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, 1997
[ ] 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
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
18448 Oxnard Street, Tarzana, California 91356
----------------------------------------- -----
(Address of principal executive offices) (Zip code)
(818) 996-7300
--------------
(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
------------------- -----------------------------------------
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 9, 1998, 40,597,626 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 9, 1998, held by nonaffiliates of the Registrant was
approximately $96.1 million.
DOCUMENTS INCORPORATED BY REFERENCE
Part II - Portions of the Annual Report to shareholders for the year ended
December 31, 1997
Part III - Proxy Statement for Annual Meeting of Stockholders to be held
May 19, 1998
Page 1 of 40 pages.
<PAGE>
TABLE OF CONTENTS
Item PAGE
- ---- ----
Part I. 1 Business.............................................. 3
2 Properties............................................ 19
3 Legal Proceedings..................................... 20
4 Submission of Matters to a Vote
of Security Holders................................... 23
Part II. 5 Market for the Registrant's Common Equity and
Related Stockholder Matters........................... 25
6 Selected Financial Data............................... 26
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 27
8 Financial Statements and Supplementary Data........... 27
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 27
Part III. 10 Directors and Executive Officers of the Registrant.... 28
11 Executive Compensation................................ 28
12 Security Ownership of Certain Beneficial Owners
and Management and Directors.......................... 28
13 Certain Relationships and Transactions with Related
Persons............................................... 28
Part IV. 14 Exhibits, Financial Statements, Financial Statement
Schedules and Reports on Form 8-K..................... 29
Signatures ....................................................... 31
2
<PAGE>
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, 1997 were approximately twice the
annual sales in California of the next largest independent clinical laboratory
in that market. During such period, Unilab had approximately 15-20% of
California's independent clinical laboratory market, which is the largest state
clinical laboratory market in the United States. As of December 31, 1997, the
Company operated three centrally-located full-service laboratories,
approximately 35 strategically-located short turn around ("STAT") laboratories
and approximately 224 conveniently-located patient service centers ("PSC").
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. The Company is in the process of
upgrading and modifying its laboratory, billing and accounting systems in order
for such systems to properly recognize and perform date calculations in the year
2000 (the "Year 2000 issue"). The Company anticipates that it will cost
approximately $500,000 for additional hardware, upgraded software and consulting
time to enable the Company to properly address the Year 2000 issue. While the
consequences of an incomplete or untimely resolution of the Year 2000 issue
could have a significant impact on the Company's ability to finalize laboratory
results, properly bill the numerous different payor groups and gather and report
financial information, the Company believes that it will adequately resolve the
Year 2000 issue. The Company believes it will have all necessary steps to deal
with the Year 2000 issue in place by late 1998 and early 1999 in order to
provide sufficient time for modifications, if any, prior to the arrival of the
year 2000.
As of December 31, 1997, on an average workday, Unilab processed
approximately 33,200 patient specimens and performed over 62,000 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
3
<PAGE>
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 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 7% 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. Physicians 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
4
<PAGE>
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.
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, which is
approximately the number of covered lives serviced by the Company today. This
business had 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
undertook a concerted effort in 1997 to improve the situation. To this end,
Unilab renegotiated contracts representing approximately two-thirds of the
covered lives and received an average price increase in excess of 50% on those
renegotiated contracts. In addition, these contracts have increasingly been
structured so that they exclude unlimited high cost services, such as high
labor-intensive pap smears and outsourced esoteric tests. 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 350 couriers, approximately 224 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
5
<PAGE>
require 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"), such as Unilab,
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.
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
1997 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 99.5%, slightly better than the 1996 cumulative accuracy rate
of 99.4%, 1995 cumulative accuracy rate of 99.3% and the 1994 rate of 99.2%.
Sales, Service and Marketing
As of December 31, 1997, Unilab employed a full-time sales,
marketing and account service manager staff of approximately 78 people. Members
of the sales, service and marketing staff are selected based upon their skill
and experience. In addition, all sales, service 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 certain of such persons contain an 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. Certain individuals serve both sales and service functions.
6
<PAGE>
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)
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.
The Clinical Laboratory Industry
Overview and Trends
Unilab believes based on published industry reports that the total
U.S. clinical laboratory market during 1997 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.
7
<PAGE>
Clinical laboratory testing continues to be 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. Moreover, as a result of certain recent
required changes in the billing and collecting of Medicare and Medicaid
payments, more detailed procedures have been required, complicating the billing
and collection process and making such processes more expensive.
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 and other third-party 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.
Strategy
Unilab's objective is to build upon its position as the largest and
low 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. Similar to the actions taken in 1997, 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.
8
<PAGE>
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/or 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 has had little practical effect on the Company.
This 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. In each of
the past two Congresses, however, legislation has been introduced, but not
passed, to exempt POLs from CLIA.
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.
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.
9
<PAGE>
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 severe 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 OIG 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 "LabScam" 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 LabScam 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 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.
10
<PAGE>
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.
The OIG's 1997/98 Workplan again identified various laboratory
practices for evaluation and investigation. These include a follow-up audit of
hospital outpatient billing for chemistry, hematology and urinalysis tests
covered by a previous investigation; scrutiny of the enforcement of the Stark I
physician/laboratory self-referral ban (see below) to ensure that enforcement is
adequate; evaluating the enforcement of CLIA to make sure that it is adequate;
and a study of trends in laboratory test utilization to identify possible
utilization controls.
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 and to certain additional diagnostic and
therapeutic "designated health services", as well, with similar expected
benefits for the independent laboratory industry. Regulations implementing the
Stark I Law were published August 14, 1995. Proposed regulations to implement
the Stark II Law were published January 9, 1998.
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 compensation
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 could be introduced in Congress
in 1998.
11
<PAGE>
In 1996, Congress passed and the President signed into law the
Health Insurance Portability and Accountability Act of 1996 ("HIPAA"),
frequently referred to as the "Kennedy-Kassebaum Act", after its principal
Senatorial sponsors. The law made major changes in federal fraud and abuse laws
applicable to health care providers. It established a new federal program
designed to coordinate federal, state and local fraud and abuse control
programs. The law permitted 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. HIPAA also mandated the creation of a new safe harbor under the
anti-kickback law that is to apply to remuneration paid or received by a managed
care organization, where there is a written agreement that places the entity at
substantial financial risk for the cost or utilization of health care services
provided. HIPAA also expanded 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 under the anti-kickback law; the OIG
published regulations implementing this advisory opinion mandate in February
1997. The Kennedy-Kassebaum law also significantly increased the penalties for
certain civil violations of the Medicare law and increased the types of offenses
for which a provider could be excluded from Medicare/Medicaid. Finally, the law
established a number of new criminal provisions applicable to health care fraud.
The Balanced Budget Act of 1997 ("BBA '97") contains numerous
changes in Medicare/Medicaid fraud and abuse provisions. BBA '97 requires
permanent exclusion from Medicare and Medicaid for persons convicted of three
health care-related crimes and a 10-year exclusion period for persons convicted
of certain offenses who have one previous conviction. The statute permits the
Secretary of HHS to refuse to enter into Medicare participation agreements with
individuals or entities that have been convicted of felonies. The new law
further permits the exclusion from Medicare and Medicaid of an entity that is
controlled by a family member of an individual who has incurred Medicare or
Medicaid sanctions, where such sanctioned individual transferred his or her
ownership or control interest in the entity in anticipation of, or following, a
conviction, money penalty or exclusion from the program. In addition, BBA '97
expands the reach of Medicare/Medicaid civil money penalties to apply to persons
who arrange or contract with excluded persons for the provision of covered
services. Further, the statute includes a provision permitting civil money
penalties of up to $50,000 per violation, plus damages equal to three times the
total amount offered, paid, solicited or received, for violations of the
Medicare/Medicaid anti-kickback statute. Finally, BBA '97 requires the Secretary
of HHS to issue advisory opinions regarding potential violations of the Stark II
law prohibiting Medicare/Medicaid physician self-referral for designated health
services. The Health Care Financing Administration (HCFA) published regulations
implementing this advisory opinion provision on January 9, 1998.
The LabScam investigation and settlements have spawned additional
federal lawsuits brought by private parties (insurers and individuals) under the
Racketeering Influenced Corrupt Organization Act (RICO), which permits the
recovery of treble damages. At least two lawsuits were filed under this statute
against major clinical laboratories during 1997.
It should be noted that, among the many federal provisions available
to enforcement authorities in connection with health care offenses, an
especially potent remedy is exclusion from Medicare, Medicaid and other federal
health care programs. Particularly significant is the permissive exclusion
authority of the OIG, the principal threat that has brought
12
<PAGE>
many clinical laboratories to the settlement table in the LabScam operation. On
December 29, 1997, the OIG released non-binding guidelines indicating the
criteria it will use in making permissive exclusion decisions. These criteria
address the circumstances and seriousness of the offense, the defendant's
response to allegations, the likelihood of reoccurrences of the same or similar
offenses, and whether the provider can continue participating in federal health
care programs without a real threat of bankruptcy or to its ability to provide
quality care.
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 almost all 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. See "Legal Proceedings--Department of Justice
Settlement". 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 Company has remaining payments, excluding interest, to the U.S. Government
of $650,000 due September 1, 1998, $500,000 due March 1, 1999 and approximately
$324,000 due on September 1, 1999. In addition, in September 1996, 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.
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
13
<PAGE>
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 to 76% of the median and effective January 1, 1998 to 74%
of the median. BBA '97 provides for a freeze on fee schedule payments for 1998
through 2002.
BBA '97 included a provision, proposed by the Clinton
Administration, that allows the Secretary of HHS to implement up to five
demonstration projects to establish competitive acquisition areas for Part B
services, including laboratory services. Each project can be conducted in no
more than three competitive acquisition areas and can be operated over a
three-year period. The Secretary can limit the number of contractors in a
competitive acquisition area to the number needed to meet the demand for
services. Where the Secretary determines after an evaluation that there is clear
evidence that the project has resulted in a decrease in federal expenditures
adversely affecting or impacting access, quality or diversity of product
selection, the Secretary may expand the projects. BBA '97 also requires the
Secretary to request the Institute of Medicine to conduct a study of laboratory
payments to review the adequacy of the current methodology and recommendations
regarding alternative payment systems. This report is to be completed within two
years. The new law also includes a package of "administrative simplification"
provisions for laboratory testing. Under these provisions, by July 1, 1999,
regional carriers for not more than five regions must be in place for clinical
laboratories, and by January 1, 1999, the Secretary must establish uniform rules
in several laboratory policy areas through a negotiated rulemaking process.
Finally, effective July 1, 1998, Medicare Part B laboratory services (other than
physician services) provided to residents of nursing facilities must be billed
directly to the nursing facility, and payment will flow from Medicare to the
nursing facility and the nursing facility to the laboratory.
Current Procedural Terminology ("CPT") codes form 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.
CPT codes are periodically revised by the AMA. 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
14
<PAGE>
as part of an automated chemistry profile. An additional allowance of 50 cents
per test was authorized when more than 19 tests are billed in a profile. In
addition, this HCFA policy required laboratory providers to submit documentation
of the medical necessity for panel tests. Medicare will reimburse laboratories
only for the tests in a profile it determines to be medically necessary and
requires that ICD-9 diagnostic codes be provided by physicians to certain
specified tests as evidence of that test's medical necessity. 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.
A substantial CPT revision effective as of April 1, 1998 included
numerous new and revised individual and panel test codes affecting several
laboratory specialties. The most significant changes again concern panel codes.
The 1998 CPT replaced the 19 pre-existing multichannel chemistry profile codes
with four "clinically relevant" test panels. Effective April 1, 1998, HCFA
directed that laboratories could no longer bill Medicare for the multichannel
chemistry profiles, but must use the new "clinically relevant" panels
exclusively. This change could have an adverse effect on revenues and operating
costs of the clinical laboratory industry, including Unilab.
Additionally, laboratory pricing practices in general have received
substantial scrutiny from the Federal government. Under its "LabScam" 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, Physicians Clinical Laboratory,
Meris Laboratories and SmithKline Beecham Clinical Laboratories, as well as the
Company, have in recent years entered into agreements with the government to
settle the government's allegations of wrongdoing, in certain cases for hundreds
of millions of dollars. Additionally, the government is pursuing criminal
investigations of certain employees of lab companies in connection with
allegedly fraudulent sales and billing practices.
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
15
<PAGE>
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.
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 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 was included in BBA `97. If enacted, direct billing legislation would
likely be favorable for the revenues and competitive position of Unilab.
