As filed with the Securities and Exchange Commission on February 27, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Laboratory Corporation of America Holdings
(Exact Name of Registrant as specified in its charter)
Delaware 13-3757370
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
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358 South Main Street
Burlington, North Carolina 27215
(910) 229-1127
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Bradford T. Smith
Executive Vice President, General Counsel,
Corporate Compliance Officer and Secretary
Laboratory Corporation of America Holdings
358 South Main Street
Burlington, North Carolina 27215
(910) 229-1127
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Keith L. Kearney Mark C. Smith
Davis Polk & Wardwell Skadden, Arps, Slate, Meagher
450 Lexington Avenue & Flom LLP
New York, New York 10017 919 Third Avenue
(212) 450-4000 New York, New York 10022
(212) 735-3000
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Approximate date of commencement of proposed sale to public: As soon as
practicable after the Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Aggregate Offering Amount of
Title of Each Class of Securities to be Registered Price (1) Registration Fee
<S> <C> <C>
Subscription Rights (2) None
Convertible Preferred Stock ("Preferred Stock").................... $643,750,000(3) $195,076
Convertible Subordinated Notes..................................... $250,000,000(4) None
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<FN>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
(2) Such indeterminate number of Rights to purchase Preferred Stock as may be
issued to existing stockholders.
(3) Includes Preferred Stock to be issued in the form of dividends on
outstanding Preferred Stock in accordance with the terms thereof.
(4) To be issued in exchange for the Preferred Stock at the option of the
Company.
</TABLE>
The registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
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SUBJECT TO COMPLETION, DATED FEBRUARY 27, 1997
10,000,000 Shares
[LOGO]
Laboratory Corporation of America Holdings
% Series A Convertible Exchangeable Preferred Stock
or
% Series B Convertible Pay-in-Kind Preferred Stock
(mandatorily redeemable , 2012; liquidation preference $50 per
share)
Dividends payable , , , and
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Laboratory Corporation of America Holdings, a Delaware corporation (the
"Company"), is distributing to holders of record ("Recordholders") of its
common stock, par value $0.01 per share (the "Common Stock"), at the
close of business on , 1997 (the "Record Date"), transferable rights (the
"Rights") to subscribe for and purchase, at the election of the holders
of the Rights (the "Rights Holders"), up to an aggregate of 10,000,000
shares (the "Underlying Shares") of either % Series A Convertible
Exchangeable Preferred Stock, par value $0.10 per share of the Company
(the "Series A Exchangeable Preferred Stock") or % Series B Convertible
Pay-in-Kind Preferred Stock, par value $0.10 per share, of the Company
(the "Series B PIK Preferred Stock" and, together with the Series A
Exchangeable Preferred Stock, the "Preferred Stock") for a cash price of
$50 (the "Subscription Price") per share. Rights Holders will be able to
exercise their Rights until 5:00 p.m. New York time on , 1997, unless such
time is extended by the Company as described herein (the "Expiration
Date").
Recordholders will receive of a Right for each share of Common
Stock held as of the Record Date (the "Rights Offering"). As soon as
practicable after the Record Date, transferable certificates evidencing the
Rights (the "Rights Certificates") will be delivered to the Recordholders.
No fractional Rights or cash in lieu thereof will be issued or paid by the
Company. The number of Rights issued by the Company to each Recordholder
will be rounded up to the nearest whole number. Each Right consists of a
basic subscription privilege under which Rights Holders may purchase at the
Subscription Price one full share of Preferred Stock for each Right held
(the "Basic Subscription Privilege").
Rights Holders who exercise their Basic Subscription Privilege in full, and
who certify as such, will also be eligible to subscribe (the
"Oversubscription Privilege") at the Subscription Price for shares of
Preferred Stock that are not otherwise purchased pursuant to the exercise
of Rights (the "Excess Shares") of the same series as purchased pursuant to
such Right Holder's Basic Subscription Privilege, subject to availability
and proration. Failure by a Rights Holder to certify that such Rights
Holder is exercising its Basic Subscription Privilege in full may result in
forfeiture of such Rights Holder's Oversubscription Privilege. Once a
Rights Holder has exercised the Basic Subscription Privilege or the
Oversubscription Privilege such exercise may not be revoked.
HLR Holdings Inc. ("HLR") and Roche Holdings, Inc. ("Roche Holdings"),
wholly owned subsidiaries of Roche Holding Ltd. ("Roche") and the owners
of approximately 49.9% of the Common Stock currently outstanding, have
informed the Company that they intend to exercise their Basic Subscription
Privilege in full for approximately $250 million in Series B PIK Preferred
Stock. HLR and Roche Holdings have not currently indicated whether or not
they will exercise their Oversubscription Privilege.
(continued)
For a discussion of certain factors that should be considered in connection
with an investment in the Preferred Stock, see "Risk Factors" beginning on
page 21.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Subscription Dealer Manager Proceeds to
Price and Solicitation Fees(1) Company(2)
------------- ------------------------- ------------
Per Share... $ $ $
Total(3).... $ $ $
(1) The fees payable to Credit Suisse First Boston Corporation ("Credit
Suisse First Boston"), the dealer manager for the Rights Offering, will
vary depending on the number of Rights exercised by Rights Holders
other than HLR and Roche Holdings. Credit Suisse First Boston will
also receive a financial advisory fee of $ .
(2) Before deducting other expenses of the Rights Offering and the Amended
Credit Agreement payable by the Company estimated at $ .
(3) Assumes that only HLR and Roche Holdings exercise their Basic
Subscription Privilege with respect to approximately 5,000,000 shares
of Series B PIK Preferred Stock. If the remaining shares of Preferred
Stock offered hereby are sold to Rights Holders other than HLR and
Roche Holdings, the total Subscription Price, total Dealer Manager and
Solicitation Fees and total Proceeds to Company would be , and
, respectively.
The Dealer Manager for the Rights Offering is:
Credit Suisse First Boston
Prospectus dated , 1997.
The annual dividend for each share of Series A Exchangeable
Preferred Stock offered hereby is $ , payable in cash. The annual
dividend for each share of Series B PIK Preferred Stock offered hereby is $
, payable in shares of Series B PIK Preferred Stock until , 2000,
and payable in cash thereafter. The Preferred Stock is convertible on or
after , 1997 in the case of the Series A Exchangeable Preferred
Stock, and on or after , 2000 in the case of the Series B PIK Preferred
Stock, in each case, at the option of the holder, unless previously redeemed,
into shares of Common Stock at a rate (subject to certain events) of
shares of Common Stock for each share of Preferred Stock, equivalent to a
conversion price of $ for each share of Common Stock. The shares of
Series A Exchangeable Preferred Stock will be exchangeable, subject to certain
conditions, at the option of the Company, in whole (but not in part), on any
dividend payment date on or after , 2000 for the Company's %
Convertible Subordinated Notes due 2012 (the "Notes") at a rate of $50
principal amount of Notes for each share of Series A Exchangeable Preferred
Stock. The Series B PIK Preferred Stock will not be exchangeable for
Notes. Except as described above, the terms of the Series A Exchangeable
Preferred Stock and the Series B PIK Preferred Stock are identical in all
respects. The Preferred Stock is not redeemable prior to , 2000. On
or after such date, the Company may redeem the Preferred Stock, in whole or in
part at the prices set forth herein, plus in each case, accrued and unpaid
dividends. See "Description of Preferred Stock" and "Description of the
Notes." All shares of Preferred Stock issued and outstanding as of ,
2012 shall be redeemed by the Company at the redemption price of $50 per
share. Dividends on the Preferred Stock are cumulative from the date of
issuance and are payable quarterly in arrears commencing , 1997. See
"Description of Preferred Stock."
The Common Stock is traded on the New York Stock Exchange
("NYSE") under the symbol "LH." On February 26, 1997, the last full trading
day before announcement of the Rights Offering, the last reported sale of the
Common Stock on the NYSE Composite Tape was $3 3/4. On , 1997,
the last full day of trading prior to the effective date of the registration
statement of which this Prospectus forms a part, the last reported sale price
of the Common Stock on the NYSE Composite Tape was $ . Application will
be made to list the Rights and Preferred Stock on the NYSE. It is expected
that the Rights will trade on the NYSE until the close of business on the
last trading day prior to the Expiration Date, at which time they will cease
to have value.
In connection with the Rights Offering, the Company will enter
into an amended and restated credit agreement (the "Amended Credit Agreement")
with its existing lenders.
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IN CONNECTION WITH THE RIGHTS OFFERING, CREDIT SUISSE FIRST
BOSTON MAY EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF
THE RIGHTS, THE SERIES A EXCHANGEABLE PREFERRED STOCK, THE SERIES B PIK
PREFERRED STOCK OR THE COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE OR IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
DURING THE RIGHTS OFFERING, CERTAIN PERSONS AFFILIATED WITH
PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR
OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN PREFERRED STOCK OR COMMON STOCK
PURSUANT TO EXEMPTIONS FROM RULE 10b-6, 10b-7 AND 10b-8 UNDER THE SECURITIES
EXCHANGE ACT OF 1934 (THE "EXCHANGE ACT").
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety and should
be read in conjunction with the more detailed information and financial
statements, including the notes thereto, included or incorporated by reference
in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. In connection with the Merger (as defined herein)
in April 1995, National Health Laboratories Holdings, Inc. ("NHL") changed its
name to Laboratory Corporation of America Holdings. Unless otherwise
indicated, all references herein to the "Company" refer to Laboratory
Corporation of America Holdings and its consolidated subsidiaries following
the Merger or NHL and its consolidated subsidiaries prior to the Merger, as
applicable.
THE COMPANY
General
Laboratory Corporation of America Holdings is one of the three
largest independent clinical laboratory companies in the United States based
on 1995 net revenues. Through a national network of laboratories, the Company
offers a broad range of testing services used by the medical profession in the
diagnosis, monitoring and treatment of disease and other clinical states.
Since its founding in 1971, the Company has grown into a network of 28 major
laboratories and approximately 1,500 service sites consisting of branches,
patient service centers and STAT laboratories, serving clients in 48 states.
For the twelve months ended September 30, 1996, the Company had net sales of
$1,619.9 million and EBITDA before a provision for settlements and related
expenses, restructuring charges and non-recurring expenses of $168.6 million.
The Company has achieved a substantial portion of its growth
through acquisitions. In June 1994, the Company acquired Allied Clinical
Laboratories, Inc. ("Allied"), then the sixth largest independent clinical
laboratory testing company in the United States (based on 1993 net revenues)
(the "Allied Acquisition"). In addition, in April 1995, the Company completed
a merger with Roche Biomedical Laboratories, Inc. ("RBL"), an indirect
subsidiary of Roche pursuant to an Agreement and Plan of Merger dated as of
December 13, 1994 (the "Merger"). In connection with the Merger, the Company
changed its name from National Health Laboratories Holdings, Inc. to
Laboratory Corporation of America Holdings. In addition to the Merger and the
Allied Acquisition, since 1993 the Company has acquired a total of 57 small
clinical laboratories with aggregate sales of approximately $182.4 million.
The Clinical Laboratory Testing Industry
Laboratory tests and procedures are used generally by
hospitals, physicians, other health care providers and commercial clients to
assist in the diagnosis, evaluation, detection, monitoring and treatment of
diseases and other medical conditions through the examination of substances in
the blood, tissues and other specimens. Clinical laboratory testing is
generally categorized as either clinical testing, which is performed on body
fluids including blood and urine, or anatomical pathology testing, which is
performed on tissue and other samples, including human cells. Clinical and
anatomical pathology procedures are frequently ordered as part of regular
physician office visits and hospital admissions in connection with the
diagnosis and treatment of illnesses. Certain of these tests and procedures
are used principally as tools in the diagnosis and treatment of a wide variety
of medical conditions such as cancer, AIDS, endocrine disorders, cardiac
disorders and genetic disease. The most frequently requested tests include
blood chemistry analyses, urinalyses, blood cell counts, PAP smears, AIDS
tests, microbiology cultures and procedures and alcohol and other
substance-abuse tests.
The clinical laboratory industry consists primarily of three
types of providers: hospital based laboratories, physician-office laboratories
and independent clinical laboratories, such as those owned by the Company. The
Company believes that in 1995 approximately 46 percent of the clinical testing
revenues in the United States were derived by hospital-based laboratories,
approximately 15 percent were derived by physicians in their offices and
laboratories and approximately 39 percent went to independent clinical
laboratories. The Health Care Financing Administration ("HCFA") has estimated
that there are approximately 5,700 independent clinical laboratories in the
United States.
Business Strategy
During the third quarter of 1996, management began implementing
a new business strategy in response to the Company's declining performance.
These new strategic objectives are as follows: remaining a low cost provider;
providing high quality customer service; and ensuring account profitability.
In addition, the Company is focused on certain growth initiatives beyond the
routine clinical laboratory testing. The Company believes that as a result of
this change in focus it is well positioned to achieve its goal of leading the
clinical laboratory industry by providing its customers with innovative,
responsive, and high quality services.
Low Cost Provider
The Company believes that due to its merger synergy programs,
its standardized equipment and its focus on cost containment, it is a low cost
provider of clinical testing services. Since the Merger, the Company has been
able to effect substantial operating cost reductions in the combined
businesses and expects that the full effect of these savings (approximately
$120 million per year when compared to the businesses' costs immediately prior
to the Merger) will first be realized in 1997. In addition, the Company is
focused on additional initiatives which are expected to achieve significant
cost savings in 1997. These plans include a new agreement with a supplier of
telecommunications services, additional supply savings primarily due to
increased efficiency, and further regional laboratory consolidation. See
"Management's Discussion and Analysis of Results of Operations and Financial
Position."
The Company has also developed and implemented sophisticated
management information systems to monitor operations and control costs. All
financial functions are centralized in Burlington, North Carolina including
centralized purchasing and accounting. This provides greater control over
spending and provides increased supervision and monitoring of results of
operations.
Client Service
The Company competes primarily on the basis of the quality of
its testing, reporting and information systems, its reputation in the medical
community, the pricing of its services and its ability to employ qualified
personnel. The Company believes it is a leading provider in terms of its menu
and quality of testing services. As a result of the required focus on the
consolidation process related to the Merger, however, the Company believes
that its level of client service has been negatively impacted. Therefore, in
1997, with the consolidation process substantially completed, one of the
Company's goals is to improve client service. One example is the continued
integration of traditional sales and customer support functions into a new
position, the Account Manager, which will have responsibility for certain
sales, service and daily operational contact with physician-clients. Other
important factors in improving client service include the Company's initiatives
to improve its billing process. See "Business--Billing."
Account Profitability
Over the last several months the Company has begun an active
effort to improve the profitability of new and existing business. To date this
effort has focused primarily on reviewing existing contracts, including those
with managed care organizations, and selectively repricing or discontinuing
business with existing accounts which perform below Company expectations. The
Company believes that as a result of this effort, the fourth quarter of 1996
was the second quarter since the Merger that the Company's price per accession
did not decline versus the immediately preceding quarter. The Company is also
targeting price increases to certain segments which have not seen price
increases since the Merger. While such increases may adversely affect
volumes, the Company believes that such measures along with other cost
reduction programs, will improve its overall profitability. The substantial
benefits of this strategic change are not expected until the latter half of
1998. Finally, the Company is reviewing its sales organization and expects to
modify its commission structure so that compensation is tied more directly to
the profitability of retained and new business instead of the current practice
of basing commissions primarily on revenue generated. The Company is also
reviewing alternatives relating to regions of the country and segments of
business where profitability is not reaching internal goals and may enter into
joint ventures, alliances, or asset swaps with interested parties in order to
maximize regional operating efficiencies.
Focused Growth Initiatives
The Company plans to increase market share in certain segments
by providing innovative services in three primary areas: (i) hospital
alliances; (ii) specialty and niche businesses; and (iii) direct marketing to
payors.
One of the Company's primary growth strategies is to develop an
increasing number of hospital alliances. These alliances can take several
different forms including laboratory management contracts, reference
agreements and joint ventures. Through these alliances the Company provides
testing services as well as contract management services. As hospitals
continue to be impacted by decreasing fee schedules from third party payors
and managed care organizations, the Company believes that they will seek the
most cost-effective laboratory services for their patients. The Company's
economies of scale as well as its delivery system enable it to assist the
hospital in achieving its goals. These alliances are generally more
profitable than the Company's core business due to the specialized nature of
many of the testing services offered in the alliance program. In 1996, the
Company added 6 alliance agreements with hospitals, physician groups and other
care provider organizations representing approximately $20 million of annual
sales which increased the total number of alliances to 20 from 14 in 1995.
Another primary growth strategy for the Company is growth of
its specialty and niche businesses. In general the specialty and niche
businesses are designed to serve two market segments: (i) markets which are
not served by the routine clinical testing laboratory and therefore are
subject to less stringent regulatory and reimbursement constraints; and (ii)
markets which are served by the routine testing laboratory and offer the
possibility of adding related services from the same supplier. The Company is
a leader in innovative diagnostic testing with an active research and
development group. This group constantly seeks new and improved technologies
for early diagnosis. For example, the Company's Center for Molecular and
Biology and Pathology ("CMBP") is a leader in molecular diagnostics and
polymerase chain reaction ("PCR") technologies which are often able to provide
earlier and more reliable information regarding HIV, genetic diseases, cancer,
and many other viral and bacterial diseases. These technologies may represent
a significant savings to managed care organizations by increasing the
detection of early stage (treatable) diseases. Also, the Company recently
acquired Genetic Design, Inc. and is now the largest provider of identity
testing services in the United States.
Finally, in 1996 the Company began to also focus efforts on
selling its services directly to payors of laboratory services. As a result
of that focus, the Company entered into an agreement with PCS Health Systems,
Inc. ("PCS"), a leading pharmacy benefit management company with 58 million
covered lives, to provide laboratory services as an extension of the PCS
prescription card services. Through this agreement patients will be provided
with identification cards indicating beneficiary eligibility for both
prescription benefits and the Company's testing services. The Company will
provide the testing services as requested and bill PCS based on a
predetermined fee schedule. The Company will pay PCS certain percentage and
fixed fees for adjudication of claims. One of the advantages of the PCS
agreements is that patient eligibility will be determined at the time of
testing through interface with the PCS information system which will expedite
processing of the claim for reimbursement.
Recent Developments
As part of an examination of the rapid growth of Federal
expenditures for clinical laboratory services, several Federal agencies,
including the Federal Bureau of Investigation, the Office of the Inspector
General ("OIG") of the Department of Health and Human Services ("HHS") and the
Department of Justice (the "DOJ"), have investigated allegations of fraudulent
and abusive conduct by health care providers. On November 21, 1996, the
Company reached a settlement with the OIG and the DOJ regarding the prior
billing practices of various of its predecessor companies (the "1996
Government Settlement"). The government's investigations covered billings for
certain tests performed as part of the chemistry profiles of NHL, RBL and
Allied from 1988 to 1994. These tests were deemed by regulators to be
medically unnecessary. The investigations were part of a broad-based Federal
inquiry into Medicare and related billings that have resulted in financial
settlements with a number of other clinical laboratories. The inquiries have
also prompted the imposition of more stringent regulatory compliance
requirements industry-wide. Under the terms of the settlement, the Company
agreed to enter into a comprehensive Corporate Integrity Agreement and to pay
$182 million to settle civil claims involving Medicare and related government
billings for tests performed by NHL, RBL and Allied. These claims arose out
of the government's contention that laboratories offering profiles containing
certain test combinations had the obligation to notify ordering physicians how
much would be billed to the government for each test performed for a patient
whose tests are paid for by Medicare, Medicaid or other government agency.
The government contended claims submitted for tests ordered by physicians and
performed by the laboratories were improper. The Company settled these
allegations without an admission of fault. The Corporate Integrity Agreement,
among other things, requires that detailed notifications be made to
physicians. In addition, as part of the overall settlement, a San Diego
laboratory that was formerly part of Allied agreed to plead guilty to a charge
of filing a false claim with Medicare and Medicaid in 1991 and to pay $5
million to the Federal government. The assets of the San Diego laboratory
were sold by Allied in 1992, two years before the Allied Acquisition. As is
customary with asset sales, Allied retained the liability for conduct
preceding the sale-a liability the Company later succeeded to, following the
Allied Acquisition and Merger. Consistent with this overall settlement, the
Company paid $187 million to the Federal government (the "Settlement Payment")
in December 1996 with proceeds from a loan from Roche Holdings (the "Roche
Loan"). See "--Relationship with Roche". As a result of negotiations related
to the 1996 Government Settlement, the Company recorded a charge of $185
million in the third quarter of 1996 (the "Settlement Charge") to increase
reserves for the 1996 Government Settlement described above and other related
expenses of government and private claims resulting therefrom.
As a result of the Company's performance, higher than projected
debt levels and potential defaults under its existing credit facility (the
"Existing Credit Agreement"), the Company has obtained waivers of certain
covenants thereunder through March 31, 1997. As a result of the limited
period covered by the waivers, approximately $998 million of the Company's
debt that would have been classified as long-term has been classified as
current in the September 30, 1996 consolidated balance sheet. Such
classification has created a material deficiency in short-term liquidity. The
Company expects to seek an additional waiver and amendment to the Existing
Credit Agreement to be effective through the completion of the Rights
Offering. There can be no assurance that such a waiver or amendment can be
obtained. In addition, the Roche Loan matures March 31, 1997. While the
Company expects to seek an extension thereof through the completion of the
Rights Offering, there can be no assurance such an extension can be obtained.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources." In connection with the
Rights Offering, the Company will enter into the Amended Credit Agreement with
its existing lenders. See "Description of Amended Credit Agreement."
During 1996 and the early part of 1997, the Company has
undergone significant changes in management with Thomas P. Mac Mahon assuming
the role of President and Chief Executive Officer in January 1997 in addition
to his position as Chairman. Prior to such time Mr. Mac Mahon served as
Senior Vice President of Roche and President of Roche Diagnostics Group where
he was responsible for the management of all United States operations of the
diagnostic businesses of Roche. In addition to Mr. Mac Mahon, the Company is
led by a new Chief Financial Officer, Wesley R. Elingburg, formerly Senior
Vice President-Finance, and a new management committee.
The Company's principal executive offices are located at 358
South Main Street, Burlington, North Carolina 27215, and its telephone number
is (910) 229-1127.
Fourth Quarter Results
Net sales for the three months ended December 31, 1996, were
$391.2 million, versus $403.4 million in the fourth quarter of 1995. In the
fourth quarter of 1996, the Company posted operating income of $21.7 million,
net income of $1.2 million, and earnings per share of $0.01. This compares
with operating income of $32.6 million, net income of $8.5 million, and
earnings per share of $0.07 in the same period in 1995, before a charge of
$15.0 million to increase the provision for doubtful accounts. After the
charge in the fourth quarter of 1995, the Company posted operating income of
$17.6 million and net income of $0.4 million.
While volume declined in the fourth quarter, pricing remained
stable, resulting in the second consecutive quarter of price stability. In
addition, although fourth quarter sales were lower than the third quarter by
approximately 3%, fourth quarter operating income improved over third quarter
operating income before special charges by 10.7%. Management believes this
performance reflects the results of its new business strategy aimed at
reducing costs and increasing account profitability. Management expects to
see further benefit from these initiatives in 1997.
Full Year Results
For the year ended December 31, 1996, net sales were $1,607.7
million. Before special charges, operating income was $99.2 million, net
income was $13.4 million, and earnings per share was $0.11. After the special
charges in 1996, the Company posted a twelve month operating loss of $118.8
million, net loss of $153.5 million, and a net loss per share of $1.25. The
special charges in 1996 were (i) second quarter charges of $23.0 million
related to additional restructuring and nonrecurring charges related to the
Merger and $10.0 million to increase the allowance for doubtful accounts, and
(ii) the third quarter Settlement Charge.
Net sales for the year ended December 31, 1995, were $1,432.0
million. Before special charges and extraordinary loss, operating income was
$157.2 million, net earnings was $50.9 million, and net earnings per share was
$0.46. After the special charges and extraordinary item, operating income was
$67.2 million, net loss was $12.3 million, and net loss per share was $0.11.
In connection with the Merger, the Company took a second quarter 1995 pretax
special charge of $75.0 million relating to restructuring and other provisions
and had an extraordinary loss of $8.3 million, net of taxes, related to the
early extinguishment of debt. In addition, in the fourth quarter of 1995 the
Company took a charge of $15.0 million to increase the provision for doubtful
accounts. The 1995 results reflect the Merger and, therefore, are not
directly comparable to results for the year ended December 31, 1996.
RELATIONSHIP WITH ROCHE
In connection with the Merger, HLR, and its designee, Roche
Holdings, received 49.9% of the total outstanding Common Stock of the Company.
In connection with the Merger, the Company, HLR, Roche Holdings and Roche
entered into a Stockholder Agreement dated as of April 28, 1995 (the
"Stockholder Agreement"). As a result of its ownership interest and its
rights under the Stockholder Agreement, Roche is able to exercise significant
influence on the governance of the Company and on the composition of its board
of directors. See "Certain Relationships and Related Transactions--The
Stockholder Agreement." HLR and Roche Holdings have indicated that they intend
to exercise their Basic Subscription Privilege in the Rights Offering in full
for approximately $250 million in Series B PIK Preferred Stock. HLR and Roche
Holdings have not currently indicated whether or not they will exercise their
Oversubscription Privilege. As mentioned above, in December, 1996, Roche
Holdings loaned $187 million to the Company to fund the Settlement Payment in
the form of a promissory note. Such note bears interest at a rate of 6.625%
per annum and matures March 31, 1997. A portion of the proceeds of the Rights
Offering will be used to repay such loan. See "Use of Proceeds."
THE RIGHTS OFFERING
Securities Offered.................. A total of 10,000,000 shares of
Preferred Stock are being offered in
the Rights Offering pursuant to the
exercise of Rights. Once the Rights
are distributed and until the
Expiration Date, the Company will not
effect a reclassification of the
Company's equity securities which could
have the effect of materially altering
the value of the Rights. See
"Description of Rights Offering" and
"Description of Preferred Stock."
Basic Subscription Privilege........ Recordholders at the close of business
on the Record Date will receive, at no
cost, of a Right for each share of
Common Stock owned of record at the
close of business on such date. Each
Right will entitle the Rights Holder to
subscribe for one Underlying Share at
the Subscription Price. Upon exercise
of the Rights, Rights Holders must
indicate on their Rights Certificate
whether they wish to receive either
shares of Series A Exchangeable
Preferred Stock or shares of Series B
PIK Preferred Stock. A failure to so
indicate on the Rights Certificate will
result in the issuance of Series A
Exchangeable Preferred Stock. No
fractional Rights or cash in lieu
thereof will be issued or paid.
Fractional Rights will be rounded up to
the nearest whole number. ONCE A RIGHT
HAS BEEN PROPERLY EXERCISED, IT CANNOT
BE REVOKED. See "Description of Rights
Offering--The Rights" and
"--Subscription Privileges."
Oversubscription Privilege.......... Each Rights Holder who elects to
exercise the Basic Subscription
Privilege in full and who certifies as
such, may also subscribe at the
Subscription Price for Excess Shares of
the same series as purchased pursuant
to such Rights Holder's Basic
Subscription Privilege, subject to
availability and proration. Failure by
a Rights Holder to indicate that such
Rights Holder has exercised its Basic
Subscription Privilege in full may
result in forfeiture of such Rights
Holder's Oversubscription Privilege.
If an insufficient number of Excess
Shares is available to satisfy fully
all exercises of the
Oversubscription Privilege, then the
available Excess Shares will be
prorated among Rights Holders who
exercise their Oversubscription
Privilege based upon the respective
number of shares of Preferred Stock
each such Rights Holder shall have
subscribed for pursuant to the Basic
Subscription Privilege. In such
event, all excess payments shall be
returned by mail without interest or
deduction promptly after the
Expiration Date and after all
prorations and adjustments
contemplated by the Rights Offering
have been effected. See
"Description of Rights Offering--
Subscription Privileges."
Subscription Price.................. $50 per share of Preferred Stock.
Record Date......................... , 1997.
Expiration Date..................... The Rights will expire, if not
exercised prior to 5:00 p.m., New York
time, on , 1997 unless extended
for up to 30 days in the sole
discretion of the Company. The number
and length of any such extensions will
be set at the time of any such
extension. See "Description of Rights
Offering--Expiration Date."
The Rights.......................... The Rights will be evidenced by
transferable certificates that will be
exercisable by a Rights Holder until
the Expiration Date. Application has
been made to list the Rights on the
NYSE. It is expected that the Rights
will trade on the NYSE until the close
of business on the last trading day
prior to the Expiration Date, at which
time they will cease to have value.
Subscription and Information Agent.. American Stock Transfer & Trust Company.
Dealer Manager...................... The Company and Credit Suisse First
Boston (the "Dealer Manager") have
entered into a Dealer Manager Agreement
pursuant to which Credit Suisse First
Boston is acting as the dealer manager
in connection with the Rights Offering.
The Company has agreed to pay certain
fees to, and expenses of, the Dealer
Manager for its services in the Rights
Offering. See "Plan of Distribution."
Procedure for Exercising Rights..... The Basic Subscription Privilege and
the Oversubscription Privilege may be
exercised by properly completing the
Rights Certificate, and forwarding it
(or following the Guaranteed Delivery
Procedures), with payment of the
Subscription Price for each Underlying
Share subscribed for pursuant to the
Basic Subscription Privilege and the
Oversubscription Privilege, to the
Subscription and Information Agent, who
must receive such Rights Certificate or
Notice of Guaranteed Delivery and
payment on or prior to the Expiration
Date. If Rights Certificates are sent
by mail, Rights Holders are urged to
use insured, registered mail, return
receipt requested. See "Description of
Rights Offering--Method of Subscription
--Exercise of Rights."
If the aggregate Subscription Price
paid by an exercising Rights Holder is
insufficient to purchase the number of
Underlying Shares that the Rights Holder
indicates are being subscribed for, or
if no number of Underlying Shares to be
purchased is specified, then the Rights
Holder will be deemed to have exercised
the Basic Subscription Privilege to
purchase Underlying Shares to the full
extent of the payment price tendered.
If the aggregate Subscription Price
paid by an exercising Rights Holder
exceeds the amount necessary to
purchase the number of Underlying
Shares for which the Rights Holder has
indicated an intention to subscribe,
then the Rights Holder will be deemed to
have exercised the Oversubscription
Privilege to the full extent of the
excess payment tendered, and any amount
remaining shall be returned to such
Rights Holder. See "Description of
Rights Offering--Method of
Subscription--Exercise of Rights."
ONCE A RIGHTS HOLDER HAS EXERCISED THE
BASIC SUBSCRIPTION PRIVILEGE OR THE
OVERSUBSCRIPTION PRIVILEGE, SUCH
EXERCISE MAY NOT BE REVOKED. RIGHTS
NOT EXERCISED PRIOR TO THE EXPIRATION
DATE WILL EXPIRE.
Persons Holding Common Stock, or
Wishing to Exercise Rights, Through
Others.............................. Persons holding shares of Common
Stock beneficially and receiving the
Rights issuable with respect
thereto, through a broker, dealer,
commercial bank, trust company or
other nominee, as well as persons
holding certificates for Common
Stock directly, who would prefer to
have such institutions effect
transactions relating to the Rights
on their behalf, should contact the
appropriate institution or nominee
and request it to effect such
transaction for them. See
"Description of Rights Offering--
Method of Subscription--Exercise of
Rights."
Procedure for Exercising Rights by
Stockholders Outside of the
United States....................... Rights Certificates will not be mailed
to holders of Common Stock whose
addresses are outside the United States
or who have an Army Post Office ("APO")
or a Fleet Post Office ("FPO") address,
but will be held by the Subscription
and Information Agent for their
accounts. To exercise the Rights
represented thereby, such holders must
notify the Subscription and Information
Agent and take all other steps which are
necessary to exercise the Rights on or
prior to 5:00 p.m. New York time on
, 1997. If no contrary
instructions have been received by
such time, the Rights of such holders
will expire. See "Description of
Rights Offering--Foreign and Certain
Other Stockholders."
Federal Income Tax Consequences..... For United States Federal income tax
purposes, receipt of Rights by a
Recordholder pursuant to the Rights
Offering should be treated as a
nontaxable distribution with respect to
the Common Stock. See "Certain Federal
Income Tax Consequences."
Issuance of Preferred Stock......... Certificates representing shares of
Preferred Stock purchased pursuant to
the exercise of the Rights will be
delivered to subscribers as soon as
practicable after the Expiration Date
and after all prorations and
adjustments contemplated by the terms
of the Rights Offering have been
effected.
No Board or Financial Advisor
Recommendations..................... An investment in the Preferred Stock
must be made pursuant to each
investor's evaluation of such
investor's best interests.
Accordingly, neither the Board of
Directors of the Company nor Credit
Suisse First Boston, as financial
advisor to the Company, makes any
recommendation to Rights Holders
regarding whether they should exercise
their Rights to purchase Preferred
Stock.
Principal Stockholders.............. HLR and Roche Holdings, the owners of
approximately 49.9% of the Common
Stock currently outstanding, have
indicated that they intend to
exercise their Basic Subscription
Privilege in full for approximately
$250 million of Series B PIK
Preferred Stock. HLR and Roche
Holdings have not currently
indicated whether or not they will
exercise their Oversubscription
Privilege.
NYSE Symbol for Common Stock........ "LH"
Proposed NYSE Symbol for Rights..... "LH RT"
Proposed NYSE Symbol for the Series A
Exchangeable Preferred Stock........ "LH PRA"
Proposed NYSE Symbol for
the Series B PIK Preferred Stock.... "LH PRB"
Right to Terminate Rights Offering.. The Company expressly reserves the
right, in its sole discretion, at any
time prior to delivery of the shares of
Preferred Stock offered hereby, to
terminate the Rights Offering if the
Rights Offering is prohibited by law,
rule or regulation or the Board of
Directors concludes that it is not in
the best interests of the Company and
its stockholders to complete the Rights
Offering. If the Rights Offering is
terminated, all funds received pursuant
to the Rights Offering will be promptly
refunded, without interest.
Use of Proceeds..................... The gross proceeds of the Rights
Offering will be used to (i) repay the
$187 million loan from Roche Holdings
in order to fund the Settlement Payment
and $3 million of accrued interest
thereon, (ii) pay fees and expenses of
approximately $15 million related to
the Rights Offering and the Amended
Credit Agreement and (iii) repay up to
$295 million outstanding under the
Existing Credit Agreement. See "Use of
Proceeds."
THE PREFERRED STOCK
Securities Offered.............. An aggregate of 10,000,000 shares of %
Series A Convertible Exchangeable
Preferred Stock and % Series B
Convertible Pay-in-Kind Preferred Stock.
Except as described below, the terms of
the Series A Exchangeable Preferred Stock
and the Series B PIK Preferred Stock are
identical in all respects.
Mandatory Redemption............ , 2012.
Dividends....................... Annual cumulative dividends of $
per share on the Preferred Stock are
payable quarterly on each ,
, and , when, as
and if declared by the Board of Directors.
Annual cumulative dividends in the case of
the Series A Exchangeable Preferred Stock
are payable in cash out of funds legally
available therefor, and in the case of the
Series B PIK Preferred Stock, in shares of
Series B PIK Preferred Stock until
, 2000, and thereafter in cash.
Liquidation Preference.......... $50 per share of Preferred Stock, plus
accrued and unpaid dividends.
Conversion Rights............... Each share of Preferred Stock will be
convertible at any time at the option of
the holder thereof in the case of the
Series A Exchangeable Preferred Stock on
or after , 1997 and in the
case of the Series B PIK Preferred Stock
on or after , 2000, into
shares of Common Stock of the Company,
subject to adjustment in certain events,
including a Fundamental Change (as defined
herein). See "Description of Preferred
Stock --Conversion Rights."
Exchange for Notes.............. The Series A Exchangeable Preferred Stock
will be exchangeable, subject to certain
conditions, at the option of the Company,
in whole (but not in part), on any dividend
payment date on or after , 2000
for the Company's % Convertible
Subordinated Notes due 2012 in a principal
amount equal to $50 per share of Preferred
Stock. The Notes will be convertible, at
the option of the holder thereof, into
shares of Common Stock initially at the
conversion price for the Preferred Stock
at the time of the exchange. Holders of
Notes will be entitled to the same
conversion rights as holders of Preferred
Stock. The Notes will bear interest at
the rate of % payable quarterly in
arrears on , ,
and of each year,
commencing on the first such interest
payment date following the date of
exchange. At the Company's option, on or
after , 2000, the Notes will be
redeemable, in whole or in part, at the
redemption prices set forth herein plus
accrued and unpaid interest. The Notes
are not subject to mandatory sinking fund
payments. The Notes will be subordinated
to all Senior Indebtedness (as defined
herein) of the Company.
Optional Redemption............. The Preferred Stock will not be redeemable
prior to , 2000. On and after
such date, the Preferred Stock will be
redeemable, in whole or in part, at the
option of the Company, at the prices set
forth herein, plus in each case accrued
and unpaid dividends to the redemption
date.
Ranking......................... The Preferred Stock will rank, with
respect to dividend rights and rights upon
liquidation, winding up or dissolution,
senior to all classes of the Company's
common stock and junior to any other
series of preferred stock that may
hereafter be created that ranks senior to
the Preferred Stock.
Voting Rights................... The holders of Preferred Stock will not
have any voting rights, except as provided
by applicable law and except that, among
other things, holders will be entitled to
vote as a separate class (with the holders
of shares of any other series of preferred
stock of the Company having similar
rights) to elect two directors of the
Company if the equivalent of six quarterly
dividends payable on the Preferred Stock
are in arrears. In addition, so long as
any Preferred Stock is outstanding the
Company will not, without the affirmative
vote or consent of the holders of at least
66 2/3% of all outstanding shares of
Preferred Stock and outstanding Parity
Dividend Stock (as defined herein) (voting
as a single class), take certain actions
so as adversely to affect the relative
rights, preferences, qualifications,
limitations, or restrictions of the
Preferred Stock, authorize or issue, or
increase the authorized amount of any
Senior Dividend Stock, Senior Liquidation
Stock (as such terms are defined herein)
or any security convertible into such
Senior Dividend Stock or Senior Liquidation
Stock or effect any reclassification of
the Preferred Stock.
Each share of Preferred Stock will be
entitled to one vote on matters on which
holders of such shares are entitled to
vote.
Federal Income Tax Consequences. There are certain Federal income tax
consequences associated with purchasing,
holding and disposing of the Preferred
Stock, including the fact that an exchange
of the Series A Exchangeable Preferred
Stock for Notes or a redemption of shares
of Preferred Stock for cash will be a
taxable transaction and may be taxable as
a dividend. See "Certain Federal Income
Tax Consequences."
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
---------------------- --------------------------------------------------------
1996 1995 1995(a) 1994(b) 1993 1992 1991
-------- -------- -------- ------- ------ ------- ------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Net sales................................ $1,216.5 $1,028.6 $1,432.0 $872.5 $760.5 $ 721.4 $603.9
Cost of sales............................ 903.9 722.4 1,024.3 597.0 444.5 395.1 332.5
-------- -------- -------- ------ ------ ------- ------
Gross profit............................. 312.6 306.2 407.7 275.5 316.0 326.3 271.4
Selling general and
administrative
expenses................................ 223.0 162.3 238.5 149.3 121.4 117.9 97.9
Amortization of
intangibles and
other assets............................ 22.1 19.2 27.0 16.3 9.1 8.3 7.7
Restructuring and non-recurring charges.. 23.0(c) 65.0(d) 65.0(d) -- -- -- --
Provision for
settlements and
related expenses........................ 185.0(c) 10.0(d) 10.0(d) -- -- 136.0(g) --
-------- -------- -------- ------ ------ ------- ------
Operating income
(loss).................................. (140.5) 49.7 67.2 109.9 185.5 64.1 165.8
Litigation settlement
and related
expenses................................ -- -- -- (21.0)(e) -- -- --
Other gains and
expenses, net........................... -- -- -- -- 15.3(f) -- --
Net interest income
(expense)............................... (49.9) (47.4) (64.1) (33.5) (9.7) (2.0) 3.5
-------- -------- -------- ------ ------ ------- ------
Earnings (loss) before
income taxes and
extraordinary item...................... (190.4) 2.3 3.1 55.4 191.1 62.1 169.3
Provision for income
taxes................................... (35.7) 6.7 7.1 25.3 78.4 21.5 65.4
-------- -------- -------- ------ ------ ------- ------
Earnings (loss) before
extraordinary item...................... (154.7) (4.4) (4.0) 30.1 112.7 40.6 103.9
Extraordinary
item--loss on early
extinguishment of
debt, net(h)............................. -- (8.3) (8.3) -- -- -- --
-------- -------- -------- ------ ------ ------- ------
Net earnings (loss)...................... $ (154.7) $ (12.7) $ (12.3) $ 30.1 $112.7 $ 40.6 $103.9
======== ======== ======== ====== ====== ======= ======
Weighted average
common shares
outstanding (in
thousands).............................. 122,917 106,424 110,579 84,754 89,439 94,468 99,096
Earnings (loss) per
common share
before
extraordinary loss...................... $ (1.26) $ (0.04) $ (0.03) $ 0.36 $ 1.26 $ 0.43 $ 1.05
Extraordinary loss per
common share............................ -- (0.08) (0.08) -- -- -- --
-------- -------- -------- ------ ------ ------- ------
Net earnings (loss)
per common share......................... $ (1.26) $ (0.12) $ (0.11) $ 0.36 $ 1.26 $ 0.43 $ 1.05
======== ======== ======== ====== ====== ======= ======
Dividends per
common share............................ -- -- -- $ 0.08 $ 0.32 $ 0.31 $ 0.27
Supplemental Data:
Net cash provided by
(used in) operating
activities.............................. $(17.6) $ 4.4 $ 47.0 $ 14.7 $ 57.2 $ 102.4 $135.3
Net cash used in
investing activities.................... $(52.1) $(83.0) $ (115.0) $(293.6) $(95.7) $ (36.3) $(37.8)
Net cash provided by
(used in) financing
activities.............................. $ 81.5 $ 76.8 $ 57.6 $ 293.4 $ 17.4 $ (84.0) $(92.0)
Bad debt expense......................... $ 58.9 $ 35.5 $ 64.8 $ 29.5 $ 28.0 $ 32.1 $ 24.9
Bad debt expense as a
% of net sales......................... 4.8% 3.5% 4.5% 3.4% 3.7% 4.4% 4.1%
Capital expenditures..................... $46.3 $ 44.3 $ 75.4 $ 48.9 $ 33.6 $ 34.9 $ 25.4
EBITDA(i)................................ $(77.2) $101.8 $139.6 $ 154.3 $217.7 $ 91.0 $187.8
EBITDA as a % of net
sales(i)................................ (6.3)% 9.9% 9.7% 17.7% 28.6% 12.6% 31.1%
Adjusted EBITDA(j)....................... $130.8 $176.8 $214.6 $ 154.3 $217.7 $227.0 $187.8
Adjusted EBITDA as a
% of net sales(j)...................... 10.8% 17.2% 15.0% 17.7% 28.6% 31.5% 31.1%
Ratio of earnings to
combined fixed
charges and preferred
stock dividends(k)...................... NM 1.04x 1.04x 2.20x 10.16x 5.71x 20.65x
</TABLE>
<TABLE>
<CAPTION>
As of
September 30, 1996 As of December 31,
------------------ ----------------------------------------------------------
Actual 1995(a) 1994(b) 1993 1992 1991
------------------ --------- -------- ------ ------ ------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..... $ 28.2 $ 16.4 $ 26.8 $ 12.3 $ 33.4 $ 51.3
Working capital(l) ........... (795.8) 249.4 90.2 62.4 32.0 64.2
Total assets.................. 1,908.4 1,837.2 1,012.7 585.5 477.4 411.3
Total debt(m)................. 1,118.6 1,034.2 648.9 341.5 154.2 7.6
Total stockholders' equity.... 256.9 411.6 166.0 140.8 212.5 330.8
</TABLE>
- -----------
(a) In April 1995, the Company completed the Merger. RBL's results of
operations have been included in the Company's results of operations
since April 28, 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General" and Note 2 to
the Consolidated Financial Statements.
(b) In June 1994, the Company completed the Allied Acquisition. Allied's
results of operations have been included in the Company's results of
operations since June 23, 1994. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--General" and
Note 2 to the Consolidated Financial Statements.
(c) In the second quarter of 1996, the Company recorded certain charges of a
non-recurring nature including additional charges related to the
restructuring of operations following the Merger. The Company recorded
a restructuring charge totaling $13.0 million for the shutdown of its La
Jolla, California administrative facility and other workforce
reductions. In addition, the Company recorded $10.0 million in non-
recurring charges in the second quarter of 1996 related to the
integration of its operations following the Merger. See Note 6 to the
Unaudited Consolidated Financial Statements. As a result of
negotiations with the OIG and DOJ related to the 1996 Government
Settlement, the Company recorded the Settlement Charge of $185.0 million
in the third quarter of 1996 to increase accruals for settlements and
related expenses of government and private claims resulting from these
investigations. See "Regulation and Reimbursement--1996 Government
Settlement."
(d) In 1995, following the Merger, the Company determined that it would be
beneficial to close certain laboratory facilities and eliminate duplicate
functions in certain geographic regions where duplicate NHL and RBL
facilities or functions existed at the time of the Merger. The Company
recorded restructuring charges of $65.0 million in connection with these
plans. See Note 3 of the Notes to Consolidated Financial Statements which
sets forth the Company's restructuring activities for the year ended
December 31, 1995. Also in 1995, the Company recorded a pre-tax special
charge of $10.0 million in connection with the estimated costs of settling
various claims pending against the Company, substantially all of which are
billing disputes, in which the Company believes it is probable that
settlements will be made by the Company.
(e) In 1994, the Company approved a settlement of shareholder class and
derivative litigation. In connection with the settlement, the Company
recorded a pre-tax special charge of $15.0 million and a $6.0 million
charge for expenses related to the settled litigation. Insurance payments
and payments from other defendants amounted to $55.0 million plus expenses.
The litigation consisted of two consolidated class action suits filed in
December 1992 and November 1993 and a consolidated shareholder derivative
action brought in Federal and state courts in San Diego, California. The
settlement involved no admission of wrongdoing and all payments under the
settlement agreement have been paid.
(f) Represents a one-time pretax gain comprised of expense reimbursement and
termination fees of $21.6 million in connection with the Company's attempt
to purchase Damon Corporation, a competing independent clinical laboratory,
less related expenses and write-off of certain bank financing costs of $6.3
million.
(g) In the fourth quarter of 1992, the Company recorded a charge against
operating income of $136.0 million related to the 1992 NHL Government
Settlement (as defined herein). See "Regulation and Reimbursement--OIG
Settlement--1992 NHL Government Settlement."
(h) In connection with the repayment in 1995 of existing revolving credit and
term loan facilities, the Company recorded an extraordinary loss of
approximately $13.5 million ($8.3 million, net of tax), consisting of the
write-off of deferred financing costs, related to the early extinguishment
of debt.
(i) EBITDA represents income (loss) before net interest expense, provision for
income taxes, depreciation and amortization expense and extraordinary
items. While EBITDA is not intended to represent cash flow from
operations as defined by generally accepted accounting principles
("GAAP") (and should not be considered as an indicator of operating
performance or an alternative to cash flow (as measured by GAAP)), as a
measure of liquidity, it is included herein to provide additional
information with respect to the ability of the Company to meet its
future debt service, capital expenditure and working capital
requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
(j) Adjusted EBITDA represents income (loss) before net interest expense,
provision for income taxes, depreciation and amortization, extraordinary
items, a provision for settlements and related expenses, restructuring
charges and nonrecurring expenses. While Adjusted EBITDA is not intended
to represent cash flow from operations as defined by GAAP (and should not
be considered as an indicator of operating performance or an
alternative to cash flow (as measured by GAAP)), as a measure of
liquidity, it is included herein to provide additional information with
respect to the ability of the Company to meet its future debt service,
capital expenditure and working capital requirements. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
(k) For the purpose of calculating the ratio of earnings to combined fixed
charges and preferred stock dividends (i) earnings consist of income
before provision for income taxes and fixed charges and (ii) fixed
charges consist of interest expense and one-third of rental expense
which is deemed representative of an interest factor. For the nine
months ended September 30, 1996, earnings were insufficient to cover
fixed charges and preferred stock dividends by $190.4 million. For the
nine months ended September 30, 1996 and the year ended December 31,
1995, pro forma earnings would have been insufficient to cover combined
fixed charges and preferred stock dividends by $225.7 million and $20.6
million, respectively, assuming only HLR and Roche Holdings exercise
their Basic Subscription Privilege ($237.9 million and $35.6 million,
respectively if HLR and Roche Holdings exercise their Basic
Subscription Privilege and all other remaining Rights are also
exercised).
