SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22758
UNILAB CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-4415490
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
18448 Oxnard Street, Tarzana, California 91356
(Address of principal executive offices) (Zip Code)
(818) 996-7300
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of October 29, 1999, 42,020,906 shares of Registrant's Common Stock, par
value $.01 per share, were outstanding.
Page 1 of 16 pages
<PAGE>
UNILAB CORPORATION
Form 10-Q for the Quarterly Period Ended September 30, 1999
INDEX
Page
Part I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Balance Sheets - September 30, 1999 3
and December 31, 1998.
Statements of Operations -
Three and nine month periods ended
September 30, 1999 and 1998. 4
Statements of Cash Flows -
Nine month periods ended September 30, 1999
and 1998. 5
Notes to Financial Statements. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
Part II - OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
<TABLE>
UNILAB CORPORATION
BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(amounts in thousands, except per share data)
<CAPTION>
September 30, December 31,
1999 1998
Assets (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $25,753 $20,137
Restricted cash 5,497 -
Accounts receivable, net 55,830 41,326
Inventory of supplies 3,970 3,055
Prepaid expenses and other current assets 2,346 1,045
- -------------------------------------------------------------------------------------------------------------------
Total current assets 93,396 65,563
Property and Equipment, net 13,009 11,277
Deferred Tax Asset 16,558 -
Goodwill, net 83,347 56,949
Other Intangible Assets, net 1,922 2,370
Other Assets 5,168 6,301
- -------------------------------------------------------------------------------------------------------------------
$213,400 $142,460
- -------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- -------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Current portion of long-term debt $1,763 $1,206
Accounts payable and accrued liabilities 23,236 14,533
Accrued payroll and benefits 10,336 6,892
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 35,335 22,631
- -------------------------------------------------------------------------------------------------------------------
Long-Term Debt, net of current portion 160,778 137,170
Other Liabilities 5,251 4,026
Commitments and Contingencies
Shareholders' Equity (Deficit):
Convertible preferred stock, $.01 par value
Issued and Outstanding - 364 at September 30
and December 31 4 4
Common stock, $.01 par value
Issued and Outstanding - 42,016 at September 30
and 40,708 at December 31 420 407
Additional paid-in capital 231,973 228,395
Accumulated deficit (220,361) (250,173)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) 12,036 (21,367)
- -----------------------------------------------------------------------------------------------------------
$213,400 $142,460
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
UNILAB CORPORATION
STATEMENTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
(amounts in thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $76,210 $53,160 $213,496 $162,046
- ----------------------------------------------------------------------------------------------------------------
Direct Laboratory and Field Expenses:
Salaries, wages and benefits 22,940 16,255 63,226 49,645
Supplies 11,307 7,480 30,653 22,585
Other operating expenses 18,855 13,075 53,254 39,404
--------------------------------------------------------
53,102 36,810 147,133 111,634
Legal charge - - 600 -
Amortization and depreciation 3,062 1,848 7,189 5,774
Selling, general and administrative expenses 10,120 8,132 29,323 24,990
- ----------------------------------------------------------------------------------------------------------------
Total Operating Expenses 66,284 46,790 184,245 142,398
- ----------------------------------------------------------------------------------------------------------------
Operating Income 9,926 6,370 29,251 19,648
Third party interest, net (3,978) (3,308) (11,244) (10,068)
- -----------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 5,948 3,062 18,007 9,580
Tax Benefit 11,904 - 11,904 -
- ----------------------------------------------------------------------------------------------------------------
Net Income $17,852 $3,062 $29,911 $9,580
- ----------------------------------------------------------------------------------------------------------------
Preferred Stock Dividends $33 $33 $99 $99
Net Income Available to Common
Shareholders $17,819 $3,029 $29,812 $9,481
Earnings Per Share:
Basic $0.42 $0.07 $0.72 $0.22
Diluted $0.36 $0.07 $0.63 $0.22
- ----------------------------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
UNILAB CORPORATION
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(amounts in thousands)
(Unaudited)
<CAPTION>
Nine months ended September 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $29,911 $9,580
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization and depreciation 7,189 5,774
Provision for doubtful accounts 15,376 11,697
Deferred tax benefit (11,904) -
Net changes in assets and liabilities affecting operations, net of acquisitions:
Increase in Accounts receivable (21,189) (15,508)
(Increase) Decrease in Inventory of supplies (378) 35
Increase in Prepaid expenses and other current assets (1,301) (286)
(Increase) Decrease in Other assets 697 (147)
Increase (Decrease) in Accounts payable and accrued liabilities 4,683 (820)
Increase in Accrued payroll and benefits 2,118 1,946
Other 99 319
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 25,301 12,590
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of third party debt (835) (1,303)
Proceeds from exercise of stock options 253 15
Other (99) (99)
- ----------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (681) (1,387)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,903) (2,335)
Payments for acquisitions, net of cash acquired (8,604) (619)
- ----------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (13,507) (2,954)
- ----------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH, CASH EQUIVALENTS
AND RESTRICTED CASH 11,113 8,249
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
- Beginning of Period 20,137 11,652
- ----------------------------------------------------------------------------------------------------------------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
- End of Period $31,250 $19,901
- ----------------------------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
UNILAB CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Management Opinion
In the opinion of management, the accompanying unaudited interim
financial statements reflect all adjustments which are necessary to
present fairly the financial position, results of operations and cash
flows for the interim periods reported. All such adjustments made were
of a normal recurring nature.
