SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
-----------------
[ ] 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
18448 Oxnard Street, Tarzana, California 91356
(Address of principal executive offices) (Zip code)
(818) 996-7300
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None Securities
registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $.01 par value American Stock Exchange
(through November 23, 1999)
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 November 22, 1999, the day before the Registrant ceased to have its shares
publicly traded as a result of a merger with an affiliate of Kelso & Company,
41,993,968 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 November 22, 1999, held by
nonaffiliates of the Registrant was approximately $210.8 million. The Company's
common stock has not traded publicly since November 23, 1999.
Page 1 of 42 pages.
<PAGE>
TABLE OF CONTENTS
Item PAGE
Part I. 1 Business.............................................. 5
2 Properties .......................................... 17
3 Legal Proceedings..................................... 18
4 Submission of Matters to a Vote of Security Holders
..................................................... 18
Part II. 5 Market for the Registrant's Common Equity and
Related Stockholder Matters ........................ 19
6 Selected Financial Data ............................ 20
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 21
7A. Quantitative and Qualitative Disclosure
of Market Risk..................................... 27
8 Financial Statements and Supplementary Data ......... 27
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 27
Part III.10 Directors and Executive Officers of the Registrant... 28
11 Executive Compensation............................... 31
12 Security Ownership of Certain Beneficial Owners
and Management ...................................... 36
13 Certain Relationships and Related Transactions....... 37
Part IV. 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K ................................. 38
Signatures ..................................................... 39
<PAGE>
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.
(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 and introduction in 2000 of a new
requisition form to reflect certain other CPT code changes.
(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.
<PAGE>
PART I
Item 1. Business
General
Unilab Corporation ("Unilab" or the "Company") is the largest
independent clinical laboratory testing company in California, providing
laboratory testing services to physicians, managed care groups, hospitals and
other health care providers. The Company believes that its revenues in
California for the year ended December 31, 1999 were more than twice the annual
sales in California of the next largest independent clinical laboratory in that
market. In May 1999, the Company completed the acquisition of substantially all
of the assets of Bio-Cypher Laboratories, a Sacramento, California based
independent clinical lab, resulting in an increase of Unilab's estimated market
share from 20% to 25% of California's independent clinical laboratory market. In
November 1999, the Company completed a "going private" transaction by merging
with an affiliate of Kelso & Company, a New York investment firm ("Kelso") (the
"Kelso Transaction"). As of December 31, 1999, the Company operated three
centrally located full-service laboratories, approximately 40 strategically
located short turn around ("STAT") laboratories and approximately 320
conveniently located patient service centers ("PSC"). As of December 31, 1999,
the Company processed on average 43,000 patient specimens and performed over
100,000 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 entered into Unilab's computer system for testing and billing
purposes. Laboratory technicians then perform the requested tests, with results
generally available to clients the next morning electronically. Unilab's
clinical computer program keeps track of patients' samples, reports test results
in a readable format and maintains records and billing information.
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 generally sent electronically to equipment
installed by Unilab in the physicians' offices.
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
approximately 98% of the tests requested by its clients, with the remaining 2%
performed by third party reference laboratories or pathologists 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: (1) service capability and convenience
offered by facilities, including accessibility of PSCs and local STAT testing
availability; (2) size and scope of testing services performed; (3) accuracy,
timeliness and consistency in reporting test results; (4) reputation in the
medical community and (5) pricing of the laboratory's testing services. The
Company's primary customer types are described below:
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 the Company's clinical laboratory testing
business. These physicians often participate in independent physician
associations ("IPAs") to achieve greater local recognition and
contracting leverage. When Unilab provides contracted testing services
to physicians who belong to IPAs, the IPA is usually billed under a
capitated arrangement. Otherwise, services rendered for physicians'
non-managed care patients 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. We believe that Unilab 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, internal
cost-efficiencies allow Unilab 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.
o Independent Laboratories. Unilab also provides reference testing
services to independent clinical laboratories which do not have a full
range of testing capabilities.
o Clinics. The Company 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, Unilab 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 1/2million
lives. Today, Unilab serves approximately 3.8 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
managed care lives at an average increase of greater than 30%. During the
course of 1999, the Company negotiated approximately 15% of covered lives at an
average increase of approximately 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 420 collection routes, approximately 320 PSCs and approximately
35 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 is also 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. The 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
1999 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 99.4%. The total accuracy rates for 1996-1998 ranged between
99.4% and 99.5%, slightly better than the 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 31,1999, 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. The November 1998 acquisition of Meris
Laboratories and the May 1999 acquisition of Bio-Cypher Laboratories served in
large part to increase market share from approximately 15% to approximately 25%
of California's independent clinical laboratory testing market. 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.
Bio-Cypher Acquisition
On April 5, 1999, the Company signed a definitive agreement to
acquire substantially all of the assets of Physicians Clinical Laboratory (doing
business as Bio-Cypher Laboratories), second only to Unilab in size in
California, with 1998 revenues of $60 million. The transaction closed 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 $8.8
million of tangible assets, the majority of which were trade accounts
receivable, and assumed liabilities of approximately $3.5 million.
Within approximately six months after closing the transaction,
the Company had substantially integrated the Bio-Cypher business and realized
much of the significant synergies available in the consolidation.
Kelso Transaction
Effective November 23, 1999, Unilab completed a merger with
and into an affiliate of Kelso. As a result, Kelso acquired approximately 93%
of the Company's common stock, which had previously been widely held and traded
on the American Stock Exchange. Upon completion of the Kelso Transaction, the
Company's common stock ceased to trade on the American Stock Exchange. The Kelso
Transaction did not, however, result in any material change to the Company's
operations, except that the Company's previous Chairman and CEO, David Weavil,
relinquished his position as CEO and Robert E. Whalen was appointed to that
position.
The Clinical Laboratory Industry
Overview and Trends
Unilab believes, based on published industry reports, that the
total U.S. clinical laboratory market during 1999 was approximately $30 billion
in annual revenue, of which the California market accounted for approximately $4
billion. Even after years of industry consolidation, the clinical laboratory
testing 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 12% 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, 1998 and
1999, 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. 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. 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. 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").
Federal and State Billing and Fraud and Abuse Laws
General. The Federal Medicare laws impose specific billing requirements on
clinical laboratories and a wide array of Medicare/Medicaid fraud and abuse
provisions apply to those clinical laboratories participating in these programs,
including Unilab. These laws prohibit, among other things, the submission of
false claims or false information to the programs, deceptive or fraudulent
conduct, the provision of excessive or unnecessary services or services at
excessive prices and 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 $50,000 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.
Governmental Oversight. 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 has been
and continues to be actively involved in such investigations and has targeted
certain laboratory practices for study, investigation and prosecution. These
practices include, without limitation, (1) offering packages of tests to
physicians (referred to as "panels" or "profiles" of tests) and "unbundling"
them into several tests to obtain higher reimbursement; (2) "upcoding" tests to
realize higher reimbursement than appropriate; (3) offering inducements to
physicians (for example, providing free fax machines or computers, free lab
services to the physician, his family and staff, paying rent to a
physician-landlord in excess of fair market value, and the collection of
hazardous waste from the physician's office without charge) in order to induce
the physician to refer testing business (including business for Medicare or
Medicaid patients) to the lab; (4) charging for tests not actually performed and
(5) duplicate billing. Such projects culminated during the 1990's in the
industry-wide governmental "LabScam" investigations 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 and HHS and HCFA have announced several
anti-fraud initiatives in 1999. 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.
Federal Legislation and Regulation. 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. 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. Legislations relating to
Stark law have been proposed in Congress, but not yet adopted, which could
narrow the scope of the law's applicability.
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. In May 1999, HCFA announced the engagement of a number of
non-governmental health care audit organizations to assist the government in
tracking and collecting fraudulent billings for healthcare services. HIPAA also
expanded the federal anti-kickback 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. 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 law prohibiting
Medicare/Medicaid physician self-referral for designated health services other
than laboratory testing services.
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. In December 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.
State Legislation and Regulation. At the state level, laboratory operations
are affected by billing requirements applicable to all laboratory testing
services and state fraud and abuse and anti-inducement laws that similarly apply
to all laboratory testing services. California, where Unilab conducts almost all
of its business, has adopted especially stringent laws of this type, including
an expansive anti-referral 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 clinical 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.
Unilab believes the Calderon law benefits independent laboratories by reducing
the financial incentives for physician-owned laboratories.
Governmental Investigations of Unilab. 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 the Company's selling, pricing
and billing practices. The HHS subpoena concerned fourteen tests, including five
tests that were the subject of the Company's civil claims settlements. See
"Legal Proceedings--Department of Justice Settlement". Unilab completed
production of these documents in February 1994. The Company did not hear
anything further on the matter thereafter.
In August 1995, Unilab received a subpoena from HHS requesting
certain information with respect to the Company's marketing and billing
practices for CBC, a diagnostic test which was not included in any prior
subpoena or any of the settlements entered into by Unilab in September 1993 (the
"Settlements"). See, "Legal Proceedings--Department of Justice Settlement". The
Company promptly completed production of all documents in response to the HHS
subpoena and cooperated fully in the HHS investigation. Unilab reached an
agreement with the Federal government in September 1996 to pay $4.0 million to
conclude this investigation. In addition, in October 1996, Unilab 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 Unilab 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 May 1999, Unilab learned of a new federal investigation
under the False Claims Act relating to the Company's billing practices for the
following four test procedures: (1) apolipoprotein in conjunction with coronary
risk panel assessments; (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 has gathered and
voluntarily submitted documentation to the DOJ regarding the two tests with
respect to which the DOJ has requested information. The Company cannot at this
time assess what the result of the investigation might be. Remedies available to
the government include civil and criminal penalties and exclusion from
participation in federal health care programs such as Medicare and Medicaid.
Application of these remedies could have a material adverse effect upon the
Company's business, financial condition, results of operations or prospects.
Unilab's Compliance Program. In recent years, it has been OIG's practice to
require labs that enter into government settlements with respect to marketing
and billing practices to enter into corporate integrity agreements ("CIA").
Under the CIA, the lab is required to adopt and comply with various procedures
for implementing a compliance program, including training programs, preparation
of policy and procedure manuals and dissemination of educational materials to
the workforce. OIG in 1997 proposed and publicly disseminated a Model Compliance
Plan, which it revised slightly in 1998, to serve as guidance for laboratory
compliance programs.
Unilab was not required to enter into a CIA when the Company
reached two government settlements in 1993 and 1996. However, Unilab has
voluntarily adopted a compliance program that substantially meets the guidelines
described in the Model Compliance Plan. The Company has established a Compliance
Committee, comprised of its senior officers. The compliance program is run under
the supervision of the Director of Compliance, who reports to the Company's
General Counsel. Both the General Counsel and the Director of Compliance update
the Board of Directors on compliance matters on a regular basis.
In November 1998, Unilab acquired substantially all of the
assets of Meris Laboratories, Inc. At that time, Meris had a 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 the 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-Meris/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-Meris/OIG Agreement will expire on March 31, 2000.
In May 1999, Unilab acquired substantially all of the assets
of Bio-Cypher Laboratories. Bio-Cypher, like Meris, was party to a CIA with the
OIG, resulting from a prior settlement of claims against Bio-Cypher arising from
the LabScam investigation. In connection with the acquisition of Bio-Cypher's
assets, and in lieu of assuming Bio-Cypher's CIA obligations, in June 1999,
Unilab again voluntarily entered into a Compliance Program Disclosure Agreement
(the "Unilab-Bio-Cypher/OIG Agreement"). The Unilab-Bio-Cypher/OIG Agreement is
substantially similar to the Unilab-Meris/OIG Agreement and will last until
August 9, 2000.
Reimbursement
Medicare reimbursement for clinical laboratory testing
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. From the late 1980s to the 1990s, the cap on Medicare reimbursement
dropped from 115% to 74% of the median of all the Medicare fee schedules. BBA
'97 provides for a freeze on fee schedule payments for 1998 through 2002. The
President's FY2000 budget proposed a reduction of the Medicare fee schedule caps
to 72% of the laboratory fee schedule medians, beginning January 1, 2000, but
Congress did not accept 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. To date,
Congress has not adopted any proposed legislation regarding beneficiary cost
sharing.
CPT Coding. 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 Unilab's laboratory reimbursement and that of the clinical
laboratory testing 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 testing industry,
including Unilab. Further changes were made in the CPT manual for 1999 and 2000.
It is currently unclear what effect, if any, these changes will have on the
Company.
Drug Testing
Drug testing for public sector employees is regulated by the
Substance Abuse and Mental Health Service Administration ("SAMHSA"), 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
SAMSHSA standards. Unilab's Tarzana (Los Angeles) laboratory is
SAMSHSA-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.
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 United
States and in California is highly fragmented and is characterized by intense
competition. According to HCFA, there are approximately 4,500 independent
clinical laboratories in the United States, 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 two largest independent
clinical laboratory competitors are Quest Diagnostics Incorporated and
Laboratory Corporation of America. Quest acquired SmithKline Beecham Clinical
Laboratories, Inc. in 1999, which had been one of Unilab's principal
competitors. The Company believes that it currently has approximately a 25%
share of the California independent clinical laboratory testing market, more
than twice that of its nearest competitor. Unilab expects to gain market share
from hospital laboratories in the coming years. The hospital laboratory segment
accounts for approximately one half of the $4.0 billion California clinical
laboratory testing market and is characterized by a large number of primarily
cost center laboratories, as opposed to profit center laboratories, that operate
with low volumes and quick turn around times.
Unilab competes primarily on the basis of the following: (1)
service capability and convenience offered by facilities, including
accessibility of PSCs and local STAT testing availability; (2) size and scope
of testing services performed; (3) accuracy, timeliness and consistency in
reporting test results; (4) reputation in the medical community and (5) pricing
of the laboratory's testing services. 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, 1999, Unilab employed approximately 3,230
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.
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 without disruption.
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.
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. Since 1993, the Company has also entered into settlements with
three additional insurance companies for an aggregate amount of $825,000.