BBA `97 included several provisions in addition to those discussed
above that could affect clinical laboratory operations and/or the reimbursement
for clinical laboratory services. These include provisions intended to expand
the penetration of managed care in the Medicare program; mandates for Medicare
to replace cost reimbursement with prospective payment systems
16
<PAGE>
for hospital outpatient services, home health care services, skilled nursing
facility services, and others; and an expansion of public health care coverage
for certain uninsured children not already covered by Medicaid and other
pre-existing public health programs.
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 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., Bio-Cypher Laboratories, Inc. (a subsidiary of Nu-Tech Bio-Med, Inc.
formerly known as Physicians Clinical Laboratories), Laboratory Corporation of
America (formerly National Health Laboratories) and Meris Laboratories, Inc.
17
<PAGE>
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, 1997, Unilab employed approximately 2,100
full-time employees and approximately 550 part-time or temporary employees, none
of whom were under union contract. The Company believes that its relations with
employees are good.
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.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Litigation
Reform Act") provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information about their companies
without fear of litigation, provided those statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those projected in the statement. Accordingly, the Company
hereby identifies the following important factors that could cause the Company's
actual financial or operating results to differ materially from those projected,
forecast or estimated by the Company in forward-looking statements.
The Company wishes to caution investors that the following factors are
hereby identified as potentially important factors that could cause the
Company's actual financial or operating results to differ materially from those
projected, forecast or estimated by the Company in forward-looking statements
contained in this Form 10-K.
(a) Adverse actions by governmental or other third-party payors,
including Medicare and Medicaid, including unilateral reduction of
fee schedules payable to the Company.
(b) The impact of the Company's compliance with Medicare and Medicaid
administrative and legal policies, including, specifically, but
without limitation, the requirements by Medicare carriers that
physicians provide diagnosis (ICD-9) codes for certain tests in
order for such tests to be deemed "medically necessary" and,
therefore, reimbursed; the policy of HCFA to eliminate Medicare
reimbursement for tests contained in certain
18
<PAGE>
commonly ordered automated multichannel chemistry panels, (CPT
Series 80002-80019); reimbursement based on demonstrable "medical
necessity"; and, in connection with such "medical necessity" issues
and compliance-related recommendations made by governmental
representatives (including the recommendations made in the OIG Model
Compliance Plan for Clinical Laboratories), the Company's
introduction during 1998 of a new requisition form for ordering
chemistry tests.
(c) Adverse implications of the Company's introduction of a new
requisition form to meet the requirements set forth in (b) above.
(d) Impact of changes in payor mix, including the shift from
traditional, fee-for-service medicine to managed care, including the
increased shift of MediCal testing business to managed care.
(e) Failure to properly contain costs and expenses.
(f) Failure to obtain new or retain existing customers at profitable
pricing.
(g) Adverse results from any new governmental investigations, including
in particular significant monetary damages and/or exclusion from the
Medicare and Medicaid programs and/or other significant litigation.
(h) Computer or other system failures that affect the ability of the
Company to perform tests, report test results or properly bill
customers, including the Year 2000 issue.
(i) Inability to obtain professional liability insurance coverage or a
material increase in premiums for such coverage.
(j) Denial of CLIA certification or other licensure of any of the
Company's clinical laboratories under CLIA, by HCFA for Medicare and
Medicaid programs or other federal, state and local agencies.
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.
19
<PAGE>
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.
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.
20
<PAGE>
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.
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
21
<PAGE>
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.
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 included 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
concerned 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 HHS
subpoena 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 Company has remaining payments to the U.S. Government of $650,000 due
September 1, 1998, $500,000 due March 1, 1999 and approximately $324,000 due on
September 1, 1999. In addition, in September 1996 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
22
<PAGE>
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.
Executive Officers and Key Management Personnel of the Registrant
The following table sets forth certain information as of February 9,
1998 regarding the directors, executive officers and key management personnel of
Unilab.
Name Age Position
- ---- --- --------
David C. Weavil...............47 Chairman of the Board, President and
Chief Executive Officer
Haywood Cochrane..............49 Director
Kirby L. Cramer...............61 Director
William Gedale................56 Director
Richard A. Michaelson.........46 Director
Gabriel Balthazar Thomas......56 Director
Mark L. Bibi..................39 Vice President, Secretary and General
Counsel
Ian J. Brotchie...............58 Division President, Unilab Northern
California
R. Jeffrey Lanzolatta.........45 Division President, Unilab Southern
California
Brian D. Urban................35 Chief Financial Officer and Treasurer
Paul T. Wertlake..............62 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. ("NHL"), 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.
Haywood Cochrane has been a director of Unilab since May 1997. He
has served as President and Chief Executive Officer of Meridian Occupational
Healthcare Associates, Inc. since February 1997. He was Executive Vice
President, Chief Financial Officer and Treasurer of LabCorp from April 1995 to
November 1996 and a consultant to LabCorp from November 1996 to February 1997.
Mr. Cochrane was President, Chief Executive Officer and a Director of Allied
Clinical Laboratories, Inc. ("Allied") from its formation in 1989 until its
acquisition by NHL in June 1994. Mr. Cochrane serves as a Director of JDN Realty
Corp., Pathology Corporation of America and Meridian Occupational Healthcare
Associates, Inc.
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 Laboratories Corporation (a subsidiary of Corning), a biological
research company. Mr. Cramer served as
23
<PAGE>
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, Landec
Corporation, ATL Ultrasound, Inc., Northwestern Trust Company, and
Pharmaceutical Product Development, Inc.
William Gedale has been a member of Unilab's Board of Directors
since September 1997. He is currently President and CEO of Mount Everest
Advisors, LLC, an investment counseling and management firm. Previously, from
1989 to 1994 he served as President and CEO of General American Investors, a New
York Stock Exchange closed-end investment company and as a Managing Director of
John W. Bristol from June 1995 to June 1996. He currently serves as a director
of Bioreliance Corporation, a biological pre-clinical contract research
organization. He previously served as a director of Allied (until its merger
with NHL) and of U.S. Home Health Care. He is a director of New York Hospital
Departmental Associates and is a trustee of the Neuroscience Research
Foundation.
Richard A. Michaelson has been a member of Unilab's Board of
Directors since September 1997. He has been a principal of Focused Healthcare
Partners Ltd., a healthcare investment entity, since January 1, 1998. He was
Senior vice President of Unilab from September 1997 to December 1997, Senior
Vice President-Finance, Treasurer and Chief Financial Officer of Unilab from
February 1994 to September 1997 and 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 (the predecessor to Quest Diagnostics Inc.) 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.
Gabriel Balthazar Thomas has been a member of Unilab's Board of
Directors since its formation in November 1998. He was a director of Unilab's
predecessor entity from December 1986 until November 1988. Mr. Thomas has been a
consultant in international marketing and management since 1971 and served as a
consultant to Unilabs Holdings S.A., a Swiss corporation and clinical laboratory
holding company, from October 1987 to May 1992. Mr. Thomas was President of
Unilab from 1989 through January 1992. Mr. Thomas is 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 Northern
California since August 1997. He was Division President of Unilab San Jose from
February 1994 to August 1997. 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>
R. Jeffrey Lanzolatta has been Division President of 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.
Brian D. Urban has been Chief Financial Officer and Treasurer of
Unilab since September 1997. He was Vice President and Controller of Unilab from
November 1993 to September 1997. 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.
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 30 of the Company's 1997 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 9, 1998, there were 40,597,626 shares of Common
Stock outstanding held by 2,695 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.
25
<PAGE>
Item 6. Selected Financial Data
The selected financial data for each of the five years in the period ended
December 31, 1997 is as follows:
(amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended December 31, 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue $ 214,001 $ 205,217 $189,042 $151,820 $207,399
Legal, acquisition and restructuring
related charges -- 70,595 4,400 1,282 5,612
Operating income (loss) 14,604 (72,842) 4,539 9,137 12,117
Loss on sale of equity investment/
promissory note -- 4,529 36,499 -- --
Income (loss) before income taxes
and extraordinary item 536 (89,493) (40,043) 4,515 6,711
Income tax provision -- -- -- -- 200
Income (loss) before extraordinary item 536 (89,493) (40,043) 4,515 6,511
Extraordinary item -- 3,451 1,732 -- --
Net income (loss) 536 (92,944) (41,775) 4,515 6,511
Preferred stock dividends 138 144 144 144 20
Net income (loss) available to
common shareholders 398 (93,088) (41,919) 4,371 6,491
Basic net income (loss) before extraordinary
item per common share 0.01 (2.43) (1.12) 0.12 0.15
Basic net income (loss) per common share 0.01 (2.53) (1.17) 0.12 0.15
Weighted average shares outstanding 39,926 36,831 35,918 34,904 43,850
At December 31,
Total assets 118,700 125,919 196,174 196,407 134,106
Long-term debt, net of current portion 124,285 126,120 87,207 67,660 31,659
Shareholders' equity (deficit) (32,283) (34,688) 56,330 95,334 78,339
</TABLE>
26
<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
Consolidated Financial Statements at page 23 of the Company's 1997
Annual Report to shareholders for a more detailed discussion of the
legal and acquisition related charges, restructuring charges and loss
on sale of equity investment/promissory note recorded in 1996 and
1995, and such information is incorporated herein by reference. The
$1.2 million acquisition related charges recorded in 1994 relates to
the closure of Unilab patient service centers and related facilities
and reduction in the Unilab workforce incurred in connection with the
Premier acquisition. 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. Furthermore, due to a reorganization, the Company's results
of operations, assets and liabilities from November 10, 1993 primarily
include the operations in California 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
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 12 through 15 of the
Company's 1997 Annual Report to shareholders is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements, together with the
report thereon of Arthur Andersen LLP ("AA") dated February 13, 1998, appearing
on pages 16 through 32 of the Company's 1997 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 1997 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.
27
<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, 1997, 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.
28
<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 Consolidated Financial
Statements:
Incorporated by reference to the 1997
Annual Report to shareholders:
Consolidated Statements of Operations
for the years ended December 31, 1997,
1996, 1995 --- 16
Consolidated Balance Sheets at
December 31, 1997 and 1996 --- 17
Consolidated Statements of Shareholders'
Equity for the years ended December 31,
1997, 1996, 1995 --- 18
Consolidated Statements of Cash Flows
for the years ended December 31,
1996, 1995, 1994 --- 20
Notes to Consolidated Financial Statements --- 21
Report of Independent Accountants --- 32
(2) Index to Consolidated Financial
Statement Schedule:
Report of Independent Accountants on
Financial Statement Schedule 32 ---
II - Valuation and Qualifying
Accounts for the years ended
December 31, 1997, 1996 and 1995 33 ---
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 consolidated financial statements or the
notes thereto.
29
<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 1997.
30
<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: 3/27/98 UNILAB CORPORATION
By: /s/ Brian D. Urban
----------------------------
Name: Brian D. Urban
Title: Chief Financial Officer and
Treasurer
31
<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, 1997 and 1996, and the related statements of
operations, shareholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997 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 13, 1998. 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, 1997,
1996 and 1995 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 13, 1998
32
<PAGE>
<TABLE>
<CAPTION>
Schedule II
UNILAB CORPORATION AND SUBSIDIARIES
-----------------------------------
VALUATION AND QUALIFYING ACCOUNTS
---------------------------------
(Amounts in thousands)
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, 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
FOR THE YEAR ENDED
DECEMBER 31, 1997;
Allowance for doubtful accounts $ 9,338 $15,663 $ -- $(15,182) $9,819
</TABLE>
33
<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).
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).
34
<PAGE>
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 (Incorporated by
Reference to Exhibit 10.3 to the Company's Annual Report
on Form 10-K, dated March 21, 1997).
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).
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).
35
<PAGE>
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 Stock Option Agreement, dated as of April 28, 1997,
between the Company and Richard A. Michaelson.
10.13 Stock Option Agreement, dated as of April 28, 1997,
between the Company and Richard A. Michaelson.
10.14 Letter Agreement, dated September 17, 1997, between the
Company and Richard A. Michaelson.
10.15 Consulting Agreement, dated as of September 17, 1997,
between the Company and Richard A. Michaelson.
10.16 Amendment No. 1, dated as of September 17, 1997, to the
Stock Option Agreement dated as of April 28, 1997,
between the Company and Richard A. Michaelson.
10.17 Amendment No. 1, dated as of September 17, 1997, to the
Stock Option Agreement, dated as of April 28, 1997,
between the Company and Richard A. Michaelson.
