SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[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
------------------
[ ] 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
incorporation or organization) (I.R.S. Employer Identification No.)
18448 Oxnard Street, Tarzana, California 91356
(Address of principal executive offices) (Zip code)
(818) 996-7300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.01 par value American Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days.
Yes X No____
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
At February 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 55 pages.
<PAGE>
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.................................. 31
12 Security Ownership of Certain Beneficial Owners
and Management and Directors............................ 41
13 Certain Relationships and Transactions with Related
Persons................................................. 45
Part IV. 14 Exhibits, Financial Statements, Financial Statement
Schedules and Reports on Form 8-K....................... 46
Signatures ........................................................ 48
<PAGE>
PART I
Item 1. Business
<PAGE>
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.
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.
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.
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:
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.
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.
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.
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.
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.
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.
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.
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 JusticeSettlement". 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.
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.
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.
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.
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.
(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.
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.
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.
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
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.
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
In addition to the other information relating to Executive
Officers and Key Management Personnel of the Registrant that appears at pages 23
to 26 of this Form 10-K Annual Report, the following information is provided
herein:
Listed below are the names and ages of the current directors
of the Registrant, the year in which each first became a director and their
principal occupations for at least the past five years.
Name and Principal
Age Occupation
Haywood D. Cochrane, Jr.- 50 Mr. Cochrane has been a director 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 Laboratory
Corporation of America Holdings, Inc.
("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
National Health Laboratories, Inc.("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 - 62 Mr. Cramer has been a member of Unilab's
Board of Directors since March 1990.
Mr. Cramer is 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 Corporation from
1968 through 1987 (when it was sold to
Corning Incorporated) 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 - 57 Mr. 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. From
January 1997 to August 1997 he was
President of Sheer Asset Management, an
investment counseling firm. Previously,
from 1989 to 1994 he served as President
and CEO of General American Investors, a
New York Stock Exchange closed-end
investment company and as a Managing
Director of John W. Bristol from June 1995
to June 1996. He currently serves as a
director of Bioreliance Corporation, a
biological pre-clinical contract research
organization. He previously served as a
director of Allied (until its merger with
NHL) and of U.S. Home Health Care. He is a
director of New York Hospital Departmental
Associates and is a trustee of the
Neuroscience Research Foundation.
Richard A. Michaelson - 47 Mr. 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 1998. He served as
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, Inc., the
clinical laboratory subsidiary of Corning
Incorporated that was a predecessor to Quest
Diagnostics Incorporated, 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.
Gabriel Balthazar Thomas - 57 Mr. 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.
David C. Weavil - 48 David C. Weavil has been Chairman,
President and Chief Executive Officer of
the Company since January 1997. He served
as Executive Vice President of LabCorp
from the date of the April 1995 merger of
Roche Biomedical Laboratories, Inc.
("RBL") and NHL which created LabCorp,
through 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 through 1988.
Michael B. Hoffman served as a director of the Company from October
1992 until his resignation for personal reasons on January 22, 1998.
Section 16(a) Beneficial Ownership Reporting Compliance
Based upon a review of Forms 3, 4, and 5 filed with the Commission by
the Company's directors and officers in 1998 the Company believes that all such
required forms were filed on a timely basis.
Item 11. Executive Compensation
The following table sets forth the annual and long-term compensation
paid or accrued by Unilab for services rendered in all capacities to Unilab
during the years ended December 31, 1998 and 1997, as applicable, of those
persons who were, at December 31, 1998, (i) the Chief Executive Officer (Mr.
Weavil) and (ii) the two other Named Executive Officers of Unilab (the Division
Presidents, Ian Brotchie and R. Jeffrey Lanzolatta) whose total annual salary
and bonus for the year ended December 31, 1998 exceeded $100,000 (Messrs.
Weavil, Brotchie, and Lanzolatta collectively are referred to herein as the
"Named Executive Officers").
<TABLE>
Summary Compensation Table
<CAPTION>
Long Term
Annual Compensation Compensation Awards
Restricted Securities
Name and Other Annual Stock Undseryling
Principal Position Year Salary ($)(3) Bonus ($) Compensation ($) Award($) Options(#)
- ------------------ ---- ------------- --------- ---------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
David C. Weavil 1998 $572,137 $425,000(4) $ 12,000(8) -- 250,000
Chairman of the Board, 1997 $464,710 $200,000(5) $139,659(9) -- 250,000
President and Chief Executive
Officer of Unilab(1)
Ian Brotchie 1998 $350,523 $57,500(6) $11,772(8) -- 50,000
Executive Vice President,
President of Northern
California Division (2)
R. Jeffrey Lanzolatta 1998 $302,113 $125,000(7) $13,163(8) -- 50,000
Executive Vice President,
President of Southern
California Division (2)
<FN>
(1) Mr. Weavil has served as Chairman, President and Chief Executive Officer
of the Company since January 20, 1997. See "Employment Agreements; Other
Arrangements--"Weavil Employment Agreement".
(2) Mr. Brotchie has served as Executive Vice President and President of the
Northern California Division of the company since May 1998. Mr. Lanzolatta
has served as Executive Vice President and President of the Southern
California Division of the Company since May 1998. Prior thereto each
served in various other senior capacities within the Company.
(3) Includes (i) amounts equal to 8% of cash compensation paid into a deferred
compensation account ($66,000 and $40,000 for Mr. Weavil in 1998 and 1997,
respectively, $22,600 for Mr. Brotchie for 1998 and $28,000 for Mr.
Lanzolatta for 1998) and (ii) amounts accrued under the Unilab Corporation
Executive Retirement Plan ($106,137 and $24,560 for Mr. Weavil for 1998
and 1997 respectively; $102,923 for Mr. Brotchie for 1998 and $49,113 for
Mr. Lanzolatta for 1998).
(4) Mr. Weavil was paid a cash bonus of $425,000 for 1998, based on a
formula adopted by the Board of Directors tied to
pre-established company-wide performance objectives.
