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, 1998
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 0-22758
UNILAB CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 95-4415490
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 12, 1999, 40,729,293 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 12, 1999, held by nonaffiliates of the Registrant was
approximately $104.2 million.
DOCUMENTS INCORPORATED BY REFERENCE
Part II - Portions of the Annual Report to shareholders for the year
ended December 31, 1998 Part III - Proxy Statement for Annual Meeting of
Stockholders to be held June 17, 1999
Page 1 of 39 pages.
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TABLE OF CONTENTS
Item PAGE
Part I. 1 Business................................................. 3
2 Properties............................................... 20
3 Legal Proceedings........................................ 21
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.............................. 26
6 Selected Financial Data.................................. 27
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 28
8 Financial Statements and Supplementary Data.............. 28
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 28
Part III. 10 Directors and Executive Officers of the Registrant....... 29
11 Executive Compensation................................... 29
12 Security Ownership of Certain Beneficial Owners
and Management and Directors............................. 29
13 Certain Relationships and Transactions with Related
Persons.................................................. 29
Part IV. 14 Exhibits, Financial Statements, Financial Statement
Schedules and Reports on Form 8-K........................ 30
Signatures ......................................................... 32
<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, 1998 were approximately twice the
annual sales in California of the next largest independent clinical laboratory
in that market. During most of such period, Unilab had approximately 15% of
California's independent clinical laboratory market, which is the largest state
clinical laboratory market in the United States. In November 1998, the Company
completed the acquisition of substantially all of the assets of Meris
Laboratories, Inc., a San Jose, California based independent clinical lab,
resulting in an increase of Unilab's estimated market share to 20% of
California's independent clinical laboratory market. As of December 31, 1998,
the Company operated three centrally-located full-service laboratories,
approximately 40 strategically-located short turn around ("STAT") laboratories
and approximately 270 conveniently-located patient service centers ("PSC"). As
of December 31, 1998, the Company processed on average 37,000 patient specimens
and performed over 85,000 test batteries per work day.
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 final stages 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 spent approximately $400,000 in 1998
and anticipates spending another $100,000 in 1999 for additional hardware,
upgraded software and consulting time to enable the Company to properly address
the Year 2000 issue. The expected cost to fix the Year 2000 issue is in line
with the company's original estimates. 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 payroll, accounting and other
employee and financial information, the Company believes that it will adequately
resolve the Year 2000 issue. The Company believes that modifications to
laboratory software and equipment and most accounting systems have been
completed and the final modifications to the billing and payroll systems will be
completed by the end of the first quarter 1999 in order to provide sufficient
time for further modifications, if any, prior to the arrival of the year 2000.
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As part of its contingency planning, the Company has
standardized the platform and software used to process and report laboratory
results during the last several years. In addition, the Company converted the
last billing system not on the Company's standard billing platform in 1998. If a
problem occurred with the laboratory hardware or software, the Company might
have to rely on outside reference laboratories to process specimens until the
Year 2000 issue was fixed. If the Company had to rely on another location or
outside reference laboratory to process specimens, turn around time on test
results would be diminished and billings and cash collections from payor groups
could be significantly delayed. The Company is reliant on the ability of
numerous payor groups, primarily insurance companies and government payors, to
solve their Year 2000 issues in order to process the Company's billings and make
appropriate cash remittances. If such payor groups do not properly resolve their
Year 2000 issues, cash collections could be significantly delayed. In addition,
the Company sends less than 2% of its specimens to outside reference
laboratories for testing and does not believe it would have difficulty finding
another reference laboratory to perform such tests if its current main vendor
encounters difficulties with the Year 2000 issue. The Company has asked all
significant vendors to report in writing to the Company on the status of their
Year 2000 issue and whether their systems will be compliant in sufficient time
to satisfy the Company's current requirements and workflow. The Company reviews
such reports regularly and makes modifications to its own planning process, if
necessary, based on the reports received from vendors.
Tests performed by Unilab measure the levels of, and analyze
chemical and cellular components in, human body fluids and tissue and are used
in the diagnosis, monitoring and treatment of disease. They include procedures
in the areas of blood chemistry, hematology, urine chemistry, tissue pathology
and cytology, among others. Commonly ordered individual tests include red and
white blood cell counts, PAP smears, blood cholesterol level tests, urinalysis
and procedures to measure blood sugar levels and to determine pregnancy. Routine
test groups include tests to determine the function of the kidney, heart, liver
and thyroid, as well as other organs, and a general health screen that measures
several important body health parameters. Many of the routine tests are
performed by automated equipment and are capable of being performed and reported
within a 24-hour period. Approximately 85% of the tests conducted by 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 the remaining 2%
performed by third party reference laboratories with whom Unilab contracts. On a
revenue basis, approximately 6% of testing fees collected by Unilab are paid to
third party reference laboratories or pathology services.
Customers
Unilab provides testing services to a broad range of health
care providers. The following factors, among others, are often used by health
care providers in selecting a laboratory: (i) accuracy, timeliness and
consistency in reporting test results; (ii) size and scope of testing services
performed; (iii) service capability and convenience offered by the laboratory;
(iv) pricing of the laboratory's testing services; (v) extent of managed care
exclusive contract coverage; (vi) local STAT testing availability; and (vii)
reputation of the laboratory for the foregoing.
<PAGE>
The primary types of customers that Unilab services are as
follows:
o 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. These physicians often
participate in Independent Physician Associations ("IPAs"). Unilab markets its
services to physicians and physician groups 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' non-managed care patients are billed to the
patient's appropriate third-party payor such as private insurance companies,
Medicare and Medicaid. When Unilab provides contracted testing services to
physicians who belong to IPAs, the Company bills the IPA (usually under a
capitated arrangement).
o Independent Physician Associations. Physicians often band together to form
IPAs as a means to achieve greater local recognition and contracting leverage.
These IPAs often provide primary care services under capitated arrangements to
HMOs, and therefore often desire to purchase support services (like lab testing)
under capitated arrangements. As stated above, if Unilab provides contracted
testing services to physicians who belong to an IPA, the Company bills the IPA.
Otherwise, services provided to other patients seen by these physicians are
billed to various other payors such as insurance, client bill, Medicare or
Medicaid.
o Health Maintenance Organizations and Other Managed Care Groups. HMOs and other
managed care payors (which designate the laboratory to be used for tests ordered
by the physician) represent a substantial portion of Unilab's business. HMOs
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. The Company believes that it services
more managed care contracts than any other lab in the California marketplace,
and that the Company has become a preferred lab services provider to managed
care for several reasons. First, Unilab has a state-wide presence, which gives
managed care clients the ability to partner with one lab subcontractor that has
state-wide coverage, instead of several subcontractors with limited geographic
coverage. Second, Unilab's internal cost-efficiencies allow the Company to offer
competitive pricing to the cost-conscious managed care community. Third, Unilab
possesses considerable expertise in addressing the needs and issues of managed
care payors.
o Hospitals. Unilab provides both esoteric testing for hospitals (which often
are not equipped to perform such sophisticated tests) and general reference
testing for hospitals which have reduced or eliminated their in-hospital
laboratory testing in an attempt to reduce their cost of delivering patient
care. The selection of an independent laboratory by hospitals is usually based
on reputation of the laboratory in the medical community, type of services
offered, accuracy, timeliness and consistency of test results and competitive
pricing.
<PAGE>
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.
o Clinics. Unilab has arrangements with a broad network of community health
clinics across the state of California that provide preventive health care
and/or medical attention for the lower-income and indigent patient population
(frequently MediCal recipients). Under these arrangements, the Company is the
primary provider of testing services for patients who choose to use these
clinics.
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. Today, Unilab serves over 3 million managed care lives. 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, came 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. By year-end 1998, Unilab had once again repriced the
capitation rates on approximately 40% of its 3 million managed care lives at an
average increase of greater than 30%. 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 320 collection routes, approximately 270 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 or
exceed 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 require that only
qualified personnel perform testing, (iii) rigorous utilization of control
specimens in order to ensure accuracy and precision of test equipment, and (iv)
a tightly managed collection and distribution network. 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.
<PAGE>
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
1998 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 %, consistent with the 1997 accuracy rate of 99.5%, and
slightly better than the 1996 cumulative accuracy rate of 99.4%, 1995 cumulative
accuracy rate of 99.3% and the 1994 cumulative accuracy rate of 99.2%.
Regional Operations, Sales, Service and Marketing
As of December 31, 1998 Unilab's sales and service organization
was comprised of approximately 75 full-time sales and sales/service employees.
Sales representatives are primarily responsible for executing focused sales
initiatives established within their regions, while sales/service
representatives are primarily responsible for account retention and enhancing
client relations (although they also have defined selling responsibilities).
This separation between "selling" and "servicing" is a key feature of Unilab's
sales organization, in that sales/service staff specialize in their respective
disciplines. Incentive compensation paid on new sales generation--achieved by
either sales or sales/service representatives--is designed to recognize the cost
of supporting the new business and reward the dedication to client support and
client retention.
