SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22758
UNILAB CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-4415490
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
18448 Oxnard Street, Tarzana, California 91356
(Address of principal executive offices) (Zip Code)
(818) 996-7300
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of October 30, 2000, 25,858,248 shares of Registrant's Common Stock, par
value $.01 per share, were outstanding.
<PAGE>
UNILAB CORPORATION
Form 10-Q for the Quarterly Period Ended September 30, 2000
INDEX
Page
Part I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Balance Sheets - September 30, 2000 3
and December 31, 1999.
Statements of Operations -
Three and nine month periods ended
September 30, 2000 and September 30, 1999. 4
Statements of Cash Flows -
Nine month periods ended September 30, 2000
and September 30, 1999. 5
Notes to Financial Statements. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II - OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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<TABLE>
UNILAB CORPORATION
BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(amounts in thousands, except per share data)
<CAPTION>
September 30, December 31,
2000 1999
Assets (Unaudited)
--------------------------------------------------------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $12,248 $12,557
Accounts receivable, net 62,384 50,281
Inventory of supplies 3,831 4,215
Prepaid expenses and other current assets 1,971 1,710
--------------------------------------------------------------------------------
Total current assets 80,434 68,763
Property and Equipment, net 13,079 13,125
Deferred Tax Asset 11,936 16,558
Goodwill, net 92,677 81,857
Other Intangible Assets, net 1,326 1,773
Other Assets 10,437 11,454
--------------------------------------------------------------------------------
$209,889 $193,530
--------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
------------------------------------------------------------ -----------------
Current Liabilities:
Current portion of long-term debt $13,985 $3,908
Accounts payable and accrued liabilities 26,459 22,468
Accrued payroll and benefits 9,153 8,998
--------------------------------------------------------------------------------
Total current liabilities 49,597 35,374
--------------------------------------------------------------------------------
Long-Term Debt, net of current portion 305,525 310,941
Other Liabilities 6,087 5,504
Commitments and Contingencies
Shareholders' Equity (Deficit):
Common stock, $.01 par value,
Authorized 30,000 shares
Issued and Outstanding -
25,858 at September 30 and 25,758 at
December 31 259 258
Additional paid-in capital 149,896 149,312
Accumulated deficit (301,475) (307,859)
--------------------------------------------------------------------------------
Total shareholders' deficit (151,320) (158,289)
--------------------------------------------------------------------------------
$209,889 $193,530
--------------------------------------------------------------------------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
UNILAB CORPORATION
STATEMENTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
(amounts in thousands)
(Unaudited)
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $87,596 $76,210 $251,156 $213,496
----------------------------------------------- --------------- ------------------ --------------- ------------
Direct Laboratory and Field Expenses:
Salaries, wages and benefits 25,912 22,940 74,015 63,226
Supplies 12,367 11,307 36,133 30,653
Other operating expenses 20,410 18,855 59,633 53,254
----------------------------------------------- --------------- ------------------ --------------- ------------
58,689 53,102 169,781 147,133
Legal charge - - - 600
Amortization and depreciation 3,302 3,062 9,363 7,189
Selling, general and administrative expenses 11,280 10,120 32,890 29,323
----------------------------------------------- --------------- ------------------ --------------- ------------
Total Operating Expenses 73,271 66,284 212,034 184,245
Operating Income 14,325 9,926 39,122 29,251
Interest expense, net 9,441 3,978 28,116 11,244
----------------------------------------------- --------------- ------------------ --------------- ------------
Income Before Income Taxes 4,884 5,948 11,006 18,007
Tax Provision (benefit) 2,051 (11,904) 4,622 (11,904)
----------------------------------------------- --------------- ------------------ --------------- ------------
Net Income $2,833 $17,852 $6,384 $29,911
----------------------------------------------- --------------- ------------------ --------------- ------------
Preferred Stock Dividends - 33 - 99
Net Income Available to Common
Shareholders $2,833 $17,819 $6,384 $29,812
----------------------------------------------- --------------- ------------------ --------------- ------------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
UNILAB CORPORATION
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(amounts in thousands)
(Unaudited)
<CAPTION>
Nine months ended September 30,
2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,384 $ 29,911
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization and depreciation 9,363 7,189
Provision for doubtful accounts 18,242 15,376
Deferred tax benefit -- (11,904)
Net changes in assets and liabilities affecting operations,
net of acquisitions:
Increase in Accounts receivable (27,045) (21,189)
(Increase) decrease in Inventory of supplies 384 (378)
(Increase) in Prepaid expenses and other current assets (261) (1,301)
Decrease in Deferred tax asset 4,622 --
Decrease in Other assets 292 697
Increase in Accounts payable and accrued liabilities 1,943 4,683
Increase in Accrued payroll and benefits 727 2,118
Other 952 99
-----------------------------------------------------------------------------------------------
Net cash provided by operating activities 15,603 25,301
-----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility 7,000 --
Payments of third party debt (2,477) (835)
Proceeds from purchase of stock 585 253
Other (99)
-----------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 5,108 (681)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,882) (4,903)
Payments for acquisitions, net of cash acquired (17,138) (8,604)
-----------------------------------------------------------------------------------------------
Net cash used by investing activities (21,020) (13,507)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (309) 11,113
CASH AND CASH EQUIVALENTS - Beginning of Period 12,557 20,137
-----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - End of Period $ 12,248 $ 31,250
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<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, 1999.
