SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-22758
UNILAB CORPORATION
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(Exact name of Registrant as specified in its charter)
Delaware 95-4415490
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
18448 Oxnard Street, Tarzana, California 91356
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(Address of principal executive offices) (Zip Code)
(818) 996-7300
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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As of August 1, 2000, 25,858,248 shares of Registrant's Common Stock, par value
$.01 per share, were outstanding.
Page 1 of 12 pages
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17
UNILAB CORPORATION
Form 10-Q for the Quarterly Period Ended June 30, 2000
INDEX
Page
Part I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Balance Sheets - June 30, 2000 3
and December 31, 1999.
Statements of Operations -
Three and six month periods ended
June 30, 2000 and June 30, 1999. 4
Statements of Cash Flows -
Six month periods ended June 30, 2000
and June 30, 1999. 5
Notes to Financial Statements. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7
Part II - OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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UNILAB CORPORATION
BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999 (amounts in thousands,
except per share data)
June 30, December 31,
2000 1999
Assets (Unaudited)
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Current Assets:
Cash and cash equivalents $9,770 $12,557
Accounts receivable, net 57,642 50,281
Inventory of supplies 3,869 4,215
Prepaid expenses and other current assets 2,019 1,710
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Total current assets 73,300 68,763
Property and Equipment, net 13,220 13,125
Deferred Tax Asset 13,986 16,558
Goodwill, net 83,167 81,857
Other Intangible Assets, net 1,476 1,773
Other Assets 10,753 11,454
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$195,902 $193,530
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Liabilities and Shareholders' Equity
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Current Liabilities:
Current portion of long-term debt $5,980 $3,908
Accounts payable and accrued liabilities 20,640 22,468
Accrued payroll and benefits 9,741 8,998
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Total current liabilities 36,361 35,374
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Long-Term Debt, net of current portion 307,667 310,941
Other Liabilities 6,612 5,504
Commitments and Contingencies
Shareholders' Equity (Deficit):
Common stock, $.01 par value, Authorized 100,000
shares
Issued and Outstanding - 25,758 at June 30 and 258 258
December 31
Additional paid-in capital 149,312 149,312
Accumulated deficit (304,308) (307,859)
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Total shareholders' deficit (154,738) (158,289)
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$195,902 $193,530
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The accompanying notes are an integral part of these financial statements.
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UNILAB CORPORATION
STATEMENTS OF OPERATIONS
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THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
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(amounts in thousands)
(Unaudited)
3 Months Ended June 30, 6 Months Ended June 30,
2000 1999 2000 1999
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Revenue $84,284 $73,727 $163,560 $137,286
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Direct Laboratory and Field Expenses:
Salaries, wages and benefits 25,235 21,831 48,103 40,286
Supplies 12,471 10,519 23,766 19,346
Other operating expenses 19,513 18,983 39,223 34,399
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57,219 51,333 111,092 94,031
Legal charge - 600 - 600
Amortization and depreciation 3,080 2,230 6,061 4,127
Selling, general and administrative 11,010 9,891 21,610 19,203
expenses
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Total Operating Expenses 71,309 64,054 138,763 117,961
Operating Income 12,975 9,673 24,797 19,325
Interest expense, net 9,446 3,780 18,675 7,266
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Income Before Income Taxes 3,529 5,893 6,122 12,059
Tax Provision 1,482 - 2,571 -
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Net Income $2,047 $5,893 $3,551 $12,059
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Preferred Stock Dividends - 33 - 66
Net Income Available to Common
Shareholders $2,047 $5,860 $3,551 $11,993
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The accompanying notes are an integral part of these financial statements.