In May 1999, Unilab learned of a new federal investigation
under the False Claims Act relating to its billing practices for the following
four test procedures: (1) apolipoprotein in conjunction with coronary risk panel
assessments; (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. The Company has gathered and voluntarily
submitted documentation to the DOJ regarding the two tests with respect to which
the DOJ has requested information. Unilab cannot at this time assess what the
result of the investigation might be. Remedies available to the government
include civil and criminal penalties and exclusion from participation in federal
health care programs such as Medicare and Medicaid. Application of these
remedies could have a material adverse effect upon Unilab's business, financial
condition, results of operations or prospects.
Item 4. Submission Of Matters to a Vote of Security Holders
On November 23, 1999, a Special Meeting of Stockholders was
held, at which stockholders approved the Kelso Transaction, including a merger
agreement with an affiliate of Kelso and the transactions contemplated by that
agreement. In the merger:
o each outstanding share of the common stock of Unilab (other than those
shares of certain Unilab institutional stockholders and Unilab senior
management) was converted into the right to receive $5.85 in cash and
each outstanding share of convertible preferred of Unilab was converted
into the right to receive its liquidation preference of $5.75 in cash;
o some or all of the shares of certain Unilab institutional stockholders
and members of Unilab senior management that did not exceed in the
aggregate 5% of the outstanding common stock on a fully diluted basis
prior to the merger remained outstanding; and
o Unilab became a subsidiary of affiliates and designees of Kelso
and other investors.
The count of all votes and ballots cast at the Special Meeting
regarding the Kelso Transaction was as follows:
For...........................................27,989,173
Against or Withheld............................1,110,405
Abstained.........................................67,838
Broker Non-Votes..............................12,826,552
Total Outstanding.............................41,993,968
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Until November 23, 1999, the Company's common stock traded on
the American Stock Exchange under the symbol "ULB". As of November 23, 1999,
there were 46,780,918 shares of Common Stock outstanding held by 3,326 holders
of record, including shares/options exercised after the date of record, and
which were primarily related to the conversion of the $14 million Meris note.
The Company did not pay any cash dividends with respect to its common
stock during 1999. Summarized quarterly share price information is as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Year Ended December 31, 1998
$ Price First Second Third Fourth First Second Third Fourth
Range Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ----- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High 3.188 6.00 5.688 5.813 3.00 3.125 2.625 2.375
Low 2.313 2.938 5.188 5.50 1.688 2.375 1.75 1.625
</TABLE>
As of the consummation of the Kelso Transaction on November 23,
1999, the stock ceased to be publicly traded.
<PAGE>
Item 6. Selected Financial Data
The selected financial data for each of the five years in the
period ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
(amounts in thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $285,163 $217,370 $214,001 $205,217 $189,042
- ----------------------------------------------------------------------------------------------------------
Legal, acquisition and restructuring
related charges 600 ---- ---- 70,595 4,400
- ----------------------------------------------------------------------------------------------------------
Merger/recapitalization expenses 25,167 ---- ---- ---- ----
- ----------------------------------------------------------------------------------------------------------
Operating income (loss) 13,722 24,241 14,604 (72,842) 4,539
- ----------------------------------------------------------------------------------------------------------
Loss on sale of equity investment/ ---- ---- ---- 4,529 36,499
promissory note
- ----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary item (5,123) 10,703 536 (89,493) (40,043)
- ----------------------------------------------------------------------------------------------------------
Income tax benefit 11,904 ---- ---- ---- ----
- ----------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 6,781 10,703 536 (89,493) (40,043)
- ----------------------------------------------------------------------------------------------------------
Extraordinary item 20,773 ---- ---- 3,451 1,732
- ----------------------------------------------------------------------------------------------------------
Net income (loss) (13,992) 10,703 536 (92,944) (41,775)
- ----------------------------------------------------------------------------------------------------------
Preferred stock dividends 108 131 138 144 144
- ----------------------------------------------------------------------------------------------------------
Net income (loss) available to
common shareholders (14,100) 10,572 398 (93,088) (41,919)
- ----------------------------------------------------------------------------------------------------------
At December 31,
- ----------------------------------------------------------------------------------------------------------
Total assets 193,530 142,460 118,700 125,919 196,174
- ----------------------------------------------------------------------------------------------------------
Long-term debt, net of current portion 310,941 137,170 124,285 126,120 87,207
- ----------------------------------------------------------------------------------------------------------
Shareholders' equity (deficit) (158,289) (21,367) (32,283) (34,688) 56,330
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Note: The variations in the year-to-year comparisons are due primarily to
the acquisition of substantially all of the assets of Physicians
Clinical Laboratories, Inc., effective May 10, 1999, the acquisition
of substantially all of the assets of Meris Laboratories, Inc.,
effective November 5, 1998, and the acquisition of MLN Holding
Acquisition Co., effective May 16, 1995. In addition, see Notes 4 and
5 of the Notes to Consolidated Financial Statements at page F-10 for
a more detailed discussion of the legal and acquisition related
charges, and merger/recapitalization expenses recorded in 1999.
The $70.6 million legal, acquisition and restructuring related
charges recorded in 1996 relate to a goodwill write-off in the amount
of $61.7 million, $4.9 million paid in government and other settlements,
and $4.0 million in restructuring and severance costs. The $4.5
million loss on the sale of a promissory note in 1996 is attributable
to a $4.0 million loss in principal and a $0.5 million write-off of
accrued and unpaid interest. The $3.5 million extraordinary item in
1996 was due to a loss on early extinguishment of debt. 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
$1.7 million extraordinary item in 1995 was due to a loss on early
extinguishment of debt.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Year ended December 31, 1999 compared to year ended December 31, 1998
Revenue. Revenue increased to $285.2 million for the year ended December 31,
1999 from $217.4 million for the comparable prior year period, representing an
increase of $67.8 million or 31.2%. Approximately $48.7 million of the increase
was attributable to revenue generated from the acquisitions of Meris
Laboratories, Inc. ("Meris"), effective November 5, 1998 and Physicians Clinical
Laboratory, Inc. (doing business as Bio-Cypher Laboratories) ("BCL"), effective
May 10, 1999. Exclusive of the acquired Meris and BCL businesses, revenue
increased $19.1 million, primarily the result of increases in reimbursement
levels of $11.7 million and additional specimen volume generating $7.4 million.
The Company experienced a 5.2% increase, exclusive of the acquired Meris and BCL
businesses, in the average reimbursement received for each specimen processed
during the year ended December 31, 1999 versus the comparable prior year period.
The increase in reimbursement levels is primarily due to increases in rates
charged to managed care clients, replacement of the Company's most unprofitable
accounts with other better priced business and changes in test mix to more
sophisticated testing procedures for HIV and sexually transmitted and other
infectious diseases. Exclusive of the acquired Meris and BCL businesses, the
Company experienced a 3.4% increase in the number of specimens processed during
the year ended December 31, 1999 versus the comparable prior year period. In
addition, while the Company experienced increases in volume over the prior year
through acquisitions and growth in the core business, the Company experienced,
over the last several months of 1999, greater seasonal softness than anticipated
and the Company purged more business (primarily lower priced and less profitable
accounts) from the BCL acquisition than originally forecasted.
Salaries, Wages and Benefits. Salaries, wages and benefits increased to $84.5
million for the year ended December 31, 1999 from $67.7 million for the
comparable prior year period. As a percentage of revenue, salaries, wages and
benefits decreased to 29.6% for the year ended December 31, 1999 from 31.2% for
the comparable prior year period. The decrease primarily reflects the economies
of scale associated with processing a significantly higher specimen volume
(25.2% volume increase including the effect of the Meris and BCL acquisitions)
without the same corresponding increase in headcount.
Supplies. Supplies expense increased to $41.5 million for the year ended
December 31, 1999 from $30.7 million for the comparable prior year period. As a
percentage of revenue, supplies expense increased to 14.6% for the year ended
December 31, 1999 from 14.1% for the comparable prior year period. The increase
was attributable to bringing certain more costly testing in-house, mandated use
of more costly safety needles and inefficiencies of running two laboratories in
the Sacramento area during the integration period of BCL. The Company closed the
BCL laboratory in mid-August, 1999.
Other Operating Expenses. Other operating expenses increased to $70.4 million
for the year ended December 31, 1999 from $53.6 million for the comparable prior
year period. As a percentage of revenue, other operating expenses were
consistent at 24.7% for the years ended December 31, 1999 and 1998.
Legal Charge. In 1999, the Company reached a settlement for $0.6 million with a
group of insurance companies regarding claims by the insurance companies that
the Company over-billed them in the early to mid-1990's in connection with
several chemistry profile tests that were previously the subject of a settlement
agreement with the government.
Merger/Recapitalization Expenses. On May 24, 1999, the Company entered into an
agreement with UC Acquisition Sub, Inc., which is owned by affiliates of Kelso
under which UC Acquisition Sub, Inc. merged with and into the Company. The
merger was completed on November 23, 1999 and was accounted for as a
recapitalization. As part of the Kelso Transaction, the Company incurred
expenses of $25.2 million related primarily to financial advisory fees, other
financing fees and expenses, legal and accounting fees, printing costs,
severance costs, and other miscellaneous items.
Amortization and Depreciation. Amortization and depreciation increased to $10.2
million for the year ended December 31, 1999 from $7.6 million for the
comparable prior year period. The increase was primarily due to the additional
amortization expense incurred from the goodwill recorded in connection with the
Meris and BCL acquisitions. In addition, based upon the final review of certain
assets acquired in the Meris and BCL acquisitions, the Company changed its
estimate of goodwill amortization arising from those acquisitions to a 10-year
period effective July 1, 1999. The effect of the change was to increase
amortization expense by $1.2 million for the year ended December 31, 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $39.1 million for the year ended December
31, 1999 from $33.5 million for the comparable prior year period. As a
percentage of revenue, selling, general and administrative expenses decreased to
13.7% for the year ended December 31, 1999 from 15.4% for the comparable prior
year period. Such decrease continued the trend realized by the Company
throughout 1998 and 1999 from cost reduction efforts and also reflected the
economies of scale and efficiencies gained from the Meris and BCL acquisitions.
EBITDA. Earnings before interest, taxes, depreciation and amortization
("EBITDA") were $3.1 million for the year ended December 31, 1999 compared to
$31.8 million for the comparable prior year period. Without the effect of the
$0.6 million legal charge recorded in the second quarter of 1999 and the
merger/recapitalization expenses recorded in the fourth quarter of 1999, EBITDA
for the year ended December 31, 1999 would have been $49.7 million or 17.4% of
sales, and would have represented an increase of approximately 56% over the
comparable prior year period.
Interest Expense. Interest expense, net increased to $18.8 million for the year
ended December 31, 1999 from $13.5 million for the comparable prior year period.
The increase was primarily due to the additional interest expense incurred on
the $14.0 million convertible subordinated note issued in connection with the
Meris acquisition, the $25.0 million subordinated note issued in connection with
the BCL acquisition and the additional interest expense from the significant
increase in leverage due to the Kelso Transaction.
The Company's interest expense will increase significantly in the year 2000 as
the effect of the additional interest expense from the increase in leverage due
to the Kelso Transaction completed in late 1999, which will be incurred for a
full year period.
Tax Benefit. 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 the
merger/recapitalization expenses) 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 during the third quarter of 1999.
Approximately $4.7 million of the tax asset recorded during the third quarter of
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. If the Company does not further reduce its valuation
allowance in the future, the Company expects to have an effective tax rate of
approximately 42% on a going forward basis.
Year ended December 31, 1998 compared to year ended December 31, 1997
Revenue. Revenue increased to $217.4 million for the year ended December 31,
1998 from $214.0 million for the comparable prior year period, representing an
increase of $3.4 million or 1.6%. Approximately $2.9 million of the increase was
attributable to revenue generated from the acquisition of Meris, which was
effective as of November 5, 1998. Exclusive of the acquired Meris business,
revenue increased $0.5 million, primarily the result of increases in
reimbursement levels of $6.3 million offset by decreases in specimen volume of
approximately $5.8 million.
The Company experienced a 3.1% increase, exclusive of the acquired Meris
business, in the average reimbursement received for each specimen processed
during the year ended December 31, 1998 versus the comparable prior year period.
The increase in reimbursement levels is primarily due to increases in rates
charged to managed care clients as the Company continues its strategy to only
work with managed care clients who are willing to adequately pay for the levels
of service they request and the elimination and replacement of the Company's
most unprofitable accounts with other reasonably priced business. Exclusive of
the acquired Meris business, the Company experienced a 2.8% decrease in the
number of specimens processed during the year ended December 31, 1998 versus the
comparable prior year period. The decrease in volume was due to the effect of
Medicare requirements for new test panels which led to changes in ordering
patterns among physicians, the elimination of some under-performing accounts and
the exit from small geographical areas where the Company could not achieve
significant economies of scale.
Salaries, Wages and Benefits. Salaries, wages and benefits decreased to $67.7
million for the year ended December 31, 1998 from $69.1 million for the
comparable prior year period. As a percentage of revenue, salaries, wages and
benefits were 31.2% and 32.3% for the years ended December 31, 1998 and 1997,
respectively. Such decrease primarily reflects a reduction in headcount and
tight control over the growth in wage increases.
Supplies. Supplies expense remained consistent at approximately 14.0% of revenue
for the years ended December 31, 1998 and 1997. However, supplies expense per
specimen processed has increased slightly in 1998 as the Company started to
perform certain more costly tests in-house in late 1997 that were previously
sent to outside reference laboratories. Although the Company experienced a
slight increase in supplies expense related to bringing this testing in-house,
the Company had a positive net benefit as lab subcontracting expenses decreased
by more than 10% in the year ended December 31, 1998 from the comparable prior
year period.
Other Operating Expenses. Other operating expenses decreased to $53.6 million
for the year ended December 31, 1998 from $57.0 million for the comparable prior
year period. As a percentage of revenue, other operating expenses were 24.7% and
26.6% for the years ended December 31, 1998 and 1997, respectively. Such
decrease was primarily due to reductions in lab subcontracting expenses (see
explanation in preceding paragraph) and reductions in outside courier,
automobile, telecommunication and insurance expenses, as the Company evaluated
all expense line items throughout 1997 and 1998 and streamlined expenses as
necessary to achieve cost efficiencies.