10.18 Amendment No. 1, dated as of September 17, 1997, to the
Stock Option Agreement, dated as of February 27, 1996,
between the Company and Richard A. Michaelson.
36
<PAGE>
10.19 Amendment No. 1, dated as of September 17, 1997, to the
Stock Option Agreement, dated as of May 1, 1995, between
the Company and Richard A. Michaelson.
10.20 Amendment No. 1, dated as of September 17, 1997, to the
Stock Option Agreement, dated as of January 1, 1995,
between the Company and Richard A. Michaelson.
10.21 Amendment No. 1, dated as of September 17, 1997, to the
Stock Option Agreement, dated as of February 25, 1994,
between the Company and Richard A. Michaelson.
10.22 Amendment No. 1, dated as of September 17, 1997, to the
Stock Option Agreement, dated as of October 20, 1992,
between the Company and Richard A. Michaelson.
10.23 Amendment No. 1, dated as of September 17, 1997, to the
Restricted Stock Agreement, dated as of May 1, 1995,
between the Company and Richard A.Michaelson
10.24 Employment Agreement, dated as of January 20, 1997
between David C. Weavil and the Company (Incorporated by
Reference to Exhibit 10.12 to the Company's Annual
Report on Form 10-K, dated March 21, 1997).
10.25 Stock Option Agreement, dated as of January 20, 1997
between David C. Weavil and the Company (Incorporated by
Reference to Exhibit 10.13 to the Company's Annual
Report on Form 10-K, dated March 21, 1997).
10.26 Promissory Note, dated January 20, 1997, payable by
David C. Weavil to the Company (Incorporated by
Reference to Exhibit 10.14 to the Company's Annual
Report on Form 10-K, dated March 21, 1997).
10.27 Secured Promissory Note, dated January 20, 1997, payable
by David C. Weavil to the Company (Incorporated by
Reference to Exhibit 10.15 to the Company's Annual
Report on Form 10-K, dated March 21, 1997).
10.28 Stock Option Agreement, dated as of February 27, 1996,
between the Company and Andrew H. Baker (Incorporated by
reference to Exhibit 10.16 to the Company's Quarterly
Report on Form 10-Q for the Quarter ended March 31,
1996, dated May 1, 1996).
37
<PAGE>
10.29 Letter Agreement, dated January 20, 1997, between Andrew
H. Baker and the Company (Incorporated by Reference to
Exhibit 10.17 to the Company's Annual Report on Form
10-K, dated March 21, 1997).
10.30 Restricted Stock Agreement, dated as of January 20,
1997, between Andrew H. Baker and the Company
(Incorporated by Reference to Exhibit 10.18 to the
Company's Annual Report on Form 10-K dated March 21,
1997).
10.31 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 (Incorporated by
Reference to Exhibit 10.19 to the Company's Annual
Report on Form 10-K, dated March 21, 1997).
10.32 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
(Incorporated by Reference to Exhibit 10.20 to the
Company's Annual Report on Form 10-K, dated March 21,
1997).
10.33 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
(Incorporated by Reference to Exhibit 10.21 to the
Company's Annual Report on Form 10-K, dated March 21,
1997).
10.34 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 (Incorporated by
Reference to Exhibit 10.22 to the Company's Annual
Report on Form 10-K, dated March 21, 1997).
10.35 Non-Compete Agreement, dated as of January 20, 1997,
between Andrew H. Baker and the Company (Incorporated by
Reference to Exhibit 10.23 to the Company's Annual
Report on Form 10-K dated March 21, 1997).
10.36 Consulting Agreement, dated as of January 20, 1997,
between the Company and Hartill Ltd. (Incorporated by
Reference to Exhibit 10.24 to the Company's Annual
Report on Form 10-K, dated March 21, 1997).
38
<PAGE>
10.37 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).
10.38 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).
10.39 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).
10.40 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).
10.41 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).
10.42 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).
10.43 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).
39
<PAGE>
10.44 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).
10.45 Participation Agreement, dated as of November 7, 1996,
by and between the Company and Donaldsosn, Lufkin and
Jenrette Securities Corporation (Incorporated by
Reference to Exhibit 10.33 to Annual Report on Form
10-K, dated March 21, 1997).
13.1 Annual Report to Shareholders
21.1 Subsidiaries of the Company
22.1 Proxy Statement, dated April __, 1998, for Annual
Meeting of Stockholders held on May 19, 1998.
24.1 Power of Attorney of David C. Weavil
24.2 Power of Attorney of Haywood Cochrane
24.3 Power of Attorney of Kirby L. Cramer
24.4 Power of Attorney of William Gedale
24.5 Power of Attorney of Richard Michaelson
24.6 Power of Attorney of Gabriel B. Thomas
99.1 Press Release, dated February 4, 1998, announcing fourth
quarter and full year 1997 earnings results.
40
Exhibit 10.12
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT is made as of the 28th day of April, 1997,
between Unilab Corporation, a Delaware corporation (hereinafter called the
"Corporation"), and Richard Michaelson, a key employee of the Corporation
(hereinafter called the "Option Holder").
1. Grant of Option. The Corporation hereby grants to the Option Holder the
right and option, hereinafter called the "Option", to purchase an aggregate of
Two Hundred Thousand (200,000) 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: Fifty (50%) Percent of the Option herein granted (for up
to 100,000 shares) shall vest and may be exercised on or after April 28, 1998,
and the remaining Fifty (50%) Percent of the Option herein granted (for up to
100,000 shares) shall vest and may be exercised on or after April 28, 1999
(unless terminated earlier pursuant to paragraph 6 hereof).
2. Purchase Price. The purchase price of the Shares covered by the Option
shall be Five-Eighths of a Dollar ($0.625) 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.
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
<PAGE>
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.
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
2
<PAGE>
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
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.
3
<PAGE>
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.
(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.
4
<PAGE>
(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.
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: Richard A. Michaelson
Address: 11-18 Fairhaven Place
Fair Lawn, NJ 07410
UNILAB CORPORATION
By:
----------------------------------
Name: David Weavil
Title: Chairman, President and
Chief Executive Officer
Address: 18448 Oxnard Street
Tarzana, CA 91356
5
Exhibit 10.13
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT is made as of the 28th day of April, 1997,
between Unilab Corporation, a Delaware corporation (hereinafter called the
"Corporation"), and Richard Michaelson, a key employee of the Corporation
(hereinafter called the "Option Holder").
1. Grant of Option. The Corporation hereby grants to the Option Holder the
right and option, hereinafter called the "Option", to purchase an aggregate of
Seventy-Five Thousand (75,000) 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 in full and may be exercised on or after April 1, 1998 (unless
terminated earlier pursuant to paragraph 6 hereof).
2. Purchase Price. The purchase price of the Shares covered by the Option
shall be Five-Eighths of a Dollar ($0.625) 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.
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").
<PAGE>
(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.
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
2
<PAGE>
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
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:
3
<PAGE>
(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.
(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.
4
<PAGE>
(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.
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: Richard A. Michaelson
Address: 11-18 Fairhaven Place
Fair Lawn, NJ 07410
UNILAB CORPORATION
By:
----------------------------------
Name: David Weavil
Title: Chairman, President and
Chief Executive Officer
Address: 18448 Oxnard Street
Tarzana, CA 91356
5
Exhibit 10.14
September 17, 1997
Mr. Richard A. Michaelson
11-18 Fairhaven Place
Fair Lawn, NJ 07410
Dear Rich:
This letter will confirm our agreement with respect to (i) your decision to
resign as an officer of Unilab Corporation ("Unilab" or the "Company") and (ii)
your continued relationship as a consultant to the Company.
You will voluntarily resign as the Company's Senior Vice President-Finance,
effective as of January 1, 1998 (the "Effective Date"). You will continue on the
Company's payroll at your current salary and benefits until the Effective Date.
In addition, as of the date hereof, you will become a director of the Company,
as previously approved by the Company's Board of Directors. 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 or supplemented by the
Letter Agreement, dated July 25, 1996, thereto (collectively, the "Employment
Agreement"):
1. As noted above, you will remain on the Company's payroll through January 1,
1998 at your current base annual salary of $247,500.
2. The expiration dates of the options to purchase 695,000 shares of Unilab
Common Stock pursuant to the Stock Option Agreements between you and the
Company dated October 20, 1992 (with respect to 150,000 shares), February 25,
1994 (with respect to 50,000 shares), January 1, 1995 (with respect to 35,000
shares), May 1, 1995 (with respect to 150,000 shares), February 27, 1996
(with respect to 35,000 shares), April 28, 1997 (with respect to 75,000
shares), and April 28, 1997 (with respect to 200,000 shares) (collectively,
the "Options") shall in each case remain as the date that is ten years after
the respective grant dates thereof, rather than remaining exercisable for
only one year following termination of employment. All such Options shall
become fully vested and freely transferable to your immediate family or
trusts for their benefit in accordance with the amendments to such Stock
Option Agreements. In addition, you will be presumed to have met the
requisite performance objectives with respect to the bonus guidelines
specified in that certain memo to you from David Weavil, dated May 12, 1997
(the "Bonus"), thereby permitting issuance to you of such Bonus promptly
after completion of the 1997 fiscal year.
<PAGE>
3. As more fully set forth in the consulting agreement, dated as of the date
hereof, between you and the Company (the "Consulting Agreement"), effective
as of January 1, 1998 you will become a consultant to the Company. Your
consulting duties will primarily consist of (i) guidance and oversight of
investor relations, (ii) assistance with continued development of the
Internet web site, (iii) an advisory role for the new Billing System project
and (iv) support for strategic financing and M&A activity. In consideration
for your consulting activities, you will receive a base consulting fee of
$5,000 per month. The initial term of the Consulting Agreement will be one
year, with automatic one year renewals unless earlier terminated in
accordance with the terms of the Consulting Agreement.
4. As promptly as practicable after January 1, 1998, you will be paid a lump sum
cash payment equal to the amount accrued in your deferred compensation
account through January 1, 1998.
5. Effective as of January 1, 1998 all amounts accrued under your Executive
Retirement Plan account (the "SERP Account") shall be deemed fully vested.
However, amounts in the SERP Account shall be accrued and distributed only in
accordance with the provisions of the SERP.
6. You will be provided with use of 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 (the "NJ Lease Expiration Date") 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).
7. You will be provided with secretarial and administrative services (through
the continued use at Unilab's expense of your current secretary) through the
NJ Lease Expiration Date.
8. You will receive continuation for 18 months from and after January 1, 1998 of
the same level of medical, hospitalization, dental, life, short- and
long-term disability insurance coverage and accidental death and
dismemberment travel accident coverage to which you would have been entitled
if you had remained a full-time senior executive of the Company 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 after the
Company fails to provide you with the coverage required hereunder.
09. During the time you are an employee of or consultant to Unilab, you will be
entitled to reimbursement of normal and approved business expenses incurred
in connection with your Unilab related business activities.
10.You will be entitled to payment or reimbursement of up to $2,500 of expenses
associated with moving certain personal possessions back to the East Coast.
2
<PAGE>
11.Title of the car you currently drive on the East Coast will be transferred
to you promptly after the date hereof, free and clear of all liens and
encumbrances; provided, however, the Company shall have the option to instead
provide you with continued use of such car through the date that is 18 months
after the date hereof, or for any portion thereof. If the Company elects not
to transfer title to you immediately, you shall also be entitled to receive
payment or reimbursement of expenses in connection with the use, maintenance,
insurance, registration, tax or imputed tax and repair of or relating to that
car until the date of transfer of title; provided, that in such event, (i)
you will reimburse Unilab for the cost of registration of the car and (ii)
from and after January 1, 1998, even if title has not been transferred to
you, you will be responsible for payment of routine maintenance and repair
and registration costs for the vehicle, while the Company will continue to
cover insurance costs.
12.As noted above, as of the date hereof you are becoming a director of the
Company. So long as you remain on the Company's payroll pursuant to Paragraph
1 above, you will not be entitled to receive any director fees. From and
after the date you leave the Company's payroll and remain as a director you
will be entitled to receive directors fees under the Company's standard
policy.
13.The restrictions on 25,000 restricted shares of Unilab common stock granted
to you pursuant to the Restricted Stock Agreement, dated as of May 1, 1995
shall lapse in accordance with Amendment No. 1 to the Restricted Stock
Agreement and none of such shares shall be deemed forfeited by termination of
your employment.