The accompanying interim financial statements and related notes should be
read in conjunction with the financial statements of Unilab Corporation
("Unilab" or the "Company") and related notes as contained in the Annual
Report on Forms 10-K and 10-K/A for the year ended December 31, 1998.
2. Net Income Per Share
Basic earnings per common share has been computed by dividing the net
income 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
42.0 million and 40.7 million for the three months ended September 30,
1999 and 1998, respectively and 41.4 million and 40.7 million for the
nine months ended September 30, 1999 and 1998, respectively.
Diluted earnings per share includes the effect of additional common
shares that would have been outstanding if dilutive potential common
shares had been issued plus a reduction of interest expense assuming
conversion of the convertible debt. For the three and nine month periods
ended September 30, 1998, the weighted average number of dilutive stock
options were 1.3 million and 1.5 million respectively, which would have
had no effect on the basic earnings per share calculation. For the three
and nine month periods ended September 30, 1999, the weighted average
number of dilutive stock options were 2.7 million and 2.3 million,
respectively, and both periods include the incremental shares from the
assumed conversion of the $14.0 million subordinated convertible note of
4.7 million, which reduced the earnings per share calculation by $0.06
and $0.09, respectively.
Without the benefit from the reduction in the valuation allowance
previously recorded against the Company's deferred tax assets as
discussed in Note 4, basic and diluted earnings per share would have been
$0.14 and $0.13 per share, respectively, for the three month period ended
September 30, 1999 and $0.43 and $0.39 per share, respectively, for the
nine month period ended September 30, 1999.
3. Acquisitions
On September 16, 1998, the Company and Meris Laboratories, Inc. ("Meris")
signed an asset purchase agreement whereby Unilab acquired substantially
all of the assets of Meris. The agreement was approved on October 28,
1998 by the United States Bankruptcy Court in Los Angeles, California and
Unilab took possession of the acquired net assets on November 5, 1998.
The purchase price consisted of the issuance of a $14.0 million
convertible subordinated note, $2.5 million in cash payable in
seventy-two equal monthly installments and the assumption of net assets
of $3.5 million, consisting primarily of accounts receivable. The
acquisition was accounted for under the purchase method of accounting and
the statements of operations include the results of Meris since November
5, 1998.
The purchase price was allocated to the net assets acquired based on
their fair value at the date of acquisition, as follows:
(in thousands)
Accounts receivable $3,251
Inventory of supplies 138
Property and equipment 175
Goodwill 14,889
Other intangible assets-non-compete agreements 235
Other assets 46
--
Assets acquired 18,734
======
Issuance of convertible subordinated notes 14,000
Accrued employee benefits 306
Assumed accounts payable 2,520
Liabilities associated with integration period 1,400
Acquisition fees, primarily legal costs 508
---
Liabilities assumed or incurred $18,734
As noted in the table above and in connection with the integration of the
acquired Meris operations with those of Unilab, the Company recorded
liabilities of $1.4 million, primarily related to severance (for the
reduction in headcount of approximately 230 employees) and other employee
related liabilities. At September 30, 1999, all significant liabilities
have been paid in connection with the integration.