Amortization and Depreciation. Amortization and depreciation expense decreased
to $7.6 million for the year ended December 31, 1998 from $8.9 million for the
comparable prior year period primarily due to certain non-compete agreements and
laboratory computer equipment becoming fully amortized or depreciated in late
1997 and early 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $33.5 million for the year ended December
31, 1998 from $34.6 million for the comparable prior year period. As a
percentage of revenue, selling, general and administrative expenses were 15.4%
and 16.2% for the years ended December 31, 1998 and 1997, respectively. Such
decrease continued the trend realized by the Company throughout 1997 and relates
to a reduction in corporate managerial and administrative positions and
streamlining of all operating support services.
EBITDA. EBITDA were $31.8 million for the year ended December 31, 1998 compared
to $23.5 million for the comparable prior year period. Without the effect of a
$1.2 million impact on EBITDA resulting from the integration period between
November 5, 1998 and late December 1998 of the Meris acquisition, EBITDA for the
year ended December 31, 1998 would have been $33.0 million.
Interest Expense. Interest expense, net decreased to $13.5 million for the year
ended December 31, 1998 from $14.1 million for the comparable prior year period
primarily due to the repayment of capital lease obligations.
Liquidity and Capital Resources
Net cash used by operating activities during the year ended December 31, 1999
was $8.4 million. However, such amount was significantly affected by the
expenses incurred by the Company to complete the Kelso Transaction in November
1999. Excluding the effect of the merger/recapitalization expenses, the Company
would have had net cash provided by operating activities of $31.6 million, which
would have reflected an improvement of $17.6 million over the comparable prior
year period when net cash provided by operating activities was $14.0 million.
Such pro forma increase in 1999 was primarily due to an improvement in the
Company's operating performance and timing of payments for accounts payable.
Net cash provided by financing activities was $15.7 million for the year ending
December 31, 1999. As part of the Kelso Transaction, 44.9 million shares of the
Company's common stock were converted into cash at $5.85 per share, 364,000
shares of preferred stock were converted into cash at $5.75 per share, stock
options were cancelled for cash consideration of $15.4 million, and the Company
retired $144.5 million of debt. In order to finance, among other things, the
conversion into cash of the common stock, preferred stock, stock options and the
retirement of debt, the Company received a new common equity investment of
$139.5 million from affiliates of Kelso, borrowed $160.0 million under a new
senior bank credit facility and issued $155.0 million of new senior notes. In
order to secure the new financing, the Company paid $8.6 million primarily for
financing fees to the underwriters of such debt. In addition, the Company's
financing activities in 1999 consisted of scheduled principal repayments under
capital lease obligations of $1.2 million, issuance of preferred dividends of
$0.1 million and proceeds from the exercise of stock options of $0.3 million.
Net cash used by investing activities was $14.9 million for the year ended
December 31, 1999, resulting from an $8.6 million cash payment in partial
consideration of the purchase price for the BCL acquisition and $6.3 million of
fixed asset additions. The Company expects that its capital expenditure
requirements, excluding any amounts related to acquisitions, will approximate
$6.0 million in 2000.
As part of the Kelso Transaction, the Company completed an offering of $155.0
million of senior notes (the "New Senior Notes") in September 1999 and entered
into a credit agreement (the "Credit Agreement") with a syndicate of banks and
other financial institutions for a $185.0 million credit facility (the "Credit
Facility").
Interest on the New Senior Notes is 12.75% and is payable on April 1st and
October 1st of each year. The New Senior Notes are due October 2009 and the
Company is not obligated to make any mandatory redemption or sinking fund
payment with respect to the New Senior Notes prior to maturity.
The New Senior Notes are not redeemable prior to October 1, 2004, after which
the New Senior Notes will be redeemable at any time at the option of the
Company, in whole or in part, at various redemption prices as set forth in the
indenture covering such New Senior Notes (the "Indenture"), plus accrued and
unpaid interest, if any, to the date of redemption. In addition, at any time
prior to October 1, 2002, the Company may redeem up to 35% of the outstanding
notes with the net proceeds of one or more public offerings of common stock of
the Company, at a redemption price of 112.75% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the redemption date.
The $185.0 million Credit Facility consists of $160.0 million in term loans
($50.0 million Term A and $110.0 million Term B) and $25.0 million in revolving
loans. Any borrowings under the revolving line of credit are due October 2005.
The Term A loan is due in quarterly principal payments of $1.3 million starting
on December 2000 and increasing to $1.9 million in December 2001, $2.5 million
in December 2002, $3.1 million in December 2003 and $3.8 million in December
2004. The Term B loan is due in quarterly principal payments of $0.3 million
starting December 1999 through September 2005 and increasing to $25.9 million in
December 2005 through November 2006. In addition, the Credit Agreement requires
mandatory repayments for various items, including a percentage of annual excess
cash flows, as defined. The amounts outstanding under the Credit Facility are
subject to certain restrictive comments. The covenants include, but are not
limited to, requirements that the Company maintain specified financial ratios
and stay within defined limitations on capital expenditures and additional
indebtedness. The Company also cannot declare or pay any dividends. All
obligations under the Credit Facility are secured by substantially all of the
Company's assets.
If the Company's ratio of net total debt to EBITDA (as defined in a capital call
agreement) for the year 2000 is greater than 5.0 times, Kelso and its affiliates
will be required, pursuant to a capital call agreement, to make (or cause their
designees to make) an equity investment in the Company. The proceeds from the
equity investment will be used to retire the term loans under the Credit
Facility. To the extent all such proceeds are not fully used to repay the term
loans, the commitment under the revolving credit facility will be reduced by an
amount equal to the lesser of (a) the amount necessary to cause the ratio of net
total debt to EBITDA, after giving effect to the equity investment, to equal 5.0
times and (b) $50.0 million.
As part of the Kelso Transaction, the Company tendered for $120.0 million (face
value) of senior notes ("Old Senior Notes") existing prior to the
recapitalization. 99.6% of the holders of the Old Senior Notes accepted the
Company's tender offer; however, 0.4% of holders did not tender and therefore
$0.5 million of the Company's Old Senior Notes remain outstanding. Interest on
the Old Senior Notes is 11% and is payable on April 1st and October 1st of each
year. The Old Senior Notes are due April 2006 and are not redeemable prior to
April 1, 2001, after which the Old Senior Notes will be redeemable at any time
at the option of the Company, in whole or in part, at various redemption prices
as set forth in the indenture covering such notes, plus accrued and unpaid
interest, if any, to the date of redemption.
The New and Old Senior Notes are general unsecured obligations of the Company
and rank pari passu in right of payment with all unsubordinated indebtedness of
the Company. In addition, the Indenture limits the ability of the Company to pay
dividends or distributions on capital stock or repurchase capital stock and
incur additional indebtedness, under certain circumstances.
The Company had $12.6 million of cash and cash equivalents on hand at December
31, 1999. Management believes that the amount of cash and cash equivalents
available at December 31, 1999, cash flows expected to be generated from
operations and additional borrowing capabilities under the revolving line of
credit of $25.0 million will be adequate to meet anticipated requirements for
working capital, interest payments, capital expenditures and scheduled principal
payments under capital lease and debt obligations for the foreseeable future.
Year 2000 Update
The Company did not experience any significant malfunctions or errors in its
operating or business systems when the date changed from 1999 to 2000. Based on
operations since January 1, 2000, the Company does not expect any significant
impact to its ongoing business as a result of the "Year 2000 issue". However, it
is possible that the full impact of the date change, which was of concern due to
computer programs that use two digits instead of four digits to define years,
has not been fully recognized. For example, it is possible that Year 2000 or
similar issues such as leap year-related problems may occur with billing,
payroll, or financial closings at month, quarterly, or year end. The Company
believes that any such problems are likely to be minor and correctable. In
addition, the Company could still be negatively affected if its customers or
suppliers are adversely affected by the Year 2000 or similar issues. The Company
currently is not aware of any significant Year 2000 or similar problems that
have arisen for its customers and suppliers.
The Company expended $0.5 million on Year 2000 readiness efforts from 1997 to
1999. These efforts included replacing some outdated, noncompliant hardware and
noncompliant software as well as identifying and remediating Year 2000 problems.
Seasonality
The Company's operations experience seasonal trends that the Company believes
affect all clinical laboratory companies. Testing volume generally tends to be
lower during the holiday seasons and, to a lesser extent, inclement weather. As
a result, because a substantial portion of the Company's expenses are relatively
fixed over the short term, the Company's operating income as a percentage of
revenue tends to decrease during the fourth quarter of each year, mainly due to
the Christmas and Thanksgiving holidays.
Inflation
Inflation was not a material factor in either revenue or operating expenses
during the periods presented.
Item 7A. Quantitative and Qualitative Disclosure of Market Risk
As of December 31, 1999, the Company had borrowings of $159.7 million under a
$185.0 million Credit Facility. The Credit Facility consists of $160.0 million
in term loans ($50.0 million Term A and $110.0 million Term B) and $25 million
in revolving loans. Interest on amounts borrowed under the Credit Facility is
subject to adjustment determined based on certain levels of financial
performance. For LIBOR borrowings, the applicable margin added to LIBOR can
range from 2.00% to 3.375% for Term A and revolving loans, and 3.50% to 3.875%
for Term B loans. At any time, a sharp rise in interest rates could have a
material adverse impact upon the Company's cost of working capital and interest
expense. For every one-half percent rise in interest rates on the Company's
variable note obligations held at December 31, 1999, interest expense would
increase by $0.8 million annually.
Item 8. Financial Statements and Supplementary Data
Please see pages F-1 through F-23.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth certain information regarding the directors,
executive officers and key management personnel of our company.
Name Age Position
David C. Weavil 48 Chairman of the Board
Robert E. Whalen 57 President, Chief Executive Officer and Director
Brian D. Urban 37 Executive Vice President, Chief Financial Officer
and Treasurer
David W. Gee 39 Executive Vice President, Secretary and General
Counsel
Mark L. Bibi 41 Executive Vice President
Ian J. Brotchie 59 Executive Vice President and Division President,
Unilab Northern
R. Jeffrey Lanzolatta 46 Executive Vice President and Division President,
Unilab Southern
C. Michael Hanbury 35 Senior Vice President, Chief Scientific Officer
Paul T. Wertlake 63 Vice President, Chief Medical Officer
Michael B. Goldberg 52 Director
David I. Wahrhaftig 42 Director
David C. Weavil served as Chairman, President and Chief Executive Officer of
Unilab from January 1997 to November 1999. Effective as of the Kelso
Transaction, Mr. Weavil serves only as Chairman of the Board. 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.
Robert E. Whalen was appointed President, Chief Executive Officer and a
director of Unilab effective as of the recapitalization. From May 1997 to
September 3, 1999, Mr. Whalen served as Executive Vice President and, from
September 1998 to September 3, 1999, as Chief Operating Officer of Scripps's
Clinic, a 320-physician multi-specialty medical group located in Southern
California. From the April 1995 merger of RBL and NHL until August 1996, Mr.
Whalen served as Executive Vice President of LabCorp. Prior to his employment at
LabCorp, Mr. Whalen held various senior level positions with NHL, which he
joined in 1976. He served as Executive Vice President of NHL from 1993 to 1995,
as Senior Vice President from 1991 to 1993 and as Vice President--Administration
from 1985 to 1993. From 1979 to 1985, he was Vice President--Division Manager of
NHL. At NHL and later LabCorp, Mr. Whalen oversaw human resources, client
service and major regional laboratories in California, Washington, Nevada and
Utah. Mr. Whalen was a member of the management committee at NHL and LabCorp.
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.
David Gee was appointed Executive Vice President, Secretary and General
Counsel of Unilab March 1, 2000. Prior to his employment with Unilab, Mr. Gee
was with the Seattle, Washington law firm of Garvey, Schubert & Barer from June
1998 through February 2000. Prior thereto, he served as Associate Vice
President, Counsel, and Assistant Secretary for Laboratory Corporation of
America ("LabCorp") from May 1995 to June 1998. He served as the Associate
General Counsel and Assistant Secretary of LabCorp's predecessor, National
Health Laboratories Incorporated from 1991 to 1995. Prior thereto, Mr. Gee was
with the law firm of Pillsbury, Madison & Sutro in its Los Angeles and San Diego
offices.
Mark L. Bibi has been Executive Vice President since March 2000. He was
Executive Vice President, Secretary and General Counsel of Unilab from May 1998
through February 2000. 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.
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.
C. Michael Hanbury, Ph.D., Senior Vice President and Chief Scientific
Officer, has been with Unilab 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
testing services and in vitro diagnostic manufacturing.
Paul T. Wertlake, M.D., has been Vice President and Chief Medical
Officer of Unilab since January 1994. Since October 1989, Dr. Wertlake has
served as the Senior Medical Officer for Southern California and Medical
Director of our Tarzana laboratory. Prior thereto, Dr. Wertlake has served in
the academic, hospital and reference laboratory sectors.
Michael B. Goldberg has been a Managing Director of Kelso since October
1991 and became a director of Unilab effective as of the recapitalization.
Mr. Goldberg served as a Managing Director and jointly managed the merger and
acquisitions department at The First Boston Corporation from 1989 to May
1991. Mr. Goldberg was a partner at the law firm of Skadden, Arps, Slate,
Meagher & Flom from 1980 to 1989. Mr. Goldberg is a director of Consolidated
Vision Group, Inc., Endo Pharmaceuticals, Inc., Hosiery Corporation of
America, Inc. and Netspeak Corporation. Mr. Goldberg is also a director of
the Phoenix House Foundation and the Woodrow Wilson Council.
David I. Wahrhaftig has been a Managing Director of Kelso since April
1998. Mr. Wahrhaftig has been affiliated with Kelso since 1987, and became a
director of Unilab effective as of the recapitalization. Mr. Wahrhaftig also
serves as a director of Consolidated Vision Group, Inc., Endo Pharmaceuticals,
Inc. and Humphreys, Inc.
Haywood D. Cochrane, Jr., Kirby L. Cramer, William Gedale, Richard A.
Michaelson, and Gabriel B. Thomas served as Directors during 1999 until
completion of the Kelso Transaction on November 23, 1999.
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, 1999, 1998 and 1997, of those persons who were, at
December 31, 1999, (i) the Chief Executive Officer and (ii) the other Named
Executive Officers of Unilab whose total annual salary and bonus for the year
ended December 31, 1999 exceeded $100,000 (Messrs. Weavil, Whalen, Lanzolatta
and Brotchie collectively are referred to herein as the "Named Executive
Officers").