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UNILAB CORPORATION
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
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(amounts in thousands)
(Unaudited)
Six months ended June 30,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,551 $12,059
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization and depreciation 6,061 4,127
Provision for doubtful accounts 11,869 9,851
Net changes in assets and liabilities affecting operations, net of acquisitions:
Increase in Accounts receivable (18,430) (14,210)
(Increase) decrease in Inventory of supplies 346 (195)
Increase in Prepaid expenses and other current assets (309) (967)
Decrease in Deferred tax asset 2,571 -
Decrease in Other assets 154 712
Increase (decrease) in Accounts payable and accrued (3,477) 2,573
liabilities
Increase (decrease) in Accrued payroll and benefits 1,087 (754)
Other 629 87
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Net cash provided by operating activities 4,052 13,283
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of third party debt (1,284) (571)
Proceeds from exercise of stock options - 126
Other - (66)
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Net cash used by financing activities (1,284) (511)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,755) (3,106)
Payments for acquisitions, net of cash acquired (2,800) (8,604)
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Net cash used by investing activities (5,555) (11,710)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,787) 1,062
CASH AND CASH EQUIVALENTS - Beginning of Period 12,557 20,137
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CASH AND CASH EQUIVALENTS - End of Period $9,770 $21,199
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The accompanying notes are an integral part of these financial statements.
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UNILAB CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Management Opinion
In the opinion of management, the accompanying unaudited interim financial
statements reflect all adjustments which are necessary to present fairly
the financial position, results of operations and cash flows for the
interim periods reported. All such adjustments made were of a normal
recurring nature.
The accompanying interim financial statements and related notes should be
read in conjunction with the financial statements of Unilab Corporation
("Unilab" or the "Company") and related notes as contained in the Annual
Report on Form 10-K for the year ended December 31, 1999.
2. Acquisition
On March 17, 2000, the Company and Southern California Clinical
Laboratories, LLC ("SCCL") signed an asset purchase agreement whereby
Unilab acquired certain assets of SCCL. The purchase price consisted of
cash payments of $5.2 million ($2.6 million paid at closing and the
remaining $2.6 million payable from the closing date in semi-annual
payments of $650,000) and the assumption of net assets of $0.7 million,
consisting primarily of accounts receivable. The acquisition was accounted
for under the purchase method of accounting and the statements of
operations include the results of SCCL since March 17, 2000.
The purchase price was primarily allocated to the net assets acquired based
on their fair value at the date of acquisition, pending final determination
of certain acquired balances. Such allocation consisted of accounts
receivable of $0.8 million, goodwill of $4.2 million, accrued employee
benefits of $0.1 million and cash payments of $4.9 million. The $2.6
million payment due over the next two years is non-interest bearing and
therefore such amount has been discounted at 9% to its present value of
$2.3 million.
3. Recapitalization
On May 24, 1999, the Company entered into an agreement with UC Acquisition
Sub, Inc., which is owned by affiliates of Kelso & Company ("Kelso"), under
which UC Acquisition Sub, Inc. merged with and into the Company (the "Kelso
Transaction"). The merger was completed on November 23, 1999. With the
completion of the merger, 93.0% of the Company's common stock is owned by
Kelso, its affiliates and designees and management, and the remaining 7.0%
is held by a limited number of investors. The transaction was accounted for
as a recapitalization.
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Besides the merger, the other principal features of the recapitalization
included:
o The conversion into cash of approximately 44.9 million shares of common
stock at $5.85 per share, the conversion into cash of 364,000 shares of
preferred stock at $5.75 per share and the accelerated vesting and
either the cancellation or retention of outstanding stock options for
cash consideration of $15.4 million, and
o The retirement of $144.5 million of debt, consisting of $119.5 million
of 11% senior notes and a $25.0 million note issued in connection with
a prior acquisition.
The Kelso Transaction was primarily financed through a new common equity
investment of $139.5 million by affiliates and designees of Kelso,
borrowings of $160.0 million under a new senior bank credit facility and
the issuance of $155.0 million of new senior notes.
