SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22758
UNILAB CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-4415490
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
18448 Oxnard Street, Tarzana, California 91356
(Address of principal executive offices) (Zip Code)
(818) 996-7300
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of July 23, 1999, 41,897,736 shares of Registrant's Common Stock, par value
$.01 per share, were outstanding.
Page 1 of 14 pages
<PAGE>
UNILAB CORPORATION
Form 10-Q for the Quarterly Period Ended June 30, 1999
INDEX
Page
Part I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Balance Sheets - June 30, 1999 3
and December 31, 1998.
Statements of Operations -
Three and six month periods ended
June 30, 1999 and June 30, 1998. 4
Statements of Cash Flows -
Six month periods ended June 30, 1999
and June 30, 1998. 5
Notes to Financial Statements. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Part II - OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE>
<TABLE>
UNILAB CORPORATION
BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(amounts in thousands, except per share data)
<CAPTION>
June 30, December 31,
1999 1998
Assets (Unaudited)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $21,199 $20,137
Accounts receivable, net 54,376 41,326
Inventory of supplies 3,787 3,055
Prepaid expenses and other current assets 2,012 1,045
- ----------------------------------------------------------------------------------------------------
Total current assets 81,374 65,563
Property and Equipment, net 12,449 11,277
Goodwill, net 89,552 56,949
Other Intangible Assets, net 2,072 2,370
Other Assets 5,276 6,301
- ----------------------------------------------------------------------------------------------------
$190,723 $142,460
- ----------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- ----------------------------------------------------------------------------------------------------
Current Liabilities:
Current portion of long-term debt $1,038 $1,206
Accounts payable and accrued liabilities 20,935 14,533
Accrued payroll and benefits 7,684 6,892
- ----------------------------------------------------------------------------------------------------
Total current liabilities 29,657 22,631
- ----------------------------------------------------------------------------------------------------
Long-Term Debt, net of current portion 161,767 137,170
Other Liabilities 5,222 4,026
Commitments and Contingencies
Shareholders' Equity (Deficit):
Convertible preferred stock, $.01 par value
Issued and Outstanding - 364 at June 30
and December 31 4 4
Common stock, $.01 par value
Issued and Outstanding - 41,898 at June 30
and 40,708 at December 31 419 407
Additional paid-in capital 231,834 228,395
Accumulated deficit (238,180) (250,173)
- --------------------------------------------------------------------------------------------
Total shareholders' deficit (5,923) (21,367)
- --------------------------------------------------------------------------------------------
$190,723 $142,460
- --------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
UNILAB CORPORATION
STATEMENTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
(amounts in thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Revenue $73,727 $54,356 $137,286 $108,886
- ----------------------------------------------------------------------------------------------------------------
Direct Laboratory and Field Expenses:
Salaries, wages and benefits 21,831 16,567 40,286 33,390
Supplies 10,519 7,492 19,346 15,105
Other operating expenses 18,983 13,200 34,399 26,329
--------------------------------------------------------
51,333 37,259 94,031 74,824
Legal charge 600 - 600 -
Amortization and depreciation 2,230 1,941 4,127 3,926
Selling, general and administrative expenses 9,891 8,324 19,203 16,858
- ----------------------------------------------------------------------------------------------------------------
Total Operating Expenses 64,054 47,524 117,961 95,608
- ----------------------------------------------------------------------------------------------------------------
Operating Income 9,673 6,832 19,325 13,278
Third party interest, net (3,780) (3,386) (7,266) (6,760)
- -----------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 5,893 3,446 12,059 6,518
Tax Provision - - - -
- ----------------------------------------------------------------------------------------------------------------
Net Income $5,893 $3,446 $12,059 $6,518
- ----------------------------------------------------------------------------------------------------------------
Preferred Stock Dividends $33 $33 $66 $66
Net Income Available to Common
Shareholders $5,860 $3,413 $11,993 $6,452
Earnings Per Share:
Basic $0.14 $0.08 $0.29 $0.15
Diluted $0.13 $0.08 $0.26 $0.15
- ----------------------------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
UNILAB CORPORATION
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(amounts in thousands)
(Unaudited)
<CAPTION>
Six months ended June 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $12,059 $6,518
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization and depreciation 4,127 3,926
Provision for doubtful accounts 9,851 7,835
Net changes in assets and liabilities affecting operations,