On April 5, 1999, the Company and Physicians Clinical Laboratory, Inc.
(doing business as Bio-Cypher Laboratories) ("BCL") signed an asset
purchase agreement whereby Unilab acquired substantially all of the
assets of BCL. The acquisition was completed on May 10, 1999. The
purchase price consisted of a $25.0 million subordinated promissory note,
the issuance of 1.0 million shares of Unilab common stock and
approximately $8.6 million of cash. In addition, Unilab acquired $9.6
million of tangible assets, the majority of which are trade accounts
receivable, and assumed liabilities of approximately $4.3 million. The
acquisition was accounted for under the purchase method of accounting and
the statements of operations include the results of BCL since May 10,
1999.
The purchase price was allocated to the assets acquired based on their
fair value at the date of acquisition as follows:
(in thousands)
Accounts receivable $8,691
Inventory of supplies 537
Property and equipment 358
Goodwill 33,839
------
Assets acquired 43,425
======
Issuance of note 25,000
Accrued payroll and benefits 1,987
Assumed accounts payable 2,275
Liabilities associated with integration period 1,957
Acquisition fees, primarily legal costs 350
Cash payment 8,606
Common stock issued 3,250
-----
Purchase Price/Liabilities assumed or incurred $43,425
As noted in the table above and in connection with the integration of the
acquired BCL operations with those of Unilab, the Company recorded
liabilities of $2.0 million, primarily related to severance (for the
reduction in headcount of over 500 employees), relocation and moving
expenses and other employee related liabilities. At September 30, 1999,
approximately $1.2 million of liabilities, expected to be paid primarily
in the next six months were outstanding.
Based upon the final review and valuation of certain assets acquired in
the Meris and BCL acquisitions, the Company has changed its estimate of
goodwill amortization arising from these acquisitions to a 10-year period
effective July 1, 1999. The effect of the change was to increase
amortization expense by $0.6 million and decrease net income by $0.6
million or $0.01 per diluted common share for the three month period
ended September 30, 1999 and $0.02 per diluted common share for the nine
month period ended September 30, 1999.
4. Income Taxes
The Company did not recognize an income tax provision for the three and
nine month periods ended September 30, 1999 and 1998. During these
periods the Company reduced the valuation allowance against its deferred
tax assets, which offset any potential income tax provision.
The Company establishes a valuation allowance in accordance with the
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". The Company continually reviews the
adequacy of the valuation allowance and recognizes the benefits from its
deferred tax assets only when an analysis of both positive and negative
factors indicate that it is more likely than not that the benefits will
be realized. The Company has approximately $29.6 million of deferred tax
assets at September 30, 1999. Based on the Company's improved operating
performance in 1998 and 1999, having fully integrated the Meris
acquisition and being substantially complete with the BCL integration,
the Company believes it will have sufficient future taxable income to
reduce its valuation allowance by approximately $16.6 at September 30,
1999. The Company's estimate of future taxable income considers the
completion of the merger agreement, and the Company's more highly
leveraged position, as discussed in Note 7.
Approximately $4.7 million of the tax asset recorded at September 30,
1999 reduced the amount of goodwill from certain acquisitions and the
remaining amount of the benefit was recognized as an income tax benefit
in the statements of operations for the three and nine month periods
ended September 30, 1999. If the Company does not further reduce its
valuation allowance in the future, the Company expects to have an
effective tax rate of approximately 42% on a going forward basis.
5. Legal Matters
The Company is currently in settlement negotiations with a group of
insurance companies regarding claims by the insurance companies that the
Company over-billed them in the early to mid-1990s in connection with
several chemistry profile tests that were previously the subject of a
settlement agreement with the government. While no formal settlement
agreement with the insurance companies has been executed, the Company
believes that it is likely that it will do so for a settlement amount of
approximately $600,000, and such amount has been reflected as a charge in
the statement of operations for the second quarter of 1999.