(l) On September 23, 1996, as a result of a potential default under the
Existing Credit Agreement, the Company entered into the Fourth
Amendment to the Existing Credit Agreement (the "Fourth Amendment")
which modified the interest coverage and leverage ratios applicable to
the quarters ended September 30, 1996 and December 31, 1996 in return
for, among other things, increased interest rate margins. As a result
of the limited period covered by the Fourth Amendment, approximately
$998 million of the Company's debt that would have been classified as
long-term has been classified as current in the September 30, 1996
consolidated balance sheet. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
(m) Total debt includes a capital lease obligation of $9.8 million at
September 30, 1996 and $9.6 million, $9.8 million, $9.7 million and $9.6
million at December 31, 1995, 1994, 1993 and 1992, respectively. Total
debt also includes the expected value of future contractual and contingent
amounts to be paid to the principals of acquired laboratories. Such
payments are principally based on a percentage of future revenues derived
from the acquired customer lists or specified amounts to be paid over a
period of time. At September 30, 1996, December 31, 1995, 1994, 1993,
1992 and 1991, such amounts were $16.5 million, $23.3 million, $35.1
million, $26.8 million, $4.6 million and $7.6 million, respectively.
Total debt excludes accrued settlement costs. In December 1996, the
Company also received a loan of $187 million from Roche Holdings to
fund the Settlement Payment. The Settlement Payment was subsequently
made in December 1996.
SUMMARY PRO FORMA CONDENSED COMBINED
CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
----------------- ------------
1996(a) 1995(a)
--------------------------------------------
(Dollars in millions, except
per share amounts)
<S> <C> <C>
Statement of Operations Data:
Net sales............................................................ $1,216.5 $1,678.6
Cost of sales........................................................ 903.9 1,199.8
-------- --------
Gross profit......................................................... 312.6 478.8
Selling general and administrative expenses.......................... 223.0 279.3
Amortization of intangibles and other assets......................... 22.1 30.1
Restructuring and non-recurring charges.............................. 23.0 65.0
Provision for settlements and related expenses....................... 185.0 10.0
-------- --------
Operating income (loss).............................................. (140.5) 94.4
Net interest expense................................................. (57.1) (77.3)
-------- --------
Earnings (loss) before income taxes and extraordinary item........... (197.6) 17.1
Provision for income taxes........................................... (38.7) 14.4
-------- --------
Earnings (loss) before extraordinary item............................ (158.9) 2.7
Preferred dividends.................................................. (16.3) (21.9)
-------- --------
Loss before extraordinary item attributable to common shareholders... $(175.2) $(19.2)
======== ========
Weighted average common shares outstanding (in thousands):
Primary............................................................. 122,917 122,909
Fully diluted....................................................... 215,772 216,776
Loss per common share before extraordinary item...................... $ (1.43) $(0.16)
======== ========
Fully diluted loss per common share.................................. $ (1.43) $(0.16)
======== ========
</TABLE>
As of September 30, 1996(b)
---------------------------
(Dollars in millions)
Balance Sheet Data:
Cash and cash equivalents........... $ 28.2
Working capital..................... 447.3
Total assets........................ 1,911.3
Total debt.......................... 1,073.6
Total stockholders' equity.......... 243.0
- -----------
(a) The summary unaudited pro forma statement of operations data for the nine
months ended September 30, 1996 and for the year ended December 31, 1995
present the results of operations of the Company assuming the Rights
Offering (assuming only HLR and Roche Holdings exercise their Basic
Subscription Privilege for approximately $250 million of Series B PIK
Preferred Stock) and the application of the proceeds therefrom, the
execution of the Amended Credit Agreement, the Merger, the Roche Loan and
the Settlement Payment had been completed as of the beginning of such
periods. If HLR and Roche Holdings exercise their Basic Subscription
Privilege for approximately $250 million of Series B PIK Preferred Stock
and all other remaining Rights are exercised for Series A Exchangeable
Preferred Stock, pro forma results would be as follows:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
----------------- ------------
1996 1995
----------------- ------------
(Dollars in millions, except per share amounts)
<S> <C> <C>
Operating income (loss)....................................... $(140.5) $ 94.4
Net interest expense.......................................... (41.9) (55.5)
Earnings (loss) before income taxes and extraordinary item.... (182.4) 38.9
Provision for income taxes.................................... (32.3) 23.3
------- -------
Earnings (loss) before extraordinary item..................... (150.1) 15.6
Preferred dividends........................................... (32.2) (43.2)
------- -------
Loss before extraordinary item attributable to common
shareholders................................................. $(182.3) $(27.6)
======== ========
Weighted average common shares outstanding (in thousands):
Primary................................................ 122,917 122,909
Fully diluted.......................................... 306,681 307,685
Loss per common share before extraordinary item............... $(1.48) $(0.22)
======== ========
Fully diluted loss per common share before extraordinary
item........................................................ $(1.48) $(0.22)
======== ========
</TABLE>
(b) The summary unaudited pro forma consolidated balance sheet data as of
September 30, 1996 presents the financial position of the Company adjusted
to give pro forma effect to the Rights Offering (assuming only HLR and
Roche Holdings exercise their Basic Subscription Privilege for
approximately $250 million of Series B PIK Preferred Stock) and the
application of the proceeds therefrom, the execution of the Amended Credit
Agreement, the Roche Loan and the Settlement Payment. If HLR and Roche
Holdings exercise their Basic Subscription Privilege for approximately $250
million of Series B PIK Preferred Stock and all other remaining Rights are
exercised for Series A Exchangeable Preferred Stock, pro forma results
would be as follows:
<TABLE>
<CAPTION>
As of September 30, 1996
------------------------
(Dollars in millions)
<S> <C>
Cash and cash equivalents............. $ 28.2
Working capital....................... 447.3
Total assets.......................... 1,911.3
Total debt............................ 823.6
Total stockholders' equity............ 243.0
</TABLE>
For a complete description of the assumptions underlying the pro forma
amounts, see "Unaudited Pro Forma Financial Information."
RISK FACTORS
In addition to the other information in this Prospectus, the
following factors should be considered carefully in evaluating an investment
in the securities offered hereby.
Substantial Leverage. Following the Rights Offering, the
Company will continue to be highly leveraged. As of September 30, 1996, after
giving pro forma effect to the Rights Offering (assuming only HLR and Roche
Holdings exercise their Basic Subscription Privilege with respect to
approximately $250 million of Series B PIK Preferred Stock) and the
application of the proceeds therefrom, the Company would have had total
indebtedness of $1,073.6 million and stockholders' equity of $243.0 million.
For the nine months ended September 30, 1996 and the year ended December 31,
1995, pro forma earnings would have been insufficient to cover combined fixed
charges and preferred stock dividends by $225.7 million and $20.6 million,
respectively, assuming only HLR and Roche Holdings exercise their Basic
Subscription Privilege ($237.9 million and $35.6 million, respectively if HLR
and Roche Holdings exercise their Basic Subscription Privilege and all other
remaining Rights are also exercised). Pro forma net interest expense for the
fiscal year ended December 31, 1995 and the nine months ended September 30,
1996 would have been $77.3 million and $57.1 million, respectively. The
Company may incur additional indebtedness in the future, subject to
limitations imposed by the Amended Credit Agreement. See "Capitalization" and
"Unaudited Pro Forma Financial Statements." As a result of the Company's
performance, higher than projected debt levels and potential defaults under the
Existing Credit Agreement, the Company has obtained waivers of certain
covenants thereunder. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." As a result of the limited period
covered by the waivers, approximately $998.0 million of the Company's debt
that would have been classified as long-term has been classified as current in
the September 30, 1996 consolidated balance sheet. Such classification has
created a material deficiency in short-term liquidity. A waiver with respect
to certain covenants expires March 31, 1997. The Company expects to seek an
additional waiver and amendment to the Existing Credit Agreement to be
effective through the completion of the Rights Offering. There can be no
assurance that such a waiver or amendment can be obtained. Borrowings under
the Company's revolving credit facility of $450.0 million (the "Revolving
Credit Facility") under the Existing Credit Agreement were $361.0 million as
of September 30, 1996. In December 1996, the Company borrowed $187.0 million
from Roche Holdings to fund the Settlement Payment in the form of a promissory
note which matures March 31, 1997. While the Company expects to seek an
extension thereof through the completion of the Rights Offering, there can be
no assurance such an extension can be obtained. The Settlement Payment was
subsequently made in December 1996. Cash and cash equivalents on hand and
additional borrowing capabilities of $89 million as of September 30, 1996
under the Revolving Credit Facility are expected to be sufficient to meet
anticipated operating requirements, debt repayments and provide funds for
capital expenditures and working capital for the near term, however, further
deterioration in cash flow from operations or the failure to complete the
Rights Offering in the first half of 1997 could result in a cash deficiency.
The level of the Company's indebtedness could have important
consequences to holders of the Company's securities, including but not limited
to the following: (i) a substantial portion of the Company's cash flow from
operations will be required to be dedicated to debt service and will not be
available for other purposes; (ii) the Company's ability to obtain additional
debt financing in the future for working capital, and capital expenditures
could be limited; (iii) the Company may be more vulnerable to extended
economic downturns and may be restricted in exploiting business opportunities;
(iv) the Amended Credit Agreement will contain financial and restrictive
covenants that limit the ability of the Company to, among other things, borrow
additional funds, dispose of assets, pay cash dividends, including dividends
on the Preferred Stock or pay interest on the Notes, and failure by the
Company to comply with such covenants could result in an event of default
which, if not cured or waived, could have a material adverse effect on the
Company and (v) the Company's level of indebtedness could limit its
flexibility in planning for, or reacting to, changes in market conditions,
including adverse governmental regulations (including reductions in the
amounts reimbursable to the Company under Medicare and Medicaid). See
"--Limitations on Third Party Payor Reimbursement of Health Care Costs."
Furthermore, the ability of the Company to satisfy its obligations will be
dependent upon its future performance and market conditions, which will be
subject to prevailing economic conditions and to financial, business and other
factors, including factors beyond the Company's control. In addition, because
the borrowings outstanding under the Amended Credit Agreement will bear
interest at a floating rate, the Company's financial performance may be
adversely affected by increases in interest rates. The Amended Credit
Agreement provides that in the event of a reduction of the percentage of
Common Stock held by HLR, Roche Holdings and their affiliates (other than the
Company and its subsidiaries) below 25%, the applicable interest margins and
facility fees on borrowings outstanding under the Amended Credit Agreement will
increase. The amount of the increase will depend, in part, on the leverage
ratio of the Company at the time of such reduction. In addition, pursuant to
the Amended Credit Agreement, the applicable interest margins on borrowings
outstanding thereunder will be based upon the leverage ratio. As a result,
the applicable interest margins will vary depending upon the number of Rights
exercised. See "Description of Amended Credit Agreement".
In addition, Notes issued upon exchange of the Preferred Stock
will be subordinated to all Senior Indebtedness. Following the Rights
Offering, assuming only HLR and Roche Holdings exercise the Basic Subscription
Right for approximately $250 million of Preferred Stock, $1,083.1 million of
Senior Indebtedness will be outstanding. There will be no restrictions on the
creation of Senior Indebtedness in the Indenture.
Limitations on Third Party Payor Reimbursement of Health Care
Costs. The health care industry is undergoing significant change as third
party payors, such as Medicare and Medicaid and insurers, increase their
efforts to control the cost of health care services. During the nine months
ended September 30, 1996, the Company derived approximately 18% and 6% of its
net revenues from tests performed for beneficiaries of Medicare and Medicaid
programs, respectively. The Company's business depends significantly on
continued participation in these programs and the Company is required by law
to accept reimbursement from Medicare and Medicaid as payment in full for
covered tests performed for Medicare and Medicaid beneficiaries. In an effort
to address the problem of increasing health care costs, legislation has been
proposed at both Federal and state levels to further regulate health care
delivery in general and clinical laboratories in particular and legislation
has been enacted that reduces the amounts reimbursable to the Company and other
independent clinical laboratories under Medicare and Medicaid, the levels of
which have declined steadily since 1984. See "Regulation and
Reimbursement--General--Regulation Affecting Reimbursement of Clinical
Laboratory Services." Such reductions have negatively impacted the Company's
net sales, cost of sales as a percentage of net sales and selling, general and
administrative expenses as a percentage of net sales. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Congress passed a bill (the Medicare Preservation Act) that would have further
reduced the amounts reimbursable to the Company and other clinical
laboratories, but the bill was vetoed by the President. In addition, effective
January 1, 1996, HCFA adopted a new policy on reimbursement for chemistry
panel tests. As of January 1, 1996, 22 automated tests (rather than 19 tests)
became reimbursable by Medicare as part of an automated chemistry profile.
HCFA retains the authority to expand in the future the list of tests included
in a panel. Effective as of March 1, 1996, HCFA eliminated its prior policy
of permitting payment for all tests contained in an automated chemistry panel
when at least one of the tests in the panel is medically necessary. Under the
new policy, Medicare payment will not exceed the amount that would be payable
if only the tests that are "medically necessary" had been ordered. In
addition, since 1995 most Medicare carriers have begun to require clinical
laboratories to submit documentation supporting the medical necessity, as
judged by ordering physicians, for commonly ordered tests. The Company has
incurred and expects to continue to incur additional reimbursement reductions
and additional costs associated with the implementation of these requirements
of HCFA and Medicare carriers. These and other proposed changes affecting the
reimbursement policy of Medicare and Medicaid programs could have a material
adverse effect on the business, results of operations or financial condition
of the Company. In particular, the Company has experienced lower collection
rates beginning in the second quarter of 1996 as a result of these more
stringent medical necessity requirements. See "--Collection Rates from Third
Party Payors."
Collection Rates from Third Party Payors. During the fourth
quarter of 1995 and the second quarter of 1996, the Company recorded pre-tax
special charges of $15.0 million and $10.0 million, respectively, based on the
Company's determination that additional reserves were needed to cover
potentially lower collection rates from several third-party payors. In
addition, the Company increased its monthly provision for doubtful accounts
beginning in the third quarter of 1996. Increased medical necessity and
related diagnosis code requirements of the Medicare program were placed on the
Company by certain third party carriers in late 1995 and additional
requirements were placed on the Company at the beginning of 1996. The Company
expects accounts receivable balances to continue to exceed 1995 levels as a
result of these more stringent requirements. In addition, increased
difficulty in collecting amounts due from private insurance including certain
managed care plans has negatively impacted operating cash flow. Finally,
Merger related integration issues have also resulted in increased accounts
receivable balances as a result of multiple billing information systems.
Although the Company currently has plans in place to improve the collection of
accounts receivable and stabilize collection rates, to date, collection rates
continue to decline despite these measures. Moreover, additional changes in
requirements of third-party payors could increase the difficulties in
collections. There can be no assurance that such trends will be reversed or
that additional reserves will not be required. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Role of Managed Care. Managed care organizations play a
significant role in the health care industry and their role is expected to
increase over the next several years. Managed care organizations typically
negotiate capitated payment contracts, whereby a clinical laboratory receives
a fixed monthly fee per covered individual, regardless of the number or cost
of tests performed per covered individual and regardless of the number or cost
of tests performed during the month (excluding certain tests, such as esoteric
tests and anatomic pathology services). Laboratory services agreements with
managed care organizations have historically been priced aggressively due to
competitive pressure and the expectation that a laboratory would capture not
only the volume of testing to be covered under the contract, but also the
additional fee-for-services business from patients of participating physicians
who are not covered under the managed care plan. However, as the number of
patients covered under managed care plans continues to increase, there is less
such fee-for-service business and, accordingly, less high margin business to
offset the low margin (and often unprofitable) managed care business.
Furthermore, increasingly, physicians are affiliated with more than one
managed care organization and as a result may be required to refer clinical
laboratory tests to different clinical laboratories, depending on the coverage
of their patients. As a result, a clinical laboratory might not receive any
fee-for-service testing from such physicians. The increase in managed care
has also resulted in declines in the utilization of laboratory testing
services. See "Business--Clients and Payors" and "Business--The Clinical
Laboratory Testing Industry." During the nine months ended September 30,
1996, services to managed care organizations under capitated rate agreements
accounted for approximately 4% of the Company's net revenues from clinical
laboratory testing and approximately 10% of the volume of specimens or
accessions tested by the Company. As discussed below, the Company has
targeted business development efforts in an attempt to become more judicious
in pricing new business and is selectively repricing or discontinuing business
with existing accounts not meeting Company targets. The Company has
experienced some volume declines as a result of this strategy, however, the
third quarter of 1996 was the first quarter since the Merger that overall
prices did not decline versus the immediately preceding quarter. There can be
no assurance however of the timing or success of such measures or that the
Company will not lose market share to other clinical laboratories who continue
to aggressively price laboratory services agreements with managed care
organizations. In addition, despite such efforts, the Company may experience
declines in per test revenue as managed care organizations continue to
increase their share of the health care insurance market.
Implementation of New Business Strategy. During the third
quarter of 1996, management began implementing a new business strategy in
response to the Company's declining performance. See "Business--Strategy."
Management expects this new business strategy will likely result in lower
volumes as a result of repricing or discontinuing business with certain
existing accounts not meeting Company profitability targets. However,
management also believes that such measures will improve the Company's overall
profitability. The substantial benefits of this strategic change are not
expected until the latter half of 1998. The Company's future results and
financial condition are dependent on the successful implementation of this new
business strategy. While the Company believes that this strategy will enable
it to improve its financial results, there can be no assurance that this new
strategy will be successful, that the anticipated benefits of this new
strategy will be realized, that management will be able to implement such
strategy on a timely basis, that the Company will return to profitability
levels experienced prior to 1995 or that losses will not continue in the
future.
Recent Operating Losses. Following the Merger, the Company
experienced a loss in 1995 and a loss in the nine months ended September 30,
1996. While such losses are largely attributable to costs incurred in
connection with the Merger, the related restructuring described below and the
Settlement Payment, there can be no assurance that losses will not continue in
the future. See "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Result of Operations." As
a result, the Company had an accumulated deficit of $0.6 million and $155.3
million as of December 31, 1995 and September 30, 1996, respectively. As a
result of the Settlement Charge, the Company recorded a significant loss in
1996.
Recent Restructuring. In connection with the Merger, the
Company recorded a second quarter pre-tax special charge of $65.0 million in
1995 and $23.0 million in 1996 relating to the restructuring and integration
of its operations following the Merger. In addition, in the second quarter of
1995, the Company had an extraordinary loss of $8.3 million, net of taxes,
related to early extinguishment of debt in connection with the Merger. While
the Company believes that these charges should be sufficient to cover all
expenses associated with the Merger and related restructuring, in the event
such costs are higher than anticipated, or additional restructuring charges
are taken, either in connection with the Merger or otherwise, this could have
a material adverse effect on the Company's results of operations and financial
condition.
Intense Competition. The independent clinical laboratory
industry in the United States is intensely competitive. The following
factors, among others, are often used by health care providers in selecting a
laboratory: (i) pricing of the laboratory's testing services; (ii) accuracy,
timeliness and consistency in reporting test results; (iii) number and type of
tests performed; (iv) service capability and convenience offered by the
laboratory; and (v) its reputation in the medical community. The Company
believes that in 1995 approximately 46% of the revenues of the clinical
laboratory testing industry was generated by hospital-affiliated laboratories,
approximately 39% by independent clinical laboratories and 15% by thousands of
individual physicians in their offices and laboratories. Independent clinical
laboratories fall into two separate categories: (1) smaller, generally local,
laboratories that generally offer fewer tests and services and have less
capital than the larger laboratories, and (2) larger laboratories such as the
Company that provide a broader range of tests and services. The Company has
two major competitors that operate in the national market--SmithKline Beecham
Clinical Laboratories, Inc. ("SmithKline") and Quest Diagnostics Incorporated,
formally known as Corning Clinical Laboratories ("Quest"). There are also
many independent clinical laboratories that operate regionally and that
compete with the Company in these regions. In addition, hospitals are in
general both competitors and customers of independent clinical laboratories.
The independent clinical laboratory testing industry has experienced intense
price competition over the past several years, which has negatively impacted
the Company's profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." There can be no assurance
that the Company will be able to compete successfully with its existing or any
new competitors or that competitive pressures faced by the Company will not
materially and adversely affect its business, operating results or financial
condition. See "Business--Competition."
Governmental Regulation. The clinical laboratory industry is
subject to significant governmental regulation at the Federal, state and local
levels. The Company's laboratories are required to be certified or licensed
under the Clinical Laboratory Improvement Act of 1967 and the Clinical
Laboratory Improvement Amendments of 1988 (collectively, as amended, "CLIA"),
and approved to participate in the Medicare and Medicaid programs. Currently,
all clinical laboratories, including most physician-office laboratories
("POLs"), are required to comply with CLIA. However, the Medicare
Preservation Act, passed in 1995 by both Houses of Congress, would have
largely exempted POLs from having to comply with CLIA (except with respect to
pap smear tests). Although this provision was not maintained by the House
Senate conference and was not included in the subsequent legislation, it could
be reintroduced at any time. The exemption of POLs from CLIA would
significantly reduce their costs, making them more financially viable and a
greater competitive challenge to the Company and would more likely encourage
physicians to establish laboratories in their offices.
A wide array of Medicare/Medicaid fraud and abuse provisions
apply to clinical laboratories participating in such programs. Penalties for
violations of these Federal laws include exclusion from participation in the
Medicare/Medicaid programs, asset forfeitures and other civil and criminal
penalties. Civil penalties for a wide range of offenses may be up to $2,000
per item and twice the amount claimed. These penalties will be increased
effective January 1, 1997 to up to $10,000 per item plus three times the
amount claimed. In the case of certain offenses, exclusion from participation
in Medicare and Medicaid is a mandatory administrative penalty. The OIG
interprets these fraud and abuse administrative provisions liberally and
enforces them aggressively. Provisions in a bill enacted in August 1996 are
likely to expand the Federal government's involvement in curtailing fraud and
abuse due to the establishment of (i) an anti-fraud and abuse trust fund
funded through the collection of penalties and fines for violations of such
laws and (ii) a health care anti-fraud and abuse task force. As part of an
examination of the rapid growth of Federal expenditures for clinical
laboratory services, several Federal agencies, including the Federal Bureau of
Investigation, the OIG and the DOJ, have investigated allegations of
fraudulent and abusive conduct by health care providers. On November 21,
1996, the Company reached a settlement with the OIG and the DOJ regarding the
prior billing practices of various of its predecessor companies. The
government's investigations covered billings for certain tests performed as
part of the chemistry profiles of NHL, RBL and Allied from 1988 to 1994.
These tests were deemed by regulators to be medically unnecessary. The
investigations were part of a broad-based federal inquiry into Medicare and
related billings that have resulted in financial settlements with a number of
other clinical laboratories. The inquiries have also prompted the imposition
of more stringent regulatory compliance requirements industry-wide. Under the
terms of the settlement, the Company agreed to enter into a comprehensive
Corporate Integrity Agreement and to pay $182 million to settle civil claims
involving Medicare and related government billings for tests performed by NHL,
RBL and Allied. These claims arose out of the government's contention that
laboratories offering profiles containing certain test combinations had the
obligation to notify ordering physicians how much would be billed to the
government for each test performed for a patient whose tests are paid for by
Medicare, Medicaid or other government agency. The government contended
claims submitted for tests ordered by physicians and performed by the
laboratories were improper. The Company settled these allegations without an
admission of fault. The Corporate Integrity Agreement, among other things,
requires that detailed notifications be made to physicians. In addition, as
part of the overall settlement, a San Diego laboratory that was formerly part
of Allied agreed to plead guilty to a charge of filing a false claim with
Medicare and Medicaid in 1991 and to pay $5 million to the Federal government.
The assets of the San Diego laboratory were sold by Allied in 1992, two years
before the Allied Acquisition. As is customary with asset sales, Allied
retained the liability for conduct preceding the sale-a liability the Company
later succeeded to, following the Allied Acquisition and Merger. Consistent
with this overall settlement, the Company paid $187 million to the Federal
Government in December 1996 with proceeds from a loan from Roche Holdings.
Additional investigations by the OIG in 1992 and 1994 were settled for $111.4
million in 1992 and $4.9 million in 1995, respectively. See "Regulation and
Reimbursement--OIG Investigations."
The Company is also subject to licensing and regulation under
Federal, state and local laws and regulations relating to the protection of
the environment and human health and safety, including those relating to the
handling, transportation and disposal of medical specimens, infectious and
hazardous waste and radioactive materials as well as to the safety and health
of laboratory employees. The sanction for failure to comply with these
regulations may be denial of the right to conduct business, significant fines
and criminal penalties. The loss of a license, imposition of a fine,
incurrence of liability under, or future changes in, such Federal, state and
local laws and regulations (or in the interpretation of current laws and
regulations) could have a material adverse effect on the Company and its
subsidiaries.
Professional Liability Litigation. As a general matter,
providers of clinical laboratory testing services may be subject to lawsuits
alleging negligence or other similar legal claims, which suits could involve
claims for substantial damages. Damages assessed in connection with, and the
costs of defending any such actions could be substantial. Litigation could
also have an adverse impact on the Company's client base. The Company
maintains liability insurance (subject to maximum limits and self-insured
retentions) for professional liability claims. This insurance does not cover
liability for the Settlement Payment. While there can be no assurance, the
Company's management believes that the levels of coverage are adequate to
cover currently estimated exposures. Although the Company believes that it
will be able to obtain adequate insurance coverage in the future at acceptable
costs, there can be no assurance that the Company will be able to obtain such
coverage or will be able to do so at an acceptable cost or that the Company
will not incur significant liabilities in excess of policy limits.
No Assurance of Dividends-received Deduction. There is no
assurance that the Company will have earnings and profits for Federal income
tax purposes. Dividends paid to corporate holders that are in excess of the
Company's earnings and profits would not qualify for the intercorporate
dividends-received deduction.
Substantial Stockholder; Ability of Substantial Stockholder to
Increase Ownership. As a result of the Merger, HLR and Roche Holdings
received 49.9% of the total outstanding Common Stock of the Company. In
connection with the Merger, the Company, HLR, Roche Holdings and Roche entered
into the Stockholder Agreement. As a result of its ownership interest and its
rights under the Stockholder Agreement, Roche is able to exercise significant
influence on the governance of the Company and on the composition of its board
of directors. Pursuant to the Stockholder Agreement, the Board of Directors
of the Company (subject to specified exceptions) is comprised of seven
members, consisting of three designees of HLR and Roche Holdings (the "Roche
Directors") and four Independent Directors (as defined therein) nominated by
the Nominating Committee of the board of directors. The Nominating Committee
consists of one Roche Director and two Independent Directors and acts by a
majority vote of the entire committee. There can be no assurance that the
interests of HLR and Roche Holdings will be the same as those of the other
stockholders of the Company. Pursuant to the Stockholder Agreement, HLR,
Roche Holdings and their affiliates (other than the Company and its
subsidiaries) have the right to acquire Equity Securities (as defined therein)
to the extent that, after giving effect thereto, their Total Voting Power
would not exceed 75%. Moreover, HLR, Roche Holdings and their affiliates
(other than the Company and its subsidiaries) may acquire additional Equity
Securities notwithstanding the fact that after giving effect thereto, their
Total Voting Power would exceed 75%, if HLR, Roche Holdings and their
affiliates (other than the Company and its subsidiaries) or any one of them
offers, prior to consummation of such purchase, to purchase all outstanding
Equity Securities and holders of Equity Securities totaling more than 50% of
the outstanding Equity Securities (excluding Equity Securities held by HLR,
Roche Holdings and their affiliates (other than the Company and its
subsidiaries)) accept such offer. After the third anniversary of the Merger,
the Stockholder Agreement does not restrict purchases by HLR, Roche Holdings
or their affiliates of Equity Securities. Certain provisions of the
Stockholder Agreement described below, including provisions limiting HLR's and
Roche Holding's representation on the Board of Directors of the Company to
three of seven members, would be suspended if the Total Voting Power of HLR,
Roche Holdings and their affiliates (other than the Company and its
subsidiaries) were to be increased to over 50%. HLR and Roche Holdings have
indicated that they intend to exercise their Basic Subscription Privilege in
the Rights Offering in full for approximately $250 million of Series B PIK
Preferred Stock. HLR and Roche Holdings have not currently indicated whether
or not they will exercise their Oversubscription Privilege. See "Certain
Relationships and Related Transactions--The Stockholder Agreement."
Special Majority Board Approval Required for Certain Actions.
Under the Stockholder Agreement, for so long as the Total Voting Power of HLR,
Roche Holdings and their affiliates (other than the Company and its
subsidiaries) or any one of them is at least 30%, a significant number of
types of major corporate actions cannot be taken without the approval of a
Special Majority of the Board of Directors (which is defined in the
Stockholder Agreement as a majority of the entire Board of Directors that
includes a majority of the Roche Directors and at least one Independent
Director). These actions include, among others, certain executive officer
appointments, certain business combinations, acquisitions or sales of assets,
amendments to the Company's Certificate of Incorporation or by-laws,
settlements of material litigation, changes in Board or committee composition,
material capital expenditures, issuance of securities and incurrence of
indebtedness.
Equity Market Considerations. There can be no assurance that
the market price of the Common Stock will not decline during or after the
subscription period or that, following the issuance of the Rights and the sale
of the Preferred Stock upon exercise of Rights, a subscribing Rights Holder
will be able to sell shares purchased in the Rights Offering at a price
greater than the Subscription Price. The election of a Rights Holder to
exercise Rights in the Rights Offering is irrevocable. Moreover, until
certificates are delivered, subscribing Rights Holders may not be able to sell
the Preferred Stock that they have purchased in the Rights Offering. In
addition, the Company reserves the right to extend the period for the Rights
Offering to a date not later than , 1997. Certificates
representing shares of Preferred Stock purchased in the Rights Offering will
be delivered as soon as practicable after the Expiration Date. There can be
no assurance that the market price of the Preferred Stock purchased pursuant
to the Rights Offering will not decline below the Subscription Price before
the certificates representing such shares have been delivered. No interest
will be paid to any subscriber in the Rights Offering.
No Prior Market for the Rights, the Preferred Stock or the
Notes. The Rights, Series A Exchangeable Preferred Stock and Series B PIK
Preferred Stock constitute new issues of securities with no established
trading market. Application will be made to have the Rights and the
Preferred Stock approved for listing on the New York Stock Exchange. There
can be no assurance that an active market for the Rights and the Preferred
Stock will develop or be sustained in the future on the New York Stock
Exchange. Although Credit Suisse First Boston has indicated to the Company
that it intends to make a market in the Rights, and, following the Rights
Offering, the Preferred Stock, as permitted by applicable laws and
regulations, it is not obligated to do so and may discontinue any such
market-making at any time without notice. Accordingly, no assurance can be
given as to the liquidity of, or trading market for, the Rights or the
Preferred Stock.
There is currently no market for the Notes. The Company
does not intend to apply for listing of the Notes on any national
securities exchange. The Company has been advised by Credit Suisse First
Boston that, following exchange of the Series A Exchangeable Preferred
Stock for Notes, they presently intend to make a market in the Notes
although they are under no obligation to do so and may discontinue market-
making activities at any time without notice. Accordingly, there can be no
assurance as to whether an active public market for the Notes will develop
or, if a public market develops, as to the liquidity of the trading market
for the Notes.
Insufficient Authorized Capital to Permit Conversion and
Payment of Dividends on Series B PIK Preferred Stock; Dilution. There are
currently insufficient shares of Common Stock authorized to permit conversion
of all of the Preferred Stock issued upon the exercise of Rights or as
dividends on the Series B PIK Preferred Stock and insufficient shares of
Preferred Stock authorized to permit the payment of dividends on the Series B
PIK Preferred Stock if all the Preferred Stock offered hereby is sold. In
connection with the next annual meeting of shareholders currently scheduled
for , 1997, the Board of Directors will propose amending the
Company's Certificate of Incorporation to increase (i) the authorized number
of shares of Common Stock to permit the conversion of all of the Preferred
Stock and (ii) the authorized number of shares of Preferred Stock to permit
the payment of dividends on the Series B PIK Preferred Stock. HLR, Roche
Holdings and the directors and executive officers of the Company have
indicated to the Company that they intend to vote in favor of such amendment.
However, there can be no assurance such amendment will be adopted. Rights
Holders may experience dilution of their percentage of equity ownership
interest and voting power in the Company if and when all of the shares of
Preferred Stock are converted into shares of Common Stock in accordance with
their terms, if they do not exercise the Basic Subscription Privilege. Even
if the Rights Holders exercise their Basic Subscription Privilege in full,
they may nevertheless still experience dilution in their voting rights and in
their proportional interest in any future net earnings of the Company if other
holders of Rights exercise the Oversubscription Privilege and such Rights
Holders elect not to exercise the Oversubscription Privilege, if and when all
of the shares of Preferred Stock are converted into shares of Common Stock in
accordance with their terms. In addition, Rights Holders who exercise Rights
for Series A Exchangeable Preferred Stock will experience dilution as
dividends on the Series B PIK Preferred Stock are paid in shares of Series B
PIK Preferred Stock until , 2000.
Shares of Common Stock Eligible for Future Sale. In accordance
with the Sharing and Call Option Agreement dated as of December 13, 1994 (the
"Sharing and Call Option Agreement") among HLR, Mafco Holdings Inc. ("Mafco"),
all of the capital stock of which is owned by Mr. Ronald O. Perelman and
National Healthcare Group, Inc., ("NHCG"), a wholly owned subsidiary of Mafco,
the Company has filed with the Commission a registration statement on Form S-3
which has been declared effective by the Securities and Exchange Commission
(the "Commission") and includes a resale prospectus that permits NHCG (or any
of its pledgees) to sell shares of Common Stock and Warrants received by NHCG
in the Merger without restriction. In addition, pursuant to the Stockholder
Agreement and the Sharing and Call Option Agreement, HLR, Roche Holdings and
NHCG, have been granted demand and piggy-back registration rights with respect
to shares of Common Stock owned by them. HLR and Roche Holdings on the one
hand and NHCG on the other hand own 49.9% and 11.8%, respectively, of the
outstanding Common Stock of the Company. Although the Company cannot make any
prediction as to the effect, if any, that sales in the public market of shares
of Common Stock owned by HLR, Roche Holdings and NHCG would have on the market
price for the Preferred Stock or Common Stock prevailing from time to time,
sales of substantial amounts of Common Stock or the availability of such
shares for sale could adversely affect prevailing market prices.
Volatility of Price of Common Stock. The market price of the
Company's Common Stock has been highly volatile in recent years and on
December 4, 1996 reached a 52-week low of $2 3/8. Factors such as
quarter-to-quarter variations in the Company's revenues and earnings have
caused and are expected to continue to cause the market price of the Company's
securities to fluctuate significantly. In addition, in recent years the stock
markets have experienced significant volatility, which often may be unrelated
to the operating performance of the affected companies. Such volatility may
also adversely affect the market price of the Company's securities. See
"Common Stock Price Range."
Forward Looking Statements
This Prospectus contains certain forward looking statements
concerning the Company's operations, economic performance and financial
condition, including, in particular, forward looking statements regarding the
Company's expectation of future performance following implementation of its
new business strategy, the Rights Offering and the entering into of the
Amended Credit Agreement. Such statements are subject to various risks and
uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors, including those identified under "Risk
Factors," under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere in this Prospectus.
USE OF PROCEEDS
The gross proceeds of the Rights Offering will be used to (i)
repay the $187 million loan from Roche Holdings in order to fund the
Settlement Payment, which bears interest at 6.625% per annum and matures March
31, 1997 and accrued interest of approximately $3 million related thereto,
(ii) pay fees and expenses of approximately $15 million related to the Rights
Offering and the Amended Credit Agreement and (iii) repay up to $295 million
outstanding under the Existing Credit Agreement which bears interest at LIBOR
plus 1.0% per annum.
COMMON STOCK PRICE RANGE
The Company's Common Stock is traded publicly on the New York
Stock Exchange under the symbol "LH." The following table sets forth for the
calendar periods indicated the high and low sales prices for the Common Stock
reported on the NYSE Composite Tape.
High Low
------- -------
1995
First Quarter................................. 15 1/2 12 5/8
Second Quarter................................ 15 1/4 11 3/4
Third Quarter................................. 14 9 1/8
Fourth Quarter................................ 10 8 1/8
1996
First Quarter................................. 9 3/8 7 1/4
Second Quarter................................ 9 7 3/8
Third Quarter................................. 7 5/8 3 1/4
Fourth Quarter................................ 3 7/8 2 3/8
1997
First Quarter (through February 25, 1997)..... 4 2 5/8
On December 31, 1996 there were approximately 733 holders of
record of the Common Stock.
DIVIDEND POLICY
The Company, in connection with the Allied Acquisition in June
1994, discontinued its dividend payments for the foreseeable future. In
addition, the Existing Credit Agreement contains, among other provisions, a
covenant which prohibited the payment of cash dividends until April 29, 1996
and places certain restrictions, as defined in the Existing Credit Agreement,
on the payment of such dividends after that date. The Amended Credit
Agreement will contain a similar restriction but will expressly permit cash
dividends on the Preferred Stock in the absence of a default and the failure
to meet a specified fixed charge coverage ratio.
CAPITALIZATION
The following table sets forth as of September 30, 1996, (i)
the cash and cash equivalents and total capitalization of the Company and (ii)
cash and cash equivalents and total capitalization, adjusted to give pro forma
effect to the Rights Offering, the execution of the Amended Credit Agreement,
the Roche Loan and the Settlement Payment. The assumptions with respect to
the Rights Offering are set forth in the notes hereto and the proceeds of the
Rights Offering are assumed to be applied as set forth under "Use of
Proceeds." See also "Unaudited Pro Forma Financial Statements." This table
should be read in conjunction with the Unaudited Consolidated Financial
Statements of the Company included elsewhere or incorporated by reference
herein.
<TABLE>
<CAPTION>
As of September 30, 1996
------------------------------------------------------------
Actual As Adjusted
-------- ---------------------------------------
(in millions)
Minimum Maximum
Subscription(1) Subscription(2)
--------------- ---------------
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 28.2 $ 28.2 $ 28.2
======== ======== ========
Short-term debt:
Current portion of long-term debt(3)....................... $93.8 $ 37.5 $ 37.5
Loan from affiliate........................................ -- -- --
Revolving credit facility classified as current(5)......... 361.0 -- --
Long-term debt classified as current(5).................... 637.5 -- --
Current portion of acquisition contingent payments......... 12.2 12.2 12.2
-------- -------- --------
Total short-term debt.................................... 1,104.5 49.7 49.7
Current portion of accrued settlement costs(4).............. 200.7 13.7 13.7
Long-term debt:
Revolving credit facility(5)............................... -- 316.0 116.0
Long-term debt, less current portion(5).................... -- 693.8 643.8
Capital lease obligations.................................. 9.8 9.8 9.8
Acquisition contingent payments, less current portion...... 4.3 4.3 4.3
-------- -------- --------
Total long-term debt..................................... 14.1 1,023.9 773.9
Accrued settlement costs, less current portion(4)........... 33.0 33.0 33.0
Preferred stock, $0.10 par value, 10,000,000 shares
authorized, none issued and outstanding actual; 4,988,751
and 10,000,000 shares, respectively, issued and
outstanding as adjusted(6)................................. -- 250.0 500.0
Stockholders' equity:
Common stock, par value $0.01 per share, 220,000,000
shares authorized; 122,923,705 shares issued and
outstanding(6)........................................... 1.2 1.2 1.2
Additional paid-in capital.................................. 411.0 398.9 398.9
Accumulated deficit......................................... (155.3) (157.0) (157.0)
-------- -------- --------
Total stockholders' equity............................... 256.9 243.1 243.1
-------- -------- --------
Total capitalization..................................... $1,609.2 $1,613.3 $1,613.3
======== ======== ========
</TABLE>
- ------------
(1) Assumes only HLR and Roche Holdings exercise their Basic Subscription
Privilege with respect to approximately $250 million of Series B PIK
Preferred Stock.
(2) Assumes HLR and Roche Holdings exercise their Basic Subscription
Privilege with respect to approximately $250 million of Series B PIK
Preferred Stock and that the remaining Rights are exercised for
approximately $250 million of Series A Exchangeable Preferred Stock.
(3) In October 1996 and January 1997, the Company made payments totaling
$37.5 million on its $800.0 million senior term loan facility (the
"Term Loan Facility").
(4) Reflects charges taken as a result of negotiations related to the 1996
Government Settlement.
(5) On September 23, 1996, as a result of a potential default under the
Existing Credit Agreement, the Company entered into the Fourth
Amendment which modified the interest coverage and leverage ratios
applicable to the quarters ended September 30, 1996 and December 31,
1996 in return for, among other things, increased interest rate
margins. As a result of the limited period covered by the Fourth
Amendment, approximately $998 million of the Company's debt that would
have been classified as long-term has been classified as current in the
September 30, 1996 consolidated balance sheet.
(6) There are currently insufficient shares of Common Stock authorized to
permit conversion of all of the Preferred Stock issued upon the
exercise of Rights or as dividends on the Series B PIK Preferred Stock
and insufficient shares of Preferred Stock authorized to permit the
payment of dividends on the Series B PIK Preferred Stock if all the
Preferred Stock offered hereby is sold. In connection with the next
annual meeting of shareholders currently scheduled for , 1997, the
Board of Directors will propose amending the Company's Certificate of
Incorporation to increase (i) the authorized number of shares of Common
Stock to permit the conversion of all of the Preferred Stock and (ii)
the authorized number of shares of Preferred Stock to permit the
payment of dividends on the Series B PIK Preferred Stock. HLR, Roche
Holdings and the directors and executive officers of the Company have
indicated to the Company that they intend to vote in favor of such
amendment.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial statements for
the nine months ended September 30, 1996 and for the year ended December 31,
1995 present the results of operations of the Company assuming that the Rights
Offering, the execution of the Amended Credit Agreement, the Merger, the Roche
Loan and the Settlement Payment had been completed as of the beginning of the
period, in the case of the pro forma statements of operations, or September
30, 1996, in the case of the pro forma balance sheet. In addition, such pro
forma financial statements assume that only HLR and Roche Holdings exercise
their Basic Subscription Privilege with respect to approximately $250 million
of Series B PIK Preferred Stock. For the effect on such pro forma financial
statements of the assumption that HLR and Roche Holdings exercise their Basic
Subscription Privilege with respect to approximately $250 million of Series B
PIK Preferred Stock and that the remaining Rights are exercised for
approximately $250 million of Series A Exchangeable Preferred Stock, see the
supplemental note to the applicable pro forma financial statements. The
proceeds of the Rights Offering have been assumed to be applied as set forth
under "Use of Proceeds". In the opinion of management, the unaudited pro
forma financial statements for the year ended December 31, 1995 and the nine
months ended September 30, 1996 include all material adjustments necessary to
restate the Company's historical results. The adjustments required to reflect
such assumptions are described in the Notes to the unaudited pro forma
financial statements and are set forth in the "Pro Forma Adjustments" columns.
The pro forma financial statements should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere and incorporated by reference herein. The pro forma
financial statements presented are for informational purposes only and may not
necessarily reflect the future results of operations or financial position or
what the results of operations or financial position would have been had the
Rights Offering, the execution of the Amended Credit Agreement, the Merger,
the Roche Loan and the Settlement Payment occurred as assumed herein.
Pro Forma Condensed Combined Consolidated Statement of Operations
Nine months ended September 30, 1996
(Dollars in millions, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma Adjustments
---------- ------------------------------------------------------------------
Pro Forma
Company(1) Roche Loan Rights Offering Combined
---------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Net sales............................ $ 1,216.5 $1,216.5
Cost of sales........................ 903.9 903.9
----------- --------
Gross profit......................... 312.6 312.6
Selling, general and
administrative expenses............ 223.0 223.0
Amortization of intangibles and
other assets.... 22.1 22.1
Restructuring and other non-
recurring charges.................. 23.0 23.0
Provisions for settlements and
related expenses................... 185.0 185.0
----------- --------
Operating income.................... (140.5) (140.5)
Other income (expenses):
Investment income................... 1.5 1.5
Interest expense.................... (51.4) $ (9.3)(2) $ 2.1(3) (58.6)
----------- ---------- --------- -----------
Loss before income taxes............. (190.4) (9.3) 2.1 (197.6)
Provision for income taxes........... (35.7) (3.9)(4) 0.9(4) (38.7)
----------- ---------- --------- -----------
Net loss............................. (154.7) (5.4) 1.2 (158.9)
----------- ---------- --------- -----------
Preferred dividends.................. (16.3) (16.3)
Net loss attributable to
common shareholders................ $ (154.7) $ (5.4) $ (15.1) $ (175.2)
========== ========== ========= ==========
Primary loss per common share(8)..... $ (1.26) $ (1.43)
========== ==========
Fully diluted loss per
common share(8).................... $ (1.26) $ (1.43)
========== ==========
Weighted average shares outstanding
(thousands)(8):
Primary............................. 122,917 122,917
Fully diluted....................... 122,917 215,772
</TABLE>
- ---------------
Supplemental Note: If HLR and Roche Holdings exercise their Basic
Subscription Privilege for approximately $250 million of Series B PIK
Preferred Stock and all other remaining Rights are exercised for Series A
Exchangeable Preferred Stock the pro forma condensed combined consolidated
statement of operations for the nine months ended September 30, 1996 would
be adjusted as follows:
<TABLE>
<CAPTION>
Pro Forma Adjustments
-----------------------------------------------------------
Rights Offering Pro Forma Combined
--------------- ------------------
<S> <C> <C>
Other income (expenses):
Investment income............................. -- $ 1.5
Interest expense.............................. $ 17.3(3) (43.4)
------ --------
Earnings before income taxes........................... 17.3 (182.4)
Provision for income taxes............................. 7.3(4) (32.3)
------ --------
Net earnings (loss).................................... 10.0 (150.1)
Preferred dividends.................................... (32.2) (32.2)
------ --------
Net loss attributable to common shareholders........... $(22.2) $ (182.3)
====== ========
$ (1.48)
========
Fully diluted loss per common share(8)................. $ (1.48)
========
Weighted average shares outstanding (thousands)(8):
Primary....................................... 122,917
Fully diluted................................. 306,681
</TABLE>
- ---------------
See accompanying Notes to Pro Forma Condensed Combined Consolidated Statements
of Operations.
Pro Forma Condensed Combined Consolidated Statement of Operations
Year ended December 31, 1995
(Dollars in millions, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Historical Pro Forma Adjustments
------------------------ ----------------------------------------------------------------
The Merger
-----------------------
Financing Pro
and Purchase Roche Rights Forma
Company(1) RBL(1) Acquisition Accounting Loan Offering Combined
------- --- ----------- ---------- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $1,432.0 $246.6 $1,678.6
Cost of sales................ 1,024.3 177.5 $(2.0)(5) 1,199.8
-------- ------ ----- --------
Gross profit................. 407.7 69.1 2.0 478.8
Selling, general and
administrative expenses..... 238.5 40.8 279.3
Amortization of intangibles
and other assets............ 27.0 4.4 (1.3)(5) 30.1
Restructuring charges........ 65.0 65.0
Provision for settlements.... 10.0 10.0
-------- ------ ----- --------
Operating income............ 67.2 23.9 3.3 94.4
Other income (expenses):
Investment income........... 1.4 0.1 1.5
Interest expense............ (65.5) (1.0) $(7.8)(6) $ (12.4)(2) $6.9(3) (78.8)
1.0 (7)
-------- ------ ----- ----- ------ ----- --------
Earnings before income taxes
and extraordinary item...... 3.1 23.0 (6.8) 3.3 (12.4) 6.9 17.1
Provision for income taxes... 7.1 10.8 (2.7)(4) 1.3(4) (5.0)(4) 2.9(4) 14.4
-------- ------ ----- ----- ------ ----- --------
Earnings (loss) before
extraordinary item.......... (4.0) 12.2 (4.1) 2.0 (7.4) 4.0 2.7
Preferred dividends.......... (21.9) (21.9)
-------- ------ ----- ----- ------ ----- --------
Net earnings (loss) before
extraordinary item
attributable to common
shareholders................ $(4.0) $12.2 $(4.1) $2.0 $ (7.4) $(17.9) $ (19.2)
======== ====== ===== ===== ======= ====== ========
Primary loss per common
share before extraordinary
item(8) ..................... $(0.04) $ (0.16)
======== =========
Fully diluted loss per
common share before
extraordinary item(8)........ $(0.04) $ (0.16)
Weighted average shares ======== =========
outstanding (thousands)(8):
Primary..................... 110,579 122,909
Fully diluted............... 110,579 216,776
<FN>
- ------------------
Supplemental Note: If HLR and Roche Holdings exercise their Basic Subscription
Privilege for approximately $250 million of Series B PIK Preferred Stock and
all other remaining Rights are exercised for Series A Exchangeable Preferred
Stock, the pro forma condensed combined consolidated statement of operations
for the year ended December 31, 1995 would be adjusted as follows:
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
-------------------------------------------
Pro Forma
Rights Offering Combined
--------------- ----------
<S> <C> <C>
Other income (expenses):
Investment income............................................ -- $ 1.5
Interest expense............................................. $27.0(3) (57.0)
------- --------
Earnings before income taxes and extraordinary item................. 27.0 38.9
Provision for income taxes.......................................... 11.3(4) 23.3
------- --------
Earnings before extraordinary item.................................. 15.7 15.6
Preferred dividends................................................. (43.2) (43.2)
------- --------
Loss before extraordinary item attributable to common $(27.5) $ (27.6)
======= ========
shareholders........................................................
Primary loss per common share before extraordinary item(8).......... $ (0.22)
Fully diluted loss per common share before extraordinary item(8).... $ (0.22)
--------
Weighted average shares outstanding (thousands)(8):
Primary...................................................... 122,909
Fully diluted................................................ 307,685
</TABLE>
See accompanying Notes to Pro Forma Condensed Combined Consolidated Statements
of Operations.
