
Net Income (Loss) $ (2.53) $ (1.17) $ 0.12
- --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
Balance Sheets
Unilab Corporation December 31, 1996
(amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
=============================================================================================================
December 31,
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets 1996 1995
- -------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 12,176 $ 70
Restricted cash 904 --
Accounts receivable, net of allowance for doubtful accounts of $9,338 and $8,454
in 1996 and 1995, respectively 37,279 40,334
Amounts due from UGL/UniHolding -- 15,000
Inventory of supplies 2,604 2,361
Prepaid expenses and other current assets 1,702 1,819
- -------------------------------------------------------------------------------------------------------------
Total current assets 54,665 59,584
- -------------------------------------------------------------------------------------------------------------
Property and Equipment, net 17,264 18,326
Goodwill, net of accumulated amortization of $5,067 and $5,676 in 1996 and
1995, respectively 44,401 100,598
Other Intangible Assets, net 3,637 12,421
Other Assets 5,952 5,245
- -------------------------------------------------------------------------------------------------------------
$ 125,919 $ 196,174
- -------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- -------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current portion of long-term debt $ 1,752 $ 21,947
Accounts payable and accrued liabilities 22,024 22,833
Accrued payroll and benefits 5,976 4,493
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 29,752 49,273
- -------------------------------------------------------------------------------------------------------------
Long-Term, Debt, net of current portion 126,120 87,207
Other Liabilities 4,735 3,364
Commitments and Contingencies
Shareholders' Equity:
Convertible preferred stock, $.01 par value; Authorized - 20,000 shares; Issued
and Outstanding - 400 at December 31, 1996 and 1995, liquidation
preference - $2,300 4 4
Common stock, $.01 par value; Voting - Authorized - 100,000 shares; Issued and
Outstanding - 37,285 and 35,052 at December 31, 1996 and 1995, respectively 373 351
Non-Voting common stock - Authorized - 5,000 shares; Issued and
Outstanding - 1,050 at December 31, 1995 -- 10
Additional paid-in capital 226,078 224,020
Accumulated deficit (261,143) (168,055)
- -------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) (34,688) 56,330
- -------------------------------------------------------------------------------------------------------------
$ 125,919 $ 196,174
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
Statements of Shareholders' Equity (Deficit)
Unilab Corporation December 31, 1996
<TABLE>
<CAPTION>
For the years ended December 31, 1996, 1995 and 1994
(amounts in thousands, except per share data)
======================================================================================================
Voting
Common Stock
Shares Amount
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balances, December 31, 1993 31,974 $320
- ------------------------------------------------------------------------------------------------------
Issuance of shares at $2.00-$5.375 upon exercise of options and warrants 205 2
- ------------------------------------------------------------------------------------------------------
Issuance of shares in connection with acquisition of Premier 1,227 12
- ------------------------------------------------------------------------------------------------------
Issuance of shares in connection with other acquisitions 846 8
- ------------------------------------------------------------------------------------------------------
Restricted shares issued to employees 44 1
- ------------------------------------------------------------------------------------------------------
Issuance of preferred stock dividend - $0.36 per share -- --
- ------------------------------------------------------------------------------------------------------
Net income -- --
- ------------------------------------------------------------------------------------------------------
Balances, December 31, 1994 34,296 $343
- ------------------------------------------------------------------------------------------------------
Issuance of shares in connection with acquisition of MLN 307 3
- ------------------------------------------------------------------------------------------------------
Issuance of shares in connection with a prior acquisition 153 2
- ------------------------------------------------------------------------------------------------------
Restricted shares issued to employees 118 1
- ------------------------------------------------------------------------------------------------------
Issuance of shares for Company's 401(k) plan matching contributions 153 2
- ------------------------------------------------------------------------------------------------------
Issuance of shares to a bank in connection with the Credit Agreement 25 --
- ------------------------------------------------------------------------------------------------------
Issuance of preferred stock dividend - $0.36 per share -- --
- ------------------------------------------------------------------------------------------------------
Net loss -- --
- ------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 35,052 $351
- ------------------------------------------------------------------------------------------------------
Issuance of shares in connection with a prior acquisition 413 4
- ------------------------------------------------------------------------------------------------------
Restricted shares issued to employees 100 1
- ------------------------------------------------------------------------------------------------------
Issuance of shares for Company's 401(k) plan matching contributions 434 4
- ------------------------------------------------------------------------------------------------------
Issuance of shares to certain executives in lieu of monthly cash compensation 164 2
- ------------------------------------------------------------------------------------------------------
Issuance of shares to a consultant for services rendered 50 1
- ------------------------------------------------------------------------------------------------------
Issuance of shares to certain Board Directors for services rendered 22 --
- ------------------------------------------------------------------------------------------------------
Conversion of non-voting common stock to voting common stock 1,050 10
- ------------------------------------------------------------------------------------------------------
Issuance of preferred stock dividend - $0.36 per share -- --
- ------------------------------------------------------------------------------------------------------
Net loss -- --
- ------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 37,285 $373
- ------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
==================================================================================================================
Non-Voting Convertible Additional Total
Common Stock Preferred Stock
Paid-In Accumulated Shareholders'
Shares Amount Shares Amount Warrants Capital Deficit Equity (Deficit)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1,050 $ 10 400 $4 $ 500 $208,012 $(130,507) $ 78,339
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - (500) 942 -- 444
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- 7,488 -- 7,500
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- 4,567 -- 4,575
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- 104 -- 105
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- -- (144) (144)
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- -- 4,515 4,515
- ------------------------------------------------------------------------------------------------------------------
1,050 $ 10 400 $4 -- $221,113 $(126,136) $ 95,334
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- 1,497 -- 1,500
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- 558 -- 560
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- 149 -- 150
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- 603 -- 605
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- 100 -- 100
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- -- (144) (144)
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- -- (41,775) (41,775)
- ------------------------------------------------------------------------------------------------------------------
1,050 $ 10 400 $4 -- $224,020 $(168,055) $ 56,330
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- 996 -- 1,000
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- 350 -- 351
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- 544 -- 548
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- 108 -- 110
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- 43 -- 44
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- 17 -- 17
- ------------------------------------------------------------------------------------------------------------------
(1,050) (10) -- - -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- -- (144) (144)
- ------------------------------------------------------------------------------------------------------------------
-- -- -- - -- -- (92,944) (92,944)
- ------------------------------------------------------------------------------------------------------------------
-- $-- $400 $4 $-- $226,078 $(261,143) $(34,688)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
Statements of Cash Flows
Unilab Corporation December 31, 1996
(in thousands)
<TABLE>
<CAPTION>
==================================================================================================================
For the years ended December 31,
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (92,944) $(41,775) $ 4,515
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Amortization and depreciation 11,491 9,614 7,499
Provision for doubtful accounts 14,180 12,017 8,287
Equity in earnings of affiliate -- (250) (570)
Loss on sale of equity investment -- 36,499 --
Loss on sale of promissory note 4,529 -- --
Writeoff of goodwill and customer lists 61,645 -- --
Loss on disposition of equipment -- -- 989
Extraordinary item - loss on early extinguishment of debt 3,451 1,732 --
Net changes in assets and liabilities affecting operations,
net of acquisitions:
Increase in Accounts receivable (11,125) (21,950) (13,390)
(Increase) decrease in Inventory of supplies (243) 72 (112)
(Increase) decrease in Prepaid expenses and other current assets 117 382 (226)
(Increase) decrease in Other assets 229 (438) 76
Increase (decrease) in Accounts payable and accrued liabilities 1,112 (3,251) (1,564)
Increase (decrease) in Accrued payroll and benefits 1,504 (59) (1,212)
Other 926 7 7
- ------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (5,128) (7,400) 4,299
- ------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Borrowings under third party debt 123,490 51,400 34,189
Payments of third party debt (104,772) (18,776) (3,190)
Financing costs under the Senior Notes and Receivables Financing (4,932) -- --
Financing costs under credit agreement -- (3,325) --
Proceeds from exercise of options and warrants -- -- 444
Other -- (244) (960)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 13,786 29,055 30,483
- ------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Capital expenditures (3,948) (4,435) (2,879)
Payments for acquisitions, net of cash acquired (2,700) (31,401) (31,679)
Net cash proceeds from sale of equity investment and promissory note 11,000 13,000 --
Other -- (240) --
- ------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 4,352 (23,076) (34,558)
- ------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash, Restricted Cash and Cash Equivalents 13,010 (1,421) 224
Cash, Restricted Cash and Cash Equivalents - Beginning of Year 70 1,491 1,267
- ------------------------------------------------------------------------------------------------------------------
Cash, Restricted Cash and Cash Equivalents - End of Year $ 13,080 $ 70 $ 1,491
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
Notes to Financial Statements
1. Description of the Company and Significant Accounting Policies
a. Description of the Company
Unilab Corporation ("Unilab" or the "Company") provides clinical laboratory
testing services to physicians, managed-care organizations, hospitals and other
health care providers primarily in the State of California.