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. If you prevail in any such
arbitration, you shall be paid or reimbursed by the Company an amount equal to
the costs of such arbitration incurred by you, 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 occurring in whole or in part on or at any time from
the
3
<PAGE>
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. ss. 621, et seq. Or Cal. Gov't. Code ss. 12940 et seq.
For the purpose of implementing a full and complete release and discharge of
Releasees, you expressly 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 your Restricted Stock Agreement, as
amended, nor will it constitute a release of any indemnification obligations
that Unilab may have in respect of events occurring prior to the Effective Date
or in respect of your services as a director of Unilab.
The Company's obligations to indemnify you and to advance expenses, as provided
in Section 13 of your 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 (subject only to
causes arising out of your fraud or willful malfeasance and to your obligations
under the $150,000 promissory note payable to 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.
4
<PAGE>
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. 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.
This agreement, together with the Restricted Stock Agreement, as amended, the
Stock Option Agreements, as amended, and the Consulting Agreement, shall
constitute the entire agreement and understanding between you and the Company
with respect to your employment or retention 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
8, 9 and 13 of your Employment Agreement 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.
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.
Rich, it has truly been a pleasure working with you. Your tireless energies and
indefatigable enthusiasm have made my early tenure with Unilab a terrific one. I
greatly appreciate all your efforts on Unilab's behalf and look forward to our
continuing relationship.
Sincerely yours, Acknowledged and agreed:
------------------------
David C. Weavil Richard A. Michaelson
5
Exhibit 10.15
CONSULTING AGREEMENT
AGREEMENT, dated as of September 17, 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 Richard A.
Michaelson, residing at 11-18 Fairhaven Place, Fair Lawn, New Jersey 07410
(hereinafter the "Consultant"):
WHEREAS, Consultant has served in senior management positions of Unilab
since October 1992, including most recently as Senior Vice President-Finance,
Treasurer and Chief Financial Officer;
WHEREAS, Consultant has been a leading executive in the clinical
laboratory industry for more than a decade;
WHEREAS, Unilab desires to continue to have the benefit of Consultant's
experience and knowledge of the clinical laboratory industry following his
voluntary resignation from his positions as Senior Vice President-Finance,
Treasurer and chief Financial 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. Effective as of January 1, 1998, Unilab hereby
engages the Consultant to advise and consult with Unilab's management and Board
of Directors with respect to (i) guidance and oversight of investor relations,
(ii) assistance with continued development of the Internet web site, (iii) an
advisory role for the new Billing System project and (iv) support for strategic
financing and M&A activity (collectively, the "Consulting Services"). The
Consultant represents and warrants to Unilab that he 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 initial term of this Agreement shall be for one (1) year from
and after January 1, 1998, and thereafter shall automatically renew for
successive one-year periods until one of the parties gives notice of termination
to the other party at least six months before the end of the then-current term,
unless otherwise sooner terminated as provided herein. However, neither party
can give a notice of termination prior to June 30, 1998.
<PAGE>
2. Compensation.
(a) Unilab shall pay the Consultant a base payment of $5,000 per month
for the Consulting Services. Consultant shall make himself available
to provide up to 30 hours per month of Consulting Services, at
Unilab's request, or such other availability as mutually agreed.
(b) Consultant shall be reimbursed for his normal and approved business
expenses incurred in providing Consulting Services.
(c) In the event that Consultant is requested to provide Consulting
Services that require Consultant to spend significant amounts of
time on such services, beyond that which is contemplated by this
Agreement, Consultant and Unilab shall each negotiate in good faith
to agree upon additional consideration to Consultant consistent with
his additional efforts expended.
3. Indemnification.
(a) Consultant agrees 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 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 wholly
harmless, to the fullest extent permitted by law, 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 constituting fraud against Unilab as determined in a
final finding of a court of competent jurisdiction.
4. Termination. This Agreement shall terminate on the earliest occurrence
of any of the following conditions:
(a) Six months after the date a proper Notice of Termination (as set
forth in Section 1) is received by the other party.
2
<PAGE>
(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 have 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.
(i) For the purposes of this Agreement, Consultant shall be deemed
to be in Default hereunder upon (1) Consultant having been
convicted by a court of competent jurisdiction of any felony
involving moral turpitude; (2) the willful malfeasance or
gross negligence by Consultant in the performance of his
duties hereunder; (3) the material violation by Consultant of
Sections 3 or 5 of this Agreement; or (4) Consultant 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.
5. Confidential Information.
(a) The Consultant shall not directly or indirectly disclose to anyone
who is not authorized by the Company to receive such information, or
use or appropriate for 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 Consultant obtained during his employment or which
the Consultant obtains 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 by any employee, or
agent, 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
3
<PAGE>
result of unauthorized disclosure by the Consultant), 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.
(b) At no time during or after the term of this Agreement shall the
Consultant 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 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 5 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 from and after January 1, 1998 and throughout the term of this Agreement
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.
4
<PAGE>
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: Richard A. Michaelson
11-18 Fairhaven Place
Fair Lawn, NJ 07410
If to Unilab: Unilab Corporation
18448 Oxnard Street
Tarzana, CA 91356
Attn: Chief Executive Officer
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.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
first hereinabove written.
By:
----------------------------------------
Name: Richard A. Michaelson
UNILAB CORPORATION
By:
----------------------------------------
Name: David C. Weavil
Title: Chairman, President and CEO
6
Exhibit 10.16
Amendment No. 1 to Stock Option Agreement
This Amendment No. 1, dated as of September 17, 1997, to the Stock Option
Agreement dated as of April 28, 1997 with respect to 200,000 option shares at an
exercise price of five-eighths of a dollar ($0.625) per share (the "Stock Option
Agreement"), is entered into by and between Unilab Corporation, a Delaware
corporation (the "Corporation") and Richard A. Michaelson (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 following words from the beginning of the third sentence
of the section: "Unless terminated earlier pursuant to Paragraph 6
hereof,", so that the sentence reads in its entirety as follows: "Any
Option not exercised within such time shall terminate."
3. Sections 6(a) and 6(b) are deleted in their entirety and replaced by
the following: "Option Holder or his estate shall be entitled to
exercise the Option through the Expiration Date notwithstanding
termination of Option Holder's employment by the Corporation or Option
Holder's death prior to the Expiration Date".
4. Section 9 is hereby deleted in its entirety and replaced with the
following:
9. 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: Richard A. Michaelson Name:
Title:
Exhibit 10.17
Amendment No. 1 to Stock Option Agreement
This Amendment No. 1, dated as of September 17, 1997, to the Stock Option
Agreement dated as of April 28, 1997 with respect to 75,000 option shares at an
exercise price of five-eighths of a dollar ($0.625) per share (the "Stock Option
Agreement"), is entered into by and between Unilab Corporation, a Delaware
corporation (the "Corporation") and Richard A. Michaelson (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 following words from the beginning of the third sentence
of the section: "Unless terminated earlier pursuant to Paragraph 6
hereof,", so that the sentence reads in its entirety as follows: "Any
Option not exercised within such time shall terminate."
3. Sections 6(a) and 6(b) are deleted in their entirety and replaced by
the following: "Option Holder or his estate shall be entitled to
exercise the Option through the Expiration Date notwithstanding
termination of Option Holder's employment by the Corporation or Option
Holder's death prior to the Expiration Date".
4. Section 9 is hereby deleted in its entirety and replaced with the
following:
9. 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: Richard A. Michaelson --------------------------------
Name:
Title:
Exhibit 10.18
Amendment No. 1 to Stock Option Agreement
This Amendment No. 1, dated as of September 17, 1997, to the Stock Option
Agreement dated as of February 27, 1996 with respect to 35,000 option shares at
an exercise price of two and three-sixteenths dollars ($2.1875) per share (the
"Stock Option Agreement"), is entered into by and between Unilab Corporation, a
Delaware corporation (the "Corporation") and Richard A. Michaelson (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 following words from the beginning of the third sentence
of the section: "Unless terminated earlier pursuant to Paragraph 6
hereof,", so that the sentence reads in its entirety as follows: "Any
Option not exercised within such time shall terminate."
3. Sections 6(a) and 6(b) are deleted in their entirety and replaced by
the following: "Option Holder or his estate shall be entitled to
exercise the Option through the Expiration Date notwithstanding
termination of Option Holder's employment by the Corporation or Option
Holder's death prior to the Expiration Date".
4. Section 9 is hereby deleted in its entirety and replaced with the
following:
9. 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: Richard A. Michaelson ---------------------------------
Name:
Title:
Exhibit 10.19
Amendment No. 1 to Stock Option Agreement
This Amendment No. 1, dated as of September 17, 1997, to the Stock Option
Agreement dated as of May 1, 1995 with respect to 150,000 option shares at an
exercise price of five dollars and three-sixteenths ($5.1875) per share (the
"Stock Option Agreement"), is entered into by and between Unilab Corporation, a
Delaware corporation (the "Corporation") and Richard A. Michaelson (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 following words from the beginning of the third sentence
of the section: "Unless terminated earlier pursuant to Paragraph 6
hereof,", so that the sentence reads in its entirety as follows: "Any
Option not exercised within such time shall terminate."
3. Sections 6(a) and 6(b) are deleted in their entirety and replaced by
the following: "Option Holder or his estate shall be entitled to
exercise the Option through the Expiration Date notwithstanding
termination of Option Holder's employment by the Corporation or Option
Holder's death prior to the Expiration Date".
4. Section 9 is hereby deleted in its entirety and replaced with the
following:
9. 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: Richard A. Michaelson Name:
Title:
Exhibit 10.20
Amendment No. 1 to Stock Option Agreement
This Amendment No. 1, dated as of September 17, 1997, to the Stock Option
Agreement dated as of January 1, 1995 with respect to 35,000 option shares at an
exercise price of four dollars and fifty cents ($4.50) per share (the "Stock
Option Agreement"), is entered into by and between Unilab Corporation, a
Delaware corporation (the "Corporation") and Richard A. Michaelson (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 following words from the beginning of the third sentence
of the section: "Unless terminated earlier pursuant to Paragraph 6
hereof,", so that the sentence reads in its entirety as follows: "Any
Option not exercised within such time shall terminate."
3. Sections 6(a) and 6(b) are deleted in their entirety and replaced by
the following: "Option Holder or his estate shall be entitled to
exercise the Option through the Expiration Date notwithstanding
termination of Option Holder's employment by the Corporation or Option
Holder's death prior to the Expiration Date".
4. Section 9 is hereby deleted in its entirety and replaced with the
following:
9. 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: Richard A. Michaelson Name:
Title:
Exhibit 10.21
Amendment No. 1 to Stock Option Agreement
This Amendment No. 1, dated as of September 17, 1997, to the Stock Option
Agreement dated as of February 25, 1994 with respect to 50,000 option shares at
an exercise price of five and five-eighths dollars ($5.625) per share (the
"Stock Option Agreement"), is entered into by and between Unilab Corporation, a
Delaware corporation (the "Corporation") and Richard A. Michaelson (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 following words from the beginning of the third sentence
of the section: "Unless terminated earlier pursuant to Paragraph 6
hereof,", so that the sentence reads in its entirety as follows: "Any
Option not exercised within such time shall terminate."
3. Sections 6(a) and 6(b) are deleted in their entirety and replaced by
the following: "Option Holder or his estate shall be entitled to
exercise the Option through the Expiration Date notwithstanding
termination of Option Holder's employment by the Corporation or Option
Holder's death prior to the Expiration Date".
4. Section 9 is hereby deleted in its entirety and replaced with the
following:
9. 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: Richard A. Michaelson Name:
Title:
Exhibit 10.22
Amendment No. 1 to Stock Option Agreement
This Amendment No. 1, dated as of September 17, 1997 to the Stock Option
Agreement dated as of October 20, 1992 with respect to 150,000 option shares at
an exercise price of five dollars and sixty-six and one-half cents ($5.665) per
share (the "Stock Option Agreement"), is entered into by and between Unilab
Corporation, a Delaware corporation (the "Corporation") and Richard A.
Michaelson (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 following words from the beginning of the third sentence
of the section: "Unless terminated earlier pursuant to Paragraph 6
hereof,", so that the sentence reads in its entirety as follows: "Any
Option not exercised within such time shall terminate."
3. Sections 6(a) and 6(b) are deleted in their entirety and replaced by
the following: "Option Holder or his estate shall be entitled to
exercise the Option through the Expiration Date notwithstanding
termination of Option Holder's employment by the Corporation or Option
Holder's death prior to the Expiration Date".