4. Supplemental Disclosure of Cash Flow Information
(amounts in thousands) Six months ended June 30,
2000 1999
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Cash paid during the period for:
Interest, net $18,195 $6,999
Income taxes $ 101 $ 421
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
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Operations
Results of Operations
Three and Six Month Periods Ended June 30, 2000 Compared with the
Three and Six Month Periods Ended June 30, 1999
Revenue
Revenue increased to $84.3 million and $163.6 million for the three and six
month periods ended June 30, 2000 from $73.7 million and $137.3 million for
the comparable prior year periods, representing increases of $10.6 million or
14.3% and $26.3 million or 19.1%, respectively. Approximately $6.1 and $16.8
million of the increases for the three and six month periods ended June 30,
2000 were attributable to revenue generated from the acquisitions of
Physician's Clinical Laboratory, Inc. (doing business as Bio-Cypher
Laboratories) ("BCL"), effective May 10, 1999 and SCCL, effective March 17,
2000. Exclusive of the acquired BCL and SCCL businesses, revenue increased
$4.5 million and $9.5 million for the respective periods, primarily the
result of increases in reimbursement levels of $0.9 million and $2.7 million,
respectively, and additional specimen volume generating $3.6 million and $6.8
million, respectively.
<PAGE>
The Company experienced a 1.0% and 1.9% increase, exclusive of the acquired
BCL and SCCL businesses, in the average reimbursement received for each
specimen processed during the three and six month periods ended June 30, 2000
versus the comparable prior year periods. The increases in reimbursement
levels are primarily due to increases in rates charged to managed care
clients, replacement of the Company's most unprofitable accounts with other
reasonably priced business and changes in test mix to more sophisticated
testing procedures for HIV and sexually transmitted diseases. Exclusive of
the acquired BCL and SCCL businesses, the Company experienced a 5.0% increase
in the number of specimens processed in the core business during the three
and six month periods ended June 30, 2000 versus the comparable prior year
periods. The increase was due to core growth.
Salaries, Wages and Benefits
Salaries, wages and benefits increased to $25.2 million and $48.1 million for
the three and six month periods ended June 30, 2000 from $21.8 million and
$40.3 million for the comparable prior year periods. As a percentage of
revenue, salaries, wages and benefits increased to 29.9% and 29.4% for the
three and six month periods ended June 30, 2000 from 29.6% and 29.3% for the
comparable prior year periods. The increases resulted primarily from some
initial inefficiencies in handling the significant increase in volume the
Company has experienced since the middle of first quarter 2000 (daily volume
in June 2000 was 12.4% higher than in January 2000). These inefficiencies
included incurring higher overtime expenses until qualified personnel could
be hired to fill needed staff positions and training of personnel, especially
in learning-curve-sensitive departments such as specimen processing, client
services and billing. The Company has made progress in reducing these
inefficiencies, and payroll expenditures have started to decline in June
2000. In addition, salaries, wages and benefits have been impacted by wage
pressures in the Company's San Jose operations.
Supplies Expense
Supplies expense increased to $12.5 million and $23.8 million for the three
and six month periods ended June 30, 2000 from $10.5 million and $19.3
million for the comparable prior year periods. As a percentage of revenue,
supplies expense increased to 14.8% and 14.5% for the three and six month
periods ended June 30, 2000 from 14.3% and 14.1% for the comparable prior
year periods. The increases were attributable to the legally mandated use of
more costly safety needles in the second half of 1999 and expenditures made
to provide initial client supplies to new accounts resulting from the
significant increase in volume during the periods.
Other Operating Expenses
Other operating expenses increased to $19.5 million and $39.2 million for the
three and six month periods ended June 30, 2000 from $19.0 million and $34.4
million for the comparable prior year periods. As a percentage of revenue,
other operating expenses decreased to 23.2% and 24.0% for the three and six
month periods ended June 30, 2000 from 25.7% and 25.1% for the comparable
prior year periods. The percentage decreases were attributable to reductions
in outside reference laboratory fees and telecommunication expenses.
Legal Charge
In November 1999, Unilab reached a settlement with a group of thirteen
insurance companies regarding claims by the insurance companies that Unilab
over-billed them in the early to mid-1990s in connection with several
chemistry profile tests that were previously the subject of a settlement
agreement with the government. Unilab paid $600,000 in the settlement. Such
amount was reflected as a charge in the statement of operations for the
second quarter of 1999.