Notes to Pro Forma Condensed Combined Consolidated Statements of Operations
(1) Reflects the results of operations of RBL for the period from January 1,
1995 to April 28, 1995. The data for the Company includes the results of
operations for RBL from May 1, 1995 through September 30, 1996.
(2) In December 1996, Roche Holdings loaned $187 million to the Company to
fund the Settlement Payment in the form of a promissory note. Such
note bears interest at a rate of 6.625% per annum and matures on March
31, 1997. Such note is assumed to be outstanding at the beginning of
the period and then repaid with proceeds from the Rights Offering. See
Note 3 below.
(3) Assumes the sale of approximately $250 million in Series B PIK Preferred
Stock to HLR and Roche Holdings in the Rights Offering and the
application of the proceeds therefrom to (i) repay the Roche Loan
including accrued interest, (ii) pay fees and expenses related to the
Amended Credit Agreement and the Rights Offering and (iii) repay
approximately $45 million under the Existing Credit Agreement. The pro
forma adjustment to interest expenses (based on the interest rate
assumptions shown below) reflects the following:
<TABLE>
<CAPTION>
Nine Months
ended Year ended
9/30/96 12/31/95
----------- ----------
(in millions)
<S> <C> <C>
Paydown of Roche Loan ............................................ $9.3 $12.4
Paydown of Revolving Credit Facility.............................. 2.3 3.3
Incremental interest under Amended Credit Agreement............... (8.4) (7.6)
Amortization of deferred financing costs.......................... (0.3) (0.4)
Commitment fee on Amended Credit Agreement........................ (0.8) (0.8)
---- -----
$2.1 $ 6.9
==== =====
</TABLE>
If the remaining Rights were exercised for approximately $250 million in
Series A Exchangeable Preferred Stock and the proceeds thereof were used to
pay down amounts outstanding under the Existing Credit Agreement, the
additional pro forma adjustment to interest expense (based on the interest
rate assumptions shown below) would be as follows:
<TABLE>
<CAPTION>
Nine Months
ended Year ended
9/30/96 12/31/95
----------- ----------
(in millions)
<S> <C> <C>
Paydown on Term Loan Facility (as defined herein)......................... $2.4 $ 3.6
Incremental paydown on Revolving Credit Facility.......................... 9.1 13.2
Additional incremental interest under Amended Credit Agreement............ 3.7 3.3
----- -----
$15.2 $20.1
===== =====
</TABLE>
The interest rate assumptions used in the foregoing were as follows:
<TABLE>
<CAPTION>
Nine Months
ended Year ended
9/30/96 12/31/95
----------- ----------
<S> <C> <C>
Roche Loan................................................................ 6.625% 6.625%
Term Loan Facility (as defined herein).................................... 6.934% 7.481%
Revolving Credit Facility................................................. 6.684% 7.231%
Incremental interest under Amended Credit Agreement (Minimum
Subscription)............................................................. 1.125% 1.125%
Incremental interest under Amended Credit Agreement (Maximum
Subscription)............................................................. 0.625% 0.625%
Commitment fee on Amended Credit Agreement................................ 0.250% 0.250%
</TABLE>
An increase or decrease in the interest rate of one-quarter of one percent
(0.25%) with respect to the pro forma debt capitalization of the Company
would increase or decrease interest expense as follows:
Nine Months
ended Year ended
9/30/96 12/31/95
----------- -----------
(in millions)
Revolving Credit Facility....... $0.7 $0.5
Term Loan Facility.............. 1.4 2.0
(4) Reflects the change in the provision for income taxes as a result of the
pro forma adjustments. Such tax adjustments were based on the historical
effective tax rates used for the Company's consolidated financial
statements.
(5) The Merger was accounted for under the purchase method of accounting. Pro
forma purchase accounting adjustments, which take into account the
revaluation of the depreciable basis of the fixed assets of both entities,
are provided below:
Period
1/1/95-
4/28/95
-------------
(in millions)
NHL
Reduction in depreciation and
amortization of leasehold
improvements expense............................... $ (2.0)
RBL
Elimination of pre-acquisition intangible
asset amortization.......................... (4.4)
Merger intangible asset amortization................ 3.1
------
$ (3.3)
======
The intangible assets of RBL consist of goodwill of $284.6 million and
customer list of $83.0 million. The amortization periods for these assets
are 40 years and 25 years, respectively.
(6) The borrowings related to the Merger are assumed to have occurred at the
beginning of the period. The pro forma adjustment to interest expense
(based on the interest rate assumptions shown below) reflects the
following:
Period
1/1/95 -
4/28/95
-------------
(in millions)
Interest on indebtedness:
Term Loan Facility................................ $ (20.7)
Revolving Credit Facility......................... (4.6)
Facility fee on revolving credit facility.......... (0.4)
Amortization of deferred financing costs........... (0.2)
Less historical amounts on Company
indebtedness assumed to be repaid:
Roche Loan interest............................... --
Interest expense.................................. 17.0
Commitment fees................................... 0.2
Amortization of deferred financing costs.......... 0.9
--------
$ (7.8)
========
The interest rate assumptions used in the foregoing were as follows:
Period
1/1/95 - 4/28/95
-----------------
Term Loan Facility................................. 7.750%
Revolving Credit Facility.......................... 7.500%
Commitment fee on Amended Credit Agreement......... 0.250%
An increase or decrease in the interest rate of one-quarter of one percent
(0.25%) with respect to the pro forma debt capitalization of the Company
would increase or decrease interest expense as follows:
Period
1/1/95 - 4/28/95
----------------
(in millions)
Term Loan Facility....................... $0.7
Revolving Credit Facility................ 0.2
(7) Reflects the elimination of interest expense attributable to RBL of debt
not assumed by HLR of $50.3 million, which was refinanced with proceeds
from the Term Loan Facility.
(8) The primary and fully diluted shares assuming that only HLR and Roche
Holdings exercise their Basic Subscription Privilege with respect to
approximately $250 million of Series B PIK Preferred Stock, are calculated
as follows:
<TABLE>
<CAPTION>
Nine Months
ended Year ended
9/30/96 12/31/95
----------- -----------
(in thousands)
<S> <C> <C>
Historical weighted average shares outstanding................................ 122,917 110,579
Effect of shares issued in connection with the Merger......................... -- 12,330
Weighted average shares used for primary earnings per share................... 122,917 122,909
Common Stock issuable upon conversion of Preferred Stock...................... 90,909 90,909
Common Stock issuable upon conversion of PIK dividend......................... 1,946 2,958
Weighted average shares used for fully diluted earnings per share............. 215,772 216,776
</TABLE>
The primary and fully diluted shares assuming that HLR and Roche Holdings
exercise their Basic Subscription Privilege with respect to approximately
$250 million of Series B PIK Preferred Stock and that the remaining Rights
are exercised for approximately $250 million of Series A Exchangeable
Preferred Stock, are calculated as follows:
<TABLE>
<CAPTION>
Nine Months
ended Year ended
9/30/96 12/31/95
----------- -----------
(in thousands)
<S> <C> <C>
Historical weighted average shares outstanding................................ 122,917 110,579
Effect of shares issued in connection with the Merger......................... -- 12,330
Weighted average shares used for primary earnings per share................... 122,917 122,909
Common Stock issuable upon conversion of Preferred Stock...................... 181,818 181,818
Common Stock issuable upon conversion of PIK dividend......................... 1,946 2,958
Weighted average shares used for fully diluted earnings per share............. 306,681 307,685
</TABLE>
Pro Forma Condensed Combined Consolidated Balance Sheet
As of September 30, 1996
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Actual Adjustments Combined
------ ----------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................ $28.2 $28.2
Accounts receivable, net................. 494.4 494.4
Inventories.............................. 45.8 45.8
Prepaid expenses and other............... 20.9 20.9
Deferred income taxes.................... 116.5 116.5
Income taxes receivable.................. 9.9 9.9
-------- ---- --------
Total current assets................. 715.7 715.7
Property, plant and equipment, net......... 289.3 289.3
Intangible assets, net..................... 885.1 885.1
Other assets, net.......................... 18.3 $2.9(1) 21.2
-------- ---- --------
$1,908.4 $2.9 $1,911.3
======== ==== ========
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Actual Adjustments Combined
------ ----------- ---------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $74.2 $74.2
Accrued expenses and other.......................... 144.3 $(1.3)(5) 143.0
Current portion of long-term debt................... 93.8 (56.3)(2) 37.5(3)
Current portion of accrued settlement expenses...... 200.7 (187.0)(4) 13.7
Loan from affiliate ................................ 187.0 (4) 0.0
3.0 (5)
(190.0)(6)
Revolving credit facility classified as current..... 361.0 (45.0)(6) 0.0
(316.0)(2)
Long-term debt classified as current................ 637.5 (637.5)(2) 0.0
------- -------- --------
Total current liabilities........................... 1,511.5 (1,243.1) 268.4
Revolving credit facility............................ -- 316.0 (2) 316.0
Long-term debt....................................... -- 637.5 (2) 693.8
56.3 (3)
Capital lease obligation............................. 9.8 9.8
Accrued settlement expenses, less current portion.... 33.0 33.0
Other liabilities.................................... 97.2 97.2
Preferred stock...................................... -- 250.0 (6) 250.0
Stockholders' equity:
Common stock........................................ 1.2 1.2
Additional paid-in capital.......................... 411.0 (12.1)(1) 398.9
Retained earnings................................... (155.3) (1.7)(5) (157.0)
------- -------- --------
Total stockholders' equity.......................... 256.9 (13.8) 243.1
------- -------- --------
$1,908.4 $2.9 $1,911.3
======== ======== ========
</TABLE>
- ------------------
* Supplemental Note: If HLR and Roche Holdings exercise their Basic
Subscription Privilege for approximately $250 million of Series B PIK
Preferred Stock and all other remaining Rights are exercised for Series A
Exchangeable Preferred Stock, the pro forma condensed combined consolidated
balance sheet as of September 30, 1996 would be adjusted as follows:
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Adjustments Combined
----------- ---------
<S> <C> <C>
Revolving credit facility classified as current........... $(245.0)(7) $0.0
(116.0)(2)
Long-term debt classified as current...................... (637.5)(2) 0.0
(50.0)(7)
-------- ------
Total current liabilities................................. (1,493.1) 268.4
Revolving credit facility................................. $116.0 (2) $116.0
Long-term debt............................................ 643.8 (2) 643.8
Preferred stock........................................... 500.0 (7) 500.0
</TABLE>
See accompanying Notes to Pro Forma Condensed Combined Consolidated Balance
Sheet
Notes to Pro Forma Condensed Combined Consolidated Balance Sheet
(1) Reflects estimated fees and expenses in connection with the Rights
Offering and Amended Credit Agreement, which fees and expenses have been
capitalized as deferred financing costs and included in the caption "Other
assets".
(2) Reflects reclassification of Revolving Credit Facility and Term Loan
Facility after execution of the Amended Credit Agreement.
(3) In October 1996 and January 1997, the Company made payments totaling $37.5
million on the Term Loan Facility.
(4) In December 1996, Roche Holdings loaned $187 million to the Company to
fund the Settlement Payment in the form of a promissory note. Such
note bears interest at a rate of 6.625% per annum and matures on March
31, 1997. Such note is assumed to be repaid with a portion of the
proceeds from the Rights Offering.
(5) Reflects accrued interest on the Roche Loan of approximately $3 million
($1.7 million net of tax) for the period December 30, 1996 through March
31, 1997 to be paid with a portion of the proceeds of the Rights Offering.
(6) Reflects the issuance of approximately $250 million of Series B PIK
Preferred Stock to HLR and Roche Holdings in the Rights Offering and the
application of the proceeds therefrom
(7) Reflects the issuance of approximately $250 million of Series B PIK
Preferred Stock to HLR and Roche Holdings in the Rights Offering and
that the remaining Rights are exercised for approximately $250 million
of Series A Exchangeable Preferred Stock and the application of the
proceeds therefrom.
SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical financial data
of the Company at the dates and for each of the periods indicated. The
selected financial data as of and for each of the years ended December 31,
1995, 1994 and 1993 have been derived from the Consolidated Financial
Statements and the notes thereto included elsewhere and incorporated by
reference herein. The selected financial data as of September 30, 1996 and
for the nine months ended September 30, 1996 and 1995 have been derived
from the Unaudited Consolidated Financial Statements. In the opinion of
management, the Unaudited Consolidated Financial Statements include all
adjustments, consisting only of normal recurring adjustments, that are
necessary for a fair presentation of the financial position and results of
operations for these periods. The unaudited interim results of operations
for the nine months ended September 30, 1996 are not necessarily indicative
of the results for the entire year ending December 31, 1996. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
---------------------- --------------------------------------------------------
1996 1995 1995(a) 1994(b) 1993 1992 1991
-------- -------- -------- ------- ------ ------- ------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Net sales................................ $1,216.5 $1,028.6 $1,432.0 $872.5 $760.5 $ 721.4 $603.9
Cost of sales............................ 903.9 722.4 1,024.3 597.0 444.5 395.1 332.5
-------- -------- -------- ------ ------ ------- ------
Gross profit............................. 312.6 306.2 407.7 275.5 316.0 326.3 271.4
Selling general and
administrative
expenses................................ 223.0 162.3 238.5 149.3 121.4 117.9 97.9
Amortization of
intangibles and
other assets............................ 22.1 19.2 27.0 16.3 9.1 8.3 7.7
Restructuring and non-recurring charges.. 23.0(c) 65.0(d) 65.0(d) -- -- -- --
Provision for
settlements and
related expenses........................ 185.0(c) 10.0(d) 10.0(d) -- -- 136.0(g) --
-------- -------- -------- ------ ------ ------- ------
Operating income
(loss).................................. (140.5) 49.7 67.2 109.9 185.5 64.1 165.8
Litigation settlement
and related
expenses................................ -- -- -- (21.0)(e) -- -- --
Other gains and
expenses, net........................... -- -- -- -- 15.3(f) -- --
Net interest income
(expense)............................... (49.9) (47.4) (64.1) (33.5) (9.7) (2.0) 3.5
-------- -------- -------- ------ ------ ------- ------
Earnings (loss) before
income taxes and
extraordinary item...................... (190.4) 2.3 3.1 55.4 191.1 62.1 169.3
Provision for income
taxes................................... (35.7) 6.7 7.1 25.3 78.4 21.5 65.4
-------- -------- -------- ------ ------ ------- ------
Earnings (loss) before
extraordinary item...................... (154.7) (4.4) (4.0) 30.1 112.7 40.6 103.9
Extraordinary
item--loss on early
extinguishment of
debt, net(h)............................. -- (8.3) (8.3) -- -- -- --
-------- -------- -------- ------ ------ ------- ------
Net earnings (loss)...................... $ (154.7) $ (12.7) $ (12.3) $ 30.1 $112.7 $ 40.6 $103.9
======== ======== ======== ====== ====== ======= ======
Weighted average
common shares
outstanding (in
thousands).............................. 122,917 106,424 110,579 84,754 89,439 94,468 99,096
Earnings (loss) per
common share
before
extraordinary loss...................... $ (1.26) $ (0.04) $ (0.03) $ 0.36 $ 1.26 $ 0.43 $ 1.05
Extraordinary loss per
common share............................ -- (0.08) (0.08) -- -- -- --
-------- -------- -------- ------ ------ ------- ------
Net earnings (loss)
per common share......................... $ (1.26) $ (0.12) $ (0.11) $ 0.36 $ 1.26 $ 0.43 $ 1.05
======== ======== ======== ====== ====== ======= ======
Dividends per
common share............................ -- -- -- $ 0.08 $ 0.32 $ 0.31 $ 0.27
Supplemental Data:
Net cash provided by
(used in) operating
activities.............................. $(17.6) $ 4.4 $ 47.0 $ 14.7 $ 57.2 $ 102.4 $135.3
Net cash used in
investing activities.................... $(52.1) $(83.0) $ (115.0) $(293.6) $(95.7) $ (36.3) $(37.8)
Net cash provided by
(used in) financing
activities.............................. $ 81.5 $ 76.8 $ 57.6 $ 293.4 $ 17.4 $ (84.0) $(92.0)
Bad debt expense......................... $ 58.9 $ 35.5 $ 64.8 $ 29.5 $ 28.0 $ 32.1 $ 24.9
Bad debt expense as a
% of net sales........................ 4.8% 3.5% 4.5% 3.4% 3.7% 4.4% 4.1%
Capital expenditures..................... $46.3 $ 44.3 $ 75.4 $ 48.9 $ 33.6 $ 34.9 $ 25.4
EBITDA(i)................................ $(77.2) $101.8 $139.6 $ 154.3 $217.7 $ 91.0 $187.8
EBITDA as a % of net
sales(i)................................ (6.3)% 9.9% 9.7% 17.7% 28.6% 12.6% 31.1%
Adjusted EBITDA(j)....................... $130.8 $176.8 $214.6 $ 154.3 $217.7 $227.0 $187.8
Adjusted EBITDA as a
% of net sales(j)....................... 10.8% 17.2% 15.0% 17.7% 28.6% 31.5% 31.1%
Ratio of earnings to
combined fixed
charges and preferred
stock dividends(k)...................... NM 1.04x 1.04x 2.20x 10.16x 5.71x 20.65x
</TABLE>
<TABLE>
<CAPTION>
As of
September 30, As of December 31,
------------------ ----------------------------------------------------------
1996 1995(a) 1994(b) 1993 1992 1991
------------------ --------- -------- ------ ------ ------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..... $ 28.2 $ 16.4 $ 26.8 $ 12.3 $ 33.4 $ 51.3
Working capital(l) ........... (795.8) 249.4 90.2 62.4 32.0 64.2
Total assets.................. 1,908.4 1,837.2 1,012.7 585.5 477.4 411.3
Total debt(m)................. 1,118.6 1,034.2 648.9 341.5 154.2 7.6
Total stockholders' equity.... 256.9 411.6 166.0 140.8 212.5 330.8
</TABLE>
(a) In April 1995, the Company completed the Merger. RBL's results of
operations have been included in the Company's results of operations since
April 28, 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General" and Note 2 to the
Consolidated Financial Statements.
(b) In June 1994, the Company completed the Allied Acquisition. Allied's
results of operations have been included in the Company's results of
operations since June 23, 1994. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--General" and
Note 2 to the Consolidated Financial Statements.
(c) In the second quarter of 1996, the Company recorded certain charges of a
non-recurring nature including additional charges related to the
restructuring of operations following the Merger. The Company recorded
a restructuring charge totaling $13.0 million for the shutdown of its
La Jolla, California administrative facility and other workforce
reductions. In addition, the Company recorded $10.0 million in non-
recurring charges in the second quarter of 1996 related to the
integration of its operations following the Merger. See Note 6 to the
Unaudited Consolidated Financial Statements. As a result of
negotiations with the OIG and DOJ related to the Settlement Payment,
the Company recorded a special charge of $185.0 million in the third
quarter of 1996 to increase accruals for settlements and related
expenses of government and private claims resulting from these
investigations. See "Regulation and Reimbursement--1996 Government
Settlement."
(d) In 1995, following the Merger, the Company determined that it would be
beneficial to close certain laboratory facilities and eliminate duplicate
functions in certain geographic regions where duplicate NHL and RBL
facilities or functions existed at the time of the Merger. The Company
recorded restructuring charges of $65.0 million in connection with these
plans. See Note 3 of the Notes to Consolidated Financial Statements which
sets forth the Company's restructuring activities for the year ended
December 31, 1995. Also in 1995, the Company recorded a pre-tax special
charge of $10.0 million in connection with the estimated costs of settling
various claims pending against the Company, substantially all of which are
billing disputes, in which the Company believes it is probable that
settlements will be made by the Company.
(e) In 1994, the Company approved a settlement of shareholder class and
derivative litigation. In connection with the settlement, the Company
recorded a pre-tax special charge of $15.0 million and a $6.0 million
charge for expenses related to the settled litigation. Insurance
payments and payments from other defendants amounted to $55.0 million
plus expenses. The litigation consisted of two consolidated class
action suits filed in December 1992 and November 1993 and a
consolidated shareholder derivative action brought in Federal and state
courts in San Diego, California. The settlement involved no admission
of wrongdoing and all payments under the settlement agreement have been
paid.
(f) Represents a one-time pretax gain comprised of expense reimbursement and
termination fees of $21.6 million in connection with the Company's
attempt to purchase Damon Corporation, a competing independent clinical
laboratory, less related expenses and write-off of certain bank
financing costs of $6.3 million.
(g) In the fourth quarter of 1992, the Company recorded a charge against
operating income of $136.0 million related to the 1992 NHL Government
Settlement. See "Regulation and Reimbursement--OIG Settlement--1992 NHL
Government Settlement."
(h) In connection with the repayment in 1995 of existing revolving credit and
term loan facilities, the Company recorded an extraordinary loss of
approximately $13.5 million ($8.3 million, net of tax), consisting of the
write-off of deferred financing costs, related to the early extinguishment
of debt.
(i) EBITDA represents income (loss) before net interest expense, provision for
income taxes, depreciation and amortization expense and extraordinary
items. While EBITDA is not intended to represent cash flow from
operations as defined by GAAP (and should not be considered as an
indicator of operating performance or an alternative to cash flow (as
measured by GAAP)), as a measure of liquidity, it is included herein to
provide additional information with respect to the ability of the
Company to meet its future debt service, capital expenditure and
working capital requirements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity
and Capital Resources."
(j) Adjusted EBITDA represents income (loss) before net interest expense,
provision for income taxes, depreciation and amortization,
extraordinary items, a provision for settlements and related expenses,
restructuring charges and nonrecurring expenses. While Adjusted EBITDA
is not intended to represent cash flow from operations as defined by
GAAP (and should not be considered as an indicator of operating
performance or an alternative to cash flow (as measured by GAAP)), as a
measure of liquidity, it is included herein to provide additional
information with respect to the ability of the Company to meet its
future debt service, capital expenditure and working capital
requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
(k) For the purpose of calculating the ratio of earnings to combined fixed
charges and preferred stock dividends (i) earnings consist of income
before provision for income taxes and fixed charges and (ii) fixed
charges consist of interest expense and one-third of rental expense
which is deemed representative of an interest factor. For the nine
months ended September 30, 1996, earnings were insufficient to cover
fixed charges and preferred stock dividends by $190.4 million.
For the nine months ended September 30, 1996 and the year ended
December 31, 1995, pro forma earnings would have been insufficient to
cover combined fixed charges and preferred stock dividends by $225.7
million and $20.6 million, respectively, assuming only HLR and Roche
Holdings exercise their Basic Subscription Privilege ($237.9 million
and $35.6 million, respectively if HLR and Roche Holdings exercise
their Basic Subscription Privilege and all other remaining Rights are
also exercised).
(l) On September 23, 1996, as a result of a potential default under the
Existing Credit Agreement, the Company entered into the Fourth
Amendment which modified the interest coverage and leverage ratios
applicable to the quarters ended September 30, 1996 and December 31,
1996 in return for, among other things, increased interest rate
margins. As a result of the limited period covered by the Fourth
Amendment, approximately $998 million of the Company's debt that would
have been classified as long-term has been classified as current in the
September 30, 1996 consolidated balance sheet. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
(m) Total debt includes a capital lease obligation of $9.8 million at
September 30, 1996 and $9.6 million, $9.8 million, $9.7 million and
$9.6 million at December 31, 1995, 1994, 1993 and 1992, respectively.
Total debt also includes the expected value of future contractual and
contingent amounts to be paid to the principals of acquired
laboratories. Such payments are principally based on a percentage of
future revenues derived from the acquired customer lists or specified
amounts to be paid over a period of time. At September 30, 1996,
December 31, 1995, 1994, 1993, 1992 and 1991, such amounts were $16.5
million, $23.3 million, $35.1 million, $26.8 million, $4.6 million and
$7.6 million, respectively. Total debt excludes accrued settlement
costs. In December 1996, the Company also received a loan of $187
million from Roche Holdings to fund the Settlement Payment. The
Settlement Payment was subsequently made in December 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company has grown significantly over the last several
years, a substantial portion of which has been achieved through acquisitions.
In June 1994, the Company acquired Allied for approximately $191.5 million in
cash plus the assumption of $24.0 million of Allied indebtedness. In April
1995, the Company completed the Merger with RBL. In connection with the
Merger, the Company issued 61,329,256 shares of Common Stock to HLR and Roche
Holdings in exchange for all outstanding shares of RBL and $135.7 million in
cash. The exchange consideration of approximately $558.0 million for the
purchase of RBL consisted of the value of the stock issued to HLR and Roche
Holdings, as well as other cash costs of the Merger, net of cash received from
HLR. The Allied Acquisition and the Merger have been accounted for under the
purchase method of accounting; as such, the acquired assets and liabilities
were recorded at their estimated fair values on the date of acquisition.
Allied's and RBL's results of operations have been included in the Company's
results of operations since June 23, 1994 and April 28, 1995, respectively.
See Note 2 of Notes to Consolidated Financial Statements. In addition to the
Merger and the Allied Acquisition, since 1993 the Company has acquired a total
of 57 small clinical laboratories with aggregate sales of approximately $182.4
million.
Following the Merger in 1995, the Company determined that it
would be beneficial to close certain laboratory facilities and eliminate
duplicate functions in certain geographic regions where both NHL and RBL
facilities or functions existed at the time of the Merger. The Company
recorded restructuring charges of $65.0 million in connection with these
plans. See Note 3 of Notes to Consolidated Financial Statements which sets
forth the Company's restructuring activities for the year ended December 31,
1995. In addition, in the second quarter of 1995, the Company had an
extraordinary loss of $8.3 million, net of taxes, related to early
extinguishment of debt related to the Merger. In the second quarter of 1996,
the Company recorded certain additional charges related to the restructuring
of operations following the Merger. The Company recorded a restructuring
charge totaling $13.0 million for the shutdown of its La Jolla, California
administrative facility and other workforce reductions and $10.0 million in
non-recurring charges related to the integration of its operations following
the Merger. See Note 6 of Notes to the Unaudited Consolidated Financial
Statement. Future cash payments under the restructuring plan are expected to
be $14.8 million in the twelve months ended September 30, 1997 and $14.1
million thereafter.
Recent Developments
In the last several years, the Company's business has been
affected by significant government regulation, price competition and increased
influence of managed care organizations resulting from payors' efforts to
control the cost, utilization and delivery of health care services. As a
result of these factors, the Company's profitability has been impacted by
changes in the volume of testing, the prices and costs of its services, the
mix of payors and the level of bad debt expense.
Many market-based changes in the clinical laboratory business
have occurred, most involving the shift away from traditional, fee-for-service
medicine to managed-cost health care. The growth of the managed care sector
presents various challenges to the Company and other independent clinical
laboratories. Managed care providers typically contract with a limited number
of clinical laboratories and negotiate discounts to the fees charged by such
laboratories in an effort to control costs. Such discounts have resulted in
price erosion and have negatively impacted the Company's operating margins.
In addition, managed care providers have used capitated payment contracts in
an attempt to promote more efficient use of laboratory testing services.
Under a capitated payment contract, the clinical laboratory and the managed
care provider agree to a per month payment to cover all laboratory tests
during the month, regardless of the number or cost of the tests actually
performed. Such contracts also shift the risks of additional testing
beyond that covered by the capitated payment to the clinical laboratory.
The increase in managed care has also resulted in declines in the
utilization of laboratory testing services.
In addition, Medicare (which principally serves patients 65 and
older) and Medicaid (which principally serves indigent patients) and insurers,
have increased their efforts to control the cost, utilization and delivery of
health care services. Measures to regulate health care delivery in general
and clinical laboratories in particular have resulted in reduced prices and
added costs and decreasing test utilization for the clinical laboratory
industry by increasing complexity and adding new regulatory and administrative
requirements. From time to time, Congress has also considered changes to the
Medicare fee schedules in conjunction with certain budgetary bills. Any
future changes to the Medicare fee schedules cannot be predicted at this time
and management, therefore, cannot predict the impact, if any, such proposals,
if enacted, would have on the results of operations or financial condition of
the Company.
These market based factors have had a significant adverse
impact on the clinical laboratory industry, and on the Company's
profitability. Management expects that price erosion and utilization declines
will continue to negatively impact net sales and results of operations for the
foreseeable future. It is the objective of management to partially offset the
increases in cost of sales as a percentage of net sales and selling, general
and administrative expenses as a percentage of net sales through the cost
savings the Company expects to realize following the Merger, as discussed
below, and through comprehensive cost reduction programs including, but not
limited to, six month deferral on increasing wages and adding new positions
implemented on July 1, 1996. In addition, the Company has targeted business
development efforts in an attempt to become more judicious in pricing new
business and is selectively repricing or discontinuing business with existing
accounts not meeting Company targets. The Company has experienced some volume
declines as a result of this strategy; however, the third quarter of 1996 was
the first quarter since the Merger that overall prices did not decline versus
the immediately preceding quarter. There can be no assurance, however, of the
timing or success of such measures or that the Company will not lose market
share as a result of such measures.
As a result of the Merger, the Company has realized and is
expected to continue to achieve substantial savings in operating costs through
the consolidation of certain operations and the elimination of redundant
expenses. Such savings are being realized over time as the consolidation
process is completed. Since the Merger, the Company has been able to effect
substantial operating cost reductions in the combined businesses and expects
that the full effect of these savings (approximately $120 million per year
when compared to the businesses' costs immediately prior to the Merger) will
first be realized in 1997. Such savings include an annualized reduction of
$4.3 million in corporate, general and administrative expenses including the
consolidation of administrative staff. Combining the NHL sales force with the
RBL sales force where duplicate territories existed has added approximately
$17.8 million of annualized synergies. Operational savings have resulted in
approximately $74.9 million of annualized synergies. These include closing of
overlapping laboratories and other facilities and savings realized from
additional buying power by the larger Company. The Company has also realized
annualized savings of approximately $14.5 million relating to employee
benefits as a result of changes to certain benefit arrangements. Additional
annualized savings of $8.5 million are expected to be achieved in 1997. These
additional savings will be principally achieved in operational areas from the
further consolidation of overlapping laboratories. The realization of the
savings have been reduced by increased temporary help and overtime expenses
during the consolidation process. These costs are expected to reduce to
normal levels at the conclusion of the consolidation process in the second
quarter of 1997. In addition, these savings have been largely offset by price
erosion and utilization declines resulting from the increase in managed care
and to a lesser extent from increases in other expenses such as bad debt
expenses as discussed below. The effects of price erosion and utilization
declines on the Company's results of operations, however, would have been
greater but for savings achieved through the synergy program. In addition,
the Company is focused on additional initiatives which are expected to achieve
incremental cost savings in 1997. These plans include a new agreement with a
supplier of telecommunications services, additional supply savings primarily
due to increased efficiency, and further regional laboratory consolidation.
There can be no assurance that the estimated additional cost savings expected
to be achieved will be realized or achieved in a timely manner or that
improvements, if any, in profitability will be achieved or that such savings
will not be offset by increases in other expenses.
During the fourth quarter of 1995 and the second quarter of
1996, the Company recorded pre-tax special charges of $15 million and $10
million, respectively, based on the Company's determination that additional
reserves were needed to cover potentially lower collection rates from several
third-party payors. In addition, the Company increased its monthly provision
for doubtful accounts during the third quarter of 1996. Increased medical
necessity and related diagnosis code requirements of the Medicare program were
placed on the Company by certain third party carriers in late 1995 and
additional requirements were placed on the Company at the beginning of 1996
and the Company experienced lower collection rates beginning in the second
quarter of 1996 as a result of these more stringent requirements. In
addition, increased difficulty in collecting amounts due from private
insurance carriers, including certain managed care plans, has negatively
impacted cash flow from operations. Finally, Merger related integration
issues have also resulted in increased accounts receivable balances as a
result of multiple billing information systems. The Company currently has
plans in place to stabilize collection rates and improve the collection of
accounts receivable. See "Business - Billing". Additionally, the Company
believes that it can benefit from the conversion of its multiple billing
systems into a centralized system which it plans to implement once the
accounts receivable situation is stabilized. To date, however, collection
rates have continued to decline despite such measures and additional
changes in requirements of third-party payors could increase the difficulty
in collections. There can be no assurance of the success of the Company's
plans to improve collections and, due to changes in medical necessity
requirements, the Company expects accounts receivable balances to continue
to exceed 1995 levels.
As part of an examination of the rapid growth of Federal expenditures
for clinical laboratory services, several Federal agencies, including the
Federal Bureau of Investigation, the OIG and the DOJ, have investigated
allegations of fraudulent and abusive conduct by health care providers. On
November 21, 1996, the Company reached a settlement with the OIG and the DOJ
regarding the prior billing practices of various of its predecessor companies.
The government's investigations covered billings for certain tests performed
as part of the chemistry profiles of NHL, RBL and Allied from 1988 to 1994.
These tests were deemed by regulators to be medically unnecessary. The
investigations were part of a broad-based federal inquiry into Medicare and
related billings that have resulted in financial settlements with a number of
other clinical laboratories. The inquiries have also prompted the imposition
of more stringent regulatory compliance requirements industry-wide. Under the
terms of the 1996 Government Settlement, the Company agreed to enter into a
comprehensive Corporate Integrity Agreement and to pay $182 million to settle
civil claims involving Medicare and related government billings for tests
performed by NHL, RBL and Allied. These claims arose out of the government's
contention that laboratories offering profiles containing certain test
combinations had the obligation to notify ordering physicians how much would
be billed to the government for each test performed for a patient whose tests
are paid for by Medicare, Medicaid or other government agency. The government
contended claims submitted for tests ordered by physicians and performed by
the laboratories were improper. The Company settled these allegations
without an admission of fault. The Corporate Integrity Agreement, among
other things, requires that detailed notifications be made to physicians.
In addition, as part of the overall settlement, a San Diego laboratory that
was formerly part of Allied agreed to plead guilty to a charge of filing a
false claim with Medicare and Medicaid in 1991 and to pay $5 million to the
Federal government. The assets of the San Diego laboratory were sold by
Allied in 1992, two years before the Allied Acquisition. As is customary
with asset sales, Allied retained the liability for conduct preceding the
sale--a liability the Company later succeeded to, following the Allied
Acquisition and Merger. Consistent with this overall settlement, the
Company paid $187 million to the Federal Government in December 1996 with
proceeds from a loan from Roche Holdings. As a result of negotiations
related to the 1996 Government Settlement, the Company recorded a charge of
$185 million in the third quarter of 1996 to increase accruals for the 1996
Government Settlement described above, and other related expenses of
government and private claims resulting therefrom.
Fourth Quarter Results
Net sales for the three months ended December 31, 1996, were
$391.2 million, versus $403.4 million in the fourth quarter of 1995. In the
fourth quarter of 1996, the Company posted operating income of $21.7 million,
net income of $1.2 million, and earnings per share of $0.01. This compares
with operating income of $32.6 million, net income of $8.5 million, and
earnings per share of $0.07 in the same period in 1995, before a charge of
$15.0 million to increase the provision for doubtful accounts. After the
charge in the fourth quarter of 1995, the Company posted operating income of
$17.6 million and net income of $0.4 million.
While volume declined in the fourth quarter, pricing remained
stable, resulting in the second consecutive quarter of price stability. In
addition, although fourth quarter sales were lower than the third quarter by
approximately 3%, fourth quarter operating income improved over third quarter
operating income before special charges by 10.7%. Management believes this
performance reflects the results of its new business strategy aimed at
reducing costs and increasing account profitability. Management expects to
see further benefit from these initiatives in 1997.
Full Year Results
For the year ended December 31, 1996, net sales were $1,607.7
million. Before special charges, operating income was $99.2 million, net
income was $13.4 million, and earnings per share was $0.11. After the special
charges in 1996, the Company posted a twelve month operating loss of $118.8
million, net loss of $153.5 million, and a net loss per share of $1.25. The
special charges in 1996 were (i) second quarter charges of $23.0 million
related to additional restructuring and nonrecurring charges related to the
Merger and $10.0 million to increase the allowance for doubtful accounts, and
(ii) the third quarter Settlement Charge.
Net sales for the year ended December 31, 1995, were $1,432.0
million. Before special charges and extraordinary loss, operating income was
$157.2 million, net earnings was $50.9 million, and net earnings per share was
$0.46. After the special charges and extraordinary item, operating income was
$67.2 million, net loss was $12.3 million, and net loss per share was $0.11.
In connection with the Merger, the Company took a second quarter 1995 pretax
special charge of $75.0 million relating to restructuring and other provisions
and had an extraordinary loss of $8.3 million, net of taxes, related to the
early extinguishment of debt. In addition, in the fourth quarter of 1995 the
Company took a charge of $15.0 million to increase the provision for doubtful
accounts. The 1995 results reflect the Merger and, therefore, are not
directly comparable to results for the year ended December 31, 1996.
Seasonality
Volume of testing generally declines during the summer months,
year-end holiday periods and other major holidays, resulting in net revenues
and cash flows in the third and fourth quarter below the annual average. In
addition, volume declines due to inclement weather may reduce net revenues and
cash flows. Therefore, comparison of the results of successive quarters may
not accurately reflect trends or results for the full year.
Results of Operations
Nine Months Ended September 30, 1996 compared with Nine Months
Ended September 30, 1995
Net sales for the nine months ended September 30, 1996 were
$1,216.5 million, an increase of 18.3% from $1,028.6 million reported in the
comparable 1995 period. Net sales from the inclusion of RBL increased net
sales by approximately $243.5 million or 23.7%. Acquisitions of small
clinical laboratory companies increased net sales by approximately 1.4%. Such
increases were partially offset by price erosion in the industry as a whole,
lower utilization of laboratory testing and lost accounts, and net of growth
in new accounts and price increases in selective markets. Lower utilization
of laboratory testing and price erosion primarily resulted from continued
changes in payor mix brought on by the increase in managed care. The Company
has targeted business development efforts in an attempt to become more
judicious in pricing new business and is selectively repricing or
discontinuing business with existing accounts not meeting Company targets.
The Company has experienced some volume declines as a result of this strategy,
however, the third quarter of 1996 was the first quarter since the Merger that
overall prices did not decline versus the immediately preceding quarter. A
reduction in Medicare fee schedules from 80% to 76% of the national limitation
amounts on January 1, 1996 reduced net sales by approximately 1.3%. Severe
weather in January and February 1996 also negatively impacted net sales.
Cost of sales, which includes primarily laboratory and
distribution costs, was $903.9 million for the nine months ended September 30,
1996, compared to $722.4 million in the corresponding 1995 period, an increase
of $181.5 million or 25.1%. Cost of sales increased approximately $181.9
million or 25.2% due to the inclusion of the cost of sales of RBL. Cost of
sales increased approximately $23.2 million as a result of wage increases
prior to the implementation of a six month deferral on wage rate increases
implemented on July 1, 1996, approximately $5.0 million as a result of higher
overtime and temporary employee expenses related to the acceleration of the
Company's synergy program and other operational factors, approximately $6.0
million due to higher depreciation and maintenance of lab equipment as a
result of the Company's purchase of more sophisticated equipment to improve
efficiency, and approximately $8.6 million in outside collection and reference
testing fees. These increases were partially offset by decreases in salaries
and benefits of $36.9 million, rental of premises of $2.9 million and several
other expense categories aggregating approximately $3.4 million primarily as a
result of the Company's synergy and cost reduction programs. Cost of sales as
a percentage of net sales was 74.3% for the nine months ended September 30,
1996 and 70.2% in the corresponding 1995 period. The increase in the cost of
sales percentage of net sales primarily resulted from a reduction in net sales
due to price erosion and utilization declines, each of which provided
little corresponding reduction in costs, and, to a lesser extent, due to
severe weather in January and February 1996 and a reduction in Medicare fee
schedules.
Selling, general and administrative expenses increased to
$223.0 million for the nine months ended September 30, 1996 from $162.3
million in the same period in 1995, representing an increase of $60.7 million
or 37.4%. The inclusion of the selling, general and administrative expenses
of RBL since April 28, 1995 increased expenses by approximately $36.5 million
or 22.5%. Increases in salaries, overtime and temporary employee expenses,
primarily related to billing issues and related telephone and data processing
costs, aggregated approximately $15.5 million. Also, increased medical
necessity and related diagnosis code requirements of third-party payors placed
on the Company at the beginning of 1996 have resulted in increased accounts
receivable balances and therefore the Company has increased its monthly
provision for doubtful accounts. This resulted in an increase of
approximately $3.9 million in the monthly provision for doubtful accounts for
the nine months ended September 30, 1996 compared to the same 1995 period. In
addition to increasing the monthly provision for doubtful accounts, the
Company recorded $10.0 million of additional provision for doubtful accounts
in the second quarter of 1996 which reflects the lower collection rates
experienced beginning in the second quarter as a result of the more stringent
medical necessity requirements. These increases were partially offset by
decreases in legal expenses, excluding settlement expenses, of $2.0 million,
insurance of $1.3 million and several other categories aggregating
approximately $1.9 million. Selling, general and administrative expenses were
18.3% and 15.8% of net sales for the nine months ended September 30, 1996 and
1995, respectively. The increase in the selling, general and administrative
percentage primarily resulted from increased employee expenses related to
billing and the increases in the provision for doubtful accounts discussed
above and to a lesser extent, from a reduction in net sales due to price
erosion and utilization declines, each of which provided little corresponding
reduction in costs.
As a result of negotiations with the OIG and DOJ related to the
Settlement Payment, the Company recorded a special charge of $185.0 million in
the third quarter of 1996 to increase reserves for settlements and related
expenses of government and private claims resulting from these investigations.
The increase in amortization of intangibles and other assets to
$22.1 million for the nine months ended September 30, 1996 from $19.2 million
in the corresponding period in 1995 primarily resulted from the Merger in
April 1995.
Interest expense was $51.4 million for the nine months ended
September 30, 1996 compared with $48.5 million for the same period in 1995.
The change resulted primarily from increased borrowings used to finance the
Merger and increased accounts receivable balances partially offset by a lower
effective borrowing rate. As a result of the Fourth Amendment, which resulted
in increased borrowing margins, the Company's interest rate margin increased
by approximately 0.625% beginning in the fourth quarter of 1996.
As a result of the restructuring and non-recurring charges in
1996 and 1995, the provision for income taxes is not comparable between
periods. However, before charges, the Company's effective income tax rate for
the nine months ended September 30, 1996 has increased from the same 1995
period as a result of increased non-deductible amortization and lower earnings
before income taxes.
Year Ended December 31, 1995 compared with Year Ended December
31, 1994.
Net sales increased by $559.5 million to $1,432.0 million in
1995, an increase of 64.1% from $872.5 million reported in 1994. Net sales
from the inclusion of RBL as a result of the Merger increased net sales by
approximately $514.7 million or 59.0%. Also, net sales from the inclusion of
Allied, which was acquired on June 23, 1994, increased net sales by
approximately $56.6 million or 6.5%. Growth in new accounts and acquisitions
of small clinical laboratory companies increased net sales by approximately
8.6% and 2.8%, respectively. Lower utilization of laboratory testing and price
erosion in the industry as a whole decreased net sales by approximately 5.0%.
A reduction in Medicare fee schedules from 84% to 80% of the national
limitation amounts on January 1, 1995, plus changes in reimbursement policies
of various third-party payors, reduced net sales by approximately 1.5%. Other
factors, including accounts terminated by management, comprised the remaining
reduction in net sales.
Cost of sales, which includes primarily laboratory and
distribution costs, increased to $1,024.3 million in 1995 from $597.0 million
in 1994. Of the $427.3 million increase, approximately $368.8 million was due
to the inclusion of the cost of sales of RBL and approximately $44.8 million
was due to the inclusion of the cost of sales of Allied. Cost of sales
increased by approximately $26.1 million due to higher testing volume
unrelated to the Merger or acquisition of Allied and approximately $4.5
million due to increases in other expenses. Reductions in compensation and
benefit expense of $9.2 million, insurance of $4.8 million, and other expense
categories of $2.9 million decreased cost of sales an aggregate of
approximately $16.9 million. These decreases resulted from the consolidation
of operations as a result of the Merger and the Company's on-going
cost-reduction program. As a percentage of net sales, cost of sales increased
to 71.5% in 1995 from 68.4% in 1994. The increase in the cost of sales
percentage primarily resulted from a reduction in net sales due to a reduction
in Medicare fee schedules, pricing pressures and utilization declines, each of
which provided little corresponding reduction in costs.
Selling, general and administrative expenses increased to
$238.5 million in 1995 from $149.3 million in 1994, an increase of $89.2
million. Approximately $74.3 million of the increase was due to the inclusion
of the selling, general and administrative expenses of RBL and approximately
$7.7 million due to the inclusion of the selling, general and administrative
expenses of Allied. As mentioned above, in the fourth quarter of 1995, the
Company also recorded an additional $15.0 million of provision for doubtful
accounts which reflects the Company's determination, based on trends that
became evident in the fourth quarter, that additional reserves were needed
primarily to cover potentially lower collection rates from several third-party
payors. The increase in selling, general and administrative expenses was
partially offset by decreases in other expense categories, including
reductions in selling expenses, as a result of the elimination of duplicative
functions in connection with the Merger and the Company's on-going
cost-reduction program. Before the increase to the provision for doubtful
accounts, selling, general and administrative expenses as a percentage of net
sales was 15.6% in 1995 and 17.1% in 1994. The decrease in the selling,
general and administrative percentage primarily resulted from reductions in
expenses as discussed above.
The increase in amortization of intangibles and other assets to
$27.0 million in 1995 from $16.3 million in 1994 primarily resulted from the
Merger in April 1995 and the acquisition of Allied in June 1994.
See Note 3 of the Notes to Consolidated Financial Statements
which sets forth the Company's restructuring activities for the year ended
December 31, 1995.
In the second quarter of 1995, the Company recorded a pre-tax
special charge of $10.0 million in connection with the estimated costs of
settling various claims pending against the Company, substantially all of
which are billing disputes, in which the Company believes it is probable that
settlements will be made by the Company.
Net interest expense was $64.1 million in 1995 compared to
$33.5 million in 1994. The change resulted primarily from increased
borrowings used to finance the Merger with RBL and the acquisition of Allied
and, to a lesser extent, due to a higher effective borrowing rate in the first
four months of 1995.
In connection with the repayment of the Company's existing
revolving credit and term loan facilities at the time of the Merger, the
Company recorded an extraordinary loss from the early extinguishment of debt
of approximately $13.5 million ($8.3 million net of tax) consisting of the
write-off of deferred financing costs.
As a result of the restructuring charges and extraordinary
loss, the provision for income taxes as a percentage of earnings before income
taxes for 1995 is not comparable to prior periods.
As discussed above and in Notes 2, 3 and 8 of the Notes to
Consolidated Financial Statements, reported results in 1995 were impacted by
the extraordinary loss, restructuring charges and provision for settlements.
Excluding the impact of these non-recurring items, net earnings would have
increased to $42.8 million in 1995 compared to $30.1 million in 1994.
Year Ended December 31, 1994 compared with Year Ended December
31, 1993.
Net sales increased by $112.0 million to $872.5 million in
1994, an increase of 14.7% over 1993. The inclusion of Allied since June 23,
1994 increased net sales by approximately $96.8 million or 12.7%. Revenues
generated by new accounts and numerous acquisitions of small clinical
laboratory companies increased net sales by approximately 9.6% and 11.4%,
respectively. In addition, a price increase, effective April 1, 1994,
increased net sales for 1994 by approximately 1.8%. A reduction in Medicare's
fee schedules from 88% to 84% of the 1984 national median effective on January
1, 1994, plus changes in reimbursement policies of various third party
payors, reduced net sales by approximately 3.1%. Other factors, in order
of decreasing magnitude, comprised the remaining reduction in net sales as
follows: declines in the level of HDL cholesterol and serum ferritin
testing, lower utilization of laboratory testing, price erosion in the
industry as a whole and severe weather in the first quarter of 1994. The
Company believes that the decline in utilization was due to fewer patient
visits to physicians' offices since the number of tests ordered per patient
remained relatively constant. Revenues derived from tests performed for
beneficiaries of Medicare and Medicaid programs were approximately 35% and
41% of net sales in 1994 and 1993, respectively.
Cost of sales, which primarily includes laboratory and
distribution costs, increased to $597.0 million in 1994 from $444.5 million in
1993. Of the $152.5 million increase, approximately $66.6 million was due to
the inclusion of the cost of sales of Allied since June 23, 1994,
approximately $62.3 million was a result of higher testing volume, and
approximately $7.0 million was due to an increase in phlebotomy staffing to
improve client service and meet competitive demand. Rental of premises
increased approximately $2.7 million due to the expansion and/or relocation of
existing facilities to accommodate increased volume and the full year impact
of expanding the number of patient service centers by 50% during 1993. The
remaining increase resulted primarily from higher compensation and insurance
expenses. As a percentage of net sales, cost of sales increased to 68.4% in
1994 from 58.4% in 1993. The increase in the cost of sales percentage
primarily resulted from a reduction in net sales due to a reduction in
Medicare fee schedules, pricing pressures and utilization declines, each of
which provide little corresponding reduction in costs.