4. Section 9 is hereby deleted in its entirety and replaced with the
following:
9. 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: Richard A. Michaelson Name:
Title:
Exhibit 10.23
AMENDMENT NO. 1 TO RESTRICTED STOCK AGREMENT
This Amendment No. 1 (this "Amendment") dated as of September 1 to the
Restricted Stock Agreement (the "Agreement"), dated as of May 1, 1995, between
Unilab Corporation (the "Corporation") and Richard A. Michaelson ("Michaelson"),
is entered into between the Corporation and Michaelson for good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged.
The Agreement is hereby amended as follows:
1. Section 3 of the Agreement is amended by deleting the section and replacing
it in its entirety with the following: "The Restriction shall lapse and have
no further force or effect on January 1, 1998."
In addition, this Amendment confirms that the Corporation's Board of
Directors has determined that none of the shares subject to the Agreement will
be forfeited pursuant to Section 5 of the Agreement.
Except as expressly provided above, the Agreement shall remain unchanged
and in full force and effect. This Amendment shall be governed by and construed
in accordance with the laws of the State of California.
UNILAB CORPORATION
By:
------------------------------
Name:
Title:
By:
------------------------------
Name: Richard A. Michaelson
Address: 11-18 Fairhaven Place
Fair Lawn, NJ 07410
Management's Discussion & Analysis of Financial Condition and Results of
Operations
Unilab Corporation December 31, 1997
Results of Operations
Year ended December 31, 1997 compared to year ended December 31, 1996
Revenue increased to $214.0 million for the year ended December 31, 1997
from $205.2 million for the comparable prior year period, representing an
increase of $8.8 million or 4.3%. The increase was primarily the result of
additional specimen volume generating approximately $17.6 million offset by
changes in payor mix and decreases in reimbursement levels of approximately $8.8
million.
The $17.6 million increase in specimen volume was due to a 8.6% increase
in the number of specimens processed during the year ended December 31, 1997
versus the comparable prior year period. Such increase was primarily
attributable to growth in the Company's core business.
The Company experienced a 3.9% decline in the average reimbursement
received for each specimen processed during the year ended December 31, 1997
versus the comparable prior year period. Such decrease was primarily due to an
increase in managed care business and a general softening in reimbursement
levels across most payor groups, most notably from insurance carriers.
While average reimbursement was down over the prior year, the average
reimbursement over the last six months of 1997 increased approximately 2.5%
over the average reimbursement in the first six months of 1997, the first time
in over two years that average reimbursement has increased over a comparable
prior period.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
were $23.5 million for the year ended December 31, 1997 compared to $9.2
million for the comparable prior year period (excluding legal and acquisition
related and restructuring charges, loss on sale of promissory note and
extraordinary item).
Salaries, wages and benefits decreased to $69.1 million for the year ended
December 31, 1997 from $70.9 million for the comparable prior year period. As a
percentage of revenue, salaries, wages and benefits were 32.3% and 34.5% for
the years ended December 31, 1997 and 1996, respectively. Such decrease
primarily reflects a reduction in headcount, control over the growth in wage
increases and economies of scale associated with fewer employees processing a
significantly higher specimen volume.
Supplies expense increased to $29.9 million for the year ended December 31,
1997 from $28.6 million for the comparable prior year period. As a percentage of
revenue, supplies expense were consistent at 14.0% for the years ended December
31, 1997 and 1996. However, on a per specimen basis, supplies costs actually
decreased 4.2% as a result of economies of scale associated with an increased
specimen volume.
Other operating expenses increased to $57.0 million for the year ended
December 31, 1997 from $54.7 million for the comparable prior year period. As a
percentage of revenue, other operating expenses were consistent at 26.6% for
the years ended December 31, 1997 and 1996.
During the third quarter of 1996, the Company recorded charges of
approximately $4.9 million, primarily related to settlements reached with the
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.
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 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 to a reduction in headcount of approximately 25 employees,
including the resignation of the Company's then Chairman, President and Chief
Executive Officer in January 1997.
Amortization and depreciation expense decreased to $8.9 million for the
year ended December 31, 1997 from $11.5 million for the comparable prior year
period. Such decrease was primarily due to a reduction in amortization expense
from the write-off of goodwill and customer lists of $61.7 million in the fourth
quarter of 1996 offset by increased depreciation expense from approximately $4.1
million of laboratory computer equipment and software placed into service at one
of the Company's laboratory locations in the first quarter of 1997.
Selling, general and administrative expenses decreased to $34.6 million
for the year ended December 31, 1997 from $41.8 million for the comparable
prior year period. As a percentage of revenue, selling, general and
administrative expenses were 16.2% and 20.4% for the years ended December 31,
1997 and 1996, respectively. Such decrease related primarily to a reduction in
the level of expenditures incurred in the sales and marketing area, including
revisions in incentive programs and reduction in staffing levels and
organizational and support services, and reduction in corporate managerial and
administrative positions.
Third party interest expense, net increased to $14.1 million for the year
ended December 31, 1997 from $13.4 million for the comparable prior year
period. The increase was primarily due to the full year effect of 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 for the year ended December
31, 1996 reflects interest income on a $15.0 million promissory note the
Company received upon the sale, effective June 30, 1995, of an equity
investment. 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,
12
<PAGE>
Management's Discussion & Analysis of Financial Condition and Results of
Operations
Unilab Corporation December 31, 1997
which reflected the $4.0 million loss in principal plus the write-off of accrued
and unpaid interest of $0.5 million from July 1, 1996 through the sale date.
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
agreements.
Approximately 15% of the Company's revenue for the year ended December 31,
1997 was attributable to tests performed for Medicare beneficiaries. Unilab is
legally required to accept the government's reimbursement for Medicare testing
as payment in full. Such reimbursements are generally made pursuant to fee
schedules, subject to a national limitation amount ("cap") that is based upon
the median of all the Medicare fee schedules. Over the past several years, the
Company has been subject to a drop in the cap, which has reduced revenue earned
on Medicare billings over those years. Effective January 1, 1998, the median
cap reduction was again decreased from 76% to 74%, which the Company estimates
will reduce revenue earned on Medicare billings by approximately 2.5% or $0.8
million in 1998.
In addition to the reduction in reimbursement from the change in the
Medicare fee schedule noted above, certain other governmental and regulatory
developments during 1997, that will continue during 1998, may have a negative
effect on the Company's results of operations. Specifically, during 1997,
Medicare imposed a requirement, effective during 1998, that requires the
provision of diagnosis codes from physicians with respect to the lab test
ordered, in order for Medicare to determine that the test ordered was "medically
necessary" and therefore reimbursable. The Company has expended considerable
efforts to educate and encourage physicians regarding this requirement, but
cannot be assured of the level of compliance with this requirement or the effect
on reimbursement levels from Medicare. Additionally, the Code of Procedural
Terminology ("CPT") for 1998 eliminates the automated multichannel chemistry
panel series and adds instead four new organ disease panels. The automated
multichannel series of tests (CPT 80002 to 80019) were among the most frequently
ordered tests by the Company's clients. HCFA has required that the old
multichannel test codes no longer be billed to Medicare after April 1, 1998. It
is also possible that other payors besides Medicare (such as third party private
insurance), will similarly adopt this billing requirement. The Company has
recently revised its requisition forms to comply with this requirement and is
undertaking considerable efforts to educate physicians and other clients about
the new tests and the way in which the government desires lab tests be ordered
and billed. Notwithstanding these efforts, the results of this CPT change may
have an adverse effect on the Company's financial results.
MediCal (the California Medicaid program) is increasingly reviewing and
effecting shifts of MediCal lab testing business to managed care. To the extent
that this shift results in reimbursement from the MediCal managed care entities
lower than that previously received from MediCal fee for service, the Company's
revenues and financial results may be adversely affected.
Results of Operations
Year ended December 31, 1996 compared to year ended December 31, 1995
Revenue increased to $205.2 million for the year ended December 31, 1996
from $189.0 million for 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
13
<PAGE>
Management's Discussion & Analysis of Financial Condition and Results of
Operations
Unilab Corporation December 31, 1997
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 charge 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 million managerial restructuring expenses
related primarily to a reduction in headcount of approximately 25 employees,
including the resignation 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 the Senior Notes
offering 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 of $0.5 million from July 1,
1996 through the sale date.
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.
Liquidity and Capital Resources
Net cash provided by operating activities during the year ending December
31, 1997 was $3.7 million and reflects an improvement of $8.8 million over the
comparable prior year period when net cash used by operating activities was
$5.1 million. The increase in 1997 was primarily due to the improvement in the
Company's operating performance and continued efficiency in cash collections on
outstanding accounts receivable offset primarily by payments made for
acquisition and restructuring charges recorded in prior years and payments made
on the U.S. Government settlement regarding the Company's sales, marketing and
billing practices.
Net cash used by financing activities was $1.4 million for the year ending
December 31, 1997, primarily resulting from scheduled principal repayments
under capital lease obligations of $1.8 million and the issuance of preferred
dividends of $0.1 million offsets by the proceeds of $0.6 million from the sale
of common stock to a member of the Board of Directors and the Company's former
Chief Executive Officer.
14
<PAGE>
Management's Discussion & Analysis of Financial Condition and Results of
Operations
Unilab Corporation December 31, 1997
Net cash used by investing activities was $3.8 million for the year ended
December 31, 1997, resulting from capital expenditures of $1.9 million and
payments made on acquisitions completed in 1996 and 1995 of $1.8 million. The
Company expects that its capital expenditure requirements, excluding any amounts
related to acquisitions, will approximate $3-$4 million in 1998. Included in the
capital budget is costs related to the Company upgrading and modifying its
laboratory, billing and accounting systems in order for such systems to properly
recognize and perform date calculations in the year 2000 (the "year 2000
issue"). The Company anticipates that it will cost approximately $500,000 for
additional hardware, upgraded software and consulting time to enable the Company
to properly address the year 2000 issue. While the consequences of an incomplete
or untimely resolution of the year 2000 issue could have a significant impact on
the Company finalizing laboratory results, properly billing the numerous
different payor groups and gathering and reporting financial information, the
Company believes that it will adequately resolve the year 2000 issue. The
Company believes it will have all necessary steps to deal with the year 2000
issue in place by late 1998 and early 1999 in order to provide sufficient time
for modifications, if any, prior to the arrival of the year 2000.
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 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.
As of December 31, 1997, the Company had not sold any accounts receivable
under this agreement. Sales of receivables, if any, under the facility are
subject to a liquidity and debt service coverage ratio. The Company was in
compliance with such covenants in 1997. 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.
The Company had $11.7 million of unrestricted cash and cash equivalents on
hand at December 31, 1997 which closely approximated the $12.2 million of
unrestricted cash and cash equivalents the Company had on hand at December 31,
1996. Management believes that the amount of unrestricted cash and cash
equivalents available at December 31, 1997 and borrowing capabilities of $20.0
million under the agreement to sell accounts receivable 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 for the foreseeable future.
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.
Forward Looking Statement
Each of the statements in this Annual Report which are not historical
facts may be deemed to be forward looking statements. These forward looking
statements contain risks and uncertainties and are subject to change based on
various competitive, regulatory, reimbursement, systems and other developments,
that could cause the outcome noted in such forward looking statement to be
materially different. Further information on various factors that could affect
the Company's financial results is included in the Company's Form 10-K for the
year ended December 31, 1997.