The Company has incurred substantial losses in each of the two years ended
December 31, 1996 and has a shareholders' deficit of $34.7 million at December
31, 1996. While the Company believes that it will have sufficient resources to
meet anticipated requirements for working capital, interest payments, capital
expenditures, and scheduled principal payments under capital lease obligations
during 1997, the Company may not be able to meet these same obligations in 1998
without improvement in its operating results and cash flows. Management's plans
to improve the Company's operating results and cash flows are described under
the caption, "Liquidity and Capital Resources" in Management's Discussion &
Analysis of Financial Condition and Result of Operations contained on page 7 of
this annual report.
b. Principles of Consolidation
The financial statements include the accounts of the Company in 1996 and the
Company and its subsidiaries in 1995 and 1994. All significant intercompany
transactions have been eliminated. The Company's investment in a 40
percent-owned affiliate prior to its disposition effective June 30, 1995 was
accounted for on the equity method.
c. Inventory of Supplies
Inventories, which consist principally of purchased clinical laboratory
supplies, are valued at the lower of cost (first-in, first-out) or market.
d. Revenue Recognition
Revenue is recognized at the time the service is provided. The Company's
revenue is based on amounts billed or billable for services rendered, net of
contractual adjustments and other arrangements made with third-party payors to
provide services at less than established billing rates.
e. Use of Estimates
The preparation of the financial statements requires management to make
estimates and assumptions that effect 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 revenue and expenses during
the reporting period. Actual results could differ from these estimates. The most
significant estimates with regards to these financial statements relate to
account receivable and insurance reserves.
The Company's net accounts receivable balance is determined after deductions
for contractual adjustments, which are estimated based on established billing
rates made with third-party payors, and an allowance for doubtful accounts,
which primarily is based on the aging of the accounts and historical collection
experience. In addition, the Company accrues for both asserted and unasserted
claims arising from workers compensation (1994 and 1995 only) and automobile
liability losses. The estimate of the liability for unasserted claims arising
from unreported incidents is based on an analysis of historical claims
experience.
f. Fair Value of Financial Instruments and
Concentration of Credit Risk
The carrying amount reported in the balance sheets for cash, accounts
receivable, accounts payable and accrued liabilities approximates fair value
because of the immediate or short-term maturity of these financial instruments.
The fair value of the Company's $120.0 million senior notes is estimated at
$82.8 million based on quotes from brokers and published analyst reports. The
Company believes that its non-bank indebtedness approximates fair value based on
current yields for debt instruments of similar quality and terms.
Concentration of credit risk with respect to accounts receivable are limited
due to the diversity of the Company's client base. However, the Company provides
services to certain patients covered by various third-party payors, including
the Federal and California Medicare/Medicaid programs. Revenue, net of
contractual allowances, from direct billings under Federal and California
Medicare/Medicaid programs during each of the years ended December 31, 1996,
1995 and 1994 approximated 25-30% of revenue.
g. Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets.
Buildings are depreciated over 28 years, laboratory and computer equipment are
generally depreciated over 7 and 3 years, respectively, and furniture and
fixtures are depreciated over 5 years. Leasehold improvements are amortized
using the straight-line method over the remaining term of the related lease.
Routine maintenance and repairs are charged to expense as incurred and amounted
to approximately $3.4 million, $2.6 million and $2.4 million for the years ended
December 31, 1996, 1995 and 1994, respectively. Major repairs which extend the
life or add value to equipment are capitalized and depreciated over their
remaining useful life.
h. Goodwill
Goodwill represents the excess of cost over the fair value of net tangible
and identifiable intangible assets acquired and is amortized using the
straight-line method. Goodwill is amortized over 40 years for acquisitions
completed prior to January 1, 1995. Effective January 1, 1995, the Company
changed its estimate of amortization arising from acquisitions completed after
that date to a 20 year period. The effect of this change in estimate in 1995 was
to increase amortization expense by approximately $0.5 million and decrease net
income by $0.5 million
14
<PAGE>
Notes to Financial Statements
or $0.01 per common share. At each balance sheet date, the Company evaluates the
realizability of goodwill based upon the Company's expectations of undiscounted
cash flows from each operating unit having a material goodwill balance. Goodwill
is adjusted, if necessary, if such analysis indicates that a permanent decline
in value below the current unamortized historical cost has occurred.
i. Other Intangible Assets
Customer lists and covenants not to compete are recorded at cost and are
amortized utilizing the straight-line method over the estimated lives of the
assets, generally 10 years for customer lists and 3-5 years for covenants not to
compete. The cost of other intangible assets is evaluated periodically and
adjusted, if necessary, if later events and circumstances indicate that a
permanent decline in value below the current unamortized historical cost has
occurred.
j. Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the basis for financial
reporting purposes and the basis for tax purposes, in accordance with Statement
of Financial Accounting Standards No. 109 ("FAS 109"), "Accounting for Income
Taxes".
k. Net Income (Loss) Per Common Share
Net income (loss) per common share has been computed by dividing the net
income (loss) by the weighted average number of common shares outstanding for
each period presented. Common stock equivalents, which include options and
warrants, are included in the income (loss) per common share calculation when
the effect is dilutive. The assumed conversion of the convertible preferred
stock is excluded from the calculation since its effect would be immaterial.
l. Reclassifications
Certain amounts in the 1995 and 1994 financial statements have been
reclassified to conform with the 1996 presentation.
m. Cash and Cash Equivalents
For the purpose of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
2. Property and Equipment, Net and
Other Intangible Assets
Property and equipment, net consists of the following:
December 31,
(in thousands) 1996 1995
- -----------------------------------------------------------
Buildings $3,166 $3,166
Leasehold improvements 4,954 4,768
Laboratory and other equipment 28,593 25,546
Furniture and fixtures 3,038 3,134
- -----------------------------------------------------------
39,751 36,614
- -----------------------------------------------------------
Less accumulated depreciation and
amortization 22,487 18,288
$17,264 $18,326
- -----------------------------------------------------------
Depreciation expense was approximately $5.0 million in 1996, $4.0 million in
1995 and $3.2 million in 1994.
Other intangible assets consist of the following:
December 31,
(in thousands) 1996 1995
- ------------------------------------------------------
Customer lists $7,675 $27,554
Covenants not to compete 2,495 2,495
Other 281 281
- ------------------------------------------------------
10,451 30,330
- ------------------------------------------------------
Less accumulated amortization 6,814 17,909
- ------------------------------------------------------
$3,637 $12,421
- ------------------------------------------------------
Amortization expense for goodwill, other intangible assets and certain other
deferred costs was approximately $6.5 million in 1996, $5.6 million in 1995 and
$4.3 million in 1994.
3. Acquisitions
On May 16, 1995, the Company acquired all the outstanding stock of MLN
Holding Acquisition Co., the parent company of Medical Laboratory Network, Inc.
("MLN") for $31.0 million in cash, $1.5 million or 307,299 shares in Unilab
common stock and warrants to acquire 200,000 shares of the Company's common
stock at an exercise price of $6.00 per share. The acquisition was accounted for
under the purchase method of accounting. The purchase price was allocated to the
assets acquired based on their fair value at the date of acquisition and the
difference between the cost of acquiring MLN and the fair value of the net
assets acquired of approximately $31.0 million was treated as goodwill for
accounting purposes. In connection with the integration of the acquired MLN
operations with those of Unilab, the Company recorded liabilities of
approximately $3.4 million, of which $1.2 million was recognized as an
acquisition related charge in the statement of operations. Such liabilities
primarily related to severance costs of $0.6 million for the
15
<PAGE>
Notes to Financial Statements
reduction in headcount of approximately 100 employees, $1.8 million related to
lease obligations primarily from the closure and downsizing of facilities and
approximately $1.0 million for other varied integration activities. At December
31, 1996, approximately $1.0 million of liabilities were outstanding,
principally related to future lease obligations, of which $0.7 million has been
included in non-current liabilities. The statements of operations include the
results of MLN since the date of acquisition.
On January 24, 1994, the Company completed the acquisition of all the
outstanding stock of Premier Laboratory Services, Inc. ("Premier"), the parent
company of San Jose-based PathLab, for $31.5 million in cash and $7.5 million or
approximately 1.2 million shares in Unilab common stock. The acquisition was
accounted for under the purchase method of accounting. The purchase price has
been allocated to the assets acquired based on their fair value at the date of
acquisition and the difference between the cost of acquiring Premier and the
fair value of the net assets acquired of approximately $47.0 million was treated
as goodwill for accounting purposes. The statements of operations include the
results of Premier since the date of acquisition.