(5) Mr. Weavil was paid a bonus of $200,000 in 1997, pursuant to his
employment agreement with the Company. Mr. Weavil received payment of
$100,000 of the bonus in shares of Unilab Common Stock at the start of his
employment with the Company in January 1997. As a result, Mr. Weavil
received 228,571 shares in payment of the bonus (calculated on the basis
of the January 17, 1997 closing market price of Unilab Common Stock of
$0.4375 per share). The remaining $100,000 of the bonus was paid in cash
in the second half of 1997.
(6) Mr. Brotchie was paid a cash bonus of $57,500 for 1998, based on a formula
tied in part to pre-established company-wide performance objectives and in
part to pre-established Divisional performance objectives.
(7) Mr. Lanzolatta was paid a cash bonus of $125,000 for 1998, based on a
formula tied in part to pre-established company-wide performance
objectives and in part to pre-established Divisional performance
objectives.
(8) For Mr. Weavil, represents the benefits from a car allowance. For Mr.
Brotchie, represents the benefits from a car allowance, Company matching
contributions to the Company's 401(k) Profit Sharing Plan, tax return
preparation fees and related tax gross-up payments on such amounts. Mr.
Mr. Lanzolatta, represents the benefits of a car allowance, Company
matching contributions to the Company's 401(k) profit sharing plan,
imputed interest on an interest free loan and related tax gross-up
payments on such amounts. See "Employment Agreements".
(9) For Mr. Weavil, represents the benefits from a car allowance, expenses
paid by the Company related to Mr. Weavil's relocation to and residence in
California, the benefit from the Company providing group term life
insurance and related tax gross-up payments on such amounts (such tax
gross-up payments being $60,955 in 1997). See "Employment Agreements;
Other Arrangements -- Weavil Employment Agreement".
</FN>
</TABLE>
Option Grants
The following table sets forth the grants of non-qualified stock
options during the year ended December 31, 1998, to the Named Executive
Officers:
<TABLE>
Option Grants In Last Fiscal Year
<CAPTION>
No. of Securities % of Total Market
Underlying Options Exercise Price of
Options Granted to or Date of Grant Date
Granted Employees in Base Price Grant Expiration Present Value
Name (#) Fiscal Year ($/Sh) ($/Sh) Date ($/Sh)
- ------ ---- ----------- ------ ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
David C. Weavil 250,000(1) 26.3% $1.75 $1.75 1/2008 $1.09(3)
Ian Brotchie 50,000(2) 5.3% $2.0625 $2.0625 1/2008 $1.28(3)
R. Jeffrey Lanzolatta 50,000(2) 5.3% $2.0625 $2.0625 1/2008 $1.28(3)
<FN>
(1) In January 1998, pursuant to the Company's Stock Option and Performance
Incentive Plan and the terms of his employment agreement, Mr. Weavil was
granted options to purchase 250,000 shares of Unilab Common Stock at an
exercise price of $1.75 per share, the closing price per share of Unilab
Common Stock as reported on the American Stock Exchange on the date of the
grant. Such options vested one-fifth on January 2, 1999, and are to vest,
one-fifth on January 2, 2000, one-fifth on January 2, 2001, one-fifth on
January 2, 2002 and one-fifth on January 2, 2003.
(2) In January 1998, pursuant to the Company's Stock Option and Performance
Incentive Plan, Messrs. Brotchie and Lanzolatta were each granted options
to purchase 50,000 shares of Unilab Common Stock at an exercise price of
$2.0625 per share, the closing price per share of Unilab Common Stock as
reported on the American Stock Exchange on the date of the grant. In each
case, 25,000 shares of such options vested on January 28, 1999 and the
remaining 25,000 shares are to vest on January 28, 2000.
(3) In accordance with Securities and Exchange Commission rules, the
Black-Scholes option pricing model was used to estimate the
grant date present value of the options set forth in this table. The
Company's use of this model should not be construed as an endorsement of
its accuracy in valuing options. All option valuation models,
including Black-Scholes, require a prediction about the future movement
of the stock price. The actual value, if any, an executive may realize
will depend on the excess of the stock price over the exercise price on
the date the option is exercised. The estimated values under the model
are based on the following assumptions and variables: (i) the exercise
of all options occurs at their expiration dates, (ii) the weighted
one-year historic stock price volatility of the Common Stock is
approximately 40% and (iii) for purposes of present value calculations,
the ten-year, zero coupon Treasury note interest rate at the date of
grant (5.79%) was used.
</FN>
</TABLE>
Other Stock Options
Unilab has from time to time granted non-qualified stock options,
some of which were granted not pursuant to any formal plan other than an
individual stock option agreement and some of which were issued under the
Company's Stock Option and Performance Incentive Plan, to its officers,
employees, consultants and directors. As of the Record Date, non-qualified stock
options to purchase a total of 6,007,833 shares of Unilab Common Stock (some of
which have not yet vested) were outstanding.
Effective as of January 1, 1996, the Company's stockholders approved
and adopted a Stock Option and Performance Incentive Plan, pursuant to which
certain of the Company's employees may receive grants of options to purchase
shares of Unilab Common Stock, and may receive other grants of Unilab Common
Stock in various forms (Restricted Stock, SARs, etc.). Options granted under the
Stock Option and Performance Incentive Plan have a ten year term and vest in
equal installments over a vesting period determined by the Administrative
Committee of the Stock Option and Performance Incentive Plan, which is typically
one to five years. The exercise price is the per share price of Unilab Common
Stock on the American Stock Exchange (or for grants made prior to the Company's
listing on the American Stock Exchange on June 24, 1996, on Nasdaq/NNM) at the
close of business on the grant date. Pursuant to this Plan, options to purchase
a total of 949,500 shares of Unilab Common Stock were issued to employees of the
Company during 1998.