<TABLE>
Summary Compensation Table
<CAPTION>
Annual Long-Term
Name and Title Year Salary Bonus Def Comp SERP Plan Other
-------- -------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
David C. Weavil 1999 $358,889 $400,000 $60,711 $828,299 $ 4,888,898(3)
Chairman (1) 1998 400,000 425,000 66,000 106,137 12,000
1997 400,000 200,000 40,000 24,560 139,659(4)
Robert E. Whalen 1999 41,111 -- 3,289 -- 92,222 (5)
President & CEO (2)
R. Jeffrey Lanzolatta 1999 225,000 175,000 32,000 384,653 2,217,537(6)
Executive Vice President and 1998 225,000 125,000 28,000 49,113 13,163
Ian Brotchie 1999 225,000 110,000 26,800 614,001 1,304,850(7)
Executive Vice President and 1998 225,000 57,500 22,600 102,923 11,772
President, Northern Division
<FN>
(1) Mr. Weavil served as Chairman, President and CEO of the Company from January
20, 1997 to November 23, 1999. He has been Chairman since November 23,
1999.
(2) Mr. Whalen has served as President and CEO since November 23, 1999.
(3) Represents (a)$2,500,000 payment in consideration for Mr. Weavil's agreement
not to compete with the Company in certain circumstances following his
departure as President and CEO, (b) $2,378,125 realized upon exercise and
payment of stock options in the Kelso Transaction and (c) $10,773 for a
car allowance.
(4) 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).
(5) Represents consulting payments to Mr. Whalen for the period from September
1, 1999 to November 22, 1999.
(6) Represents (a) $1,237,025 realized upon exercise of options during the year
and the payment of stock options in the Kelso Transaction, (b) $9,600 for
a car allowance, (c) $877,500 from the sale of 150,000 restricted shares
of Unilab common stock that had previously been granted to him by the
Company, (d) forgiveness of a $50,000 loan, (e) imputed interest of
$2,580 on an interest free loan and (f) tax gross-up benefits of $40,827.
Mr. Lanzolatta assumed his current position in 1998.
(7) Represents (a) $1,295,250 realized upon exercise and payment of stock
options in the Kelso Transaction, (b) $9,600 for car allowance. Mr.
Brotchie assumed his current position in 1998.
</FN>
</TABLE>
Option Grants
The following table sets forth the grants of non-qualified
stock options during the year ended December 31, 1999, to the Named Executive
Officers:
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year (1999)
Options Granted % of Total Ex. Price Market Price Exp. Data
<S> <C> <C> <C> <C> <C>
D. Weavil --- --- --- --- ---
R. Whalen --- --- --- --- ---
J. Lanzolatta (1) 50,000 7.03% $2.3125 $2.3125 1/4/09
I. Brotchie (1) 50,000 7.03% $2.3125 $2.3125 1/4/09
<FN>
(1)In January 1999 pursuant to the Company's Stock Option and Performance
Incentive Plan, Messrs. Lanzolatta and Brotchie were each granted options
to purchase 50,000 shares of Unilab Common Stock at an exercise price of
$2.3125 per share, the closing price per share of Unilab Common Stock as
reported on the American Stock Exchange on the date of the grant (January
4). All such options were cashed out in the Kelso Transaction at a per
share price of $5.85.
</FN>
</TABLE>
Other Stock Options
The terms of the new stock option plan have not yet been finalized, though it is
anticipated that 3.8 million options (besides those options being rolled-over)
will be available for grants at an option exercise price of $5.85. It is
anticipated that part of the options will vest through length of service and
part will vest subject to various performance criteria. In addition, all
outstanding options (besides those being rolled-over) became immediately vested
and were cancelled for cash consideration of $15.4 million as part of the
recapitalization.
Option Exercises and Fiscal Year-End Values
The following table reflects the options to purchase Unilab Common Stock that
were exercised by the Named Executive Officers during the fiscal year ended
December 31, 1999 and lists the number and value of the unexercised options to
purchase Unilab Common Stock held by the Named Executive Officers at December
31, 1999.
<TABLE>
<CAPTION>
Aggregate Option Exercises in Last Fiscal Year and FY-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at FY-End (#)(2) FY-End ($)(2)
------------------------ ----------
Shares Acquired
Name on Exercise (#) Value Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C> <C> <C>
David C. Weavil (1) 500,000 2,378,125 --- ---
Robert E. Whalen --- --- --- ---
Jeff Lanzolatta 299,000 1,237,025 --- ---
Ian Brotchie 340,000 1,295,250 --- ---
<FN>
(1) Pursuant to Mr. Weavil's employment agreement he received in January 1997
options to purchase 250,000 shares of Common Stock, which vest in equal
installments over five years, beginning January 1998 and ending January
2002. He also received in January 1998 pursuant to his employment
agreement additional 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, which vest in equal
installments over five years, beginning January 1999 and ending January
2003.
(2) All options (except certain options, valued at approximately $0.5
million, elected to be rolled-over by the option holders into a new stock
option plan) to acquire shares of Unilab common stock that were
outstanding in 1999 were cashed out in the Kelso Transaction at a per
share price of $5.85.
</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 1999, three of the Company's four Named Executives participated in the
SERP receiving the aggregate contributions specified in the Executive
Compensation table set forth on Page 31. In addition, two other employees
participated in the SERP, receiving aggregate contributions equivalent to
$527,857.
Board of Directors'
Report on Executive Compensation
Until consummation of the Kelso Transaction on November 23,
1999, the Compensation Committee consisted of Messrs. Kirby L. Cramer
(Chairman) and Gabriel B. Thomas. Since November 23, 1999 the Board has
functioned in the role of Compensation Committee, given its small size
(four persons).
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 interest of executives
with those of its stockholders. The Company believes that this alignment of
interests is still important, even in light of the fact that the Company has far
fewer stockholders as a result of the Kelso Transaction. 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 it is
expected, at appropriate intervals, long-term incentive compensation in the form
of stock option grants and/or awards of restricted stock. 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 evaluation of
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. 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.
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 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 Board. Additionally, cash bonuses were
awarded for 1999 to certain senior officers of the Company in connection with
consummation of the Kelso Transaction.
Historically, 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 or in the absence of a 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 Board
intends to issue stock options in 2000 on the basis of the $5.85 per share
purchase price in the Kelso Transaction.
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 believes that this program has been and will continue to
be instrumental in focusing the Company's senior management on building
long-term value for stockholders. It has been the historical 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 have
contained 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.
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 Board believes that such benefits are
comparable to those offered by other clinical laboratory companies. Except as
specified in the Executive Compensation Table, 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 an executive officer in the last fiscal year.
The Company's former chairman and CEO, David C. Weavil, and
four other executive officers, may have received compensation for purposes of
Section 162(m) of the Internal Revenue Code in excess of $1 million during 1999,
as a result of which not all compensation paid to such 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 1999, David C. Weavil, the Chairman, President and Chief
Executive Officer of the Company during such period, was paid a base annual
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 $400,000 cash bonus in
November 1999 in consideration for 1999 performance and his efforts towards
closing the Kelso Transaction. Mr. Weavil also received deferred compensation
equal to 8% of his 1999 cash compensation (valued at $60,711), plus
participation in the Company's Executive Retirement Plan (valued at $828,299 in
1999), which brought his annual cash compensation for 1999 to $1,647,899.
Upon consummation of the Kelso Transaction, Mr. Weavil entered
into a consulting agreement with the Company, under which he is to receive
$220,000 per year for 5 years. He also executed a non-compete agreement with the
Company, for which he received additional consideration.
Robert E. Whalen became President and Chief Executive Officer
of the Company upon consummation of the Kelso Transaction on November 23, 1999.
Mr. Whalen has a base annual salary of $400,000, the same as his predecessor.
Mr. Whalen also received deferred compensation equal to 8% of his 1999 cash
compensation (valued at $3,289), which brought his cash compensation for 1999
to $44,400.
Compensation of Other Named Executive Officer and Key Management Personnel
The Company has also entered into employment agreements with
certain of the Company's other Named Executive Officers (Messrs. Lanzolatta and
Brotchie) 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 or the Board in the case of the
Company's other Named Executive Officers).
The Board 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, are a major
incentive in aligning the interests of employees, including senior management,
and stockholders. The Board therefore intends to continue to explore various
methods of assuring such commonality of interest in the Company's long-term
performance.
Michael B. Goldberg
David I. Wahrhaftig
David E. Weavil
Robert E. Whalen
Members of the Board
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information concerning each
person believed to be a beneficial owner of more than 5% of the outstanding
shares of Unilab common stock and beneficial ownership of Unilab common stock by
each director, Named Executive Officer and all directors and executive officers
as a group, in each case as of March 23, 2000.
Shares Percentage
Kelso Investment Associates VI, L.P. (1) 18,743,590 72.8%
KEP VI, LLC (1) 2,901,709 11.3%
Frank T. Nickell (1) (2) (2)
Thomas R. Wall IV (1) (2) (2)
George E. Matelich (1) (2) (2)
Michael B. Goldberg (1)(3) (2) (2)
David I. Wahrhaftig (1)(3) (2) (2)
Frank K. Bynum, Jr. (1) (2) (2)
Philip E. Berney (1) (2) (2)
Robert E. Whalen (4)(5) 50,000 0.2%
Brian D. Urban (4)(6) 50,000 0.2%
All Directors and Executive Officers 100,000 0.4%
of Unilab as a Group (10 persons)
- -----------
(1) The business address for these persons is Kelso & Company,
320 Park Avenue, 24th Floor, New York, New York 10022.
(2) Messrs. Nickell, Wall, Matelich, Goldberg, Wahrhaftig, Bynum and
Berney may be deemed to share beneficial ownership of shares of common
stock owned of record by Kelso Investment Associates VI, L.P. and KEP
VI, LLC, by virtue of their status as managing members of KEP VI, LLC
and the general partner of Kelso Investment Associates VI, L.P.
Messrs. Nickell, Wall, Matelich, Goldberg, Wahrhaftig, Bynum and
Berney share investment and voting power with respect to the shares of
common stock owned by Kelso Investment Associates VI, L.P. and KEP VI,
LLC but disclaim beneficial ownership of such shares.
(3) Messrs. Goldberg and Wahrhaftig are directors of Unilab.
(4) Business address: 18448 Oxnard Street, Tarzana, California 91356.
(5) Mr. Whalen is President and Chief Executive Officer and a director.
(6) Mr. Urban is Executive Vice President, Chief Financial Officer and
Treasurer.
Item 13. Certain Relationships and Related Transactions
Whalen Employment Agreement. The Company expects to enter into
an employment agreement with Robert E. Whalen, retroactively effective as of the
time of his appointment as President and Chief Executive Officer.
Weavil Employment Agreement and Consulting Agreement. Unilab
entered into an employment agreement with David C. Weavil on January 20, 1997 to
serve as Chairman of the Board, President and Chief Executive Officer of Unilab.
With the completion of the Kelso Transaction, Mr. Weavil's employment agreement
was terminated and the Company entered into a five-year consulting agreement
with Mr. Weavil. Pursuant to this agreement, Mr. Weavil is entitled to an annual
consulting fee of $220,000, a seat on the board of directors and options to
purchase common stock of Unilab on terms that are substantially similar to the
options granted to management and other employees following the merger. Mr.
Weavil also received a bonus of $400,000. Unilab also entered into a
non-competition agreement pursuant to which Mr. Weavil was compensated for
limiting his ability to compete with the Company following the completion of the
Kelso Transaction.
Transactions with Kelso
Under the terms of the merger agreement covering the Kelso
Transaction and Unilab, the Company paid to Kelso a one-time fee of $6 million
upon the completion of the merger plus out of pocket expenses of approximately
$130,000. In addition, under the merger agreement, Unilab is required to do the
following:
o pay to Kelso annual financial advisory fees of $600,000;
o reimburse Kelso for its expenses incurred in providing Unilab with
financial advisory services; and
o indemnify Kelso and certain related parties with respect to the
transactions contemplated by the merger, including the financing of
the merger and any services to be provided by Kelso or any related
party to Unilab going forward.
Unilab has already begun paying financial advisory fees to
Kelso and has already reimbursed Kelso for some expenses.
Company directors that are affiliated with Kelso do not
receive any compensation for serving on the board.
PART IV
<TABLE>
<CAPTION>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
<S> <C>
(a)1. Financial Statements
Report of Independent Public Accountants................................F-1
Statements of Operations for the Years Ended December 31, 1997,
December 31, 1998 and December 31, 1999 ................................F-2
Balance Sheets at December 31, 1998 and December 31, 1999...............F-3
Statements of Shareholders' Equity (Deficit) for the Years Ended
December 31, 1997, December 31, 1998 and December 31, 1999..............F-4
Statements of Cash Flows for the Years Ended December 31, 1997,
December 31, 1998 and December 31, 1999.................................F-5
Notes to the Consolidated Financial Statements..........................F-6
(a)2. Financial Statement Schedules
Report of Independent Public Accountant on
Financial Statement Schedule............................................F-22
Schedule II - Valuation and Qualifying Accounts.........................F-23
(a)3. Exhibits required to be filed by Item 601 of Regulation S-K.
The information called for by this paragraph is incorporated
herein by reference to the Exhibit Index of this report.
</TABLE>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, Unilab Corporation has duly caused this amendment to be signed on its
behalf by the undersigned thereunto duly authorized.
Dated: 3/24/00 UNILAB CORPORATION
By: /s/ Brian D. Urban
----------------------
Name: Brian D. Urban
Title: Executive Vice President,
Chief Financial Officer and
Treasurer
In Accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Robert E. Whalen President and Chief Executive Officer, March 24, 2000
- -------------------- Director (Principal Executive Officer)
Robert E. Whalen
/s/ Brian D. Urban Executive Vice President, March 24, 2000
- ------------------ Chief Financial Officer and
Brian D. Urban Treasurer (Principal Financial
and Accounting Officer)
/s/ Michael D. Goldberg Director March 24, 2000
- -----------------------
Michael D. Goldberg
/s/ David Wahrhaftig Director March 24, 2000
- --------------------
David Wahrhaftig
/s/ David C. Weavil Director March 24, 2000
- -------------------
David C. Weavil
/s/ By Brian D. Urban
Brian D. Urban, Attorney-in-Fact March 24, 2000
</TABLE>
<PAGE>
Index
Exhibit No. Description of Exhibit
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).