The following unaudited pro forma results of operations for the year ended
December 31, 1995 and 1994 have been prepared as if the acquisition of MLN
occurred on January 1, 1994.
Unaudited pro forma results are as follows (in thousands except per share
data):
Years Ended December 31,
1995 1994
(Unaudited)
- ------------------------------------------------------------------
Revenue $198,073 $178,150
- ------------------------------------------------------------------
Net income (loss) (37,774) 5,896
- ------------------------------------------------------------------
Net income (loss) available to common
shareholders (37,918) 5,752
- ------------------------------------------------------------------
Net income (loss) per share $ (1.05) $ 0.16
- ------------------------------------------------------------------
The historical financial results of Unilab for 1995 and 1994 have been
adjusted primarily for the full year historical results of MLN, an increase in
interest expense due to the additional debt incurred to purchase MLN and cost
savings of approximately $2.9 million in 1995 and $4.4 million in 1994 from the
integration of the MLN operations into Unilab. The pro forma information does
not include the integration charge of $1.2 million and the extraordinary item of
$1.7 million recorded in 1995 and the integration charge of $1.3 million
recorded in 1994.
The unaudited pro forma information presented above does not purport to be
indicative of the results that actually would have been obtained if the combined
operations had been conducted during the periods presented or of future
operations of the combined operations.
4. Restructuring Charges
During the fourth quarter of 1996, the Company recorded charges of $65.7
million, consisting of the write-off of goodwill and customer lists of $61.7
million and a reserve for managerial restructuring expenses, consisting
primarily of severance related expenses, of $4.0 million. The write-off of
goodwill and customer lists principally related to two of the Company's
laboratory operations, which had seen decreasing operating results and cash
flows throughout 1996.
The $4.0 million managerial restructuring expenses related primarily to a
reduction in headcount of approximately 25 employees, including the termination
of the Company's then Chairman, President and Chief Executive Officer in January
1997. Most affected employees were terminated in late December through mid
January. At December 31, 1996, approximately $3.5 million of liabilities were
outstanding, of which $0.4 million has been included in non-current liabilities.
5. Legal and Acquisition Related Charges
During the third quarter of 1996, the Company recorded charges of $4.9
million, primarily related to settlements reached with the United States
("U.S.") Government and certain other entities in connection with the Company's
sales, marketing and billing practices. The Company agreed to pay the U.S.
Government approximately $4.0 million to conclude an investigation of certain of
Unilab's billings to Medicare and certain other governmental entities for
hematology indices being billed in conjunction with complete blood counts. The
Company paid the U.S. Government approximately $528,000 in October 1996 and has
remaining payments of $650,000 due March 1 and September 1, 1997 and 1998,
$500,000 due March 1, 1999 and approximately $324,000 due on September 1, 1999.
All deferred payments to the U.S. Government will bear interest at approximately
5.2 percent. In addition, Unilab paid the California MediCal program
approximately $160,000 in October 1996 to settle all their claims concerning the
same issue.
In December 1993, the Company was named as a defendant in The Trylon
Corporation v. MetWest Inc., Unilab Corporation and Does 1 through 30. The
lawsuit alleged that Unilab breached a contract, and the implied covenants of
good faith and fair dealing in connection with that contract with respect to the
sales, marketing and distribution of blue white speculite lightsticks, a product
designed for use in connection with PAP smears to screen for cervical cancer and
precancerous conditions in women. Plaintiff sought an unspecified amount of
damages. In February 1994, the case was referred to arbitration in accordance
with the arbitration clause of the contract between the parties. In September
1995, the arbitrator rendered an award in favor of The Trylon Corporation
("Trylon") of approximately
16
<PAGE>
Notes to Financial Statements
$437,000. In November 1995, the arbitrator reduced the award to Trylon to
approximately $374,000 (comprised of approximately $313,000 principal award plus
interest of approximately $61,000) and granted Trylon's request for payment of
legal fees of approximately $1.4 million. The Company recorded a $1.2 million
charge during the first quarter of 1995 related to the expected cost, consisting
primarily of legal fees, in defending itself against such lawsuit and another
$2.0 million charge during the fourth quarter of 1995 reflecting the costs
associated with the conclusion of this arbitration, including the fees of
Trylon's counsel and counsel for the Company.
In connection with the MLN acquisition, the Company recorded a charge of
approximately $1.2 million in the second quarter of 1995 related primarily to
the integration of the acquired MLN operations with those of the Company.
In connection with the Premier acquisition, the Company recorded a charge
of approximately $1.3 million in the first quarter of 1994 related primarily to
the closure of Unilab patient service centers and related facilities and
reduction in the Unilab work force.
6. Unusual Income Item
During 1995, the Company determined that certain accruals established in
prior years for insurance claims and related matters were not necessary due to
the settlement of open claims/ matters below reserved amounts and overall better
claims experience and therefore recognized income of approximately $0.9 million
in 1995 for the reduction in the outstanding liability related to such insurance
matters. Such income has been included as a reduction of other operating
expenses in the statement of operations.
7. Income Taxes
Income (loss) before income taxes for domestic and foreign operations is as
follows:
Years Ended December 31,
(in thousands) 1996 1995 1994
- --------------------------------------------------------
Domestic $ (92,944) $(42,025) $3,945
Foreign -- 250 570
- --------------------------------------------------------
$ (92,944) $(41,775) $4,515
- --------------------------------------------------------
The provision for income taxes is as follows:
Years Ended December 31,
(in thousands) 1996 1995 1994
- ---------------------------------------------
Current:
- ---------------------------------------------
Federal $ -- -- --
- ---------------------------------------------
State -- -- --
- ---------------------------------------------
$ -- -- --
- ---------------------------------------------
A reconciliation between the actual income tax expense and income taxes
computed by applying the statutory Federal income tax rate to earnings before
income taxes is as follows:
Years Ended December 31,
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Computed income taxes at U.S.
statutory rate $(31,601) $(14,204) $ 1,535
- --------------------------------------------------------------------------------
Amortization and write off of good
will and intangible assets disallowed
for income tax purposes 1,140 959 925
- --------------------------------------------------------------------------------
Capital and operating losses with no
tax benefit 30,461 13,245 --
- --------------------------------------------------------------------------------
Change in valuation allowance -- -- (2,460)
- --------------------------------------------------------------------------------
$ -- $ -- $ --
- --------------------------------------------------------------------------------
Temporary differences and carryforwards which give rise to deferred tax
assets are as follows:
December 31,
(in thousands) 1996 1995
- -------------------------------------------------------------
Bad debt reserve $ 2,382 $ 2,029
Intangible assets 13,396 7,392
Property and equipment 820 786
Accrued liabilities 4,142 3,004
Net operating loss carryforwards 18,825 7,876
- -------------------------------------------------------------
39,565 21,087
- -------------------------------------------------------------
Valuation allowance (39,565) (21,087)
- -------------------------------------------------------------
$ -- $ --
- -------------------------------------------------------------
The realization of the deferred tax assets at December 31, 1996 is dependent
upon the Company having future taxable income. A valuation allowance has been
provided against the entire deferred tax asset balance at December 31, 1996 and
1995. Approximately $6.4 million of benefit, if any, to be recorded from the
recognition of the deferred tax assets would reduce the amount of goodwill
recorded from certain acquisitions.
In addition, the Company has a capital loss of approximately $36.5 million
from the sale of its equity investment in UGL. The capital loss can only be
utilized by the Company to the extent it offsets capital gains generated. A
valuation allowance has also been entirely provided against the available
capital loss at December 31, 1996 and 1995.
The Company has net operating loss and capital loss carryforwards for tax
purposes in the U.S. which are available to offset future taxable income through
2011 and 2000, respectively. At December 31, 1996, available net operating loss
and capital loss carryforwards for U.S. tax purposes were approximately $55.4
million and $36.5 million, respectively. Net operating loss carryforwards for
California state tax purposes is approximately $27.5 million.
17
<PAGE>
Notes to Financial Statements
8. Investment In and Loss Upon
Sale of Equity Affiliate
Effective November 10, 1993, the Company acquired a 40% interest in Unilabs
Group Limited ("UGL") a European-based clinical laboratory company. The
unaudited results of operations and the financial position of UGL prior to its
disposition effective June 30, 1995, as described below, are summarized as
follows:
December 1, December 1,
1994- 1993-
May 31, November 30,
(amounts in thousands) 1995 1994
- --------------------------------------------------------------------------------
Condensed income statement information:
Revenue $43,292 $76,297
Operating income 6,260 10,266
Net income 3,854 4,070
- --------------------------------------------------------------------------------
The Company ceased recording equity earnings from UGL after April 30, 1995.