In May of 1999, Unilab learned of a new federal investigation under the
False Claims Act relating to Unilab's billing practices for the following
four test procedures: (1) apolipoprotein in conjunction with coronary
risk panel assignments; (2) microscopic evaluation in conjunction with
urinalysis; (3) performance of T7 index in conjunction with T3 and T4
tests; and (4) fragmenting billing of unlisted panel codes. Unilab is in
the process of gathering and voluntarily submitting documentation
regarding these tests to the Department of Justice. The Company accrues
for potential liabilities in matters such as this as they become known
and can be reasonably estimated. In the Company's opinion, this
investigation is not reasonably likely to have a material adverse effect
on the Company's results of operations or financial position. However, no
assurance can be given as to the ultimate outcome with respect to such
investigation. The resolution of such investigation could be material to
the Company's operating results for any particular period, depending upon
the level of income for such period.
6. Supplemental Disclosure of Cash Flow Information
(amounts in thousands) Nine months ended September 30,
1999 1998
Cash paid during the period for:
Interest, net $6,954 $6,821
Income taxes 421 2
In connection with business acquisitions, liabilities were assumed as
follows:
Nine months ended September 30,
1999 1998
Fair value of asset acquired $43,425 -
Cash paid 8,606 -
Value of common stock issued 3,250 -
----- -------------
Liabilities assumed $31,569 -
======= ============
7. Pending Transaction
On May 25, 1999, the Company signed a definitive agreement to merge with
UC Acquisition Sub, Inc., a corporation formed by Kelso & Company
("Kelso"). Kelso is a private investment firm based in New York. The
transaction is valued at approximately $437 million, including
indebtedness of approximately $145 million which will be refinanced.
Unilab will continue to operate as an independent company under its
current name.
Pursuant to a merger agreement, all but approximately 1.8 million shares
of common stock of the Company (approximately 7% of the Company's
post-merger shares outstanding) will be converted into the right to
receive $5.85 per common share in cash, with the Company's current
stockholders retaining those 1.8 million shares. Unilab currently has
42.0 million shares of common stock outstanding, excluding outstanding
options and convertible securities. Following the merger, Kelso and its
affiliates are expected to own approximately 93% of the Company's
outstanding shares. Kelso and its affiliates will invest approximately
$139 million of equity in the transaction. The transaction is structured
to be accounted for as a recapitalization for accounting purposes.
As part of the Company's refinancing of its existing indebtedness and
obtaining additional financing to pay the merger consideration, the
Company sold $155 million of 10-year notes (the "Senior Notes") in a
private placement in the Rule 144A market. Interest on the Senior Notes
is 12.75% 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 were issued at a discounted rate of 97.268%
per note. The aggregate discount on the Senior Notes approximated $4.2
million and will be charged to operations as additional interest expense
over the life of the Senior Notes using the interest method starting at
the completion of the merger agreement. In order to complete the Senior
Notes offering, the Company was required to place in escrow $5.6 million,
which represents interest expense on the Senior Notes from September 28,
1999 through January 20, 2000 (the mandatory redemption date of the
Senior Notes if the merger agreement is not finalized by January 20,
2000), offset by the expected interest income earned on the escrow
deposit. In addition, the Company was required to place in escrow a
breakage premium of 1% of the net proceeds from the Senior Notes offering
in the event the merger agreement is not finalized. Net interest of
approximately $103,000 was earned on the Senior Notes from September 28
through September 30 and the remaining escrow balance of approximately
$5.5 million has been shown as restricted cash on the Company's balance
sheet at September 30, 1999.
The Company mailed a Proxy Statement to shareholders on October 26, 1999
asking shareholders to approve the merger agreement at a special meeting
of shareholders scheduled for November 23, 1999. The merger is subject to
approval by the Company's shareholders and other customary conditions.
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Three and Nine Month Periods Ended September 30, 1999 Compared with the
Three and Nine Month Periods Ended September 30, 1998
Revenue. Revenue increased to $76.2 million and $213.5 million for the
three and nine month periods ended September 30, 1999 from $53.2 million
and $162.0 million for the comparable prior year periods, representing
increases of $23.0 million or 43.4% and $51.5 million or 31.8%,
respectively. Approximately $16.4 and $36.4 million of the increases for
the three and nine month periods ended September 30, 1999 were attributable
to revenue generated from the acquisitions of Meris, effective November 5,
1998 and BCL, effective May 10, 1999. Exclusive of the acquired Meris and
BCL businesses, revenue increased $6.6 million and $15.1 million for the
respective periods, primarily the result of increases in reimbursement
levels of $4.2 million and $8.5 million, respectively, and additional
specimen volume generating $2.4 million and $6.6 million, respectively.