net of acquisitions:
Increase in Accounts receivable (14,210) (10,797)
(Increase) Decrease in Inventory of supplies (195) 38
Increase in Prepaid expenses and other current assets (967) (533)
(Increase) Decrease in Other assets 712 (146)
Increase (Decrease) in Accounts payable and accrued liabilities 2,573 (3,235)
Decrease in Accrued payroll and benefits (754) (178)
Other 87 181
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 13,283 3,609
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of third party debt (571) (867)
Proceeds from exercise of stock options 126 7
Other (66) (66)
- ------------------------------------------------------------------------------------------------
Net cash used by financing activities (511) (926)
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,106) (1,174)
Payments for acquisitions, net of cash acquired (8,604) (465)
- ------------------------------------------------------------------------------------------------
Net cash used by investing activities (11,710) (1,639)
- ------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,062 1,044
CASH AND CASH EQUIVALENTS - Beginning of Period 20,137 11,652
- ------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - End of Period $21,199 $12,696
- ------------------------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
UNILAB CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Management Opinion
In the opinion of management, the accompanying unaudited interim
financial statements reflect all adjustments which are necessary to
present fairly the financial position, results of operations and cash
flows for the interim periods reported. All such adjustments made were of
a normal recurring nature.
The accompanying interim financial statements and related notes should be
read in conjunction with the financial statements of Unilab Corporation
("Unilab" or the "Company") and related notes as contained in the Annual
Report on Form 10-K for the year ended December 31, 1998.
2. Net Income Per Share
Basic earnings per common share has been computed by dividing the net
income less preferred dividends by the weighted average number of common
shares outstanding for each period presented. The weighted average number
of common shares used in the calculation of basic earnings per share was
41.4 million and 40.6 million for the three months ended June 30, 1999
and 1998, respectively and 41.1 million and 40.6 million for the six
months ended June 30, 1999 and 1998, respectively.
Diluted earnings per share includes the effect of additional common
shares that would have been outstanding if dilutive potential common
shares had been issued plus a reduction of interest expense assuming
conversion of the convertible debt. For the three and six month periods
ended June 30, 1998, the weighted average number of dilutive stock
options were 1.7 million and 1.6 million respectively, which would have
had no effect on the basic earnings per share calculation. For the three
and six month periods ended June 30, 1999, the weighted average number of
dilutive stock options were 2.5 million and 2.2 million, respectively,
and both periods include the incremental shares from the assumed
conversion of the $14.0 million subordinated convertible note of 4.7
million, which reduced the earnings per share calculation by $0.01 and
$0.03, respectively.
3. Acquisitions
On September 16, 1998, the Company and Meris Laboratories, Inc. ("Meris")
signed an asset purchase agreement whereby Unilab acquired substantially
all of the assets of Meris. The agreement was approved on October 28,
1998 by the United States Bankruptcy Court in Los Angeles, California and
Unilab took possession of the acquired net assets on November 5, 1998.
The purchase price consisted of the issuance of a $14.0 million
convertible subordinated note, $2.5 million in cash payable in
seventy-two equal monthly installments and the assumption of net assets
of $3.5 million, consisting primarily of accounts receivable. The
acquisition was accounted for under the purchase method of accounting and
the statements of operations include the results of Meris since November
5, 1998.
The purchase price was allocated to the net assets acquired based on
their fair value at the date of acquisition, as follows:
(in thousands)
Accounts receivable $3,251
Inventory of supplies 138
Property and equipment 175
Goodwill 14,889
Other intangible assets-non-compete agreements 235
Other Assets 46
--
Assets Acquired 18,734
======
Issuance of convertible subordinated notes 14,000
Accrued employee benefits 306
Assumed accounts payable 2,520
Liabilities associated with integration period 1,400
Acquisition fees, primarily legal costs 508
---
Liabilities assumed or incurred 18,734
As noted in the table above and in connection with the integration of the
acquired Meris operations with those of Unilab, the Company recorded
liabilities of $1.4 million, primarily related to severance (for the
reduction in headcount of approximately 230 employees) and other employee
related liabilities. At June 30, 1999, approximately $0.2 million of
liabilities, expected to be paid in the next three months of 1999, were
outstanding.
On April 5, 1999, the Company and Physicians Clinical Laboratory, Inc.