Prior to that time the Company's equity earnings were calculated as 40 percent
of UGL's net income less amortization of the excess of the Company's purchase
price of UGL over the Company's 40 percent interest in the equity of UGL. Prior
to its disposition, the Company's investment in the net assets of UGL included
goodwill in the amount of approximately $43.0 million, which was amortized over
40 years or approximately $1.1 million annually.
On July 14, 1995, the Company completed a transaction with UGL, effective as
of June 30, 1995, whereby UGL purchased Unilab's 40 percent equity investment in
UGL for $30.0 million. The Company received $13.0 million in cash and UGL
assumed the Company's $2.0 million subordinated note to UGL upon completion of
the transaction, and the Company received the remaining $15.0 million in a
one-year promissory note. The sale resulted in a one-time non-cash charge by the
Company of approximately $36.5 million.
The one-year promissory note of $15.0 million did not bear interest from
July 1, 1995 through December 31, 1995 and, thereafter, bore interest at the
greater of 10% or LIBOR plus 3.25%. Since the note was non-interest bearing for
a six-month period, the note was discounted at a rate of 10% to $14.25 million
at June 30, 1995. Non-cash interest income of $750,000 related to such note was
recorded in 1995.
In November 1996, the Company sold a 100% participation interest in its
rights under the $15.0 million promissory note to a third party for $11.0
million. The Company recorded a $4.5 million loss upon the sale, which reflected
the $4.0 million loss in principal plus the write-off of accrued and unpaid
interest from July 1, 1996 through the sale date of $0.5 million.
9. Long-Term Debt
Long-term debt consists of the following:
December 31,
(amounts in thousands) 1996 1995
- --------------------------------------------------------------------------------
Senior Notes, interest at 11.0 percent payable
semi-annually $119,162 $ --
Revolving bank line of credit, interest at LIBOR
plus 3.0 percent -- 19,000
Seven year bank term loan, interest at LIBOR
plus 3.0 percent -- 41,157
Five year bank term loan, interest at LIBOR plus
3.50 percent -- 38,642
Obligation under capital lease collateralized by
land and building with interest due through 2004 3,184 3,266
Obligations under capital leases collateralized by
equipment with interest due through 1999 5,526 7,089
- --------------------------------------------------------------------------------
127,872 109,154
Less--current portion 1,752 21,947
- --------------------------------------------------------------------------------
$126,120 $87,207
- --------------------------------------------------------------------------------
In March 1996, the Company completed an offering of $120.0 million of senior
notes (the "Senior Notes"). The proceeds from the Senior Notes offering were
used to retire outstanding borrowings under the Company's then existing bank
term loan and revolving line of credit facility (the "Old Credit Facility") in
the principal amount of $102.1 million, plus accrued interest. Interest on the
Senior Notes is 11% and is payable on April 1st and October 1st of each year.
The Senior Notes are due April 2006 and the Company is not required to make any
mandatory redemption or sinking fund payment with the respect to the Senior
Notes prior to maturity.
In connection with the Senior Notes offering and the accounts receivable
financing discussed below, the Company incurred approximately $5.0 million of
financing costs. The debt financing costs are deferred and amortized, using the
interest method, over the term of the related debt. Upon completion of the
Senior Notes offering, the Company wrote-off $3.5 million of deferred financing
costs related to the Old Credit Facility in the first quarter of 1996. The $3.5
million charge has been shown as an extraordinary loss from the early
extinguishment of debt in the statement of operations.
The Senior Notes were issued at a discount of 99.242% per note. The
aggregate discount on the Senior Notes approximated $0.9 million and is charged
to operations as additional interest expense over the life of the Senior Notes
using the interest method. At December 31, 1996, the unamortized discount
approximated $0.8 million.
18
<PAGE>
Notes to Financial Statements
The Senior Notes are not redeemable prior to April 1, 2001, after which the
Senior Notes will be redeemable at any time at the option of the Company, in
whole or in part, at various redemption prices as set forth in the indenture
covering such Senior Notes (the "Indenture"), plus accrued and unpaid interest,
if any, to the date of redemption. In addition, at any time prior to April 1,
1999, the Company may redeem up to $42.0 million in aggregate principal amount
of the Senior Notes with the net proceeds of one or more public offerings of
common stock of the Company, at a redemption price of 110% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the redemption
date.
In the event of a change in control, as defined in the Indenture, holders of
the Senior Notes will have the right to require the Company to purchase their
Notes, in whole or in part, at a price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
purchase.
The Notes are general unsecured obligations of the Company and rank pari
passu in right of payment with all unsubordinated indebtedness of the Company.
In addition, the Indenture limits the ability of the Company to incur additional
indebtedness, under certain circumstances.
Upon completion of the Old Credit Facility in 1995, the Company wrote-off
$1.7 million of deferred financing costs related to the Company's previous
credit facility. The $1.7 million charge has been shown as an extraordinary loss
from the early extinguishment of debt in the statement of operations.
In July 1996, the Company entered into an agreement with a financial
institution whereby it can sell accounts receivable up to a maximum of $20.0
million. As collections reduce accounts receivables which have been sold, the
Company may sell new receivables to bring the amount sold up to a maximum of
$20.0 million.
As of December 31, 1996, the Company had not sold any accounts receivable
under this agreement. The termination date for the agreement is July 1999. If
the facility terminates prior to July 1999 for any reason, the Company is
obligated to pay a $200,000 early termination fee. A commitment fee of 1/2
percent is required on the unused portion of the available facility. The Company
retains collection and administrative responsibilities on the receivables sold
as agent for the purchaser. In addition, accounts receivable sold, if any, will
be reflected as a reduction of accounts receivable in the balance sheet. The
full amount of the allowance for doubtful accounts will be retained because the
Company will retain substantially the same risk of credit loss as if the
receivables had not been sold.
Sales of receivables, if any, under the facility are subject to a liquidity
and debt service coverage ratio. While the Company was in compliance with such
covenants at December 31, 1996, it is unlikely that the Company will remain in
compliance with the debt service coverage ratio at March 31, 1997. Absent a
waiver to the covenant requirements or an amendment to the covenants or the debt
agreement, the Company may be unable to borrow under this facility after March
31, 1997.
In connection with the Company's workers compensation and automobile
liability insurance policies, the Company has issued letters of credit in the
aggregate amount of $0.9 million. The letters of credit are collateralized by
cash equivalents in the same amount. Accordingly, $0.9 million has been shown as
restricted cash at December 31, 1996.
At December 31, 1996, future scheduled principal payments of long-term debt
are as follows (in thousands):
- ------------------------------
Years ending December 31,
- ------------------------------
1997 $ 1,752
1998 1,676
1999 1,107
2000 1,543
2001 351
Thereafter 121,443
- ------------------------------
$127,872
- ------------------------------
10. Capital Shares, Stock Options and Warrants
a. Convertible Preferred Stock
As of December 31, 1996, the Company has authorized 20,000,000 shares of
preferred stock at $.01 par value. The Board of Directors of the Company will
determine, among other things, the number of shares, voting rights, dividend
rates, liquidation preferences, and redemption and conversion privileges of each
series of such preferred stock. As of December 31, 1996, 18,600,000 shares for
which no series has been designated were authorized and unissued.
The Company has 400,000 shares of convertible preferred stock outstanding at
December 31, 1996. Holders of the convertible preferred stock are entitled to
receive, when and as declared by the Board of Directors of the Company,
cumulative dividends at an annual rate of $0.36 per share, payable semi-annually
on June 30 and December 30 in each year. The convertible preferred stock is
convertible on a share for share basis into shares of the Company's common
stock, at the holder's option, at any time from and after November 10, 1996. In
addition, the convertible preferred stock has a per share liquidation preference
of $5.75 per share and the Company has the right at its sole option to redeem
the shares any time after November 10, 1998, in whole or in part, at a
redemption price of $5.75 per share plus an amount equal to all declared and
unpaid dividends thereon to the redemption date.
b. Non-Voting Common Stock
At December 31, 1995 the Company had 1,050,000 shares of non-voting common
stock outstanding. At the Company's May 1996 annual meeting of stockholders, an
amendment to the
19
<PAGE>
Notes to Financial Statements
Company's Certificate of Incorporation was approved and adopted by stockholders
permitting the holder of all the 1,050,000 outstanding shares of the Company's
non-voting common stock to convert such shares into regular voting common stock.