Effective as of January 1, 1996, the Company's stockholders approved
and adopted a Non-Employee Directors Stock Plan, pursuant to which certain of
the Company's directors receive annual grants, typically on the first trading
day of each year, of options to purchase shares of Unilab Common Stock. Such
stock options have a ten year term and vest 50% on the date of grant and 50% on
the first anniversary of the date of grant. The exercise price is the per share
price of Unilab Common Stock on the American Stock Exchange (or for grants prior
to the June 24, 1996 listing date on the American Stock Exchange, on Nasdaq/NNM)
at the close of business on the grant date. Pursuant to this program, options to
purchase 80,000 shares were issued to non-employee directors in January 1998.
Restricted Stock
Unilab has, from time to time, granted restricted stock to its
employees. Such shares typically contain restrictions on transfer of the granted
shares of Unilab Common Stock for a two to five year period, with forfeiture of
such shares upon earlier separation from the Company, in the Board's discretion.
As of April 5, 1999, 759,499 shares of restricted Unilab Common Stock were
outstanding, including 150,000 shares issued to R. Jeffrey Lanzolatta, one of
the Named Executive Officers (50,000 shares granted in 1996 and 100,000 shares
granted in 1994).
Option Exercises and Fiscal Year-End Values
The following table reflects the options to purchase Unilab Common
Stock that were exercised by the Named Executive Officers during the fiscal year
ended December 31, 1998 and lists the number and value of the unexercised
options to purchase Unilab Common Stock held by the Named Executive Officers at
December 31, 1998.
<TABLE>
Aggregated Option Exercises In Last Fiscal Year and FY-End Option Values
<CAPTION>
Number of
Securities
Underlying Value of
Unexercised Unexercised
Options at In-the-Money
FY-End (#) Options at
FY-End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
David C. Weavil(1) -- -- 50,000/450,000(1) $96,875/543,750
Ian Brotchie(2) -- -- 288,750/101,250(2) $210,000/94,375
R. Jeffrey Lanzolatta(3) -- -- 148,750/100,250(3) $210,656/95,031
</TABLE>
(1) Pursuant to Mr. Weavil's employment agreement he received (i) in January
1997 options to purchase 250,000 shares of Unilab Common Stock at an
exercise price equal to the $0.4375 per share closing market price of
Unilab Common Stock on the last trading day prior to the date of grant,
vesting in equal installments over five years, beginning January 1998 and
ending January 2002 and (ii) in January 1998 options to purchase 250,000
shares of Unilab Common Stock at an exercise price equal to the $1.75 per
share closing market price of Unilab Common Stock on the date of grant,
vesting in equal installments over five years, beginning January 1999 and
ending January 2003.
<TABLE>
(2) Mr. Brotchie has received the following stock options:
<CAPTION>
Date of Exercise Vested at Unvested
Grant Price 12/31/98 Value 12/31/98 Value
<S> <C> <C> <C> <C> <C>
1/25/94 $6.1125 100,000 $ 0 0 $ 0
1/1/95 4.50 18,750 0 6,250 0
5/1/95 5.1875 50,000 0 0 0
4/28/97 0.625 45,000 78,750 45,000 78,750
4/28/97 0.625 75,000 131,250 0 0
1/28/98 2.0625 0 0 50,000 15,625
---------- ---------- ------ ------
288,750 $210,000 101,250 $94,375
<FN>
Mr. Brotchie also received on January 4, 1999 options to purchase 50,000
shares at an exercise price of $2.3125, vesting one half on January 4,
2000 and one half on January 4, 2001.
</FN>
</TABLE>
<TABLE>
(3) Mr. Lanzolatta has received the following stock options:
<CAPTION>
Date of Exercise Vested at Unvested
Grant Price 12/31/98 Value at 12/31/98 Value
<S> <C> <C> <C> <C> <C>
2/25/94 $5.625 $20,000 $ 0 0 $ 0
1/1/95 4.50 5,250 0 1,750 0
2/27/96 2.1875 3,500 656 3,500 656
4/28/97 0.625 45,000 78,750 45,000 78,750
4/28/97 0.625 75,000 131,250 0 0
1/28/98 2.0625 0 0 50,000 15,625
---------- ---------- ------ ------
148,750 $210,656 100,250 $95,031
<FN>
Mr. Lanzolatta also received on January 4, 1999 options to purchase
50,000 shares at an exercise price of $2.3125, vesting one half on January 4,
2000 and one half on January 4, 2001.
</FN>
</TABLE>
Executive Retirement Plan
Effective as of January 1, 1995, the Company's stockholders approved the
adoption of the Executive Retirement Plan (the "SERP"). The SERP provides for
issuance to certain selected officers and other senior executives of the Company
("Executives") of up to 1,000,000 shares in the aggregate of Unilab Common
Stock. Shares of Unilab Common Stock to be issued in connection with the SERP
will be made available from treasury or authorized and unissued shares of Unilab
Common Stock. An Executive participating in the SERP is entitled to receive an
annual allocation of Awards. An Award is a unit of measurement equivalent to a
share of Unilab Common Stock. The number of Awards allocated each year will have
a fair market value equal to the annual expense of a projected single life
annuity commencing at age 65, providing an Executive with a benefit equal to 2%
of the Executive's "Final Compensation" multiplied by the number of years of
service (not to exceed 25) (the "Target Benefit"). For purposes of determining
the annual expense under the SERP, an Executive's "Final Compensation" equals
the projected average compensation of the Executive for the 5 consecutive
calendar years preceding and including the Executive's attainment of age 65.
Initially, based on recommendations from the actuary for the SERP, an
Executive's compensation will be projected to increase at the rate of 5 1/2% per
year.
As soon as practicable following the death, disability or retirement of an
Executive after attaining age 65 (the "Payment Date"), the Executive (or his
Beneficiary, as the case may be) will be issued a certificate or certificates
for a number of shares of Common Stock equal to the vested number of Awards in
the Account of the Executive. In addition, an Executive shall be entitled to a
distribution of his Account upon his termination of employment for Good Reason
or without Cause (as defined in the SERP), in each case only after a Change in
Control. Any other amounts in an Account, other than Awards, shall be
distributed in a single cash lump sum payment.
During 1998, five of the Company's executives participated in the SERP.