Selling, general and administrative expenses increased to
$149.3 million in 1994 from $121.4 million in 1993, an increase of $27.9
million. Approximately $21.7 million of the increase was due to the inclusion
of the selling, general and administrative expenses of Allied since June 23,
1994. Approximately $3.9 million of the increase was a result of a
non-recurring charge in the fourth quarter of 1994 for lease costs and the
write-off of leasehold improvements related to the relocation of certain of
the Company's regional laboratories. The remaining increase was primarily due
to expansion of data processing and billing departments due to increased
volume and to improve client service. As a percentage of net sales, selling,
general and administrative expenses increased to 17.1% in 1994 compared with
16.0% in 1993. The increase in the selling, general and administrative
percentage primarily resulted from a reduction in net sales, as discussed
above, that provided little corresponding reduction in costs.
The increase in amortization of intangibles and other assets to
$16.3 million in 1994 from $9.1 million in 1993 primarily resulted from the
acquisition of Allied and several small clinical laboratory companies during
1994 and 1993.
In the third quarter of 1994, the Company approved a settlement
of shareholder class and derivative litigation. The litigation consisted of
two consolidated class action suits and a consolidated shareholder derivative
action brought in Federal and state courts in San Diego, California. The
settlement involved no admission of wrongdoing. In connection with the
settlement, the Company recorded a pre-tax special charge of $15.0 million and
a $6.0 million charge for expenses related to the settled litigation.
Insurance payments and payments from other defendants aggregate $55.0 million
plus expenses.
Other gains and expenses in 1993 include expense reimbursement
and termination fees of $21.6 million received in connection with the
Company's attempt to purchase Damon Corporation, less related expenses and the
write-off of certain bank financing costs aggregating $6.3 million, resulting
in a one-time pre-tax gain of $15.3 million.
Net interest expense was $33.5 million in 1994 compared to $9.7
million in 1993. The increase resulted primarily from increased borrowings
used to finance the Allied Acquisition in June 1994, the acquisition of
numerous small laboratory companies during both 1994 and 1993 and repurchases
of the Company's common stock in 1993. Higher average interest rates also
contributed to the increase in net interest expense.
The provision for income taxes as a percentage of earnings
before income taxes increased to 45.7% in 1994 from 41.0% in 1993, primarily
due to a higher effective tax rate for both Federal and state income taxes.
Liquidity and Capital Resources
Net cash provided by (used for) operating activities (after
payment of settlement and related expenses of $1.7 million, $32.1 million and
$29.8 million, respectively) was $(17.6) million, $47.0 million and $14.7
million, in the first nine months of 1996, fiscal 1995 and fiscal 1994,
respectively. The decrease in cash flow from operations in the first nine
months of 1996 primarily resulted from an increase in accounts receivable
related to increased medical necessity and related diagnosis code requirements
of third-party payors placed on the Company at the beginning of 1996 and
reflects the lower collection rates experienced beginning in the second
quarter as a result of the more stringent requirements as discussed above.
Capital expenditures were $46.3 million, $75.4 million and
$48.9 million for the first nine months of 1996, fiscal 1995 and fiscal 1994,
respectively. The Company expects capital expenditures to be approximately
$60.0 million in 1996 and $65.0 million in each of 1997 and 1998 to continue
the Merger related integration, and to further automate laboratory processes
and to improve efficiency. Such expenditures are expected to be funded by
cash flow from operations as well as borrowings under the Company's Amended
Credit Agreement.
In connection with the Merger, the Company entered into the
Existing Credit Agreement, with the banks named therein (the "Banks") and an
administrative agent (the "Bank Agent"), which made available to the Company
the Term Loan Facility of $800.0 million and the Revolving Credit Facility of
$450.0 million. On April 28, 1995, the Company borrowed $800.0 million under
the Term Loan Facility and $184.0 million under the Revolving Credit
Facility (i) to pay the cash payment to shareholders in connection with the
Merger; (ii) to repay in full the existing revolving credit and term loan
facilities of a wholly owned subsidiary of the Company of approximately
$640.0 million including interest and fees; (iii) to repay approximately
$50.0 million of existing indebtedness of RBL; and (iv) for other
transaction costs in connection with the Merger and for use as working
capital and general corporate purposes of the Company and its subsidiaries.
Availability of funds under the Existing Credit Agreement is conditioned on
certain customary conditions, and the Existing Credit Agreement, as
amended, contains customary representations, warranties, covenants and
events of default.
Borrowings under the Revolving Credit Facility were $361.0
million as of September 30, 1996. In addition, in December 1996, the Company
received a loan of $187.0 million from Roche Holdings to fund the Settlement
Payment in the form of a promissory note which bears interest at 6.625% per
annum and matures March 31, 1997. The Company subsequently made the
Settlement Payment in December 1996. The Roche Loan will be repaid with a
portion of the proceeds from the Rights Offering. Cash and cash
equivalents on hand and additional borrowing capabilities of $89 million
under the Revolving Credit Facility as of September 30, 1996 are expected
to be sufficient to meet anticipated operating requirements, debt
repayments and provide funds for capital expenditures and working capital
for the near term, however, further deterioration in cash flow from
operations or the failure to complete the Rights Offering in the first half
of 1997 could result in a cash deficiency.
As a result of the Company's performance, higher than projected
debt levels and a potential default under the Existing Credit Agreement, the
Company obtained waivers for the quarter ended June 30, 1996 of certain
covenants under the Existing Credit Agreement and on September 23, 1996,
subsequently negotiated an amendment (the "Fourth Amendment") to the Existing
Credit Agreement. The Fourth Amendment modifies the interest coverage and
leverage ratios applicable to the quarters ending September 30 and December
31, 1996. The Fourth Amendment also increases the interest rate margin on
its revolving credit facility from 0.25% to 0.875% and increases the
interest rate margin on its term loan facility from 0.375% to 1.00%. As a
result of the Settlement Charge in the third quarter of 1996, as described
above, the Company obtained a waiver (the "Third Waiver") which excludes
the special charge from covenant calculations for the periods covered by
the most recent amendment until 30 days after the 1996 Government
Settlement. As a result of the Roche Loan and the 1996 Government
Settlement, the Company negotiated a Fifth Amendment and Fourth Waiver (the
"Fifth Amendment") to the Existing Credit Agreement. The Fifth Amendment
extended the Third Waiver until January 31, 1997 and excluded the Roche
Loan from covenant calculations for the quarters ending December 31, 1996
and March 31, 1997. On January 27, 1997, the Company negotiated a waiver
(the "Fifth Waiver") which further extended the Third Waiver until March
31, 1997. Because of the limited period covered by the waivers,
approximately $998 million of the Company's debt that otherwise would have
been classified as long-term has been classified as current in the
September 30, 1996 consolidated balance sheet. Such classification has
created a material deficiency in short-term liquidity. The Company expects
to seek an additional waiver and amendment to the Existing Credit Agreement
to be effective through completion of the Rights Offering. There can be no
assurance that such a waiver or amendment can be obtained. In addition,
the Roche Loan matures March 31, 1997. While the Company expects to seek
an extension thereof through the completion of the Rights Offering, there
can be no assurance such an extension can be obtained.
At December 31, 1995, the Company was a party to interest rate
swap agreements with certain major financial institutions, rated A or better
by Moody's Investor Service, solely to manage its interest rate exposure with
respect to $600.0 million of its floating rate debt under the Term Loan
Facility. The agreements effectively changed the interest rate exposure on
$600.0 million of floating rate debt to a weighted average fixed interest rate
of 6.01%, through requiring that the Company pay a fixed rate amount in
exchange for the financial institutions paying a floating rate amount.
Amounts paid by the Company in 1995 were not significant. Amounts paid in the
nine months ended September 30, 1996 were approximately $1.5 million. The
notional amounts of the agreements are used to measure the interest to be paid
or received and do not represent the amount of exposure to credit loss. These
agreements mature in September 1998. The estimated cost at which the Company
could terminate such agreements was $9.5 million at December 31, 1995. The
estimated unrealized loss on such agreements was approximately $1.7 million at
October 31, 1996.
In connection with the Rights Offering existing lenders under
the Existing Credit Agreement will enter into the Amended Credit Agreement
with the Company. The Amended Credit Agreement will make available to the
Company the Amended Term Loan Facility (as hereinafter defined) of $694.0
million and the Amended Revolving Credit Facility (as defined herein) of
$450.0 million. Following the Rights Offering, the Company estimates that
availability under the Amended Credit Agreement will be approximately $99
million assuming only HLR and Roche exercise their Basic Subscription
Privilege ($299 million if all shares of Preferred Stock are purchased in the
Rights Offering). Such availability will be conditioned on certain customary
conditions and the Amended Credit Agreement will contain customary
representations, warranties, covenants and events of default. See
"Description of New Bank Credit Agreement."
The gross proceeds of the Rights Offering will be used to (i)
repay the $187 million loan from Roche Holdings made in December 1996 in order
to fund the Settlement Payment, plus accrued interest of approximately $3
million thereon, (ii) pay fees and expenses of approximately $15 million
related to the Rights Offering and the Amended Credit Agreement and (iii)
repay up to $295 million outstanding under the Existing Credit Agreement. See
"Use of Proceeds."
The Company expects that its cash needs for working capital,
capital expenditures and the cash costs of the restructuring and operations of
the Company after the Rights Offering will be met by its cash flow from
operations and borrowings under the Amended Credit Agreement. See
"Description of Amended Credit Agreement".
Changes in Accounting Standards
Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of ("SFAS No. 121")," was issued in 1995 and established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets held and used
and for long-lived assets and certain identifiable intangibles to be disposed
of. SFAS No. 121 is effective for fiscal years beginning after December 15,
1995. The implementation of SFAS No. 121 will have no effect on the results
of operations of the Company for 1996.
In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123") effective for fiscal years beginning after December 15, 1995. SFAS No.
123 establishes the fair value based method of accounting for stock-based
compensation arrangements, under which compensation cost is determined using
the fair value of the stock option at the grant date and the number of options
vested, and is recognized over the periods in which the related services are
rendered. If the Company were to retain its current intrinsic value based
method, as allowed by SFAS No. 123, it will be required to disclose the pro
forma effect of adopting the fair value based method. The Company adopted the
pro forma disclosure method of accounting for stock-based compensation.
Forward Looking Statements
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 provides a
new "safe harbor" for forward-looking statements to encourage companies to
provide prospective information about their companies without fear of
litigation so long as 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. The Company desires to take advantage of the new
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995 and is including this section herein in order to do so. Accordingly, the
Company hereby identifies the following important factors that could cause the
Company's actual financial results to differ materially from those projected,
forecast, estimated, or budgeted by the Company in forward-looking statements.
(a) Heightened competition, including the intensification of price
competition.
(b) Impact of changes in payor mix, including the shift from traditional,
fee-for-service medicine to managed-cost health care.
(c) Adverse actions by governmental or other third-party payors, including
unilateral reduction of fee schedules payable to the Company.
(d) The impact upon the Company's collection rates or general or
administrative expenses resulting from compliance with Medicare administrative
policies including specifically the HCFA's recent requirement that
laboratories performing certain automated blood chemistry profiles obtain and
provide documentation of the medical necessity of tests included in the
profiles for each Medicare beneficiary.
(e) Adverse results from investigations of clinical laboratories by the
Federal Bureau of Investigation and the OIG including specifically significant
monetary damages and/or exclusion from the Medicare and Medicaid programs.
(f) Failure to obtain new customers, retain existing customers or reduction
in tests ordered or specimens submitted by existing customers.
(g) Adverse results in significant litigation matters.
(h) Denial of certification or licensure of any of the Company's clinical
laboratories under CLIA, by Medicare and Medicaid programs or other Federal,
state or local agencies.
(i) Adverse publicity and news coverage about the Company or the clinical
laboratory industry.
(j) Inability to carry out marketing and sales plans.
(k) Inability to successfully integrate the operations of or fully realize
the costs savings expected from the consolidation of certain operations and
the elimination of duplicative expenses resulting from the Merger or risk that
declining revenues or increases in other expenses will offset such savings.
(l) The ability of the Company to attract and retain experienced and
qualified personnel.
(m) Changes in interest rates causing an increase in the Company's
effective borrowing rate.
BUSINESS
Overview
Laboratory Corporation of America Holdings is one of the three
largest independent clinical laboratory companies in the United States based
on 1995 net revenues. Through a national network of laboratories, the Company
offers a broad range of testing services used by the medical profession in the
diagnosis, monitoring and treatment of disease and other clinical states.
Since its founding in 1971, the Company has grown into a network of 28 major
laboratories and approximately 1,500 service sites consisting of branches,
patient service centers and STAT laboratories, serving clients in 48 states.
For the twelve months ended September 30, 1996, the Company had net sales of
$1,619.9 million and EBITDA before a provision for settlements and related
expenses, restructuring charges and non-recurring expenses of $168.6 million.
The Company has achieved a substantial portion of its growth
through acquisitions. In June 1994 the Company acquired Allied Clinical
Laboratories, Inc., then the sixth largest independent clinical laboratory
testing company in the United States (based on 1993 net revenues). On April
28, 1995, the Company completed a merger with RBL, an indirect subsidiary of
Roche pursuant to an Agreement and Plan of Merger dated as of December 13,
1994. In connection with the Merger, the Company changed its name from
National Health Laboratories Holdings Inc. to Laboratory Corporation of
America Holdings. In addition to the Merger and the Allied Acquisition, since
1993, the Company has acquired a total of 57 small clinical laboratories with
aggregate sales of approximately $182.4 million.
During 1996 and the early part of 1997, the Company has
undergone significant changes in management with Thomas P. Mac Mahon assuming
the role of President and Chief Executive Officer in January 1997 in addition
to his position as Chairman. Prior to such time Mr. Mac Mahon served as
Senior Vice President of Roche and President of Roche Diagnostics Group where
he was responsible for the management of all United States operations of the
diagnostic businesses of Roche. In addition to Mr. Mac Mahon, the Company is
led by a new Chief Financial Officer, Wesley R. Elingburg, formerly Senior
Vice President--Finance, and a new management committee.
The Clinical Laboratory Testing Industry
Overview
Laboratory tests and procedures are used generally by
hospitals, physicians, other health care providers and commercial clients to
assist in the diagnosis, evaluation, detection, monitoring and treatment of
diseases and other medical conditions through the examination of substances in
the blood, tissues and other specimens. Clinical laboratory testing is
generally categorized as either clinical testing, which is performed on body
fluids including blood and urine, or anatomical pathology testing, which is
performed on tissue and other samples, including human cells. Clinical and
anatomical pathology procedures are frequently ordered as part of regular
physician office visits and hospital admissions in connection with the
diagnosis and treatment of illnesses. Certain of these tests and procedures
are used principally as tools in the diagnosis and treatment of a wide variety
of medical conditions such as cancer, AIDS, endocrine disorders, cardiac
disorders and genetic disease. The most frequently requested tests include
blood chemistry analyses, urinalyses, blood cell counts, PAP smears, AIDS
tests, microbiology cultures and procedures and alcohol and other
substance-abuse tests.
The clinical laboratory industry consists primarily of three
types of providers: hospital based laboratories, physician-office
laboratories and independent clinical laboratories, such as those owned by
the Company. The Company believes that in 1995 approximately 46 percent of
the clinical testing revenues in the United States were derived by
hospital-based laboratories, approximately 15 percent was derived by
physicians in their offices and laboratories and approximately 39 percent
went to independent clinical laboratories. The HCFA has estimated that
there are approximately 5,700 independent clinical laboratories in the
United States.
Effect of Market Changes on the Clinical Laboratory Business
Many market-based changes in the clinical laboratory business
have occurred, most involving the shift away from traditional, fee-for-service
medicine to managed-cost health care. The growth of the managed care sector
presents various challenges to the Company and other independent clinical
laboratories. Managed care providers typically contract with a limited number
of clinical laboratories and negotiate discounts to the fees charged by such
laboratories in an effort to control costs. Such discounts have resulted in
price erosion and have negatively impacted the Company's operating margins.
In addition, managed care providers have used capitated payment contracts
in an attempt to promote more efficient use of laboratory testing services.
Under a capitated payment contract, the clinical laboratory and the managed
care provider agree to a per month payment to cover all laboratory tests
during the month, regardless of the number or cost of the tests actually
performed. Such contracts also shift the risks of additional testing
beyond that covered by the capitated payment to the clinical laboratory.
The increase in managed care has also resulted in declines in the
utilization of laboratory testing services.
In addition, Medicare ( which principally services patients 65
and older) and Medicaid (which principally serves indigent patients) and
insurers, have increased their effort to control the cost, utilization and
delivery of health care services. Measures to regulate health care delivery
in general and clinical laboratories in particular have resulted in reduced
prices and added costs and decreasing test utilization for the clinical
laboratory industry by increasing complexity and adding new regulatory and
administrative requirements. From time to time, Congress has also considered
changes to the Medicare fee schedules in conjunction with certain budgetary
bills. Any future changes to the Medicare fee schedules cannot be predicted
at this time and management, therefore, cannot predict the impact, if any,
such proposals, if enacted, would have on the results of operations of the
Company.
The Company believes that the volume of clinical laboratory
testing will be positively influenced by several factors, including primarily:
an expanded base of scientific knowledge which has led to the development of
more sophisticated specialized tests and increased the awareness of physicians
of the value of clinical laboratory testing as a cost-effective means of
prevention, early detection of disease and monitoring of treatment.
Additional factors which have contributed to recent volume growth include: an
increase in the number and types of tests which are, due to advances in
technology and increased cost efficiencies, readily available on a more
affordable basis to physicians; expanded substance-abuse testing by
corporations and governmental agencies; increased testing for sexually
transmitted diseases such as AIDS; and the general aging of the population in
the United States. The impact of these factors is expected to be partially
offset by declines in volume as a result of increased controls over the
utilization of laboratory services by Medicare and other third party payors,
particularly managed care organizations.
Business Strategy
During the third quarter of 1996, management began implementing
a new business strategy in response to the Company's declining performance.
These new strategic objectives are as follows: remaining a low cost provider;
providing high quality customer service; and ensuring account profitability.
In addition, the Company is focused on certain growth initiatives beyond the
routine clinical laboratory testing. The Company believes that as a result of
this change in focus it is well positioned to achieve its goal of leading the
clinical laboratory industry by providing its customers with innovative,
responsive, and high quality services.
Low Cost Provider
The Company believes that due to its merger synergy programs,
its standardized equipment and its focus on cost containment, it is a low cost
provider of clinical testing services. Since the Merger, the Company has been
able to effect substantial operating cost reductions in the combined
businesses and expects that the full effect of these savings (approximately
$120 million per year when compared to the businesses' costs immediately prior
to the Merger) will first be realized in 1997. In addition, the Company is
focused on additional initiatives which are expected to achieve significant
cost savings in 1997. These plans include a new agreement with a supplier of
telecommunications services, additional supply savings primarily due to
increased efficiency, and further regional laboratory consolidation. See
"Management's Discussion and Analysis of Results of Operations and Financial
Position."
The Company has also developed and implemented sophisticated
management information systems to monitor operations and control costs. All
financial functions are centralized in Burlington, North Carolina including
centralized purchasing and accounting. This provides greater control over
spending and provides increased supervision and monitoring of results of
operations.
Client Service
The Company competes primarily on the basis of the quality of
its testing, reporting and information systems, its reputation in the medical
community, the pricing of its services and its ability to employ qualified
personnel. The Company believes it is a leading provider in terms of its menu
and quality of testing services. As a result of the required focus on the
consolidation process related to the Merger, however, the Company believes
that its level of client service has been negatively impacted. Therefore, in
1997, with the consolidation process substantially completed, one of the
Company's goals is to improve client service. One example is the continued
integration of traditional sales and customer support functions into a new
position, the Account Manager, which will have responsibility for certain
sales, service and daily operational contact with physician-clients. Other
important factors in improving client service include the Company's
initiatives to improve its billing process. See "--Billing."
Account Profitability
Over the last several months the Company has begun an active
effort to improve the profitability of new and existing business. To date this
effort has focused primarily on reviewing existing contracts, including those
with managed care organizations, and selectively repricing or discontinuing
business with existing accounts which perform below Company expectations. The
Company believes that as a result of this effort, the fourth quarter of 1996
was the second quarter since the Merger that the Company's price per accession
did not decline versus the immediately preceding quarter. The Company is also
targeting price increases to certain segments which have not seen price
increases since the Merger. While such increases may adversely affect
volumes, the Company believes that such measures along with other cost
reduction programs, will improve its overall profitability. The substantial
benefits of this strategic change are not expected until the latter half of
1998. Finally, the Company is reviewing its sales organization and expects to
modify its commission structure so that compensation is tied more directly to
the profitability of retained and new business instead of the current practice
of basing commissions primarily on revenue generated. The Company is also
reviewing alternatives relating to regions of the country and segments of
business where profitability is not reaching internal goals and may enter into
joint ventures, alliances, or asset swaps with interested parties in order to
maximize regional operating efficiencies.
Focused Growth Initiatives
The Company plans to increase market share in certain segments
by providing innovative services in three primary areas: (i) hospital
alliances; (ii) specialty and niche businesses; and (iii) direct marketing to
payors.
One of the Company's primary growth strategies is to develop an
increasing number of hospital alliances. These alliances can take several
different forms including laboratory management contracts, reference
agreements and joint ventures. Through these alliances the Company provides
testing services as well as contract management services. As hospitals
continue to be impacted by decreasing fee schedules from third party payors
and managed care organizations, the Company believes that they will seek the
most cost-effective laboratory services for their patients. The Company's
economies of scale as well as its delivery system enable it to assist the
hospital in achieving its goals. These alliances are generally more
profitable than the Company's core business due to the specialized nature of
many of the testing services offered in the alliance program. In 1996, the
Company added 6 alliance agreements with hospitals, physician groups and other
care provider organizations representing approximately $20 million of annual
sales which increased the total number of alliances to 20 from 14 in 1995.
Another primary growth strategy for the Company is growth of
its specialty and niche businesses. In general the specialty and niche
businesses are designed to serve two market segments: (i) markets which are
not served by the routine clinical testing laboratory and therefore are
subject to less stringent regulatory and reimbursement constraints; and (ii)
markets which are served by the routine testing laboratory and offer the
possibility of adding related services from the same supplier. The Company is
a leader in innovative diagnostic testing with an active research and
development group. This group constantly seeks new and improved technologies
for early diagnosis. For example, the Company's Center for Molecular and
Biology and Pathology is a leader in molecular diagnostics and polymerase
chain reaction technologies which are often able to provide earlier and more
reliable information regarding HIV, genetic diseases, cancer and many other
viral and bacterial diseases. These technologies may represent a significant
savings to managed care organizations by increasing the detection of early
stage (treatable) diseases. Also, the Company recently acquired Genetic
Design, Inc. and is now the largest provider of identity testing services in
the United States.
Finally, in 1996 the Company began to also focus efforts on
selling its services directly to payors of laboratory services. As a result
of that focus, the Company entered into an agreement with PCS Health Systems,
Inc., a leading pharmacy benefit management company with 58 million covered
lives, to provide laboratory services as an extension of the PCS prescription
card services. Through this agreement patients will be provided with
identification cards indicating beneficiary eligibility for both prescription
benefits and the Company's testing services. The Company will provide the
testing services as requested and bill PCS based on a predetermined fee
schedule. The Company will pay PCS certain percentage and fixed fees for
adjudication of claims. One of the advantages of the PCS agreements is that
patient eligibility will be determined at the time of testing through
interface with the PCS information system which will expedite processing of
the claim for reimbursement.
Laboratory Testing Operations and Services
The Company has 28 major laboratories, and approximately 1,500
service sites consisting of branches, patient service centers and STAT
laboratories. A "branch" is a central office which collects specimens in a
region for shipment to one of the Company's laboratories for testing. Test
results can be printed at a branch and conveniently delivered to the client.
A branch also is used as a base for sales staff. A "patient service center"
generally is a facility maintained by the Company to serve the physicians in a
medical professional building. The patient service center collects the
specimens as requested by the physician. The specimens are sent, principally
through the Company's in-house courier system (and, to a lesser extent,
through independent couriers), to one of the Company's major laboratories for
testing. Some of the Company's patient service centers also function as "STAT
labs," which are laboratories that have the ability to perform certain routine
tests quickly and report results to the physician immediately. The Company
processed an average of approximately 250,000 patient specimens per day in
1996. Patient specimens are delivered to the Company accompanied by a test
request form. These forms, which are completed by the client, indicate the
tests to be performed and provide the necessary billing information.
Each specimen and related request form is checked for
completeness and then given a unique identification number. The unique
identification number assigned to each specimen helps to assure that the
results are attributed to the correct patient. The test request forms are
sent to a data entry terminal where a file is established for each patient and
the necessary testing and billing information is entered. Once this
information is entered into the computer system, the tests are performed and
the results are entered primarily through computer interface or manually,
depending upon the tests and the type of equipment involved. Most of the
Company's computerized testing equipment is directly linked with the Company's
information systems. Most routine testing is completed by early the next
morning, and test results are printed and prepared for distribution by service
representatives that day. Some clients have local printer capability and have
reports printed out directly in their offices. Clients who request that they
be called with a result are so notified in the morning. It is Company policy
to notify the client immediately if a life-threatening result is found at any
point during the course of the testing process.
Testing Services
Routine Testing
The Company currently offers over 1,700 different routine
clinical laboratory tests or procedures. Several hundred of these are
frequently used in general patient care by physicians to establish or support
a diagnosis, to monitor treatment or medication or to search for an otherwise
undiagnosed condition. The most frequently requested routine tests include
blood chemistry analyses, urinanalyses, blood cell counts, PAP smears and AIDS
tests. These routine procedures are most often used by practicing physicians
in their outpatient office practices. Physicians may elect to send such
procedures to an independent laboratory or they may choose to establish an
in-house laboratory to perform some of the tests.
The Company performs this core group of routine tests in each
of its 28 major regional laboratories, which constitutes a majority of the
testing performed by the Company. The Company generally performs and reports
most routine procedures within 24 hours, utilizing a variety of sophisticated
and computerized laboratory testing instruments.
Specialty and Niche Testing
While the information provided by many routine tests may be
used by nearly all physicians, regardless of specialty, many other procedures
are more specialized in nature. Certain types of testing capabilities and/or
client requirements have been developed into specialty or niche businesses by
the Company for marketing and management purposes. The following are
specialty and niche businesses in which the Company offers testing and related
services:
<TABLE>
<CAPTION>
<S> <C>
Allergy Testing. ........................... The Company offers an extensive range of allergen testing
services as well as computerized analysis and treatment programs
that enable primary care physicians to diagnose and treat many
kinds of allergic disorders.
Ambulatory Monitoring....................... The Company performs a computer assisted analysis of
electrocardiograms and blood pressure measurements. Many of
these analyses are submitted by physicians who require extended
(up to 24 hours) monitoring of these parameters for patients.
Clinical Research Testing. ................. The Company regularly performs clinical laboratory testing for
pharmaceutical companies conducting clinical research trials on
new drugs. This testing often involves periodic testing of
patients participating in the trial over several years.
Diagnostic Genetics. ....................... The Company offers cytogenetic biochemical and molecular
genetic tests.
Industrial Hygiene Testing. ................ The Company maintains a separate testing facility in Richmond,
Virginia, dedicated to the analysis of potentially toxic substances
in the workplace environment.
Kidney Stone Analysis. ..................... The Company offers specialized patient analysis assessing the
risk of kidney stones based on laboratory measurements and
patient history.
Oncology Testing. .......................... The Company offers an extensive series of testing technologies
that aid in diagnosing and monitoring certain cancers and
predicting the outcome of certain treatments.
Identity Testing. .......................... The Company provides forensic identity testing used in
connection with criminal proceedings and parentage evaluation
services which are used to assist in the resolution of disputed
parentage in child support litigation. Parentage testing involves
the evaluation of immunological and genetic markers in
specimens obtained from the child, the mother and the alleged
father.
Substance Abuse Testing. ................... The Company provides urinalysis testing for the detection of
drugs of abuse for private and government customers, and also
provides blood testing services for the detection of drugs of
abuse and alcohol. These testing services are designed to
produce "forensic" quality test results that satisfy the rigorous
requirements for admissibility as evidence in legal proceedings.
Veterinary Testing. ........................ The Company offers clinical laboratory testing of animal
specimens for veterinarians which require specialized testing
procedures and handling due to their differing characteristics.
</TABLE>
The specialized or niche testing services noted above, as well
as other complex procedures, are sent to designated facilities where the
Company has concentrated the people, instruments and related resources for
performing such procedures so that quality and efficiency can be most
effectively monitored. The Company's Center for Molecular Biology in Research
Triangle Park, North Carolina, also specializes in new test development and
education and training related thereto.
Clients
The Company provides testing services to a broad range of
health care providers. During the year ended December 31, 1995 and the nine
months ended September 30, 1996, no client or group of clients under the same
contract accounted for more than two percent of the Company's net sales. The
primary client groups serviced by the Company include:
Independent Physicians and Physician Groups
Physicians requiring testing for their patients who are
unaffiliated with a managed care plan are one of the Company's primary sources
of testing services. Fees for clinical laboratory testing services rendered
for these physicians are billed either to the physician, to the patient or the
patient's third party payor such as insurance companies, Medicare and
Medicaid. Billings are typically on a fee-for service basis. If the billings
are to the physician, they are based on the wholesale or customer fee schedule
and subject to negotiation. Otherwise, the patient is billed at the
laboratory's retail or patient fee schedule and subject to third party payor
limitations and negotiation by physicians on behalf of their patients.
Medicare and Medicaid billings are based on government set fee schedules.
Hospitals
The Company serves hospitals with services ranging from routine
and specialty testing to contract management services. Hospitals generally
maintain an on-site laboratory to perform immediately needed testing on
patients receiving care. However, they also refer less time sensitive
procedures, less frequently needed procedures and highly specialized
procedures to outside facilities, including independent clinical laboratories
and larger medical centers. The Company typically charges hospitals for any
such tests on a fee-for-service basis which is derived from the Company's
customer fee schedule.
HMOs and Other Managed Care Groups
The Company serves HMOs and other managed care organizations.
These medical service providers typically contract with a limited number of
clinical laboratories and then designate the laboratory or laboratories to be
used for tests ordered by participating physicians. Testing is mostly
performed on a capitated basis for managed care organizations. Under a
capitated payment contract, the Company agrees to cover all laboratory
tests during a given month for which the management care organization
agrees to pay a flat monthly fee. The tests covered under agreements of
this type are negotiated for each contract, but usually include mostly
routine tests and exclude highly specialized tests. Many of the national
and large regional managed care organizations prefer to use large
independent clinical labs such as the Company because they can service them
on a national basis.
Other Institutions
The Company serves other institutions, including governmental
agencies, large employers and other independent clinical laboratories that do
not have the breadth of the Company's testing capabilities. The institutions
typically pay on a negotiated or bid fee-for-service basis.
Payors
Most testing services are billed to a party other than the
"client" that ordered the test. In addition, tests performed by a single
physician may be billed to different payors depending on the medical benefits
of a particular patient. Payors other than the direct patient, include among
others, insurance companies, managed care organizations, Medicare and
Medicaid. Based on the year ended December 31, 1995 and the nine months ended
September 30, 1996 billings to the Company's respective payors based on the
total volume of accessions are as follows:
<TABLE>
<CAPTION>
Accession Volume as a % of Total
----------------------------------
Nine Months Ended Revenue per
Fiscal 1995 September 30, 1996 Accession
----------- ------------------ -----------
<S> <C> <C> <C>
Private Patients.......................... 3 - 5% 3 - 5% $65 - 75
Medicare, Medicaid and Insurance.......... 25 - 30% 30 - 35% $25 - 35
Commercial Clients........................ 50 - 55% 45 - 50% $15 - 25
Managed Care.............................. 15 - 20% 15 - 20% $10 - 30
</TABLE>
Hospital Affiliations and Alliances
The Company provides management services in a variety of health
care settings. The Company generally supplies the laboratory manager and
other laboratory personnel, as well as equipment and testing supplies to
manage a laboratory that is owned by a hospital, managed care organization or
other health care provider. In addition, the Company maintains a data
processing system to organize and report test results and to provide billing
and other pertinent information related to the tests performed in the managed
laboratory. Under the typical laboratory management agreement, the laboratory
manager, who is often employed by the Company, reports to the hospital or
clinic administration. Thus, the hospital or clinic ("Provider") maintains
control of the laboratory. A pathologist designated by the Provider serves as
medical director for the laboratory.
An important advantage the Company offers to its clients is the
flexibility of the Company's information systems used in contract management
services. In addition to the ability to be customized for a particular user's
needs, the Company's information systems also interface with several hospital
and clinic systems, giving the user more efficient and effective information
flow.
The Company's management service contracts typically have terms
between three and five years. However, most contracts contain a clause that
permits termination prior to the contract expiration date. The termination
terms vary but they generally fall into one of the following categories: (i)
termination without cause by either the Company or the contracted Provider
after written notice (generally 60 to 90 days prior to termination); (ii)
termination by the contracted Provider only if there are uncorrected
deficiencies in the Company's performance under the contract after notice by
the contracted Provider; or (iii) termination by the contracted Provider if
there is a loss of accreditation held by any Company laboratory that services
the contracted Provider, which accreditation is not reinstated within 30 days
of the loss, or up to 30 days' notice if there is a decline in the quality of
services provided under such contract which remains uncorrected after a 15-day
period. While the Company believes that it will maintain and renew its
existing contracts, there can be no assurance of such maintenance or renewal.
As part of its marketing efforts, and as a way to focus on a
contract management client's particular needs, the Company has developed
several different pricing formulas for its management services agreements. In
certain cases, profitability may depend on the Company's ability to accurately
predict test volumes, patient encounters or the number of admissions in the
case of an inpatient facility.
PCS
In 1996, the Company entered into an agreement with PCS to
provide laboratory services as an extension of its prescription card services.
PCS, a wholly-owned subsidiary of Eli Lilly and Company, is one of the leading
pharmacy benefit management company in the United States with 58 million
members covered by its programs and services. The arrangement with PCS is
modeled after the current PCS prescription benefit plan. Patients will be
provided with identification cards indicating beneficiary eligibility for both
PCS prescription benefits and Company testing services.
The process begins when a test sample is collected at the
physician's office or local Company service center. Eligibility verification
capabilities will be available at the service center, regional laboratory and
centralized billing office using the electronic network managed by PCS. The
laboratory sample will be sent via the courier to the Company testing
facility. After tests are completed, the results are forwarded to the
physician and the billing information regarding the tests performed are sent
to PCS for plan processing and claim remittance.
The benefits to the client under the PCS arrangement include
the ability to tailor the program to meet the specific needs of client
companies and their employees and the ability to provide (i) combined
utilization reporting for potential outcomes measurement and disease
management and (ii) consistent, cost effective, quality laboratory services to
employees in several geographic locations through the Company's national
presence. The benefits to the Company are the ability to ensure eligibility
at the time of specimen collection, a pricing above the Company's current
composite price per accession despite a significant discount to the client and
improved cash flow through contracted reimbursement.
Sales and Marketing
The Company offers its services through a combination of direct
sales generalists and specialists. Sales generalists market the mainstream or
traditional routine laboratory services primarily to physicians, while
specialists concentrate on individual market segments, such as hospitals or
managed care organizations, or on testing niches, such as identity testing or
genetic testing. Specialist positions are established when an in-depth level
of expertise is necessary to effectively offer the specialized services. When
the need arises, specialists and generalists work cooperatively to address
specific opportunities. At September 30, 1996, the Company employed
approximately 267 generalists and 81 specialists. The Company's sales
generalists and specialists are compensated through a combination of salaries,
commissions and bonuses, at levels commensurate with each individual's
qualifications and responsibilities. Commissions are primarily based upon the
individual's productivity in generating new business for the Company.
The Company also employs customer service associates ("CSAs")
to interact with clients on an ongoing basis. CSA's monitor the status of the
services being provided to clients, act as problem-solvers, provide
information on new testing developments and serve as the client's regular
point of contact with the Company. At September 30, 1996, the Company
employed approximately 370 CSA's. CSA's are compensated with a combination of
salaries and bonuses commensurate with each individual's qualifications and
responsibilities.
The Company believes that the clinical laboratory service
business is shifting away from the traditional direct sales structure and into
one in which the purchasing decisions for laboratory services are increasingly
made by managed care organizations, insurance plans, employers and
increasingly by patients themselves. In view of these changes, the Company
has adapted its sales and marketing structure to more appropriately address
the new opportunities. For example, the Company has expanded its specialists
sales positions in both its primary business and its niche businesses in order
to maximize the Company's competitive strengths of advanced technology and
marketing focus. Additionally, the Company has begun to integrate selected
traditional sales and customer support functions into a new position, the
Account Manager, which will have responsibility for certain sales, service and
daily operational contact with physician-clients.
Information Systems
The Company believes that the health care provider's need for
data will continue to place high demands on its information systems staff. The
Company operates several systems to handle laboratory, billing and financial
data and transactions. The Company believes that the efficient handling of
information involving clients, patients, payors and other parties will be a
critical factor in the Company's future success. In 1995, the Company created
the Corporate Information Systems Division to manage its information resources
and programs on a consolidated basis in order to achieve greater efficiency
and economies of scale. In addition, as a key part of its response to these
challenges, the Company hired a Chief Information Officer, whose
responsibility is to integrate, manage and develop the Company's information
systems.
In 1996, information systems activities have been focused on
selection and consolidation of the Company's multiple laboratory and billing
systems to standardized laboratory testing and billing systems. The Company
has also been focused on the establishment of regional data centers to handle
all of the information processing needs of the Company. The Company believes
that it can benefit from the conversion of its multiple billing systems into a
centralized system which it plans to implement once problems with the
collection of accounts receivable balances resulting from increased medical
necessity and diagnosis code requirements are corrected. These conversions
are expected to be completed within two years. The Company does not
anticipate that the conversion costs will result in a significant increase in
capital expenditures over the levels spent during the last several years.
Billing
Billing for laboratory services is a complicated process.
Laboratories must bill many different payors such as doctors, patients,
hundreds of different insurance companies, Medicare, Medicaid and employer
groups, all of whom have different billing requirements. The Company believes
that a majority of its bad debt expense is the result of non-credit related
issues which slow the billing process, create backlogs of unbilled
requisitions and generally increase the aging of accounts receivable. A
primary cause of bad debt expense is missing or incorrect billing information
on requisitions. The Company believes that this experience is similar to that
of its primary competitors. The Company performs the requested tests and
returns back the test results regardless of whether billing information has
been provided at all or has been provided incorrectly. The Company
subsequently attempts to obtain any missing information or rectify any
incorrect billing information received from the health care provider. Among
the many other factors complicating the billing process are more complicated
billing arrangements due to contracts with third-party administrators,
disputes between payors as to the party responsible for payment of the bill
and auditing for specific compliance issues. Ultimately, if all issues are
not resolved in a timely manner, the related receivables are written off to
bad debt expense.
The Company's bad debt expense has increased since the Merger
due principally to three developments that have further complicated the
billing process: (1) increased complexities in the billing process due to
requirements of managed care payors; (2) increased medical necessity and
diagnosis code requirements; and (3) existence of multiple billing information
systems. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
During the fourth quarter of 1995 and the second quarter of
1996, the Company recorded pre-tax special charges of $15 million and $10
million, respectively, based on the Company's determination that additional
reserves were needed to cover potentially lower collection rates from several
third-party payors. In addition, the Company increased its monthly provision
for doubtful accounts during the third quarter of 1996. To date, accounts
receivable balances have continued to grow. Although there can be no
assurance of success, the Company has recently developed a number of
initiatives to address the complexity of the billing process and to improve
the collection rates. These initiatives include: reorganization of
departments to allow for more focus on specific issues; retention of
management consultants to assess the situation and assist in re-engineering
the billing process; establishment of a project group to address inaccurate
and missing billing information captured when the specimen is received;
addition of staff in each operating division to train field personnel in
billing matters and to review and approve contracts with third-party payors to
ensure that contracts can be properly billed; and training of clients related
to limited coverage tests and the importance of providing diagnosis codes
pertaining to such tests. Additionally, the Company believes that it can
benefit from the conversion of its multiple billing systems into a centralized
system which it plans to implement once the accounts receivable situation is
stabilized.
Quality Assurance
The Company considers the quality of its tests to be of
critical importance, and it has established a comprehensive quality assurance
program for all of its laboratories and other facilities, designed to help
assure accurate and timely test results. In addition to the compulsory
external inspections and proficiency programs demanded by HCFA and other
regulatory agencies, Company-wide systems and procedures are in place to
emphasize and monitor quality assurance. All of the Company's regional
laboratories are subject to on-site evaluations, the College of American
Pathologists ("CAP") proficiency testing program, state surveys and the
Company's own internal quality control programs.
External Proficiency/ Accreditations. The Company participates
in numerous externally-administered, blind quality surveillance programs,
including the CAP program. The blind programs supplement all other quality
assurance procedures and give management the opportunity to review its
technical and service performance from the client's perspective.
Internal Quality Control. The Company regularly performs
internal quality control testing by running quality control samples with known
values with patient samples submitted for testing. All quality control sample
test results are entered into the Company's national laboratory computer,
which connects the Company's facilities nationwide to a common on-line quality
control database. This system helps technologists and technicians check
quality control values and requires further prompt verification if any quality
control value is out of range. The Company has an extensive, internally
administered program of blind sample proficiency testing (i.e. the testing
laboratory does not know the sample being tested is a quality control sample),
as part of which the Company's locations receive specimens from the Company's
Quality Assurance and Corporate Technical Services departments for analysis.
The CAP accreditation program involves both on-site inspections
of the laboratory and participation in the CAP's proficiency testing program
for all categories in which the laboratory is accredited by the CAP. The CAP
is an independent non-governmental organization of board certified
pathologists which offers an accreditation program to which laboratories can
voluntarily subscribe. The CAP has been accredited by the HCFA to inspect
clinical laboratories to determine CLIA standards. A laboratory's receipt of
accreditation by the CAP satisfies the Medicare requirement for participation
in proficiency testing programs administered by an external source. All of
the Company's major laboratories are accredited by the CAP.
Competition
The clinical laboratory business is intensely competitive. The
Company believes that in 1995 the entire United States clinical laboratory
testing industry had revenues exceeding $30 billion; approximately 46% of such
revenues were attributable to hospital-affiliated laboratories, approximately
39% were attributable to independent clinical laboratories and approximately
15% were attributable to physicians in their offices and laboratories. As
recently as 1993, there were seven laboratories that provided clinical
laboratory testing services on a national basis: NHL, RBL, Quest, SmithKline,
Damon Corporation, Allied and Nichols Institute. Apart from the Merger and
the Allied Acquisition, Quest acquired Nichols Institute in August 1994 and
Damon Corporation in August 1993. In addition, in the last several years a
number of large regional laboratories have been acquired by national clinical
laboratories. There are presently three national independent clinical
laboratories: the Company, which had approximately $1.6 billion in revenues
from clinical laboratory testing in 1996; Quest, which had approximately $1.6
billion in revenues from clinical laboratory testing in 1996; and SmithKline,
which had approximately $1.3 billion in revenues from clinical laboratory
testing in 1996.
In addition to the two national clinical laboratories, the
Company competes on a regional basis with many smaller regional independent
clinical laboratories as well as laboratories owned by hospitals and
physicians. The Company believes that the following factors, among others,
are often used by health care providers in selecting a laboratory: (i) pricing
of the laboratory's test services; (ii) accuracy, timeliness and consistency
in reporting test results; (iii) number and type of tests performed; (iv)
service capability and convenience offered by the laboratory; and (v) its
reputation in the medical community. The Company believes that it competes
favorably with its principal competitors in each of these areas and is
currently implementing strategies to improve its competitive position. See
"--Business Strategy."
The Company believes that consolidation will continue in the
clinical laboratory testing business. In addition, the Company believes that
it and the other large independent clinical laboratory testing companies will
be able to increase their share of the overall clinical laboratories testing
market due to a number of external factors including cost efficiencies
afforded by large-scale automated testing, Medicare reimbursement reductions
and the growth of managed health care entities which require low-cost testing
services and large service networks. In addition, legal restrictions on
physician referrals and the ownership of laboratories as well as increased
regulation of laboratories are expected to contribute to the continuing
consolidation of the industry.
Properties
The following table summarizes certain information as to the
Company's principal operating and administrative facilities as of December 31,
1996.
<TABLE>
<CAPTION>
Approximate Area
Location (in square feet) Nature of Occupancy
-------- ----------------- -------------------
<S> <C> <C>
Operating Facilities:
Birmingham, Alabama 100,000 Lease expires 2005
Phoenix, Arizona 43,000 Lease expires 2001; one 5 year
renewal option
San Diego, California 54,000 Lease expires 2007
Denver, Colorado 20,000 Lease expires 2001; two 5 year
renewal options
Tampa, Florida 95,000 Lease expires 2009; one 5 year
renewal option
Chicago, Illinois 40,000 Lease expires 2003; two 5 year
renewal options
Louisville, Kentucky 60,000 Lease expires 2002; three 5 year
renewal options
Detroit, Michigan 32,000 Lease expires 2004; two 5 year
renewal options
Kansas City, Missouri 78,000 Owned
Reno, Nevada 16,000 Owned
14,000 Lease expires 1999; 2 year
renewal option
Raritan, New Jersey 186,000 Owned
Uniondale, New York 108,000 Lease expires 2007; two 5 year
renewal options
Burlington, North Carolina 205,000 Owned
Charlotte, North Carolina 25,000 Lease expires 1997; renewal
option every 3 years
Research Triangle Park, North 74,000 Lease expires 2008, three 5 year
Carolina renewal options
111,000 Lease expires 2011; three 5 year
renewal options
Winston-Salem, North Carolina 73,000 Lease expires 2009; one 5 year
renewal option
Dublin, Ohio 82,000 Owned
Memphis, Tennessee 30,000 Lease expires 1999; one 5 year
renewal option
Dallas, Texas 54,000 Lease expires 2004; one 5 year
renewal option
Houston, Texas 32,000 Lease expires 1997
San Antonio, Texas 44,000 Lease expires 2004; one 5 year
renewal option
Salt Lake City, Utah 20,000 Lease expires 2002; two 5 year
renewal options
Chesapeake, Virginia 21,000 Lease expires 2002; two 5 year
renewal options
Herndon, Virginia 64,000 Lease expires 2004; one 5 year
renewal option
Richmond, Virginia 57,000 Lease expires 2001; one 5 year
renewal option
Seattle, Washington 42,000 Lease expires 1998; two 5 year
renewal options
Fairmont, West Virginia 25,000 Lease expires 2005; three 5 year
renewal options
Administrative Facilities:
Burlington, North Carolina 160,000 Owned
188,000 Leases expire 1997-2008; various
options to purchase or renew
</TABLE>
Employees
At December 31, 1996, the Company employed approximately 22,000
people. These include approximately 18,000 full-time employees and
approximately 4,000 part-time employees, which represents the equivalent of
approximately 19,300 persons full-time. Of the approximately 19,300 full-time
equivalent employees, approximately 400 are sales personnel, approximately
17,000 are laboratory and distribution personnel and approximately 1,900 are
administrative and data processing personnel. The Company has one collective
bargaining agreement which covers approximately 20 employees. The Company
believes that its overall relations with its employees are good.
Legal Proceedings
The Company is involved in various legal proceedings arising in
the ordinary course of business. Some of the proceedings against the Company
involve claims that are substantial in amount. Although it is not feasible to
predict the outcome of such proceedings or any claims made against the
Company, it does not anticipate that the ultimate liability of such
proceedings or claims will have a material adverse effect on the Company's
financial position or results of operations as they primarily relate to
professional liability for which the Company believes it has adequate
insurance coverage. The Company maintains professional liability insurance
for its professional liability claims.
REGULATION AND REIMBURSEMENT
General
The clinical laboratory industry is subject to significant
governmental regulation at the Federal, state and local levels. Under CLIA,
virtually all clinical laboratories, including those owned by the Company,
must be certified by the Federal government. Many clinical laboratories
must also meet governmental standards, undergo proficiency testing and are
subject to inspection. Certifications or licenses are also required by
various state and local laws.
The health care industry is undergoing significant change as
third-party payors, such as Medicare (which principally serves patients 65 and
older) and Medicaid (which principally serves indigent patients) and insurers,
increase their efforts to control the cost, utilization and delivery of health
care services. In an effort to address the problem of increasing health care
costs, legislation has been proposed or enacted at both the Federal and state
levels to regulate health care delivery in general and clinical laboratories
in particular. Some of the proposals include managed competition, global
budgeting and price controls. Although the Clinton Administration's health
care reform proposal, initially advanced in 1994, was not enacted, such
proposal or other proposals may be considered in the future. In particular,
the Company believes that reductions in reimbursement for Medicare services
will continue to be implemented from time to time. Reductions in the
reimbursement rates of other third-party payors are likely to occur as well.
The Company cannot predict the effect health care reform, if enacted, would
have on its business, and there can be no assurance that such reforms, if
enacted, would not have a material adverse effect on the Company's business
and operations.
Regulation of Clinical Laboratories
CLIA extends Federal oversight to virtually all clinical
laboratories by requiring that laboratories be certified by the government.
Many clinical laboratories must also meet governmental quality and personnel
standards, undergo proficiency testing and be subject to biennial inspection.
Rather than focusing on location, size or type of laboratory, this extended
oversight is based on the complexity of the tests performed by the laboratory.