(doing business as Bio-Cypher Laboratories) ("BCL") signed an asset
purchase agreement whereby Unilab acquired substantially all of the
assets of BCL. The acquisition was completed on May 10, 1999. The
purchase price consisted of a $25.0 million subordinated promissory note,
the issuance of 1.0 million shares of Unilab common stock and
approximately $8.6 million of cash. In addition, Unilab acquired $9.6
million of tangible assets, the majority of which are trade accounts
receivable, and assumed liabilities of approximately $4.3 million. The
acquisition will be accounted for under the purchase method of accounting
and the statements of operations include the results of BCL since May 10,
1999.
The purchase price was allocated to the assets acquired based on their
fair value at the date of acquisition as follows:
(in thousands)
Accounts receivable $8,691
Inventory of supplies 537
Property and equipment 358
---
Goodwill 33,839
Assets acquired $43,425
=======
Issuance of note 25,000
Accrued payroll and benefits 1,987
Assumed accounts payable 2,275
Liabilities associated with integration period 1,957
Acquisition fees, primarily legal costs 350
Cash payment 8,606
Common stock issued 3,250
-----
Purchase Price/Liabilities assumed or incurred $43,425
As noted in the table above and in connection with the integration of the
acquired BCL operations with those of Unilab, the Company recorded
liabilities of $2.0 million, primarily related to severance (for the
reduction in headcount of over 500 employees), relocation and moving
expenses and other employee related liabilities. At June 30, 1999,
approximately $1.8 million of liabilities, expected to be paid primarily
in the next six months of 1999, were outstanding.
4. Legal Matters
The Company is currently in settlement negotiations with a group of
insurance companies regarding claims by the insurance companies that the
Company over-billed them in the early to mid-1990s in connection with
several chemistry profile tests that were previously the subject of a
settlement agreement with the government. While no formal settlement
agreement with the insurance companies has been executed, the Company
believes that it is likely that it will do so for a settlement amount of
approximately $600,000, and such amount has been reflected as a charge in
the statement of operations for the second quarter of 1999.
In May of 1999, Unilab learned of a new federal investigation under the
False Claims Act relating to Unilab's billing practices for the following
four test procedures: (1) apolipoprotein in conjunction with coronary
risk panel assignments; (2) microscopic evaluation in conjunction with
urinalysis; (3) performance of T7 index in conjunction with T3 and T4
tests; and (4) fragmenting billing of unlisted panel codes. Unilab is in
the process of gathering and voluntarily submitting documentation
regarding these tests to the Department of Justice. The Company accrues
for potential liabilities in matters such as this as they become known
and can be reasonably estimated. In the Company's opinion, this
investigation is not reasonably likely to have a material adverse effect
on the Company's results of operations or financial position. However, no
assurance can be given as to the ultimate outcome with respect to such
investigation. The resolution of such investigation could be material to
the Company's operating results for any particular period, depending upon
the level of income for such period.
5. Supplemental Disclosure of Cash Flow Information
(amounts in thousands) Six months ended June 30,
1999 1998
Cash paid during the period for:
Interest, net $6,999 $6,791
Income taxes 421 2
In connection with business acquisitions, liabilities were assumed as
follows:
Six months ended June 30,
1999 1998
Fair value of asset acquired $43,425 -
Cash paid 8,604 -
Value of common stock issued 3,250 -
----- ------------
Liabilities assumed $31,571 -
======= ============
6. Pending Transaction
On May 25, 1999, the Company signed a definitive agreement to merge with
UC Acquisition Sub, Inc., a corporation formed by Kelso & Company
("Kelso"). Kelso is a private investment firm based in New York.
The transaction is valued at approximately $437 million, including
indebtedness of approximately $145 million which will be refinanced.
Unilab will continue to operate as an independent company under its
current name.