The Company experienced a 7.6% and 5.1% increase, exclusive of the acquired
Meris and BCL businesses, in the average reimbursement received for each
specimen processed during the three and nine month periods ended September
30, 1999 versus the comparable prior year periods. The increases in
reimbursement levels is primarily due to increases in rates charged to
managed care clients, replacement of the Company's most unprofitable
accounts with other better priced business and changes in test mix to more
sophisticated testing procedures for HIV and sexually transmitted and other
infectious diseases. Exclusive of the acquired Meris and BCL businesses,
the Company experienced a 4.6% and 4.0% increase in the number of specimens
processed in the core business during the three and nine month periods
ended September 30, 1999 versus the comparable prior year periods. In
addition, while the Company has experienced increases in volume over the
prior year through acquisitions and growth in the core business, the
Company has experienced over the last several months greater seasonal
softness than anticipated and the Company has purged more business
(primarily lower priced and less profitable accounts) from the BCL
acquisition than originally forecasted.
Salaries, Wages and Benefits. Salaries, wages and benefits increased to
$22.9 million and $63.2 million for the three and nine month periods ended
September 30, 1999 from $16.3 million and $49.6 million for the comparable
prior year periods. As a percentage of revenue, salaries, wages and
benefits decreased to 30.1% and 29.6% for the three and nine month periods
ended September 30, 1999 from 30.6% for both the comparable prior year
periods. The decreases primarily reflect the economies of scale associated
with processing a significantly higher specimen volume (25.3% volume
increase during the first nine months of 1999 including the effect of the
Meris and BCL acquisitions) without the same corresponding increase in
headcount.
Supplies. Supplies expense increased to $11.3 million and $30.7 million for
the three and nine month periods ended September 30, 1999 from $7.5 million
and $22.6 million for the comparable prior year periods. As a percentage of
revenue, supplies expense increased to 14.8% and 14.4% for the three and
nine month periods ended September 30, 1999 from 14.1% and 13.9% for the
comparable prior year periods. The increases are attributable to bringing
certain more costly testing in-house, mandated use of more costly safety
needles and inefficiencies of running two laboratories in the Sacramento
area during the integration period of BCL. The Company closed the BCL
laboratory in mid-August, 1999.
Other Operating Expenses. Other operating expenses increased to $18.9
million and $53.3 million for the three and nine month periods ended
September 30, 1999 from $13.1 million and $39.4 million for the comparable
prior year periods. As a percentage of revenue, other operating expenses
increased to 24.7% and 24.9% for the three and nine month periods ended
September 30, 1999 from 24.6% and 24.3% for the comparable prior year
periods. The increases are attributable to inefficiencies of running two
laboratories in the Sacramento area during the integration period of BCL
and a higher volume of testing being processed by outside reference
laboratories.
Legal Charge. The Company is currently in settlement negotiations with a
group of insurance companies regarding claims by the insurance companies
that the Company over-billed them in the mid-1990s in connection with
several chemistry profile tests that were previously the subject of a
settlement agreement with the government. While no formal settlement
agreement with the insurance companies has been executed, the Company
believes that it is likely that it will do so for a settlement amount of
approximately $600,000, and such amount has been reflected as a charge in
the statement of operations for the second quarter of 1999.
Amortization and Depreciation. Amortization and depreciation increased to
$3.1 million and $7.2 million for the three and nine month periods ended
September 30, 1999 from $1.9 million and $5.8 million for the comparable
prior year periods. The increases are primarily due to the additional
amortization expense incurred from the goodwill recorded in connection with
the Meris and BCL acquisitions offset by a decrease in depreciation expense
due to certain laboratory computer equipment becoming fully depreciated in
1998.
In addition, based upon the final review of certain assets acquired in the
Meris and BCL acquisitions, the Company has changed its estimate of
goodwill amortization arising from those acquisitions to a 10-year period
effective July 1, 1999. The effect of the change was to increase
amortization expense by $0.6 million for the three and nine month periods
ended September 30, 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $10.1 million and $29.3 million for
the three and nine month periods ended September 30, 1999 from $8.1 million
and $25.0 million for the comparable prior year periods. As a percentage of
revenue, selling, general and administrative expenses decreased to 13.3%
and 13.7% for the three and nine month periods ended September 30, 1999
from 15.3% and 15.4% for the comparable prior year periods. Such decreases
continued the trend realized by the Company throughout 1998 and 1999 from
cost reduction efforts and also reflected the economies of scale and
efficiencies gained from the Meris and BCL acquisitions.