In July 1996, all of the outstanding shares of non-voting stock were converted
into shares of the Company's voting common stock on a share for share basis.
c. Restricted Stock
The Company granted 99,500 restricted shares, 117,500 restricted shares and
44,500 restricted shares of common stock to certain employees at no cost in
1996, 1995 and 1994, respectively. The outstanding restricted shares vest
ratably each year on their anniversary date and become fully vested after a
period of two to five years. The cost of the restricted shares, based on the
share's fair market value at the award dates, is charged to shareholders' equity
and subsequently amortized against earnings over the vesting period. In
addition, 100,000 restricted shares were issued to an employee, who is not an
officer of the Company, in connection with certain acquisitions in 1994. Such
shares also vest 20 percent each year on their anniversary date and become fully
vested after five years. At December 31, 1996, 361,500 restricted shares were
outstanding and approximately $351,000, $150,000 and $10,000 was amortized to
expense in 1996, 1995 and 1994, respectively.
d. Stock Options
Employee Stock Option Plan
In 1996, the Company's shareholders approved the adoption of the Unilab
Corporation Stock Option and Performance Incentive Plan (the "1996 Option Plan")
which effectively replaced and superseded both the Stock Option Program for Key
Executives (the "Key Executive Plan") and a stock option plan for the benefit of
a broad base of company employees (the "1995 Option Plan") both previously
adopted effective January 1, 1995. The 1995 Option Plan was amended to
discontinue grants under that plan. The 1996 Option Plan provides one
comprehensive plan for all employees and all future grants to employees will be
made under the 1996 Option Plan.
Under the terms of the 1996 Option Plan, incentive stock options,
non-statutory stock options, reload options or rights, stock appreciation
rights, restricted or unrestricted shares of Unilab stock, performance shares or
units and tax offset payments can be granted to any of the Company's employees,
with limited exceptions, and options for a maximum of 4,000,000 shares of the
Company's common stock may be granted. No employee may receive annual awards of
or relating to more than 250,000 shares of Unilab common stock.
The 1996 Option Plan is administered by a committee of the Board of
Directors (the "Administrator"). The number of options or awards granted,
exercise price, vesting and term will be determined by the Administrator. At
December 31, 1996 and 1995, 747,167 and 482,000 options, respectively, were
outstanding under the aggregate of the 1996 Option Plan, the 1995 Option Plan
and the Key Executive Plan.
Stock Program For Directors
In 1996, the Company's shareholders approved the adoption of the Unilab
Corporation Non-Employee Directors Stock Plan (the "1996 Directors Plan"), which
effectively replaced the Stock Option Program for Directors (the "1995 Directors
Plan") previously adopted effective January 1, 1995.
Under the terms of the 1996 Directors Plan, each outside director will
receive an annual option grant of 10,000 shares and an additional annual option
grant of 10,000 shares will be awarded to each outside director who serves as
the chairman of a committee or committees of the Board of Directors. 50 percent
of options granted under the 1996 Directors Plan are exercisable immediately and
50 percent are exercisable in one year.
At December 31, 1996 and 1995, 120,000 and 50,000 options, respectively,
were outstanding under the aggregate of the 1996 and 1995 Directors Plans.
Other
During the years ended December 31, 1996 and 1995, the Company's Board of
Directors also authorized the grant of nonqualified stock options to
individuals.
Information regarding the Company's stock option plans and nonqualified
stock options as of December 31, 1994, 1995 and 1996, and changes during the
years ending on those dates is summarized as follows:
- ---------------------------------------------------------
Weighted-Average
Shares Exercise Price
- ---------------------------------------------------------
December 31, 1993 1,723,500 $5.63
- ---------------------------------------------------------
Granted 848,000 5.62
Exercised (20,000) 3.69
Forfeited (20,000) 8.19
- ---------------------------------------------------------
December 31, 1994 2,531,500 $5.65
- ---------------------------------------------------------
Granted 992,000 4.87
Exercised -- --
Forfeited (45,000) 7.18
- ---------------------------------------------------------
December 31, 1995 3,478,500 $5.40
- ---------------------------------------------------------
Granted 681,500 2.11
Exercised -- --
Forfeited (280,500) 5.56
- ---------------------------------------------------------
December 31, 1996 3,879,500 $4.73
- ---------------------------------------------------------
In addition, 105,000 options were repriced from a weighted average price of
$5.16 to $2.19 during 1996. The options outstanding at December 31, 1996 expire
in various years through the year 2006. Options exercisable at December 31,
1996, 1995 and 1994 were 3,049,255, 2,621,000 and 2,012,500, respectively.
20
<PAGE>
Notes to Financial Statements
The weighted average fair value of options granted during 1996 and 1995 were
$1.90 and $4.12, respectively. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1996 and 1995,
respectively: risk-free interest rates of 6.1 percent and 7.4 percent; expected
lives of 8.49 years and 7.03 years; expected volatility of 95.60 percent and
99.07 percent and no dividends would be issued during the option terms.
Information about stock options outstanding at December 31, 1996 is
summarized as follows:
- --------------------------------------------------------------------------------
Options Outstanding
- --------------------------------------------------------------------------------
Number Weighted-Average Weighted-
Range of Outstanding Remaining Average
Exercise Prices at 12/31/96 Contracted Life ercise Price
- --------------------------------------------------------------------------------
$0.625 to $2.0 329,500 6.2 years $1.83
$2.063 to $4.0 585,500 8.0 $2.29
$4.125 to $10.375 2,964,500 4.3 $5.53
- --------------------------------------------------------------------------------
3,879,500 5.0 $4.73
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Options Outstanding
- --------------------------------------------------------------------------------
Number
Range of Exercisable Weighted-Average
Exercise Prices at 12/31/96 Exercise Price
- --------------------------------------------------------------------------------
$0.625 to $2.0 183,333 $1.97
$2.063 to $4.0 206,167 $2.39
$4.125 to $10.375 2,659,755 $5.65
- --------------------------------------------------------------------------------
3,049,255 $5.21
- --------------------------------------------------------------------------------
The Company accounts for its stock option plans under Accounting Principle
Board Opinion No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized. Had compensation cost for the Company's
stock option plans been determined consistent with Statement of Financial
Accounting Standards No. 123 ("FAS 123"), "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share would have been
reduced to the following pro forma amounts:
- --------------------------------------------------------------------------------
Years Ended December 31,
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
As Reported $ (92,944) $(41,775)
Net loss Pro Forma $ (94,391) $(43,549)
- --------------------------------------------------------------------------------
Net loss per As Reported $ (2.53) $ (1.17)
share Pro Forma $ (2.57) $ (1.22)
- --------------------------------------------------------------------------------
Because the FAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting compensation cost may not be
representative of that to be expected in future years.
e. Warrants
As of December 31, 1996, 200,000 warrants remain outstanding. Such warrants
were issued as part of the acquisition of MLN, can be exercised at $6.00 per
share and will expire if not exercised before May, 1997.
f. Stockholder Protection Rights Plan
In February 1994, the Company adopted a Stockholder Protection Rights Plan,
which was amended and restated in February 1996 ("Rights Plan"). Pursuant to the
Rights Plan, a dividend of one Right for each outstanding share of the Company's
common stock was issued to shareholders of record on March 15, 1994. Under
certain conditions, each Right may be exercised to purchase one one-hundredth of
a share of Series A Junior Participating Preferred Stock at a price of $22.50
for each share of common stock held. The Rights are exercisable until 10 days
after a person or group acquires 15% or more of the Company's common stock or
announces a tender or exchange offer, the consummation of which would result in
ownership by such person or group of 15% or more of the Company's common stock.
If thereafter, a person or group acquires 15% or more of Unilab's outstanding
Common Stock, each Right will entitle its holder (other than such person or
members of such group) to purchase, at the Right's then-current purchase price,
in lieu of one one-hundredth of a share of Preferred Stock, a number of shares
of Unilab's Common Stock having a market value of twice the Right's purchase
price. In addition, should Unilab be acquired in a merger or other business
combination, 50% or more of its assets or earning power is sold or transferred,
or a reclassification or recapitalization of the Company occurs that has the
effect of increasing by more than 1% the proportionate ownership of Unilab's
stock by the acquiring person, then, each Right will entitle its holder to
purchase, at the Right's then-current purchase price, a number of the acquiring
company's shares of common stock having a market value at that time of twice the
Right's purchase price.
The Rights may be redeemed prior to becoming exercisable by the Company,
subject to approval of the Board of Directors, for one cent per Right in
accordance with the provisions of the Rights Plan. The Rights expire on March
15, 2004. The Company has reserved 1,000,000 shares of Series A Junior
Participating Preferred Stock for issuance upon exercise of the Rights.
11. Related Party Transactions
In 1995, the Company sold its equity investment in UGL to UGL for $30.0
million (see Note 8). In addition, a $2.0 million subordinated note to UGL
issued in 1993 was assumed by UGL as part of the sale of the Company's equity
investment in 1995.
21
<PAGE>
Notes to Financial Statements
MetPath, formerly a subsidiary of Corning Incorporated and which at one time
was an affiliate of the Company, provided certain lab testing services for
specimens under a reference testing agreement. The cost of these services
amounted to $1.0 million in 1994.