2.4 Asset Purchase Agreement, dated as of April 5, 1999, by
and between the Company, as Buyer, and Physicians Clinical
Laboratories, Inc. doing business as Bio-Cypher
Laboratories, as Seller (Incorporated by Reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K
dated May 10, 1999).
2.5 Registration Rights Agreement by and between the
Company and Physicians Clinical Laboratories, Inc.
doing business as Bio-Cypher Laboratories, (Incorporated
by Reference to Exhibit 2.3 to the Company's Current Report
on Form 8-K dated May 10, 1999).
2.6 Agreement and Plan of Merger, dated as of May 24, 1999,
as amended between the Company and UC Acquisition Sub, Inc.
(Incorporated by Reference to Exhibit 2.1 to the company's
Current Report on Form 8-K dated May 24, 1999).
2.7 Letter agreement, dated as of July 8, 1999, between the
Company and UC Acquisition Sub, Inc.(Incorporated by
Reference to Exhibit 2.1 to the Company's Current Report
on Form 8-K dated July 8, 1999).
2.8 Letter Agreement, dated as of July 30, 1999, between the
Company and UC Acquisition Sub, Inc. (Incorporated by
reference to Exhibit 2.2 to the Company's Current Report
on Form 8-K dated July 8, 1999).
2.9 Letter Agreement, dated as of August 10, 1999, between
the Company and UC Acquisition Sub, Inc. (Incorporated by
reference to Exhibit 2.3 to the Company's Current Report
on Form 8-K dated August 13, 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 Indenture, dated as of September 28, 1999,
between Unilab Finance Corp. and HSBC Bank
USA relating to the company's 12 3/4% Senior
Subordinated Notes due 2009 (the
"Indenture") (Incorporated by Reference to
Exhibit 4.1 to the Company's Registration
Statement on Form S-4 dated December 30,
1999).
4.2 Supplemental Indenture, dated as of November
23, 1999, among the Company, Unilab Finance
Corp. and HSBC Bank USA, amending the
Indenture (Incorporated by Reference to
Exhibit 4.2 to the Company's Registration
Statement on Form S-4 dated December 30,
1999).
4.3 Assumption Agreement, dated as of November 23, 1999,
between the Company and Unilab Finance Corp. (Incorporated
by Reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-4 dated December 30, 1999).
4.4 Credit Agreement, dated as of November 23, 1998, among
the Company and the several lenders named therein
(Incorporated by Reference to Exhibit 4.4 to the
Company's Registration Statement on Form S-4 dated
December 30, 1999).
4.5 Capital Call Agreement, dated as of November 23, 1999,
by and among Kelso & Company, L.P., the Company and
Bankers Trust Company (Incorporated by Reference to
Exhibit 4.5 to the Company's Registration Statement on
Form S-4 dated December 30, 1999).
10.1 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).
10.2 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).
10.3 Amendment to Employment Agreement, dated November 23, 1999,
by and between, the company and David C. Weavil
(Incorporated by Reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-4,dated December 30, 1999).
10.4 Consulting Agreement, dated as of December 1, 1999, by
and between David C. Weavil and the Company (Incorporated
by Reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-4, dated December 30, 1999).
10.5 Non Compete Agreement, dated November 23, 1999, by and
among the Company, UC Acquisition Sub, Inc., and
David C. Weavil (Incorporated by Reference to Exhibit 10.5
to the Company's Registration Statement on Form S-4,
dated December 30, 1999).
10.6 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).
10.7 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).
10.8 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).
10.9 Stockholders Agreement, dated as of November 23, 1999,
among the Company, Kelso Investment Associates VI, LLC
KEP VI, LLC and certain other stockholders of the Company
(Incorporated by Reference to Exhibit 10.9 to the
Company's Registration Statement on Form S-4 dated
December 30, 1999).
21.1 List of subsidiaries of the Company (the Company has no
subsidiaries).
24.1 Power of Attorney of Michael Goldberg
24.2 Power of Attorney of David Wahrhaftig
24.3 Power of Attorney of Robert E. Whalen
24.4 Power of Attorney of David C. Weavil
99.1 Press Release, dated March 7, 2000, announcing 1999 results.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Unilab Corporation
We have audited the accompanying balance sheets of Unilab Corporation
(a Delaware corporation) as of December 31, 1999 and 1998, and the related
statements of operations, shareholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Unilab Corporation
as of December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 3, 2000
<PAGE>
<TABLE>
UNILAB CORPORATION
STATEMENTS OF OPERATIONS
<CAPTION>
For the years ended December 31,
1999 1998 1997
------- ----------- --------
(amounts in thousands)
<S> <C> <C> <C>
Revenue .................................................... $285,163 $217,370 $214,001
-------- -------- --------
Direct Laboratory and Field Expenses:
Salaries, wages and benefits........................... 84,476 67,742 69,094
Supplies............................................... 41,532 30,671 29,858
Other operating expenses............................... 70,443 53,594 56,990
---- ------ -------
196,451 152,007 155,942
Legal charges............................................... 600 -- --
Merger/recapitalization expenses............................ 25,167 -- --
Amortization and depreciation............................... 10,163 7,592 8,885
Selling, general and administrative expenses................ 39,060 33,530 34,570
---- ------ -------
Total Operating Expenses.......................... 271,441 193,129 199,397
------- ------ -------
Operating Income ........................................... 13,722 24,241 14,604
Interest expense, net.................................. 18,845 13,538 14,068
------- ------ -------
Income (Loss) Before Tax Benefit and Extraordinary Item..... (5,123) 10,703 536
Tax Benefit ............................................... 11,904 -- --
------ ------ -------
Income Before Extraordinary Item............................ 6,781 10,703 536
Extraordinary Item--loss on early extinguishment of debt.... 20,773 -- --
------- ------ -------
Net Income (Loss)........................................... $(13,992) $ 10,703 $ 536
--------- -------- ------
Preferred Stock Dividends................................... 108 131 138
Net Income (Loss) Available to Common Shareholders.......... $ (14,100) $ 10,572 $ 398
========== ======= ======
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
UNILAB CORPORATION
BALANCE SHEETS
<CAPTION>
December 31,
1999 1998
----- ------
(amounts in thousands,
Assets except per share data)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................................... $ 12,557 $ 20,137
Accounts receivable, net of allowance for doubtful accounts
of $21,250 and $10,813 in 1999 and 1998, respectively 50,281 41,326
Inventory of supplies....................................................... 4,215 3,055
Prepaid expenses and other current assets................................... 1,710 1,045
------- ------
Total Current Assets................................................... 68,763 65,563
------ ------
Property and equipment, net................................................. 13,125 11,277
Deferred tax asset.......................................................... 16,558
Goodwill, net of accumulated amortization of $12,030
and $7,754 in 1999 and 1998, respectively................................ 81,857 56,949
Other intangible assets, net................................................ 1,773 2,370
Other assets................................................................ 11,454 6,301
------- -------
$ 193,530 $ 142,460
========= =========
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of long-term debt........................................... $ 3,908 $ 1,206
Accounts payable and accrued liabilities.................................... 22,468 14,533
Accrued payroll and benefits................................................ 8,998 6,892
-------- -------
Total Current Liabilities.............................................. 35,374 22,631
------ ------
Long-term debt, net of current portion...................................... 310,941 137,170
Other liabilities........................................................... 5,504 4,026
Commitments and Contingencies
Shareholders' Equity (Deficit):
Convertible preferred stock, $.01 par value; Authorized--20,000 shares;
Issued and Outstanding--0 and 364 at December 31, 1999 and 1998, respectively -- 4
Common stock, $.01 par value; Voting--Authorized--100,000 shares;
Issued and Outstanding--25,758 and 40,708 at December 31, 1999
and 1998, respectively 258 407
Additional paid-in capital.................................................. 149,312 228,395
Accumulated deficit......................................................... (307,859) (250,173)
-------- --------
Total Shareholders' Deficit.............................................. (158,289) (21,367)
-------- --------
$193,530 $142,460
======== ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
UNILAB CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 1999, 1998 and 1997
(amounts in thousands, except per share amounts)
<CAPTION>
Total
Convertible Additional Shareholders'
Common Stock Preferred Stock Paid-In Accumulated Equity
Shares Amount Shares Amount Capital Deficit (Deficit)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996.................. 37,285 $ 373 400 $ 4 $ 226,078 $(261,143) $ (34,688)
Restricted shares issued to employees........ 15 -- -- -- 237 -- 237
Restricted shares forfeited by employees..... (20) -- -- -- (45) -- (45)
Issuance of shares for Company's 401(k) plan
matching contributions 29 -- -- -- 49 -- 49
Issuance of shares to certain Board Directors
for services rendered 84 1 -- -- 63 -- 64
Conversion of preferred stock to common stock 36 -- (36) -- -- -- --
Issuance of shares at $0.625 upon exercise of
stock options 75 1 -- -- 46 -- 47
Issuance of shares to a former CEO in
connection with CEO's resignation 500 5 -- -- 214 -- 219
Shares sold to a former CEO pursuant to
transition agreements in connection
with CEO's resignation 533 5 -- -- 295 -- 300
Shares sold to a former CeO pursuant to
an employment agreement 1,143 12 -- -- 488 -- 500
Issuance of shares to a former CEO as
bonus pursuant to an employment
agreement 229 2 -- -- 98 -- 100
Shares sold to a Board Director pursuant to
a stock purchase plan 500 5 -- -- 276 -- 281
Issuance of shares to employees as special
year end bonus 169 2 -- -- 253 -- 255
Issuance of preferred stock dividend--$0.36
per share -- -- -- -- -- (138) (138)
Net income................................... -- -- -- -- -- 536 536
------------------------------------------------------------------------
Balances, December 31, 1997.................. 40,578 $ 406 364 $ 4 $ 228,052 $(260,745) $ (32,283)
Issuance of shares to certain Board Directors
for services rendered 72 1 -- -- 159 -- 160
Issuance of shares at $0.63--$2.19 upon
exercise of options 19 -- -- -- 15 -- 15
Issuance of shares for Company's 401(k) plan
matchiing contributions 14 -- -- -- 25 -- 25
Restricted shares issued to employees........ 17 -- -- -- 132 -- 132
Issuance of shares to part-time employees as
special bonus 8 -- -- -- 12 -- 12
Issuance of preferred stock dividend--$0.36 per
share -- -- -- -- -- (131) (131)
Net income................................... -- -- -- -- -- 10,703 10,703
------------------------------------------------------------------------
Balances, December 31, 1998.................. 40,708 $ 407 364 $ 4 $228,395 $(250,173) $(21,367)
Issuance of shares to certain Board Directors
for services rendered 39 -- -- -- 100 -- 100
Issuance of shares at $0.44--$2.00 upon
exercise of options 391 4 -- -- 323 -- 327
Miscellaneous issuances/repurchases of stock
from employees (40) -- -- -- 88 -- 88
Issuance of shares in connection with the BCL
acquisition 1,000 10 -- -- 3,240 -- 3,250
Conversion of note and accrued interest to
common stock 4,683 47 -- -- 14,002 -- 14,049
Effect of the merger/recapitalization
transaction............................... (21,023) (210) (364) (4) (96,836) (43,586) (140,636)
Issuance of preferred stock dividend--$0.36 per
share -- -- -- -- -- (108) (108)
Net loss..................................... -- -- -- -- -- (13,992) (13,992)
Balances, December 31, 1999.................. 25,758 $ 258 -- $ -- $149,312 $(307,859) $(158,289)
---------------------------------------------------------------------
--
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
UNILAB CORPORATION
STATEMENTS OF CASH FLOWS
<CAPTION>
For the years ended December 31,
1999 1998 1997
----------- --------- --------
(in thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss).......................................................... $(13,992) $10,703 $ 536
Adjustments to reconcile net income (loss) to net cash provided (used)
Amortization and depreciation......................................... 10,163 7,592 8,885
Provision for doubtful accounts....................................... 20,572 15,662 15,663
Deferred tax benefit.................................................. (11,904) -- --
Non-cash merger/recapitalization expenses............................. 5,892 -- --
Net changes in assets and liabilities affecting operations, net of
Increase in Accounts receivable....................................... (21,636) (17,154) (14,967)
Increase in Inventory of supplies..................................... (623) (106) (207)
(Increase) decrease in Prepaid expenses and other current assets...... (736) 250 407
Increase in Other assets.............................................. (140) (112) (1,107)
Increase (decrease) in Accounts payable and accrued liabilities....... 4,489 (4,047) (7,221)
Increase (decrease) in Accrued payroll and benefits................... (820) 800 816
Other................................................................. 325 408 910
-------- -------- ---------
Net cash provided by (used in) operating activities........................ (8,410) 13,996 3,715
------ -------- ---------
Cash Flows From Financing Activities:
Borrowings under third party debt.......................................... 310,765 -- --
Payments of third party debt............................................... (145,993) (1,720) (1,776)
Financing costs under the New Senior Notes and Credit Facility............. (8,635) -- --
Purchase of old stock and stock options less new equity investment......... (140,636) -- 581
Proceeds from exercise of options.......................................... 327 15 47
Other ................................................................... (108) (131) (236)
---------- -------- ---------
Net cash provided by (used in) financing activities........................ 15,720 (1,836) (1,384)
----------- -------- ---------
Cash Flows From Investing Activities:
Capital expenditures....................................................... (6,286) (3,005) (1,935)
Payments for acquisitions, net of cash acquired............................ (8,604) (670) (1,824)
--------- -------- -------
Net cash used by investing activities...................................... (14,890) (3,675) (3,759)
--------- -------- -------
Net Increase (Decrease) in Cash and Cash Equivalents....................... (7,580) 8,485 (1,428)
Cash and Cash Equivalents--Beginning of Year................................ 20,137 11,652 13,080
--------- -------- ------
Cash and Cash Equivalents--End of Year...................................... $ 12,557 $20,137 $11,652
======== ======= =======
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
UNILAB CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. Description of the Company and Significant Accounting Policies
a. Description of the Company
Unilab Corporation ("Unilab" or the "Company") provides clinical laboratory
testing services to physicians, managed-care organizations, hospitals and other
health care providers primarily in the State of California.
b. Inventory of Supplies
Inventories, which consist principally of purchased clinical laboratory
supplies, are valued at the lower of cost (first-in, first-out) or market.
c. Revenue Recognition
Revenue is recognized at the time the service is provided. The Company's
revenue is based on amounts billed or billable for services rendered, net of
contractual adjustments and other arrangements made with third-party payors to
provide services at less than established billing rates.