15
<PAGE>
Statements of Operations
Unilab Corporation December 31, 1997
(amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the years ended December 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenue $ 214,001 $ 205,217 $ 189,042
- -------------------------------------------------------------------------------------------------------
Direct Laboratory and Field Expenses:
Salaries, wages and benefits 69,094 70,869 65,002
Supplies 29,858 28,631 24,175
Other operating expenses 56,990 54,672 43,700
- -------------------------------------------------------------------------------------------------------
155,942 154,172 132,877
Legal and acquisition related charges -- 4,940 4,400
Restructuring charges -- 65,655 --
Amortization and depreciation 8,885 11,491 9,614
Selling, general and administrative expenses 34,570 41,801 37,612
- -------------------------------------------------------------------------------------------------------
Total Operating Expenses 199,397 278,059 184,503
- -------------------------------------------------------------------------------------------------------
Operating Income (Loss) 14,604 (72,842) 4,539
Other Income (Expenses):
Third party interest, net (14,068) (13,401) (8,994)
Related party interest, net -- 1,279 661
Equity in earnings of affiliate -- -- 250
Loss on sale of equity investment -- -- (36,499)
Loss on sale of promissory note -- (4,529) --
- -------------------------------------------------------------------------------------------------------
Total Other Income (Expenses) (14,068) (16,651) (44,582)
- -------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes and Extraordinary Item 536 (89,493) (40,043)
Tax provision -- -- --
- -------------------------------------------------------------------------------------------------------
Income (Loss) Before Extraordinary Item 536 (89,493) (40,043)
Extraordinary item - loss on early extinguishment of debt -- 3,451 1,732
- -------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 536 $ (92,944) $ (41,775)
- -------------------------------------------------------------------------------------------------------
Preferred Stock Dividends 138 144 144
Net Income (Loss) Available to Common Shareholders $ 398 $ (93,088) $ (41,919)
- -------------------------------------------------------------------------------------------------------
Basic Earnings Per Share:
Income (Loss) Before Extraordinary Item $ 0.01 $ (2.43) $ (1.12)
Extraordinary Item -- (0.10) (0.05)
Net Income (Loss) $ 0.01 $ (2.53) $ (1.17)
- -------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
Balance Sheets
Unilab Corporation December 31, 1997
<TABLE>
<CAPTION>
(amounts in thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------------
December 31,
Assets 1997 1996
- ---------------------------------------------------------------------------------- ------------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 11,652 $ 12,176
Restricted cash -- 904
Accounts receivable, net of allowance for doubtful accounts of $9,819 and
$9,338 in 1997 and 1996, respectively 36,583 37,279
Inventory of supplies 2,811 2,604
Prepaid expenses and other current assets 1,295 1,702
- ----------------------------------------------------------------------------------------------------------------
Total current assets 52,341 54,665
- ----------------------------------------------------------------------------------------------------------------
Property and Equipment, net 13,160 17,264
Goodwill, net of accumulated amortization of $6,368 and $5,067 in 1997 and
1996, respectively 43,699 44,401
Other Intangible Assets, net 2,731 3,637
Other Assets 6,769 5,952
- ----------------------------------------------------------------------------------------------------------------
$ 118,700 $ 125,919
- ----------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- ----------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current portion of long-term debt $ 1,811 $ 1,752
Accounts payable and accrued liabilities 15,678 22,024
Accrued payroll and benefits 6,302 5,976
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 23,791 29,752
- ----------------------------------------------------------------------------------------------------------------
Long-Term Debt, net of current portion 124,285 126,120
Other Liabilities 2,907 4,735
Commitments and Contingencies
Shareholders' Equity:
Convertible preferred stock, $.01 par value; Authorized - 20,000 shares;
Issued and Outstanding - 364 and 400 at December 31, 1997 and 1996, respectively
Liquidation preference - $2,093 4 4
Common stock, $.01 par value; Voting - Authorized - 100,000 shares;
Issued and Outstanding - 40,578 and 37,285 at December 31, 1997 and 1996,
respectively 406 373
Additional paid-in capital 228,052 226,078
Accumulated deficit (260,745) (261,143)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) (32,283) (34,688)
- ----------------------------------------------------------------------------------------------------------------
$ 118,700 $ 125,919
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
Statements of Shareholders' Equity (Deficit)
Unilab Corporation December 31, 1997
For the years ended December 31, 1997, 1996 and 1995
(amounts in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Voting Non-Voting
Common Stock Common Stock
Shares Amount Shares Amount
---------- -------- ----------- --------
<S> <C> <C> <C> <C>
Balances, December 31, 1994 34,296 $343 1,050 $ 10
- -----------------------------------------------------------------------------------------------------------------------
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 1,050 $ 10
- -----------------------------------------------------------------------------------------------------------------------
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 (1,050) (10)
- -----------------------------------------------------------------------------------------------------------------------
Issuance of preferred stock dividend - $0.36 per share -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Net loss -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 37,285 $373 -- $ --
- -----------------------------------------------------------------------------------------------------------------------
Restricted shares issued to employees 15 -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Restricted shares forfeited by employees (20) -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Issuance of shares for Company's 401(k) plan matching contributions 29 -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Issuance of shares to certain Board Directors for services rendered 84 1 -- --
- -----------------------------------------------------------------------------------------------------------------------
Conversion of preferred stock to common stock 36 -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Issuance of shares at $0.625 upon exercise of stock options 75 1 -- --
- -----------------------------------------------------------------------------------------------------------------------
Issuance of shares to the Company's former CEO in connection with
CEO's resignation 500 5 -- --
- -----------------------------------------------------------------------------------------------------------------------
Shares sold to the Company's former CEO pursuant to transition agreements
in connection with CEO's resignation 533 5 -- --
- -----------------------------------------------------------------------------------------------------------------------
Shares sold to Company's current CEO pursuant to an employment agreement 1,143 12 -- --
- -----------------------------------------------------------------------------------------------------------------------
Issuance of shares to Company's current CEO as bonus pursuant to an
employment agreement 229 2 -- --
- -----------------------------------------------------------------------------------------------------------------------
Shares sold to a Board Director pursuant to the 1997 Directors Stock
Purchase Plan 500 5 -- --
- -----------------------------------------------------------------------------------------------------------------------
Issuance of shares to employees as special year-end bonus 169 2 -- --
- -----------------------------------------------------------------------------------------------------------------------
Issuance of preferred stock dividend--$0.36 per share -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Net income -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 40,578 $406 -- $ --
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Convertible Additional Total
Preferred Stock Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity (Deficit)
-------- -------- ------------ -----------------------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1994 400 $ 4 $221,113 $ (126,136) $ 95,334
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of shares in connection with acquisition of MLN -- -- 1,497 -- 1,500
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of shares in connection with a prior acquisition -- -- 558 -- 560
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted shares issued to employees -- -- 149 -- 150
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of shares for Company's 401(k) plan matching contributions -- -- 603 -- 605
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of shares to a bank in connection with the Credit Agreement -- -- 100 -- 100
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of preferred stock dividend - $0.36 per share -- -- -- (144) (144)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss -- -- -- (41,775) (41,775)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1995 400 $ 4 $224,020 $ (168,055) $ 56,330
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of shares in connection with a prior acquisition -- -- 996 -- 1,000
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted shares issued to employees -- -- 350 -- 351
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of shares for Company's 401(k) plan matching contributions -- -- 544 -- 548
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of shares to certain executives in lieu of monthly
cash compensation -- -- 108 -- 110
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of shares to a consultant for services rendered -- -- 43 -- 44
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of shares to certain Board Directors for services rendered -- -- 17 -- 17
- ------------------------------------------------------------------------------------------------------------------------------------
Conversion of non-voting common stock to voting common stock -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of preferred stock dividend - $0.36 per share -- -- -- (144) (144)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loss -- -- -- (92,944) (92,944)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1996 400 $ 4 $226,078 $ (261,143) $ (34,688)
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted shares issued to employees -- -- 237 -- 237
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted shares forfeited by employees -- -- (45) -- (45)
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of shares for Company's 401(k) plan matching contributions -- -- 49 -- 49
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of shares to certain Board Directors for services rendered -- -- 63 -- 64
- ------------------------------------------------------------------------------------------------------------------------------------
Conversion of preferred stock to common stock (36) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of shares at $0.625 upon exercise of stock options -- -- 46 -- 47
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of shares to the Company's former CEO in connection with
CEO's resignation -- -- 214 -- 219
- ------------------------------------------------------------------------------------------------------------------------------------
Shares sold to the Company's former CEO pursuant to transition
agreements in connection with CEO's resignation -- -- 295 -- 300
- ------------------------------------------------------------------------------------------------------------------------------------
Shares sold to Company's current CEO pursuant to an
employment agreement -- -- 488 -- 500
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of shares to Company's current CEO as bonus pursuant
to an employment agreement -- -- 98 -- 100
- ------------------------------------------------------------------------------------------------------------------------------------
Shares sold to a Board Director pursuant to the 1997 Directors
Stock Purchase Plan -- -- 276 -- 281
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of shares to employees as special year-end bonus -- -- 253 -- 255
- ------------------------------------------------------------------------------------------------------------------------------------
Issuance of preferred stock dividend--$0.36 per share -- -- -- (138) (138)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 536 536
- ------------------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1997 364 $ 4 $228,052 $ (260,745) $ (32,283)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
18 & 19
<PAGE>
Statements of Cash Flows
Unilab Corporation December 31, 1997
<TABLE>
<CAPTION>
(in thousands)
- ---------------------------------------------------------------------------------------------------------------------
For the years ended December 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 536 $ (92,944) $(41,775)
Adjustments to reconcile net income (loss) to
net cash provided (used) by operating activities:
Amortization and depreciation 8,885 11,491 9,614
Provision for doubtful accounts 15,663 14,180 12,017
Equity in earnings of affiliate -- -- (250)
Loss on sale of equity investment -- -- 36,499
Loss on sale of promissory note -- 4,529 --
Writeoff of goodwill and customer lists -- 61,645 --
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 (14,967) (11,125) (21,950)
(Increase) decrease in Inventory of supplies (207) (243) 72
Decrease in Prepaid expenses and other current assets 407 117 382
(Increase) decrease in Other assets (1,107) 229 (438)
Increase (decrease) in Accounts payable and accrued liabilities (7,221) 1,112 (3,251)
Increase (decrease) in Accrued payroll and benefits 816 1,504 (59)
Other 910 926 7
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 3,715 (5,128) (7,400)
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Borrowings under third party debt -- 123,490 51,400
Payments of third party debt (1,776) (104,772) (18,776)
Financing costs under the Senior Notes and Receivables Financing -- (4,932) --
Financing costs under credit agreement -- -- (3,325)
Proceeds from the sale of stock 581 -- --
Proceeds from exercise of options 47 -- --
Other (236) -- (244)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (1,384) 13,786 29,055
- ---------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Capital expenditures (1,935) (3,948) (4,435)
Payments for acquisitions, net of cash acquired (1,824) (2,700) (31,401)
Net cash proceeds from sale of equity investment and promissory note -- 11,000 13,000
Other -- -- (240)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (3,759) 4,352 (23,076)
- ---------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash, Restricted Cash and Cash Equivalents (1,428) 13,010 (1,421)
Cash, Restricted Cash and Cash Equivalents - Beginning of Year 13,080 70 1,491
- ---------------------------------------------------------------------------------------------------------------------
Cash, Restricted Cash and Cash Equivalents - End of Year $ 11,652 $ 13,080 $ 70
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<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.
b. Principles of Consolidation
The financial statements include the accounts of the Company in 1997 and 1996
and the Company and its subsidiaries in 1995. 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 Company's $120.0 million of senior notes approximate fair value based on
quotes from brokers. 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, 1997,
1996 and 1995 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.
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 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.
21
<PAGE>
Notes to Financial Statements
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. Earnings Per Common Share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("FAS 128"), "Earnings Per Share,"
which requires the disclosure of a basic and diluted earnings per share. The
implementation of FAS 128 had no impact on the calculation of earnings per share
previously reported for the years ended December 31, 1996 and 1995.
Basic earnings per common share has been computed by dividing the net income
(loss) less preferred dividends by the weighted average number of common shares
outstanding for each period presented. The weighted average number of common
shares used in the calculation of basic earnings per share was 39.9 million,
36.8 million and 35.9 million for the years ended December 31, 1997, 1996 and
1995 respectively.
Diluted earning per share includes the effect of additional common shares
that would have been outstanding if dilutive potential common shares had been
issued. No dilutive securities existed in 1996 or 1995. In 1997, the weighted
average number of dilutive stock options were 0.6 million, which would have had
no effect on the basic earnings per share calculation. The assumed conversion of
the convertible preferred stock is excluded from the calculation since its
effect would be immaterial.
Options to purchase 2.9 million shares of common stock at prices ranging from
$1.19 to $6.875 were outstanding at December 31, 1997 but were not included in
the computation of diluted earnings per share because the options' exercise
price was greater than the average market price for the year of the Company's
common shares.
l. 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) 1997 1996
- ----------------------------------------------------------
Buildings $ 3,166 $ 3,166
Leasehold improvements 5,236 4,954
Laboratory and other equipment 29,700 28,593
Furniture and fixtures 3,391 3,038
- ----------------------------------------------------------
41,493 39,751
- ----------------------------------------------------------
Less accumulated depreciation and
amortization 28,333 22,487
- ----------------------------------------------------------
$13,160 $17,264
- ----------------------------------------------------------
Depreciation expense was approximately $6.0 million in 1997, $5.0 million in
1996 and $4.0 million in 1995.