In 1992, HHS published regulations implementing CLIA. The
quality standards and enforcement procedure regulations became effective in
1992, although certain personnel, quality control and proficiency testing
requirements are currently being phased in by HHS. The quality standards
regulations divide all tests into three categories (waivered, moderate
complexity and high complexity) and establish varying requirements depending
upon the complexity of the test performed. A laboratory that performs high
complexity tests must meet more stringent requirements than a laboratory that
performs only moderate complexity tests, while those that perform only one or
more of approximately twelve routine "waivered" tests may apply for a waiver
from most requirements of CLIA. All major and many smaller company facilities
are certified by CLIA to perform high complexity testing. The remaining
smaller testing sites of the Company are certified by CLIA to perform moderate
complexity testing or have obtained a waiver from most requirements of CLIA.
Generally, the HHS regulations require, for laboratories that perform high
complexity or moderate complexity tests, the implementation of systems that
ensure the accurate performance and reporting of test results, establishment
of quality control systems, proficiency testing by approved agencies and
biennial inspections.
The sanction for failure to comply with these regulations may
be suspension, revocation or limitation of a laboratory's CLIA certificate
necessary to conduct business, significant fines and criminal penalties. The
loss of a license, imposition of a fine or future changes in such Federal,
state and local laws and regulations (or in the interpretation of current laws
and regulations) could have a material adverse effect on the Company.
The Company is also subject to state regulation. CLIA provides
that a state may adopt more stringent regulations than Federal law. For
example, state law may require that laboratory personnel meet certain
qualifications, specify certain quality controls, maintain certain records and
undergo proficiency testing. For example, certain of the Company's
laboratories are subject to the State of New York's clinical laboratory
regulations, which contain provisions that are more stringent than Federal
law.
The Company's laboratories have continuing programs to ensure
that their operations meet all applicable regulatory requirements.
Regulation Affecting Reimbursement of Clinical Laboratory
Services
Containment of health care costs, including reimbursement for
clinical laboratory services, has been a focus of ongoing governmental
activity. In 1984, Congress established a Medicare fee schedule for clinical
laboratory services performed for patients covered under Part B of the
Medicare program. Subsequently, Congress imposed a national ceiling on the
amount that can be paid under the fee schedule. Laboratories must accept the
scheduled amount as payment in full for covered tests performed on behalf of
Medicare beneficiaries and must bill the program directly. In addition, state
Medicaid programs are prohibited from paying more than the Medicare fee
schedule amount for clinical laboratory services furnished to Medicaid
recipients. In 1995 and the first nine months of 1996, the Company derived
approximately 28% and 24%, respectively, of its net sales from tests performed
for beneficiaries of Medicare and Medicaid programs. In addition, the
Company's other business depends significantly on continued participation in
these programs because clients often want a single laboratory to perform all
of their testing services. Since 1984, Congress has periodically reduced the
ceilings on Medicare reimbursement to clinical laboratories from previously
authorized levels. In 1993, pursuant to provisions in the Omnibus Budget and
Reconciliation Act of 1993 ("OBRA '93"), Congress reduced, effective
January 1, 1994, the Medicare national limitations from 88% of the 1984
national median to 76% of the 1984 national median, which reductions were
implemented on a phased-in basis from 1994 through 1996 (to 84% in 1994,
80% in 1995 and 76% in 1996). The 1996 reduction to 76% was implemented as
scheduled on January 1, 1996. OBRA '93 also eliminated the provision for
annual fee schedule increases based upon the consumer price index for 1994
and 1995. These reductions were partially offset, however, by annual
consumer price index fee schedule increases of 3.2% and 2.7% in 1996 and
1997, respectively. Because a significant portion of the Company's costs
are relatively fixed, these Medicare reimbursement reductions have a direct
adverse effect on the Company's net earnings and cash flows. The Company
cannot predict if additional Medicare reductions will be implemented.
On January 1, 1993, numerous changes in the Physicians' Current
Procedural Terminology ("CPT") were published. The CPT is a coding system
that is published by the American Medical Association. It lists descriptive
terms and identifying codes for reporting medical and medically related
services. The Medicare and Medicaid programs require suppliers, including
laboratories, to use the CPT codes when they bill the programs for services
performed. HCFA implemented these CPT changes for Medicare on August 1, 1993.
The CPT changes have altered the way the Company bills third-party payors for
some of its services, thereby reducing the reimbursement the Company receives
from those programs for some of its services. For example, certain codes for
calculations, such as LDL cholesterol, were deleted and are no longer a
payable service under Medicare and Medicaid.
Moreover, Medicare denied reimbursement to NHL for claims
submitted for HDL cholesterol and serum ferritin (a measure of iron in the
blood) tests from September 1993 to December 1993, at which time NHL removed
such tests from its basic test profiles.
In 1996, the HCFA implemented changes in the policies used to
administer Medicare payments to clinical laboratories for the most frequently
performed automated blood chemistry profiles. Among other things, the changes
established a consistent standard nationwide for the content of the automated
chemistry profiles. Another change incorporated in the HCFA policy requires
laboratories performing certain automated blood chemistry profiles to obtain
and provide documentation of the medical necessity of tests included in the
profiles for each Medicare beneficiary. The Company expects to incur
additional costs associated with the implementation of these requirements.
The amount of additional costs and potential reductions in reimbursement for
certain components of chemistry profiles and the impact on the Company's
financial condition and results of operations have not yet been determined.
Future changes in Federal, state and local regulations (or in
the interpretation of current regulations) affecting governmental
reimbursement for clinical laboratory testing could have a material adverse
effect on the Company. The Company is unable to predict, however, whether and
what type of legislation will be enacted into law.
Fraud and Abuse Regulations
The Medicare and Medicaid anti-kickback laws prohibit
intentionally paying anything of value to influence the referral of
Medicare and Medicaid business. HHS has published safe harbor regulations
which specify certain business activities that, although literally covered
by the laws, will not violate the Medicare/Medicaid anti-kickback laws.
Failure to fall within a safe harbor does not constitute a violation of the
anti-kickback laws if all conditions of the safe harbor are met; rather,
the arrangement would remain subject to scrutiny by HHS.
In October 1994, the OIG issued a Special Fraud Alert, which
set forth a number of practices allegedly engaged in by clinical laboratories
and health care providers that the OIG believes violate the anti-kickback
laws. These practices include providing employees to collect patient samples
at physician offices if the employees perform additional services for
physicians that are typically the responsibility of the physicians' staff;
selling laboratory services to renal dialysis centers at prices that are below
fair market value in return for referrals of Medicare tests which are billed
to Medicare at higher rates; providing free testing to a physician's HMO
patients in situations where the referring physicians benefit from such lower
utilization; providing free pickup and disposal of bio-hazardous waste for
physicians for items unrelated to a laboratory's testing services; providing
facsimile machines or computers to physicians that are not exclusively used in
connection with the laboratory services performed; and providing free testing
for health care providers, their families and their employees (professional
courtesy testing). The OIG stressed in the Special Fraud Alert that when one
purpose of the arrangements is to induce referral of program-reimbursed
laboratory testing, both the clinical laboratory and the health care provider
or physician may be liable under the anti-kickback laws and may be subject to
criminal prosecution and exclusion from participation in the Medicare and
Medicaid programs.
According to the 1995 work plan of the OIG, its recently
established Office of Civil Fraud and Administrative Adjudication ("OCFAA")
will be responsible for protecting the government-funded health care programs
and deterring fraudulent conduct by health care providers through the
negotiation and imposition of civil monetary penalties, assessments and
program exclusions. The OCFAA works very closely with the Department of
Justice, the Office of General Counsel and the OIG investigative and audit
offices in combating fraud and abuse. In addition, the OIG has stated in its
1995 work plan that it will determine the extent to which laboratories supply
physicians' offices with phlebotomists (blood-drawing technicians), offer
management services or medical waste pick-up to physicians, provide training
to physicians or engage in other financial arrangements with purchasers of
laboratories' services. The OIG will assess the potential benefits of such
arrangements as well as the extent to which such arrangements might be
unlawful.
In March 1992, HCFA published proposed regulations to implement
the Medicare statute's prohibition (with certain exceptions) on referrals by
physicians who have an investment interest in or a compensation arrangement
with laboratories. The prohibition on referrals also applies where an
immediate family member of a physician has an investment interest or
compensation arrangement with a laboratory. The proposed regulations would
define remuneration that gives rise to a compensation arrangement as including
discounts granted by a laboratory to a physician who sends testing business to
the laboratory and who pays the laboratory for such services. If that
definition of remuneration were to have become effective, it could have had an
impact on the way the Company prices its services to physicians. However, in
August 1993, the referenced Medicare statute was amended by OBRA '93. One of
these amendments makes it clear that day-to-day transactions between
laboratories and their customers, including, but not limited to, discounts
granted by laboratories to their customers, are not affected by the
compensation arrangement provisions of the Medicare statute.
Environmental and Occupational Safety
The Company is subject to licensing and regulation under
Federal, state and local laws and regulations relating to the protection of
the environment and human health and safety, including laws and regulations
relating to the handling, transportation and disposal of medical specimens,
infectious and hazardous waste and radioactive materials as well as to the
safety and health of laboratory employees. All Company laboratories are
subject to applicable Federal and state laws and regulations relating to
biohazard disposal of all laboratory specimens and the Company utilizes
outside vendors for disposal of such specimens. In addition, the Federal
Occupational Safety and Health Administration has established extensive
requirements relating to workplace safety for health care employers, including
clinical laboratories, whose workers may be exposed to blood-borne pathogens
such as HIV and the hepatitis B virus. 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, blood-borne pathogens. Although the Company
is not aware of any current material non-compliances with such Federal, state
and local laws and regulations, failure to comply could subject the Company to
denial of the right to conduct business, fines, criminal penalties and/or
other enforcement actions.
Drug Testing
Drug testing for public sector employees is regulated by the
Substance Abuse and Mental Health Services Administration ("SAMSHA") (formerly
the National Institute on Drug Abuse), which has established detailed
performance and quality standards that laboratories must meet in order to be
approved to perform drug testing on employees of Federal government
contractors and certain other entities. To the extent that the Company's
laboratories perform such testing, each must be certified as meeting SAMSHA
standards. The Company's Research Triangle Park, North Carolina; Memphis,
Tennessee; Raritan, New Jersey; Seattle, Washington; Herndon, Virginia and
Reno, Nevada laboratories are SAMSHA certified.
Controlled Substances
The use of controlled substances in testing for drugs of abuse
is regulated by the Federal Drug Enforcement Administration.
OIG Investigations
Several Federal agencies are responsible for investigating
allegations of fraudulent and abusive conduct by health care providers,
including the Federal Bureau of Investigation, the OIG and the DOJ. In its
published work plan for 1992-1993, the OIG indicated its intention to target
certain laboratory practices for investigation and prosecution. Pursuant to
one such project described in such work plan, entitled "Laboratory Unbundle,"
laboratories that offer packages of tests to physicians and "unbundle" them
into several "tests to get higher reimbursement when billing Medicare and
Medicaid" will be identified and "suitable cases will be presented for
prosecution." Under another project described in such work plan,
laboratories "that link price discounts to the volume of physician referrals,
'unbundle' tests in order to bill Medicare at a higher total rate, and conduct
unnecessary tests... will be identified to coordinate investigations through
the country."
1996 Government Settlement
In August 1993, RBL and Allied each received a subpoena from
the OIG requesting documents and information concerning pricing and billing
practices. In September 1993, NHL received a subpoena from the OIG which
required NHL to provide documents to the OIG concerning its regulatory
compliance procedures. Among other things, the OIG subpoena received by RBL
and Allied called for the production of documents regarding 14 blood chemistry
tests which were being or had been performed by certain independent clinical
laboratories in conjunction with automated chemistry profiles and which were
being or had been billed separately to Medicare or Medicaid. An automated
chemistry profile is a grouping of which tests that can be performed together
on a single specimen and that Medicare and Medicaid pay under the Medicare fee
schedule. The government's investigations covered billings for tests
performed by NHL, RBL and Allied from 1988 to 1994. These tests were deemed
by regulators to be medically unnecessary. The investigations were part of
a broad-based federal inquiry into Medicare and related billings that have
resulted in financial settlements with a number of other clinical
laboratories. The inquiries have also prompted the imposition of more
stringent regulatory compliance requirements industry-wide. Under the terms
of the 1996 Government Settlement, the Company agreed to enter into a
comprehensive Corporate Integrity Agreement and to pay $182 million to settle
civil claims involving Medicare and related government billings for tests
performed by NHL, RBL and Allied. These claims arose out of the government's
contention that laboratories offering profiles containing certain test
combinations had the obligation to notify ordering physicians how much would
be billed to the government for each test performed for a patient whose
tests are paid for by Medicare, Medicaid or other government agency. The
government contended claims submitted for tests ordered by physicians and
performed by the laboratories were improper. The Company settled these
allegations without an admission of fault. The Corporate Integrity
Agreement, among other things, requires that detailed notifications be made
to physicians. In addition, as part of the overall settlement, a San Diego
laboratory that was formerly part of Allied agreed to plead guilty to a
charge of filing a false claim with Medicare and Medicaid in 1991 and to
pay $5 million to the Federal government. The assets of the San Diego
laboratory were sold by Allied in 1992, two years before the Allied
Acquisition. As is customary with asset sales, Allied retained the
liability for conduct preceding the sale--a liability the Company later
succeeded to, following the Allied Acquisition and Merger.
Pursuant to the 1996 Government Settlement, the Company paid
$187 million in December 1996. The Settlement Payment was paid from the
proceeds of a $187 million loan made by Roche to the Company in December 1996.
See "Certain Relationships and Related Transactions--Other Transactions with
Roche."
1992 NHL Government Settlement
In November 1990, NHL became aware of a grand jury inquiry
relating to its pricing practices being conducted by the United States
Attorney for the San Diego area (the Southern District of California) with the
assistance of the OIG. On December 18, 1992, NHL entered into a settlement
with the United States Attorney (the "1992 NHL Government Settlement"), which
related to the government's contention that NHL improperly included tests for
HDL cholesterol and serum ferritin in its basic test profile, without clearly
offering an alternative profile that did not include these medical tests. The
government also contended that, in certain instances, physicians were told
that these additional tests would be included in the basic test profile at no
extra charge. As a result, the government contended, NHL's marketing
activities denied physicians the ability to exercise their judgment as to the
medical necessity of these tests.
Pursuant to the 1992 NHL Government Settlement, NHL pleaded
guilty to the charge of presenting two false claims to the Civilian Health and
Medical Program of the Uniformed Services ("CHAMPUS") and paid a $1 million
fine. In connection with pending and threatened civil claims, NHL also agreed
to pay $100 million to the Federal Government in installments. As of December
31, 1995, all such payments due to the government under the 1992 NHL
Government Settlement had been made. Concurrent with the 1992 NHL Government
Settlement, NHL settled related Medicaid claims with states that account for
over 99.5% of its Medicaid business and paid $10.4 million to the settling
states.
1994 Allied Government Settlement
In April 1994, Allied received a subpoena from the OIG
requesting documents and certain information regarding the Medicare billing
practices of its Cincinnati, Ohio clinical laboratory with respect to certain
cancer screening tests. In March 1995, Allied resolved the issues raised by
the April 1994 subpoena and a related qui tam action commenced in Cincinnati,
Ohio Federal court by entering into agreements with, among others, HHS, the
United States Department of Justice and the relators in the qui tam action
pursuant to which it agreed to pay $4.9 million to settle all pending claims
and inquiries regarding these billing practices and certain others. NHL had
previously established reserves that were adequate to cover such settlement
payments. In connection with the settlement, Allied agreed with HHS, among
other things, to implement a corporate integrity program to ensure that Allied
and its representatives remain in compliance with applicable laws and
regulations and to provide certain reports and information to HHS regarding
such compliance efforts. During 1995 and 1996, Allied met all of its
obligations assumed under the corporate integrity agreement.
Compliance Program
Because of evolving interpretations of regulations and the
national debate over health care, compliance with all Medicare, Medicaid
and other government-established rules and regulations has become a
significant factor throughout the clinical laboratory industry. The
Company has implemented a comprehensive company-wide compliance program.
The objective of the program is to develop, implement and update as
necessary aggressive and reliable compliance safeguards. Emphasis is
placed on developing training programs for personnel to attempt to assure
the strict implementation of all rules and regulations. Further, in-depth
reviews of procedures, personnel and facilities are conducted to assure
regulatory compliance throughout the Company. Such sharpened focus on
regulatory standards and procedures will continue to be a priority for the
Company in the future.
The Company believes that it is in compliance in all material
respects with all statutes, regulations and other requirements applicable to
its clinical laboratory operations. The clinical laboratory testing industry
is, however, subject to extensive regulation, and many of these statutes and
regulations have not been interpreted by the courts. There can be no
assurance therefore that applicable statutes and regulations might not be
interpreted or applied by a prosecutorial, regulatory or judicial authority in
a manner that would adversely affect the Company. Potential sanctions for
violation of these statutes and regulations include significant fines and the
loss of various licenses, certificates and authorizations.
MANAGEMENT
The following table sets forth the directors and executive
officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Thomas P. Mac Mahon 50 Chairman of the Board, President, Chief Executive
Officer and Director
Jean-Luc Belingard 48 Director
Wendy E. Lane 45 Director
Robert E. Mittelstaedt, Jr. 53 Director
James B. Powell, M.D. 58 Director
David B. Skinner, M.D. 61 Director
Andrew G. Wallace, M.D. 61 Director
Wesley R. Elingburg 40 Executive Vice President, Chief Financial Officer
and Treasurer
Larry L. Leonard 55 Executive Vice President, Southwest and West
Divisions
Bradford T. Smith 43 Executive Vice President, General Counsel,
Corporate Compliance Officer and Secretary
Stevan R. Stark 49 Executive Vice President, Alliances and Sales
Coordination
Ronald B. Sturgill 60 Executive Vice President, Human Resources and
South Atlantic Division
William M. Meilahn 56 Senior Vice President, Chief Information Officer
</TABLE>
Thomas P. Mac Mahon has been President and Chief Executive Officer since
January 1997 and has been Chairman and a Director of the Company since April
1996. Prior to April 1996 and since the Merger, Mr. Mac Mahon served as Vice
Chairman and Director. Mr. Mac Mahon was Senior Vice President of Roche from
1993 to January 1997 and President of Roche Diagnostics Group and a Director
and member of the Executive Committee of Roche from 1988 to January 1997. Mr.
Mac Mahon was also a Director of HLR until January 1997. As Senior Vice
President of Roche and President of Roche Diagnostics Group, Mr. Mac Mahon was
responsible for the management of all United States operations of the
diagnostic business of Roche. Mr. Mac Mahon is a member of the management
committee of the Company.
Jean-Luc Belingard has served as a Director of the Company
since the Merger. Mr. Belingard is Director General of the Diagnostics
Division and member of the Executive Committee of F. Hoffmann-La Roche Ltd
("F. Hoffmann-La Roche"), Basel, Switzerland, a subsidiary of Roche Holding.
He joined F. Hoffmann-La Roche in 1982, and held various positions prior to
being named to his current positions in 1990. His current responsibilities
include the management of the worldwide diagnostic business of Roche. Mr.
Belingard is also a director of Perkin-Elmer Corporation, Norwalk, Connecticut
and a Foreign Trade Advisor to the French Government.
Wendy E. Lane has been a Director of the Company since November
1996. Ms. Lane has been Chairman of Lane Holdings, Inc., a private investment
firm, since 1992. Prior to forming Lane Holdings, Inc., Ms. Lane was a
Principal and Managing Director of Donaldson, Lufkin & Jenrette, an investment
banking firm, serving in these and other positions from 1980 to 1992. Ms.
Lane also serves as a director of Watts Industries, Inc.
Robert E. Mittelstaedt, Jr. has been a Director of the Company
since November 1996. Mr. Mittelstaedt is Vice Dean of The Wharton School of
the University of Pennsylvania, Director of the Aresty Institute of Executive
Education. Mr. Mittelstaedt has held these and other positions with the
Wharton school since 1973, with the exception of the period from 1985 to 1989
when he founded, served as President and Chief Executive Officer, and sold
Intellego, Inc., a company engaged in practice management, systems development
and service bureau billing operations in the medical industry. Mr.
Mittelstaedt is also a director of A.G. Simpson Automotive Systems, Inc. and
IS&S Inc.
James B. Powell, M.D. has served as a Director of the Company
since the Merger. From the Merger to January 1997, Dr. Powell served as
President and Chief Executive Officer. Previously, Dr. Powell was President
of RBL from 1982 until the Merger. Dr. Powell has been President, Chief
Executive Officer and Director of Auto Cyte, Inc. ("Auto Cyte") since January
1997. Auto Cyte is a newly formed company specializing in the development of
advanced, automated pap-smear testing technologies. Dr. Powell is a principal
investor in Auto Cyte. He is a medical doctor and became certified in
anatomic and clinical pathology in 1969.
David B. Skinner, M.D. has served as a Director of the Company
since the Merger. Dr. Skinner has been President and Chief Executive Officer
of New York Hospital and Professor of Surgery at Cornell Medical School since
1987. He was the Chairman of the Department of Surgery and Professor of
Surgery at the University of Chicago Hospitals and Clinics from 1972 to 1987.
Andrew G. Wallace, M.D. has served as a Director of the Company
since the Merger. Dr. Wallace has served as both the Dean of Dartmouth
Medical School and Vice President for Health Affairs at Dartmouth College
since 1990. He was the Vice Chancellor for Health Affairs at Duke University
and the Chief Executive Officer of Duke Hospital from 1981 to 1990.
Wesley R. Elingburg has served as Executive Vice President,
Chief Financial Officer and Treasurer since October 24, 1996. Previously, Mr.
Elingburg has served as Senior Vice President, Finance following the Merger.
Prior to that time, Mr. Elingburg served as Senior Vice President-Finance and
Treasurer of RBL from 1988 through April 1995 and Assistant Vice President of
Roche from 1989 until the Merger in April 1995. Mr. Elingburg is a member of
the management committee of the Company.
Larry L. Leonard has served as Executive Vice President of the
Company since 1993. He joined the Company in 1978. Dr. Leonard, who holds a
Ph.D degree in microbiology, was named Senior Vice President of the Company in
1991 and previously was Vice President-Division Manager. Dr. Leonard oversees
major regional laboratories in Arizona, Texas, Colorado, California, Nevada,
Washington and Utah. Dr. Leonard is a member of the management committee of
the Company.
Bradford T. Smith has served as Executive Vice President,
General Counsel and Secretary since the Merger. Mr. Smith was appointed
Corporate Compliance Officer in August 1996. Previously, Mr. Smith served as
Assistant General Counsel of HLR, Division Counsel of RBL and Assistant
Secretary and member of RBL's Senior Management Committee from 1988 until
April 1995. Mr. Smith served as Assistant Secretary of HLR from 1989
until the Merger and as an Assistant Vice President of HLR during 1992 and
1993. Mr. Smith is a member of the management committee of the Company.
Stevan R. Stark was appointed Executive Vice President,
Alliances and Sales Coordination in October 1996 and was Senior Vice
President, New York Division, Cranford Region and Alliance/Hospital Division
since the Merger in April 1995. Mr. Stark oversees the Company's sales
operations including business alliances, managed care and new business
development. Previously, Mr. Stark was a Vice President and Division Manager
from 1991 to 1995 and a Division Manager from 1986 to 1991. He joined the
Company in 1983. Mr. Stark is a member of the management committee of the
Company.
Ronald B. Sturgill has served as Executive Vice President,
Human Resources of the South Atlantic Division since October 1996. Mr.
Sturgill oversees human resources and major regional laboratories in North and
South Carolina. Prior to October 1996, Mr. Sturgill served as Senior Vice
President, South Atlantic Division. Mr. Sturgill served as Senior Vice
President, Administration of RBL from 1987 until the Merger where his duties
included the supervision of Information Systems, Human Resources, Sales
Support and Training. Mr. Sturgill is a member of the management committee of
the Company.
William M. Meilahn has served as Senior Vice President, Chief
Information Officer since December 1995. Previously, Mr. Meilahn was
Executive Vice President, MIS and a director of Eduserv Technologies, Inc.
from 1993 through 1996, and was a Vice President in various capacities for
Automatic Data Processing, Inc. from 1983 through 1993. Mr. Meilahn is a
member of the management committee of the Company.
OWNERSHIP OF CAPITAL STOCK
The following table sets forth as of February 14, 1997, the
total number of shares of Common Stock beneficially owned, and the percent so
owned, by (i) each director of the Company who is a beneficial owner of any
shares of Common Stock, (ii) each person known to the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, (iii)
certain executive officers and (iv) all directors and officers as a group.
The number of shares owned are those "beneficially owned," as determined under
the rules of the Commission, and such information is not necessarily
indicative of beneficial ownership for any other purpose. Under such rules,
beneficial ownership includes any shares as to which a person has sole or
shared voting power or investment power and any shares of common stock which
the person has the right to acquire within 60 days through the exercise of any
option, warrant or right, through conversion of any security, or pursuant to
the automatic termination of power of attorney or revocation of trust,
discretionary account or similar arrangement.
<TABLE>
<CAPTION>
Percent of
Number of Shares Common Stock
Beneficial Owner Beneficially Owned Outstanding
---------------- ------------------- -------------
<S> <C> <C>
Roche Holdings, Inc......................................................... 61,329,256(1) 49.9%
15 East North Street
Dover, DE 19901
Ronald O. Perelman.......................................................... 14,527,244(2) 11.8%
35 East 62nd Street
New York, NY 10021
Thomas P. Mac Mahon......................................................... 3,996 *
James B. Powell, M.D........................................................ 66,667(3) *
Jean-Luc Belingard.......................................................... 3,996 *
David B. Skinner, M.D....................................................... 3,996 *
Andrew G. Wallace, M.D...................................................... 3,996 *
Timothy J. Brodnik.......................................................... --(3) *
Haywood D. Cochrane, Jr..................................................... 107,738(3) *
James R. Maher.............................................................. 205,374 *
John F. Markus.............................................................. 27,649(3) *
Robert E. Whalen............................................................ -- *
David C. Flaugh............................................................. -- *
All current directors and executive officers as a group (13 persons)....... 206,365(3) *
<FN>
- ----------
* Less than 1%
(1) As reported on the Schedule 13D filed with the Commission on May 8, 1995,
on behalf of Roche Holdings, 49,008,538 of these shares are directly
held by HLR, and 12,320,718 of these shares are directly held by Roche
Holdings. Both HLR and Roche Holdings are indirect wholly owned
subsidiaries of Roche. Dr. H.C. Paul Sacher, an individual and
citizen of Switzerland has, pursuant to an agreement, the power to vote
a majority of the voting shares of Roche Holdings.
(2) As reported in the Schedule 13G filed with the Commission on February 13,
1997, on behalf of Mafco, all shares are owned by NHCG, an indirect wholly
owned subsidiary of Mafco. All of the capital stock of Mafco is owned by
Mr. Ronald O. Perelman.
(3) Beneficial ownership by officers and directors of the Company includes
shares of Common Stock which such officers and directors have the right to
acquire upon the exercise of options which either are vested or which may
vest within 60 days. The number of shares of Common Stock included in the
table as beneficially owned which are subject to such options is as
follows: Dr. Powell -- 66,667; all directors and executive officers as a
group (not including Messrs. Brodnik, Cochrane, Flaugh, Markus and Whalen
who are no longer employed by the Company) -- 182,732.
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Stockholder Agreement
In connection with the Merger, the Company, HLR, Roche Holdings
and Roche entered into a stockholder agreement dated as of April 28, 1995 (the
"Stockholder Agreement"). The Stockholder Agreement contains certain
provisions relating to (i) the governance of the Company following the Merger,
including but not limited to the composition of the Board of Directors, (ii)
the issuance, sale and transfer of the Company's Equity Securities (as defined
therein) by the Company and Roche, (iii) the acquisition of additional Equity
Securities and (iv) the registration rights granted by the Company to HLR,
Roche Holdings and Roche with respect to the Company's Equity Securities. A
copy of the Stockholder Agreement was included as an exhibit to the current
report on Form 8-K of the Company filed with the Commission on May 12, 1995 in
connection with the consummation of the Merger.
Pursuant to the Stockholder Agreement, the Board of Directors
of the Company will (subject to specified exceptions) be comprised of seven
members, consisting of three designees of HLR and Roche Holdings (the "Roche
Directors") and four Independent Directors (as defined therein) nominated by
the Nominating Committee of the Board of Directors.
The Stockholder Agreement also provides that, among other
things, certain actions by the Company will require approval by a majority of
the Roche Directors and at least one Independent Director (a "Special Majority
Vote"). Included in these items is any change in the size or composition of
the Board of Directors or any committee thereof and the establishment of a new
committee of the Board of Directors, and with certain exceptions, the issuance
of securities by the Company.
The Stockholder Agreement also provides that, except under
certain circumstances, which include the issuance of Common Stock pursuant to
a public offering, the Company may not issue any equity securities unless HLR
and Roche Holdings are offered the opportunity to purchase an amount of such
stock necessary to maintain their interest.
In addition, the Stockholder Agreement contains a Demand
Registration provision pursuant to which the Company is obligated, upon the
request of HLR, Roche Holdings, or Roche, to file registration statements with
the Commission covering any shares of Common Stock owned by those parties
which are restricted securities within the meaning of Rule 144(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act"). HLR, Roche
Holdings and Roche will also have the right to include such securities in any
registration statement filed by the Company offering securities for its own
account or for the account of any holder other than Mafco or any of its
affiliates, subject to certain reductions if the managing underwriter
determines that the size of the offering or the combination of securities
offered would materially interfere with the offering.
The Sharing and Call Option Agreement
In connection with the Merger Agreement, HLR, Mafco, NHCG, and
the Company entered into the Sharing and Call Option Agreement. The Sharing
and Call Option Agreement provides, among other things, that at any time after
the third anniversary of the Merger, HLR or one of its affiliates (other than
the Company) may exercise the right, which right may only be exercised once,
to purchase all, but not less than all, of the shares of Common Stock then
owned by NHCG, Mafco or any of their controlled affiliates. The Sharing and
Call Option Agreement provides that HLR or one of its affiliates will, if it
elects to exercise this purchase right, pay a price per share for the shares
to be purchased equal to 102% of the average closing price per share of such
security for the 30 trading days before the date of such exercise.
In addition, in accordance with the Sharing and Call Option
Agreement, the Company has filed with the Commission a registration statement
on Form S-3 (the "NHGC Registration Statement") which has been declared
effective by the Commission and includes a resale prospectus that permits NHCG
(or any of its pledgees) to sell shares of Common Stock and Warrants received
by NHCG in the Merger without restriction. The Company has agreed to use its
best efforts to prepare and file with the Commission such post-effective
amendments to the NHCG Registration Statement or other filings as may be
necessary to keep such NHCG Registration Statement continuously effective for
a period ending on the third anniversary of the date of the Sharing and Call
Option Agreement and during such period to use its best efforts to cause the
resale prospectus to be supplemented by any required prospectus supplement.
The Company has also agreed to pay the applicable Registration Expenses (as
defined therein) arising from exercise of the registration rights set forth
in the Sharing and Call Option Agreement. A copy of the Sharing and Call
Option Agreement was filed with the Commission by the Company as an exhibit to
the Company's December 31, 1994 Form 10-K.
Registration Rights Agreement
In addition to those registration rights granted to NHCG under
the Sharing and Call Option Agreement, the Company and NHCG also are parties
to a registration rights agreement dated as of April 30, 1991 (the
"Registration Rights Agreement") pursuant to which the Company is obligated,
upon the request of NHCG, to file registration statements ("Demand
Registration Statements") from time to time with the Commission covering the
sale of any shares of Common Stock owned by NHCG upon the completion of
certain public offerings by the Company of shares of Common Stock in 1991.
Such Demand Registration Statements may also cover the resale from time to
time of any shares of Common Stock that NHCG may purchase in the open market
at a time when it is deemed to be an affiliate (as such term is defined under
Rule 144 under the Securities Act of 1933, as amended), and certain securities
issued in connection with a combination of shares, recapitalization,
reclassification, merger or consolidation, or other pro rata distribution.
NHCG will also have the right to include such Common Stock and other
securities in any registration statement filed by the Company for the
underwritten public offering of shares of Common Stock (whether or not for the
Company's account), subject to certain reductions in the amount of such Common
Stock and securities if the managing underwriters of such offering determine
that the inclusion thereof would materially interfere with the offering. The
Company agreed not to effect any public or private sale, distribution or
purchase of any of its securities which are the same as or similar to the
securities covered by any Demand Registration Statement during the 15-day
period prior to, and during the 45-day period beginning on, the closing date
of each underwritten offering under such registration statement and NHCG
agreed to a similar restriction with respect to underwritten offerings by the
Company. NHCG's rights under the Registration Rights Agreement are
transferable as provided therein.
Until the third anniversary of the Sharing and Call Option
Agreement, when the Company's obligation to keep the NHCG Registration
Statement effective expires, the registration rights granted to NHCG pursuant
to the Registration Rights Agreement are substantially duplicative of those
granted pursuant to the Sharing and Call Option Agreement. After such date
and only to the extent that NHCG still holds shares of Common Stock or
Warrants that it held as of or received in the Merger, NHCG will continue to
be entitled to the registration rights described in the preceding paragraph,
unless the Rights Agreement has been otherwise amended or terminated.
Tax Allocation Arrangement
Until May 7, 1991, the Company was included in the consolidated
federal income tax returns, and in certain state income tax returns, of Mafco,
M&F Holdings, Revlon Group and Revlon. As a result of the reduction of M&F
Holdings' indirect ownership interest in the Company on May 7, 1991, the
Company is no longer a member of the Mafco consolidated tax group. For
periods subsequent to May 7, 1991, the Company files its own separate Federal,
state and local income tax returns. Nevertheless, the Company will remain
obligated to pay to M&F Holdings (or other members of the consolidated group
of which M&F Holdings is a member) any income taxes the Company would have had
to pay (in excess of those which it has already paid) if it had filed separate
income tax returns for taxable periods beginning on or after January 1, 1985
(but computed without regard to (i) the effect of timing differences (i.e.,
the liability or benefit that otherwise could be deferred will be, instead,
includible in the determination of current taxable income) and (ii) any gain
recognized on the sale of any asset not in the ordinary course of business).
In addition, despite the reduction of M&F Holdings' indirect ownership of the
Company, the Company will continue to be subject under existing federal
regulations to several liability for the consolidated federal income taxes for
any consolidated return year in which it was a member of any consolidated
group of which Mafco, M&F Holdings, Revlon Group or Revlon was the common
parent. However, Mafco, M&F Holdings, Revlon Group and Revlon have agreed to
indemnify the Company for any federal income tax liability (or any similar
state or local income tax liability) of Mafco, M&F Holdings, Revlon Group,
Revlon or any of their subsidiaries (other than that which is attributable to
the Company or any of its subsidiaries) that the Company would be required to
pay.
Other Transactions with Roche
In December 1996, the Company received a loan from Roche
Holdings of $187.0 million to fund the Settlement Payment in the form of a
promissory note which bears interest at 6.625% per annum and matures March 31,
1997. Such note will be repaid with a portion of the proceeds from the Rights
Offering.
The Company has certain on-going arrangements with Roche for
the purchase by the Company of certain products and the licensing by the
Company from Roche of certain diagnostics technologies, with an aggregate
value of approximately $9.1 million and $18.7 million in 1995 and 1996,
respectively. The Company provides certain diagnostic testing and support
services to Roche in connection with Roche's clinical pharmaceutical trials,
with an aggregate value of approximately $2.3 million and $2.4 million in 1995
and 1996, respectively. In addition, in connection with the Merger, the
Company and Roche entered into a transition services agreement for the
provision by Roche to the Company of certain payroll and other corporate
services for a limited transition period following the Merger. These services
were charged to the Company based on the time involved and the Roche personnel
providing the service. The Company paid Roche a total of approximately
$215,000 and $267,000 in 1995 and 1996, respectively, for these services.
Each of these arrangements was entered into in the ordinary course of
business, on an arm's length basis and on terms which the Company believes are
no less favorable to it than those obtainable from unaffiliated third parties.
Pursuant to the Merger Agreement, an aggregate of 61,329,256
shares of Common Stock were issued to HLR and its designee, Roche Holdings in
exchange for all shares of common stock, no par value, of RBL outstanding
immediately prior to the effective date of the Merger (other than treasury
shares, which were canceled) and a cash contribution of $135.7 million. The
issuance of such shares of Common Stock constituted approximately 49.9% of the
total outstanding shares of Common Stock outstanding immediately after the
Merger.
In addition, pursuant to the Merger Agreement on April 28, 1995
the Company issued to Roche, for a purchase price of approximately $51.0
million, warrants to purchase 8,325,000 shares of Common Stock.
HLR and Roche Holdings have indicated that they intend to
exercise their Basic Subscription Privilege in the Rights Offering in full for
approximately $250 million of Series B PIK Preferred Stock. HLR and Roche
Holdings have not currently indicated whether or not they will exercise their
Oversubscription Privilege.
DESCRIPTION OF THE AMENDED CREDIT AGREEMENT
In connection with the Rights Offering existing lenders under
the Existing Credit Agreement will enter into the Amended Credit Agreement
with the Company. A copy of the form of the Amended Credit Agreement has been
filed as an exhibit to the Registration Statement of which this Prospectus is
a part. The following summaries of certain provisions of the Amended Credit
Agreement do not purport to be complete and where reference is made to
particular provisions of the Amended Credit Agreement such provisions,
including definitions of certain terms are incorporated by reference as a part
of such summaries or terms, which are qualified in their entirety by such
reference.
The Amended Credit Agreement will make available to the Company
a term loan facility of $693.8 million (the "Amended Term Loan Facility") and
a $450.0 million revolving credit facility (the "Amended Revolving Credit
Facility"). Following the Rights Offering, assuming only HLR and Roche
Holdings exercise their Basic Subscription Privilege, the Company estimates
that availability under the Amended Credit Agreement will be approximately
$99 million ($299 million if all shares of Preferred Stock are purchased in
the Rights Offering). Such availability will be conditioned on certain
customary conditions contained in the Amended Credit Agreement.
Facilities and Maturity Dates
As in the Existing Credit Agreement, the senior unsecured
credit facilities under the Amended Credit Agreement will be composed of the
Amended Term Loan Facility and the Amended Revolving Credit Facility. The
Amended Revolving Credit Facility will include a $50,000,000 letter of credit
sublimit. The Amended Credit Agreement maturity dates will be extended
approximately three years for the Amended Term Loan Facility to March 31, 2004
and approximately four years for the Amended Revolving Credit Facility to March
31, 2004.
Interest Margins and Facility Fee
As in the Existing Credit Agreement, both the Amended Term Loan
Facility and the Amended Revolving Credit Facility will bear interest, at the
option of the Company, at (i) the base rate plus the applicable base rate
margin or (ii) the eurodollar rate plus the applicable eurodollar rate margin.
The Amended Credit Agreement provides that in the event of a reduction of the
percentage of Common Stock held by HLR, Roche Holdings and their affiliates
(other than the Company and its subsidiaries) below 25%, the applicable
interest margins and facility fees on borrowings outstanding under the Amended
Credit Agreement will increase. The amount of the increase will depend, in
part, on the leverage ratio of the Company at the time of such reduction. In
addition, pursuant to the Amended Credit Agreement, the applicable interest
margins on borrowings outstanding thereunder will be based upon the leverage
ratio.
Amendment Fees
The Company will pay each lender an amendment fee based on its
commitment.
Letter of Credit Issuers, Fronting Fee and Letter of Credit Fee
Any lender that is party to the Amended Credit Agreement may
serve as a letter of credit issuer under the Amended Credit Agreement, as
agreed between the Company and such lender. The fronting fee payable to each
letter of credit issuer will be as negotiated between the Company and such
issuer, but will not exceed 0.125% per annum of the outstanding amount of such
issuer's letter of credit. Each lender will be deemed to have purchased a
participating interest in each letter of credit, and in addition to the
fronting fee the Company will pay a letters of credit fee for the account of
all the lenders equal to the applicable Amended Term Loan Facility Eurodollar
Rate Margin minus 0.125% per annum.
Term Facility Amortization
Total amortization of the Amended Term Loan Facility for each
twelve-month period following the Closing Date will be reduced significantly
for the first three years, and will be made (in quarterly installments) in
accordance with the following table:
Year Amount
---- ------
(in millions)
1997.............................. $0
1998.............................. $0
1999.............................. $50
2000.............................. $100
2001.............................. $150
2002.............................. $150
2003.............................. $150
3/31/2004......................... $93.75
Mandatory and Optional Prepayments and Commitment Reductions
As in the Existing Credit Agreement, the amounts available
under the Amended Revolving Credit Facility will be subject to certain
mandatory permanent reduction and prepayment requirements and the Amended Term
Loan Facility will be subject to specified mandatory prepayment requirements.
In the Amended Credit Agreement, required amounts will first be applied to
repay scheduled Amended Term Loan Facility payments until the Amended Term
Loan Facility is repaid in full and then to reduce the commitments and
advances under the Amended Revolving Credit Facility. Required payments and
reductions will include (i) the proceeds of debt issuances, subject to certain
exceptions; (ii) the proceeds of certain asset sales, unless reinvested within
one year of the applicable asset sale in productive assets of a kind then used
or usable in the business of the Company and its subsidiaries; (iii) the
proceeds of sales of accounts receivable, subject to certain exceptions; (iv)
the proceeds of sales of equity securities in excess of certain amounts; and
(v) under certain circumstances, a percentage of excess cash flow, as
calculated annually.
Representations and Warranties
The Amended Credit Agreement will contain representations and
warranties substantially similar to those set forth in the Existing Credit
Agreement.
Conditions Precedent
Conditions precedent to closing under the Amended Credit
Agreement will include, without limitation, execution of loan documentation
satisfactory to the lenders, receipt of appropriate certificates and legal
opinions, accuracy in all material respects of representations and warranties,
absence of defaults and material litigation, evidence of authority, receipt of
1996 audited financial statements, absence of material adverse change in the
Company and its subsidiaries (taken as a whole) since December 31, 1996,
satisfactory review of the 1996 Government Settlement, satisfactory due
diligence by the Administrative Agent and payment of transaction fees.
Covenants
The Amended Credit Agreement will contain customary covenants
similar to, and in the case of limitations on acquisitions and incurrence of
additional debt more restrictive than, the covenants set forth in the Existing
Credit Agreement.
Financial Covenants
As in the Existing Credit Agreement, the Amended Credit
Agreement will contain financial covenants with respect to a leverage ratio,
an interest coverage ratio and minimum stockholders' equity. The covenant
levels will be less restrictive than under the Existing Credit Agreement, and
will be tested quarterly.
Events of Default
The Amended Credit Agreement will contain events of default
substantially similar to those set forth in the Existing Credit Agreement.
DESCRIPTION OF RIGHTS OFFERING
The Rights
The Company is hereby issuing transferable Rights at no cost to
each record holder of Common Stock as of the close of business on the Record
Date of , 1997. The Company will issue of a Right for each
share of Common Stock held on the Record Date. The Rights will be evidenced
by transferable Rights Certificates, which are being distributed to each
Recordholder contemporaneously with the delivery of this Prospectus. The
Rights permit the holder thereof to purchase an equal amount of either Series
A Exchangeable Preferred Stock or Series B PIK Preferred Stock. Except as
to payment of dividends, conversion and exchangeability as described in
"Description of Preferred Stock," the terms of the Series A Exchangeable
Preferred Stock and the Series B PIK Preferred Stock are identical in all
respects.
No fractional Rights or cash in lieu thereof will be issued or
paid. Instead, the number of Rights issued to a Recordholder will be rounded
up to the nearest whole number. A depositary, bank, trust company or
securities broker or dealer holding shares of Common Stock on the Record Date
for more than one beneficial owner may, upon delivery to American Stock
Transfer & Trust Company (the "Subscription and Information Agent") of the
Certification and Request for Additional Rights form available from the
Company or the Subscription and Information Agent, exchange its Rights
Certificate to obtain a new Rights Certificate for the number of Rights to
which all beneficial owners in the aggregate would have been entitled had each
been a holder on the Record Date. No other Rights Certificate may be so
divided as to increase the number of Rights to which the original recipient
was entitled. The Company reserves the right to refuse to issue any Rights
Certificate if such issuance would be inconsistent with the principle that
each beneficial owner's holdings will be rounded up to the nearest whole
number of Rights. The Subscription and Information Agent must receive the
Certification and Request for Additional Rights no later than 5:00 p.m., New
York time, on , 1997 after which time no new Rights Certificates will be
issued.
Because the number of Rights issued to each Recordholder will
be rounded up to the nearest whole number, beneficial owners of Common Stock
who are also Recordholders of their shares will receive more Rights under
certain circumstances than beneficial owners of Common Stock who are not
Recordholders of their shares and who do not obtain (or cause the
Recordholders of their shares of Common Stock to obtain) a separate Rights
Certificate with respect to the shares beneficially owned by them, including
shares held in an investment advisory or similar account. To the extent that
Recordholders or beneficial owners of Common Stock who obtain a separate
Rights Certificate receive more Rights, they will be able to subscribe for more
shares pursuant to the Basic Subscription Privilege. Beneficial owners of
Common Stock who are not Recordholders may obtain a separate Rights
Certificate upon request to the nominee Recordholder. See "Method of
Subscription--Exercise of Rights."
Once the Rights are distributed and until the Expiration Date,
the Company will not effect a reclassification of the Company's equity
securities which could have the effect of materially altering the value of the
Rights.
Expiration Date
The Rights will expire at 5:00 p.m., New York time, on ,
1997 subject to extension in the sole discretion of the Company for up to 30
additional days. The Company does not currently contemplate any extensions.
After the Expiration Date, unexercised Rights will be null and void. The
Company will not be obligated to honor any purported exercise of Rights
received by the Subscription and Information Agent after the Expiration Date,
regardless of when the documents relating to that exercise were sent, except
pursuant to the Guaranteed Delivery Procedures described below. The Company
may extend the Expiration Date by giving oral or written notice to the
Subscription and Information Agent on or before the Expiration Date, followed
by a press release no later than 9:00 a.m. New York time on the next business
day after the previously scheduled Expiration Date. The Rights Offering will
not be extended to a time later than 5:00 p.m., New York time, on , 1997.
Subscription Privileges
Basic Subscription Privilege. Each Right will entitle the
holder thereof to purchase at the Subscription Price one Underlying Share.
Upon exercise of Rights, Rights Holders must indicate on their Rights
Certificate whether they wish to receive either shares of Series A
Exchangeable Preferred Stock or shares of Series B PIK Preferred Stock. A
failure to so indicate on the Rights Certificate will result in issuance of
Series A Exchangeable Preferred Stock. Each Rights Holder is entitled to
subscribe for all, or any portion of, the Underlying Shares which may be
acquired through the exercise of Rights held by it; provided, that all of the
portion of Underlying Shares purchased must be either Series A Exchangeable
Preferred Stock or Series B PIK Preferred Stock. Payment of the Subscription
Price will be held in an escrow account to be maintained by the Subscription
and Information Agent and will be applied to the purchase of Preferred Stock.
The certificates representing Underlying Shares purchased pursuant to the
Basic Subscription Privilege will be delivered to subscribers as soon as
practicable after the Expiration Date.
Oversubscription Privilege. Subject to availability and
proration, Rights Holders who fully exercise the Basic Subscription Privilege
and who certify as such will be eligible to subscribe, at the Subscription
Price, for additional shares of the same series of Preferred Stock purchased
pursuant to such Rights Holder's Basic Subscription Privilege available after
satisfaction of all subscriptions pursuant to the Basic Subscription
Privilege. This Oversubscription Privilege must be exercised at the same time
as the Basic Subscription Privilege is exercised. Failure of a Rights Holder
to certify that such Rights Holder is exercising its Basic Subscription
Privilege in full may result in forfeiture of such Rights Holder's
Oversubscription Privilege.
Shares of Preferred Stock will be available for purchase
pursuant to the Oversubscription Privilege only to the extent that any
Underlying Shares are not subscribed for through exercise of the Basic
Subscription Privilege. If the Underlying Shares not subscribed for through
the Basic Subscription Privilege are not sufficient to satisfy all
subscriptions pursuant to the Oversubscription Privilege, the Excess Shares
will be allocated pro rata (subject to the elimination of fractional shares)
among the Rights Holders who exercise their Oversubscription Privilege in
proportion to the respective number of shares of Preferred Stock each such
Rights Holder subscribes for pursuant to the Basic Subscription Privilege;
provided, however, that if such pro rata allocation results in any Rights
Holder being allocated a greater number of Excess Shares than such holder
subscribed for pursuant to the exercise of the Oversubscription Privilege,
then each Rights Holder will be allocated only that number of Excess Shares
for which such holder oversubscribed, and the remaining Excess Shares will be
allocated among all other Rights Holders exercising the Oversubscription
Privilege on the same pro rata basis outlined above; such proration will be
repeated until all Excess Shares have been allocated to the full extent of the
Oversubscription Privilege exercised. Payment for oversubscription will be
deposited upon receipt by the Subscription and Information Agent and held in a
segregated account with the Subscription and Information Agent pending a final
determination of the number of Underlying Shares to be issued pursuant to such
Oversubscription Privilege. THEREFORE, RIGHTS HOLDERS WHO PLACE
OVERSUBSCRIPTION ORDERS PRIOR TO THE EXPIRATION DATE WILL LOSE ACCESS TO FUNDS
TENDERED FOR AN INDETERMINATE PERIOD OF TIME UP TO DAYS AFTER THE
EXPIRATION DATE AND MAY NOT ACTUALLY ACQUIRE SHARES OF PREFERRED STOCK
SUBSCRIBED FOR. If a proration of the Excess Shares results in a Rights
Holder receiving fewer Excess Shares than such Rights Holder subscribed for
pursuant to the Oversubscription Privilege, then the excess funds paid by that
holder at the Subscription Price for shares not issued will be returned
without interest or deduction. Certificates representing Underlying Shares
purchased pursuant to the Oversubscription Privilege, together with
certificates representing Underlying Shares purchased pursuant to the Basic
Subscription Privilege, will be delivered to subscribers as soon as
practicable after the Expiration Date.