David C. Weavil, the Company's Chairman, President and Chief Executive Officer
during 1998, received a 1998 contribution to the SERP from the Company
equivalent to $106,137. The other two Named Executive Officers, Ian Brotchie,
Executive Vice President and President of the Northern California Division and
R. Jeffrey Lanzolatta, Executive Vice President and President of the Southern
California Division, received 1998 contributions to the SERP equivalent to
$102,923 and $49,113, respectively. The other two participants in the SERP
received aggregate 1998 contributions to the SERP equivalent to $94,419. The
amount of such Awards was calculated on the date of issuance of the Awards,
utilizing the common stock price valuation as of such date. Since the price of
Unilab Common Stock increased between the date of issuance and December 31,
1998, the value of the Awards also increased. In light of an increase during
1997 of the Company's Common Stock price, the Board limited the maximum number
of Awards to be granted annually to all participants in the SERP to 200,000
Awards in the aggregate.
Employment Agreements; Other Arrangements
Weavil Employment Agreement. On January 20, 1997, Unilab and
David C. Weavil entered into an employment agreement (the "Weavil Employment
Agreement") pursuant to which he serves as Chairman of the Board, President and
Chief Executive Officer of Unilab. The term of the Weavil Employment Agreement
initially ended on January 19, 1998, and automatically renewed and will continue
to renew for successive one-year periods unless one party thereto gives at least
a six month notice of termination before the end of the current term (the
"Employment Period"). Mr. Weavil receives an annual base salary of $400,000,
subject to upward adjustment at the Board of Directors' discretion. Mr. Weavil
received upon execution of the Weavil Employment Agreement a bonus of $100,000,
which was paid in shares of Unilab Common Stock. In payment of this bonus, Mr.
Weavil received 228,571 shares of Unilab Common Stock, calculated by dividing
$100,000 by $0.4375, the closing market price of Unilab Common Stock on January
17, 1997, the last trading day prior to Mr. Weavil's commencement of employment.
Mr. Weavil was also eligible to receive, and did receive, an additional 1997
cash bonus of $100,000 when Unilab met certain performance objectives
pre-established by the Board of Directors of Unilab. Mr. Weavil received a cash
bonus of $425,000 in 1998, based on a pre-established formula tied to
Company-wide performance. The Weavil Employment Agreement also provides that
Unilab will establish for Mr. Weavil a deferred compensation account to be
credited annually with an additional amount equal to 8% of Mr. Weavil's total
cash compensation (inclusive of all bonuses) for that year. Mr. Weavil earned
$66,000 in deferred compensation during 1998. The Weavil Employment Agreement
also provides for Mr. Weavil's participation in the Company's Executive
Retirement Plan.
Pursuant to the terms of the Weavil Employment Agreement, Mr.
Weavil purchased from the Company on January 20, 1997 $500,000 worth of newly
issued shares of Unilab Common Stock based on the January 17, 1997 closing
market price of $0.4375. Accordingly, Mr. Weavil purchased 1,142,857 shares of
Unilab Common Stock at that time. Mr. Weavil was granted demand registration
rights with respect to such shares, as well as the 228,571 shares he received in
payment of his $100,000 bonus noted in the preceding paragraph. The $500,000
utilized by Mr. Weavil to purchase such shares was borrowed from the Company.
The repayment of $250,000 of such borrowed funds was due 180 days after the date
of loan (i.e., by July 20, 1997), was unsecured and bore interest at 6%. That
note was repaid in full by Mr. Weavil on July 20, 1997. Repayment of the other
$250,000 of such funds is due five years after issuance (i.e. by January 20,
2002), is secured by the shares of Unilab Common Stock purchased from the
proceeds thereof and bears interest at 6%.
Also pursuant to the Weavil Employment Agreement, on January
20, 1997, Mr. Weavil was granted options to purchase 250,000 shares of Unilab
Common Stock at an exercise price of $0.4375. the closing market price of Unilab
Common Stock on January 17, 1997. Such options vested 20% on January 20, 1998,
and 20% on January 20, 1999, and will vest 20% on January 20, 2000, 20% on
January 20, 2001 and 20% on January 20, 2002. Additionally, the Weavil
Employment Agreement provided for Mr. Weavil to be granted on January 2, 1998
options to purchase 250,000 shares of Unilab Common Stock at an exercise price
equal to the closing market price of Unilab Common Stock on such date. Such
options were granted on January 2, 1998 at an exercise price of $1.75 per share.
Such options vest in equal installments over five years, beginning on January 2,
1999 and ending on January 2, 2003.
In the event that Mr. Weavil's employment is terminated by the
Company without Cause (as defined in the Weavil Employment Agreement) and not in
association with a Change of Control (as defined in the Weavil Employment
Agreement), Mr. Weavil will receive 18 months of continued compensation (salary,
bonus and deferred compensation) and continued benefits coverage. Mr. Weavil has
agreed not to compete with the Company for 18 months following termination of
employment without Cause and not in association with a Change of Control.
The Weavil Employment Agreement also provides for certain
payments to Mr. Weavil upon his termination or resignation following a Change of
Control of Unilab (as defined in the Weavil Employment Agreement). If in
association with a Change of Control, Mr. Weavil resigns his employment for Good
Reason or his employment is terminated without Cause, then he becomes entitled
to receive a lump sum in cash equal to two times Mr. Weavil's annual total
compensation (inclusive of cash bonuses and deferred compensation).
Brotchie Employment Agreement. On January 25, 1994, Unilab and
Ian J. Brotchie entered into an employment agreement (the "Brotchie Employment
Agreement") pursuant to which he initially served as President of Unilab's
wholly-owned subsidiary, Associated Laboratories, Inc. Mr. Brotchie has been
Executive Vice President and President, Northern California Division, since May
1998. The term of the Brotchie Employment Agreement initially ended on January
25, 1996 and automatically renewed and will continue to renew for successive
one-year periods, unless one party thereto gives at least a six-month notice of
termination before the end of the current term (the "Employment Period"). The
Brotchie Employment Agreement initially provided for a base salary of $175,000
per year, which has since been increased to $225,000 per year. Mr. Brotchie is
also entitled to an annual bonus of up to 60% of his base salary and incentive
compensation, as determined in the sole discretion of the Company's Board of
Directors or its designee. Mr. Brotchie received a cash bonus of $57,500
for 1998.