Amortization and Depreciation
Amortization and depreciation expense increased to $3.1 million and $6.1
million for the three and six month periods ended June 30, 2000 from $2.2
million and $4.1 million for the comparable prior year periods. The increases
were primarily due to the additional amortization expense incurred from the
goodwill recorded in connection with the BCL and SCCL acquisitions.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased to $11.0 million and
$21.6 million for the three and six month periods ended June 30, 2000 from
$9.9 million and $19.2 million for the comparable prior year periods. As a
percentage of revenue, selling, general and administrative expenses decreased
to 13.1% and 13.2% for the three and six month periods ended June 30, 2000
from 13.4% and 14.0% for the comparable prior year periods. Such decreases
reflect the economies of scale and efficiencies gained from processing a
higher specimen count without the same corresponding increase in expenses.
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
were $16.1 million and $30.9 million for the three and six month periods
ended June 30, 2000, compared to $11.9 million and $23.5 million for the
comparable prior year periods, representing increases of 34.9% and 31.6%,
respectively over the comparable prior year periods.
Interest Expense
Net interest expense increased to $9.4 million and $18.7 million for the
three and six month periods ended June 30, 2000 compared to $3.8 million and
$7.3 million for the comparable prior year periods primarily due to the
additional interest expense from the significant increase in leverage due to
the Kelso Transaction.
Tax Provision
The Company establishes a valuation allowance in accordance with the
provisions of the Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". The Company continually reviews the adequacy
of the valuation allowance and recognizes the benefits from its deferred tax
assets only when an analysis of both positive and negative factors indicate
that it is more likely than not that the benefits will be realized. Based on
the Company's improved operating performance in 1998 and 1999 (before
expenses incurred in the Kelso Transaction) and, having fully integrated both
the Meris and BCL acquisitions, the Company believed it would have sufficient
future taxable income and therefore reduced its valuation allowance by
approximately $16.6 million during the third quarter of 1999.
Prior to recognition of its deferred tax assets in the third quarter of 1999,
the Company did not recognize an income tax provision as any potential income
tax provision, such as in the second quarter and first six months of 1999,
was offset by an equal reduction in its valuation allowance recorded against
the deferred tax assets. 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% in 2000.
Liquidity and Capital Resources
Net cash provided by operating activities was $4.1 million for the sixth
months ended June 30, 2000 and reflects a decrease of $9.2 million over the
sixth months ended June 30, 1999 when net cash provided by operating
activities was $13.3 million. The decrease was primarily due to the higher
interest expense incurred from the increase in leverage from the Kelso
Transaction and the payment of $2.6 million of one-time expenses accrued at
December 31, 1999 but paid in the first quarter of 2000, also related to the
Kelso Transaction completed in November of 1999.
Net cash used by financing activities was $1.3 million for the sixth months
ended June 30, 2000, resulting from scheduled principal repayments under debt
and capital lease obligations.
Net cash used by investing activities was $5.5 million for the sixth months
ended June 30, 2000, resulting from $2.8 million paid for acquisitions,
primarily related to a cash payment made in partial consideration of the
purchase price for the SCCL acquisition and fixed asset additions of $2.8
million.
The Company had $9.8 million of cash and cash equivalents at June 30, 2000.
Management believes that the amount of cash and cash equivalents available at
June 30, 2000, the cash flow expected from operations, and $25.0 million
available under the Company's line of credit will be sufficient for the
Company to meet anticipated requirements for working capital, interest
payments, capital expenditures and scheduled principal payments under debt
and capital lease obligations for the foreseeable future.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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(A) Exhibits
Exhibit 99.1 - Press Release, dated August 2, 2000 announcing second
quarter earnings results.
(B) Reports on Form 8-K
(1) Current Report on Form 8-K dated April 21, 2000 with respect to Item 4.
(2) Amendment to Current Report on Form 8-K(A), dated May 11, 2000 with
respect to Item 4.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNILAB CORPORATION
By: /s/ Brian D. Urban
Date: August 2, 2000 Brian D. Urban
Executive Vice President,
Chief Financial Officer and Treasurer