Other intangible assets consist of the following:
December 31,
(in thousands) 1997 1996
- ----------------------------------------------------------
Customer lists $7,675 $7,675
Covenants not to compete 300 2,495
Other -- 281
- ----------------------------------------------------------
7,975 10,451
- ----------------------------------------------------------
Less accumulated amortization 5,244 6,814
- ----------------------------------------------------------
$2,731 $3,637
- ----------------------------------------------------------
Amortization expense for goodwill, other intangible assets and certain other
deferred costs was approximately $2.9 million in 1997, $6.5 million in 1996 and
$5.6 million in 1995.
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 reduction in
headcount of approximately 100 employees, $1.8 million related to lease
obligations primarily from the closure and
22
<PAGE>
Notes to Financial Statements
downsizing of facilities and approximately $1.0 million for other varied
integration activities. At December 31, 1997, approximately $0.7 million of
liabilities were outstanding, principally related to future lease obligations,
of which $0.4 million has been included in non-current liabilities. The
statements of operations include the results of MLN since the date of
acquisition.
The following unaudited pro forma results of operations for the year ended
December 31, 1995 (in thousands except per share data) have been prepared as if
the acquisition of MLN occurred on January 1, 1994:
- ----------------------------------------------------------
Revenue $198,073
- ----------------------------------------------------------
Net loss (37,774)
- ----------------------------------------------------------
Net loss available to common shareholders (37,918)
- ----------------------------------------------------------
Net loss per share $ (1.05)
- ----------------------------------------------------------
The historical financial results of Unilab for 1995 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 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.
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 resignation
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, 1997, approximately $1.4 million of liabilities were
outstanding, of which $0.2 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 has remaining payments to the U.S. Government of $650,000 due March 1
and September 1, 1998, $500,000 due March 1, 1999 and approximately $324,000 due
on September 1, 1999. All deferred payments to the U.S. Government 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 $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.
23
<PAGE>
Notes to Financial Statements
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) 1997 1996 1995
- ----------------------------------------------------------
Domestic $536 $(92,944) $(42,025)
Foreign -- -- 250
- ----------------------------------------------------------
$536 $(92,944) $(41,775)
- ----------------------------------------------------------
The provision for income taxes is as follows:
Years Ended December 31,
in thousands) 1997 1996 1995
- ----------------------------------------------------------
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) 1997 1996 1995
- -------------------------------------------------------------------------------
Computed income taxes at U.S.
statutory rate $ 188 $(31,601) $(14,204)
- -------------------------------------------------------------------------------
Amortization and write off of goodwill
and intangible assets disallowed for
income tax purposes 420 1,140 959
- -------------------------------------------------------------------------------
Capital and operating losses with
no tax benefit -- 30,461 13,245
- -------------------------------------------------------------------------------
Other (608) -- --
- -------------------------------------------------------------------------------
$ -- $ -- --
- -------------------------------------------------------------------------------
Temporary differences and carryforwards, excluding the capital loss
carryforward discussed below, which give rise to deferred tax assets are as
follows:
December 31,
(in thousands) 1997 1996
- ----------------------------------------------------------
Bad debt reserve $ 2,563 $ 2,382
Intangible assets 11,752 13,396
Property and equipment 383 820
Accrued liabilities 2,254 4,142
Net operating loss carryforwards 21,761 18,825
- ----------------------------------------------------------
38,713 39,565
- ----------------------------------------------------------
Valuation allowance (38,713) (39,565)
- ----------------------------------------------------------
$ -- $ --
- ----------------------------------------------------------
The realization of the deferred tax assets at December 31, 1997 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, 1997 and
1996. 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, 1997 and 1996.
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
2012 and 2000, respectively. At December 31, 1997, available net operating loss
and capital loss carryforwards for U.S. tax purposes were approximately $64.0
million and $36.5 million, respectively. Net operating loss carryforwards for
California state tax purposes were approximately $32.1 million.
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,
1994-
May 31,
(amounts in thousands) 1995
- ----------------------------------------------------------
Condensed income statement information:
Revenue $43,292
Operating income 6,260
Net income 3,854
- ----------------------------------------------------------
24
<PAGE>
Notes to Financial Statements
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) 1997 1996
- -----------------------------------------------------------------------
Senior Notes, interest at 11.0 percent pay-
able semi-annually $119,253 $119,162
Obligation under capital lease collateralized
by land and building with interest due
through 2004 3,054 3,184
Obligations under capital leases
collateralized by equipment with interest
due through 1999 3,789 5,526
- -----------------------------------------------------------------------
126,096 127,872
Less--current portion 1,811 1,752
- -----------------------------------------------------------------------
$124,285 $126,120
- -----------------------------------------------------------------------
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 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, 1997, the unamortized discount
approximated $0.7 million.
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
25
<PAGE>
Notes to Financial Statements
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, 1997, the Company had not sold any accounts receivable
under this agreement. Sales of receivables, if any, under the facility are
subject to a liquidity and debt service coverage ratio. The Company was in
compliance with such covenants in 1997. 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.
In connection with the Company's workers compensation and automobile
liability insurance policies, the Company issued letters of credit in the
aggregate amount of $0.9 million. The letters of credit were collateralized by
cash equivalents in the same amount. Accordingly, $0.9 million was shown as
restricted cash at December 31, 1996. During 1997, the Company eliminated the
letters of credit and secured the workers compensation and automobile liability
insurance policies through cash collateral agreements. Such cash collateral
agreements approximated $0.7 million at December 31, 1997 and are included in
other assets in the balance sheets.
At December 31, 1997, future scheduled principal payments of long-term debt
are as follows (in thousands):
- ----------------------------------------------------------
Years ending December 31,
- ----------------------------------------------------------
1998 $ 1,811
1999 1,205
2000 1,558
2001 442
2002 562
Thereafter 120,518
- ----------------------------------------------------------
$126,096
- ----------------------------------------------------------
10. Capital Shares, Stock Options and Warrants
a. Convertible Preferred Stock
As of December 31, 1997, 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, 1997, 18,600,000 shares for
which no series has been designated were authorized and unissued.
The Company has 364,000 shares of convertible preferred stock outstanding at
December 31, 1997. 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.
36,000 shares of preferred shares were converted into common stock during 1997.
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 the Company's May 1996 annual meeting of stockholders, an amendment to the
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 15,000 restricted shares, 99,500 restricted shares and
117,500 restricted shares of common stock to certain employees at no cost in
1997, 1996 and 1995, 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. At December
31, 1997, 228,500 restricted shares were outstanding and approximately $192,000,
$351,000 and $150,000 was amortized to expense in 1997, 1996 and 1995,
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.
26
<PAGE>
Notes to Financial Statements
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, 1997
and 1996, 2,202,334 and 747,167 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 April 1997, the Company reserved 1,500,000 shares under a plan whereby
members of the Company's Board of Directors may purchase common shares at the
then current market price of the shares (the "1997 Directors Stock Purchase
Plan"). 500,000 shares were purchased in 1997 and 1,000,000 shares remain
outstanding under the 1997 Directors Stock Purchase Plan at December 31, 1997.
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, 1997 and 1996, 200,000 and 120,000 options, respectively,
were outstanding under the aggregate of the 1996 and 1995 Directors Plans.
Other
Prior to the adoption of the 1996 Option Plan and the 1996 Directors Plan,
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, 1995, 1996 and 1997, and changes during the years
ending on those dates is summarized as follows:
Weighted-Average
Shares Exercise Price
- ----------------------------------------------------------
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
- ----------------------------------------------------------
Granted 1,751,000 0.62
Exercised (75,000) 0.63
Forfeited (999,166) 4.76
- ----------------------------------------------------------
December 31, 1997 4,556,334 3.21
- ----------------------------------------------------------
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, 1997 expire
in various years through the year 2007. Options exercisable at December 31,
1997, 1996 and 1995 were 2,940,907, 3,049,255 and 2,621,000, respectively.
The weighted average fair value of options granted during 1997, 1996 and 1995
were $0.55, $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 1997, 1996
and 1995, respectively: risk-free interest rates of 6.9 percent, 6.1 percent and
7.4 percent; expected lives of 9.09 years, 8.49 years and 7.03 years; expected
volatility of 91.7 percent, 95.60 percent and 99.07 percent and no dividends
would be issued during the option terms.
27
<PAGE>
Notes to Financial Statements
Information about stock options outstanding at December 31, 1997 is
summarized as follows:
Options Outstanding
- --------------------------------------------------------------------------------
Number Weighted-Average Weighted-
Range of Outstanding Remaining Average
Exercise Prices at 12/31/97 Contracted Life Exercise Price
- --------------------------------------------------------------------------------
$0.438 to $2.0 1,838,000 8.6 years $ 0.75
$2.063 to $4.0 534,167 7.4 $ 2.30
$4.125 to $6.875 2,184,167 6.0 $ 5.48
- --------------------------------------------------------------------------------
4,556,334 7.2 $ 3.21
- --------------------------------------------------------------------------------
Options Outstanding
- --------------------------------------------------------------------------------
Number
Range of Exercisable Weighted-Average
Exercise Prices at 12/31/97 Exercise Price
- --------------------------------------------------------------------------------
$0.438 to $2.0 412,666 $ 1.15
$2.063 to $4.0 404,417 $ 2.33
$4.125 to $6.875 2,123,824 $ 5.50
- --------------------------------------------------------------------------------
2,940,907 $ 4.46
- --------------------------------------------------------------------------------
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) 1997 1996 1995
- --------------------------------------------------------------------------------
Net income As Reported $ 536 $(92,944) $(41,775)
(loss) Pro Forma $ (508) $(94,391) $(43,549)
- --------------------------------------------------------------------------------
Net income
(loss) As Reported $ 0.01 $ (2.53) $ (1.17)
per share Pro Forma $(0.01) $ (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. 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
The Company sold 533,333 shares, valued at $0.3 million at the time of
issuance, to its former CEO pursuant to transition agreements between the former
CEO and the Company in connection with the CEO's resignation in January 1997.
The Company extended a $0.5 million loan to its current CEO for the purchase of
1.1 million shares of the Company's common stock in January 1997. The CEO repaid
$250,000 of the loan during the year and the remaining $250,000 is due in
January 2002. The loan bears interest at 6% and is payable quarterly. In
addition, in 1997, the Company sold 500,000 shares, valued at approximately $0.3
million at the time of issuance, to a director of the Company pursuant to the
1997 Directors Stock Purchase Plan. Each of these transactions were consummated
at the then prevailing market price of the Company's common stock.
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.
The Company extended a loan of $1.0 million in 1992 to the Company's then
Chief Executive Officer ("Former CEO") for the purchase of a residence in
connection with the officer's relocation to California. During 1994, the Former
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 Former CEO, the
outstanding loan balance of $0.5 million was forgiven and the Former CEO has
agreed to sell the
28
<PAGE>
Notes to Financial Statements
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, the Company guaranteed another loan of
$0.4 million at December 31, 1997 made by a bank to an executive of the
Company. The loan was used to purchase a residence and such residence serves as
collateral for the Company's guarantee.
12. Commitments and Contingencies
Property and equipment leased under capital leases is as follows:
December 31,
(in thousands) 1997 1996
- ----------------------------------------------------------
Building $3,100 $3,100
Laboratory and other equipment 7,283 7,957
Less--Accumulated amortization 5,158 3,760
- ----------------------------------------------------------
Net leased property under capital
leases $5,225 $7,297
- ----------------------------------------------------------
As of December 31, 1997, 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
- ----------------------------------------------------------
1998 $2,632 $ 7,736
1999 1,854 5,207
2000 2,039 3,448
2001 782 2,268
2002 822 1,788
Thereafter 1,457 2,133
- ----------------------------------------------------------
Total minimum lease payments 9,586 $22,580
Less: Amount representing interest 2,743
- ----------------------------------------------------------
Present value of net minimum lease
payments $6,843
- ----------------------------------------------------------
Rental expense for operating leases was approximately $10.2 million, $9.6
million and $9.4 million in 1997, 1996 and 1995, respectively.
The Company has employment agreements with its principal officers and
certain other key employees. Such agreements expire at various dates through
November 10, 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 employees 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 $3.0 million. The Company may
terminate the employment agreements without cause on specified advance notice 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 times 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, deferred compensation,
continuation of benefits or acceleration of stock options, is approximately $4.6
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 $0.1 million, $0.5 million and
$0.6 million for the years ended December 31, 1997, 1996 and 1995, respectively.