Unilab's marketing department is committed to promoting the
Company's mission of "maintaining high quality and cost-effective laboratory
services that are responsive to the values and needs of patients and
physicians." Unilab promotes this mission and other Company initiatives through
the creation and targeted dissemination of marketing materials to clients and
prospects by Unilab's sales and sales/service representatives (as well as
Unilab's couriers). More specifically, Unilab's marketing initiatives and
materials address four distinct objectives:
<PAGE>
o Enhance medical community awareness of Unilab's full spectrum of services;
o Promote and sell new services and technological advances;
o Educate clients on regulatory and compliance issues that will affect the
medical community; and
o Address customer needs and concerns about new testing procedures.
These marketing initiatives are prioritized through a
collaborative effort among senior management, sales and sales/service employees
and other relevant departments.
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 nine acquisitions in California, including five since 1994 with
aggregate annual revenues in excess of $75 million (including the November 1998
acquisition of Meris Laboratories). Unilab intends to 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 months after completion of an acquisition.
Meris Acquisition
On September 16, 1998, the Company signed a definitive
agreement to acquire substantially all of the assets of Meris Laboratories,
Inc., one of the leading regional independent laboratories in Northern
California with run-rate revenue of approximately $25.2 million. Meris had filed
for bankruptcy protection under Chapter 11 in November 1997. The transaction
closed on November 5, 1998.
The gross purchase price paid for Meris was $16.5 million
(approximately 0.60x annual revenue), consisting of a $14.0 million convertible
subordinated note (bearing 7.5% interest, convertible under certain
circumstances at $3.00 per share) and the assumption of $2.5 million in
additional liabilities (to be paid in equal installments of $35,000 per month
over 72 months). In addition to the customer list, the Company acquired
approximately $4.0 million of assets, the majority of which were trade accounts
receivable.
Within approximately two months after closing the transaction,
the Company had substantially integrated the Meris business and realized much of
the significant synergies available in the consolidation.
The Clinical Laboratory Industry
Overview and Trends
Unilab believes based on published industry reports that the
total U.S. clinical laboratory market during 1998 was approximately $30 billion
in annual revenue, of which the California market accounted for approximately $4
to $4.5 billion. Even after years of industry consolidation 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 600 located in California. The Company
believes that approximately 55% of clinical laboratory testing revenues in
California result from tests performed by hospitals, 15% 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.
<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, maintain
its position as a low cost provider, conduct its billing and business practices
in an appropriate, efficient, effective, and responsible manner and grow through
organic growth and acquisitions. Similar to the actions taken in 1997 and 1998,
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 and selected acquisitions.
<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. Such legislation has again been introduced in
the current 106th Congress in February 1999. Moreover, in 1999 California
received deemed equivalency status under CLIA, which is formal recognition by
the federal government that California quality requirements meet or exceed CLIA
levels.
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.
<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 treble 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 Work Plans, targeted certain
laboratory practices for study, investigation and prosecution. Pursuant to one
such project in the fiscal 1992/1993 Work Plan, 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 Work Plan, 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 began in 1998 and 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 Work Plan 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.
<PAGE>
The OIG's 1996/97 Work Plan 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 reissued this
compliance guidance document in slightly revised form in 1998.
The OIG's 1997/98 Work Plan 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 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.
The OIG's April 1, 1998-September 30, 1998 Semi-annual Report
reported that the OIG successfully completed several civil cases related to
fraudulent billing by clinical laboratories to Medicare, Medicaid and other
federal health care programs, and that the OIG also obtained convictions and
settlements for other types of fraudulent or abusive activities on the part of
laboratories. The Report describes one particular case that, in the OIG's view,
was "one of the most reprehensible cases involving fraudulent billing for
laboratory tests." (OIG Semi-Annual Report, April 1, 1998-September 30, 1998 at
25.) In this case, according to the Report, a laboratory unbundled blood
chemistry tests and billed Medicare for thousands of tests that were not
medically necessary during a nine-year period receiving $5.0 million in Medicare
overpayments. The Report stated that this laboratory agreed to pay $15 million
to resolve this liability.
In its Fiscal Year 1999 Work Plan, the OIG targeted laboratory
tests provided to End Stage Renal Disease (ESRD) beneficiaries for two
nationwide reviews: one concerning inappropriate separate billing for laboratory
tests included in the ESRD composite rate, and the other concerning the medical
appropriateness for such tests. The FY 1999 Work Plan also announced a project
to analyze HCFA's enforcement of Medicare's physician/laboratory self-referral
prohibition (see discussion below).
In addition to these recent OIG initiatives, HHS anti-fraud
initiatives launched in 1999 include a comprehensive anti-fraud program
announced by HCFA in February 1999. In this initiative, HCFA will take numerous
steps to enhance the fraud detection and enforcement elements of its Medicare
and Medicaid program administration, including implementation of the Medicare
Integrity Program, a program created by the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") to enhance the anti-fraud activities of the
contractors that administer the Medicare program. The 1999 HCFA anti-fraud
initiative responds in part to a recent OIG report estimating that, in 1998, 7%
of Medicare claims were billed improperly or erroneously.
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.
<PAGE>
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
1995-1998, it is possible that similar proposals could be introduced in Congress
in 1999.
In 1996, Congress passed and the President signed into law
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 and amended those regulations in 1998. 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 for certain specified types of
violations, 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 (other
than laboratory services). The Health Care Financing Administration (HCFA)
published regulations implementing this advisory opinion provision on January 9,
1998.
<PAGE>
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 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 an expansive anti-inducement
law that is even broader than the federal law (Ca. Bus. Prof. Code ss.650) and
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 for lab services
the physician did not perform. 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.
<PAGE>
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 one remaining payment, excluding interest, to
the U.S. Government of approximately $324,000 due on September 1, 1999. In
addition, in October 1996, the Company paid the California MediCal program
approximately $160,000 to settle all their claims regarding the same issue.
The settlements 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.
In November 1998, Unilab acquired substantially all of the
assets of Meris Laboratories, Inc. At that time, Meris had a corporate integrity
agreement (CIA) with the OIG arising from the settlement of claims against Meris
asserted by the United States in connection with its LabScam investigations. As
part of Unilab's purchase of the Meris assets and in lieu of assuming the Meris
CIA, Unilab voluntarily entered into an agreement with the OIG entitled
"Compliance Program Disclosure Agreement" (the "Unilab/OIG Agreement"). Pursuant
to this Agreement Unilab will maintain its hotline, undertake special billing
audits of the former Meris facilities, obtain new CLIA certifications and
provider numbers for the former Meris facilities, and provide certain
information to the OIG. The Unilab/OIG Agreement will last until February 28,
2000.
Professional Ethics
The American Medical Association's (AMA's) view regarding
referrals by physicians to businesses in which they hold ownership interests is
that "in general, physicians should not refer patients to a health care facility
outside their office practice at which they do not directly provide care or
services when they have an investment interest in the facility". Under the AMA
guidelines physicians are expected to refer patients to independent laboratories
rather than to laboratories in which they have an investment interest. The AMA
guidelines do not have the force of law. The management of Unilab believes that
such AMA policy against physician self-referrals may have a positive effect on
Unilab by further facilitating referrals away from physician-owned laboratories
to independent laboratory concerns such as Unilab.
Reimbursement
Medicare reimbursement for clinical laboratory services is made
pursuant to Medicare fee schedules, subject to a national limitation amount
("cap") that is based upon the median of all the Medicare fee schedules. During
the late 1980s and the 1990s, that cap dropped from 115% of the median to 100%
of the median, to 93% of the median, to 88% of the median, to 84% of the median
to 80% of the median to 76% of the median and effective January 1, 1998 to 72%
of the median. BBA '97 provides for a freeze on fee schedule payments for 1998
through 2002. The President's FY2000 budget proposes a reduction of the Medicare
fee schedule caps to 74% of the laboratory fee schedule medians, beginning
January 1, 2000. It is too early to predict how Congress will respond to this
proposal. In addition, an expert panel considering changes in Medicare has
proposed reinstatement of beneficiary cost sharing for diagnostic clinical
laboratory services provided to Medicare patients, although it is not known
whether the full Medicare Commission will agree to this proposal or whether any
congressional action will be taken with regard to it.
<PAGE>
BBA '97 included a provision 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. HCFA has requested Congress to repeal
the BBA's requirement concerning regional carriers and, although Congress has
not yet acted on that request, HCFA has taken no action to implement the
provision; thus, it is unlikely to be implemented by the July 1, 1999 deadline.
Further, a negotiating rulemaking committee has met on a number of occasions to
propose some changes in laboratory payment and billing policies as mandated by
the BBA, but those proposals have not yet been finally agreed to by the
committee. Once agreed to by the committee, they must still be issued in the
form of a Notice of Proposed Rulemaking by HCFA; thus, it is likely to be some
time before any action is expected with regard to the committee's proposals.
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.
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 revision 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 appears to have had an adverse effect on
revenues and operating costs of the clinical laboratory industry, including
Unilab. Further changes were made in the CPT manual for 1999, including an
expansion by one test of one of the "clinically relevant" panels. It is
currently unclear what affect, if any, this change will have on 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 and prosecutions of certain former employees of
lab companies in connection with allegedly fraudulent sales and billing
practices.