To exercise the Oversubscription Privilege, banks, brokers and
other nominee Rights Holders who exercise the Oversubscription Privilege on
behalf of beneficial owners of Rights will be required to certify to the
Subscription and Information Agent and the Company the aggregate number of
Rights as to which the Oversubscription Privilege has been exercised and the
number and series of Excess Shares thereby subscribed for by each beneficial
owner of Rights on whose behalf such nominee is acting.
Subscription Price
The Subscription Price is $50 per Underlying Share subscribed
for pursuant to the Basic Subscription Privilege and the Oversubscription
Privilege.
No Board or Financial Advisor Recommendation
An investment in the Preferred Stock must be made pursuant to
each investor's evaluation of such investor's best interests. Accordingly,
neither the Board of Directors of the Company nor Credit Suisse First Boston,
as financial advisor, makes any recommendation to Rights Holders regarding
whether they should exercise their Rights to subscribe for shares of Preferred
Stock.
Method of Subscription -- Exercise of Rights
Rights Holders may exercise their Rights by delivering to the
Subscription and Information Agent, at the addresses specified below, at or
prior to the Expiration Date, the properly completed and executed Rights
Certificate(s) evidencing those Rights, with any signatures guaranteed as
required, together with payment in full of the Subscription Price for each
Underlying Share subscribed for pursuant to the Basic Subscription Privilege
and the Oversubscription Privilege. Payment may be made only (i) by check or
bank draft drawn upon a U.S. bank, or postal, telegraphic or express money
order, payable to the Subscription and Information Agent; or (ii) by wire
transfer of funds to the escrow account maintained by the Subscription and
Information Agent for the purpose of accepting subscriptions (the
"Subscription Account"). Requests for information by Rights Holders,
including with respect to payment by wire transfer to the Subscription
Account, should be directed to the Subscription and Information Agent at (800)
937-5449 or (212) 936-5100. The Subscription Price will be deemed to have
been received by the Subscription and Information Agent only upon (i) clearance
of any uncertified check; (ii) receipt by the Subscription and Information
Agent of any certified check or bank draft drawn upon a U.S. bank or any
postal, telegraphic or express money order; or (iii) receipt of collected
funds in the Subscription Account. Funds paid by uncertified personal check
may take up to five business days to clear. Accordingly, Rights Holders who
wish to pay the Subscription Price by means of an uncertified personal check
are urged to make payment sufficiently in advance of the Expiration Date to
ensure that such payment is received and clears by such time and are urged to
consider, in the alternative, payment by means of certified check, bank draft,
money order or wire transfer. All funds received in payment of the
Subscription Price shall be held by the Subscription and Information Agent and
invested at the direction of the Company in short-term certificates of
deposit, short-term obligations of the United States or any state or any
agency thereof or money market mutual funds investing in the foregoing
instruments. The account in which such funds will be held will not be insured
by the FDIC. Any interest earned on such funds will be retained by the
Company.
The Rights Certificates and payment of the Subscription Price
or, if applicable, Notices of Guaranteed Delivery, as defined below, must be
delivered to the Subscription and Information Agent by one of the methods
described below.
(1) BY FIRST CLASS MAIL; EXPRESS MAIL OR OVERNIGHT COURIER; AND BY HAND:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(2) BY FACSIMILE:
FOR NOTICE OF GUARANTEED DELIVERY ONLY
(718) 921-8355
Delivery to an address or facsimile other than those above does
not constitute valid delivery.
The Company will pay the costs of the fees and expenses of the
Subscription and Information Agent and has also agreed to indemnify the
Subscription and Information Agent from certain liabilities which it may incur
in connection with the Rights Offering. Except for fees absorbed by the
Company, and transfer taxes, if any, which shall be paid by the Company, all
commissions, fees and other expenses (including brokerage commissions)
incurred in connection with the exercise of Rights will be for the account of
the Rights Holder, and none of such commissions, fees or expenses will be paid
by the Company.
If a Rights Holder wishes to exercise Rights, but time will not
permit such Rights Holder to cause the Rights Certificate(s) evidencing those
Rights to reach the Subscription and Information Agent prior to the Expiration
Date, such Rights may nevertheless be exercised if all of the following
conditions (the "Guaranteed Delivery Procedures") are met:
(i) the Rights Holder has caused payment in full of the
Subscription Price for each Underlying Share being subscribed for
pursuant to the Basic Subscription Privilege and, if applicable, the
Oversubscription Privilege to be received (in the manner set forth
above) by the Subscription and Information Agent at or prior to the
Expiration Date;
(ii) the Subscription and Information Agent receives, at or prior
to the Expiration Date, a guarantee notice (a "Notice of Guaranteed
Delivery"), guaranteed by a member firm of an approved Signature
Guarantee Medallion Program, giving the name of the exercising Rights
Holder, the number of Underlying Shares being subscribed for pursuant to
the Basic Subscription Privilege and, if any, pursuant to the
Oversubscription Privilege and guaranteeing the delivery to the
Subscription and Information Agent of the Rights Certificate(s)
evidencing those Rights within two (2) business days following the date
of the Notice of Guaranteed Delivery; and
(iii) the properly completed Rights Certificate(s) evidencing the
Rights being exercised, with any signatures guaranteed as required, is
received by the Subscription and Information Agent within two (2)
business days following the date of the Notice of Guaranteed Delivery
relating thereto. The Notice of Guaranteed Delivery may be delivered to
the Subscription and Information Agent in the same manner as Rights
Certificates at the address set forth above or may be delivered to the
Subscription and Information Agent by telegram or facsimile
transmission. Additional copies of the form of Notice of Guaranteed
Delivery are available upon request from the Subscription and
Information Agent at the address and telephone number set forth below.
If an exercising Rights Holder does not indicate the number of
Rights being exercised, or does not forward full payment of the aggregate
Subscription Price for the number of Rights that the Rights Holder indicates
are being exercised, then the Rights Holder will be deemed to have exercised
the Basic Subscription Privilege with respect to the maximum number of Rights
that may be exercised for the aggregate payment delivered by the Rights Holder
and, to the extent that the aggregate payment delivered by a Rights Holder
exceeds the product of the Subscription Price multiplied by the number of
Rights evidenced by the Rights Certificates delivered by a Rights Holder (such
excess being the "Subscription Excess"), the Rights Holder will be deemed to
have exercised the Oversubscription Privilege to purchase, to the extent
available, that number of whole Excess Shares equal to the quotient obtained
by dividing the Subscription Excess by the Subscription Price. Any amount
remaining after application of the foregoing procedures shall be returned to
the Rights Holder promptly by mail without interest or deduction.
Funds received in payment of the Subscription Price for Excess
Shares subscribed for pursuant to the Oversubscription Privilege will be held
by the Subscription and Information Agent in the Subscription Account and
segregated from its other accounts pending issuance of the Excess Shares. If
a Rights Holder exercising the Oversubscription Privilege is allocated less
than all of the Excess Shares for which that Rights Holder subscribed pursuant
to the Oversubscription Privilege, then the excess funds paid by the Rights
Holder as the Subscription Price for shares not allocated to such Rights
Holder shall be returned by mail as soon as practicable after the Expiration
Date and after all prorations and reductions contemplated by the terms of the
Rights Offering have been effected.
Certificates representing shares of Preferred Stock subscribed
for and issued pursuant to the Rights will be mailed as soon as practicable
after the Expiration Date and after all prorations contemplated by the terms
of the Rights Offering have been effected. Certificates for shares of
Preferred Stock issued pursuant to the exercise of Rights will be registered
in the name of the Rights Holder exercising such Rights. There can be no
assurance that the value of the Preferred Stock will not decline below the
Subscription Price before such shares of Preferred Stock are delivered.
A Rights Holder who subscribes for fewer than all of the shares
represented by its Right Certificates may, under certain circumstances,
receive from the Subscription and Information Agent a new Rights Certificate
representing the remaining Rights. See "--Partial Exercise Procedures."
Recordholders who hold shares of Common Stock for the account
of others, such as brokers, trustees or depositories for securities, should
contact the respective beneficial owners of such shares as soon as possible
to ascertain these beneficial owners' intentions and to obtain instructions
with respect to their Rights. If a beneficial owner so instructs, the
Recordholders of that beneficial owner's Rights should complete appropriate
Rights Certificates and submit them to the Subscription and Information Agent
with the proper payment. In addition, beneficial owners of Rights through
such a nominee holder should contact the nominee holder and request the
nominee holder to effect transactions in accordance with the beneficial
owners' instructions. If a beneficial owner wishes to obtain a separate
Rights Certificate he, she or it should contact the nominee as soon as
possible and request that a separate Rights Certificate be issued. A nominee
may request any Rights Certificate held by it to be split into such smaller
denominations as it wishes, provided that the Rights Certificate is received
by the Subscription and Information Agent, properly endorsed, no later than
5:00 p.m., New York time, on , 1997.
The instructions as to use of Laboratory Corporation of America
Holdings Rights Certificates (the "Instructions") accompanying the Rights
Certificates should be read carefully and followed in detail. RIGHTS
CERTIFICATES SHOULD BE SENT WITH PAYMENT TO THE SUBSCRIPTION AND INFORMATION
AGENT. DO NOT SEND RIGHTS CERTIFICATES OR PAYMENTS TO THE COMPANY.
THE METHOD OF DELIVERY OF RIGHTS CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AND INFORMATION AGENT WILL BE AT THE
ELECTION AND RISK OF THE RIGHTS HOLDERS. IF RIGHTS CERTIFICATES AND PAYMENTS
ARE SENT BY MAIL, RIGHTS HOLDERS ARE URGED TO SEND SUCH MATERIALS BY REGISTERED
MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, AND ARE URGED TO ALLOW
A SUFFICIENT NUMBER OF DAYS TO ENSURE DELIVERY TO THE SUBSCRIPTION AND
INFORMATION AGENT AND CLEARANCE OF PAYMENT PRIOR TO THE EXPIRATION DATE.
BECAUSE UNCERTIFIED CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR,
RIGHTS HOLDERS ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF
CERTIFIED CHECK, BANK DRAFT, MONEY ORDER OR WIRE TRANSFER.
Certain directors and officers of the Company will assist the
Company in the Rights Offering by, among other things, participating in
informational meetings regarding the Rights Offering, generally being available
to answer questions of potential subscribers and soliciting orders in the
Rights Offering. None of such directors and officers will receive additional
compensation for such services. None of such directors and officers are
registered as securities brokers or dealers under the Federal or applicable
state securities laws, nor are any of such persons affiliated with any broker
or dealer. Because none of such persons are in the business of either
effecting securities transactions for others or buying and selling securities
for their own account, they are not required to register as brokers or dealers
under the Federal securities laws. In addition, the proposed activities of
such directors and officers are exempted from registration pursuant to a
specific safe-harbor provision under Rule 3a4-1 under the Exchange Act.
Substantially similar exemptions from registration are available under
applicable state securities laws.
All questions concerning the timeliness, validity, form and
eligibility of any exercise of Rights will be determined by the Company, whose
determination will be final and binding. The Company, in its sole discretion,
may waive any defect or irregularity, or permit a defect or irregularity to be
corrected within such time as it may determine. Rights Certificates will not
be deemed to have been received or accepted until all irregularities have been
waived or cured within such time as the Company determines, in its sole
discretion. Neither the Subscription and Information Agent nor the Company
will be under any duty to give notification of any defect or irregularity in
connection with the submission of Rights Certificates or incur any liability
for failure to give such notification. The Company reserves the right to
reject any exercise if such exercise is not in accordance with the terms of
the Rights Offering or not in proper form or if the acceptance thereof or the
issuance of the Preferred Stock pursuant thereto could be deemed unlawful.
Any questions or requests for assistance concerning the method
of subscribing for shares of Preferred Stock or for additional copies of this
Prospectus, the Certification and Request for Additional Rights, the
Instructions or the Notice of Guaranteed Delivery may be directed to the
Subscription and Information Agent at the address and telephone number below:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 937-5449
(212) 936-5100
Partial Exercise Procedures
A new Rights Certificate will be issued to a submitting Rights
Holder upon the partial exercise of Rights only if the Subscription and
Information Agent receives a properly endorsed Rights Certificate no later than
the fourth business day prior to the Expiration Date. After such time and
date no new Rights Certificates will be issued. Accordingly, after such time
and date a Rights Holder exercising less than all of its Rights will lose the
power to exercise its remaining Rights. A new Rights Certificate will be sent
by first class mail to the submitting Rights Holder if the Subscription and
Information Agent receives the properly completed Rights Certificate by 5:00
p.m. New York time, on , 1997. Unless the submitting Rights Holder
makes other arrangements with the Subscription and Information Agent, a new
Rights Certificate received by the Subscription and Information Agent after
5:00 p.m. New York time, on , 1997 will be held for pick-up by the
submitting Rights Holder at the Subscription and Information Agent's hand
delivery address provided above. All deliveries of newly issued Subscription
Right Certificates will be at the risk of the submitting Rights Holder.
Except for the fees charged by the Subscription and Information
Agent (which will be paid by the Company as described above), all commissions,
fees and other expenses (including brokerage commissions and transfer terms)
incurred in connection with the exercise of Rights will be for the account of
the transferor of the Rights, and none of such commissions, fees or expenses
will be paid by the Company or the Subscription and Information Agent.
Foreign and Certain Other Stockholders
Rights Certificates will not be mailed to Recordholders whose
addresses are outside the United States and Canada or who have an APO or FPO
address, but will be held by the Subscription and Information Agent for each
Recordholder's account. To exercise their Rights, such persons must notify
the Subscription and Information Agent at or prior to 5:00 p.m., New York
time, on , 1997. Such Rights Holder's rights expire at the Expiration
Date.
Subscription by Principal Stockholder
HLR and Roche Holdings have indicated that they intend to
exercise their Basic Subscription Privilege in the Rights Offering in full for
approximately $250 million in Series B PIK Preferred Stock. HLR and Roche
Holdings have not indicated whether they intend to exercise their
Oversubscription Privilege.
No Revocation
ONCE A RIGHTS HOLDER HAS PROPERLY EXERCISED THE BASIC
SUBSCRIPTION PRIVILEGE OR THE OVERSUBSCRIPTION PRIVILEGE, SUCH EXERCISE MAY
NOT BE REVOKED.
Dilution
Rights Holders may experience dilution of their percentage of
equity ownership interest and voting power in the Company if and when all of
the shares of Preferred Stock are converted into shares of Common Stock in
accordance with their terms if they do not exercise the Basic Subscription
Privilege. Even if the Rights Holders exercise their Basic Subscription
Privilege in full, they may nevertheless still experience dilution in their
voting rights and in their proportional interest in any future net earnings of
the Company if other holders of Rights exercise the Oversubscription Privilege
and such Rights Holders elect not to exercise the Oversubscription Privilege,
if and when all of the shares of Preferred Stock are converted into shares of
Common Stock in accordance with their terms. In addition, Rights Holders who
exercise Rights for Series A Exchangeable Preferred Stock will experience
dilution as dividends on the Series B PIK Preferred Stock are paid in shares
of Series B PIK Preferred Stock until , 2000.
Termination of the Rights Offering
The Company expressly reserves the right, in its sole
discretion, at any time prior to delivery of the shares of Preferred Stock
offered hereby, to terminate the Rights Offering if the Rights Offering is
prohibited by law or regulation or the Board of Directors concludes that it is
not in the best interests of the Company, and its stockholders, to complete
the Rights Offering. If the Rights Offering is terminated, all funds received
pursuant to the Rights Offering will be promptly refunded, without interest.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of
220,000,000 shares of Common Stock, par value $.01 per share, and 10,000,000
shares of preferred stock, par value $0.10 per share. As of February 14,
1997, 122,935,081 shares of Common Stock were issued and outstanding. Prior
to the Rights Offering, no shares of preferred stock were issued and
outstanding.
There are currently insufficient shares of Common Stock
authorized to permit conversion of all of the Preferred Stock issued upon the
exercise of Rights or as dividends on the Series B PIK Preferred Stock and
insufficient shares of Preferred Stock authorized to permit the payment of
dividends on the Series B PIK Preferred Stock if all the Preferred Stock
offered hereby is sold. In connection with the next annual meeting of
shareholders currently scheduled for , 1997, the Board of Directors
will propose amending the Company's Certificate of Incorporation to increase
(i) the authorized number of shares of Common Stock to permit the conversion
of all of the Preferred Stock and (ii) the authorized number of shares of
Preferred Stock to permit the payment of dividends on the Series B PIK
Preferred Stock. HLR, Roche Holdings and the directors and executive officers
of the Company have indicated to the Company that they intend to vote in favor
of such amendment.
Common Stock
Each holder of Common Stock is entitled to one vote for each
share held on all matters to be voted upon by the stockholders. The holders
of outstanding shares of Common Stock, subject to any preferences that may be
applicable to any outstanding series of Preferred Stock, are entitled to
receive ratably such dividends out of assets legally available therefor at
such times and in such amounts as the Board of Directors may from time to time
determine. Upon liquidation or dissolution of the Company, the holders of
Common Stock of the Company will be entitled to share ratably in the assets of
the Company legally available for distribution to shareholders after payment
of liabilities and subject to the prior rights of any holders of Preferred
Stock then outstanding. Holders of Common Stock generally have no conversion,
sinking fund, redemption, preemptive or subscription rights. However,
pursuant to the Stockholder Agreement, HLR and Roche Holdings were granted
certain preemptive rights. See "Certain Relationships and Related
Transactions--The Stockholder Agreement". In addition, the Common Stock does
not have cumulative voting rights. Shares of Common Stock are not liable to
further calls or assessments by the Company and holders of Common Stock are not
liable for any liabilities of the Company.
Warrant Agreement
In connection with the Merger, the Company entered into a
warrant agreement dated April 10, 1995 (the "Warrant Agreement"). Pursuant
to the Warrant Agreement, the Company distributed a dividend consisting of
warrants to purchase an aggregate of approximately 13,826,308 shares of
Common Stock to stockholders of record of Common Stock as of April 21,
1995, including NHCG. In addition, pursuant to the Merger, on April 28,
1995, Roche purchased warrants (the "Roche Warrants") from the Company to
purchase 8,325,000 shares of Common Stock for an aggregate purchase price
of $51,048,900. The Warrant Agreement provides that each Warrant may be
exercised on the fifth anniversary (the "Warrant Expiration Date") of
issuance to purchase one share of Common Stock at a purchase price of
$22.00 per share (subject to adjustment); $ per share following the Rights
Offering (subject to further adjustment). The Company has the option,
exercisable by notice 60 days prior to the Warrant Expiration Date, to
redeem the Warrants on the Warrant Expiration Date for a cash redemption
price per Warrant equal to the average closing price of the Common Stock
over a specified period prior to the Warrant Expiration Date minus the
exercise price.
Preferred Stock
The Board of Directors is authorized to issue up to an
aggregate of 10,000,000 shares of Preferred Stock in one or more classes or
series, and to fix for each such class or series such voting powers, full or
limited, or no voting powers, and such distinctive designations, preferences
and relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such class or series and as may be permitted by
the Delaware General Corporate Law ("DGCL"), including, without limitation,
the authority to provide that any such class or series may be (i) subject to
redemption at such time or times and at such price or prices; (ii) entitled to
receive dividends (which may be cumulative or non-cumulative) at such rates,
on such conditions, and at such times, and payable in preference to, or in such
relation to, the dividends payable on any other class or classes or any other
series; (iii) entitled to such rights upon the dissolution of, or upon any
distribution of the assets of, the Company; or (iv) convertible into, or
exchangeable for, shares of any other class or classes of stock, or of any
other series of the same or any other class or classes of stock, of the
Company at such price or prices or at such rates of exchange and with such
adjustments; all as may be stated in such resolution or resolutions. See
"Description of Preferred Stock" for a description of the Preferred Stock
being offered hereby.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is
American Stock Transfer & Trust Company.
DESCRIPTION OF PREFERRED STOCK
General
The Preferred Stock consists of the Series A Exchangeable
Preferred Stock and the Series B PIK Preferred Stock, each of which has been
authorized as a new series of preferred stock, which in the aggregate will
consist of 10,000,000 shares (plus up to 2,875,000 shares of Series B PIK
Preferred Stock to be issued in the form of dividends). The Company's
Certificate of Incorporation authorizes the Company to issue without any
action on the part of its stockholders, an aggregate of 10,000,000 shares of
Preferred Stock, par value $0.10 per share. When issued in accordance with
the terms of the Rights Offering, the Preferred Stock will be fully paid and
nonassessable. The holders of the Preferred Stock will have no preemptive
rights with respect to any shares of capital stock of the Company or any other
securities of the Company convertible into, or carrying rights or options to
purchase, any such shares. The Preferred Stock will not be subject to any
sinking fund. Unless converted, exchanged or redeemed by the Company prior to
, 2012, on such date all of the Preferred Stock shall be redeemed by
the Company at the redemption price set forth herein. The following summary
description of the terms of the Preferred Stock does not purport to be
complete and is qualified in its entirety by reference to the Certificate of
Designation, Rights and Preferences for the Series A Exchangeable Preferred
Stock (the "Series A Certificate of Designation") and the Certificate of
Designation, Rights and Preferences for the Series B PIK Preferred Stock (the
"Series B Certificate of Designation" and together with the Series A
Certificate of Designation, the "Certificates of Designation"), copies of
which are filed as exhibits to the Registration Statement of which this
Prospectus forms a part. Upon request, the transfer agent for the Preferred
Stock will furnish holders a copy of the applicable Certificate of
Designation. The Company has applied to list the Preferred Stock on the NYSE.
Dividends and Ranking
Dividends on Series A Exchangeable Preferred Stock. Holders of
shares of Series A Exchangeable Preferred Stock will be entitled to receive,
when, as and if declared by the Board of Directors of the Company out of funds
legally available for payment, cash dividends at an annual rate of % of the
Liquidation Preference (as defined) of the Preferred Stock, or $ per share
of Series A Exchangeable Preferred Stock in cash, payable quarterly in arrears
on , , and of each year,
commencing , 1997 (with respect to the period from the date of
issuance of such shares of Preferred Stock to such date), except that if
any such date is a Saturday, Sunday or legal holiday then such dividend
will be payable on the next day that is not a Saturday, Sunday or legal
holiday. Dividends will accrue and be cumulative from such date of
issuance and will be payable to holders of record as they appear on the
stock transfer books on such record dates as are fixed by the Board of
Directors (provided that no record date shall be later than (a) the sixth
business day prior to the date fixed for any redemption of the Preferred
Stock or, (b) in the case of the dividend payment date occurring on ,
the tenth business day prior to such date).
Dividends on Series B PIK Preferred Stock. Holders of shares
of Series B PIK Preferred Stock will be entitled to receive, when, as and if
declared by the Board of Directors of the Company out of funds legally
available for payment, dividends at an annual rate of % of the Liquidation
Preference (as defined) of the Preferred Stock, or $ per share of Series B
PIK Preferred Stock, payable in shares of Series B PIK Preferred Stock until
, 2000 and thereafter in cash, payable quarterly in arrears on
, , and of each year, commencing ,
1997 (with respect to the period from the date of issuance of such Shares
of Preferred Stock to such date), except that if any such date is a
Saturday, Sunday or legal holiday then such dividend will be payable on the
next day that is not a Saturday, Sunday or legal holiday. Dividends will
accrue and be cumulative from such date of issuance and will be payable to
holders of record as they appear on the stock transfer books on such record
dates as are fixed by the Board of Directors (provided that no record date
shall be later than (a) the sixth business day prior to the date fixed for
any redemption of the Preferred Stock or, (b) in the case of the dividend
payment date occurring on , the tenth business day prior to such date). No
fractional shares of Series B PIK Preferred Stock will be issued, so that
the number of shares to be paid as a dividend pursuant to the Series B PIK
Preferred Stock shall be rounded to the nearest whole number of shares.
All dividends paid in additional shares of Series B PIK Preferred Stock
shall be deemed issued on the applicable dividend payment date, and will
thereupon be duly authorized, validly issued, fully paid and nonassessable
and free and clear of all liens and charges.
The Preferred Stock will be junior as to dividends to any
series or class of stock hereafter issued that ranks senior as to dividends to
the Preferred Stock ("Senior Dividend Stock"), and if at any time the Company
has failed to pay or declare and set apart for payment accrued and unpaid
dividends on any Senior Dividend Stock, the Company may not pay any dividend
on the Preferred Stock. The Preferred Stock will have priority as to
dividends over the Common Stock and any other series or class of the Company's
stock hereafter issued that ranks junior as to dividends to the Preferred
Stock, when and if issued (collectively, "Junior Dividend Stock"), and no
dividend (other than dividends payable solely in stock that is Junior Dividend
Stock and that ranks junior to the Preferred Stock as to distributions of
assets upon liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary (such stock that is junior as to liquidation rights,
"Junior Liquidation Stock") (the Common Stock and any other capital stock of
the Company that is both Junior Dividend Stock and Junior Liquidation Stock,
"Junior Stock")) may be paid on any Junior Dividend Stock, and no payment may
be made on account of the purchase, redemption, retirement, or other
acquisition of Junior Dividend Stock or Junior Liquidation Stock (other than
such acquisitions pursuant to employee or director incentive or benefit plans
or arrangements, or in exchange solely for Junior Stock), unless all accrued
and unpaid dividends on the Preferred Stock for all dividend payment periods
ending on or before the date of payment of such dividends on Junior Dividend
Stock, or such payment for such Junior Dividend Stock or Junior Liquidation
Stock, as the case may be, have been paid or declared and set apart for
payment. The Company may not pay dividends on the Preferred Stock unless it
has paid or declared and set apart for payment or contemporaneously pays or
declares and sets apart for payment all accrued and unpaid dividends for all
dividend payment periods on any class or series of stock having parity with
the Preferred Stock as to dividends ("Parity Dividend Stock") ratably, so that
the amount of dividends declared and paid per share on the Preferred Stock and
such Parity Dividend Stock will bear to each other the same ratio that the
accrued and unpaid dividends to the date of payment on Preferred Stock and
such Parity Dividend Stock bear each other. No payment may be made on account
of the purchase, redemption, retirement or other acquisition of shares of
Junior Stock, Parity Dividend Stock or other class or series of the Company's
capital stock ranking on a parity with the Preferred Stock as to distributions
of assets upon liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary (such stock that has parity with the Preferred Stock
as to liquidation rights, "Parity Liquidation Stock" and, together with Parity
Dividend Stock, "Parity Stock") (other than such acquisitions pursuant to
employee or director or incentive or benefit plans or arrangements, or in
exchange solely for Junior Stock) unless all accrued and unpaid dividends on
the Preferred Stock for all dividend payment periods ending on or before the
date of payment on account of such acquisition of such Parity Dividend Stock
or Parity Liquidation Stock shall have been paid or declared and set apart for
payment.
The amount of dividends payable per share of Preferred Stock
for each quarterly dividend period will be computed by dividing the annual
dividend amount by four. The amount of dividends payable for the initial
period and for any period shorter than a full quarterly dividend period will
be computed on the basis of a 360-day year of twelve 30-day months. No
interest will be payable in respect of any dividend payment on the Preferred
Stock which may be in arrears.
Under Delaware law, the Company may declare and pay dividends
on its capital stock only out of surplus, as defined in the Delaware General
Corporation Law (the "DGCL") or, if there is no such surplus, out of its net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. Surplus under the DGCL is generally defined to mean
the excess, at any given time, of the net assets of a corporation over the
amount of the corporation's capital. No dividends or distributions may be
declared, paid or made if the Company is or would be rendered insolvent by
virtue of such dividend or distribution, or if such declaration, payment or
distribution would contravene the certificate of incorporation of the
corporation. The Company is also subject to restrictions on dividend payments
(including dividend payments on the Preferred Stock) pursuant to the terms of
the Amended Credit Agreement. See "Dividend Policy".
Liquidation Rights
In the case of the voluntary or involuntary liquidation,
dissolution or winding up of the Company, holders of shares of Preferred Stock
are entitled to receive the liquidation preference of $50 per share (the
"Liquidation Preference"), plus an amount equal to any accrued and unpaid
dividends to the payment date, before any payment or distribution is made to
the holders of Common Stock or any Junior Liquidation Stock, but the holders
of the shares of the Preferred Stock will not be entitled to receive the
liquidation preference of such shares until the liquidation preference of any
other series or class of stock hereafter issued that ranks senior as to
liquidation rights to the Preferred Stock ("Senior Liquidation Stock") has
been paid in full. The holders of Preferred Stock and all series or classes
of stock hereafter issued that rank on a parity as to distributions of assets
upon such liquidation, dissolution or winding up of the Company with the
Preferred Stock are entitled to share ratably, in accordance with the
respective preferential amounts payable on such stock, in any distribution
(after payment of the liquidation preference of the Senior Liquidation Stock)
which is not sufficient to pay in full the aggregate of the amounts payable
thereon. After payment in full of the liquidation preference of the shares of
the Preferred Stock, the holders of such shares will not be entitled to any
further participation in any distribution of assets by the Company. Neither a
consolidation nor merger of the Company with another corporation nor a sale or
transfer of all or substantially all of the Company's property or assets will
be considered a liquidation, dissolution or winding up of the Company.
Voting Rights
The holders of the Preferred Stock will not have voting rights
except as described below or as required by law. In exercising any such vote,
each outstanding share of Preferred Stock will be entitled to one vote,
excluding shares held by any entity controlled by the Company, which shares
shall have no voting rights.
Whenever dividends on the Preferred Stock or any outstanding
shares of Parity Dividend Stock have not been paid in an aggregate amount
equal to at least six quarterly dividends on such shares (whether or not
consecutive), the number of members of the Company's Board of Directors will
be increased by two, and the holders of the Preferred Stock, voting separately
as a class with the holders of Parity Dividend Stock on which like voting
rights have been conferred and are exercisable, will be entitled to elect such
two additional directors who shall continue to serve so long as such dividends
remain in arrears. Such voting rights will terminate when all such dividends
accrued and unpaid have been declared and paid or set apart for payment. The
term of office of all directors so elected will terminate immediately upon the
termination of such voting rights and the number of members of the Board of
Directors will be reduced by two.
In addition, so long as any Preferred Stock is outstanding, the
Company will not, without the affirmative vote or consent of the holders of at
least 66 2/3% of all outstanding shares of Preferred Stock and outstanding
Parity Dividend Stock (voting as a single class), (i) amend, alter or repeal
(by merger or otherwise) any provision of the Certificate of Incorporation or
the bylaws of the Company so as to affect adversely the relative rights,
preferences, qualifications, limitations, or restrictions of the Preferred
Stock, (ii) authorize or issue, or increase the authorized amount of any
Senior Dividend Stock, Senior Liquidation Stock or any security convertible
into such Senior Dividend Stock or such Senior Liquidation Stock, (iii)
authorize or issue, or increase the authorized amount of any additional class
of Parity Stock or any security convertible into such Parity Stock or (iv)
effect any reclassification of the Preferred Stock.
Redemption
The Preferred Stock may not be redeemed prior to ,
2000. On or after such date, the Preferred Stock may be redeemed by the
Company, at its option, in whole or in part at any time, subject to the
limitations, if any, imposed by applicable law, at a cash redemption price per
share, if redeemed during the 12-month period beginning of the
years indicated below, plus, in each case, accrued interest thereon to the
date of redemption:
Redemption
Price
Year Per Share
---- ----------
2000............................... %
2001...............................
2002...............................
2003...............................
2004...............................
2005...............................
2006 and thereafter................ 100
If fewer than all the outstanding shares of Preferred Stock are to be
redeemed, the Company will select those shares to be redeemed pro rata or by
lot or in such other manner as the Board of Directors may determine to be
fair. On , 2012, all of the outstanding Preferred Stock will be
mandatorily redeemed by the Company at a redemption price of $50 per share.
If at any time dividends on the Preferred Stock are in arrears, the Company
may not redeem less than all of the then outstanding shares of the Preferred
Stock until all accrued dividends for all past dividend periods have been paid
in full.
Notice of redemption will be mailed at least 30 days but not
more than 60 days before the date fixed for redemption to each holder of
record of shares of Preferred Stock to be redeemed at the address shown on the
stock transfer books. No fractional shares of Preferred Stock will be issued
upon a redemption of less than all of the Preferred Stock, but in lieu
thereof, an appropriate amount will be paid in cash based on the value for the
shares of Preferred Stock as determined in good faith by the Board of
Directors. After the date fixed for redemption (unless the Company defaults
on the payment of the redemption price), dividends will cease to accrue on the
shares of Preferred Stock called for redemption and other rights of the
holders of such shares will terminate, except the right to receive the
redemption price without interest, and all conversion privileges will
terminate on the business day prior to the date fixed for redemption.
Conversion Rights
The holder of any shares of Preferred Stock will have the right
at any time on or after , 1997 in the case of the Series A
Exchangeable Preferred Stock and on or after , 2000 in the case of
the Series B PIK Preferred Stock, at the holder's option, to convert any or
all shares into Common Stock at any time at the conversion rate (subject to
adjustment as described below) of shares for each share of Preferred
Stock, equivalent to an initial conversion price of $ for each share of
Common Stock. If the Preferred Stock is called for redemption, the conversion
right will terminate at 5:00 p.m. New York City time on the business day prior
to the date fixed for such redemption and if not exercised prior to such time,
such conversion right will be lost, unless the Company defaults in making the
payment due upon redemption, except that, with respect to any redemption
occurring on or one business day thereafter, the
conversion rights will terminate at 5:00 p.m. New York City time on the date
fixed for redemption such that all holders of shares of Preferred Stock to be
redeemed will be entitled to receive the dividend
payment (assuming such holders held such shares on the corresponding record
date). Except as provided in the next paragraph, no payment or adjustment
will be made upon any conversion of any share of Preferred Stock or on account
of any dividends on the Common Stock issued upon conversion (except that if a
converting holder of Preferred Stock is eligible for a dividend on both the
Preferred Stock and the Common Stock issued upon conversion, the holder is
entitled to the higher of such dividend amounts). Following conversion, the
holder will no longer have any right to payment of dividends on the shares
surrendered for conversion. No fractional shares of Common Stock will be
issued upon conversion but, in lieu thereof, an appropriate amount will be
paid in cash based on the reported last sale price for the shares of Common
Stock on the NYSE on the day of such conversion.
If the Company, by dividend or otherwise, declares or makes a
distribution on its Common Stock referred to in clause (iv) or (v) of the next
following paragraph, the holders of the Preferred Stock, upon the conversion
thereof subsequent to the close of business on the date fixed for the
determination of shareholders entitled to receive such distribution and prior
to the effectiveness of the conversion price adjustment in respect of such
distribution, will be entitled to receive for each share of Common Stock into
which each such share of Preferred Stock is converted the portion of the
shares of Common Stock, rights, warrants, evidences of indebtedness, shares of
capital stock, cash and assets so distributed applicable to one share of
Common Stock; provided, however, that the Company may, with respect to all
holders for converting, in lieu of distributing any portion of such
distribution not consisting of cash or securities of the Company, pay such
holder cash equal to the fair market value thereof (as determined by the Board
of Directors).
The conversion price will be subject to adjustment in certain
events including, without duplication: (i) dividends (and other
distributions) payable in Common Stock on any class of capital stock of the
Company; (ii) the issuance to all holders of Common Stock of rights or
warrants, entitling holders of such rights or warrants to subscribe for or
purchase Common Stock at less than the then current market price (as defined in
the Certificate of Designation); (iii) subdivisions and combinations of Common
Stock; (iv) distributions to all holders of Common Stock of evidences of
indebtedness of the Company, shares of capital stock, cash or assets
(including securities, but excluding those rights, warrants, dividends and
distributions referred to above and dividends and distributions paid
exclusively in cash); (v) distributions consisting of cash, excluding (A) cash
that is part of a distribution referred to in (iv) above, and (B) any cash
representing an amount per share of Common Stock of any quarterly cash
dividend to the extent it does not exceed the amount per share of Common Stock
of the next preceding quarterly cash dividend (as adjusted to reflect any of
the events referred to in clauses (i) through (iv) of this sentence) or all of
any such quarterly cash dividends if the amount thereof per share of Common
Stock multiplied by four does not exceed % of the current market price of
Common Stock on the trading day (as defined in the Certificate of Designation)
next preceding the date of declaration of such dividend. Promptly, following
certain adjustments to the conversion price, notice of such event will be
mailed to the holders of the Preferred Stock and (vi) payment in respect of a
tender or exchange offer by the Company or any subsidiary of the Company for
the Common Stock to the extent that the cash and value (as determined by the
Board of Directors) of any consideration included in such payment per share of
Common Stock exceeds the Closing Price per share of Common Stock on the
trading day next preceding the date on which the Company becomes irrevocably
obligated to make such payment.
The foregoing adjustments to the conversion price are designed
to compensate the holders of the Preferred Stock for the value of the cash,
securities or other assets that they would have otherwise received had they
converted their Preferred Stock into shares of Common Stock prior to such
distribution. Such adjustment would generally result in a reduced conversion
price, which would entitle the holders of Preferred Stock to receive a greater
number of shares of Common Stock upon conversion of the Preferred Stock into
Common Stock.
The Company from time to time may reduce the conversion price
by an amount for any period of time of at least 20 days, in which case the
Company shall give at least 15 days' notice of such reduction, if the Board of
Directors of the Company has made a determination that such reduction would be
in the best interest of the Company, which determination shall be conclusive.
In the event that the Company is a party to any transaction
(including, without limitation, a merger, consolidation, sale of all or
substantially all of the Company's assets, recapitalization or
reclassification of the Common Stock (each of the foregoing being referred to
as a "Company Transaction")), in each case (except in the case of a Common
Stock Fundamental Change (as defined)) as a result of which shares of Common
Stock shall be converted into the right to receive securities, cash or other
property, each share of the Preferred Stock shall thereafter be convertible
into the kind and amount of securities, cash and other property receivable
upon the consummation of such Company Transaction by a holder of that number
of shares of Common Stock into which one share of the Preferred Stock was
convertible immediately prior to such Company Transaction (or in the case of a
Common Stock Fundamental Change, common stock of the kind received by the
holders of Common Stock as a result of such Common Stock Fundamental Change)
(but after giving effect to any adjustment discussed in the next paragraph
relating to a Fundamental Change (as defined) if such Company Transaction
constitutes a Fundamental Change, and subject to funds being legally available
for such purpose under applicable law at the time of such conversion).
Notwithstanding any other provision in the preceding paragraphs
to the contrary, if any Fundamental Change occurs, then the conversion price
in effect will be adjusted immediately after such Fundamental Change as
described below. In addition, in the event of a Common Stock Fundamental
Change, each share of the Preferred Stock shall be convertible solely into
common stock of the kind received by holders of Common Stock as the result of
such Common Stock Fundamental Change. For purposes of calculating any
adjustment to be made pursuant to this paragraph in the event of a Fundamental
Change, immediately after such Fundamental Change:
(i) in the case of a Non-Stock Fundamental Change (as defined),
the conversion price of the Preferred Stock will thereupon become the
lower of (A) the conversion price in effect immediately prior to such
Non-Stock Fundamental Change, but after giving effect to any other prior
adjustments, and (B) the result obtained by multiplying the greater of
the Applicable Price (as defined) or the then applicable Reference
Market Price (as defined) by a fraction of which the numerator will be
$50 and the denominator will be the then current redemption price per
share (or, for periods prior to , 2000 an amount per share determined in
accordance with the Certificate of Designation); and
(ii) in the case of a Common Stock Fundamental Change, the
conversion price of the Preferred Stock in effect immediately prior to
such Common Stock Fundamental Change, but after giving effect to any
other prior adjustments, will thereupon be adjusted by multiplying such
conversion price by a fraction, of which the numerator will be the
Purchaser Stock Price (as defined) and the denominator will be the
Applicable Price; provided, however, that in the event of a Common Stock
Fundamental Change in which (A) 100% of the value of the consideration
received by a holder of Common Stock is common stock of the successor,
acquiror or other third party (and cash, if any, is paid with respect to
any fractional interests in such common stock resulting from such Common
Stock Fundamental Change) and (B) all of the Common Stock will have been
exchanged for, converted into, or acquired for, common stock (and cash
with respect to fractional interests) of the successor, acquiror or
other third party, the conversion price of the Preferred Stock in effect
immediately prior to such Common Stock Fundamental Change will thereupon
be adjusted by dividing such conversion price by the number of shares of
common stock of the successor, acquiror, or other third party received
by a holder of one share of Common Stock as a result of such Common
Stock Fundamental Change.
The foregoing conversion price adjustments in the event of a
Non-Stock Fundamental Change will apply in situations whereby all or
substantially all of the Common Stock is acquired in a transaction in which 50%
or less of the value received by holders of Common Stock consists of common
stock that has been admitted for listing on a national securities exchange or
quoted on the Nasdaq National Market. If the market price of the Common Stock
immediately prior to a Non-Stock Fundamental Change is lower than the
applicable conversion price of the Preferred Stock then in effect, the
conversion price will be adjusted as described in (i) above and the holders of
the Preferred Stock will be entitled to receive the amount and kind of
consideration that would have been received if the Preferred Stock had been
converted into Common Stock prior to the Non-Stock Fundamental Change after
giving effect to such adjustment.
The foregoing conversion price adjustments in the event of a
Common Stock Fundamental Change will apply in situations whereby more than 50%
of the value received by holders of Common Stock consists of common stock of
another company that has been admitted for listing on a national securities
exchange or quoted on the Nasdaq National Market, in which case the Preferred
Stock will become convertible into shares of common stock of the other
company. If consideration for the Common Stock consists partly of common
stock of another company and partly of other securities, cash or property,
each share of Preferred Stock will be convertible solely into a number of
shares of such common stock determined so that the initial value of such
shares (measured as described in the definition of Purchaser Stock Price
below) equals the value of the shares of Common Stock into which such share of
Preferred Stock Price below) equals the value of the shares of Common Stock
into which such share of Preferred Stock was convertible immediately before
the Transaction (measured as described in the definition of Applicable Price
below). If consideration for Common Stock is solely common stock of another
company, each share of Preferred Stock will be convertible into the same
number of shares of such common stock receivable by a holder of the number of
shares of Common Stock into which such share of Preferred Stock was
convertible immediately before such transaction.
Depending upon whether the Fundamental Change is a Non-Stock
Fundamental Change or Common Stock Fundamental Change, a holder may receive
significantly different consideration upon conversion. In the event of a
Non-Stock Fundamental Change, the holder has the right to convert each share
of the Preferred Stock into the kind and amount of shares of stock and other
securities or property or assets receivable by a holder of the number of
shares of Common Stock issuable upon conversion of such share of the Preferred
Stock immediately prior to such Non-Stock Fundamental Change, but after giving
effect to the adjustment described above. However, in the event of a Common
Stock Fundamental Change in which less than 100% of the value of the
consideration received by a holder of Common Stock is common stock of the
acquiror or other third party, a holder of a share of the Preferred Stock who
converts a share following the Common Stock Fundamental Change will receive
consideration in the form of such common stock only, whereas a holder who has
converted his share prior to the Common Stock Fundamental Change will receive
consideration in the form of common stock as well as any other securities or
assets (which may include cash) receivable thereupon by a holder of the number
of shares of Common Stock issuable upon conversion of such share of Preferred
Stock immediately prior to such Common Stock Fundamental Change.
The term "Applicable Price" means (i) in the event of a
Non-Stock Fundamental Change in which the holders of the Common Stock receive
only cash, the amount of cash received by the holder of one share of Common
Stock and (ii) in the event of any other Non-Stock Fundamental Change or any
Common Stock Fundamental Change, the average of the Closing Prices (as
defined) for the Common Stock during the ten trading days (as defined in the
Certificate of Designation) prior to and including the record date for the
determination of the holders of Common Stock entitled to receive cash,
securities, property or other assets in connection with such Non-Stock
Fundamental Change or Common Stock Fundamental Change, or, if there is no such
record date, the date upon which the holders of the Common Stock shall have
the right to receive such cash, securities, property or other assets, in each
case, as adjusted in good faith by the Board of Directors or the Company to
appropriately reflect any of the events referred to in clauses (i) through (v)
of the third paragraph of this Conversion Rights subsection.
The term "Closing Price" of any common stock means on any day
the last reported sale price regular way on such day or in case no sale takes
place on such day, the average of the reported closing bid and asked prices
regular way in each case on the NYSE or, if the common stock is not quoted on
such system, on the principal national securities exchange or quotation system
on which such stock is listed or admitted to trading or quoted, or, if not
listed or admitted to trading on any national securities exchange or quotation
system, the average of the closing bid and asked prices in the
over-the-counter market on such day, or, if not so available in such manner,
as furnished by any NYSE Member firm selected by the Company for that purpose.
The term "Common Stock Fundamental Change" means any
Fundamental Change in which more than 50% of the value (as determined in good
faith by the Board of Directors of the Company) of the consideration received
by holders of Common Stock consists of common stock that for each of the ten
consecutive trading days referred to in the second preceding paragraph has
been admitted for listing or admitted for listing subject to notice of
issuance on a national securities exchange or quoted on the Nasdaq National
Market, provided, however, that a Fundamental Change shall not be a Common
Stock Fundamental Change unless either (i) the Company continues to exist
after the occurrence of such Fundamental Change and the outstanding shares of
Preferred Stock continue to exist as outstanding Preferred Stock, or (ii) not
later than the occurrence of such Fundamental Change, the outstanding shares
of Preferred Stock are converted into or exchanged for shares of Preferred
Stock of a corporation succeeding to the business of the Company, which
Preferred Stock has powers, preferences and relative, participating, optional
or other rights, and qualifications, limitations and restrictions,
substantially similar to those of the Preferred Stock.
The term "Fundamental Change" means the occurrence of any
transaction or event in connection with a plan pursuant to which all or
substantially all of the Common Stock shall be exchanged for, converted into,
acquired for or constitute solely the right to receive cash, securities,
property or other assets (whether by means of an exchange offer, liquidation,
tender offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise) provided, in the case of a plan involving more
than one such transaction or event, for purposes of adjustment of the
conversion price, such Fundamental Change shall be deemed to have occurred
when substantially all of the Common Stock of the Company shall be exchanged
for, converted into, or acquired for or constitute solely the right to receive
cash, securities, property or other assets, but the adjustment shall be based
upon the highest weighted average per share consideration which a holder of
Common Stock could have received in such transactions or events as a result of
which more than 50% of the Common Stock of the Company shall have been
exchanged for, converted into, or acquired for or constitute solely the right
to receive cash, securities, property or other assets.
The term "Non-Stock Fundamental Change" means any Fundamental
Change other than a Common Stock Fundamental Change.
The term "Purchaser Stock Price" means, with respect to any
Common Stock Fundamental Change, the average of the Closing Prices for the
common stock received in such Common Stock Fundamental Change for the ten
consecutive trading days prior to and including the record date for the
determination of the holders of Common Stock entitled to receive such common
stock, or if there is no such record date, the date upon which the holders of
the Common Stock shall have the right to receive such common stock, in each
case, as adjusted in good faith by the Board of Directors to appropriately
reflect any of the events referred to in clauses (i) through (v) of the third
paragraph of this subsection; provided, however, that if no such Closing
Prices exist, the Purchaser Stock Price shall be set at a price determined in
good faith by the Board of Directors of the Company.
The term "Reference Market Price" shall mean $ (which is
an amount equal to 66 2/3% of the reported last sale price for the Common
Stock on the NYSE on , 1997) and in the event of any adjustment to
the conversion price other than as a result of a Fundamental Change, the
Reference Market Price shall also be adjusted so that the ratio of the
Reference Market Price to the conversion price after giving effect to any such
adjustment shall always be the same ratio of $ to the initial conversion
price specified in the first sentence of this subsection.
Notwithstanding the foregoing provisions, the issuance of any
shares of Common Stock pursuant to any plan providing for the reinvestment of
dividends or interest payable on securities of the Company and the investment
of additional optional amounts in shares of Common Stock under any such plan,
and the issuance of any shares of Common Stock or options or rights to
purchase such shares pursuant to any employee benefit plan or program of the
Company or pursuant to any option, warrant, right or exercisable, exchangeable
or convertible security outstanding as of the date the Preferred Stock was
first designated shall not be deemed to constitute an issuance of Common Stock
or exercisable, exchangeable or convertible securities by the Company to which
any of the adjustment provisions described above applies. There shall also be
no adjustment of the conversion price in case of the issuance of any stock (or
securities convertible into or exchangeable for stock) of the Company, except
as specifically described above. If any action would require adjustment of
the conversion price pursuant to more than one of the provisions described
above, only one adjustment shall be made and such adjustment shall be the
amount of adjustment which has the highest absolute value to holders of the
Preferred Stock. No adjustment in the conversion price will be required
unless such adjustment would require an increase or decrease of at least 1% of
the conversion price, but any adjustment that would otherwise be required to
be made shall be carried forward and taken into account in any subsequent
adjustment.