2. Acquisitions
SCCL Acquisition
On March 17, 2000, the Company and Southern California Clinical
Laboratories, LLC ("SCCL") signed an asset purchase agreement whereby
Unilab acquired certain assets of SCCL. The purchase price consisted of
cash payments of $5.2 million ($2.6 million paid at closing and the
remaining $2.6 million payable from the closing date in semi-annual
payments of $650,000) and the assumption of net assets of $0.7 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 SCCL since March 17, 2000.
The purchase price was primarily allocated to the net assets acquired
based on their fair value at the date of acquisition. Such allocation
consisted of accounts receivable of $0.8 million, goodwill of $4.2
million, accrued employee benefits of $0.1 million and cash payments of
$4.9 million. The $2.6 million payment due over the next two years is
non-interest bearing and therefore such amount has been discounted at 9%
to its present value of $2.3 million.
PAL Acquisition
On August 11, 2000, the Company and Pathology Associates Laboratories
("PAL") signed an asset purchase agreement whereby Unilab acquired
certain assets of PAL. The purchase price consisted of a cash payment of
$13.5 million and the assumption of net assets of $2.4 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 PAL since August 11, 2000. In
addition, a contingent payment may be made to the buyer in December 2001
for up to $6.0 million if annualized cash receipts are between $9.6
million and $11.5 million.
The purchase price was primarily allocated to the net assets acquired
based on their fair value at the date of acquisition, pending final
determination of certain acquired balances. Such allocation consisted of
accounts receivable of $2.5 million, goodwill of $11.1 million, other
assets of $.2 million, accrued employee benefits of $0.3 million and cash
payments of $13.5 million.
3. Recapitalization
On May 24, 1999, the Company entered into an agreement with UC
Acquisition Sub, Inc., which is owned by affiliates of Kelso & Company
("Kelso"), under which UC Acquisition Sub, Inc. merged with and into the
Company (the "Kelso Transaction"). The merger was completed on November
23, 1999. With the completion of the merger, 93.0% of the Company's
common stock is owned by Kelso, its affiliates and designees and
management, and the remaining 7.0% is held by a limited number of
investors. The transaction was accounted for as a recapitalization.
Besides the merger, the other principal features of the recapitalization
included:
o The conversion into cash of approximately 44.9 million shares of
common stock at $5.85 per share, the conversion into cash of
364,000 shares of preferred stock at $5.75 per share and the
accelerated vesting and either the cancellation or retention of
outstanding stock options for cash consideration of $15.4 million,
and
o The retirement of $144.5 million of debt, consisting of $119.5
million of 11% senior notes and a $25.0 million note issued in
connection with a prior acquisition.
The Kelso Transaction was primarily financed through a new common equity
investment of $139.5 million by affiliates and designees of Kelso,
borrowings of $160.0 million under a new senior bank credit facility and
the issuance of $155.0 million of new senior notes.