In the event that Mr. Brotchie's employment is terminated by
the Company without Cause (as defined in the Brotchie Employment Agreement) and
not in association with a Change of Control (as defined in the Brotchie
Employment Agreement), Mr. Brotchie will receive 24 months of continued
compensation (salary and bonus) and continued benefits coverage. Mr. Brotchie
has agreed not to compete with the Company for 24 months following termination
of employment without Cause and not in association with a Change of Control.
The Brotchie Employment Agreement also provides for certain
payments to Mr. Brotchie upon his termination or resignation following a Change
of Control. If in association with a Change of Control, Mr. Brotchie resigns his
employment for Good Reason or is terminated without Cause, then he becomes
entitled to receive a lump sum payment equal to two times Mr. Brotchie's annual
total compensation (inclusive of cash bonuses).
Lanzolatta Employment Agreement. On November 11, 1993, Unilab
and R. Jeffrey Lanzolatta entered into an employment agreement (the "Lanzolatta
Employment Agreement) pursuant to which he initially served as Vice President,
Sales and Marketing. Mr. Lanzolatta has been Executive Vice President and
President, Southern California Division, since May 1998.The term of the
Lanzolatta Employment Agreement initially ended on November 11, 1994 and
automatically renewed and will continue to renew for successive one-year
periods, unless one party thereto gives at least a six-month notice of
termination before the end of the current term (the "Employment Period"). The
Lanzolatta Employment Agreement initially provided for a base salary of $145,000
per year, which has since been increased to $225,000 per year. Mr. Lanzolatta is
also entitled to an annual bonus in an amount determined in the sole discretion
of the Company's Board of Directors or its designee. Mr. Lanzolatta received a
cash bonus of $125,000 for 1998.
In the event that Mr. Lanzolatta's employment is terminated by
the Company without Cause (as defined in the Lanzolatta Employment Agreement)
and not in association with a Change of Control (as defined in the Lanzolatta
Employment Agreement), Mr. Lanzolatta will receive 12 months of continued
compensation (salary and bonus) and continued benefits coverage. Mr. Lanzolatta
has agreed not to compete with the Company for 12 months following termination
of employment without Cause and not in association with a Change of Control.
The Lanzolatta Employment Agreement also provides for certain
payments to Mr. Lanzolatta upon his termination or resignation following a
Change of Control. If in association with a Change of Control, Mr. Lanzolatta
resigns his employment for Good Reason or is terminated without Cause, then he
becomes entitled to receive a lump sum payment equal to two times Mr.
Lanzolatta's annual total compensation (inclusive of cash bonuses).
Compensation Committee
Report on Executive Compensation
Philosophy
The Company has developed an overall compensation program and
specific compensation plans which are designed to enhance corporate performance,
and thus stockholder value, by aligning the financial interests of executives
with those of its stockholders. In pursuit of these overall objectives, the
structure and scope of the Company's compensation program are designed to
attract key executives to the Company and retain the best possible executive
talent; to reinforce and link executive and stockholder interests through
equity-based plans; and to provide a compensation package that recognizes
individual performance in conjunction with overall corporate performance.
Principal Components of Executive Compensation
The principal elements of the Company's executive compensation
program consist of both annual and long-term programs and include base salary,
annual cash and/or stock bonus if performance objectives are achieved, and, at
appropriate intervals, long-term incentive compensation in the form of stock
option grants and/or awards of restricted stock. Such stock option grants and
restricted stock awards are issued to the Company's executives and other
employees under the Stock Option and Performance Incentive Plan. The Company
also provides medical and other fringe benefits generally available to Company
employees and, for certain of its selected senior executives, a deferred
compensation plan and the SERP.
Base salaries for executives are determined by evaluating the
responsibilities of the position held and the experience of the individual, with
reference to the competitive marketplace for executive talent, including a
comparison to base salaries for positions having comparable responsibilities at
other companies in the clinical laboratory industry (including certain of the
companies included in the index used for the Performance Graph contained
herein). In addition to comparing base salary compensation of other companies,
consideration is given to the relative overall corporate performance of the
Company in relation to its competitors in the industry, with the objective of
achieving standards and setting base executive salaries in the Company somewhat
above the market rate paid for comparable positions in the clinical laboratory
industry. In July 1996 at the request of the Company's Chief Executive Officer
at the time, with the backing of the Compensation Committee, the Company's
senior executives voluntarily accepted a 10% reduction in base salary in light
of the Company's disappointing 1996 financial performance. With one exception (a
raise given in connection with a promotion), base salaries of senior executives
have been frozen since that time.
The Company's executive officers and other key persons may be
eligible for an annual cash and/or stock bonus under their individual employment
agreements. Individual performance objectives formulated by Company management
are recommended by the Chief Executive Officer for approval by the Compensation
Committee or the Board and are awarded upon the discretionary recommendation of
the CEO. Eligible executives may receive bonus awards based upon certain
percentages of base salary at threshold and maximum levels appropriate to the
nature of their position in the Company. Whether any bonus is awarded, and, if
so, the amount thereof depends upon actual performance against predetermined
individual and corporate objectives established by the CEO or the Compensation
Committee. Cash bonuses were awarded for 1998 on the basis of a formula tied to
company performance and/or divisional performance to each of the Named Executive
Officers and certain other senior officers of the Company.