In addition, certain laboratory services are provided pursuant to managed
care contracts which provide for the payment of capitated fees (a fixed monthly
fee per individual enrolled with a managed care plan for some or all laboratory
tests performed during the month) rather than individual fees for tests actually
performed. Revenue under capitated arrangements is recognized monthly when
billed or when due under the terms of the related contracts.
d. Use of Estimates
The preparation of the financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from these estimates. The most
significant estimates with regards to these financial statements relate to
accounts receivable and insurance reserves.
The Company's net accounts receivable balance is determined after
deductions for contractual adjustments, which are estimated based on established
billing rates made with third party payors, and an allowance for doubtful
accounts, which primarily is based on the aging of the accounts and historical
collection experience. In addition, the Company accrues for both asserted and
unasserted claims arising from workers' compensation (1994 and 1995 only) and
automobile liability losses (1994 through 1997 only). The estimate of the
liability for unasserted claims arising from unreported incidents is based on an
analysis of historical claims experience.
e. Fair Value of Financial Instruments and Concentration of Credit Risk
The carrying amounts reported in the balance sheets for cash, accounts
receivable, accounts payable and accrued liabilities approximate fair value
because of the immediate or short-term maturity of these financial instruments.
The Company's $159.7 million of bank indebtedness and $155.0 million of senior
notes were secured in late 1999 and the Company believes such amounts still
approximate fair value. The Company believes that its non-bank indebtedness
approximates fair value based on current yields for debt instruments of similar
quality and terms.
Concentration of credit risk with respect to accounts receivable are
limited due to the diversity of the Company's client base. However, the Company
provides services to certain patients covered by various third-party payors,
including the Federal and California Medicare/Medicaid programs. Revenue, net of
contractual allowances, from direct billings under Federal and California
Medicare/Medicaid programs during each of the years ended December 31, 1999,
1998 and 1997 approximated 25-30% of revenue.
f. Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets.
Buildings are depreciated over 28 years, laboratory and computer equipment are
generally depreciated over 7 and 3 years, respectively, and furniture and
fixtures are depreciated over 5 years. Leasehold improvements are amortized
using the straight-line method over the remaining term of the related lease.
Major repairs which extend the life or add value to equipment are capitalized
and depreciated over their remaining useful life.
g. Goodwill
Goodwill represents the excess of cost over the fair value of net tangible
and identifiable intangible assets acquired and is amortized using the
straight-line method. Goodwill is amortized over 40 years for acquisitions
completed prior to January 1, 1995 and over 20 years for acquisitions after that
date.
Based upon a final review and valuation of certain assets acquired in the
Meris Laboratories, Inc. ("Meris") and Physicians Clinical Laboratory, Inc.
(doing business as Bio-Cypher Laboratories) ("BCL") acquisitions in November
1998 and May 1999, respectively, (see Note 3), the Company changed its estimate
of goodwill amortization arising from these acquisitions to a ten year period
effective July 1, 1999. The effect of this change in estimate was to increase
amortization expense and the net loss by $1.2 million in 1999.
The Company continually evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life of goodwill might
warrant revision or that the remaining balance of goodwill and other long-lived
assets may not be recoverable. When factors indicate that goodwill and other
long-lived assets should be evaluated for possible impairment, the Company uses
an estimate of undiscounted future net cash flows over the remaining life of
goodwill to determine if impairment has incurred. Assets are grouped at the
lowest level for which there are identifiable cash flows that are largely
independent from other asset groups. The Company uses discounted future expected
net cash flows to determine the amount of impairment loss.
h. Other Intangible Assets
Customer lists and covenants not to compete are recorded at cost and are
amortized utilizing the straight-line method over the estimated lives of the
assets, generally 10 years for customer lists and 3-5 years for covenants not to
compete. The cost of other intangible assets is evaluated periodically and
adjusted, if necessary, if later events and circumstances indicate that a
permanent decline in value below the current unamortized historical cost has
occurred.
i. Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the basis for financial
reporting purposes and the basis for tax purposes, in accordance with Statement
of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes".
j. Cash and Cash Equivalents
For the purpose of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months or
less to be cash equivalents.
2. Property and Equipment, Net and Other Intangible Assets
Property and equipment, net consists of the following:
December 31,
1999 1998
(in thousands)
Buildings.................................. $3,166 $3,166
Leasehold improvements..................... 8,023 5,564
Laboratory and other equipment............. 33,758 30,053
Furniture and fixtures..................... 3,921 3,459
------- -----
48,868 42,242
Less-accumulated depreciation and
amortization $13,125 $11,277
Depreciation expense was approximately $4.8 million in 1999, $5.0 million
in 1998 and $6.0 million in 1997.
Other intangible assets consist of the following:
December 31,
1999 1998
(in thousands)
Customer lists..................... $7,675 $7,675
Covenants not to compete........... 235 235
------- -----
7,910 7,910
Less-accumulated amortization...... 6,137 5,540
------- -----
$1,773 $2,370
Amortization expense for goodwill, other intangible assets and certain
other deferred costs was approximately $5.4 million in 1999, $2.6 million in
1998 and $2.9 million in 1997.
3. Acquisitions
On September 16, 1998, the Company and 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 (all of which were paid by December 31, 1999), primarily related
to severance (for the reduction in headcount of approximately 230 employees) and
other employee related liabilities.
On April 5, 1999, the Company and 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 $8.8 million of tangible assets, the majority of which are trade
accounts receivable, and assumed liabilities of approximately $3.5 million. The
acquisition was accounted for under the purchase method of accounting and the
statements of operations include the results of BCL since May 10, 1999.
The purchase price was allocated to the assets acquired based on their
fair value at the date of acquisition as follows:
(in thousands)
Accounts receivable................................... $ 7,891
Inventory of supplies................................. 537
Property and equipment................................ 358
Goodwill ............................................. 33,839
------
Assets Acquired................................... 42,625
------
Issuance of note ..................................... 25,000
Accrued payroll and benefits.......................... 1,989
Assumed accounts payable.............................. 1,475
Liabilities associated with integration period........ 1,957
Acquisition fees, primarily legal costs............... 350
Cash payment ......................................... 8,604
Common stock issued................................... 3,250
-----
Purchase Price/Liabilities Assumed or Incurred.... $ 42,625
=========
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 December 31, 1999, approximately $0.5 million of
liabilities, expected to be paid primarily in the next six months, were
outstanding.
The following unaudited pro forma results of operations for the years ended
December 31, 1999, 1998 and 1997 (in thousands) have been prepared as if the
acquisition of BCL occurred on January 1, 1998 and the acquisition of Meris
occurred on January 1, 1997:
Years Ended December 31,
1999 1998 1997
---- ---- ----
(Unaudited)
Revenue $ 303,688 $ 296,951 $ 243,904
Net Income 3,432 12,547 5,859
The historical financial results of Unilab for 1999, 1998 and 1997 have
been adjusted primarily for the historical results of BCL and Meris, an increase
in interest expense due to the additional debt incurred to purchase BCL and
Meris, an increase in amortization of goodwill and cost savings from the
integration of the BCL and Meris operations into Unilab.
The unaudited pro forma information presented above does not purport to be
indicative of the results that actually would have been obtained if the combined
operations had been conducted during the periods presented or of future
operations of the combined operations.
4. 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 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 the $25.0 million note
issued in connection with the BCL acquisition. In order to
retire such debt, the Company paid a premium of $17.2 million
and additionally wrote-off $3.6 million of deferred financing
costs. The retirement premium and the write-off of the
deferred financing costs, which totaled $20.8 million, has
been shown as an extraordinary loss for the early
extinguishment of debt in the statement of operations.
The Kelso Transaction was primarily financed through a new common equity
investment of $139.5 million by affiliates and designees of Kelso and borrowings
of $160.0 million under a new senior bank credit facility and the issuance of
$155.0 million of new senior notes.
In addition, as part of the Kelso Transaction, the Company incurred
merger/recapitalization expenses of $25.2 million related primarily to financial
advisory fees, other financing fees and expenses, legal and accounting fees,
printing costs, severance costs and other miscellaneous items.
5. Legal and Acquisition Related Charges
In 1999, the Company reached a settlement for $0.6 million 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.
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 (see note 10 for additional information on contingencies).
6. Income Taxes
For the years ended December 31, 1999, 1998 and 1997, income (loss) before
income taxes consisted of domestic earnings (losses) and no provision for
Federal or State income taxes was recorded.
A reconciliation between the actual income tax expense (benefit) and income
taxes computed by applying the statutory Federal income tax rate to earnings
before income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
(in thousands)
<S> <C> <C> <C>
Computed income taxes at U.S. statutory rate............................ $ (9,064) $3,746 $188
Amortization and write-off of goodwill and intangible assets disallowed
for income tax purposes.............................................. 411 420 420
Non-deductible merger expenses.......................................... 3,250 -- --
Change in valuation allowance........................................... (5,790) (3,871) --
Other................................................................... (711) (295)
----------- -----
$ (11,904) $ -- $ --
=========== ====== =====
</TABLE>
Temporary differences and carryforwards, excluding the capital loss
carryforward discussed below, which give rise to deferred tax assets are as
follows:
December 31,
1999 1998
(in thousands)
Bad debt reserve.................... $ 7,147 $ 2,972
Intangible assets................... 12,313 9,807
Property and equipment.............. 250 383
Accrued liabilities................. 1,664 1,408
Net operating loss carryforwards.... 25,130 21,166
------- ------
46,504 35,736
Valuation allowance................. (29,946) (35,736)
------- -------
$ 16,558 $ --
======== ======
The Company establishes a valuation allowance in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes". The Company continually reviews the adequacy of the valuation
allowance and recognizes the benefits from its deferred tax assets only when an
analysis of both positive and negative factors indicate that it is more likely
than not that the benefits will be realized. Based on the Company's improved
operating performance in 1998 and 1999 (before the merger/recapitalization
expenses) 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 during the third
quarter of 1999 reduced the amount of goodwill from certain acquisitions and the
remaining amount of the benefit was recognized as an income tax benefit in the
statements of operations. In addition, approximately $3.7 million of future
benefit from the recognition of deferred tax assets will be an adjustment to
additional paid in capital.
In addition, the Company has a capital loss of approximately $36.5 million
from the sale of an equity investment in 1995. The capital loss can only be
utilized by the Company to the extent it offsets capital gains generated. A
valuation allowance has also been entirely provided against the available
capital loss at December 31, 1999 and 1998.
The Company has net operating loss and capital loss carryforwards for tax
purposes in the U.S. which are available to offset future taxable income through
2012 and 2000, respectively. At December 31, 1999, available net operating loss
and capital loss carryforwards for U.S. tax purposes were approximately $73.9
million and $36.5 million, respectively. Net operating loss carryforwards for
California state tax purposes were approximately $33.2 million. Utilization of
the net operating losses may be subject to an annual limitation due to ownership
change limitations provided by the Internal Revenue Code of 1986 and similar
state provisions. The annual limitations may result in the expiration of net
operating losses before utilization.
7. Long-Term Debt
<TABLE>
Long-term debt consists of the following:
<CAPTION>
December 31,
1999 1998
(in thousands)
<S> <C> <C>
New Senior Notes, interest at 12.75 percent payable semi-annually........... $150,810 $ --
Old Senior Notes, interest at 11.0 percent payable semi-annually............ 488 119,344
Six year bank term loan, interest at LIBOR plus 3.125 percent............... 50,000 --
Seven year bank term loan, interest at LIBOR plus 3.875 percent............. 109,725 --
Convertible subordinated note, interest at 7.5 percent payable
semi-annually............................................................ -- 14,000
Obligation under capital lease collateralized by land and building with
interest due through 2004 ............................................... 2,609 2,867
Obligations under capital leases collateralized by equipment with interest
due through October 2000................................................. 1,217 2,165
------ ------
314,849 138,376
Less-- current portion...................................................... 3,908 1,206
------ ------
$310,941 $137,170
======== ========
</TABLE>
As part of the Kelso Transaction (see Note 4), the Company completed an
offering of $155.0 million of senior notes (the "New Senior Notes") in September
1999 and entered into a credit agreement (the "Credit Agreement") with a
syndicate of banks and other financial institutions for a $185.0 million credit
facility (the "Credit Facility").
The New Senior Notes were issued at a discount of 97.27% per note. The
aggregate discount on the New Senior Notes approximated $4.2 million and is
charged to operations as additional interest expense over the life of the New
Senior Notes using the effective interest method. Interest on the New Senior
Notes is 12.75% and is payable on April 1st and October 1st of each year. The
New Senior Notes are due October 2009 and the Company is not obligated to make
any mandatory redemption or sinking fund payment with respect to the New Senior
Notes prior to maturity.
The New Senior Notes are not redeemable prior to October 1, 2004, after
which the New Senior Notes will be redeemable at any time at the option of the
Company, in whole or in part, at various redemption prices as set forth in the
indenture covering such New Senior Notes (the "Indenture"), plus accrued and
unpaid interest, if any, to the date of redemption. In addition, at any time
prior to October 1, 2002, the Company may redeem up to 35% of the outstanding
notes with the net proceeds of one or more public offerings of common stock of
the Company, at a redemption price of 112.75% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the redemption date.
The $185.0 million Credit Facility consists of $160.0 million in term loans
($50.0 million Term A and $110.0 million Term B) and $25.0 million in revolving
loans. Any borrowings under the revolving line of credit are due October 2005.