The Company extended a loan of $1.0 million in 1992 to the Company's then
Chief Executive Officer ("CEO") for the purchase of a residence in connection
with the officer's relocation to California. During 1994, the CEO borrowed $0.5
million from a bank and used such proceeds to reduce his outstanding loan to the
Company. This loan is guaranteed by the Company. In January 1997, in connection
with the termination of the CEO, the outstanding loan balance of $0.5 million
was forgiven and the CEO has agreed to sell the residence and use the sales
proceeds to first reduce his loan balance from the bank. Upon repayment of the
loan, the Company will be released from its guarantee of such debt. In addition
certain other loans made by banks to officers of the Company are guaranteed by
the Company. Such guarantees totalled approximatley $0.9 million at December 31,
1996.
12. Commitments and Contingencies
Property and equipment leased under capital leases is as follows:
- --------------------------------------------------------------------------------
December 31,
- --------------------------------------------------------------------------------
(in thousands) 1996 1995
- --------------------------------------------------------------------------------
Building $3,100 $3,100
Laboratory and other equipment 7,957 7,957
Less--Accumulated amortization 3,760 2,393
- --------------------------------------------------------------------------------
Net leased property under capital leases $7,297 $8,664
- --------------------------------------------------------------------------------
As of December 31, 1996, future minimum rental payments required under
capital and operating leases that have initial or remaining noncancellable terms
in excess of one year are approximately as follows:
- --------------------------------------------------------------------------------
Capital Operating
(in thousands) leases leases
- --------------------------------------------------------------------------------
1997 $ 2,850 $ 7,186
1998 2,595 5,017
1999 1,853 3,557
2000 2,128 2,373
2001 783 1,790
Thereafter 2,278 4,996
- --------------------------------------------------------------------------------
Total minimum lease payments 12,487 $24,919
Less: Amount representing interest 3,777
- --------------------------------------------------------------------------------
Present value of net minimum lease
payments $ 8,710
- --------------------------------------------------------------------------------
Rental expense for operating leases was approximately $9.6 million, $9.4
million and $8.5 million in 1996, 1995 and 1994, respectively.
Pursuant to the terms of acquisitions made in 1996 and 1995, the former
owner of the acquired businesses may earn additional purchase price
consideration in cash based on the attainment of cash receipts from specified
acquired customer accounts above specified minimum levels (as defined in the
agreement). No additional estimated amounts were accrued in 1996 or 1995.
Additional estimated amounts up to $2.0 million, which would be accounted for as
goodwill, may be made in 1997.
The Company has employment agreements with its principal officers and
certain other key employees. Such agreements expire at various dates through
January 20, 1998 and automatically renew for successive one or two year periods,
depending on the employee, until one of the parties gives notice of termination
in accordance with the agreement. The agreements also provide for annual bonuses
for certain officers and key employees, dependent upon the achievement of
certain performance objectives. In addition, the agreements for certain officers
provide for annual deferred compensation equal to 8% of the employees' cash
compensation (inclusive of bonuses) for the year. The aggregate commitment under
these agreements, excluding bonuses and any deferred compensation related
thereto, is approximately $3.4 million. The Company may terminate the employment
agreements without cause by providing severance pay equal to one to two times,
depending on the employee, the current base salary plus certain other benefits.
In addition, the employment agreements grant these employees the right to
receive two to three times, depending on the employee, their annual salary and
bonus, plus continuation of certain benefits and acceleration of certain stock
options, if there is a change in control of the Company (as defined) and a
termination of such employees or certain other events within two years
thereafter. The maximum contingent liability upon a change in control, excluding
any bonus, continuation of benefits or acceleration of stock options, is
approximately $5.6 million.
The Company is party to certain legal proceedings considered incidental to
its business. Although the ultimate disposition of these legal proceedings is
not determinable, management does not believe that the ultimate outcome of such
legal proceedings will have a material adverse effect upon the financial
condition, liquidity or results of operations of the Company.
13. Benefit Plans
The Company provides a savings plan under Section 401(k) of the Internal
Revenue Code covering most employees. The expense related to Company
contributions to the plan totaled approximately $0.5 million, $0.6 million and
$1.0 million for the years ended December 31, 1996, 1995 and 1994, respectively.
Effective January 1, 1995, the Company contributions, which were previously made
in cash, were made in shares of Unilab common stock. Effective September 1,
1996, the Company discontinued its matching contributions.
22
<PAGE>
Notes to Financial Statements
Effective January 1, 1995, the Company adopted the Unilab Corporation
Executive Retirement Plan (the "SERP"), an unfunded defined contribution plan,
for the benefit of designated key employees. The benefit formula is primarily
based on the employee's final five-year average compensation and years of
service. Pension (income) expense for the SERP was approximately ($153,000) in
1996 and $207,000 in 1995. At December 31, 1996, the accumulated obligation
recognized as a liability in the balance sheet was approximately $54,000. The
weighted average discount rate and rate of increase in future compensation
levels used in determining the present value of benefit obligations were 6.1%
and 3.8% in 1996 and 7.9% and 5.5% in 1995.
14. Supplemental Disclosures of Cash Flow Information
- --------------------------------------------------------------------------------
Years Ended December 31,
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Cash paid during the year for:
Interest $12,139 $ 9,253 $ 4,403
Income taxes 9 3 5
Supplemental Disclosure of
Noncash Investing and
Financing Activities:
Restricted shares of common
stock issued to employees 107 598 129
Shares issued for Company's
401(k) plan matching
contributions 548 605 --
Shares issued to a bank in
connection with the Credit
Agreement -- 100 --
Shares issued to certain Board
Directors and a consultant for
services rendered 61 -- --
Payment of purchase price for a
prior acquisition in common
shares 1,000 560 441
- --------------------------------------------------------------------------------
In connection with business
acquisitions, liabilities were
assumed as follows:
Fair value of assets acquired $ -- $ 42,697 $ 57,935
Cash paid -- (31,401) (31,679)
Value of common stock issued -- (1,500) (11,635)
- --------------------------------------------------------------------------------
Liabilities assumed -- $ 9,796 $ 14,621
- --------------------------------------------------------------------------------
In the fourth quarter of 1996, the Company wrote off $61.7 million of
goodwill and customer lists. In connection with the Company's sale of its equity
investment, UGL assumed the Company's $2.0 million subordinated note to UGL and
the Company recorded non-cash interest income of $750,000 in 1995 on the $15.0
million promissory note due from UGL and UniHolding.
In 1995 and 1994, capital lease obligations of approximately $4.0 million
and $3.0 million, respectively, were incurred when the Company entered into
leases for new equipment and computer software.
15. Quarterly Financial Data (unaudited)
Summarized unaudited quarterly financial data for 1996 and 1995 (in thousands,
except per share data) is as follows:
- --------------------------------------------------------------------------------
Year Ended December 31, 1996
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Revenue $51,541 $52,058 $52,670 $48,948
- --------------------------------------------------------------------------------
Direct laboratory and field
expenses:
Salaries, wages and benefits 17,605 17,291 17,912 18,061
Supplies 6,600 7,152 7,562 7,317
Other operating expenses 13,033 13,366 14,114 14,159
Total 37,238 37,809 39,588 39,537
- --------------------------------------------------------------------------------
Legal and acquisition charges -- -- 4,940 --
- --------------------------------------------------------------------------------
Restructuring charges -- -- -- 65,655
- --------------------------------------------------------------------------------
Amortization and depreciation 2,819 2,905 2,921 2,846
- --------------------------------------------------------------------------------
Selling, general and administra
tive expenses 10,984 10,871 10,606 9,340
- --------------------------------------------------------------------------------
Operating income (loss) 500 473 (5,385) (68,430)
- --------------------------------------------------------------------------------
Loss before
extraordinary item (1,890) (2,686) (8,535) (76,382)
- --------------------------------------------------------------------------------
Net loss (5,341) (2,686) (8,535) (76,382)
- --------------------------------------------------------------------------------
Net loss available to
common shareholders (5,377) (2,722) (8,571) (76,418)
Per common share data:
Net loss before
extraordinary item $ (0.05) $ (0.07) $ (0.23) ($ 2.08)
Net loss $ (0.15) $ (0.07) $ (0.23) ($ 2.08)
- --------------------------------------------------------------------------------
Price Range:
High 2.625 2.125 1.375 0.75
- --------------------------------------------------------------------------------
Low 1.50 1.50 0.563 0.375
- --------------------------------------------------------------------------------
23
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
Year Ended December 31, 1995
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Revenue $ 42,242 $ 47,913 $ 50,160 $ 48,727
- --------------------------------------------------------------------------------
Direct laboratory and field
expenses:
Salaries, wages and benefits 13,784 15,650 17,117 18,451
Supplies 5,183 5,834 6,690 6,468
Other operating expenses 9,835 10,813 11,347 11,705
Total 28,802 32,297 35,154 36,624
- --------------------------------------------------------------------------------
Legal and acquisition charges 1,200 1,200 -- 2,000
- --------------------------------------------------------------------------------
Amortization and depreciation 1,871 2,258 2,693 2,792
- --------------------------------------------------------------------------------
Selling, general and
administrative expenses 8,289 9,106 9,975 10,242
- --------------------------------------------------------------------------------
Operating income (loss) 2,080 3,052 2,338 (2,931)
- --------------------------------------------------------------------------------
Income (loss) before
extraordinary item 590 (35,809) 232 (5,056)
- --------------------------------------------------------------------------------
Net income (loss) 590 (37,541) 232 (5,056)
- --------------------------------------------------------------------------------
Net income (loss)
available to
common shareholders 554 (37,577) 196 (5,092)
- --------------------------------------------------------------------------------
Per common share data:
Net income (loss) before
extraordinary item* $ 0.02 $ (1.00) $ 0.01 $ (0.14)
Net income (loss)* $ 0.02 $ (1.05) $ 0.01 $ (0.14)
- --------------------------------------------------------------------------------
Price Range:
High 5.375 5.50 4.875 4.125
- --------------------------------------------------------------------------------
Low 3.563 4.50 4.00 2.313
- --------------------------------------------------------------------------------
*Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share in 1995 does
not equal the total computed for the year due to stock transactions which
occurred during 1995.