Pursuant to a merger agreement, all but approximately 1.8 million shares
of common stock of the Company (approximately 7% of the Company's
post-merger shares outstanding) will be converted into the right to
receive $5.85 per common share in cash, with the Company's current
stockholders retaining those 1.8 million shares. Unilab currently has
41.9 million shares of common stock outstanding, excluding outstanding
options and convertible securities. Kelso has the ability to convert the
transaction to all cash consideration. In this event, the Company's
current stockholders will receive $5.85 in cash for 100% of their common
shares. The transaction is structured to be accounted for as a
recapitalization for accounting purposes. Following the merger, Kelso and
its affiliates are expected to own approximately 93% of the Company's
outstanding shares. Kelso and its affiliates will invest approximately
$139 million of equity in the transaction. The merger is expected to be
completed during the third quarter of 1999 and is subject to approval by
the Company's stockholders, the refinancing of the Company's existing
indebtedness and obtaining additional financing to pay the merger
consideration, the expiration of the applicable waiting period under the
Hart-Scott-Rodino Act and other customary conditions.
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Three and Six Month Periods Ended June 30, 1999 Compared with the
Three and Six Month Periods Ended June 30, 1998
Revenue. Revenue increased to $73.7 million and $137.3 million for the
three and six month periods ended June 30, 1999 from $54.4 million and
$108.9 million for the comparable prior year periods, representing
increases of $19.3 million or 35.6% and $28.4 million or 26.1%,
respectively. Approximately $13.8 and $20.0 million of the increases for
the three and six month periods ended June 30, 1999 were attributable to
revenue generated from the acquisitions of Meris, effective November 5,
1998 and BCL, effective May 10, 1999. Exclusive of the acquired Meris and
BCL businesses, revenue increased $5.5 million and $8.4 million for the
respective periods, primarily the result of increases in reimbursement
levels of $2.8 million and $4.3 million, respectively, and additional
specimen volume generating $2.7 million and $4.1 million, respectively.
The Company experienced a 5.0% and 3.8% increase, exclusive of the acquired
Meris and BCL businesses, in the average reimbursement received for each
specimen processed during the three and six month periods ended June 30,
1999 versus the comparable prior year periods. The increases in
reimbursement levels is primarily due to increases in rates charged to
managed care clients, replacement of the Company's most unprofitable
accounts with other reasonably priced business and changes in test mix to
more sophisticated testing procedures for HIV and sexually transmitted
diseases. Exclusive of the acquired Meris and BCL businesses, the Company
experienced a 5.0% and 3.7% increase in the number of specimens processed
in the core business during the three and six month periods ended June 30,
1999 versus the comparable prior year periods.
Salaries, Wages and Benefits. Salaries, wages and benefits increased to
$21.8 million and $40.3 million for the three and six month periods ended
June 30, 1999 from $16.6 million and $33.4 million for the comparable prior
year periods. As a percentage of revenue, salaries, wages and benefits
decreased to 29.6% and 29.3% for the three and six month periods ended June
30, 1999 from 30.5% and 30.7% for the comparable prior year periods. The
decreases primarily reflect the economies of scale associated with
processing a significantly higher specimen volume (20.6% volume increase
during the first six months of 1999 including the effect of the Meris and
BCL acquisitions) without the same corresponding increase in headcount.
Supplies. Supplies expense increased to $10.5 million and $19.3 million for
the three and six month periods ended June 30, 1999 from $7.5 million and
$15.1 million for the comparable prior year periods. As a percentage of
revenue, supplies expense increased to 14.3% and 14.1% for the three and
six month periods ended June 30, 1999 from 13.8% and 13.9% for the
comparable prior year periods. The increases are attributable to bringing
certain more costly testing in-house, mandated use of more costly safety
needles and inefficiencies of running two laboratories in the Sacramento
area during the integration period of BCL. The Company expects to close the
BCL laboratory by September 1, 1999.
Other Operating Expenses. Other operating expenses increased to $19.0
million and $34.4 million for the three and six month periods ended June
30, 1999 from $13.2 million and $26.3 million for the comparable prior year
periods. As a percentage of revenue, other operating expenses increased to
25.7% and 25.1% for the three and six month periods ended June 30, 1999
from 24.3% and 24.2% for the comparable prior year periods. The increases
are attributable to inefficiencies of running two laboratories in the
Sacramento area during the integration period of BCL and a higher volume of
testing being processed by outside reference laboratories.
Legal Charge. The Company is currently in settlement negotiations with a
group of insurance companies regarding claims by the insurance companies
that the Company over-billed them in the mid-1990s in connection with
several chemistry profile tests that were previously the subject of a
settlement agreement with the government. While no formal settlement
agreement with the insurance companies has been executed, the Company
believes that it is likely that it will do so for a settlement amount of
approximately $600,000, and such amount has been reflected as a charge in
the statement of operations for the second quarter of 1999.