EBITDA. Earnings before interest, taxes, depreciation and amortization
("EBITDA") were $13.0 million and $36.4 million for the three and nine
month periods ended September 30, 1999, compared to $8.2 million and $25.4
million for the comparable prior year periods. Without the effect of the
$0.6 million legal charge recorded in the second quarter of 1999, EBITDA
for the three and nine month periods ended September 30, 1999 would have
been $13.0 million or 17.0% of sales and $37.0 million or 17.3% of sales,
respectively, and would have represented increases of approximately 58% and
46%, respectively over the comparable prior year periods.
Interest Expense. Third party interest, net increased to $4.0 million and
$11.2 million for the three and nine month periods ended September 30, 1999
compared to $3.3 million and $10.1 million for the comparable prior year
periods. The increases were primarily due to the additional interest
expense incurred on the $14.0 million convertible subordinated note issued
in connection with the Meris acquisition and the $25.0 million subordinated
note issued in connection with the BCL acquisition.
Tax Provision. The Company did not recognize an income tax provision for
the three and nine month periods ended September 30, 1999 and 1998. During
these periods the Company reduced the valuation allowance against its
deferred tax assets, which offset any potential income tax provision.
The Company establishes a valuation allowance in accordance with the
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". The Company continually reviews the adequacy
of the valuation allowance and recognizes the benefits from its deferred
tax assets only when an analysis of both positive and negative factors
indicate that it is more likely than not that the benefits will be
realized. The Company has approximately $29.6 million of deferred tax
assets at September 30, 1999. Based on the Company's improved operating
performance in 1998 and 1999, having fully integrated the Meris acquisition
and being substantially complete with the BCL integration, the Company
believes it will have sufficient future taxable income to reduce its
valuation allowance by approximately $16.6 at September 30, 1999. The
Company's estimate of future taxable income considers the completion of the
merger agreement, and the Company's more highly leveraged position, as
discussed in Note 7 of the unaudited notes to financial statements.
Approximately $4.7 million of the tax asset recorded at September 30, 1999
reduced the amount of goodwill recorded from certain acquisitions and the
remaining amount of the benefit was recognized as an income tax benefit in
the statement of operations for the three and nine month periods ended
September 30, 1999. If the Company does not further reduce its valuation
allowance in the future, the Company expects to have an effective tax rate
of approximately 42% on a going forward basis.
Year 2000 Update
As stated in the Company's Annual Report on Forms 10-K and 10-K/A for the
year ended December 31, 1998, the Company expected to have modifications to
all major systems completed by the end of the first quarter 1999. All
modifications to laboratory and accounting systems in order for such
systems to recognize and perform date calculations in the year 2000 have
been completed. Modifications to billing systems are substantially
complete, with only some very minor adjustments needed to make such billing
systems fully compliant.
Liquidity and Capital Resources
Net cash provided by operating activities was $25.3 million for the nine
months ended September 30, 1999 and reflects an improvement of $12.7
million over the comparable prior year period when net cash provided by
operating activities was $12.6 million. The improvement in 1999 was
primarily due to an improvement in the Company's operating performance and
timing of payments for accounts payable.
Net cash used by financing activities was $0.7 million for the nine months
ended September 30, 1999, resulting primarily from scheduled principal
repayments under capital lease obligations.
Net cash used by investing activities was $13.5 million for the nine months
ended September 30, 1999, resulting from an $8.6 million cash payment in
partial consideration of the purchase price for the BCL acquisition and
$4.9 million of fixed asset additions.
The Company had $25.8 million of unrestricted cash and cash equivalents on
hand at September 30, 1999. Management believes that the amount of
unrestricted cash and cash equivalents available at September 30, 1999 will
be sufficient for the Company to meet anticipated requirements for working
capital, interest payments, capital expenditures and scheduled principal
payments under capital lease and debt obligations for the foreseeable
future.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
Exhibit 99.1 - Press Release, dated November 9, 1999, announcing
third quarter earnings results.