Exchange Provisions
The Series A Exchangeable Preferred Stock may be exchanged, in
whole but not in part, at the option of the Company, for Notes on any
Exchange Date") through the issuance of Notes, in redemption of and in
, , or , on or after , 2000 (a "Notes
Exchange Date") through the issuance of Notes, in redemption of and in
exchange for shares of Series A Exchangeable Preferred Stock, provided certain
conditions are met. See "Description of the Notes." Holders of the Series A
Exchangeable Preferred Stock will be entitled to receive Notes at the rate of
$50 principal amount of Notes for each share of Series A Exchangeable
Preferred Stock. The Company will mail notice of its intention to redeem
through such an exchange to each holder of record to the Series A Exchangeable
Preferred Stock not less than 30 nor more than 60 days before the Notes
Exchange Date. If notice of exchange has been given (unless the Company
defaults in issuing Notes in redemption of an exchange for the Series A
Exchangeable Preferred Stock or fails to pay or set aside for payment accrued
and unpaid dividends on the Series A Exchangeable Preferred Stock) and certain
conditions with respect to the issuance of Notes are met, on the Notes
Exchange Date the holders of the Series A Exchangeable Preferred Stock will
cease to be stockholders with respect to such shares and will have no
interests in or claims against the Company by virtue thereof (except the right
to receive Notes in exchange therefor and accrued and unpaid dividends on the
Series A Exchangeable Preferred Stock to the Notes Exchange Date) and will
have no voting, conversion or other rights with respect to such shares, and
all shares of Series A Exchangeable Preferred Stock will no longer be
outstanding. No shares of Series A Exchangeable Preferred Stock may be
exchanged for Notes unless the Company has paid or set aside for the benefit
of the holders of the Series A Exchangeable Preferred Stock all accrued and
unpaid dividends on the Series A Exchangeable Preferred Stock to the Notes
Exchange Date. The ability of the Company to exchange Series A Exchangeable
Preferred Stock to the Notes is restricted under the terms of the Amended
Credit Agreement. See "Risk Factors--Substantial Leverage." The ability of
the Company to exchange Series A Exchangeable Preferred Stock for Notes is
also subject to certain conditions contained in the Indenture relating to the
Notes and to limitations imposed under the DGCL and by applicable laws
protecting the rights of creditors.
Lack of Established Market for the Preferred Stock
There is currently no public market for the Preferred Stock.
Although an application has been made for the listing of the Preferred Stock
on the NYSE, there can be no assurance that an active market for the Preferred
Stock will develop or that, if the Preferred Stock is approved for such
listing, such listing will continue while the Preferred Stock is outstanding.
Future trading prices for the Preferred Stock will depend on many factors,
including, among others, the Company's financial results, the market for
similar securities and the volume of trading activity in the Preferred Stock.
Transfer Agent
The transfer agent of the Preferred Stock will be American
Stock Transfer & Trust Company.
DESCRIPTION OF THE NOTES
If the Company elects to issue Notes in exchange for the Series
A Exchangeable Preferred Stock, the Company will issue the Notes under an
Indenture (the "Indenture") between the Company and , as
trustee (the "Trustee") at a rate of $50 principal amount of Notes for each
share of Series A Exchangeable Preferred Stock exchanged. The Indenture will
be substantially in the form filed as an exhibit to the Registration Statement
of which this Prospectus is a part, with such changes as may be required by
law or usage. The following summaries of certain provisions of the Indenture
do not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all the provisions of the Indenture including the
definition therein of certain terms and the Trust Indenture Act of 1939, as
amended.
General
The Notes will be unsecured, subordinated obligations of the
Company, will be limited in aggregate principal amount to the aggregate
liquidation preference of the Series A Exchangeable Preferred Stock for which
the Notes are exchanged and will mature on , 2012. The Company will
pay interest on the Notes quarterly in cash on , ,
and of each year, at the rate of % per annum. Interest on the
Notes will be paid to the persons who are registered holders at the close of
business on the , , and next preceding
the interest payment dates. Interest will be computed on the basis of a
360-day year of twelve 30-day months. Principal (and premium, if any) and
interest will be payable, and the Notes may be presented for conversion,
exchange or registration of transfer, at the office or agency of the Company
maintained for such purposes in New York, New York or at such other office or
agency as may be maintained by the Company for such purpose, except that
payment of interest may, at the option of the Company, be made by check mailed
to the address of the person entitled thereto as it appears on the security
register. The Notes are to be issued only in registered form, without
coupons, in denominations of $50 or any integral multiple thereof.
Conversion Rights
The holders of Notes will have the right at any time, through
the close of business on the maturity date, subject to prior redemption, to
convert any Notes (or any portion thereof that is an integral multiple of $50)
into shares of Common Stock, initially at the conversion rate in effect on the
Preferred Stock at the date of exchange of the Series A Exchangeable Preferred
Stock for Notes (subject to adjustment as described below). If a Note is
called for redemption, the conversion right will terminate at 5:00 p.m. New
York City time on the business day prior to the date fixed for redemption. No
payment of interest and no adjustment in respect of dividends will be made
upon the conversion of any Notes, and the holder will lose any right to
payment of interest on the Notes surrendered for conversion, except that, with
respect to any redemption occurring on or one business
day thereafter, the conversion rights will terminate at 5:00 p.m. New York
City time on the date fixed for redemption such that all holders of Notes to
be redeemed will be entitled to receive the interest
payment (assuming such holders held the Notes on ). Notes
surrendered for conversion during the period from the regular record date for
an interest payment to the corresponding interest payment date (except Notes
called for redemption during such period) must be accompanied by payment of an
amount equal to the interest thereon which the holder is to receive on such
interest payment date. No fractional shares of Common Stock will be issued
upon conversion but, in lieu thereof, an appropriate amount will be paid in
cash based on the last reported sale price for the shares of Common Stock on
the NYSE on the day of such conversion. The provisions in the Indenture for
adjustment of the conversion rate will be substantially the same as those
applicable to the Preferred Stock described under "Description of Preferred
Stock--Conversion Rights."
Subordination
Payment of the principal of (and premium, if any) and interest
on the Notes will be subordinated in the right of payment, as set forth in the
Indenture, to the prior payment in full of all Senior Indebtedness when due in
accordance with the terms thereof. Senior Indebtedness will be defined in the
Indenture as the principal of (and premium, if any) and unpaid interest on,
and all other sums, whether direct or contingent including, without
limitation, costs and expenses of collection and enforcement (including the
reasonable fees and expenses of legal counsel engaged for such purpose)
payable by the Company relating to, the following (whether outstanding at the
date of the Indenture or thereafter incurred or created): (a) indebtedness for
money borrowed (including purchase money obligations) evidenced by notes or
other written obligations including, without limitation, letters of credit and
bankers acceptances, (b) indebtedness evidenced by notes, bonds or other
securities issued under the provisions of an indenture or similar instrument,
(c) obligations as lessee under capitalized leases and under leases of
property made as part of any sale and leaseback transactions, (d) indebtedness
of others of any of the kinds described in the preceding clauses (a) through
(c) assumed or guaranteed and (e) renewals, extensions and refunding of
indebtedness and obligations of the kinds described in the preceding clauses
(a) through (d); provided, however, that the following will not constitute
Senior Indebtedness: (i) any indebtedness or obligation as to which, in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is expressly provided that such indebtedness or obligation is
subordinate in right of payment to all other indebtedness, (ii) any
indebtedness or obligation which by its terms refers explicitly to the Notes
and states that such indebtedness or obligation shall not be senior in right of
payment thereto, (iii) any indebtedness or obligation in respect of the Notes
and (iv) any indebtedness or obligation to a subsidiary.
Following the Rights Offering, assuming only HLR and Roche
Holdings exercise their Basic Subscription Privilege for approximately $250
million of Series B PIK Preferred Stock, $1,083.1 million of Senior
Indebtedness will be outstanding. There will be no restrictions on the
creation of Senior Indebtedness in the Indenture.
By reason of such subordination, in the event of dissolution,
insolvency, bankruptcy or other similar proceeding, creditors (other than
holders of Senior Indebtedness or Notes) may recover less, ratably, than the
holders of Senior Indebtedness and may recover more, ratably, than the holders
of the Notes and, upon any distribution of assets, the holders of Notes will
be required to pay over their share of such distribution to the holders of
Senior Indebtedness until such Senior Indebtedness is paid in full. In
addition, such subordination may affect the Company's obligation to make
principal and interest payments with respect to the Notes, and the rights of
the Trustee or the holders of the Notes to exercise certain remedies under the
Indenture (including the right to declare the Notes due and payable prior to
their stated maturity), in the event of any default on the payment of
principal (or premium, if any) or interest on any Senior Indebtedness beyond
any applicable grace period, or in the event of any default with respect to
Senior Indebtedness that would permit or automatically effect acceleration of
the maturity thereof or if any Notes are declared due and payable prior to
their stated maturity.
Redemption at Option of Company
The Notes are not redeemable prior to , 2000. On or
after such date the Notes may be redeemed by the Company, at its option, in
whole or in part at any time, subject to the limitations, if any, imposed by
applicable law, at a redemption price, expressed as a percentage of the
principal amount, together with accrued and unpaid interest to the date fixed
for redemption, if redeemed during the twelve month period beginning
of the years indicated below:
Year Redemption Price
2000............................ %
2001............................
2002............................
2003............................
2004............................
2005............................
2006 and thereafter............. 100
Notes in any denomination equal to or larger than $50 may be
redeemed in whole or in part in multiples of $50. On and after the redemption
date, interest will cease to accrue on Notes or portions thereof called for
redemption.
Notice of redemption will be mailed at least 30 but not more
than 60 days prior to the redemption date to each holder of Notes to be
redeemed at the address appearing in the security register maintained by the
Company. If less than all the outstanding Notes are to be redeemed, the
Trustee will select the Notes (or portion thereof equal to $50 or any integral
multiple thereof) to be redeemed by such method as the Trustee shall deem fair
and appropriate.
Consolidation, Merger and Sale of Assets
The Company, without the consent of any holders of Notes may
consolidate or merge with or into any person, or convey, transfer or lease its
assets substantially as an entirety to any person, and any person may
consolidate or merge with, or into, or transfer or lease its assets
substantially as an entirety to the Company, provided that (i) the person (if
other than the Company) formed by such consolidation or into which the Company
is merged or which acquires or leases the assets of the Company substantially
as an entirety is organized and existing under the laws of the United States,
any state thereof or the District of Columbia, and assumes the Company's
obligations on the Notes and under the Indenture, (ii) after giving effect to
such transaction, no event of default and no event that, after notice or lapse
of time or both, would become an event of default shall have happened and be
continuing and (iii) certain other conditions are met.
Defaults and Remedies
An event of default under the Indenture is defined as: default
for 30 days in payment of interest on the Notes; default in payment of
principal of (or premium, if any, on) the Notes; failure by the Company for 60
days after written notice to it to comply with any of its other covenants in
the Indenture; and certain events of bankruptcy, insolvency or reorganization
relative to the Company. If an event of default occurs and is continuing, the
Trustee or holders of at least 25% in aggregate principal amount of the Notes
outstanding may, subject to the applicable subordination provisions, declare
the Notes to be due and payable immediately, but under certain conditions such
acceleration may be rescinded by the holders of a majority in principal amount
of the Notes then outstanding.
Holders of Notes may not enforce the Indenture except as
provided in the Indenture and except that, subject to the applicable
subordination provisions, nothing shall prevent the holders of Notes from
enforcing payment of the principal (or premium, if any) or interest on, or
conversion of, their Notes. The Trustee may refuse to enforce the Indenture
unless it receives reasonable security or indemnity. Subject to certain
limitations, holders of a majority in principal amount of the Notes may direct
the Trustee in its exercise of any trust or power under the Indenture.
The Company will semiannually furnish the Trustee with an
officers' certificate with respect to compliance with the terms of the
Indenture.
Modification
Modification and amendment of the Indenture may be effected by
the Company and the Trustee with the consent of the holders of not less than a
majority in aggregate principal amount of the Notes, provided that no such
modification or amendment may, without the consent of each holder affected
thereby, (i) reduce the rate or change the time or place for payment of
interest on any Notes, (ii) reduce the principal of (or premium, if any) or
change the fixed maturity of, any Notes, (iii) make any Notes payable in a
currency other than that stated in the Notes, (iv) impair the right to
institute suit for the enforcement of any payment on or with respect of any
Notes, (v) make any change that adversely affects the right to convert any
Notes, (vi) modify the subordination provisions in a manner adverse to the
holders or (vii) reduce the amount of Notes whose holders must consent to a
modification or amendment or waive compliance with certain provisions of the
Indenture. The Indenture also contains provisions permitting the Company and
the Trustee to effect certain minor modifications of the Indenture not
adversely affecting the rights of holders of Notes in any material respect.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of certain Federal income
tax considerations relevant to the receipt, ownership and disposition of the
Rights, the Preferred Stock and the Notes, but does not purport to be a
complete analysis of all the potential tax effects thereof. This summary is
based on the Internal Revenue Code of 1986, as amended to the date hereof (the
"Code"), administrative pronouncements, judicial decisions and existing and
proposed Treasury Regulations, changes to any of which subsequent to the date
of this Prospectus may affect the tax consequences described herein. In this
connection, it should be noted that as used in the discussion below, the term
"earnings and profits" refers to the Company's earnings and profits as
determined under the Code. There is no assurance that the Company will have
earnings and profits for any particular taxable year. This summary addresses
only initial distributees of the Rights who hold all their Common Stock, the
Rights, the Preferred Stock and the Notes as capital assets within the meaning
of section 1221 of the Code. It does not discuss all of the tax consequences
that may be relevant to a holder in light of its particular circumstances or
to holders subject to special rules, such as certain financial institutions,
insurance companies, dealers in securities and holders that are, for Federal
income tax purposes, non-resident alien individuals or foreign corporations.
Holders should consult their tax advisors with regard to the application of
the Federal income tax laws to their particular situations as well as any tax
consequences arising under the laws of any state, local or foreign taxing
jurisdiction.
On February 6, 1997, the Clinton Administration released
several revenue proposals that, if adopted, may, with respect to certain
holders, affect the Federal income tax consequences of holding the Preferred
Stock. Among such proposals is the proposal to reduce the dividend-received
deduction rate from 70% to 50% for any corporation that owns less than 20% (by
vote and value) of the stock of the Company. There can be no assurance as to
whether or when any of such proposals will become effective.
The Rights
For Federal income tax purposes, receipt of Rights by a
shareholder pursuant to the Rights Offering should be treated as a nontaxable
distribution with respect to the Common Stock.
If the fair market value of the Rights is less than 15% of the
fair market value of the Common Stock on the date of distribution, then
pursuant to section 307(b) of the Code, the Rights will be allocated a zero
basis, unless the shareholder affirmatively elects to allocate basis in
proportion to their relative fair market values determined on such date. Such
election must be made in the shareholder's tax return for the taxable year in
which the Rights are received. On the other hand, if the fair market value of
the Rights equals or exceeds 15% of the fair market value of the Common Stock
on such date, then the shareholder's basis in the Common Stock must be
allocated between the Common Stock and the Rights received in proportion to
their relative fair market values.
In the case of exercise, any basis allocated to the Rights
should be added to the basis of the Preferred Stock that is so acquired. An
initial distributee shareholder would not be able to claim a loss if its Rights
expire unexercised. If a shareholder elects to sell its Rights, the
shareholder should include its holding period in the Common Stock with respect
to which the Rights were distributed in determining the holding period of the
Rights.
If the Company has, as of the date of the issuance of the
Rights, current or accumulated earnings and profits, then the Rights will,
with respect to the initial distributees of such Rights, be treated as
"Section 306 stock." In that event, each Right, with respect to an initial
distributee, shall carry section 306 "taint" in the amount equal to the lesser
of (i) the fair market value of the Right on the date of distribution, or (ii)
the allocable share of the Company's current or accumulated earnings and
profits. Under such circumstances, subject to certain exceptions, an initial
distributee shareholder who disposes of the Rights must treat the proceeds as
ordinary income to the extent of the "taint" and cannot recognize a loss on
the sale of the Rights.
The Preferred Stock
Dividends
Cash dividends paid on the Preferred Stock will be taxable as
ordinary income to the extent of the Company's earnings and profits. To the
extent that the amount of cash distributions paid on the Preferred Stock
exceeds the Company's earnings and profits, such distributions will be treated
first as a return of capital and will be applied against and reduce the
adjusted tax basis of the Preferred Stock in the hands of the shareholder.
Any remaining amount after the holder's basis has been reduced to zero will be
taxable.
Dividends paid in kind on the Series B PIK Preferred Stock will
be taxable as ordinary income in an amount equal to the lesser of (i) the fair
market value of the Series B PIK Preferred Stock paid in kind and (ii) the
Company's earnings and profits. Thus, holders of Series B PIK Preferred Stock
may recognize income without the receipt of cash to pay the tax attributable
to such income. To the extent that the fair market value of distributions in
Series B PIK Preferred Stock exceed the Company's earnings and profits, such
distributions will be treated first as a return of capital and applied against
and reduce the basis of the Series B PIK Preferred Stock with respect to which
such distributions were made. Any amount remaining after such basis has been
reduced to zero will be taxable. A recipient's adjusted basis in the Series B
PIK Preferred Stock received as a dividend will equal the fair market value of
such shares on the date of distribution, and the holding period for such
shares will begin on the date following the date of distribution.
For purposes of the remainder of this discussion, the term
"dividend" refers to a distribution taxable as ordinary income as described
above unless the context indicates otherwise. Dividends received by corporate
shareholders will be eligible for a dividends-received deduction under section
243 of the Code, subject to the limitations contained in sections 246 and 246A
of the Code.
Under certain circumstances, section 1059 of the Code would
require a corporate shareholder to reduce its basis in the Preferred Stock by
the "nontaxed portion" of any "extraordinary dividend." Generally, the
nontaxed portion of an extraordinary dividend is the amount excluded from
income under section 243 of the Code (relating to the dividends-received
deduction). Under the Code, the term "extraordinary dividend" includes any
redemption of stock that is treated as a dividend and that is non-pro rata as
to all shareholders, including holders of common stock, irrespective of
holding period, as well as all dividends on "disqualified preferred stock."
An "extraordinary dividend" may arise from an exchange of Preferred Stock for
Notes or cash, and the Preferred Stock may constitute "disqualified preferred
stock." Corporate shareholders should consult their tax advisors with respect
to the possible application of the extraordinary dividend rules.
Redemption and Exchange for the Notes
Subject to the discussion below with respect to section 306 of
the Code, the redemption of Preferred Stock for cash will be treated as a
distribution that is taxable as a dividend to the extent of the Company's
allocable earnings and profits unless the redemption (a) results in a
"complete termination" of the shareholder's stock interest in the Company, (b)
is "substantially disproportionate," or (c) is "not essentially equivalent to a
dividend" under section 302 of the Code. In determining whether any of these
tests has been met, shares considered to be owned by the shareholder by reason
of certain constructive ownership rules set forth in section 318 of the Code,
as well as shares actually owned, must generally be taken into account. A
distribution to a shareholder will be "not essentially equivalent to a
dividend" if it results in a "meaningful reduction" in the shareholder's stock
interest in the Company. The Internal Revenue Service has issued a published
ruling indicating that a redemption which results in a reduction in the
proportionate interest in the Company (taking into account the section 318
constructive ownership rules) of a shareholder whose relative stock interest
is minimal (an interest of less than 1% should satisfy this requirement) and
who exercises no control over Company affairs should be treated as being "not
essentially equivalent to a dividend." If any of these three tests is met,
the redemption of the Preferred Stock for cash would be treated, as to that
shareholder, as an exchange under section 302(a) of the Code giving rise to
capital gain or loss.
If the Rights are treated as "section 306 stock," then the
Preferred Stock acquired pursuant to the exercise by the initial distributee
shareholder of such Rights would constitute "section 306 stock" in the hands
of such shareholder to the extent of the original "taint" on the Rights.
Under section 306(a)(2) of the Code, proceeds equal to the amount of such
"taint" received upon the redemption of the Preferred Stock will be taxable as
ordinary income to the extent of the Company's earnings and profits at the
time of the redemption, unless the "complete termination" test described above
is met.
A redemption of Series A Exchangeable Preferred Stock in
exchange for Notes cannot qualify under the "complete termination" or
"substantially disproportionate" tests described above. The redemption
would, therefore, be treated as a distribution to the extent of the fair
market value of the Notes and taxable as a dividend to the extent of the
shareholder's allocable share of the Company's earnings and profits unless
it satisfies the "not essentially equivalent to a dividend" test. The
Internal Revenue Service has ruled that a holder of convertible notes is
considered to own the underlying stock for purposes of the section 318
constructive ownership rules, and further that a redemption which does not
result in any reduction in the interest of a shareholder does not satisfy
the meaningful reduction standard even if such shareholder holds only a
minimal interest. Therefore, under a literal interpretation of the
statute, regulations and rulings, the receipt of Notes in exchange for
Series A Exchangeable Preferred Stock will be taxable as a dividend to the
extent of the shareholder's allocable share of the Company's earnings and
profits. Accordingly, each shareholder should consult its tax advisor
regarding this issue, including the possible effect of the disposition of a
portion of its interest in the Company contemporaneously and as part of an
integrated plan with the exchange for Notes.
If a shareholder is treated as having received a dividend upon
a redemption or an exchange for Notes, the basis of its Series A
Exchangeable Preferred Stock will be transferred to any remaining
stockholdings in the Company. If the shareholder does not retain any stock
ownership in the Company, it may be permitted to transfer such basis to any
Notes received in the exchange or it may lose such basis entirely.
Sale of Preferred Stock
Subject to the discussion below with respect to section 306 of
the Code, a holder will recognize taxable gain or loss upon the sale or
disposition (other than a redemption or an exchange for Notes as discussed
above) of shares of Preferred Stock equal to the difference between the amount
of cash or the fair market value of property received and the holder's tax
basis in the shares. Such gain or loss will be capital gain or loss and will
be long-term capital gain or loss if the holder has held the shares of
Preferred Stock for more than one year.
If the Rights constitute "section 306 stock" as described
above, then upon the sale or disposition of the Preferred Stock acquired
through the exercise of the Rights, the proceeds received will be taxable as
ordinary income to the extent of the "taint." Furthermore, no loss will be
recognized upon the sale or disposition; any unrecovered basis would revert to
the shareholder's remaining Common Stock holdings or possibly to its Preferred
Stock holdings, or, if the shareholder does not retain any such holding, it
may lose such basis entirely.
The Notes
Original Issue Discount
For purposes of the following discussion, it is assumed that
the Notes will constitute debt for Federal income tax purposes and will not
constitute "applicable high-yield discount obligations" under section
163(i) of the Code, and that the Notes or Series A Exchangeable Preferred
Stock will be readily tradeable on an established securities market at the
time of exchange of the Notes for Series A Exchangeable Preferred Stock.
In general, if a Note's stated redemption price at maturity exceeds its
"issue price," it will be considered to have been issued at an original
issue discount ("OID") in an amount equal to such excess. For these
purposes, the issue price of a Note will be equal to the fair market value
of the Note (including the value of the conversion feature) as of the issue
date or, if the Note is not traded on an established securities market
within 30 days of the issue date, the fair market value of the Series A
Exchangeable Preferred Stock on such date. The stated redemption price at
maturity of a Note will equal the sum of all payments required under the
Note other than payments of "qualified stated interest." "Qualified stated
interest" is stated interest unconditionally payable as a series of
payments in cash or property (other than interest payments payable in debt
instruments of the Company) at least annually during the entire term of the
Note and equal to the outstanding principal balance of the Note multiplied
by a single fixed rate of interest.
If the difference between a Note's stated redemption price at
maturity and its issue price is less than a de minimis amount, i.e., 1/4 of 1
percent of the stated redemption price at maturity multiplied by the number of
complete years to maturity, then the Note will not be considered to have OID.
A holder will be required to include any qualified stated
interest payments in income in accordance with the holder's method of
accounting for Federal income tax purposes. A holder will also be required to
include any OID in income for Federal income tax purposes as it accrues, in
accordance with a constant yield method based on a compounding of interest,
before the receipt of cash payments attributable to such income. Under this
method, a holder generally will be required to include in income increasingly
greater amounts of OID in successive accrual periods.
Bond Premium
If the issue price of the Note reduced by the portion
attributable to the conversion feature exceeds the amount payable at maturity,
a holder will have "amortizable bond premium" equal in amount to such excess,
and may elect (in accordance with applicable Code provisions) to amortize such
premium, using a constant yield method. A holder who elects to amortize bond
premium must reduce its tax basis in the Note by the amount of the premium
amortized in any year. An election to amortize bond premium applies to all
taxable debt obligations then owned and thereafter acquired by the taxpayer
and may be revoked only with the consent of the Internal Revenue Service.
Redemption or Sale of Notes
Generally, any redemption or sale of Notes by a holder will
result in taxable gain or loss equal to the difference between the amount of
cash received (except to the extent that cash received is attributable to
interest which has not been included in income) and the holder's tax basis in
the Notes. Unless the exchange for the Notes was treated as a dividend, the
tax basis of a holder in a Note will generally be equal to the issue price of
the Note plus any OID included in the holder's income prior to sale or
redemption of the Note, reduced by any bond premium amortized prior to such
sale or redemption. Such gain or loss will be capital gain or loss and will
be long-term capital gain or loss if the holding period exceeds one year.
Conversion of Preferred Stock or Notes into Common Stock
Generally, no gain or loss will be recognized for Federal
income tax purposes on conversion of Preferred Stock or Notes solely into
shares of Common Stock, except with respect to any cash received in lieu of a
fractional share interest (in an amount equal to the difference between the
cash received and the holder's adjusted tax basis allocable to such fractional
shares). A holder's basis in the Common Stock received upon conversion will
be the same as its basis in the Preferred Stock (assuming there are no
dividend arrearages) or Notes, excluding the basis allocated to any fractional
share as described above. The holding period of the Common Stock received
upon conversion of Preferred Stock will include the holding period of the
Preferred Stock. With respect to any Common Stock acquired upon the
conversion of a Note, except for the portion, if any, of each full share of
Common Stock attributable to interest accrued within the meaning of section
354(a)(2)(B) of the Code on or after the date on which the holder acquired the
Note, the Common Stock will have a holding period commencing on the day after
the date on which the holder acquired the Note.
If a shareholder converts Preferred Stock when dividends are in
arrears, it may be deemed to receive a distribution taxable as a dividend.
Under such circumstances, the shareholder is advised to consult its tax
advisor concerning the calculation of the amount of the dividend and the
determination of the holding period of the Common Stock received upon
conversion.
Conversion Adjustments for the Preferred Stock and the Notes
The conversion price of the Preferred Stock and Notes is
subject to adjustment under certain circumstances. Holders may be deemed to
receive a dividend to the extent of the Company's earnings and profits if the
conversion price is adjusted to reflect a taxable distribution of property to
holders of Common Stock or in certain other circumstances involving conversion
price adjustments. Such deemed dividend would be includible in gross income,
although the holder would not receive any cash.
Backup Withholding and Information Reporting
A holder of Common Stock, Rights, Preferred Stock or Notes may
be subject to information reporting and to backup withholding at the rate of
31% with respect to dividends or interest paid on, or the proceeds of a sale,
exchange or redemption thereof, as the case may be, unless such holder
provides proof of an applicable exemption or a correct taxpayer identification
number, and otherwise complies with applicable requirements of the backup
withholding rules. The amounts withheld under the backup withholding rules
are not an additional tax and may be refunded or credited against the holder's
Federal income tax liability, provided the required information is furnished
to the Internal Revenue Service on a timely basis.
PLAN OF DISTRIBUTION
The Company has retained Credit Suisse First Boston to act as
dealer manager in connection with the Rights Offering. The Dealer Manager
will provide marketing assistance and financial advisory services in
connection with the Rights Offering and will solicit the exercise of Rights by
Rights Holders.
In its capacity as financial advisor, Credit Suisse First
Boston provided advice to the Company regarding the structure of the Rights
Offering and with respect to marketing the shares of Preferred Stock to be
issued in the Rights Offering.
The Company has agreed to pay the Dealer Manager a fee of $
per share for each Underlying Share issued pursuant to the exercise of
Rights other than any Underlying Shares issued to HLR and Roche Holdings and
to pay the Dealer Manager a fee for its soliciting efforts equal to $ per
share for each Underlying Share issued pursuant to the exercise of Rights
other than any Underlying Shares issued to HLR and Roche Holdings. The
maximum compensation that the Dealer Manager would receive under this
arrangement is $ .
In addition, the Company has agreed to indemnify the Dealer
Manager with respect to certain liabilities, including civil liabilities under
the Securities Act, or contribute to payments which the Dealer Manager may be
required to make in respect thereof.
The Company is also required to pay to Credit Suisse First
Boston, as financial advisor, a fee in the amount of $ . In addition,
the Company has agreed to reimburse Credit Suisse First Boston, upon request
made from time to time, for certain out-of-pocket expenses incurred in
connection with its activities as financial advisor.
Credit Suisse First Boston has not prepared any report or
opinion constituting a recommendation or advice to the Company or its
stockholders, nor has Credit Suisse First Boston prepared an opinion as to the
fairness of the Subscription Price or the terms of the Rights Offering to the
Company or its current stockholders. Credit Suisse First Boston expresses no
opinion and makes no recommendation to holders of Rights as to the purchase by
any person of Underlying Shares. Credit Suisse First Boston also expresses no
opinion as to the prices at which shares to be distributed in connection with
the Rights Offering may trade if and when they are issued or at any future
time.
Other than the Dealer Manager, the Company has not employed any
brokers, dealers or underwriters in connection with the solicitation of
exercise of Rights, and, except as described above, no other commissions, fees
or discounts will be paid in connection with the Rights Offering. Certain
employees of the Company may solicit responses from Rights Holders, but such
employees will not receive any commissions or compensation for such services
other than their normal employment compensation.
An affiliate of the Dealer Manager will receive proceeds
from the Rights Offering in connection with its role as a lender under the
Company's Existing Credit Agreement and Amended Credit Agreement.
LEGAL MATTERS
The validity of the Preferred Stock and Notes and certain other
matters will be passed upon for the Company by Davis Polk & Wardwell. Davis
Polk & Wardwell from time to time provides legal services to the Company and
its affiliates.
EXPERTS
The consolidated financial statements and schedule of the
Company as of December 31, 1995 and 1994, and for each of the years in the
three-year period ended December 31, 1995, have been included or incorporated
by reference herein and in the Registration Statement in reliance upon the
reports of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein or incorporated by reference herein upon the
authority of said firm as experts in accounting and auditing.
The consolidated statement of operations and cash flows of
Roche Biomedical Laboratories, Inc. for the year ended December 31, 1994
incorporated in this Prospectus by reference to the National Health
Laboratories Holdings Inc. Registration Statement on Forms S4/S3 dated April
25, 1995 (Registration No. 33-58775) filed under the Securities Act of 1933,
as amended, which contains the statement of operations and cash flows for the
year ended December 31, 1994, have been so incorporated in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act and in accordance therewith files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and
other information filed by the Company may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
Commission's following Regional Offices: Chicago Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and New
York Regional Office, 7 World Trade Center, New York, New York 10048. Copies
of such material can also be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549-1004. The Commission maintains an Internet web
site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the Commission.
The address of that site is http://www.sec.gov. The Company's Common Stock is
listed on the New York Stock Exchange, Inc. and reports and other information
concerning the Company can also be inspected at the office of the New York
Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration
Statement on Form S-3 under the Securities Act with respect to the securities
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
where such contract or other document has been filed as an exhibit to the
Registration Statement, reference is made to the exhibit so filed, each such
statement being qualified in all respects by such reference. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement and exhibits thereto. The
information so omitted, including exhibits, may be obtained from the
Commission at its principal office in Washington, D.C. upon the payment of the
prescribed fees, or may be inspected without charge at the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549-1004.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, the Company's Quarterly Reports on Form 10-Q for the
quarters ended March 31, 1996, June 30, 1996 and September 30, 1996, the
Company's Reports on Form 8-K dated February 13, 1996, April 25, 1996, June
27, 1996, August 1, 1996, September 23, 1996, October 24, 1996, November
21, 1996, December 4, 1996, December 30, 1996 and January 6, 1997, the
Company's Report on Form 8-K/A dated February 26, 1997 and the consolidated
statement of operations and cash flows of Roche Biomedical Laboratories,
Inc. for the year ended December 31, 1994 included in the National Health
Laboratories Holdings Inc. Registration Statement on Forms S4/S3 dated
April 25, 1995 (Registration No. 33-58775) filed under the Securities Act
of 1933, as amended, are hereby incorporated by reference in this
Prospectus except as superseded or modified herein. All documents filed
with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act, after the date of this Prospectus and prior to the
termination of the offering shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the date of filing of
such documents. Any statement contained in any document incorporated or
deemed to be incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies
or supersedes such statement. Any such statement so modified or superseded
shall not be deemed, except as modified or superseded, to constitute a part
of this Prospectus. The Company will provide without charge to each
person, including any beneficial owner, to whom this Prospectus is
delivered, upon written or oral request of such person, a copy of any and
all of the documents that have been or may be incorporated by reference
herein (other than exhibits to such documents which are not specifically
incorporated by reference into such documents). Such requests should be
directed to Attention: Bradford T. Smith, Secretary, Laboratory
Corporation of America Holdings, 358 South Main Street, Burlington, North
Carolina 27215, (910) 229-1127.
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Balance Sheets as of September 30,
1996 (unaudited) and December 31, 1995.................... F-2
Unaudited Consolidated Statements of Operations
for the nine-month periods ended September 30, 1996
and September 30, 1995.................................... F-3
Unaudited Consolidated Statements of Cash Flows
for the nine-month periods ended September 30, 1996
and September 30, 1995.................................... F-4
Notes to Unaudited Consolidated Financial Statements........ F-6
Independent Auditors' Report................................ F-9
Consolidated Balance Sheets as of
December 31, 1995 and 1994................................ F-10
Consolidated Statements of Operations for
each of the years in the three-year period
ended December 31, 1995................................... F-11
Consolidated Statements of Stockholders'
Equity for each of the years in the
three-year period ended December 31, 1995................. F-12
Consolidated Statements of Cash Flows for
each of the years in the three-year
period ended December 31, 1995............................ F-13
Notes to Consolidated Financial Statements.................. F-15
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 28.2 $ 16.4
Accounts receivable, net........................... 494.4 425.6
Inventories........................................ 45.8 51.3
Prepaid expenses and other......................... 20.9 21.4
Deferred income taxes.............................. 116.5 63.3
Income taxes receivable............................ 9.9 21.9
-------- --------
Total current assets................................ 715.7 599.9
Property, plant and equipment, net.................. 289.3 304.8
Intangible assets, net.............................. 885.1 916.7
Other assets, net................................... 18.3 15.8
-------- --------
$1,908.4 $1,837.2
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 74.2 $ 106.2
Accrued expenses and other ........................ 144.3 173.5
Current portion of long-term debt ................. 93.8 70.8
Current portion of accrued settlement costs........ 200.7 --
Revolving credit facility classified as current.... 361.0 --
Long-term debt classified as current............... 637.5 --
-------- --------
Total current liabilities........................... 1,511.5 350.5
Revolving credit facility........................... -- 218.0
Long-term debt, less current portion................ -- 712.5
Accrued settlement costs, less current portion...... 33.0 --
Capital lease obligation............................ 9.8 9.6
Other liabilities................................... 97.2 135.0
Stockholders' equity:
Preferred stock, $0.10 par value; 10,000,000
shares authorized; none issued and
outstanding...................................... -- --
Common stock, $0.01 par value; 220,000,000
shares authorized; 122,923,705
shares and 122,908,698 shares issued and
outstanding at September 30, 1996
and December 31, 1995, respectively.............. 1.2 1.2
Additional paid-in capital.......................... 411.0 411.0
Accumulated deficit................................. (155.3) (0.6)
-------- --------
Total stockholders' equity......................... 256.9 411.6
-------- --------
$1,908.4 $1,837.2
======== ========
See notes to unaudited consolidated financial statements.
</TABLE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1996 1995
-------- --------
<S> <C> <C>
Net sales....................................................................... $1,216.5 $1,028.6
Cost of sales................................................................... 903.9 722.4
-------- --------
Gross profit.................................................................... 312.6 306.2
Selling, general and administrative expenses.................................... 223.0 162.3
Amortization of intangibles and other assets.................................... 22.1 19.2
Restructuring and non-recurring charges......................................... 23.0 65.0
-------- --------
Provision for settlements and related expenses.................................. 185.0 10.0
-------- --------
Operating income (loss)......................................................... (140.5) 49.7
Other income (expense):
Investment income.............................................................. 1.5 1.1
Interest expense............................................................... (51.4) (48.5)
-------- --------
Earnings (loss) before income taxes and extraordinary item...................... (190.4) 2.3
Provision for income taxes...................................................... (35.7) 6.7
-------- --------
Loss before extraordinary item.................................................. (154.7) (4.4)
Extraordinary item --
Loss on early extinguishment of debt, net of income tax benefit of $5.2........ -- (8.3)
-------- --------
Net loss........................................................................ $ (154.7) $ (12.7)
======== ========
Net loss per common share:
Loss per common share before extraordinary loss................................ $ (1.26) $ (0.04)
Extraordinary loss per common share............................................ -- (0.08)
-------- --------
Net loss per common share...................................................... $ (1.26) $ (0.12)
======== ========
Dividends per common share...................................................... $ -- $ --
======== ========
See notes to unaudited consolidated financial statements.
</TABLE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
1996 1995
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................................ $(154.7) $ (12.7)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Restructuring and non-recurring charges.............................................. 23.0 65.0
Provision for settlements and related expenses....................................... 185.0 10.0
Extraordinary loss, net of income tax benefits....................................... -- 8.3
Depreciation and amortization ....................................................... 63.3 52.1
Deferred income taxes, net........................................................... (27.4) (27.5)
Provision for doubtful accounts, net................................................. 9.9 3.0
Change in assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable...................................................... (78.7) (60.0)
Decrease in inventories.............................................................. 6.5 4.4
Decrease (increase) in prepaid expenses and other.................................... (2.4) 6.5
Change in income taxes receivable/payable, net....................................... 12.0 5.4
Decrease in accounts payable and other............................................... (34.9) (7.0)
Payments for restructuring and non-recurring charges................................. (14.4) (6.7)
Payments for settlement and related expenses......................................... (1.7) (32.1)
Other, net........................................................................... (3.1) (4.3)
------- -------
Net cash provided by (used for) operating activities.................................... (17.6) 4.4
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................................... (46.3) (44.3)
Acquisitions of businesses............................................................. (3.3) (38.7)
Investment in joint venture............................................................ (2.5) --
------- -------
Net cash used for investing activities................................................. (52.1) (83.0)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities.............................................. $ 223.0 $ 270.0
Payments on revolving credit facilities................................................ (80.0) (265.0)
Proceeds from long-term debt........................................................... -- 800.0
Payments on long-term debt............................................................. (52.1) (430.0)
Deferred payments on acquisitions...................................................... (9.4) (10.3)
Proceeds from exercise of stock options................................................ -- 0.2
Dividends paid on common stock......................................................... -- (474.8)
Cash received for issuance of common stock............................................. -- 135.7
Cash received for warrants............................................................. -- 51.0
------- -------
Net cash provided by financing activities.............................................. 81.5 76.8
------- -------
Net increase (decrease) in cash and cash equivalents................................... 11.8 (1.8)
Cash and cash equivalents at beginning of year......................................... 16.4 26.8
------- -------
Cash and cash equivalents at end of period............................................. $ 28.2 $ 25.0
======= =======
Supplemental schedule of cash flow information:
Cash paid (received) during the period for:
Interest............................................................................... $ 55.1 $ 42.4
Income taxes........................................................................... (15.6) 22.0
Disclosure of non-cash financing and investing activities:
Common stock issued in connection with an acquisition.................................. $ -- $ 539.6
Common stock issued in connection with the cancellation of employee stock options...... -- 6.9
In connection with business acquisitions, liabilities were assumed as follows:
Fair value of assets acquired.......................................................... $ 9.6 $ 775.7
Cash paid.............................................................................. (3.4) (38.7)
Stock issued........................................................................... -- (539.6)
------- -------
Liabilities assumed.................................................................... $ 6.2 $ 197.4
======= =======
See notes to unaudited consolidated financial statements.
</TABLE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of
Laboratory Corporation of America Holdings and its wholly owned subsidiaries
(the "Company") after elimination of all material intercompany accounts and
transactions.
The accompanying consolidated condensed financial statements of
the Company and its subsidiaries are unaudited. In the opinion of management,
all adjustments (which include only normal recurring accruals) necessary for a
fair statement of the results of operations have been made.
2. EARNINGS PER SHARE
Earnings per share are based upon the weighted average number
of shares outstanding during the nine months ended September 30, 1996 of
122,917,281 shares, and the weighted average number of shares outstanding
during the nine months ended September 30, 1995 of 106,424,055 shares.
3. MERGER WITH ROCHE BIOMEDICAL LABORATORIES, INC.
On April 28, 1995, the Company completed its merger (the
"Merger") with Roche Biomedical Laboratories, Inc. ("RBL").
The following table provides unaudited pro forma operating
results as if the Merger had been completed at the beginning of 1995. The pro
forma information does not include the restructuring charges and extraordinary
item related to the Merger. The pro forma information has been prepared for
comparative purposes only and does not purport to be indicative of future
operating results.
Nine Months
Ended
September 30, 1995
------------------
Net sales................................. $1,275.2
Net earnings.............................. 49.5
Net earnings per common share............. 0.41
4. SETTLEMENTS AND RELATED EXPENSES
As previously discussed in the Company's December 31, 1995
10-K and June 30, 1996 10-Q, the Office of Inspector General ("OIG") of
Health and Human Services and the Department of Justice ("DOJ") had been
investigating certain past laboratory practices of the predecessor
companies of the Company -- National Health Laboratories Holdings Inc.
("NHL"), Roche Biomedical Laboratories, Inc. ("RBL") and Allied Clinical
Laboratories, Inc. ("Allied"). On November 21, 1996, the Company reached
a settlement with the OIG and the DOJ regarding the prior billing practices
of these predecessor companies. The government's investigations covered
billings for certain tests performed as part of the chemistry profiles of
NHL, RBL and Allied from 1988 to 1994. These tests were deemed by
regulators to be medically unnecessary. The investigations were part of a
broad-based federal inquiry into Medicare and related billings that have
resulted in financial settlements with a number of other clinical
laboratories. The inquiries have also prompted the imposition of more
stringent regulatory compliance requirements industry-wide. Under the
terms of the 1996 Government Settlement, the Company agreed to enter into a
comprehensive Corporate Integrity Agreement and to pay $182.0 to
settle civil claims involving Medicare and related government billings for
tests performed by NHL, RBL and Allied. These claims arose out of the
government's contention that laboratories offering profiles containing
certain test combinations had the obligation to notify ordering physicians
how much would be billed to the government for each test performed for a
patient whose tests are paid for by Medicare, Medicaid or other government
agency. The government contended claims submitted for tests ordered by
physicians and performed by the laboratories were improper. The Company
settled these allegations without an admission of fault. The Corporate
Integrity Agreement, among other things, requires that detailed
notifications be made to physicians. In addition, as part of the overall
settlement, a San Diego laboratory that was formerly part of Allied agreed
to plead guilty to a charge of filing a false claim with Medicare and
Medicaid in 1991. The assets of the San Diego laboratory were sold by
Allied in 1992, two years before the Allied Acquisition. As is customary
with asset sales, Allied retained the liability for conduct preceding the
sale--a liability the Company later succeeded to, following the Allied
Acquisition and Merger. Consistent with this overall settlement, the
Company paid $187.0 to the Federal Government in December 1996 with
proceeds from a loan from Roche Holdings. As a result of negotiations
related to the 1996 Government Settlement, the Company recorded a charge of
$185.0 in the third quarter of 1996 (the "Settlement Charge") to
increase reserves for the 1996 Government Settlement described above, and
other related expenses of government and private claims resulting
therefrom. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" for a
discussion of the impact of the settlement on the Company's liquidity.
Also see "Regulation and Reimbursement" for additional discussion of legal
proceedings.
5. LONG-TERM DEBT
The Company obtained waivers for the quarter ended June 30,
1996 of certain covenants contained in its existing credit agreement, as
amended (the "Credit Agreement") and subsequently successfully negotiated an
amendment (the "Fourth Amendment") to the Credit Agreement on September 23,
1996. The Fourth Amendment modifies the interest coverage and leverage ratios
applicable to the quarters ending September 30 and December 31, 1996. The
Fourth Amendment also increases the interest rate margin on its revolving
credit facility (the "Revolving Credit Facility") from 0.25% to 0.875% and
increases the interest rate margin on its term loan facility (the "Term
Loan Facility", and collectively with the Revolving Credit Facility, the
"Bank Facility") from 0.375% to 1.00%. As a result of the Settlement Charge
taken in the third quarter of 1996, as described in Note 4, the Company
obtained a waiver which excludes the Settlement Charge from covenant
calculations for the periods covered by the most recent amendment. Because
of the limited period covered by the Fourth Amendment, approximately $998.0
of the Company's debt that otherwise would have been classified as
long-term has been classified as current in the September 30, 1996
consolidated balance sheet. Such classification has created a material
deficiency in short-term liquidity. The Company has commenced a
comprehensive analysis of its capital structure and expects to seek an
additional waiver and amendment to the existing Credit Agreement to be
effective through completion of the Rights Offering. There can be no
assurance that such waivers or amendments can be obtained. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
6. RESTRUCTURING AND NON-RECURRING CHARGES
In the second quarter of 1996, the Company recorded certain
charges of a non-recurring nature including additional charges related to the
restructuring of operations. The Company recorded a restructuring charge
totaling $13.0 for the shutdown of its La Jolla, California administrative
facility and other workforce reductions. This amount includes approximately
$8.1 for severance, $3.5 for the future lease obligation of the La Jolla
facility and $1.4 for the write down of leasehold improvements and fixed
assets that will be abandoned or disposed of. The La Jolla facility is
expected to be substantially closed by the end of 1996. The remaining
workforce reductions will take place in various other areas of the Company and
are expected to be completed by the end of 1996.
In addition, the Company recorded certain non-recurring charges
in the second quarter of 1996 related to further integration after the Merger.
The Company decided to abandon certain data processing systems and therefore
wrote off approximately $6.7 in capitalized software costs. In addition, the
Company relocated its principal drug testing facility to accommodate
consolidation of the RBL and the Company operations and will incur
approximately $1.3 in costs primarily related to the write off of leasehold
improvements and building cleanup. Finally, the Company recorded a charge of
$2.0 for various other items including the write-off of certain supplies
related to changes in testing methodologies to increase efficiency. As a
result of these changes, some supplies were not compatible with the new
testing methods and were disposed of.
Following the Merger in 1995, the Company determined that it
would be beneficial to close Company laboratory facilities in certain
geographic regions where duplicate Company and RBL facilities existed at the
time of the Merger. As part of the Company's evaluation of its future
obligations under these restructuring activities, certain changes in the
estimates were made during the quarter ended June 30, 1996. These resulted in
the reclassification of certain accruals in the categories listed below
although the total liability did not change.
The following represents the Company's restructuring activities
for the period indicated:
<TABLE>
<CAPTION>
Asset Lease and
Severance revaluations other facility
Costs and write-offs obligations Total
--------- -------------- -------------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.......... $12.8 $18.6 $18.9 $50.3
Additional restructuring charges...... 8.1 1.4 3.5 13.0
Reclassifications..................... 1.6 0.7 (2.3) --
Non cash items........................ -- (10.8) -- (10.8)
Cash payments......................... (11.9) -- (1.8) (13.7)
----- ----- ----- -----
Balance at September 30, 1996......... $10.6 $ 9.9 $18.3 $38.8
===== ===== ===== =====
Current............................... $24.7
Non-current........................... 14.1
-----
$38.8
=====
</TABLE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Laboratory Corporation of America Holdings:
We have audited the consolidated financial statements of
Laboratory Corporation of America Holdings and subsidiaries as listed in the
accompanying index. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. 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 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Laboratory Corporation of America Holdings and subsidiaries as of December 31,
1995 and 1994, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1995, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Raleigh, North Carolina
February 16, 1996
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share data)
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1994
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 16.4 $ 26.8
Accounts receivable, net.............................................................. 425.6 205.4
Inventories........................................................................... 53.7 20.1
Prepaid expenses and other............................................................ 19.0 8.3
Deferred income taxes................................................................. 63.3 29.4
Income taxes receivable............................................................... 21.9 3.0
-------- --------
Total current assets................................................................... 599.9 293.0
Property, plant and equipment, net..................................................... 304.8 140.1
Intangible assets, net................................................................. 916.7 551.9
Other assets, net...................................................................... 15.8 27.7
-------- --------
$1,837.2 $1,012.7
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 106.2 $ 44.3
Accrued expenses and other ........................................................... 168.9 92.8
Current portion of long-term debt .................................................... 70.8 39.0
Current portion of accrued settlement expenses........................................ 4.6 26.7
-------- --------
Total current liabilities.............................................................. 350.5 202.8
Revolving credit facility ............................................................. 218.0 213.0
Long-term debt, less current portion................................................... 712.5 341.0
Capital lease obligation............................................................... 9.6 9.8
Deferred income taxes.................................................................. 5.1 20.6
Other liabilities...................................................................... 129.9 59.5
Stockholders' equity:
Preferred stock, $0.10 par value; 10,000,000 shares authorized; none issued........... -- --
Common stock, $0.01 par value; 220,000,000 shares authorized; 122,908,722 and
84,761,817 shares issued and outstanding at December 31, 1995 and 1994,
respectively.......................................................................... 1.2 0.8
Additional paid-in capital............................................................. 411.0 153.5
Retained earnings (accumulated deficit)................................................ (0.6) 11.7
-------- --------
Total stockholders' equity............................................................ 411.6 166.0
-------- --------
$1,837.2 $1,012.7
======== ========
See notes to consolidated financial statements.