The Term A loan is due in quarterly principal payments of $1.3 million starting
on December 2000 and increasing to $1.9 million in December 2001, $2.5 million
in December 2002, $3.1 million in December 2003 and $3.8 million in December
2004. The Term B loan is due in quarterly principal payments of $0.3 million
starting December 1999 through September 2005 and increasing to $25.9 million in
December 2005 through November 2006. In addition, the Credit Agreement requires
mandatory repayment for various items, including a percentage of annual excess
cash flow, as defined. Interest on amounts borrowed under the Credit Facility is
subject to adjustment determined based on certain levels of financial
performance. For LIBOR borrowings, the applicable margin added to LIBOR can
range from 2.00% to 3.375% for Term A and revolving loans and 3.50% to 3.875%
for Term B loans. The amounts outstanding under the Credit Facility are subject
to certain restrictive covenants. The covenants include, but are not limited to,
requirements that the Company maintain specified financial ratios and stay
within defined limitations on capital expenditures and additional indebtedness.
The Company also cannot declare or pay any dividends. All obligations under the
Credit Facility are secured by substantially all of the Company's assets.
If the Company's ratio of net total debt to EBITDA (as defined in a capital
call agreement) for the year 2000 is greater than 5.0 times, Kelso and its
affiliates will be required, pursuant to a capital call agreement, to make (or
cause their designees to make) an equity investment in the Company. The proceeds
from the equity investment will be used to retire the term loans under the
Credit Facility. To the extent all such proceeds are not fully used to repay the
term loans, the commitment under the revolving credit facility will be reduced
by an amount equal to the remaining proceeds. The equity investment will be in
an amount equal to the lesser of (a) the amount necessary to cause the ratio of
net total debt to EBITDA, after giving effect to the equity investment, to equal
5.0 times and (b) $50.0 million.
As part of the Kelso Transaction, the Company tendered for $120.0 million
(face value) of senior notes ("Old Senior Notes") existing prior to the
recapitalization. 99.6% of the holders of the Old Senior Notes accepted the
Company's tender offer; however, 0.4% of holders did not tender and therefore
$0.5 million of the Company's Old Senior Notes remain outstanding. Interest on
the Old Senior Notes is 11% and is payable on April 1st and October 1st of each
year. The Old Senior Notes are due April 2006 and are not redeemable prior to
April 1, 2001, after which the Old Senior Notes will be redeemable at any time
at the option of the Company, in whole or in part, at various redemption prices
as set forth in the indenture covering such notes, plus accrued and unpaid
interest, if any, to the date of redemption.
In the event of a change in control, as defined in the Indenture, holders
of the New Senior Notes will have the right to require the Company to purchase
their notes, in whole or in part, at a price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of purchase.
The New and Old Senior Notes are general unsecured obligations of the
Company and rank pari passu in right of payment with all unsubordinated
indebtedness of the Company. In addition, the Indenture limits the ability of
the Company to pay dividends or distributions on capital stock or repurchase
capital stock and incur additional indebtedness, under certain circumstances.
In connection with the acquisition of Meris (see Note 3), the Company
issued a $14.0 million convertible subordinated note. The $14.0 million note
plus accrued interest of $49,000 was converted into 4.7 million shares of the
Company's common stock. In accordance with the terms of the note, the conversion
price was $3.00 per share.
At December 31, 1999, future scheduled principal payments of long-term debt
are as follows (in thousands):
Years Ended December 31,
2000 $ 3,908
2001 7,167
2002 9,787
2003 12,431
2004 14,783
Thereafter 266,773
-------
$314,849
8. Capital Shares, Stock Options and Warrants
a. Convertible Preferred Stock
As of December 31, 1999, the Company has authorized 20,000,000 shares of
preferred stock at $.01 par value. The Board of Directors of the Company will
determine, among other things, the number of shares, voting rights, dividend
rates, liquidation preferences, and redemption and conversion privileges of each
series of such preferred stock. As of December 31, 1999, 19,000,000 shares for
which no series has been designated were authorized and unissued.
As part of the Kelso Transaction (see Note 4), 364,000 shares of
convertible preferred stock were redeemed for $5.75 a share. 36,000 shares of
preferred shares were converted into common stock during 1997. Holders of the
convertible preferred stock were entitled to receive, when and as declared by
the Board of Directors of the Company, cumulative dividends at an annual rate of
$0.36 per share, payable semiannually on June 30 and December 30 in each year.
b. Restricted Stock
The Company granted 17,000 restricted shares and 15,000 restricted shares
of common stock to certain employees at no cost in 1998 and 1997, respectively.
Approximately $132,000 and $192,000 was amortized to expense in 1998 and 1997,
respectively. As part of the recapitalization (see Note 4), all restricted
shares became fully vested and were redeemed at $5.85 a share.
c. Stock Options
Employee Stock Option Plan
As approved by the Company's shareholders, the Company maintained until the
November 23, 1999 consummation of the Kelso Transaction, the Unilab Corporation
Stock Option and Performance Incentive Plan (the "Employee Option Plan") and the
Unilab Corporation Non-Employee Directors Stock Plan (the "Directors Option
Plan").
Under the terms of the Employee Option Plan, incentive stock options,
non-statutory stock options, reload options or rights, stock appreciation
rights, restricted or unrestricted shares of Unilab stock, performance shares or
units and tax offset payments could be granted to any of the Company's
employees, with limited exceptions, and options for a maximum of 4,000,000
shares of the Company's common stock could be granted. No employee could receive
annual awards of or relating to more than 250,000 shares of Unilab common stock.
Under the terms of the Directors Option Plan, each outside director could
received an annual option grant of 10,000 shares and an additional annual option
grant of 10,000 shares was awarded to each outside director who serves as the
chairman of a committee or committees of the Board of Directors.
In April 1997, the Company reserved 1,500,000 shares under a plan whereby
members of the Company's Board of Directors may purchase common shares at the
then current market price of the shares. 500,000 shares were purchased in 1997.
The plan was terminated in 1999.
All outstanding options (except certain options, as described below, that
were elected to be rolled-over by the option holders in a new stock option plan)
under the Employee Option Plan and the Director Option Plan were cashed out in
the Kelso Transaction.
Other
Prior to the adoption of the Employee Option Plan and the Directors Option
Plan, the Company's Board of Directors also authorized the grant of nonqualified
stock options to individuals.
Information regarding the Company's stock option plans and nonqualified
stock options as of December 31, 1997, 1998 and 1999, and changes during the
years ending on those dates is summarized as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Shares Exercise Price
<S> <C> <C>
December 31, 1996........................ 3,879,500 $4.73
Granted............................. 1,751,000 0.62
Exercised........................... (75,000) 0.63
Forfeited........................... (999,166) 4.76
-------- ----
December 31, 1997........................ 4,556,334 $3.21
Granted............................. 949,500 2.00
Exercised........................... (19,500) 0.79
Forfeited........................... (170,835) 4.05
-------- ----
December 31, 1998........................ 5,315,499 $2.94
--------- -----
Granted............................. 711,000 2.32
Exercised........................... (390,500) 0.84
Forfeited........................... (161,790) 5.34
Redeemed/Rolled-over as part of ....
the recapitaliation................. (5,474,209) --
December 31, 1999........................ -- $ --
--------- -----
</TABLE>
As part of the Kelso Transaction (see Note 4), certain executive and
managerial employees had the option to rollover their existing stock options
instead of having the stock options redeemed in cash at the spread between $5.85
a share and the stock option exercise price. Certain individuals elected to
rollover their stock options, valued at $0.5 million, into a new stock option
plan. As of December 31, 1999, the terms of the new stock option plan had not
been finalized, though it is anticipated that 3.8 million options (besides those
options being rolled-over) will be available for grants at an option exercise
price of $5.85. It is anticipated that part of the options will vest through
length of service and part will vest subject to various performance criteria. In
addition, all outstanding options (besides those being rolled-over) became
immediately vested and were cancelled for cash consideration of $15.4 million as
part of the recapitalization.
The Company accounts for its stock option plans under Accounting Principle
Board Opinion No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized in connection with options awarded to
employees. Had compensation cost for the Company's stock option plans been
determined consistent with Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation", the Company's actual
net income of $10,703,000 and $536,000 for the years ended December 31, 1998 and
1997, respectively, would have been reduced to pro forma net income (loss) of
$9,423,000 and ($508,000) for the years ended December 31, 1998 and 1997,
respectively. Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting compensation cost may
not be representative of that to be expected in future years.
e. Stockholder Protection Rights Plan
In February 1994, the Company adopted a stockholder Protection Rights Plan,
which was amended and restated in February 1996 ("Rights Plan"). Pursuant to the
Rights Plan, a dividend of one Right for each outstanding share of the Company's
common stock was issued to shareholders of record on March 15, 1994. The Rights
were redeemed in connection with the Kelso Transaction.
9. Related Party Transactions
The Company sold 533,333 shares, valued at $0.3 million at the time of
issuance, to a former CEO pursuant to transition agreements between the former
CEO and the Company in connection with the CEO's resignation in January 1997.
The Company extended a $0.5 million loan to a former CEO for the purchase of 1.1
million shares of the Company's common stock in January 1997. The CEO repaid
$250,000 of the loan during 1997 and the remaining $250,000 was repaid during
1999. In addition, in 1997, the Company sold 500,000 shares, valued at
approximately $0.3 million at the time of issuance, to a director of the Company
pursuant to a directors stock purchase plan. Each of these transactions were
consummated at the then prevailing market price of the Company's common stock.
The Company guaranteed a loan of $0.4 million at December 31, 1999 made by a
bank to an executive of the Company. The loan was used to purchase a residence
and such residence serves as collateral for the Company's guarantee.
Under the terms of the merger agreement covering the Kelso Transaction (see
Note 4) and the Company, the Company paid to Kelso a one-time fee of $6.0
million plus out-of-pocket expenses, upon completion of the merger. In addition,
Kelso will earn annual financial advisory fees of $600,000, starting as of
November 23, 1999. Kelso earned financial advisory fees of $65,000 in 1999.
10. Commitments and Contingencies
Property and equipment leased under capital leases is as follows:
December 31,
1999 1998
(in thousands)
Building......................................... $3,100 $3,100
Laboratory and other equipment................... 4,103 5,638
Less--Accumulated amortization.................... 4,426 4,934
----- -----
Net leased property under capital leases......... $2,777 $3,804
====== ======
As of December 31, 1999, future minimum rental payments required under
capital and operating leases that have initial or remaining noncancelable terms
in excess of one year are approximately as follows:
Capital Operating
Leases Leases
(in thousands)
2000 $2,038 $ 10,718
2001 782 6,984
2002 822 4,732
2003 863 3,333
2004 594 1,418
Thereafter.................................. -- 1,509
------ -------
Total minimum lease payments................ 5,099 $28,694
-------
Less: Amount representing interest.......... 1,273
-----
Present value of net minimum lease payments. $3,826
======
Rental expense for operating leases was approximately $15.3 million, $10.8
million and $10.2 million in 1999, 1998 and 1997, respectively.
The Company has employment agreements with its principal officers and
certain other key employees. Such agreements expire at various dates through
February 2003 and most automatically renew for successive one or two year
periods, depending on the employee, until one of the parties gives notice of
termination in accordance with the agreement. The agreements also provide for
annual bonuses for certain officers and key employees, dependent upon the
achievement of certain performance objectives. In addition, the agreements for
certain employees provide for annual deferred compensation equal to 8% of the
employees' cash compensation (inclusive of bonuses) for the year. The aggregate
commitment under these agreements, excluding bonuses and any deferred
compensation related thereto, is approximately $2.3 million. The Company may
terminate the employment agreements without cause on specified advance notice by
providing severance pay equal to one to two times, depending on the employee, of
the current base salary plus certain other benefits.
In addition, the employment agreements grant these employees the right to
receive two times their annual salary and bonus, plus continuation of certain
benefits and acceleration of certain stock options, if there is a change in
control of the Company (as defined) and a termination of such employees or
certain other events within two years thereafter. The maximum contingent
liability upon a change in control, excluding any bonus, deferred compensation,
continuation of benefits or acceleration of stock options, is approximately $3.4
million.
The Company is party to certain legal proceedings considered incidental to
its business. Although the ultimate disposition of these legal proceedings is
not determinable, management does not believe that the ultimate outcome of such
legal proceedings will have a material adverse effect upon the financial
condition, liquidity or results of operations of the Company.
11. Benefit Plans
The Company provides a savings plan under Section 401(k) of the Internal
Revenue Code covering most employees. The expense related to Company
contributions to the plan totaled approximately $0.4 million, $0.3 million and
$0.1 million for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company maintains the Unilab Corporation Executive Retirement Plan (the
"SERP"), an unfunded defined contribution plan, for the benefit of designated
key employees. Prior to the recapitalization (see Note 4), the benefit earned
each year was issued into participants' account through memorandum shares, which
represent rights to receive stock of the Company at a future date. After the
recapitalization, participants will receive an annual contribution to their
account as well as earning interest on their account balance at prime plus two
percent. The benefit formula to determine amounts earned by participants is
primarily based on the employee's final five-year average compensation and years
of service. Pension expense for the SERP was approximately $2.7 million (of
which $2.1 million is included in merger/recapitalization expenses in the
Statement of Operations), $407,000 and $271,000 in 1999, 1998 and 1997,
respectively. At December 31, 1999, the accumulated obligation recognized as a
liability in the balance sheet was approximately $2.5 million. The weighted
average discount rate and rate of increase in future compensation levels used in
determining the present value of benefit obligations were 5.1% and 3.8% in 1999,
6.0% and 3.8% in 1998 and 6.6% and 3.8% in 1997.
12. Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
---------------------------
(in thousands)
<S> <C> <C> <C>
Cash paid during the year for:
Interest....................................................... $ 15,821 $ 13,419 $ 14,063
Income taxes................................................... 421 2 1
Supplemental Disclosure of Noncash Investing and Financing Activities:
Restricted shares of common stock issued to employees.......... -- 32 16
Shares issued for Company's 401(k) plan matching contributions. -- 25 49
Shares issued to certain Board Directors for services rendered. -- 160 64
In connection with business acquisitions, liabilities were assumed
as follows:
Fair value of assets acquired.................................. $ 42,625 $ 18,734 $ --
Cash paid...................................................... $ 8,604 $ -- $ --
Value of common stock issued................................... $ 3,250 $ -- $ --
Liabilities assumed............................................ $ 30,771 $ 18,734 $ --
</TABLE>
During 1997, the Company issued 500,000 shares, valued at $0.2 million at
the time of issuance, to a former CEO in connection with the CEO's resignation.