Awards of stock options and restricted stock have been made
periodically to executive officers and certain other employees of the Company
upon consultation with and recommendation of the Chief Executive Officer and
approval of the Compensation Committee, which may, under certain circumstances,
be submitted for ratification by the Board of Directors. Such options have been
granted with an exercise price equal to the market value of Unilab Common Stock
on the date of grant. The purpose of these awards has been to provide a
meaningful equity interest in the Company to Company employees in a format that
is designed to retain and align the financial interests of these employees with
those of stockholders. The Board and the Compensation Committee believe that
this program has been and will be instrumental in focusing the Company's senior
management on building long-term value for stockholders. It has been the
practice of the Company to make grants of stock options with a staggered vesting
schedule and forfeiture of shares if not exercised within a specified period
following separation from the Company's employ. The restricted stock grants
similarly contain certain restrictions on vesting and transfer tied to the
recipient's continued employment by the Company. These restrictions on stock
option awards and restricted stock grants are designed to encourage recipients
to remain in the Company's employ in order to recognize the full value of the
awards. The term over which these restrictions have applied typically is one to
five years in the case of stock options and two to five years in the case of
restricted stock. To date, only stock options and restricted stock have been
granted under the Stock Option and Performance Incentive Plan; however, the
Compensation Committee expects that other forms of equity-based compensation
permitted under that plan may also have similar restrictions.
In addition, the Company provides health care benefits and
profit sharing for senior executives and other key persons on terms generally
available to all Company employees. The Compensation Committee believes that
such benefits are comparable to those offered by other clinical laboratory
companies. The value of perquisites, as determined in accordance with the rules
of the Securities and Exchange Commission relating to executive compensation,
did not exceed $50,000 or 10% of the total salary and bonus of any executive
officer in the last fiscal year.
Since no executive officer of the Company received compensation
for purposes of Section 162(m) of the Internal Revenue Code in excess of $1
million during 1998, the Compensation Committee presently anticipates that all
compensation paid to executive officers will qualify for deductibility under
Section 162(m), which limits in certain circumstances the deductibility of
compensation in excess of $1 million paid to certain executive officers, except
for "performance-based compensation" which complies with requirements imposed
under Section 162(m).
Chief Executive Officer's Compensation
For 1998, David C. Weavil, the Chairman, President and Chief
Executive Officer of the Company during such period, was paid a base salary of
$400,000, as specified in his employment agreement and the same as in 1997. The
Compensation Committee considered Mr. Weavil's salary to be appropriate in light
of (i) the need to recruit Mr. Weavil in January 1997 with an attractive
compensation package, (ii) Mr. Weavil's compensation at his prior employer,
(iii) the compensation of other senior executives in the clinical laboratory
industry and (iv) the fact that the base salary was the same as Mr. Weavil's
base salary in 1997. Mr. Weavil received a $425,000 cash bonus in March 1999 in
consideration for 1998 performance. Mr. Weavil also received deferred
compensation equal to 8% of his 1998 cash compensation (valued at $66,000), plus
participation in the Company's Executive Retirement Plan (valued at $106,137 in
1998), which brought his annual cash compensation for 1998 to $997,139. Pursuant
to his Employment Agreement, Mr. Weavil also received in January 1998 options to
purchase 250,000 shares of Unilab Common Stock at an exercise price of $1.75 per
share, the then current market price. Pursuant to the terms of the Weavil
Employment Agreement, Mr. Weavil purchased from the Company on January 20, 1997
$500,000 worth of newly issued shares of Unilab common stock based on the
January 17, 1997 closing market price of $0.4375. Accordingly, Mr. Weavil
purchased 1,142,857 shares of Unilab Common Stock at that time. Mr. Weavil was
granted demand registration rights with respect to such shares, as well as the
228,571 shares he received in payment of his $100,000 bonus. The $500,000
utilized by Mr. Weavil to purchase such shares was borrowed from the Company.
The repayment of $250,000 of such borrowed funds was due 180 days after the date
of loan (i.e., by July 20, 1997), was unsecured and bore interest at 6% and was
repaid on time. Repayment of the other $250,000 of such funds is due five years
after issuance (i.e. by January 20,2002), is secured by the shares of Unilab
Common Stock purchased from the proceeds thereof and bears interest at 6%. Such
compensation and bonus structure were determined pursuant to Mr. Weavil's
Employment Agreement, described above under the caption "Employment Agreements;
Other Arrangements -- Weavil Employment Agreement".
Under the terms of Mr. Weavil's Employment Agreement, bonus
payments for 1998 and beyond are to be determined in the discretion of the Board
of Directors or the Compensation Committee. The Committee based Mr. Weavil's
1998 bonus on the Company's ability to meet or exceed certain pre-established
financial parameters. Since the Company's performance in 1998 substantially met
the parameters previously established by the Board, Mr. Weavil received a bonus
of $425,000 in March 1999.
Compensation of Other Named Executive Officer and Key Management Personnel
The Company has also entered into employment agreements with
the Company's other Named Executive Officers and other key management personnel.
Each agreement provides a base salary plus potential bonus, if certain
performance objectives are achieved, and other incentive compensation at the
discretion of the Chief Executive Officer (approved by the Compensation
Committee, in the case of the Company's other Named Executive Officers).
The Compensation Committee believes that significant stock
ownership, through grants of stock options, restricted stock, loans to finance
the purchase of Common Stock and other forms of equity-based incentive
compensation that would be permitted under the Stock Option and Performance
Incentive Plan, are a major incentive in aligning the interests of employees,
including senior management, and stockholders. The Compensation Committee
therefore intends to continue to explore various methods of assuring such
commonality of interest in the Company's long-term performance.
Kirby L. Cramer (Chairman)
Gabriel B. Thomas
Members of the Compensation Committee
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Directors
Ownership of Management and Directors
The following table sets forth certain information known to Unilab
regarding the beneficial ownership of Unilab Common Stock as of April 5, 1999
by: (i) each of Unilab's directors and Named Executive Officers (see "Executive
Compensation" for definition of Named Executive Officer) and (ii) all directors
and executive officers as a group. For purposes of this table, a person or group
of persons is deemed to have "beneficial ownership" of any shares as of a given
date which such person has the right to acquire within 60 days after such date.
For purposes of computing the percentage of outstanding shares held by each
person or group of persons named below on a given date, any security which such
person or persons have the right to acquire within 60 days after such date is
deemed to be outstanding, but is not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person. Except as noted below,
each person has full voting and investment power over the shares indicated.