<PAGE>
Drug Testing
Drug testing for public sector employees is regulated by the
National Institute on Drug Abuse ("NIDA"), which has established detailed
performance and quality standards that laboratories must meet in order to be
approved to perform drug testing on employees of the Federal government, Federal
government contractors and certain other entities. To the extent that Unilab
performs such testing, it must be certified as meeting NIDA standards. Unilab's
Tarzana (Los Angeles) laboratory is NIDA-certified.
Occupational Safety
In addition to its comprehensive regulation of safety in the
workplace, the Federal Occupational Safety and Health Administration ("OSHA")
has adopted rules that establish extensive requirements related to workplace
safety for health care employers, including clinical laboratories, whose workers
may be exposed to bloodborne pathogens. These regulations, among other things,
require work practice controls, protective clothing and equipment, training,
medical follow-up, vaccinations and other measures designed to minimize exposure
to, and transmission of, bloodborne pathogens such as HIV and the hepatitis B
virus. OSHA has also adopted rules establishing safety requirements for the use
of chemicals as reagents and for other purposes.
At the state level, California imposes occupational safety and
health requirements administered by the California Occupational Safety and
Health Administration.
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.
<PAGE>
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
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 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., approximately 600 of which the Company believes are
located in California. These independent clinical laboratories fall into two
separate categories. The first 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.
<PAGE>
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 three largest independent
clinical laboratory competitors are SmithKline Beecham Clinical Laboratories,
Inc., Bio-Cypher Laboratories, Inc., and Laboratory Corporation of America. The
Company believes that it currently has approximately 20% of the California
independent clinical laboratory testing market, roughly twice that of its
nearest competitor and, the Company believes, approximately quadruple the share
of its second and third largest competitors.
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, 1998, Unilab employed approximately 2,600
full- and part-time 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.
<PAGE>
(a) Adverse actions by governmental or other third-party payors,
including Medicare and Medicaid, including unilateral
reduction of fee schedules payable to the Company (such as
that proposed in President Clinton's fiscal year 2000 budget).
(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
commonly ordered automated multichannel chemistry panels (CPT
Series 80002-80019) and the replacement of such panels in 1998 with
four clinically relevant test groupings; 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,
as amended), 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, or
liability from acquired companies that have had 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.
<PAGE>
Unilab leases its laboratory facilities and PSCs. All of the
major laboratory facilities have been built or improved for the purpose of
providing clinical laboratory testing services. The Company believes its
facilities are suitable, adequate and have sufficient production capacity for
its operations as currently conducted and as anticipated to be conducted. Unilab
believes that if it were to lose the lease on any of its facilities, it could
find alternate space at competitive market rates and relocate its operations to
such new locations.
Item 3. Legal Proceedings
Unilab is a party to various legal proceedings arising in the
ordinary course of its business. Although the ultimate disposition of these
proceedings is not determinable, management does not believe that adverse
determinations in any or all of such proceedings will have a material adverse
effect upon the financial condition, liquidity or results of operations of
Unilab.
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 had been filed approximately two years
earlier by a former employee.
A qui tam action, under the Federal "whistleblower" statute, is
a private action brought on behalf of the U.S. government in connection with
claims for payments submitted to the U.S. The private individual(s) bringing the
qui tam action may be entitled to 15% to 30% of any amounts recovered as a
consequence of the qui tam action. By law, the DOJ is required to investigate
the matters raised by the qui tam complaint to determine whether to "intervene"
(i.e., pursue the action itself) or to permit the private plaintiff to pursue
the action.
In September 1993, Unilab entered into settlements, which
included Corning with regard to its subsidiary, MetPath, pursuant to which
Unilab made payments to the DOJ (the "DOJ Settlement") and to the State of
California (the "California Settlement" and, together with the DOJ Settlement,
the "Settlements") to settle certain civil claims relating to the investigation.
Unilab's portion of the Settlements was approximately $3.0 million, which
included approximately $2.2 million of the DOJ Settlement and the entire $0.5
million amount of the California Settlement.
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 had 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 addressed 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 addressed the State of
California's contention that improper MediCal claims were submitted with respect
to the same five tests.
<PAGE>
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 available to its clients test
profiles which provide the choice of incorporating as few or as many of these
additional tests in the basic blood chemistry profile as its physician-clients
feel appropriate for a full diagnostic evaluation. Notwithstanding such policy,
the government contended that it was not made sufficiently clear to
physician-clients the financial consequences to the Medicare program of their
choice in ordering such tests as "add-ons" to the basic blood chemistry profile,
thereby resulting in physicians' ordering certain of these tests, and Medicare
or MediCal, as the case may be, being billed for such tests, when not medically
necessary.
The government did not question the quality, reliability or
validity of any tests or test results. The tests for HDL cholesterol (High
Density Lipoprotein, or "good" cholesterol) and LDL cholesterol (Low Density
Lipoprotein, or "bad" cholesterol) are classic established diagnostic
measurements used in assessing the risk for cardiovascular disease. TIBC (Total
Iron Binding Capacity) and serum ferritin (a test which Unilab offered, when
requested by the physician-client, as a reflex when indicated by abnormal
results in other panel tests) are useful indicators of iron deficiency or iron
overload. PBG (Protein Bound Glucose), used in conjunction with the glucose
test, is a test that aids in the diagnosis of diabetes, a disease which affects
almost 10% of the general population, and can have severe detrimental effects if
not promptly identified and treated. While the Settlements did not require any
specific changes to policies or practices with regard to these tests, Unilab
nevertheless has re-emphasized to its clients the financial consequences to them
and to third party payors of their laboratory 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.
<PAGE>
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
received similar requests for production as part of what the Company
believes to be the industry-wide LabScam 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 one remaining payment to the U.S. Government of
approximately $324,000 (excluding interest) due on September 1, 1999. In
addition, in October 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.
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 12, 1999 regarding the directors, executive officers and key management
personnel of Unilab.
Name Age Position
David C. Weavil..............48 Chairman of the Board, President and
Chief Executive Officer
Haywood Cochrane.............50 Director
Kirby L. Cramer..............62 Director
William J. Gedale............57 Director
Richard A. Michaelson........47 Director
Gabriel Balthazar Thomas.....57 Director
Mark L. Bibi.................40 Executive Vice President, Secretary and
General Counsel
Ian J. Brotchie..............59 Executive Vice President and Division
President, Unilab Northern California
C. Michael Hanbury...........35 Senior Vice President, Chief Scientific
Officer
R. Jeffrey Lanzolatta........46 Executive Vice President and Division
President, Unilab Southern California
Brian D. Urban...............36 Executive Vice President, Chief Financial
Officer and Treasurer
Paul T. Wertlake.............63 Vice President, Chief Medical Officer
<PAGE>
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") from the
April 1995 merger of Roche Biomedical Laboratories, Inc. ("RBL") and National
Health Laboratories, Inc. ("NHL"), which created LabCorp, until December 1996.
He was additionally 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 to 1988.
Haywood Cochrane has been a director of Unilab since May
1997. He has served as President and Chief Executive Officer of Meridian
Corporate Healthcare 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, Sonus Corporation and
Meridian Corporate Healthcare.
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 biological research company.
Mr. Cramer served as Chief Executive Officer of Hazleton Laboratories Corp.
from 1968 through 1987, when it was sold to Corning, and as Chairman of the
Board of Directors of Hazleton Laboratories Corp. from 1987 through 1991. Mr.
Cramer is now a professional director and currently serves as a director of
Immunex Corp., Commerce Bancorporation, Landec Corporation, Sonosite, Inc.,
Northwestern Trust Company, and Ragen MacKenzie Group.
William J. 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. He was
President of Sheer Asset Management from January 1997 to August 1997 and
President of Mount Everest Advisors, LLC from July 1996 to July 1997. From June
1995 to June 1996 he was a Managing Director of John W. Bristol. Previously,
from 1989 to 1994 he served as President and CEO of General American Investors,
a New York Stock Exchange closed-end investment company. 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.
<PAGE>
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 Corning Lab
Services Inc. 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 1988. 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 Executive Vice President, Secretary and
General Counsel of Unilab since May 1998. He served as Vice President, Secretary
and General Counsel from June 1993 through April 1998. Mr. Bibi was with the New
York City law firm of Schulte Roth & Zabel from May 1989 through June 1993.
Prior thereto, he was with the law firm of Sullivan & Cromwell, New York, New
York, from August 1985 to April 1989.
Ian J. Brotchie has been Executive Vice President and Division
President of Unilab Northern California since May 1998. He served as
Division President of Unilab Northern California from August 1997 to April
1998. He was Division President of Unilab San Jose from February 1994 to
August 1997. He was President of Associated Laboratories, Inc. 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.