In 1997, the Company also issued 228,571 shares, valued at $0.1 million at the
time of issuance, to a former CEO as a bonus pursuant to an employment
agreement. In addition, the Company issued in 1997 approximately 169,000 shares,
valued at $0.3 million at the time of issuance, to all full-time employees as a
special year-end bonus.
<PAGE>
13. Quarterly Financial Data (unaudited)
Summarized unaudited quarterly financial data for 1999 and 1998 (in
thousands) is as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1999
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Revenue .......................................... $63,559 $73,727 $76,210 $71,667
Direct laboratory and field expenses:
Salaries, wages and benefits................. 18,455 21,831 22,940 21,250
Supplies..................................... 8,827 10,519 11,307 10,879
Other operating expenses..................... 15,416 18,983 18,855 17,189
Total................................... 42,698 51,333 53,102 49,318
Legal charge . -- 600 -- --
Merger/recapitalization expenses.................. -- -- -- 25,167
Amortization and depreciation..................... 1,897 2,230 3,062 2,974
Selling, general and administrative expenses...... 9,312 9,891 10,120 9,737
Operating income (loss)........................... 9,652 9,673 9,926 (15,529)
Net income (loss)................................. 6,166 5,893 17,852 (43,903)
Net income (loss) available to common shareholders 6,133 5,860 17,819 (43,912)
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Revenue ......................................... $54,530 $54,356 $53,160 $55,324
Direct laboratory and field expenses:
Salaries, wages and benefits................. 16,823 16,567 16,255 18,097
Supplies..................................... 7,613 7,492 7,480 8,086
Other operating expenses..................... 13,129 13,200 13,075 14,190
Total................................... 37,565 37,259 36,810 40,373
Amortization and depreciation..................... 1,985 1,941 1,848 1,818
Selling, general and administrative expenses...... 8,534 8,324 8,132 8,540
Operating income.................................. 6,446 6,832 6,370 4,593
Net income ..................................... 3,072 3,446 3,062 1,123
Net income available to common shareholders....... 3,039 3,413 3,029 1,091
</TABLE>
Second Quarter 1999
Effective May 10, 1999, the Company acquired substantially all of the
assets of BCL. In addition, the Company reached a settlement for $0.6 million
regarding claims into the Company's sales and billing practices.
Third Quarter 1999
The Company reduced its valuation allowance against its deferred tax assets
by $16.6 million, with $4.7 million reducing the amount of goodwill previously
recorded from certain acquisitions and $11.9 million being recognized as a tax
benefit in the statement of operations.
Fourth Quarter 1999
As part of the recapitalization of the Company, the Company incurred
expenses of $25.2 million and retired debt that resulted in an extraordinary
loss of $20.8 million.
Fourth Quarter--1998
Effective November 5, 1998, the Company acquired substantially all of the
assets of Meris. During the integration period between November 5, 1998 and late
December 1998, the Company estimates that the Meris operations had a negative
$1.2 million impact on operating profit for the quarter.
Fourth Quarter 1999 and 1998
Testing volume generally tends to be lower during the holiday seasons. As a
result, because a substantial portion of the Company's expenses are relatively
fixed over the short term, the Company's operating income as a percentage of
revenue tends to decrease during the fourth quarter, mainly due to the Christmas
and Thanksgiving holidays.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
To the Board of Directors and Shareholders of Unilab Corporation:
We have audited in accordance with generally accepted auditing standards,
the financial statements of Unilab Corporation included in this Form 10-K and
have issued our report thereon dated March 3, 2000. Our audit was 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, 1999,
1998 and 1997 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 audit 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
March 3, 2000
<PAGE>
<TABLE>
Schedule II
UNILAB CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
<CAPTION>
Balance Charged
at to Costs
Beginning and Balance
of Period Expenses Deductions End of Period
<S> <C> <C> <C> <C>
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
FOR THE YEAR ENDED DECEMBER 31, 1999;
Allowance for doubtful accounts........................ $10,813 $ 20,572 $(10,135) $ 21,250
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, Michael B. Goldberg, in my
individual capacity and as Director of Unilab Corporation, a Delaware
corporation (the "Company"), hereby constitute and appoint David Gee and/or
Brian D. Urban, jointly or individually, from the date hereof until such time as
this Power of Attorney is revoked in writing, to act as my true and lawful agent
and attorney-in-fact, in my name and on my behalf to execute, consent to, swear
to, acknowledge, record, file, amend and/or modify and deliver one or more
registration statements for the filing of securities of the Company under the
Securities Act of 1933, as amended (the "Securities Act") and any and all
filings made by or on behalf of the Company with the United States Securities
and Exchange Commission pursuant to the Securities Act and/or the Securities
Exchange Act of 1934, as amended, including without limitation, the Annual
Report on Form 10-K.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 23rd day of March 2000.
/s/ Michael B. Goldberg
----------------------------
Michael B. Goldberg
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, David I. Wahrhaftig, in my
individual capacity and as Director of Unilab Corporation, a Delaware
corporation (the "Company"), hereby constitute and appoint David Gee and/or
Brian D. Urban, jointly or individually, from the date hereof until such time as
this Power of Attorney is revoked in writing, to act as my true and lawful agent
and attorney-in-fact, in my name and on my behalf to execute, consent to, swear
to, acknowledge, record, file, amend and/or modify and deliver one or more
registration statements for the filing of securities of the Company under the
Securities Act of 1933, as amended (the "Securities Act") and any and all
filings made by or on behalf of the Company with the United States Securities
and Exchange Commission pursuant to the Securities Act and/or the Securities
Exchange Act of 1934, as amended, including without limitation, the Annual
Report on Form 10-K.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 23rd day of March 2000.
/s/ David I. Wahrhaftig
-----------------------------
David I. Wahrhaftig
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, Robert E. Whalen, in my
individual capacity and as Director of Unilab Corporation, a Delaware
corporation (the "Company"), hereby constitute and appoint David Gee and/or
Brian D. Urban, jointly or individually, from the date hereof until such time as
this Power of Attorney is revoked in writing, to act as my true and lawful agent
and attorney-in-fact, in my name and on my behalf to execute, consent to, swear
to, acknowledge, record, file, amend and/or modify and deliver one or more
registration statements for the filing of securities of the Company under the
Securities Act of 1933, as amended (the "Securities Act") and any and all
filings made by or on behalf of the Company with the United States Securities
and Exchange Commission pursuant to the Securities Act and/or the Securities
Exchange Act of 1934, as amended.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 22nd day of March 2000.
/s/ Robert E. Whalen
-------------------------------
Robert E. Whalen
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, David C. Weavil, in my
individual capacity and as Director of Unilab Corporation, a Delaware
corporation (the "Company"), hereby constitute and appoint David Gee and/or
Brian D. Urban, jointly or individually, from the date hereof until such time as
this Power of Attorney is revoked in writing, to act as my true and lawful agent
and attorney-in-fact, in my name and on my behalf to execute, consent to, swear
to, acknowledge, record, file, amend and/or modify and deliver one or more
registration statements for the filing of securities of the Company under the
Securities Act of 1933, as amended (the "Securities Act") and any and all
filings made by or on behalf of the Company with the United States Securities
and Exchange Commission pursuant to the Securities Act and/or the Securities
Exchange Act of 1934, as amended, including without limitation, the Annual
Report on Form 10-K.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney
this 24th day of March 2000.
/s/ David C. Weavil
-------------------------------
David C. Weavil
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000899714
<NAME> UNILAB CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 12,557
<SECURITIES> 0
<RECEIVABLES> 71,531
<ALLOWANCES> (21,250)
<INVENTORY> 4,215
<CURRENT-ASSETS> 68,763
<PP&E> 48,868
<DEPRECIATION> (35,743)
<TOTAL-ASSETS> 193,530
<CURRENT-LIABILITIES> 35,374
<BONDS> 151,298
0
0
<COMMON> 258
<OTHER-SE> (158,547)
<TOTAL-LIABILITY-AND-EQUITY> 193,530
<SALES> 285,163
<TOTAL-REVENUES> 285,163
<CGS> 0
<TOTAL-COSTS> 196,451
<OTHER-EXPENSES> 54,418
<LOSS-PROVISION> 20,572
<INTEREST-EXPENSE> 18,845
<INCOME-PRETAX> (5,123)
<INCOME-TAX> 11,904
<INCOME-CONTINUING> 6,781
<DISCONTINUED> 0
<EXTRAORDINARY> 20,773
<CHANGES> 0
<NET-INCOME> (13,992)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
PRESS RELEASE UNILAB CORPORATION
18448 Oxnard Street
Tarzana, CA 91356
www.Unilab.com
For Further Information:
Melissa Mahoney
Phone: (818) 758-6607
e-mail: [email protected]
IMMEDIATE RELEASE
March 7, 2000
UNILAB CORPORATION ANNOUNCES 1999 RESULTS
TARZANA, CA, March 7, 2000 - UNILAB Corporation announced today that net sales
for the year ended December 31, 1999 were $285.2 million, versus $217.4 million
in the prior year. The Company reported net income for the year of $20.6
million, excluding non-recurring charges and expenses associated with the
recapitalization transaction in November, a deferred tax benefit, and a charge
associated with a legal settlement. Net income in the prior year was $10.7
million.
Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") were
$49.7 million for full year 1999, exclusive of the non-recurring items discussed
above, or 17.4% of sales, compared to $31.8 million, or 14.6% of sales, for the
prior year.
For the quarter ended December 31, 1999, sales were $71.7 million, compared to
$55.3 million during the same period last year. Excluding the non-recurring
items in 1999, net income for the quarter was $2.0 million, compared to $1.1
million in the prior year period. On the same basis, EBITDA was $12.6 million,
or 17.6% of sales, compared to $6.4 million, or 11.6% of sales in the same
period last year.
After accounting for the impact of the recapitalization transaction, the
deferred tax benefit, and the legal settlement, net income for the year was
$(14.1) million, and EBITDA was $3.0 million. For the quarter, net income was
$(44.0) million, and EBITDA was $(33.5) million.
"The past year was a significant one for Unilab," said Bob Whalen, Unilab's
President and CEO. "The successful acquisition of the BCL business, and the
going-private transaction with Kelso, took place while concurrently maintaining
and strengthening the company's core business."
The Company's volume for the full year was 25.2% above 1998 levels, and pricing
increased by 4.8%. For the 4th quarter, volume levels were 24.8% above the same
quarter last year, and pricing increased by 3.8%. "Our Meris and Bio-Cypher
acquisitions have clearly had a positive impact on volumes," stated Mr. Whalen.
"We are pleased to see that our 1999 results continue the trends that Unilab
established over the last couple of years."
In addition, Unilab announced that it has signed a definitive Asset Purchase
Agreement to acquire substantially all of the assets of Southern California
Clinical Laboratories (SCCL), an independent regional laboratory headquartered
in Pasadena, California. The transaction is expected to close within the next
several weeks.
The statements in this press release that are not historical facts may be deemed
to be forward-looking statements. Each of the above forward-looking statements
is subject to change based on various risks and uncertainties, including without
limitation, legislative and regulatory developments and competitive actions in
the marketplace that could cause the outcome to be materially different from
stated. Certain of these risks and uncertainties are listed in the Company's
1998 Annual Report on Form 10-K.
Unilab Corporation is the largest provider of clinical laboratory testing
services in California through its primary testing facilities in Los Angeles,
San Jose and Sacramento and over 300 regional service and testing facilities
located throughout the state. Additional information is available on the
Company's website at www.unilab.com.
- tables to follow -
<PAGE>
<TABLE>
Unilab Corporation
Statement of Operations
(amounts in thousands, except per share data)
<CAPTION>
Three months ended Dec. 31, Year ended Dec. 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $71,667 $55,324 $285,163 $217,370
------- ------- -------- --------
Direct Laboratory and Field Expenses:
Salaries, Wages and Benefits 21,250 18,097 84,476 67,742
Supplies 10,879 8,086 41,532 30,671
Other Operating Expenses 17,189 14,190 70,443 53,594
------ ------ ------ ------
49,318 40,373 196,451 152,007
Legal Charge - - 600 -
Merger/Recapitalization Expenses 25,297 - 25,297 -
Amortization and Depreciation 2,974 1,818 10,163 7,592
Selling, General and Administrative Expenses 9,737 8,540 39,060 33,530
----- ----- ------ ------
Total Operating Expenses 87,326 50,731 271,571 193,129
------ ------ ------- -------
Operating Income (Loss) (15,659) 4,593 13,592 24,241
Interest, net 7,601 3,470 18,845 13,538
----- ----- ------ ------
Income (Loss) Before Income Taxes (23,260) 1,123 (5,253) 10,703
& Extraordinary Item
Tax Benefit - - 11,904 -
---------- ---------- ------ ----------
Income (Loss) Before Extraordinary Item (23,260) 1,123 6,651 10,703
Extraordinary Item - Loss on Early
Extinguishment of Debt 20,773 - 20,773 -
------ ---------- ------ ----------
Net Income (Loss) (44,033) 1,123 (14,122) 10,703
-------- ----- -------- ------
Preferred Stock Dividends 9 32 108 131
Net Income (Loss) Available to Common
Stockholders $(44,042) $1,091 $(14,230) $10,572
========= ====== ========= =======
EBITDA $(33,458) $6,411 $2,982 $31,833
EBITDA Without Non-Recurring Charges $12,612 $6,411 $49,652 $31,833
</TABLE>
<PAGE>
Unilab Corporation
Balance Sheet
(amounts in thousands)
December 31 December 31,
1999 1998
---- ----
Cash and Cash Equivalents $12,557 $20,137
Accounts Receivable, net 50,281 41,326
Other Current Assets 5,925 4,100
----- -----
Total Current Assets 68,763 65,563
Fixed Assets, net 13,125 11,277
Deferred Tax Asset 16,558 -
Goodwill and Other Intangible Assets 83,630 59,319
Other Assets 11,324 6,301
------ -----
Total Assets $193,400 $142,460
======== ========
Total Current Liabilities 35,374 22,631
Long-Term Debt, net of current portion 310,941 137,170
Other Liabilities 5,504 4,026
Total Shareholders' Deficit (158,419) (21,367)
--------- --------
Total Liabilities and Shareholders' Deficit $193,400 $142,460
======== ========