(B) Reports on Form 8-K
(1) Current Report on Form 8-K dated August 13, 1999 with respect to
Items 5 and 7.
(2) Current Report on Form 8-K/A dated October 25, 1999 with respect
to Items 2 and 7.
(3) Current Report on Form 8-K/A dated October 25, 1999 with respect
to Item 7.
(4) Current Report on Form 8-K/A dated October 26, 1999 with respect
to Items 2 and 7.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNILAB CORPORATION
By: /s/ Brian D. Urban
Date: November 9, 1999 Brian D. Urban
Executive Vice President,
Chief Financial Officer and Treasurer
PRESS RELEASE UNILAB CORPORATION
(AMEX:ULB)
18448 Oxnard Street
Tarzana, CA 91356
www.Unilab.com
For Further Information:
Melissa Mahoney
Phone: (818) 758-6607
e-mail: [email protected]
IMMEDIATE RELEASE
November 9, 1999
UNILAB CORPORATION ANNOUNCES THIRD QUARTER RESULTS
TARZANA, CA, November 9, 1999 -- UNILAB Corporation (AMEX: ULB) announced today
that net sales for the quarter ended September 30, 1999 were $76.2 million
versus $53.2 million in the same period last year. The Company reported net
income for the quarter of $17.9 million, or $0.36 per diluted common share,
compared to net income of $3.1 million, or $0.07 per diluted common share in the
same period last year. Without the benefit of a reduction in the valuation
allowance recorded against the Company's deferred tax assets, net income for the
third quarter of this year would have been $5.9 million, or $0.13 per diluted
common share.
Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") were
$13.0 million for the quarter, or 17.0% of sales, compared to $8.2 million, or
15.5% of sales, for the same period last year.
For the first nine months, revenues were $213.5 million compared to $162.0
million during the same period last year. Net income was $29.9 million, or $0.63
per diluted common share, compared to net income of $9.6 million, or $0.22 per
diluted common share in the prior year. Without the reduction in the valuation
allowance recorded against the Company's deferred tax assets, net income for the
first nine months of this year would have been $18.0 million, or $0.39 per
diluted share. EBITDA was $37.0 million, or 17.3% of sales (excluding the effect
of a $600 thousand legal charge recorded in the second quarter), compared to
$25.4 million, or 15.7% of sales in the same period last year.
Revenue growth of 43.4% in the third quarter versus the same quarter of 1998 was
due to a 34.7% increase in volume, with the remaining 8.7% increase due to
pricing. Year to date, revenue growth of 31.8% versus the first nine months of
1998 was attributed to a 25.3% increase in volume, with a 6.5% increase due to
pricing. Exclusive of the business associated with the Company's Meris and
Bio-Cypher acquisitions, pricing per specimen increased 7.6% and volume
increased 4.6% for the third quarter, and pricing per specimen increased 5.1%
and volume increased 4.0% for the nine month period of 1999.
As previously announced, Unilab has entered into a definitive merger agreement
with UC Acquisition Sub, Inc., an affiliate of Kelso & Company to be acquired by
Kelso. The transaction is subject to shareholder approval at a special meeting
of shareholders on November 23, 1999, and is expected to close shortly
thereafter.
Unilab also announced that, on November 5, 1999, a purported class action, Bond
Opportunity Fund et al. v. Unilab Corporation et al. (99 Civ. 11074) (LAP), was
filed in the United States District Court for the Southern District of New York
against Unilab and its Board of Directors. The action seeks to enjoin the
special meeting of stockholders scheduled for November 23, 1999 to approve the
pending merger with an affiliate of Kelso and seeks unspecified compensatory
damages. The complaint alleges that the defendants breached their fiduciary
duties in approving the merger agreement with UC Acquisition Sub and alleges
that stockholder approval is being sought on the basis of a misleading proxy
statement in violation of the federal proxy rules. Unilab and the other
defendants are scheduled to file with the court on November 11, 1999 a motion to
dismiss the complaint and their opposition to plaintiffs' motion for a
preliminary injunction. A hearing on the motion to dismiss and preliminary
injunction motion is scheduled for November 17, 1999. Unilab believes the claims
asserted in the complaint to be without merit and that there is no basis for an
injunction.