Effective January 1, 1995, the Company contributions, which were previously made
in cash, were made in shares of Unilab common stock. From September 1, 1996 to
September 30, 1997, the Company discontinued its matching contributions.
Effective October 1, 1997, the Company partially re-instated its matching
contributions. Such contributions were made in shares of Unilab common stock.
Effective January 1, 1998, the Company plans to make Company contributions in
cash, which will be used to purchase Company common stock by the plan's trustee.
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 earned each year is
issued into participants' account through memorandum shares, which represent
rights to receive stock of the Company at a future date. The SERP limits the
aggregate number of shares issued annually to 200,000 shares and the memorandum
shares granted each year vest ratably over a three year period. As of December
31, 1997, 307,067 memorandum shares were outstanding, of which 173,446 were
vested at December 31, 1997. The benefit formula to determine amounts earned by
participants is primarily based on the employee's final five-year average
compensation and years of service. Compensation expense is recorded each year
for the amount of shares that vest and changes in the price of the Company's
common stock. Pension
29
<PAGE>
Notes to Financial Statements
(income) expense for the SERP was approximately, $271,000, ($153,000) and
$207,000 in 1997, 1996 and 1995, respectively. At December 31, 1997, the
accumulated obligation recognized as a liability in the balance sheet was
approximately $325,000. The weighted average discount rate and rate of increase
in future compensation levels used in determining the present value of benefit
obligations were 6.6% and 3.8% in 1997, 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) 1997 1996 1995
- --------------------------------------------------------------------------------
Cash paid during the year for:
Interest $14,063 $12,139 $ 9,253
Income taxes 1 9 3
Supplemental Disclosure of
Noncash Investing and
Financing Activities:
Restricted shares of common
stock issued to employees 16 107 598
Shares issued for Company's
401(k) plan matching
contributions 49 548 605
Shares issued to a bank in
connection with the Credit
Agreement -- -- 100
Shares issued to certain Board
Directors and a consultant for
services rendered 64 61 --
Payment of purchase price for a
prior acquisition in common
shares -- 1,000 560
- --------------------------------------------------------------------------------
In connection with business
acquisitions, liabilities were
assumed as follows:
Fair value of assets acquired $ -- $ -- $42,697
Cash paid -- -- (31,401)
Value of common stock issued -- -- (1,500)
- --------------------------------------------------------------------------------
Liabilities assumed $ -- $ -- $ 9,796
- --------------------------------------------------------------------------------
During 1997, the Company issued 500,000 shares, valued at $0.2 million at
the time of issuance, to the Company's former CEO in connection with the CEO's
resignation. In 1997, the Company also issued 228,571 shares, valued at $0.1
million at the time of issuance, to the Company's current CEO as a bonus
pursuant to an employment agreement. In addition, the Company issued in 1997
approximately 169,000 shares, valued at $0.3 million at the time of issuance, to
all full-time employees as a special year-end bonus.
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, capital lease obligations of approximately $4.0 million 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 1997 and 1996 (in
thousands, except per share data) is as follows:
Year Ended December 31, 1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Revenue $53,033 $54,027 $54,238 $52,703
- --------------------------------------------------------------------------------
Direct laboratory and field
expenses:
Salaries, wages and benefits 17,820 17,352 17,174 16,748
Supplies 7,551 7,616 7,488 7,203
Other operating expenses 13,982 14,593 14,649 13,766
Total 39,353 39,561 39,311 37,717
- --------------------------------------------------------------------------------
Amortization and
depreciation 2,153 2,312 2,210 2,210
- --------------------------------------------------------------------------------
Selling, general and
administrative expenses 9,155 8,539 8,491 8,385
- --------------------------------------------------------------------------------
Operating income 2,372 3,615 4,226 4,391
- --------------------------------------------------------------------------------
Net income (loss) (1,135) 54 691 926
- --------------------------------------------------------------------------------
Net income (loss)
available to
common shareholders (1,171) 18 655 896
- --------------------------------------------------------------------------------
Per common share data:
Net income (loss) $ 0.03) $ 0.00 $ 0.02 $ 0.02
- --------------------------------------------------------------------------------
Price Range:
High 0.875 1.125 1.813 2.125
- --------------------------------------------------------------------------------
Low 0.438 0.563 1.125 1.50
- --------------------------------------------------------------------------------
30
<PAGE>
Notes to Financial Statements
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
administrative 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
- --------------------------------------------------------------------------------
Fourth Quarter - 1997
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 - 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.
31
<PAGE>
Report of Independent Public Accountants
Unilab Corporation December 31, 1997
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, 1997 and 1996, and the related
statements of operations, shareholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
/s/ Arthur Anderson LLP
Los Angeles, California
February 13, 1998
32
Exhibit 21.1
Subsidiaries of the Company
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.
/s/ David C. Weavil
-------------------
David C. Weavil
Exhibit 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, Haywood D. Cochrane, Jr., 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 17th day of June 1997.
/s/ Haywood D. Cochrane
-----------------------
Haywood D. Cochrane, Jr.
Exhibit 24.3
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.
/s/ Kirby L. Cramer
-------------------
Kirby L. Cramer
Exhibit 24.4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, Bill Gedale, in my individual
capacity and as Director of Unilab Corporation, a Delaware corporation (the
"Company"), hereby constitute and appoint Mark L. Bibi, David C. Weavil 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 17th day of September 1997.
/s/ William Gedale
------------------
William Gedale
Exhibit 24.5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, Richard A. Michaelson, in my
individual capacity and as Director of Unilab Corporation, a Delaware
corporation (the "Company"), hereby constitute and appoint Mark L. Bibi, David
C. Weavil 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 18th day of March, 1998.
/s/ Richard A. Michaelson
--------------------------
Richard A. Michaelson
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.
/s/ Gabriel B. Thomas
---------------------
Gabriel B. Thomas
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000899714
<NAME> UNILAB CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 11,652
<SECURITIES> 0
<RECEIVABLES> 46,402
<ALLOWANCES> (9,819)
<INVENTORY> 2,811
<CURRENT-ASSETS> 52,341
<PP&E> 41,493
<DEPRECIATION> (28,333)
<TOTAL-ASSETS> 118,700
<CURRENT-LIABILITIES> 23,791
<BONDS> 124,285
0
4
<COMMON> 406
<OTHER-SE> (32,693)
<TOTAL-LIABILITY-AND-EQUITY> 118,700
<SALES> 214,001
<TOTAL-REVENUES> 214,001
<CGS> 0
<TOTAL-COSTS> 155,942
<OTHER-EXPENSES> 27,792
<LOSS-PROVISION> 15,663
<INTEREST-EXPENSE> 14,068
<INCOME-PRETAX> 536
<INCOME-TAX> 0
<INCOME-CONTINUING> 536
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 536
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
Exhibit 99.1
PRESS RELEASE Unilab Corporation
(AMEX:ULB)
18448 Oxnard Street
Tarzana, CA 91356
www.Unilab.com
For Further Information:
Charles Kim
Phone: (818) 758-6607
e-mail: [email protected]
IMMEDIATE RELEASE
February 4, 1998
UNILAB CORPORATION ANNOUNCES 1997 RESULTS
TARZANA, CA, February 4, 1998 -- UNILAB Corporation (AMEX: ULB) announced today
that net sales for the year ended December 31, 1997 were $214.0 million, an
increase of 4.3% from $205.2 million in the prior year. The Company reported net
income for the year of $0.5 million, or $.01 per common share, compared to a net
loss of $92.9 million, or $(2.53) per common share in the prior year. Excluding
the approximately $78.5 million in nonrecurring charges in 1996, the prior
year's net loss was $14.4 million, or $(0.39) per common share.
Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") were
$23.5 million for 1997, or 11.0% of sales, compared to $9.2 million, or 4.5% of
sales, for the prior year.
For the quarter ended December 31, 1997, net sales were $52.7 million, an
increase of 7.7% from the $48.9 million in the same period in the prior year.
EBITDA for the quarter was a record $6.6 million, or 12.5% of sales, compared
with $0.1 million (exclusive of non-recurring charges) earned in the fourth
quarter of 1996. The fourth quarter EBITDA represents the first time in the
Company's history that the seasonally weaker fourth quarter has exceeded the
prior quarter's earnings.
David Weavil, Unilab's Chairman and CEO, said "1997 has been a watershed year
for Unilab. Four sequential quarters of rising EBITDA was the product of
effective and timely execution of the Company's 1997 action plan by a focused
management team."
Weavil added "We've achieved steady progress in 1997 on the two primary
objectives we laid out at the beginning of the year. First, the Company targeted
contractual price increases and service restructuring to insure that those
critical aspects of customer agreements became more rational. Second, we
redoubled our efforts to be a lower cost laboratory services provider by
improving our processes and eliminating expenses that don't add real and
perceived value to
<PAGE>
patient care. These initiatives address the basic pervasive challenges facing
many healthcare companies these days. I am pleased that most of our customers
have been supportive of our efforts and value a relationship with an efficient
and high quality laboratory. Among our chief goals in 1998 will be the further
development of the Company's operating fundamentals; process enhancements,
baseline cost reductions, targeted growth and customer contract reviews. Most
importantly, as a result of the foundation laid in 1997 by our improved
financial performance, we feel that Unilab now has a stable base from which to
continue building."
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.
- tables to follow -
<PAGE>
Unilab Corporation
Statement of Operations
(amounts in thousands, except per share data)
Three months Year ended
ended Dec. 31, Dec. 31,
1997 1996 1997 1996
---- ---- ---- ----
Revenue $52,703 $ 48,948 $214,001 $205,217
Direct Laboratory and Field Expenses:
Salaries, Wages and Benefits 16,748 18,061 69,094 70,869
Supplies 7,203 7,317 29,858 28,631
Other Operating Expenses 13,766 14,159 56,990 54,672
------- -------- -------- --------
37,717 39,537 155,942 154,172
------- -------- -------- --------
Legal and Acquisition Related Charges -- -- -- 4,940
Restructuring Charges -- 65,655 -- 65,655
Amortization and Depreciation 2,210 2,846 8,885 11,491
Selling, General and
Administrative Expenses 8,385 9,340 34,570 41,801
------- -------- -------- --------
Total Operating Expenses 48,312 117,378 199,397 278,059
------- -------- -------- --------
Operating Income (Loss) 4,391 (68,430) 14,604 (72,842)
Other Income (Expenses):
Interest Expense, net (3,465) (3,423) (14,068) (12,122)
Loss on Sale of Promissory Note -- (4,529) -- (4,529)
------- -------- -------- --------
Income (Loss) Before Income Taxes
and Extraordinary Item 926 (76,382) 536 (89,493)
Extraordinary Item - Loss on Early
Extinguishment of Debt -- -- -- 3,451
--------
Net Income (Loss) 926 (76,382) 536 (92,944)
Preferred Stock Dividends 30 36 138 144
------- -------- -------- --------
Net Income (Loss) Available to
Common Stockholders $ 896 ($76,418) $ 398 ($93,088)
Basic Earnings per Share:
Income (Loss) Before Extraordinary
Item $ 0.02 ($ 2.08) $ 0.01 ($ 2.43)
Extraordinary Item -- -- -- ($ 0.10)
Net Income (Loss) $ 0.02 ($ 2.08) $ 0.01 ($ 2.53)
Weighted Average Common
Shares Outstanding 40,393 37,236 39,927 36,831
EBITDA, excluding legal and acquisition
related charges, restructuring
charges and extraordinary item $ 6,601 $ 71 $ 23,489 $ 9,244
<PAGE>
Unilab Corporation
Balance Sheet
(amounts in thousands)
December 31 December 31,
1997 1996
---- ----
Cash and Cash Equivalents $ 11,652 $ 12,176
Restricted Cash -- 904
Accounts Receivable, net 36,583 37,279
Other Current Assets 4,106 4,306
--------- ---------
Total Current Assets 52,341 54,665
Fixed Assets, net 13,160 17,264
Goodwill and Other Intangible Assets 46,430 48,038
Other Assets 6,769 5,952
--------- ---------
Total Assets $ 118,700 $ 125,919
--------- ---------
Total Current Liabilities 23,791 29,752
Long-Term Debt, net of current portion 124,285 126,120
Other Liabilities 2,907 4,735
Total Shareholders' Deficit (32,283) (34,688)
--------- ---------
Total Liabilities and Shareholders' Deficit $ 118,700 $ 125,919
--------- ---------