C. Michael Hanbury, Ph.D., Senior Vice President and Chief
Scientific Officer, has been with the Company since April 1998. Prior to joining
Unilab, from April 1996 to April 1998, Dr. Hanbury managed Regulatory Affairs
for Roche Diagnostics, Inc., an international diagnostic company representing
their interests to the US Food and Drug Administration for a variety of
molecular diagnostic tests for infectious disease. Prior thereto, Dr. Hanbury
served from September 1994 to March 1996 as National Technical Director of an
international clinical diagnostic manufacturer and as a clinical chemist for
Roche Biomedical Labs from April 1988 to September 1994. Dr. Hanbury is a
registered clinical pathologist with over 14 years experience in laboratory
services and in vitro diagnostic manufacturing.
<PAGE>
R. Jeffrey Lanzolatta has been Executive Vice President and
Division President of Unilab Southern California since May 1998. He served as
Division President of Unilab Southern California from July 1996 to April 1998.
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 Executive Vice President, Chief
Financial Officer and Treasurer of Unilab since May 1998. He served as Vice
President, Chief Financial Officer and Treasurer from September 1997 to April
1998. 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 14 (Unaudited Quarterly Financial Data) of the Notes to
Consolidated Financial Statements at page 30 of the Company's 1998 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 12, 1999, there were 40,729,293
shares of Common Stock outstanding held by 2,940 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.
<PAGE>
Item 6. Selected Financial Data
The selected financial data for each of the five years in the
period ended December 31, 1998 is as follows:
<TABLE>
(amounts in thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
For the Years Ended December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $217,370 $214,001 $205,217 $189,042 $151,820
- ----------------------------------------------------------------------------------------------------------
Legal, acquisition and restructuring
related charges ---- ---- 70,595 4,400 1,282
- ----------------------------------------------------------------------------------------------------------
Operating income (loss) 24,241 14,604 (72,842) 4,539 9,137
- ----------------------------------------------------------------------------------------------------------
Loss on sale of equity investment/ ---- ---- 4,529 36,499 ----
promissory note
- ----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary item 10,703 536 (89,493) (40,043) 4,515
- ----------------------------------------------------------------------------------------------------------
Income tax provision ---- ---- ---- ---- ----
- ----------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 10,703 536 (89,493) (40,043) 4,515
- ----------------------------------------------------------------------------------------------------------
Extraordinary item ---- ---- 3,451 1,732 ----
- ----------------------------------------------------------------------------------------------------------
Net income (loss) 10,703 536 (92,944) (41,775) 4,515
- ----------------------------------------------------------------------------------------------------------
Preferred stock dividends 131 138 144 144 144
- ----------------------------------------------------------------------------------------------------------
Net income (loss) available to
common shareholders 10,572 398 (93,088) (41,919) 4,371
- ----------------------------------------------------------------------------------------------------------
Basic net income (loss) before extraordinary
item per common share 0.26 0.01 (2.43) (1.12) 0.12
- ----------------------------------------------------------------------------------------------------------
Basic net income (loss) per common share 0.26 0.01 (2.53) (1.17) 0.12
- ----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 40,665 39,926 36,831 35,918 34,904
- ----------------------------------------------------------------------------------------------------------
At December 31,
- ----------------------------------------------------------------------------------------------------------
Total assets 142,460 118,700 125,919 196,174 196,407
- ----------------------------------------------------------------------------------------------------------
Long-term debt, net of current portion 137,170 124,285 126,120 87,207 67,660
- ----------------------------------------------------------------------------------------------------------
Shareholders' equity (deficit) (21,367) (32,283) (34,688) 56,330 95,334
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Note: The variations in the year-to-year comparisons are due primarily to
the acquisition of substantially all of the assets of Meris
Laboratories, Inc., effective November 5, 1998, 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 7 of the Notes to
Consolidated Financial Statements at page __ of the Company's
1998 Annual Report to shareholders for a more detailed discussion
of the legal and acquisition related charges, restructuring charges
and loss on sale of promissory note recorded in 1996, and such
information is incorporated herein by reference. The $4.4 million
legal charge recorded in 1995 relates to a settlement and legal
fees paid in connection with a lawsuit regarding the company's
sales, marketing and distribution of a product designed for use in
connection with pap smears. The $36.5 loss on the sale of equity
investment recorded in 1995 relates to the sale of a 40% equity
investment the Company had in a European laboratory company. The
$1.3 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.
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 1998 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 12, 1999,
appearing on pages 16 through 31 of the Company's 1998 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.
<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, 1998, 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 26 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.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement Schedules
and Reports on Form 8-K
Reference
----------------------------------
Form 10-K Annual Report to
Annual Report Shareholders
Page Page
(a)(1) Index to Financial Statements:
Incorporated by reference to the 1998
Annual Report to shareholders:
Statements of Operations for the
years ended December 31, 1998,
1997, 1996 --- 16
Balance Sheets at
December 31, 1998 and 1997 --- 17
Statements of Shareholders'
Equity (Deficit) for the years ended
December 31, 1998, 1997, 1996 --- 18
Statements of Cash Flows for
the years ended December 31,
1998, 1997, 1996 --- 20
Notes to Financial Statements --- 21
Report of Independent Public Accountants --- 31
(2) Index to Financial Statement Schedule:
Report of Independent Public Accountants
on Financial Statement Schedule 33 ---
II - Valuation and Qualifying
Accounts for the years ended
December 31, 1998, 1997 and 1996 34 ---
The financial statement schedule should be read in conjunction with the
financial statements incorporated by reference in Item 8 of this Form 10-K
Annual Report. Schedules other than those listed above have been omitted because
of the absence of the conditions under which they are required or because the
information required is shown in the financial statements or the notes thereto.
<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
The following current Reports on Form 8-K were filed during the
fourth quarter of 1998.
Current Report on Form 8-K, dated October 29, 1998, regarding
Items 5 and 7.
Current Report on Form 8-K, dated November 16, 1998, regarding
Items 5 and 7.
Additionally, the Company filed the following Current Report on
Form 8-K during the first quarter of 1999:
Amendment to Current Report on Form 8-K(A), dated January 18,
1999, regarding Items 2 and 7.
<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: 3/24/99 UNILAB CORPORATION
By: /s/ Brian D. Urban
Name: Brian D. Urban
Title: Executive Vice President,
Chief Financial Officer and
Treasurer
<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, 1998 and 1997, and the related statements of
operations, shareholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1998 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 12, 1999. 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, 1998,
1997 and 1996 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 12, 1999
<PAGE>
<TABLE>
Schedule II
UNILAB CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
<CAPTION>
Balance at Charged to Balance
Beginning Costs and End of
of Period Expenses Deductions Period
<S> <C> <C> <C> <C>
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
FOR THE YEAR ENDED
DECEMBER 31, 1998;
Allowance for doubtful accounts $ 9,819 $15,662 $(14,668) $10,813
</TABLE>
<PAGE>
Index
Exhibit No. Description
2.1 Asset Purchase Agreement, dated as of September 16, 1998, by and
between Unilab Corporation, as Buyer, and Meris Laboratories, Inc.
Debtor and Debtor-in-Possession, as Seller (Incorporated by
reference to Exhibit 2.1 to the Company's Amendment on Form 8-K(A)
dated January 18, 1999).
2.2 $14 million Convertible Subordinated Note, dated November 5, 1998,
payable by Unilab Corporation to Meris Laboratories, Inc.
(Incorporated by reference to Exhibit 2.2 to the Company's Amendment
on Form 8-K(A) dated January 18, 1999).
2.3 Registration Rights Agreement, dated November 5, 1998, by and between
Unilab Corporation and Meris Laboratories, Inc. (Incorporated by
reference to Exhibit 2.3 to the Company's Amendment on Form
8-K(A) dated January 18, 1999).
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).
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).
<PAGE>
10.1 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).
10.2 Consulting Agreement, dated as of September 17, 1997, between
the Company and Richard A. Michaelson (Incorporated by reference
to Exhibit 10.15 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).
10.3 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 (Incorporated by reference to Exhibit
10.15 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.4 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 (Incorporated by reference to Exhibit
10.15 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.5 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 (Incorporated by reference to
Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.6 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 (Incorporated by Reference to Exhibit 10.19 to
the Company's annual Report on form 10-K for the year ended
December 31, 1997).
10.7 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 (Incorporated by Reference to Exhibit
10.20 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.8 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 (Incorporated by Reference to
Exhibit 10.21 to the company's Annual Report on form 10-K for the year
ended December 31, 1997).
<PAGE>
10.9 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 (Incorporated by Reference to
Exhibit 10.22 to the Company's Annual Report on form 10-K for the
year ended December 31, 1997).
10.10 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 (Incorporated by Reference to Exhibit
10.23 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
<PAGE>
10.18 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).
10.19 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).
10.20 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).
10.21 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).
10.22 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).
10.23 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).
10.24 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).
10.25 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).
10.26 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).
<PAGE>
10.27 Settlement Agreement, dated as of February 17, 1994, by and among
the United States Department of Justice; the Office of the Civilian
Health and Medical Program of the Uniformed Services; MetPath
Inc; and the Company (Incorporated by Reference to Exhibit 10.18 to
the Company's Annual Report on Form 10-K dated March 30, 1994).
10.28 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).