First Quarter - 1996
Upon completion of the Senior Notes offering, the Company wrote-off $3.5
million of deferred financing costs related to the Company's previous credit
facility.
Third Quarter - 1996
The Company recorded a charge of $4.9 million to conclude an investigation
of certain of the Company's billings to Medicare and certain other governmental
entities for hematology indices being billed in conjunction with complete blood
counts.
Fourth Quarter - 1996
The Company recorded a $4.5 million loss upon the sale of its $15.0 million
promissory note due from UGL/UniHolding.
The Company recorded charges of $65.7 million, consisting primarily of the
write-off of goodwill and customer costs and a reserve for managerial
restructuring expenses.
Testing volume generally tends to be lower during the holiday seasons. As a
result, because a substantial portion of the Company's expenses are relatively
fixed over the short term, the Company's operating income as a percentage of
revenue tends to decrease during the fourth quarter, mainly due to the Christmas
and Thanksgiving holidays.
First Quarter - 1995
The Company recorded a $1.2 million charge related primarily to the expected
cost, consisting primarily of legal fees, in defending itself against the
lawsuit brought by Trylon.
Second Quarter - 1995
In connection with the acquisition of MLN, the Company recognized a $1.2
million charge related primarily to the integration of the acquired MLN
operations with those of the Company.
The Company sold its 40 percent equity investment in UGL for $30.0 million.
The sale resulted in a one-time non-cash charge by the Company of approximately
$36.5 million.
Upon completion of the Credit Agreement, the Company wrote off $1.7 million
of deferred financing costs related to the Company's previous credit facility.
The charge has been shown as an extraordinary item.
Fourth Quarter - 1995
The Company recorded a $2.0 million charge reflecting the costs associated
with the conclusion of arbitration proceedings in the lawsuit brought by Trylon.
Testing volume generally tends to be lower during the holiday seasons. As a
result, because a substantial portion of the Company's expenses are relatively
fixed over the short term, the Company's operating income as a percentage of
revenue tends to decrease during the fourth quarter, mainly due to the Christmas
and Thanksgiving holidays.
24
<PAGE>
Report of Independent Accountants
Unilab Corporation December 31, 1996
To the Board of Directors and Shareholders of Unilab Corporation
We have audited the accompanying balance sheets of Unilab Corporation (a
Delaware corporation) as of December 31, 1996 and 1995, and the related
statements of operations, shareholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 financial position of Unilab Corporation as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 17, 1997
DESIGN: LEHNER & WHYTE, INC.
25
<PAGE>
Unilab Corporation
Directors Corporate Officers Unilab Main Laboratory
David Weavil David Weavil Locations
Chairman, President and CEO Chairman, President and
Unilab Corporation Chief Executive Officer
Tarzana, California 18408 Oxnard Street
Richard A. Michaelson Tarzana, CA 91356
Kirby L. Cramer Senior Vice President - Phone: (818) 996-7300
Chairman Emeritus Finance, Treasurer and
Hazleton Corporation Chief Financial Officer 3714 Northgate Boulevard
Kirkland, Washington Sacramento, CA 95834
Mark L. Bibi Phone: (916) 927-9900
Michael B. Hoffman Vice President,
General Partner Secretary and 967 Mabury Road
The Blackstone Group, L.P. General Counsel San Jose, CA 95133
New York, New York Phone: (408) 288-9850
Brian D. Urban
Walker Lewis Vice President and
Senior Advisor Controller Transfer Agent
Dillon, Read & Co., Inc. and Registrar
New York, New York
Corporate Chase/Mellon
Thomas O. Pyle Headquarters Shareholder Services
Consultant 450 W. 33rd Street
New York, New York 18448 Oxnard Street New York, NY 10001
Tarzana, CA 91356
Gabriel B. Thomas Phone: (818) 757-0601
Consultant Fax: (818) 757-3809 Unilab is traded over the
St. Paul en Foret, France American Stock Exchange.
Its symbol is ULB.
Independent
Accountants
Arthur Andersen LLP
633 West Fifth Street
Los Angeles, CA 90017
26
<PAGE>
[UNILAB LOGO]
UNILAB CORPORATION
18848 OXNARD ST.
TARZANA, CA 91358
Exhibit 21.1
Subsidiaries of Unilab Corporation
None.
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, David C. Weavil, in my
individual capacity and as Director of Unilab Corporation, a Delaware
corporation (the "Company"), hereby constitute and appoint Mark L. Bibi, Richard
A. Michaelson and/or Brian D. Urban, severally or any one of them acting alone,
from the date hereof until such time as this Power of Attorney is revoked in
writing, to act as my true and lawful agent and attorney-in-fact, in my name and
on my behalf to execute, consent to, swear to, acknowledge, record, file, amend
and/or modify and deliver one or more registration statements for the filing of
securities of the Company under the Securities Act of 1933, as amended (the
"Securities Act") and any and all filings made by or on behalf of the Company
with the United States Securities and Exchange Commission pursuant to the
Securities Act and/or the Securities Exchange Act of 1934, as amended.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 12th day of March 1997.
-------------------------------
David C. Weavil
Exhibit 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, Kirby L. Cramer, in my
individual capacity and as Director of Unilab Corporation, a Delaware
corporation (the "Company"), hereby constitute and appoint Mark L. Bibi, Richard
A. Michaelson and/or Brian D. Urban, severally or any one of them acting alone,
from the date hereof until such time as this Power of Attorney is revoked in
writing, to act as my true and lawful agent and attorney-in-fact, in my name and
on my behalf to execute, consent to, swear to, acknowledge, record, file, amend
and/or modify and deliver one or more registration statements for the filing of
securities of the Company under the Securities Act of 1933, as amended (the
"Securities Act") and any and all subsequent filings made by or on behalf of the
Company with the United States Securities and Exchange Commission pursuant to
the Securities Act and/or the Securities Exchange Act of 1934, as amended.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 10th day of October 1994.
-------------------------------
Kirby L. Cramer
Exhibit 24.3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, Michael B. Hoffman, in my
individual capacity and as Director of Unilab Corporation, a Delaware
corporation (the "Company"), hereby constitute and appoint Mark L. Bibi, Richard
A. Michaelson and/or Brian D. Urban, severally or any one of them acting alone,
from the date hereof until such time as this Power of Attorney is revoked in
writing, to act as my true and lawful agent and attorney-in-fact, in my name and
on my behalf to execute, consent to, swear to, acknowledge, record, file, amend
and/or modify and deliver one or more registration statements for the filing of
securities of the Company under the Securities Act of 1933, as amended (the
"Securities Act") and any and all subsequent filings made by or on behalf of the
Company with the United States Securities and Exchange Commission pursuant to
the Securities Act and/or the Securities Exchange Act of 1934, as amended.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 11th day of October 1994.
-------------------------------
Michael B. Hoffman
Exhibit 24.4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, Walker Lewis, in my individual
capacity and as Director of Unilab Corporation, a Delaware corporation (the
"Company"), hereby constitute and appoint Mark L. Bibi, Richard A. Michaelson
and/or Brian D. Urban, severally or any one of them acting alone, from the date
hereof until such time as this Power of Attorney is revoked in writing, to act
as my true and lawful agent and attorney-in-fact, in my name and on my behalf to
execute, consent to, swear to, acknowledge, record, file, amend and/or modify
and deliver one or more registration statements for the filing of securities of
the Company under the Securities Act of 1933, as amended (the "Securities Act")
and any and all subsequent filings made by or on behalf of the Company with the
United States Securities and Exchange Commission pursuant to the Securities Act
and/or the Securities Exchange Act of 1934, as amended.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 13th day of October 1994.