The statements in this press release that are not historical facts or
information may be deemed to be forward looking statements. Each of the above
forward looking statements is subject to change based on various risks and
uncertainties, including without limitation, legislative and regulatory
developments and competitive actions in the marketplace that could cause the
outcome to be materially different from stated. Certain of these risks and
uncertainties are listed in the Company's 1998 Form 10-K.
Unilab Corporation is the largest provider of laboratory testing services in
California through its primary testing facilities in Los Angeles, San Jose, and
Sacramento, and over 300 regional service and testing facilities located
throughout the state. Additional information is available on the Company's
website at: www.unilab.com.
<PAGE>
<TABLE>
Unilab Corporation
Statement of Operations
(amounts in thousands, except per share data)
(Unaudited)
<CAPTION>
Three months ended Sept. 30, Nine months ended Sept. 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenue $76,210 $53,160 $213,496 $162,046
Direct Laboratory and Field Expenses:
Salaries, Wages and Benefits 22,940 16,255 63,226 49,645
Supplies 11,307 7,480 30,653 22,585
Other Operating Expenses 18,855 13,075 53,254 39,404
------ ------ ------ ------
53,102 36,810 147,133 111,634
Legal Charge - - 600
- -
Amortization and Depreciation 3,062 1,848 7,189 5,774
Selling, General and Administrative Expenses 10,120 8,132 29,323 24,990
------ ----- ------ ------
Total Operating Expenses 66,284 46,790 184,245 142,398
Operating Income 9,926 6,370 29,251 19,648
Third Party Interest, net (3,978) (3,308) (11,244) (10,068)
------- ------- -------- --------
Income Before Income Taxes 5,948 3,062 18,007 9,580
Tax Benefit 11,904 - 11,904 -
------ -------- ------- ---------
Net Income $17,852 $3,062 $29,911 $9,580
======= ====== ======= ======
Preferred Stock Dividends $33 $33 $99 $99
Net Income Available to Common
Stockholders $17,819 $3,029 $29,812 $9,481
======= ====== ======= ======
Earnings per Share:
Basic $0.42 $0.07 $0.72 $0.22
Diluted $0.36 $0.07 $0.63 $0.22
EBITDA $12,988 $8,218 $36,439 $25,422
</TABLE>
<PAGE>
<TABLE>
Unilab Corporation
Balance Sheet
(amounts in thousands)
<CAPTION>
September 30 December 31,
1999 1998
(Unaudited)
<S> <C> <C>
Cash and Cash Equivalents $25,753 $20,137
Restricted Cash 5,497 -
Accounts Receivable, net 55,830 41,326
Other Current Assets 6,316 4,100
----- -----
Total Current Assets 93,396 65,563
Property and Equipment, net 13,009 11,277
Deferred Tax Asset 16,558 -
Goodwill, net 83,347 56,949
Other Intangible Assets, net 1,922 2,370
Other Assets 5,168 6,301
----- -----
Total Assets $213,400 $142,460
======== ========
Total Current Liabilities $35,335 $22,631
Long-Term Debt, net of current portion 160,778 137,170
Other Liabilities 5,251 4,026
Total Shareholders' Equity (Deficit) 12,036 (21,367)
------ --------
Total Liabilities and Shareholders' Deficit $213,400 $142,460
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000899714
<NAME> UNILAB CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 31,250
<SECURITIES> 0
<RECEIVABLES> 64,597
<ALLOWANCES> (8,767)
<INVENTORY> 3,970
<CURRENT-ASSETS> 93,396
<PP&E> 47,486
<DEPRECIATION> (34,477)
<TOTAL-ASSETS> 213,400
<CURRENT-LIABILITIES> 35,335
<BONDS> 119,413
0
4
<COMMON> 420
<OTHER-SE> 11,612
<TOTAL-LIABILITY-AND-EQUITY> 213,400
<SALES> 213,496
<TOTAL-REVENUES> 213,496
<CGS> 0
<TOTAL-COSTS> 131,757
<OTHER-EXPENSES> 37,112
<LOSS-PROVISION> 15,376
<INTEREST-EXPENSE> 11,244
<INCOME-PRETAX> 18,007
<INCOME-TAX> 11,904
<INCOME-CONTINUING> 29,911
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,911
<EPS-BASIC> 0.72
<EPS-DILUTED> 0.63
</TABLE>