10.29 Participation Agreement, dated as of November 7, 1996, by and
between the Company and Donaldson, 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 Selected portions of Annual Report to Shareholders
21.1 Subsidiaries of the Company
22.1 Proxy Statement, dated _____ __, 1999, for Annual Meeting of
Stockholders held on June 17, 1999.
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, 1999, announcing fourth quarter
and full year 1998 earnings results.
Exhibit 13.1
Management's Discussion & Analysis of Financial Condition
and Results of Operations
Results of Operations
Year ended December 31, 1998 compared to year ended December 31, 1997
Revenue increased to $217.4 million for the year ended December 31,
1998 from $214.0 million for the comparable prior year period, representing an
increase of $3.4 million or 1.6%. Approximately $2.9 million of the increase was
attributable to revenue generated from the acquisition of Meris Laboratories,
Inc. ("Meris"), which was effective as of November 5, 1998. Exclusive of the
acquired Meris business, revenue increased $0.5 million, primarily the result of
increases in reimbursement levels of $6.3 million offset by decreases in
specimen volume of approximately $5.8 million.
The Company experienced a 3.1% increase, exclusive of the acquired
Meris business, in the average reimbursement received for each specimen
processed during the year ended December 31, 1998 versus the comparable prior
year period. The increase in reimbursement levels is primarily due to increases
in rates charged to managed care clients as the Company continues its strategy
to only work with managed care clients who are willing to adequately pay for the
levels of service they request and the elimination and replacement of the
Company's most unprofitable accounts with other reasonably priced business.
Exclusive of the acquired Meris business, the Company experienced a 2.8%
decrease in the number of specimens processed during the year ended December 31,
1998 versus the comparable prior year period. The decrease in volume was the
effect of Medicare requirements for new test panels which led to changes in
ordering patterns among physicians, the elimination of some under-performing
accounts and the exit from small geographical areas where the Company couldn't
achieve significant economies of scale.
Earnings before interest, taxes, depreciation and amortization
("EBITDA") were $31.8 million for the year ended December 31, 1998 compared to
$23.5 million for the comparable prior year period. Without the effect of a $1.2
million impact on EBITDA resulting from the integration period between November
5, 1998 and late December 1998 of the Meris acquisition, EBITDA for the year
ended December 31, 1998 would have been $33.0 million.
Salaries, wages and benefits decreased to $67.7 million for the year
ended December 31, 1998 from $69.1 million for the comparable prior year period.
As a percentage of revenue, salaries, wages and benefits were 31.2% and 32.3%
for the years ended December 31, 1998 and 1997, respectively. Such decrease
primarily reflects a reduction in headcount and tight control over the growth in
wage increases.
Supplies expense remained consistent at approximately 14.0% of revenue
for the years ended December 31, 1998 and 1997. However, supplies expense per
specimen processed has increased slightly in 1998 as the Company started to
perform certain more costly tests in-house in late 1997 that were previously
sent to outside reference laboratories. Although the Company experienced a
slight increase in supplies expense related to bringing this testing in-house,
the Company had a positive net benefit as lab subcontracting expenses decreased
by more than 10% in the year ended December 31, 1998 from the comparable prior
year period.
Other operating expenses decreased to $53.6 million for the year ended
December 31, 1998 from $57.0 million for the comparable prior year period. As a
percentage of revenue, other operating expenses were 24.7% and 26.6% for the
years ended December 31, 1998 and 1997, respectively. Such decrease was
primarily due to reductions in lab subcontracting expenses (see explanation in
preceding paragraph) and reductions in outside courier, automobile,
telecommunication and insurance expenses, as the Company evaluated all expense
line items throughout 1997 and 1998 and streamlined expenses as
necessary to achieve cost efficiencies.
Amortization and depreciation expense decreased to $7.6 million for the
year ended December 31, 1998 from $8.9 million for the comparable prior year
period primarily due to certain non-compete agreements and laboratory computer
equipment becoming fully amortized or depreciated in late 1997 and early 1998.
Selling, general and administrative expenses decreased to $33.5 million
for the year ended December 31, 1998 from $34.6 million for the comparable prior
year period. As a percentage of revenue, selling, general and administrative
expenses were 15.4% and 16.2% for the years ended December 31, 1998 and 1997,
respectively. Such decrease continued the trend realized by the Company
throughout 1997 and relates to a reduction in corporate managerial and
administrative positions and streamlining of all operating support services.
Third party interest expense, net decreased to $13.5 million for the
year ended December 31, 1998 from $14.1 million for the comparable prior year
period primarily due to the repayment of capital lease obligations.
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.
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
United States ("U.S.") Government and certain other entities in connection with
the Company's sales, marketing and billing practices. The Company agreed to pay
the U.S.Government approximately $4.0 million to conclude an investigation of
certain of Unilab's billings to Medicare and certain other governmental
entities for hematology indices being billed in conjunction with complete
blood counts. Unilab also paid the California MediCal program approximately
$160,000 in October 1996 to settle all their claims concerning the same issue.
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, 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.
Liquidity and Capital Resources
Net cash provided by operating activities during the year ending
December 31, 1998 was $14.0 million and reflects an improvement of $10.3 million
over the comparable prior year period when net cash provided by operating
activities was $3.7 million. The increase in 1998 was primarily due to the
improvement in the Company's operating performance.
Net cash used by financing activities was $1.8 million for the year
ending December 31, 1998, primarily resulting from scheduled principal
repayments under capital lease obligations of $1.7 million and the issuance of
preferred dividends of $0.1 million.
Net cash used by investing activities was $3.7 million for the year ended
December 31, 1998, resulting from capital expenditures of $3.0 million and
payments made on acquisitions completed in 1996 and 1995 of $0.7 million. The
Company expects that its capital expenditure requirements, excluding any amounts
related to acquisitions, will approximate $4.0 million in 1999.
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 Company's then existing bank term loan and
revolving line of 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.
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 connection with the acquisition of Meris, the Company issued a $14.0
million convertible subordinated note, bearing interest at the rate of 7.5% and
payable on May 5 and November 5 of each year. The note is subordinated to the
Senior Notes and is due in November 2006. The note is convertible into the
Company's common stock at a conversion price of $3.00 per share, subject to
certain restrictions. In addition, subject to certain restrictions, the note may
be redeemed by the Company.
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, 1998, 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 1998. 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 $20.1 million of cash and cash equivalents on hand at
December 31, 1998. Management believes that the amount of cash and cash
equivalents available at December 31, 1998 and the cash flow expected to be
generated from operations 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.
Year 2000
The Company is in the final stages 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 spent approximately $400,000 in 1998 and anticipates
spending another $100,000 in 1999 for additional hardware, upgraded software and
consulting time to enable the Company to properly address the year 2000 issue.
The expected cost to fix the year 2000 issue is in line with the Company's
original estimates. 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 payroll, accounting and other employee and
financial information, the Company believes that it will adequately resolve the
year 2000 issue. The Company believes that modifications to laboratory software
and equipment and most accounting systems have been completed and the final
modifications to the billing and payroll systems will be completed by the end of
the first quarter 1999 in order to provide sufficient time for further
modifications, if any, prior to the arrival of the year 2000.
As part of its contingency planning, the Company has standardized the
platform and software used to process and report laboratory results during the
last several years. In addition, the Company converted the last billing system
not on the Company's standard billing platform in 1998. If a problem occurred
with the laboratory hardware or software, the Company might have to rely on
outside reference laboratories to process specimens until the year 2000 issue
was fixed. If the Company had to rely on another location or outside reference
laboratory to process specimens, turn around time on test results would be
diminished and billings and cash collections from payor groups could be
significantly delayed.
The Company is reliant on the ability of numerous payor groups,
primarily insurance companies and government payors, to solve their year
2000 issue in order to process the Company's billings and make appropriate cash
remittances. If such payor groups do not properly resolve their year 2000
issues, cash collections could be significantly delayed. In addition, the
Company sends less than 2% of its specimens to outside reference laboratories
for testing and does not believe it would have difficulty finding another
reference laboratory to perform such tests if its current main vendor encounters
difficulties with the year 2000 issue. The Company has asked all significant
vendors to report in writing to the Company on the status of their year 2000
issue and whether their systems will be compliant in sufficient time to satisfy
the Company's current requirements and workflow. The Company reviews such
reports regularly and makes modifications to its own planning process, if
necessary, based on the reports received from vendors.
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, 1998.