<TABLE>
<CAPTION>
Number of Shares of Percent of
Unilab Common Stock Unilab Common Stock
Name and Address of Beneficial Owner Beneficially Owned Beneficially Owned(1)
<S> <C> <C>
David C. Weavil 1,495,928(2) 3.6%
Haywood D. Cochrane, Jr. 70,265(3) *
Kirby L. Cramer 1,075,622(4) 2.6%
William Gedale 7,751(5) *
Richard A. Michaelson 745,024(6) 1.8%
Gabriel B. Thomas 120,934(7) *
All Directors and Executive Officers
Of Unilab as a Group (10 persons) 4,931,924 11.4%
<FN>
- ---------------
* less than 1%
</FN>
</TABLE>
(1) Calculated pursuant to Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and based on
40,707,673 shares of Unilab Common Stock outstanding as of the April 5,
1999.
(2) Mr. Weavil is Chairman, President and Chief Executive Officer of
the Company. Pursuant to the terms of an Employment Agreement dated
January 20, 1997 between David C. Weavil and Unilab, Mr. Weavil (a)
purchased $500,000 of Common Stock from the Company at the closing
market price of the Common Stock on January 17, 1997 ($0.4375), with
funds borrowed from the Company (half of which have been paid back to
the Company, including accrued 6% interest thereon), resulting in
ownership of 1,142,857 shares and (b) received 228,571 shares
($100,000 of stock issued at the January 17, 1997 closing price
($0.4375)) as a partial payment of his 1997 bonus. During 1998 and
1997 Mr. Weavil donated 18,000 and 7,500 shares, respectively, to
charity. Pursuant to his Employment Agreement, Mr. Weavil has also
received options to purchase 250,000 shares at the January 17, 1997
closing price of $0.4375 per share, 100,000 shares of which have vested
and are included in this ownership calculation, and options to
purchase 250,000 shares at the January 2, 1998 closing price of $1.75,
50,000 of which have vested. See "Employment Agreements;
Other Arrangements -- Weavil Employment Agreement".
(3) Mr. Cochrane is a director of the Company. Includes a presently
exercisable option to purchase 10,000 shares at $0.75 per
share, which expires in June 2007, a presently exercisable option to
purchase 10,000 shares at $1.75 per share, which expires in
January 2008 and a presently exercisable option to purchase 5,000 shares
at $2.3125 per share, which expires in January 2009. Also includes 953
shares received in pro rata payment of second quarter 1997 director fees,
4,444 shares received in payment of third quarter 1997 director fees,
3,077 shares received in payment of fourth quarter 1997 director fees,
2,857 shares received in payment of first quarter 1998 director fees,
3,721 shares received in payment of second quarter 1998 director fees,
4,324 shares received in payment of third quarter 1998 director fees,
5,161 shares received in payment of fourth quarter 1998 director
fees, 4,324 shares received in payment of first quarter 1999
director fees and 3,404 shares received in payment of second
quarter 1999 director fees. See "Compensation of Directors".
(4) Mr. Cramer is a director of the Company. Includes a presently
exercisable option to purchase 10,000 shares at $2.00 per
share, which expires in July 2000, a presently exercisable option to
purchase 30,000 shares at $6.125 per share, which expires
in March 2003, a presently exercisable option to purchase 10,000 shares
at $6.00 per share, which expires in November 2003, a presently
exercisable option to purchase 20,000 shares at $4.50 per share,
which expires in December 2004, a presently exercisable option to
purchase 20,000 shares at $2.625 per share, which expires in January 2006,
a presently exercisable option to purchase 20,000 shares at $0.50 per
share, which expires in January 2007, a presently exercisable option
to purchase 20,000 shares at $1.75 per share, which expires in January
2008 and a presently exercisable option to purchase 10,000 shares at
$2.3125 per share, which expires in January 2009. Also includes 6,667
shares received in payment of fourth quarter 1996 director fees,
10,000 shares received in payment of first quarter 1997 director fees,
8,000 shares received in payment of second quarter 1997 director fees,
4,444 shares received in payment of third quarter 1997 director fees,
3,077 shares received in payment of fourth quarter 1997 director fees,
3,721 shares received in payment of second quarter 1998 director fees,
4,324 shares received in payment of third quarter 1998 director fees,
5,161 shares received in payment of fourth quarter 1998 director fees,
4,324 shares received in payment of first quarter 1999 director fees
and 3,404 shares received in payment of second quarter 1999 director
fees. Mr. Cramer purchased 500,000 shares of Common Stock from the
Company on April 4, 1997 at a per share purchase price equal
to the closing market price on such date of $0.5625. Such shares were
purchased pursuant to the Directors Stock Purchase Plan.
See "Compensation of Directors".
(5) Mr. Gedale is a director of the Company. Includes a presently
exercisable option to purchase 10,000 shares at $1.6875 per
share, which expires in September 2007, a presently exercisable option
to purchase 10,000 shares at $1.75 per share, which expires in January
2008, and a presently exercisable option to purchase 5,000 shares at
$2.3125 per share, which expires in January 2009. Also includes 3,721
shares received in payment of second quarter 1998 director fees. Mr.
Gedale received 4,324 shares received in payment of third quarter 1998
director fees, 5,161 shares received in payment of fourth quarter 1998
director fees, 4,324 shares received in payment of first quarter 1999
director fees and 3,404 shares received in payment of second
quarter 1999 director fees. He sold 5,161 shares on December 14, 1998
in open market sales transactions at a sales price of $2.0625 per share,
4,000 shares on October 12, 1998 in open market sales transactions at
a sales price of $1.8125 per share, 2,162 shares on July 9, 1998 in open
market sales transactions at a sales price of $2.50 per share, 1,160
shares on April 20, 1998 in open market sales transactions at a sales
price of $2.6875 per share and 4,324 shares on January 4, 1999 in open
market sales transactions at a sales price of $2.3125 per share. See
"Compensation of Directors".