-------------------------------
Walker Lewis
Exhibit 24.5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, Thomas O. Pyle, in my individual
capacity and as Director of Unilab Corporation, a Delaware corporation (the
"Company"), hereby constitute and appoint Mark L. Bibi, Richard A. Michaelson
and/or Brian D. Urban, severally or any one of them acting alone, from the date
hereof until such time as this Power of Attorney is revoked in writing, to act
as my true and lawful agent and attorney-in-fact, in my name and on my behalf to
execute, consent to, swear to, acknowledge, record, file, amend and/or modify
and deliver one or more registration statements for the filing of securities of
the Company under the Securities Act of 1933, as amended (the "Securities Act")
and any and all subsequent filings made by or on behalf of the Company with the
United States Securities and Exchange Commission pursuant to the Securities Act
and/or the Securities Exchange Act of 1934, as amended.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of March 1995.
-------------------------------
Thomas O. Pyle
Exhibit 24.6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, Gabriel B. Thomas, in my
individual capacity and as Director of Unilab Corporation, a Delaware
corporation (the "Company"), hereby constitute and appoint Mark L. Bibi, Richard
A. Michaelson and/or Brian D. Urban, severally or any one of them acting alone,
from the date hereof until such time as this Power of Attorney is revoked in
writing, to act as my true and lawful agent and attorney-in-fact, in my name and
on my behalf to execute, consent to, swear to, acknowledge, record, file, amend
and/or modify and deliver one or more registration statements for the filing of
securities of the Company under the Securities Act of 1933, as amended (the
"Securities Act") and any and all subsequent filings made by or on behalf of the
Company with the United States Securities and Exchange Commission pursuant to
the Securities Act and/or the Securities Exchange Act of 1934, as amended.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 10th day of October 1994.
-------------------------------
Gabriel B. Thomas
Exhibit 99.1
PRESS RELEASE UNILAB CORPORATION
(AMEX: ULB)
18448 Oxnard Street
Tarzana, CA 91356
For Further Information:
Richard A. Michaelson
Phone: (818) 758-6607
IMMEDIATE RELEASE
March 3, 1997
UNILAB CORPORATION ANNOUNCES 1996 RESULTS
TARZANA, CA, March 3, 1997 -- UNILAB Corporation (AMEX: ULB) announced today
that net sales for the year ended December 31, 1996 increased to $205.2 million
from $189.0 million in the same period last year. The Company reported a net
loss for the year of $92.9 million, or ($2.53) per common share, compared to a
net loss of $41.8 million, or ($1.17) per common share in the prior year. The
current year loss included approximately $78.6 million in non-recurring charges,
consisting of $4.0 million of restructuring costs associated with recent
management changes and downsizing, a $61.7 million charge taken in the fourth
quarter for the write-down of the Company's goodwill and other intangible
assets, and other previously announced charges of $12.9 million. The prior year
loss included approximately $42.6 million in non-recurring charges primarily
related to divestiture and acquisition activities. Earnings before Interest,
Taxes, Depreciation and Amortization ("EBITDA") before non-recurring charges
were $9.2 million for 1996, compared to $18.6 million for the prior year.
For the quarter ended December 31, 1996, net sales were $48.9 million, compared
to $48.7 million in the same period in the prior year. EBITDA for the quarter,
excluding non-recurring charges, was $0.1 million, compared to $1.9 million in
the fourth quarter of 1996.
David Weavil, Unilab's Chief Executive Officer, said "Unilab is aggressively
addressing a series of challenges that are being faced by many, if not most, of
the major lab companies throughout the country. Responding to the substantial
decline in average reimbursement which the Company has experienced in the past
year leads us to focus on two primary objectives. First, the Company has
targeted price increases and business development efforts to insure that all
agreements for existing and new business are profitably priced. Second, we will
continue to strive to be a lower cost provider of lab testing services. These
objectives bring together our needs with those of customers who value an
efficient, high quality laboratory." As previously reported, Mr. Weavil was
appointed Chairman and Chief Executive Officer of Unilab on January 20, 1997
following a 20 year career in the laboratory industry, most recently as Chief
Operating Officer of the country's largest national laboratory company.
Unilab Corporation is the largest provider of clinical laboratory testing
services in California through its primary testing facilities in Los Angeles,
San Jose and Sacramento and over 200 regional service and testing facilities
located throughout the state.
* * * * *
<PAGE>
Unilab Corporation
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Three months ended December 31, Years Ended December 31,
(amounts in thousands, except per share data) 1996 1995 1996 1995
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue $48,948 $48,727 $205,217 $189,042
Direct Laboratory and Field Expenses:
Salaries, Wages and Benefits 18,061 18,451 70,869 65,002
Supplies 7,317 6,468 28,631 24,175
Other Operating Expenses 14,159 11,705 54,672 43,700
------- ------- -------- --------
39,537 36,624 154,172 132,877
------- ------- -------- --------
Legal and Acquisition Related Charges -- 2,000 4,940 4,400
Restructuring Charges 65,655 -- 65,655 --
Amortization and Depreciation 2,846 2,792 11,491 9,614
Selling, General and Administrative Expenses 9,340 10,242 41,801 37,612
------- ------- -------- --------
Total Operating Expenses 117,378 51,658 278,059 184,503
------- ------- -------- --------
Operating Income (Loss) (68,430) (2,931) (72,842) 4,539
Other Income (Expenses)
Interest, Expense, net (3,423) (2,125) (12,122) (8,333)
Equity in Earnings of Affiliate -- -- -- 250
Loss on Sale of Equity Investment/
Promissory Note (4,529) -- (4,529) (36,499)
------- ------- -------- --------
Loss Before Income Taxes and
Extraordinary Item (76,382) (5,056) (89,493) (40,043)
Extraordinary Item - Loss on Early
Extinguishment of Debt -- -- 3,451 1,732
------- ------- -------- --------
Net Loss (76,382) (5,056) (92,944) (41,775)
Preferred Stock Dividends 36 36 144 144
------- ------- -------- --------
Net Loss Available to Common Stockholders ($76,418) ($5,092) ($93,088) ($41,919)
======= ======= ======== ========
Net Loss per Share:
Loss Before Extraordinary Item ($2.08) ($0.14) ($2.43) ($1.12)
Extraordinary Item -- -- (0.10) (0.05)
Net Loss ($2.08) ($0.14) ($2.53) ($1.17)
Weighted Average Common
Shares Outstanding 37,236 36,124 36,831 35,918
EBITDA, excluding non-recurring items $ 71 $ 1,861 $ 9,244 $ 18,553
</TABLE>
<PAGE>
Unilab Corporation
Consolidated Balance Sheet
December 31, December 31,
(amounts in thousands) 1996 1995
----------- -----------
Cash, Restricted Cash and Cash Equivalents $ 13,080 $ 70
Accounts Receivable, net 37,279 40,334
Amounts Due from UGL/UniHoldings -- 15,000
Other Current Assets 4,306 4,180
-------- --------
Total Current Assets 54,665 59,584
Fixed Assets, net 17,264 18,326
Goodwill and Other Intangible Assets 48,038 113,019
Other Assets 5,952 5,245
-------- --------
Total Assets $125,919 $196,174
-------- --------
Total Current Liabilities 29,752 49,273
Long-Term Debt, net of current portion 126,120 87,207
Other Liabilities 4,735 3,364
Total Shareholders' Equity (Deficit) (34,688) 56,330
-------- --------
Total Liabilities and Shareholders' Equity (Deficit) $125,919 $196,174
-------- --------
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000899714
<NAME> UNILAB CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 13,080
<SECURITIES> 0
<RECEIVABLES> 46,617
<ALLOWANCES> (9,338)
<INVENTORY> 2,604
<CURRENT-ASSETS> 54,665
<PP&E> 39,751
<DEPRECIATION> (22,487)
<TOTAL-ASSETS> 125,919
<CURRENT-LIABILITIES> 29,752
<BONDS> 126,120
0
4
<COMMON> 373
<OTHER-SE> (35,065)
<TOTAL-LIABILITY-AND-EQUITY> 125,919
<SALES> 205,217
<TOTAL-REVENUES> 205,217
<CGS> 0
<TOTAL-COSTS> 154,172
<OTHER-EXPENSES> 104,767
<LOSS-PROVISION> 14,180
<INTEREST-EXPENSE> 12,122
<INCOME-PRETAX> (89,493)
<INCOME-TAX> 0
<INCOME-CONTINUING> (89,493)
<DISCONTINUED> 0
<EXTRAORDINARY> 3,451
<CHANGES> 0
<NET-INCOME> (92,944)
<EPS-PRIMARY> (2.53)
<EPS-DILUTED> (2.53)
</TABLE>