<PAGE>
<TABLE>
Statements of Operations
(amounts in thousands, except per share data)
<CAPTION>
- ----------------------------------------------------------------------------------------
For the years ended December 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $217,370 $214,001 $205,217
- ----------------------------------------------------------------------------------------
Direct Laboratory and Field Expenses:
Salaries, wages and benefits 67,742 69,094 70,869
Supplies 30,671 29,858 28,631
Other operating expenses 53,594 56,990 54,672
- ----------------------------------------------------------------------------------------
152,007 155,942 154,172
Legal and acquisition related charges -- -- 4,940
Restructuring charges -- -- 65,655
Amortization and depreciation 7,592 8,885 11,491
Selling, general and administrative expenses 33,530 34,570 41,801
- ----------------------------------------------------------------------------------------
Total Operating Expenses 193,129 199,397 278,059
- ----------------------------------------------------------------------------------------
Operating Income (Loss) 24,241 14,604 (72,842)
Other Income (Expenses):
Third party interest, net (13,538) (14,068) (13,401)
Related party interest, net -- -- 1,279
Loss on sale of promissory note -- -- (4,529)
- ----------------------------------------------------------------------------------------
Total Other Income (Expenses) (13,538) (14,068) (16,651)
- ----------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes
and Extraordinary Item 10,703 536 (89,493)
Tax Provision -- -- --
- ----------------------------------------------------------------------------------------
Income (Loss) Before Extraordinary Item 10,703 536 (89,493)
Extraordinary Item - loss on early
extinguishment of debt -- -- 3,451
- ----------------------------------------------------------------------------------------
Net Income (Loss) $10,703 $536 $(92,944)
- ----------------------------------------------------------------------------------------
Preferred Stock Dividends 131 138 144
Net Income (Loss) Available to
Common Shareholders $10,572 $398 $(93,088)
- ----------------------------------------------------------------------------------------
Basic Earnings Per Share:
Income (Loss) Before Extraordinary Item $0.26 $0.01 $(2.43)
Extraordinary Item -- -- (0.10)
Net Income (Loss) $0.26 $0.01 $(2.53)
- ----------------------------------------------------------------------------------------
Diluted Earnings Per Share:
Income (Loss) Before Extraordinary Item $0.25 $0.01 $(2.43)
Extraordinary Item -- -- (0.10)
Net Income (Loss) $0.25 $0.01 $(2.53)
- ----------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Balance Sheets
(amounts in thousands, except per share data)
<CAPTION>
- ---------------------------------------------------------------------------------------
December 31,
Assets 1998 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $20,137 $11,652
Accounts receivable, net of allowance
for doubtful accounts of $10,813 and $9,819
in 1998 and 1997, respectively 41,326 36,583
Inventory of supplies 3,055 2,811
Prepaid expenses and other current assets 1,045 1,295
- ---------------------------------------------------------------------------------------
Total Current Assets 65,563 52,341
- ---------------------------------------------------------------------------------------
Property and Equipment, net 11,277 13,160
Goodwill, net of accumulated amortization of $7,754
and $6,368 in 1998 and 1997, respectively 56,949 43,699
Other Intangible Assets, net 2,370 2,731
Other Assets 6,301 6,769
- ---------------------------------------------------------------------------------------
$142,460 $118,700
- ---------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- ---------------------------------------------------------------------------------------
Current Liabilities:
Current portion of long-term debt $1,206 $1,811
Accounts payable and accrued liabilities 14,533 15,678
Accrued payroll and benefits 6,892 6,302
- ---------------------------------------------------------------------------------------
Total Current Liabilities 22,631 23,791
- ---------------------------------------------------------------------------------------
Long-Term Debt, net of current portion 137,170 124,285
Other Liabilities 4,026 2,907
Commitments and Contingencies
Shareholders' Equity (Deficit):
Convertible preferred stock,
$.01 par value; Authorized - 20,000 shares;
Issued and Outstanding - 364 at
December 31, 1998 and 1997
Liquidation preference -- $2,093 4 4
Common stock, $.01 par value;
Voting - Authorized - 100,000 shares;
Issued and Outstanding - 40,708 and 40,578 at
December 31, 1998 and 1997, respectively 407 406
Additional paid-in capital 228,395 228,052
Accumulated deficit (250,173) (260,745)
- ---------------------------------------------------------------------------------------
Total Shareholders' Equity (Deficit) (21,367) (32,283)
- ---------------------------------------------------------------------------------------
$142,460 $118,700
- ---------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Statements of Shareholders' Equity (Deficit)
For the years ended December 31, 1998, 1997 and 1996
(amounts in thousands, except per share data)
<CAPTION>
Voting
Common Stock
Shares Amount
<S> <C> <C>
- --------------------------------------------------------------------------------------
Balances, December 31, 1995 35,052 $ 351
- --------------------------------------------------------------------------------------
Issuance of shares in connection
with a prior acquisition 413 4
Restricted shares issued to employees 100 1
Issuance of shares for Company's
401(k) plan matching contributions 434 4
Issuance of shares to certain executives
in lieu of monthly cash compensation 164 2
Issuance of shares to a consultant for services rendered 50 1
Issuance of shares to certain Board Directors
for services rendered 22 --
Conversion of non-voting common stock
to voting common stock 1,050 10
Issuance of preferred stock dividend -- $0.36 per share -- --
Net loss -- --
- --------------------------------------------------------------------------------------
Balances, December 31, 1996 37,285 373
- --------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------
Issuance of shares to certain Board Directors
for services rendered 72 1
Issuance of shares at $0.63 - $2.19 upon
exercise of options 19 --
Issuance of shares for Company's 401(k)
plan matching contributions 14 --
Restricted shares issued to employees 17 --
Issuance of shares to part-time employees
as special bonus 8 --
Issuance of preferred stock dividend -- $0.36 per share -- --
Net income -- --
- --------------------------------------------------------------------------------------
Balances, December 31, 1998 40,708 $407
- --------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Non-Voting Convertible Additional
Common Stock Preferred Stock Paid-In Accumulated Total Shareholders'
Shares Amount Shares Amount Capital Deficit Equity (Deficit)
<S> <C> <C> <C> <C> <C> <C>
1,050 $10 400 $4 $224,020 $(168,055) $56,330
- -- -- -- -- 996 -- 1,000
- -- -- -- -- 350 -- 351
- -- -- -- -- 544 -- 548
- -- -- -- -- 108 -- 110
- -- -- -- -- 43 -- 44
- -- -- -- -- 17 -- 17
(1,050) (10) -- -- -- -- --
- -- -- -- -- -- (144) (144)
- -- -- -- -- -- (92,944) (92,944)
- -- $-- 400 $4 $226,078 $(261,143) $(34,688)
- -- -- -- -- 237 -- 237
- -- -- -- -- (45) -- (45)
- -- -- -- -- 49 -- 49
- -- -- -- -- 63 -- 64
- -- -- (36) -- -- -- --
- -- -- -- -- 46 -- 47
- -- -- -- -- 214 -- 219
- -- -- -- -- 295 -- 300
- -- -- -- -- 488 -- 500
- -- -- -- -- 98 -- 100
- -- -- -- -- 276 -- 281
- -- -- -- -- 253 -- 255
- -- -- -- -- -- (138) (138)
- -- -- -- -- -- 536 536
- -- $-- 364 $4 $228,052 $(260,745) $(32,283)
- -- -- -- -- 159 -- 160
- -- -- -- -- 15 -- 15
- -- -- -- -- 25 -- 25
- -- -- -- -- 132 -- 132
- -- -- -- -- 12 -- 12
- -- -- -- -- -- (131) (131)
- -- -- -- -- -- 10,703 10,703
- -- $-- 364 $4 $228,395 $(250,173) $(21,367)
</TABLE>
<PAGE>
<TABLE>
Statements of Cash Flows
(in thousands)
<CAPTION>
- -----------------------------------------------------------------------------------------------
For the years ended December 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $10,703 $536 $(92,944)
Adjustments to reconcile net income
(loss) to net cash
provided (used) by operating activities:
Amortization and depreciation 7,592 8,885 11,491
Provision for doubtful accounts 15,662 15,663 14,180
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
Net changes in assets and liabilities
affecting operations, net of acquisitions:
Increase in Accounts receivable (17,154) (14,967) (11,125)
Increase in Inventory of supplies (106) (207) (243)
Decrease in Prepaid expenses and
other current assets 250 407 117
(Increase) decrease in Other assets (112) (1,107) 229
Increase (decrease) in Accounts payable and
accrued liabilites (4,047) (7,221) 1,112
Increase in Accrued payroll and benefits 800 816 1,504
Other 408 910 926
- -----------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 13,996 3,715 (5,128)
- -----------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Borrowings under third party debt -- -- 123,490
Payments of third party debt (1,720) (1,776) (104,772)
Financing costs under the Senior Notes
and Receivables Financing -- -- (4,932)
Proceeds from the sale of stock -- 581 --
Proceeds from exercise of options 15 47 --
Other (131) (236) --
- -----------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (1,836) (1,384) 13,786
- -----------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Capital expenditures (3,005) (1,935) (3,948)
Payments for acquisitions, net of cash acquired (670) (1,824) (2,700)
Net cash proceeds from sale of equity
investment and promissory note -- -- 11,000
- -----------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (3,675) (3,759) 4,352
- -----------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash
and Cash Equivalents 8,485 (1,428) 13,010
Cash and Cash Equivalents - Beginning of Year 11,652 13,080 70
- -----------------------------------------------------------------------------------------------
Cash and Cash Equivalents - End of Year $20,137 $11,652 $13,080
- -----------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<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. 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.
c. 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.
d. 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
accounts 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 (1994 through 1997 only). The estimate of the
liability for unasserted claims arising from unreported incidents is based on an
analysis of historical claims experience.
e. Fair Value of Financial Instruments and Concentration of Credit Risk
The carrying amount reported in the balance sheets for cash, accounts
receivable, accounts payable and accrued liabilities approximates fair value
because of the immediate or short-term maturity of these financial instruments.