4. Supplemental Disclosure of Cash Flow Information
(amounts in thousands) Nine months ended September 30,
2000 1999
Cash paid during the period for:
Interest, net $21,507 $6,954
Income taxes $ 101 $ 421
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Three and Nine Month Periods Ended September 30, 2000 Compared with the
Three and Nine Month Periods Ended September 30, 1999
Revenue
Revenue increased to $87.6 million and $251.2 million for the three and
nine month periods ended September 30, 2000 from $76.2 million and $213.5
million for the comparable prior year periods, representing increases of
$11.4 million or 14.9% and $37.7 million or 17.6%, respectively.
Approximately $3.1 and $19.9 million of the increases for the three and
nine month periods ended September 30, 2000 were attributable to revenue
generated from the acquisitions of Physician's Clinical Laboratory, Inc.
(doing business as Bio-Cypher Laboratories) ("BCL"), effective May 10,
1999, SCCL, effective March 17, 2000 and PAL, effective August 11, 2000.
Exclusive of the acquired BCL, SCCL and PAL businesses, revenue increased
$8.3 million and $17.8 million for the respective periods, primarily the
result of increases in reimbursement levels of $0.5 million and $3.2
million, respectively, and additional specimen volume generating $7.8
million and $14.6 million, respectively.
The Company experienced a 0.7% and 1.4% increase, exclusive of the acquired
BCL, SCCL and PAL businesses, in the average reimbursement received for
each specimen processed during the three and nine month periods ended
September 30, 2000 versus the comparable prior year periods. The increases
in reimbursement levels are 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 BCL, SCCL and PAL businesses, the
Company experienced a 10.2% and 6.8% increase in the number of specimens
processed in the core business during the three and nine month periods
ended September 30, 2000 versus the comparable prior year periods. The
increases were due to core growth.
Salaries, Wages and Benefits
Salaries, wages and benefits increased to $25.9 million and $74.0 million
for the three and nine month periods ended September 30, 2000 from $22.9
million and $63.2 million for the comparable prior year periods. As a
percentage of revenue, salaries, wages and benefits decreased to 29.6% and
29.5% for the three and nine month periods ended September 30, 2000 from
30.1% and 29.6% for the comparable prior year periods. The decrease
primarily reflects the economies of scale associated with processing a
significantly higher specimen volume (17.4% volume increase including the
effect of the BCL, SCCL and PAL acquisitions) without the same
corresponding increase in headcount offset by wage pressures, primarily in
the company's San Jose operations.
Supplies Expense
Supplies expense increased to $12.4 million and $36.1 million for the three
and nine month periods ended September 30, 2000 from $11.3 million and
$30.7 million for the comparable prior year periods. As a percentage of
revenue, supplies expense decreased to 14.1% for the three month period
ended September 30, 2000 and was consistent at 14.4% for the nine month
period ended September 30, 2000 from 14.8% and 14.4% for the comparable
prior year periods. The decrease in the third quarter was attributable to a
switch of certain technologies to more cost effective methods and price
reductions in certain supply contracts.
Other Operating Expenses
Other operating expenses increased to $20.4 million and $59.6 million for
the three and nine month periods ended September 30, 2000 from $18.9
million and $53.3 million for the comparable prior year periods. As a
percentage of revenue, other operating expenses decreased to 23.3% and
23.7% for the three and nine month periods ended September 30, 2000 from
24.7% and 24.9% for the comparable prior year periods. The percentage
decreases were primarily attributable to reductions in outside reference
laboratory fees and telecommunication expenses.
Legal Charge
In November 1999, Unilab reached a settlement with a group of thirteen
insurance companies regarding claims by the insurance companies that Unilab
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. Unilab paid $600,000 in the settlement. Such
amount was reflected as a charge in the statement of operations for the
second quarter of 1999.
Amortization and Depreciation
Amortization and depreciation expense increased to $3.3 million and $9.4
million for the three and nine month periods ended September 30, 2000 from
$3.1 million and $7.2 million for the comparable prior year periods. The
increases were primarily due to the additional amortization expense
incurred from the goodwill recorded in connection with the BCL, SCCL and
PAL acquisitions.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased to $11.3 million and
$32.9 million for the three and nine month periods ended September 30, 2000
from $10.1 million and $29.3 million for the comparable prior year periods.