(6) Mr. Michaelson is a director of and consultant to the Company (see
"Certain Relationships and Transactions with Related Parties"). He
served as Senior Vice President of the Company until December 31, 1997.
Includes a presently exercisable option
to purchase 50,000 shares at $5.625 per share, which expires in February
2004, a presently exercisable option to purchase 35,000 shares at $4.50
per share, which expires in January 2005, a presently exercisable
option to purchase 150,000 shares at $5.1875 per share, which expires
in May 2005, a presently exercisable option to purchase 35,000 shares
at $2.1875 per share, which expires in February 2006, a presently
exercisable option to purchase 200,000 shares at $0.625 per share which
expires in April 2007, a presently exercisable option to purchase 10,000
shares at $1.75 per share, which expires in January 2008 and a presently
exercisable option to purchase 5,000 shares at $2.3125 per share,
which expires in January 2009. Also includes 29,090 shares received in
partial payment of salary for the months of August and September 1996.
Additionally, includes 3,721 shares received in payment of second quarter
1998 director fees, 4,324 shares received in payment of third quarter
1998 director fees, 5,161 shares received in payment of fourth quarter
1998 director fees, 4,324 shares received in payment of first quarter
1999 director fees and 3,404 shares received in payment of second
quarter 1999 director fees. See "Compensation of Directors" and "Certain
Relationships and Transactions with Related Persons".
(7) Mr. Thomas is a director of the Company. Includes a presently exercisable
option to purchase 10,000 shares at $6.00 per share,
which expires in November 2003, a presently exercisable option to
purchase 20,000 shares at $4.50 per share, which expires in
December 2004, a presently exercisable option to purchase 20,000
shares at $2.625 per share, which expires in January 2006, a
presently exercisable option to purchase 20,000 shares at $0.50 per
share, which expires in January 2007, a presently exercisable
option to purchase 20,000 shares at $1.75 per share, which expires in
January 2008 and a presently exercisable option to purchase 10,000
shares at $2.3125 per share, which expires in January 2009. Also
includes 3,721 shares received in payment of second quarter 1998
director fees, 4,324 shares received in payment of third quarter 1998
director fees, 5,161 shares received in payment of fourth quarter 1998
director fees, 4,324 shares received in payment of first quarter 1999
director fees and 3,404 shares received in payment of second quarter 1999
director fees. See "Compensation of Directors".
Ownership of Certain Beneficial Owners
The following table sets forth certain information, to the knowledge
of Unilab, regarding the beneficial ownership of Unilab Common Stock as of April
5, 1999 by all stockholders known by Unilab (based on public filings with the
Commission, except as otherwise noted) to be the beneficial owners of more than
5% of the outstanding shares of Unilab Common Stock. For purposes of this table,
a person or group of persons is deemed to have "beneficial ownership" of any
shares as of a given date which such person has the right to acquire within 60
days after such date. For purposes of computing the percentage of outstanding
shares held by each person or group of persons named above on a given date, any
security which such person or persons has the right to acquire within 60 days
after such date is deemed to be outstanding, but is not deemed to be outstanding
for the purpose of computing the percentage ownership of any other person.
Except as noted below, each person has full voting and investment power over the
shares indicated.
Number Percent of
of Shares of Common Stock
Name and Address of Common Stock Beneficially
Beneficial Owner Beneficially Owned Owned(1)
Rockefeller & Co., Inc. 3,550,514(2) 8.7%
30 Rockefeller Plaza
New York, NY 10112
Andrew H. Baker 2,716,228(3) 6.7%
c/o Focused Healthcare Partners, Ltd.
401 Hackensack Avenue
Hackensack, NJ 07601
- --------------------
(1) Calculated pursuant to Rule 13d-3 promulgated under the Exchange
Act and based on 40,707,673 shares of Unilab Common Stock
outstanding as of April 5, 1999.
(2) As reported in Schedule 13G, Amendment No. 3 filed with the Commission
on February 12, 1999
(3) Mr. Baker is the former Chairman, President and Chief Executive Officer of
the Company. Represents 2,176,238 shares directly or indirectly owned by
Mr. Baker (of which 18,069 shares are directly owned by Mr. Baker's
spouse) and beneficial ownership of 540,000 shares issuable upon exercise
of fully vested and presently exercisable options to purchase Unilab
Common Stock. Based on Company records, a Form 4 filed by Mr. Baker on
January 30, 1997 and a Schedule 13D filed by Mr. Baker on April 16, 1997.
Item 13. Certain Relationships and Transactions with Related Persons
Indebtedness of Management
In connection with the hiring of David Weavil as the Company's Chairman,
President and Chief Executive Officer in January 1997, the Company loaned Mr.
Weavil $500,000, which Mr. Weavil used to acquire 1,142,857 newly issued shares
of Unilab Common Stock, valued at the January 17, 1997 closing market price of
$0.4375. $250,000 of such amount due was unsecured and bore interest at 6% and
was repaid on schedule on July 20, 1997. Repayment of the other $250,000 is due
on January 20, 2002, is secured by the shares of Unilab Common Stock purchased
with the proceeds thereof and bears interest at 6%.
R. Jeffrey Lanzolatta, one of the Named Executive Officers, is party to a
secured demand promissory note dated December 17, 1996, in the amount of
$50,000, reflecting the Company's advance to Mr. Lanzolatta of $50,000 against
future bonus payments. Under the promissory note, interest will be paid at the
prime rate of Citibank, N.A. if the principal sum is not paid when due. These
amounts are secured by 150,000 shares of restricted Unilab common stock owned by
Mr. Lanzolatta.
Transactions with Related Persons
The Company retains one of its directors, Richard A. Michaelson,
as a consultant to assist in structuring and negotiating significant
corporate transactions, such as acquisitions. Mr. Michaelson was paid
$60,000 in 1998 under the terms of his consulting agreement.
<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.
(3) Exhibits required to be filed by Item 601 of Regulation S-K.
<PAGE>
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: 4/27/99 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).
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).
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).
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).
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.