The fair value of the Company's $120.0 million of senior notes approximates
$125.4 million 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, 1998,
1997 and 1996 approximated 25-30% of revenue.
f. 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.
g. 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. 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.
h. 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.
i. 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".
j. 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 year ended December 31, 1996.
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 40.7
million, 39.9 million and 36.8 million for the years ended December 31, 1998,
1997, and 1996, 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 expenses assuming conversion of the
convertible debt. No dilutive securities existed in 1996. In 1997, the weighted
average number of dilutive stock options were 0.6 million, which had
no effect on the basic earnings per share calculation. In 1998, the weighted
average number of dilutive stock options were 1.4 million and the incremental
shares from the assumed conversion of the $14.0 million subordinated convertible
note were 0.7 million, which reduced the earnings per share calculated by
$0.01. The assumed conversion of the convertible preferred stock is excluded
from the calculation since its effect would be immaterial.
Options to purchase 2.1 and 2.9 million shares of common stock at
prices ranging from $2.63 to $6.88 and $1.19 to $6.88 were outstanding at
December 31, 1998 and 1997, respectively, 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.
k. 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) 1998 1997
- -------------------------------------------------------------------------------
Buildings $3,166 $3,166
Leasehold improvements 5,564 5,236
Laboratory and other equipment 30,053 29,700
Furniture and fixtures 3,459 3,391
- -------------------------------------------------------------------------------
42,242 41,493
- -------------------------------------------------------------------------------
Less accumulated depreciation
and amortization 30,965 28,333
- -------------------------------------------------------------------------------
$11,277 $13,160
- -------------------------------------------------------------------------------
Depreciation expense was approximately $5.0 million in 1998, $6.0 million in
1997 and $5.0 million in 1996.
Other intangible assets consist of the following:
December 31,
(in thousands) 1998 1997
- -------------------------------------------------------------------------------
Customer lists $7,675 $7,675
Covenants not to compete 235 300
7,910 7,975
- -------------------------------------------------------------------------------
Less accumulated amortization 5,540 5,244
$2,370 $2,731
- -------------------------------------------------------------------------------
Amortization expense for goodwill, other intangible assets and certain other
deferred costs was approximately $2.6 million in 1998, $2.9 million in 1997 and
$6.5 million in 1996.
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 assets acquired based on their
fair value at the date of acquisition and the difference between the cost of
acquiring Meris and the fair value of the net assets acquired of approximately
$14.9 million was treated as goodwill for accounting purposes. 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 December 31, 1998, approximately $1.3 million
of liabilities, expected to be paid in the first six months of 1999, were
outstanding.
The following unaudited pro forma results of operations for the years
ended December 31, 1998 and 1997 (in thousands except per share data) have been
prepared as if the acquisition of Meris occurred on January 1, 1997:
Years Ended December 31,
(Unaudited)
1998 1997
- -------------------------------------------------------------------------------
Revenue $239,649 $243,904
- -------------------------------------------------------------------------------
Net Income 16,371 5,859
- -------------------------------------------------------------------------------
Net income available to
common shareholders 16,263 5,721
- -------------------------------------------------------------------------------
Earnings per share: Basic 0.40 0.14
Diluted 0.37 0.14
- -------------------------------------------------------------------------------
The historical financial results of Unilab for 1998 and 1997 have been
adjusted primarily for the historical results of Meris, an increase in interest
expense due to the additional debt incurred to purchase Meris, an increase in
amortization of goodwill and cost savings from the integration of the Meris
operations into Unilab.
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, 1998, approximately $0.5 million
of liabilities were outstanding and such amount is expected to be paid in 1999.
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 $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.
6. Income Taxes
For the years ended December 31, 1998, 1997 and 1996, income (loss)
before income taxes consisted of domestic earnings (losses) and no provision for
Federal or State income taxes was recorded.
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) 1998 1997 1996
- -------------------------------------------------------------------------------
Computed income taxes
at U.S. statutory rate $3,746 $188 $(31,601)
- -------------------------------------------------------------------------------
Amortization and write-
off of goodwill and
intangible assets disallowed
for income tax purposes 420 420 1,140
- -------------------------------------------------------------------------------
Capital and operating losses
with no tax benefit - - 30,461
- -------------------------------------------------------------------------------
Change in valuation allowance (3,871) - -
- -------------------------------------------------------------------------------
Other (295) (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) 1998 1997
Bad debt reserve $2,972 $2,563
Intangible assets 9,807 11,752
Property and equipment 383 383
Accrued liabilities 1,408 2,254
Net operating loss carryforwards 20,272 21,761
34,842 38,713
Valuation allowance (34,842) (38,713)
$-- $--
The realization of the deferred tax assets at December 31, 1998 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,
1998 and 1997. Approximately $4.0 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 an equity investmentin 1995. 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, 1998 and 1997.
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, 1998, available net
operating loss and capital loss carryforwards for U.S. tax purposes were
approximately $60.0 million and $36.5 million, respectively. Net operating loss
carryforwards for California state tax purposes were approximately $30.0
million.
7. Loss on Sale of Promissory Note
In November 1996, the Company sold a 100% participation interest in its
rights under a $15.0 million promissory note (which the Company received upon
the sale of an equity investment in 1995) 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.
8. Long-Term Debt
Long-term debt consists of the following:
December 31,
(in thousands) 1998 1997
- -------------------------------------------------------------------
Senior Notes, interest at 11.0
percent payable semi-annually $119,344 $119,253
Convertible subordinated
note, interest at 7.5 percent
payable semi-annually 14,000 --
Obligation under capital lease
collateralized by land and building
with interest due through 2004 2,867 3,054
Obligations under capital leases
collateralized by equipment with
interest due through 2000 2,165 3,789
- -------------------------------------------------------------------
138,376 126,096
Less -- current portion 1,206 1,811
- -------------------------------------------------------------------
$137,170 $124,285
- -------------------------------------------------------------------
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 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 Company's previous 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, 1998, 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.
In connection with the acquisition of Meris (see Note 3), the Company
issued a $14.0 million convertible subordinated note, bearing interest at the
rate of 7.5%, payable in cash or in kind, at the Company's option (other than
the interest payment due in November 2006, which will be payable in cash).
Interest is payable on May 5 and November 5 of each year. The note is
subordinated to the Senior Notes and is due in November 2006.
The note is convertible into the Company's common stock at a conversion
price of $3.00 per share; however, the holder of such note cannot exercise its
conversion right unless the Company's average stock price during the thirty day
trading period preceding an offer to convert is equal to or greater than $3.60 a
share (the "Offer Date"). The holder of the note can convert up to one-half of
the note during the first four years; any outstanding balance after November
2002 may be converted by the holder through the maturity date. The Company, at
its option, can force conversion of the note, in whole or in part, at any Offer
Date.
In addition, at the Company's option, the note may be redeemed, in
whole or in part, at any Offer Date; provided that the holder of such note may
exercise its conversion right to the extent noted in the preceding paragraph
rather than being redeemed. The redemption price would equal the face value
of the note being redeemed times a premium percentage (the average stock
price during the specified period divided by $3.00). If the note has not
been converted or redeemed prior to maturity, the remaining note balance
will be paid in cash at the then outstanding principal amount of the note. In
the event of a change in control, as defined in the Note, the outstanding
principal amount of the Note shall be automatically converted into shares of
the Company's common stock.
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, 1998, 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 1998. 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.
At December 31, 1998, future scheduled principle payments of long-term
debt are as follows (in thousands):
Years Ended December 31,
- -------------------------------------
1999 $1,206
2000 1,557
2001 442
2002 562
2003 706
Thereafter 133,903
- -------------------------------------
$138,376
- -------------------------------------
9. Capital Shares, Stock Options and Warrants
a. Convertible Preferred Stock
As of December 31, 1998, 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, 1998, 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, 1998. 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
semiannually 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 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 17,000 restricted shares, 15,000 restricted shares
and 99,500 restricted shares of common stock to certain employees at no cost in
1998, 1997 and 1996, 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
shares' fair market value at the award dates, is charged to shareholders' equity
and subsequently amortized against earnings over the vesting period. At December
31, 1998, 260,834 restricted shares were outstanding and approximately $132,000,
$192,000 and $351,000 was amortized to expense in 1998, 1997 and 1996,
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"). The 1995 Option
Plan was amended to discontinue grants under that plan. The 1996 Option
Plan provides one comprehensive plan for all employees and all future grants
to employees will be made under the 1996 Option Plan.
Under the terms of the 1996 Option Plan, incentive stock options,
non-statutory stock options, reload options or rights, stock appreciation
rights, restricted or unrestricted shares of Unilab stock, performance shares or
units and tax offset payments can be granted to any of the Company's employees,
with limited exceptions, and options for a maximum of 4,000,000 shares of the
Company's common stock may be granted. No employee may receive annual awards of
or relating to more than 250,000 shares of Unilab common stock.