As a percentage of revenue, selling, general and administrative expenses
decreased to 12.9% and 13.1% for the three and nine month periods ended
September 30, 2000 from 13.3% and 13.7% for the comparable prior year
periods. Such decreases reflect the economies of scale and efficiencies
gained from processing a higher specimen count without the same
corresponding increase in expenses.
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
were $17.6 million and $48.5 million for the three and nine month periods
ended September 30, 2000, compared to $13.0 million and $36.4 million for
the comparable prior year periods, representing increases of 35.7% and
33.1%, respectively over the comparable prior year periods.
Interest Expense
Net interest expense increased to $9.4 million and $28.1 million for the
three and nine month periods ended September 30, 2000 compared to $4.0
million and $11.2 million for the comparable prior year periods primarily
due to the additional interest expense from the significant increase in
leverage due to the Kelso Transaction.
Tax Provision
The Company establishes a valuation allowance in accordance with the
provisions of the Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". The Company continually reviews the adequacy
of the valuation allowance and recognizes the benefits from its deferred
tax assets only when an analysis of both positive and negative factors
indicate that it is more likely than not that the benefits will be
realized. Based on the Company's improved operating performance in 1998 and
1999 (before expenses incurred in the Kelso Transaction) and, having fully
integrated both the Meris and BCL acquisitions, the Company believed it
would have sufficient future taxable income and therefore reduced its
valuation allowance by approximately $16.6 million during the third quarter
of 1999.
Approximately $4.7 million of the tax asset recorded at September 30, 1999
reduced the amount of goodwill recorded from certain acquisitions and the
remaining amount of the benefit was recognized as an income tax benefit in
the statement of operations for the three and nine month periods ended
September 30, 1999.
Prior to recognition of its deferred tax assets in the third quarter of
1999, the Company did not recognize an income tax provision as any
potential income tax provision was offset by an equal reduction in its
valuation allowance recorded against the deferred tax assets. Since the
recognition of the deferred tax assets, the Company has recorded a tax
provision at an effective tax rate of approximately 42%.
Liquidity and Capital Resources
Net cash provided by operating activities was $15.6 million for the nine
months ended September 30, 2000 and reflects a decrease of $9.7 million
over the nine months ended September 30, 1999 when net cash provided by
operating activities was $25.3 million. The decrease was primarily due to
the higher interest expense incurred from the increase in leverage from the
Kelso Transaction and the payment of $2.6 million of one-time expenses
accrued at December 31, 1999 but paid in the first quarter of 2000, also
related to the Kelso Transaction completed in November of 1999.
Net cash provided by financing activities was $5.1 million for the nine
months ended September 30, 2000, resulting primarily from borrowings under
the revolving credit facility of $7.0 million which was used to partially
fund the $13.5 million acquisition of PAL acquired on August 11, 2000, $0.6
million from the purchase of stock by an officer of the Company offset by
scheduled principal repayments under debt and capital lease obligations of
$2.5 million.
Net cash used by investing activities was $21.0 million for the nine months
ended September 30, 2000, resulting from $17.1 million paid for
acquisitions primarily related to cash payments made for the SCCL and PAL
acquisitions and fixed asset additions of $3.9 million.
The Company had $12.2 million of cash and cash equivalents at September 30,
2000. Each April 1 and October 1 of each year through 2009, approximately
$9.9 million of interest is due on $155.4 million of senior notes
outstanding. The October 1, 2000 interest payment of $9.9 million was made
from the $12.2 million of cash and cash equivalents on hand. Management
believes that the amount of cash and cash equivalents available at
September 30, 2000, the cash flow expected from operations, and the
remaining $18.0 million available under the $25.0 million Company line of
credit will be sufficient for the Company to meet anticipated requirements
for working capital, interest payments, capital expenditures and scheduled
principal payments under debt and capital lease 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 October 30, 2000 announcing
third quarter earnings results.
(B) Reports on Form 8-K
The Company did not file any reports on 8-K during the three
months ended September 30, 2000.
<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 30, 2000 Brian D. Urban
Executive Vice President,
Chief Financial Officer and Treasurer