Depreciation and Amortization. Depreciation and amortization increased to
$2.2 million and $4.1 million for the three and six month periods ended
June 30, 1999 from $1.9 million and $3.9 million for the comparable prior
year periods. The increases are primarily due to the additional
amortization expense incurred from the goodwill recorded in connection with
the Meris and BCL acquisitions offset by a decrease in depreciation expense
due to certain laboratory computer equipment becoming fully depreciated in
1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $9.9 million and $19.2 million for the
three and six month periods ended June 30, 1999 from $8.3 million and $16.9
million for the comparable prior year periods. As a percentage of revenue,
selling, general and administrative expenses decreased to 13.4% and 14.0%
for the three and six month periods ended June 30, 1999 from 15.3% and
15.5% for the comparable prior year periods. Such decreases continued the
trend realized by the Company throughout 1998 and 1999 and also reflected
the economies of scale and efficiencies gained from the Meris and BCL
acquisitions.
EBITDA. Earnings before interest, taxes, depreciation and amortization
("EBITDA") were $11.9 million and $23.5 million for the three and six month
periods ended June 30, 1999, compared to $8.8 million and $17.2 million for
the comparable prior year periods. Without the effect of a $0.6 million
impact on EBITDA resulting from the integration period between May 10, 1999
and June 30, 1999 of the BCL acquisition and the $0.6 million legal charge
recorded in the second quarter of 1999, EBITDA for the three and six month
periods ended June 30, 1999 would have been $13.1 million or 17.8% of sales
and $24.7 million or 18.0% of sales, respectively, and would have
represented increases of approximately 49% and 43%, respectively over the
comparable prior year periods.
Interest Expense. Third party interest, net increased to $3.8 million and
$7.3 million for the three and six month periods ended June 30, 1999
compared to $3.4 million and $6.8 million for the comparable prior year
periods. The increases were primarily due to the additional interest
expense incurred on the $14.0 million convertible subordinated note issued
in connection with the Meris acquisition and the $25.0 million subordinated
note issued in connection with the BCL acquisition.
Year 2000 Update
As stated in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, the Company expected to have modifications to all major
systems completed by the end of the first quarter 1999. All modifications
to laboratory and accounting systems in order for such systems to recognize
and perform date calculations in the year 2000 have been completed.
Modifications to billing systems are substantially complete, with only some
very minor adjustments needed to make such billing systems fully compliant.
Liquidity and Capital Resources
Net cash provided by operating activities was $13.3 million for the six
months ended June 30, 1999 and reflects an improvement of $9.7 million over
the comparable prior year period when net cash provided by operating
activities was $3.6 million. The improvement in 1999 was primarily due to
an improvement in the Company's operating performance and timing of
payments for accounts payable.
Net cash used by financing activities was $0.5 million for the six months
ended June 30, 1999, resulting primarily from scheduled principal
repayments under capital lease obligations.
Net cash used by investing activities was $11.7 million for the six months
ended June 30, 1999, resulting from an $8.6 million cash payment in partial
consideration of the purchase price for the BCL acquisition and $3.1
million of fixed asset additions.
The Company had $21.2 million of cash and cash equivalents on hand at June
30, 1999. Management believes that the amount of cash and cash equivalents
available at June 30, 1999 will be sufficient for the Company to meet
anticipated requirements for working capital, interest payments, capital
expenditures and scheduled principal payments under capital lease and debt
obligations for the foreseeable future.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
Exhibit 99.1 - Press Release, dated July 28, 1999, announcing
second quarter earnings results.
(B) Reports on Form 8-K
(1) Current Report on Form 8-K dated April 6, 1999 with respect to Items 5
and 7.
(2) Current Report on Form 8-K dated May 10, 1999 with respect to Items 5
and 7.
(3) Current Report on Form 8-K dated May 17, 1999 with respect to Items 2
and 7.
(4) Current Report on Form 8-K dated May 27, 1999 with respect to Items 5
and 7.
(5) Current Report on Form 8-K dated July 23, 1999 with respect to Items 5
and 7.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNILAB CORPORATION
By: /s/ Brian D. Urban
Date: October 25, 1999 Brian D. Urban
Executive Vice President,
Chief Financial Officer and Treasurer