The 1996 Option Plan is administered by a committee of the Board of
Directors (the "Administrator"). The number of options or awards granted,
exercise price, vesting and term will be determined by the Administrator. At
December 31, 1998, and 1997, 3,016,999 and 2,202,334 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,
1998.
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").
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 Plans are exercisable immediately
and 50 percent are exercisable in one year.
At December 31, 1998 and 1997, 255,000 and 200,000 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, 1996, 1997 and 1998, and changes during the
years ending on those dates is summarized as follows:
Weighted-Average
Shares Exercise Price
- --------------------------------------------------------------------------
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
- --------------------------------------------------------------------------
Granted 949,500 2.00
Exercised (19,500) 0.79
Forfeited (170,835) 4.05
- --------------------------------------------------------------------------
December 31, 1998 5,315,499 $2.94
- --------------------------------------------------------------------------
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,
1998 expire in various years through the year 2008. Options exercisable at
December 31, 1998, 1997 and 1996 were 3,804,997, 2,940,907 and 3,049,255,
respectively.
The weighted average fair value of options granted during 1998, 1997
and 1996 were $1.55, $0.55 and $1.90, 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
1998, 1997 and 1996, respectively: risk-free interest rates of 5.8 percent, 6.9
percent and 6.1 percent; expected lives of 9.08 years, 9.09 years, 8.49 years;
expected volatility of 64.2 percent, 91.7 percent and 95.6 percent and no
dividends would be issued during the option terms.
Information about stock options outstanding at December 31, 1998, is
summarized as follows:
Options Outstanding
- -----------------------------------------------------------------------------
Weighted-
Number Average Weighted-
Range of Outstanding Remaining Average
Exercise Prices at 12/31/98 Contracted Life Exercise Price
- -----------------------------------------------------------------------------
$0.438 to $2.0 2,124,250 7.8 years $0.90
$2.063 to $4.0 1,117,333 8.1 years $2.16
$4.125 to $6.875 2,073,916 5.2 years $5.46
- -----------------------------------------------------------------------------
5,315,499 6.9 years $2.94
- -----------------------------------------------------------------------------
Options Outstanding
- -----------------------------------------------------------------------------
Number Weighted-
Range of Exercisable Average
Exercise Prices at 12/31/98 Exercise Price
- -----------------------------------------------------------------------------
$0.438 to $2.0 1,277,415 $0.84
$2.063 to $4.0 468,666 $2.26
$4.125 to $6.875 2,058,916 $5.47
- -----------------------------------------------------------------------------
3,804,997 $3.52
- -----------------------------------------------------------------------------
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) 1998 1997 1996
- -----------------------------------------------------------------------------
Net income As Reported $10,703 $536 $(92,944)
(loss) Pro Forma $9,423 $(508) $(94,391)
- -----------------------------------------------------------------------------
Net income
(loss) As Reported $0.25 $0.01 $(2.53)
per diluted share Pro Forma $0.22 $(0.01) $(2.57)
- -----------------------------------------------------------------------------
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.
10. 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 1997 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. The Company
guaranteed a loan of $0.4 million at December 31, 1998 made by a band 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.
11. Commitments and Contingencies
Property and equipment leased under capital leases is as follows:
December 31,
(in thousands) 1998 1997
- -----------------------------------------------------------------------------
Building $3,100 $3,100
Laboratory and other equipment 5,638 7,283
Less-Accumulated amortization 4,934 5,158
Net leased property under capital leases $3,804 $5,225
As of December 31, 1998, future minimum rental payments required under
captial and operating leases that have initial or remaining noncancelable terms
in excess of one year are approximately as follows:
Capital Operating
(in thousands) Leases Leases
1999 $1,854 $9,696
2000 2,039 5,720
2001 782 4,163
2002 822 2,616
2003 863 2,067
Thereafter 594 1,772
Total minimum less payments $6,954 $26,034
Less: Amount representing interest 1,922
Present value of net minimum
lease payments $5,032
Rental expense for operating leases was approximately $10.8 million,
$10.2 million and $9.6 million in 1998, 1997 and 1996, respectively.
The Company has employment agreements with its principal officers and
certain other key employees. Such agreements expire at various dates through
November 10, 1999 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 $2.2 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 $3.5
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.
12. 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 $0.3 million, $0.1 million and
$0.5 million for the years ended December 31, 1998, 1997 and 1996, 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 made Company contributions in cash, which
were 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. 1998, 457,195 memorandum shares were outstanding, of which 308,415 were
vested at December 31, 1998. 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 (income) expense for the SERP was approximately $407,000,
$271,000 and ($153,000) in 1998, 1997 and 1996, respectively. At December 31,
1998, the accumulated obligation recognized as a liability in the balance sheet
was approximately $732,000. The weighted average discount rate and rate of
increase in future compensation levels used in determining the present value of
benefit obligations were 6.0% and 3.8% in 1998, 6.6% and 3.8% in 1997 and 6.1%
and 3.8% in 1996.
13. Supplemental Disclosures of Cash Flow Information
Years Ended December 31,
(in thousands) 1998 1997 1996
- -----------------------------------------------------------------------------
Cash paid during the year for:
Interest $13,419 $14,063 $12,139
Income taxes 2 1 9
Supplemental Disclosure
of Noncash Investing
and Financing Activities:
Restricted shares of
common stock issued
to employees 32 16 107
Shares issued for Company's
401(k) plan matching
contributions 25 49 548
Shares issued to certain
Board Directors and
a consultant for
services rendered 160 64 61
Payment of purchase price
for a prior acquisition in
common shares -- -- 1,000
- -----------------------------------------------------------------------------
In connection with business
acquisitions, liabilities
were assumed as follows:
Fair value of assets acquired $18,734 -- --
- -----------------------------------------------------------------------------
Liabilities assumed $18,734 -- --
- -----------------------------------------------------------------------------
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.
14. Quarterly Financial Data (unaudited)
Summarized unaudited quarterly financial data for 1998 and 1997 (in
thousands, except per share data) is as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
Revenue $54,530 $54,356 $53,160 $55,324
- --------------------------------------------------------------------------------------
Direct laboratory
and field expenses:
Salaries, wages
and benefits 16,823 16,567 16,255 18,097
Supplies 7,613 7,492 7,480 8,086
Other operating
expenses 13,129 13,200 13,075 14,190
- --------------------------------------------------------------------------------------
Total 37,565 37,259 36,810 40,373
Amortization and
depreciation 1,985 1,941 1,848 1,818
Selling, general
and administrative
expenses 8,534 8,324 8,132 8,540
- --------------------------------------------------------------------------------------
Operating income 6,446 6,832 6,370 4,593
- --------------------------------------------------------------------------------------
Net income 3,072 3,446 3,062 1,123
- --------------------------------------------------------------------------------------
Net income available
to common
shareholders 3,039 3,413 3,029 1,091
- --------------------------------------------------------------------------------------
Per common share
data-diluted:
Net income $0.07 $0.08 $0.07 $0.03
- --------------------------------------------------------------------------------------
Price Range:
High 3.00 3.125 2.625 2.375
- --------------------------------------------------------------------------------------
Low 1.688 2.375 1.75 1.625
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------
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 com-
mon shareholders (1,171) 18 655 896
- --------------------------------------------------------------------------------------
Per common share data-diluted:
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
- --------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Fourth Quarter - 1998
Effective November 5, 1998, the Company acquired substantially all of
the assets of Meris. During the integration period between November 5,1998 and
late December 1998, the Company estimates that the Meris operations had a
negative $1.2 million impact on operating profit for the quarter.
Fourth Quarter 1998 and 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.
<PAGE>
Report of Independent Public Accountants
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, 1998 and 1997, and the related
statements of operations, shareholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
February 12, 1999
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
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 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.
<PAGE>
<TABLE>
Unilab Corporation
Statement of Operations
(amounts in thousands, except per share data)
<CAPTION>
Three months ended Dec. 31, Year ended Dec. 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
<TABLE>
Unilab Corporation
Balance Sheet
(amounts in thousands)
<CAPTION>
December 31 December 31,
1997 1996
<S> <C> <C>
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
-------- --------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000899714
<NAME> UNILAB CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 20,137
<SECURITIES> 0
<RECEIVABLES> 52,139
<ALLOWANCES> (10,813)
<INVENTORY> 3,055
<CURRENT-ASSETS> 65,563
<PP&E> 42,242
<DEPRECIATION> (30,965)
<TOTAL-ASSETS> 142,460
<CURRENT-LIABILITIES> 22,631
<BONDS> 137,170
0
4
<COMMON> 407
<OTHER-SE> (20,956)
<TOTAL-LIABILITY-AND-EQUITY> 142,460
<SALES> 217,370
<TOTAL-REVENUES> 217,370
<CGS> 0
<TOTAL-COSTS> 152,007
<OTHER-EXPENSES> 25,460
<LOSS-PROVISION> 15,662
<INTEREST-EXPENSE> 13,538
<INCOME-PRETAX> 10,703
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,703
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,703
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.25
</TABLE>