</TABLE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net sales.............................................................. $1,432.0 $ 872.5 $ 760.5
Cost of sales.......................................................... 1,024.3 597.0 444.5
-------- -------- --------
Gross profit........................................................... 407.7 275.5 316.0
Selling, general and administrative expenses........................... 238.5 149.3 121.4
Amortization of intangibles and other assets........................... 27.0 16.3 9.1
Restructuring charges.................................................. 65.0 -- --
Provision for settlements ............................................. 10.0 -- --
-------- -------- --------
Operating income....................................................... 67.2 109.9 185.5
Other income (expenses):
Litigation settlement and related expenses............................ -- (21.0) --
Other gains and expenses, net......................................... -- -- 15.3
Investment income..................................................... 1.4 1.0 1.2
Interest expense...................................................... (65.5) (34.5) (10.9)
-------- -------- --------
Earnings before income taxes and extraordinary loss.................... 3.1 55.4 191.1
Provision for income taxes............................................. 7.1 25.3 78.4
-------- -------- --------
Earnings (loss) before extraordinary loss.............................. (4.0) 30.1 112.7
Extraordinary loss from early extinguishment of debt, net of income
tax benefit of $5.2.................................................. (8.3) -- --
--------- --------- ---------
Net earnings (loss).................................................... $ (12.3) $ 30.1 $ 112.7
--------- -------- ---------
Earnings (loss) per common share:
Earnings (loss) per common share before extraordinary item............ $ (0.03) $ 0.36 $ 1.26
Extraordinary loss per common share................................... (0.08) -- --
--------- -------- --------
Net earnings (loss) per common share................................... $ (0.11) $ 0.36 $ 1.26
========= ======== ========
Dividends per common share............................................. $ -- $ 0.08 $ 0.32
========= ======== ========
See notes to consolidated financial statements.
</TABLE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in millions, except per share data)
<TABLE>
<CAPTION>
Minimum
Common Additional Pension
Stock $0.01 Paid-in Retained Liability Treasury
Par Value Capital Earnings Adjustment Stock
----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993........ $ 1.0 $225.9 $117.5 $ -- $(131.9)
------- ------ ------ --------- -------
Net earnings.................... -- -- 112.7 -- --
Exercise of stock options....... -- 0.4 -- -- --
Dividends to stockholders....... -- -- (28.2) -- --
Acquisition of treasury
stock......................... -- -- -- -- (154.2)
Adjustment for minimum
pension liability............. -- -- -- (2.4) --
------- ------ ------ --------- -------
Balance, December 31, 1993...... 1.0 226.3 202.0 (2.4) (286.1)
Net earnings.................... -- -- 30.1 -- --
Exercise of stock options....... -- 0.1 -- -- --
Dividends to stockholders....... -- -- (6.8) -- --
Retirement of treasury stock.... (0.2) (72.3) (213.6) -- 286.1
Adjustment for minimum
pension liability............. -- -- -- 2.4 --
Other........................... -- (0.6) -- -- --
------- ------ ------ --------- --------
Balance,
December 31, 1994............. 0.8 153.5 11.7 -- --
Net loss........................ -- -- (12.3) -- --
Exercise of stock options....... -- 0.2 -- -- --
Cancellation of
stock options................. -- 6.9 -- -- --
Distribution to
stockholders.................. (0.2) (474.5) -- -- --
Issuance of
common stock.................. 0.6 674.6 -- -- --
Issuance of warrants............ -- 51.0 -- -- --
Other........................... -- (0.7) -- -- --
------- ------ ------ --------- --------
Balance, December 31, 1995...... $ 1.2 $411.0 $ (0.6) $ -- $ --
======= ====== ====== ========= ========
See notes to consolidated financial statements.
</TABLE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)............................................ $(12.3) $ 30.1 $112.7
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization .............................. 72.4 44.4 32.2
Restructuring charges....................................... 65.0 -- --
Extraordinary loss, net of income tax benefit............... 8.3 -- --
Provision for doubtful accounts, net........................ 12.4 (1.4) 0.2
Provision for settlements and related expenses.............. 10.0 21.0 --
Other gains and expenses, net............................... -- -- (15.3)
Change in assets and liabilities, net of effects of
acquisitions:
Increase in accounts receivable............................. (58.6) (54.0) (35.8)
Decrease (increase) in inventories.......................... 5.1 (0.9) (0.9)
Decrease (increase) in prepaid expenses and other........... 1.0 5.1 (2.5)
Decrease (increase) in deferred income taxes, net........... (21.6) 11.0 19.1
Decrease (increase) in income taxes receivable.............. (11.7) 5.5 6.5
Increase (decrease) in accounts payable, accrued
expenses and other........................................ 27.9 (13.1) 1.5
Payments for restructuring charges.......................... (13.4) -- --
Payments for settlement and related expenses................ (32.1) (29.8) (55.8)
Other, net.................................................. (5.4) (3.2) (4.7)
------- ------- -------
Net cash provided by operating activities...................... 47.0 14.7 57.2
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................... (75.4) (48.9) (33.6)
Proceeds from sale of subsidiary.............................. -- 10.1 --
Acquisitions of businesses.................................... (39.6) (254.8) (78.2)
Restricted investment......................................... -- -- 0.8
Other gains and expenses, net................................. -- -- 15.3
------- ------- -------
Net cash used for investing activities........................ (115.0) (293.6) (95.7)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities..................... $ 308.0 $ 308.0 $342.0
Payments on revolving credit facilities....................... (303.0) (373.0) (139.0)
Proceeds from long-term debt.................................. 800.0 400.0 --
Payments on long-term debt.................................... (446.7) (20.0) --
Deferred payments on acquisitions............................. (12.9) (7.6) (1.9)
Purchase of treasury stock.................................... -- -- (154.2)
Dividends paid on common stock................................ -- (13.6) (29.0)
Distribution to stockholders.................................. (474.7) -- --
Cash received for issuance of common stock.................... 135.7 -- --
Cash received for issuance of warrants........................ 51.0 -- --
Proceeds from exercise of stock options....................... 0.2 0.1 0.4
Other......................................................... -- (0.5) (0.9)
------- ------- -------
Net cash provided by financing activities..................... 57.6 293.4 17.4
------- ------- -------
Net increase (decrease) in cash and cash equivalents.......... (10.4) 14.5 (21.1)
Cash and cash equivalents at beginning of year................ 26.8 12.3 33.4
------- ------- -------
Cash and cash equivalents at end of year...................... $ 16.4 $ 26.8 $ 12.3
======= ======= =======
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest...................................................... $ 58.6 $ 34.2 $ 8.4
Income taxes.................................................. 27.2 14.8 59.6
Disclosure of non-cash financing and investing activities:
Dividends declared and unpaid on common stock................. $ -- $ -- $ 6.8
Common stock issued in connection with acquisition............ 539.5 -- --
Common stock issued in connection with the cancellation of
employee stock options...................................... 6.9 -- --
In connection with business acquisitions, liabilities were
assumed as follows:
Fair value of assets acquired................................. $ 777.7 $ 399.4 $ 106.9
Cash paid .................................................... (39.6) (254.8) (78.2)
Stock issued.................................................. (539.5) -- --
------- ------- -------
Liabilities assumed........................................... $ 198.6 $ 144.6 $ 28.7
======= ======= =======
See notes to consolidated financial statements.
</TABLE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts
of Laboratory Corporation of America Holdings and its subsidiaries
("Company") after elimination of all material intercompany accounts and
transactions. Prior to April 28, 1995, the Company's name was National
Health Laboratories Holdings Inc. ("NHL"). On April 28, 1995, following
approval at a special meeting of the stockholders of the Company, the name
of the Company was changed to Laboratory Corporation of America Holdings.
Cash Equivalents
Cash equivalents (primarily investments in money market funds,
time deposits and commercial paper which have original maturities of three
months or less at the date of purchase) are carried at cost which approximates
market.
Inventories
Inventories, consisting primarily of laboratory supplies, are
stated at the lower of cost (first-in, first-out) or market.
Financial Instruments
Interest rate swap agreements, which are used by the Company in
the management of interest rate exposure, are accounted for on an accrual
basis. Amounts to be paid or received under such agreements are recognized as
interest income or expense in the periods in which they accrue.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. The cost of
properties held under capital leases is equal to the lower of the net present
value of the minimum lease payments or the fair value of the leased property
at the inception of the lease. Depreciation and amortization expense is
computed on all classes of assets based on their estimated useful lives, as
indicated below, using principally the straight-line method.
Years
-----
Buildings and improvements...................... 35-40
Machinery and equipment......................... 3-10
Furniture and fixtures.......................... 5-10
Leasehold improvements and assets held under capital leases
are amortized over the shorter of their estimated lives or the period of
the related leases. Expenditures for repairs and maintenance charged
against earnings in 1995, 1994 and 1993 were $27.5, $16.5 and $10.8,
respectively.
Intangible Assets
Intangible assets, consisting of goodwill, net of
amortization, of $700.1 and $417.0 at December 31, 1995 and 1994,
respectively, and other intangibles (i.e., customer lists and non-compete
agreements), net of amortization, of $216.6 and $134.9 at December 31, 1995
and 1994, respectively, are being amortized on a straight-line basis over a
period of 40 years and 3-25 years, respectively. Total accumulated
amortization for intangible assets aggregated $87.4 and $60.8 at December
31, 1995 and 1994, respectively. The Company assesses the recoverability
of intangible assets by determining whether the amortization of the
intangibles' balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operations. The
amount of intangible asset impairment, if any, is measured based on
projected undiscounted future operating cash flows.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments," requires that fair
values be disclosed for most of the Company's financial instruments. The
carrying amount of cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses are considered to be representative of their
respective fair values. The carrying amount of the revolving credit facility
and long-term debt are considered to be representative of their respective
fair values as their interest rates are based on market rates.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts
receivable are limited due to the diversity of the Company's clients as
well as their dispersion across many different geographic regions.
Revenue Recognition
Sales are recognized on the accrual basis at the time test
results are reported, which approximates when services are provided. Services
are provided to certain patients covered by various third-party payor programs
including the Medicare and Medicaid programs. Billings for services under
third-party payor programs are included in sales net of allowances for
differences between the amounts billed and estimated program payment amounts.
Adjustments to the estimated payment amounts based on final settlement with
the programs are recorded upon settlement. In 1995, 1994 and 1993,
approximately 28%, 35% and 41%, respectively, of the Company's revenues were
derived from tests performed for beneficiaries of Medicare and Medicaid
programs.
Income Taxes
The Company accounts for income taxes under Financial
Accounting Standards Board Statement of Financial Accounts Standards No. 109,
"Account for Income Taxes" ("Statement 109"). Statement 109 requires the use
of the asset and liability method of account for income taxes. Under the
asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. Under Statement 109, the effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Earnings per Common Share
For the years ended December 31, 1995, 1994 and 1993, earnings
per common share is calculated based on the weighted average number of shares
outstanding during each year (110,579,096, 84,754,183 and 89,438,764 shares,
respectively).
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles 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 revenues and expenses during the
reported periods. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the prior years' financial statements have
been reclassified to conform with the 1995 presentation.
2. MERGER AND ACQUISITIONS
On April 28, 1995, the Company completed its merger with Roche
Biomedical Laboratories, Inc. ("RBL") pursuant to an Agreement and Plan of
Merger (the "Merger Agreement") dated as of December 13, 1994 (the "Merger").
Pursuant to the Merger Agreement, each outstanding share of
common stock, par value $0.01 per share of the Company ("Common Stock") (other
than as provided in the Merger Agreement), was converted (the "Share
Conversion") into (i) 0.72 of a share of Common Stock of the Company and (ii)
a distribution of $5.60 in cash per share, without interest. The aggregate
number of shares issued and outstanding following the Share Conversion was
61,041,159. Also, an aggregate of 538,307 shares of Common Stock were issued
in connection with the cancellation of certain employee stock options.
In addition, pursuant to the Merger Agreement, an aggregate of
61,329,256 shares of Common Stock were issued to HLR Holdings Inc. ("HLR") and
its designee, Roche Holdings, Inc. in exchange for all shares of common stock,
no par value of RBL outstanding immediately prior to the effective date of the
Merger (other than treasury shares, which were canceled) and a cash
contribution described below. The issuance of such shares of Common Stock
constituted approximately 49.9% of the total outstanding shares of Common
Stock outstanding immediately after the Merger.
The Company also made a distribution (the "Warrant
Distribution") to holders of record as of April 21, 1995, of 0.16308 of a
warrant per outstanding share of Common Stock, each such warrant representing
the right to purchase one newly issued share of Common Stock for $22.00
(subject to adjustment) on April 28, 2000 (each such warrant, a "Warrant").
Approximately 13,826,000 Warrants were issued in the Warrant Distribution
(including fractional Warrants, which were not distributed, but were
liquidated in sales on the New York Stock Exchange and the proceeds thereof
distributed to such stockholders).
In addition, pursuant to the Merger Agreement on April 28, 1995
the Company issued to Hoffmann-La Roche Inc. ("Roche"), for a purchase price
of approximately $51.0, 8,325,000 Warrants (the "Roche Warrants") to purchase
shares of Common Stock, which Warrants have the terms described above.
The aggregate cash consideration of approximately $474.7 paid
to stockholders of the Company in the Merger was financed from three sources:
a cash contribution (the "Company Cash Contribution") of approximately $288.0
out of the proceeds of borrowings under the credit agreement (as described in
note 9), a cash contribution made by HLR to the Company in the amount of
approximately $135.7 and the proceeds from the sale and issuance of the Roche
Warrants.
The exchange consideration of approximately $558.0 for the
purchase of RBL consisted of the value of the stock issued to HLR and Roche
Holdings, Inc., as well as other cash costs of the Merger, net of cash
received from HLR. The Merger has been accounted for under the purchase
method of accounting; as such RBL's assets and liabilities were recorded at
their estimated fair values on the date of acquisition. The exchange
consideration exceeded the fair value of acquired net tangible assets by
approximately $371.9. RBL's results of operations have been included in the
Company's results of operations since April 28, 1995.
The Company acquired Allied Clinical Laboratories, Inc.
("Allied") as a wholly owned subsidiary on June 23, 1994, for approximately
$191.5 in cash, $185.0 of which was borrowed under a revolving credit
facility, plus the assumption of $24.0 of Allied indebtedness and the
recognition of approximately $5.0 of Allied net liabilities (the "Allied
Acquisition"). The Allied Acquisition was accounted for using the purchase
method of accounting; as such, Allied's assets and liabilities were recorded
at their fair values on the date of acquisition. The purchase price exceeded
the fair value of acquired net tangible assets by approximately $220.5.
Allied's results of operations have been included in the Company's results of
operations since June 23, 1994.
The following table provides unaudited pro forma operating
results as if the Merger and the acquisition of Allied had been completed at
the beginning of each of the periods presented. The pro forma information
does not include the restructuring charges and the extraordinary item related
to the Merger. The pro forma information has been prepared for comparative
purposes only and does not purport to be indicative of future operating
results.
Year Ended December 31,
---------------------------
1995 1994
-------- --------
Net sales......................... $1,678.6 $1,692.6
Net earnings...................... 48.9 71.3
Net earnings per common share..... $ 0.40 $ 0.58
During 1995, the Company also acquired nine small clinical
laboratory companies for an aggregate purchase price, including assumption
of liabilities, of $41.7. During 1994 and 1993, the Company acquired
eleven and thirty-four laboratories, respectively, for an aggregate
purchase price, including assumption of liabilities, of $79.3 and $106.9,
respectively. The acquisitions were accounted for as purchase
transactions. The excess of cost over the fair value of net tangible
Assets acquired during 1995, 1994 and 1993 was $28.2, $72.1, and $100.1,
respectively, which is included under the caption "Intangible assets, net"
in the accompanying consolidated balance sheets. The consolidated
statements of operations reflect the results of operations of these
purchased businesses from their dates of acquisition.
3. RESTRUCTURING CHARGES
Following the Merger, the Company determined that it would be
beneficial to close Company laboratory facilities in certain geographic
regions where duplicate Company and RBL facilities existed at the time of the
Merger. In addition, the Company decided to downsize certain finance and
administrative positions in La Jolla, California in order to eliminate
duplicative functions.
Under the restructuring plan, the Company recorded a
restructuring charge of $65.0 in the second quarter of 1995. The charge
includes approximately $24.2 to reduce the workforce by approximately 2,200
individuals. The plan includes a reduction of approximately 1,520 laboratory
operations personnel, approximately 80 sales and marketing personnel and
approximately 600 finance and administrative personnel both at laboratory
locations and in La Jolla, California.
Approximately $21.3 of the restructuring charges consist of the
reduction of certain assets to their net realizable values and primarily
consists of the write-off of approximately $17.7 of leasehold improvements on
facilities to be closed or significantly downsized.
Lease and other facility obligations accounted for
approximately $19.5 of the restructuring charge, including the future minimum
lease payments and expenses from the estimated closing or downsizing date to
the end of the contractual lease term for facilities to be significantly
downsized or closed.
As of December 31, 1995, three facilities have either been
closed or significantly downsized. In addition, certain duplicative functions
in La Jolla, California were eliminated. As of December 31, 1995, the net
reduction in the total workforce was approximately 800 employees. The Company
expects that a substantial portion of the remaining restructuring will be
completed in 1996 with the remainder completed in early 1997. The Company
believes that the remaining liabilities are sufficient to complete such
restructuring activities.
The following represents the Company's restructuring activities
for the period indicated:
<TABLE>
<CAPTION>
Asset Lease and
Severance Revaluations other facility
Costs and write-offs obligations Total
----------- --------------- -------------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1994..... $ -- $ -- $ -- $ --
Restructuring charges............ 24.2 21.3 19.5 65.0
Non cash items................... (0.3) (2.7) -- (3.0)
Cash payments.................... (11.1) -- (0.6) (11.7)
----- ----- ----- -----
Balance at December 31, 1995..... $12.8 $18.6 $18.9 $50.3
===== ===== ===== =====
Current.......................... $32.3
Non-current...................... 18.0
-----
$50.3
=====
</TABLE>
4. ACCOUNTS RECEIVABLE, NET
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Gross accounts receivable.................................... $516.0 $270.7
Less contractual allowances and allowance for
doubtful accounts....................................... (90.4) (65.3)
------ ------
$425.6 $205.4
====== ======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Land.......................................................... $ 7.0 $ 1.3
Buildings and building improvements........................... 54.7 1.8
Machinery and equipment....................................... 268.1 154.2
Leasehold improvements........................................ 70.3 44.2
Furniture and fixtures........................................ 27.3 22.0
Buildings under capital leases................................ 9.6 9.6
------ ------
437.0 233.1
Less accumulated depreciation and amortization................ (132.2) (93.0)
------ ------
$304.8 $140.1
====== ======
</TABLE>
6. ACCRUED EXPENSES AND OTHER
December 31, December 31,
1995 1994
------------ ------------
Employee compensation and benefits..... $50.5 $38.8
Deferred acquisition related payments.. 14.8 15.9
Acquisition related reserves........... 39.4 21.8
Restructuring reserves................. 32.3 --
Other.................................. 31.9 16.3
------ -----
$168.9 $92.8
====== =====
7. OTHER LIABILITIES
December 31, December 31,
1995 1994
------------ ------------
Deferred acquisition related payments.. $ 8.5 $19.2
Acquisition related reserves........... 68.2 31.9
Restructuring reserves................. 18.0 --
Other.................................. 35.2 8.4
------ -----
$129.9 $59.5
====== =====
8. PROVISIONS FOR SETTLEMENTS
In the second quarter of 1995, the Company recorded a pre-tax
special charge of $10.0 in connection with the estimated costs of settling
various claims pending against the Company, substantially all of which are
billing disputes, in which the Company believes it is probable that
settlements will be made by the Company.
In the third quarter of 1994, the Company approved a settlement
of previously disclosed shareholder class and derivative litigation. The
litigation consisted of two consolidated class action suits and a consolidated
shareholder derivative action brought in Federal and state courts in San
Diego, California. The settlement involved no admission of wrongdoing. In
connection with the settlement, the Company recorded a pre-tax special charge
of $15.0 and a $6.0 charge for expenses related to the settled litigation.
Insurance payments and payments from other defendants aggregated $55.0 plus
expenses.
9. LONG-TERM DEBT
The Company entered into a credit agreement dated as of April
28, 1995 (the "Credit Agreement"), with the banks named therein (the "Banks")
and Credit Suisse (New York Branch), as administrative agent (the "Bank
Agent"), under which the Banks made available to the Company a Term Loan
Facility of $800.0 (the "Term Loan Facility") and a revolving credit
facility of $450.0 (the "Revolving Credit Facility" and, together with the
Term Loan Facility, the "Bank Facility"). The Bank Facility provided funds
for the Company Cash Contribution, for the refinancing of certain existing
debt of the Company and its subsidiaries and RBL, for related fees and
expenses of the Merger and for general corporate purposes of the Company and
its subsidiaries, in each case subject to the terms and conditions set forth
in the Credit Agreement. The Bank Facility is unconditionally and
irrevocably guaranteed by certain of the Company's subsidiaries.
In connection with the Credit Agreement, the Company paid the
Banks and Bank Agent customary underwriting, closing and participation fees,
respectively. In addition, the Credit Agreement includes a facility fee based
on the total Revolving Credit Facility commitment (regardless of usage) of
0.125% per annum. Availability of funds under the Bank Facility is
conditioned on certain customary conditions, and the Credit Agreement, as
amended, contains customary representations, warranties, covenants and events
of default.
The Revolving Credit Facility matures in April 2000. The Term
Loan Facility matures in April 2001, with payments in each quarter prior to
maturity based on a specified amortization schedule. For as long as HLR and
its affiliates' ownership of outstanding Company common stock (the "HLR Group
Interest") remains at least 25%, the Revolving Credit Facility bears interest,
at the option of the Company, at (i) Credit Suisse's Base Rate (as defined in
the Credit Agreement) or (ii) the Eurodollar Rate (as defined in the Credit
Agreement) plus a margin of 0.25% and the Term Loan Facility bears interest,
at the option of the Company, at (i) Credit Suisse's Base Rate (as defined in
the Credit Agreement) or (ii) the Eurodollar Rate (as defined in the Credit
Agreement) plus a margin of 0.375%. In the event there is a reduction in the
HLR Group interest to below 25%, applicable interest margins will not be
determined as set forth above, but instead will be determined based upon the
Company's financial performance as described in the Credit Agreement. The
Company's weighted average borrowing rate, including the effects of interest
rate swap agreements discussed below, was 6.23% at December 31, 1995.
Aggregate maturities on long-term debt are $70.8, $112.5,
$150.0, $162.5, and $187.5 for the years 1996 through 2000, respectively.
At December 31, 1995, the Company was a party to interest
rate swap agreements with certain major financial institutions, rated A or
better by Moody's Investors Service, solely to manage its interest rate
exposure with respect to $600.0 of its floating rate debt under the Term
Loan Facility. The agreements effectively changed the interest rate
exposure on $600.0 of floating rate debt to a weighted average fixed
interest rate of 6.01%, through requiring that the Company pay a fixed rate
amount in exchange for the financial institutions paying a floating rate
amount. Amounts paid by the Company in 1995 were not significant. The
notional amounts of the agreements are used to measure the interest to be
paid or received and do not represent the amount of exposure to credit
loss. These agreements mature in September 1998. The estimated cost at
which the Company could terminate these agreements as of December 31, 1995
was $9.5. The fair value was estimated by discounting the expected cash
flows using rates currently available for interest rate swaps with similar
terms and maturities.
In connection with the repayment of existing revolving credit
and term loan facilities, the Company recorded an extraordinary loss of
approximately $13.5 ($8.3 net of tax), consisting of the write-off of deferred
financing costs, related to the early extinguishment of debt.
Prior to April 28, 1995, the Company had a credit agreement
with a group of banks which provided the Company with a $400.0 term loan
facility and a revolving credit facility of $350.0. This credit agreement
provided funds for the Allied Acquisition, to refinance certain existing debt
of Allied and the Company, and for general corporate purposes. The credit
agreement was repaid in full on April 28, 1995. At December 31, 1994, the
Company's effective borrowing rate on this credit agreement was 8.16%.
10. STOCKHOLDERS' EQUITY
In connection with a corporate reorganization on June 7, 1994,
all of the 14,603,800 treasury shares held by National Health Laboratories
Incorporated were canceled. As a result, the $286.1 cost of such treasury
shares was eliminated with corresponding decreases in the par value,
additional paid-in capital and retained earnings accounts of $0.2, $72.3 and
$213.6, respectively.
11. INCOME TAXES
The provisions for income taxes in the accompanying
consolidated statements of operations consist of the following:
Years Ended December 31,
-------------------------------------
1995 1994 1993
----- ----- -----
Current:
Federal....... $10.4 $16.2 $48.9
State......... 1.5 3.0 10.4
----- ----- -----
11.9 19.2 59.3
----- ----- -----
Deferred:
Federal....... (4.6) 4.9 14.9
State......... (0.2) 1.2 4.2
----- ----- -----
(4.8) 6.1 19.1
----- ----- -----
$ 7.1 $25.3 $78.4
===== ===== =====
The effective tax rates on earnings before income taxes is
reconciled to statutory federal income tax rates as follows:
Years Ended December 31,
-----------------------------------
1995 1994 1993
----- ----- -----
Statutory federal
rate................ 35.0% 35.0% 35.0%
State and local
income taxes,
net of federal
income tax
benefit............. 28.0 4.9 4.9
Non deductible
amortization of
intangible assets... 166.0 4.9 0.9
Other................. 7.0 0.9 0.2
----- ----- -----
Effective rate........ 236.0% 45.7% 41.0%
===== ===== =====
The significant components of deferred income tax expense are
as follows:
Years Ended December 31,
-----------------------------------
1995 1994 1993
------ ------ ------
Acquisition
related reserves.... $(17.7) $ (1.2) $ --
Settlement and
related expenses.... 8.8 2.5 22.2
Reserve for
doubtful accounts... (4.3) 0.9 0.4
Other................. 8.4 3.9 (3.5)
------ ------ ------
$ (4.8) $ 6.1 $ 19.1
====== ====== ======
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities
at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
------------ ------------
<S> <C> <C>
Deferred tax assets:
Settlement and related expenses, principally due to accrual for financial
reporting purposes........................................................... $1.8 $10.7
Accounts receivable, principally due to allowance for doubtful accounts.......... 21.9 8.4
Self insurance reserves, principally due to accrual for financial reporting
purposes..................................................................... 4.8 2.4
Postretirement benefit obligation, principally due to accrual for financial
reporting purposes........................................................... 9.9 --
Compensated absences, principally due to accrual for financial reporting
purposes..................................................................... -- 2.8
Acquisition related reserves, principally due to accrual for financial
reporting purposes........................................................... 81.0 8.0
State net operating loss carryforwards........................................... 7.4 --
Other............................................................................ 13.7 4.4
------ -----
Total gross deferred tax assets.................................................. 140.5 36.7
Deferred tax liabilities:
Intangible assets, principally due to differences in amortization................ (59.5) (22.1)
Property, plant and equipment, principally due to differences in
depreciation................................................................. (16.4) (0.8)
Other............................................................................ (6.4) (5.0)
------ -----
Total gross deferred tax liabilities............................................. (82.3) (27.9)
------ -----
Net deferred tax asset........................................................... $ 58.2 $ 8.8
====== =====
</TABLE>
A valuation allowance was deemed unnecessary at December 31,
1995, 1994 and 1993. Based on the Company's history of taxable income,
exclusive of one-time charges, and its projection of future earnings, it
believes that it is more likely than not that sufficient taxable income will
be generated in the foreseeable future to realize the deferred tax asset.
12. STOCK OPTIONS
In 1988, the Company adopted the 1988 Stock Option Plan,
reserving 2,000,000 shares of common stock for issuance pursuant to options
and stock appreciation rights that may be granted under the plan. The Stock
Option Plan was amended in 1990 to limit the number of options to be issued
under the Stock Option Plan to 550,000 in the aggregate (including all options
previously granted). In 1991, the number of shares authorized for issuance
under the Stock Option Plan was increased to an aggregate of 2,550,000.
In 1994, the Company adopted the 1994 Stock Option Plan,
reserving 3,000,000 shares of common stock for issuance pursuant to options
and stock appreciation rights that may be granted under the plan.
In connection with the Merger, all options outstanding as of
December 13, 1994 became vested and employees were given the choice to (i)
cancel options outstanding as of December 31, 1994 and receive cash and shares
of common stock according to a formula included in the Merger Agreement or
(ii) convert such options into new options based on a formula included in the
Merger Agreement. In connection with the cancellation of stock options, the
Company paid a total of $5.5 in cash and issued 538,307 shares of common stock
to option holders. Also, a total of 562,532 options were reissued as a result
of option conversions at exercise prices between $11.293 and $16.481.
The following table summarizes grants of non-qualified options
made by the Company to officers and key employees under both plans. Stock
options are generally granted at an exercise price equal to or greater than
the fair market price per share on the date of grant. Also, for each grant,
one-third of the options vested on the date of grant and one-third vest on
each of the first and second anniversaries of such date, subject to their
earlier expiration or termination.
Changes during 1993, 1994 and 1995 in options outstanding under
the plans were as follows:
Number of Exercise Price
Options per Option
---------- --------------------------
Options at January 1, 1993....... 864,071 $ 7.750 -- $20.250
Granted........................ 818,500 $16.625 -- $17.875
Exercised...................... (33,400) $ 7.750
Canceled or expired............ (84,835) $16.625 -- $20.250
----------
Outstanding at December 31, 1993. 1,564,336 $ 7.750 -- $20.250
Granted........................ 2,042,000 $ 7.690 -- $13.875
Exercised ..................... (11,125) $ 7.690 -- $ 7.750
Canceled or expired............ (92,498) $13.875 -- $20.250
----------
Outstanding at December 31, 1994. 3,502,713 $ 7.690 -- $20.250
Granted........................ 1,378,000 $13.000
Merger-related grants.......... 562,532 $11.293 -- $16.481
Exercised...................... (20,542) $ 7.690 -- $13.875
Merger-related cancellations... (3,425,667) $ 7.690 -- $20.250
Canceled or expired............ (254,125) $ 7.690 -- $20.250
----------
Outstanding at December 31, 1995. 1,742,911 $11.293 -- $16.481
==========
Exercisable at December 31, 1995. 886,973 $11.293 -- $16.481
==========
13. COMMITMENTS AND CONTINGENCIES
The Company is involved in certain claims and legal actions
arising in the ordinary course of business. In the opinion of management,
based upon the advice of counsel, the ultimate disposition of these matters
will not have a material adverse effect on the financial position or results
of operations of the Company.
Under the Company's present insurance programs, coverage is
obtained for catastrophic exposures as well as those risks required to be
insured by law or contract. The Company is responsible for the uninsured
portion of losses related primarily to general, product and vehicle liability
and workers' compensation. The self-insured retentions are on a per
occurrence basis without any aggregate annual limit. Provisions for losses
expected under these programs are recorded based upon the Company's estimates
of the aggregated liability of claims incurred. At December 31, 1995 and
1994, the Company had provided letters of credit aggregating approximately
$8.6 and $4.9, respectively, primarily in connection with certain insurance
programs.
During 1991, the Company guaranteed a $9.0, five-year loan to a
third party for construction of a new laboratory to replace one of the
Company's existing facilities. Following its completion in November of 1992,
the building was leased to the Company by this third party. Such transaction
is treated as a capital lease for financial reporting purposes. The
associated lease term continues for a period of 15 years, expiring in 2007.
Under the terms of this guarantee, as modified, the Company is required to
maintain 105% of the outstanding loan balance including any overdue interest
as collateral in a custody account established and maintained at the lending
institution. As of December 31, 1995 and 1994, the Company had placed $9.5 of
investments in the custody account. Such investments are included under the
caption "Other assets, net" in the accompanying consolidated balance sheets.
The Company does not anticipate incurring any loss as a result
of this loan guarantee due to protection provided by the terms of the lease.
Accordingly, the Company, if required to repay the loan upon default of the
borrower (and ultimate lessor), is entitled to a rent abatement equivalent to
the amount of repayment made by the Company on the borrower's behalf, plus
interest thereon at a rate equal to 2% over the prime rate.
The Company leases various facilities and equipment under
noncancellable lease arrangements. Future minimum rental commitments for
leases with noncancellable terms of one year or more at December 31, 1995 are
as follows:
Operating Capital
1996............................. $ 38.1 $ 1.3
1997............................. 29.8 1.4
1998............................. 23.5 1.5
1999............................. 19.5 1.6
2000............................. 16.2 1.7
Thereafter....................... 47.0 15.0
------ ------
Total minimum
lease payments................. 174.1 22.5
Less amount representing
interest....................... -- 12.9
------ ------
Total minimum operating lease
payments and present
value of minimum
capital lease payments......... $174.1 $ 9.6
====== ======
Rental expense, which includes rent for real estate, equipment
and automobiles under operating leases, amounted to $60.4, $34.6 and $29.9 for
the years ended December 31, 1995, 1994 and 1993, respectively.
14. PENSION AND POSTRETIREMENT PLANS
The Company maintains a defined contribution pension plan
for all eligible employees. Eligible employees are defined as individuals
who are age 21 or older and have been employed by the Company for at least
six consecutive months and completed 1,000 hours of service. Company
contributions to the plan are based on a percentage of employee
contributions. The cost of this plan was $5.8, $3.6, and $3.0 in 1995,
1994 and 1993, respectively.
In addition, substantially all employees of the Company are
covered by a defined benefit retirement plan (the "NHL Plan"). The benefits
to be paid under the NHL Plan are based on years of credited service and
average final compensation. Employees of Allied became eligible under the NHL
Plan effective January 1, 1995.
Effective December 31, 1994, the Company adopted certain
amendments to the NHL Plan which resulted in a decrease of approximately $9.5
in the projected benefit obligation.
Under the requirements of Statement of Financial Accounting
Standards No. 87, "Employers Accounting for Pensions", the Company recorded an
additional minimum pension liability representing the excess accumulated
benefit obligation over plan assets at December 31, 1993. A corresponding
amount was recognized as an intangible asset to the extent of unrecognized
prior service cost, with the balance recorded as a separate reduction of
stockholders' equity. The Company recorded an additional liability of $3.0,
an intangible asset of $0.6, and a reduction of stockholders' equity of $2.4.
Such amounts were eliminated as a result of the amendments to the NHL Plan
effective December 31, 1994.
In connection with the Merger, the Company assumed obligations
under the RBL defined benefit pension plan ("RBL Plan"). Effective July 1,
1995, the plan was amended to provide benefits similar to the NHL Plan, as
amended. Certain employees of RBL were grandfathered so that their benefits
were not affected by the amendment. On January 1, 1996, the two plans were
merged.
The Company's policy is to fund both the NHL Plan and RBL Plan
with at least the minimum amount required by applicable regulations. The
components of net periodic pension cost for each of the NHL and RBL plans are
summarized as follows:
<TABLE>
<CAPTION>
NHL Plan RBL Plan
------------------------------- ------------
Eight
Years ended ended
December 31, December 31,
------------------------------- ------------
1995 1994 1993 1995
------ ------ ------ ------------
<S> <C> <C> <C> <C>
Service cost.......................... $ 3.2 $ 5.5 $ 3.7 $ 2.6
Interest cost......................... 2.7 3.5 2.6 2.3
Actual return on plan assets.......... (7.6) 0.1 (1.3) (4.3)
Net amortization and deferral......... 4.2 (1.4) 0.4 1.2
----- ----- ----- -----
Net periodic pension cost............. $ 2.5 $ 7.7 $ 5.4 $ 1.8
===== ===== ===== =====
</TABLE>
The status of the plans are as follows:
<TABLE>
<CAPTION>
NHL Plan RBL Plan
---------------------- ------------
December 31, December 31,
---------------------- ------------
1995 1994 1995
------ ------ ------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations: Vested benefits.......... $36.2 $26.6 $38.8
Non-vested benefits...................................................... 4.4 3.5 6.4
----- ----- -----
Accumulated benefit obligation............................................ 40.6 30.1 45.2
Effect of projected future salary increases............................... 2.2 1.9 1.6
----- ----- -----
Projected benefit obligation.............................................. 42.8 32.0 46.8
Fair value of plan assets, principally corporate equity securities and
fixed income investments................................................. 40.8 31.6 46.6
----- ----- -----
Unfunded projected benefit obligation..................................... 2.0 0.4 0.2
Unrecognized prior service cost........................................... 6.6 9.7 12.7
Unrecognized net loss..................................................... (7.1) (8.4) (9.4)
----- ----- -----
Accrued pension cost...................................................... $ 1.5 $ 1.7 $ 3.5
===== ===== =====
</TABLE>
Assumptions used in the accounting for the plans were as
follows:
<TABLE>
<CAPTION>
NHL Plan RBL Plan
---------------------- ------------
1995 1994 1995
------ ------ ------------
<S> <C> <C> <C>
Weighted average discount rate......................................... 7.5% 8.5% 7.5%
Weighted average rate of increase in future compensation levels........ 4.0% 4.0% 5.4%
Weighted average expected long-term rate of return..................... 9.0% 9.0% 9.5%
</TABLE>
In addition, the Company assumed obligations under RBL's
postretirement medical plan. Effective July 1, 1995, coverage under the plan
was restricted to certain existing RBL employees. This plan is unfunded and
the Company's policy is to fund benefits as claims are incurred. The
components of postretirement benefit expense are as follows:
Eight months
ended
December 31, 1995
-----------------
Service cost......................... $ 1.1
Interest cost........................ 1.4
-----
Postretirement benefit costs......... $ 2.5
=====
The status of the plan is as follows:
Accumulated postretirement
benefit obligation................ $27.2
Unrecognized net loss............... (2.1)
-----
Accrued postretirement
benefit obligation................ $25.1
=====
The weighted average discount rate used in the calculation of
the accumulated postretirement benefit obligation and the net postretirement
benefit costs were 7.6% and 8.1%, respectively. The health care cost trend
rate was assumed to be 9.0%, declining gradually to 5.1% in the year 2005,
then remaining level to the year 2020 in which it declines to 5.0%, and
remaining level thereafter. The health care cost trend rate has a significant
effect on the amounts reported. To illustrate, a one percentage point
increase in the assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation as of December 31, 1995 by
approximately $5.1, and the aggregate of the service and interest components
of 1995 net periodic postretirement benefit cost by approximately $0.2.
15. QUARTERLY DATA (UNAUDITED)
The following is a summary of unaudited quarterly data:
<TABLE>
<CAPTION>
Year ended December 31, 1995
--------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Full Year
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales................................... $243.8 $367.3 $417.5 $403.4 $1,432.0
Gross profit................................ 79.5 108.9 117.8 101.5 407.7
Earnings (loss) before extraordinary item... 12.8 (31.6) 14.4 0.4 (4.0)
Extraordinary item.......................... -- (8.3) -- -- (8.3)
Net earnings (loss)......................... 12.8 (39.9) 14.4 0.4 (12.3)
Earnings (loss) per common share before
extraordinary loss.......................... 0.15 (0.28) 0.12 -- (0.03)
Extraordinary loss per common share......... -- (0.08) -- -- (0.08)
Earnings (loss) per common share............ 0.15 (0.36) 0.12 -- (0.11)
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1994
--------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Full Year
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales...................... $185.0 $203.9 $248.7 $234.9 $872.5
Gross profit................... 52.7 67.4 81.0 74.4 275.5
Net earnings................... 8.1 14.1 0.2 7.7 30.1
Earnings per common share...... 0.10 0.16 -- 0.10 0.36
</TABLE>
In the fourth quarter of 1995, the Company recorded an
additional $15.0 of provision for doubtful accounts which reflects the
Company's determination, based on trends that became evident in the fourth
quarter, that additional reserves were needed primarily to cover potentially
lower collection rates from several third-party payors.
In the second quarter of 1995, the Company recorded a pre-tax
special charge of $65.0 to cover the costs of the restructuring plan related
to the Merger. The charge includes approximately $24.2 to reduce the
workforce, $21.3 to reduce certain assets to their net realizable values, and
$19.5 for lease and other facility obligations. Also in the second quarter of
1995, the Company recorded a pre-tax special charge of $10.0 in connection
with the estimated costs of settling various claims pending against the
Company, substantially all of which are billing disputes, in which the Company
believes it is probable that settlements will be made by the Company.
In connection with the repayment of existing revolving
credit and term loan facilities, the Company recorded an extraordinary loss
of approximately $13.5 ($8.3 net of tax) in the second quarter of 1995,
consisting of the write-off of deferred financing costs, related to the
early extinguishment of debt.
In the third quarter of 1994, the Company approved a settlement
of previously disclosed shareholder class and derivative litigation. In
connection with the settlement, the Company recorded a pre-tax special charge
of $15.0 and a $6.0 charge for expenses related to the settled litigation.
In the fourth quarter of 1994, the Company recorded a
non-recurring charge of approximately $3.9 for lease costs and the write-off
of leasehold improvements related to the relocation of certain of the
Company's regional laboratories.
16. SUBSEQUENT EVENT (UNAUDITED)
As part of an examination of the rapid growth of Federal
expenditures for clinical laboratory services, several Federal agencies,
including the Federal Bureau of Investigation, the Office of the Inspector
General ("OIG") of the Department of Health and Human Services ("HHS") and
the Department of Justice (the "DOJ"), have investigated allegations of
fraudulent and abusive conduct by health care providers. On November 21,
1996, the Company reached a settlement with the OIG and the DOJ regarding
the prior billing practices of various of its predecessor companies. The
government's investigations covered billings for certain tests performed as
part of the chemistry profiles of National Health Laboratories Holdings
Inc. ("NHL"), RBL and Allied from 1988 to 1994. These tests were deemed
by regulators to be medically unnecessary. The investigations were part of
a broad-based federal inquiry into Medicare and related billings that have
resulted in financial settlements with a number of other clinical
laboratories. The inquiries have also prompted the imposition of more
stringent regulatory compliance requirements industry-wide. Under the
terms of the 1996 Government Settlement, the Company agreed to enter into a
comprehensive Corporate Integrity Agreement and to pay $182.0 to
settle civil claims involving Medicare and related government billings for
tests performed by NHL, RBL and Allied. These claims arose out of the
government's contention that laboratories offering profiles containing
certain test combinations had the obligation to notify ordering physicians
how much would be billed to the government for each test performed for a
patient whose tests are paid for by Medicare, Medicaid or other government
agency. The government contended claims submitted for tests ordered by
physicians and performed by the laboratories were improper. The Company
settled these allegations without an admission of fault. The Corporate
Integrity Agreement, among other things, requires that detailed
notifications be made to physicians. In addition, as part of the overall
settlement, a San Diego laboratory that was formerly part of Allied agreed
to plead guilty to a charge of filing a false claim with Medicare and
Medicaid in 1991 and to pay $5.0 to the Federal government. The
assets of the San Diego laboratory were sold by Allied in 1992, two years
before the Allied Acquisition. As is customary with asset sales, Allied
retained the liability for conduct preceding the sale--a liability the
Company later succeeded to, following the Allied Acquisition and Merger.
Consistent with this overall settlement, the Company paid $187.0 to
the Federal Government in December 1996 with proceeds from a loan from
Roche Holdings. As a result of negotiations related to the 1996 Government
Settlement, the Company recorded a charge of $185.0 in the third
quarter of 1996 to increase reserves for the 1996 Government Settlement
described above, and other related expenses of government and private
claims resulting therefrom.
- --------------------------------------------- -------------------------------
No dealer, salesman or any other person has
been authorized to give any information or
to make any representation not contained or
incorporated by reference in this Prospectus,
and, if given or made, such information or Laboratory Corporation
representation must not be relied upon as of America Holdings
having been authorized by the Company or the
Dealer Manager. This Prospectus does not
constitute an offer to sell or a solicitation
of an offer to buy any of the securities
offered hereby in any jurisdiction to any
person to whom it is unlawful to make such
an offer in such jurisdiction. Neither the
delivery of this Prospectus nor any sale 10,000,000 Shares
made hereunder shall, under any circumstances,
create any implication that the information
contained herein is correct as of any date
subsequent to the date hereof or that there
has been no change in the affairs of
the Company since such date.
------------- % Series A Convertible
Exchangeable
TABLE OF CONTENTS Preferred Stock
or
Page % Series B Convertible
---- Pay-in-Kind
Prospectus Summary................... 4 Preferred Stock
Risk Factors......................... 21
Use of Proceeds...................... 29
Common Stock Price Range............. 30
Dividend Policy...................... 30
Capitalization....................... 31
Unaudited Pro forma
Financial Statements............... 33
Selected Historical Financial Data... 43
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 47
Business............................. 58
Regulation and Reimbursement......... 70
Management........................... 76
Ownership of Capital Stock........... 79
Certain Relationships and Related PROSPECTUS
Transactions....................... 80
Description of the Amended Credit
Agreement.......................... 83
Description of Rights Offering....... 86
Description of Capital Stock......... 93
Description of Preferred Stock....... 95
Description of the Notes.............104 Credit Suisse First Boston
Certain Federal Income Tax
Consequences.......................107
Plan of Distribution.................112
Legal Matters........................113
Experts..............................113
Available Information................114
Incorporation of Certain Documents
by Reference.......................114
- --------------------------------------------- -------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the fees and expenses payable by
the Company in connection with the Rights Offering other than dealer manager
and solicitation fees. All of such expenses except the Securities and
Exchange Commission registration fee, the NASD filing fee and the NYSE listing
fee are estimated:
Securities and Exchange Commission registration fee........ $ 195,076
NASD filing fee............................................ 30,500
NYSE listing fee........................................... *
Printing expense........................................... *
Accounting fees and expenses............................... *
Legal fees and expenses.................................... *
Rating agency fees......................................... *
Miscellaneous.............................................. *
------------
Total................................................... $ *
============
- -----------
* To be completed by amendment.
Item 15. Indemnification of Directors and Officers
Reference is made to Section 102(b)(7) of the Delaware General
Corporation Law (the "DGCL"), which enables a corporation in its original
certificate of incorporation or an amendment thereto to eliminate or limit the
personal liability of a director for violations of the director's fiduciary
duty, except (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL (providing for liability of directors for
the unlawful payment of dividends or unlawful stock purchases or redemptions)
or (iv) for any transaction from which a director derived an improper personal
benefit.
Section 145 of the DGCL empowers the Company to indemnify,
subject to the standards set forth therein, any person in connection with any
action, suit or proceeding brought before or threatened by reason of the fact
that the person was a director, officer, employee or agent of such company, or
is or was serving as such with respect to another entity at the request of
such company. The DGCL also provides that the Company may purchase insurance
on behalf of any such director, officer, employee or agent.
The Company's Certificate of Incorporation provides in effect
for the indemnification by the Company of each director and officer of the
Company to the fullest extent permitted by applicable law.
Item 16. Exhibits
See index to exhibits at E-1.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the registration statement is on Form S-3, Form S-8 or Form F-3,
and the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished to
the Commission by the registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described in Item 15
above or otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
Pursuant to the requirements of the Securities Act of 1933,
Laboratory Corporation of America Holdings certifies that it has reasonable
grounds to believe that it meets all of the requirements for filing on Form
S-3 and has duly caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the city of Burlington,
state of North Carolina, on February 27, 1997.
LABORATORY CORPORATION OF AMERICA
HOLDINGS
By: /s/ Thomas P. Mac Mahon
------------------------------
Thomas P. Mac Mahon
Chairman of the Board, President
and Chief Executive Officer
The registrant and each person whose signature appears below
constitutes and appoints Thomas P. Mac Mahon, Wesley R. Elingburg and Bradford
T. Smith, and each of them, his, her or its true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him, her
or it and in his, her, or its name, place and stead, in any and all
capacities, to sign and file (i) any and all amendments (including
post-effective amendments) to this registration statement, with all exhibits
thereto, and other documents in connection therewith, and (ii) a registration
statement, and any and all amendments, thereto, relating to the offering
covered hereby filed pursuant to Rule 462(b) under the Securities Act of 1933,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he, she or it
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the Board, President, Chief Executive February
/s/ Thomas P. Mac Mahon Officer and Director 27, 1997
- -------------------------------
Thomas P. Mac Mahon
Executive Vice President, Chief Financial Officer February
and Treasurer (Principal Accounting and Financial 27, 1997
/s/ Wesley R. Elingburg Officer)
- -------------------------------
Wesley R. Elingburg
/s/ Jean-Luc Belingard Director February
- ------------------------------- 27, 1997
Jean-Luc Belingard
/s/ Wendy E. Lane Director February
- ------------------------------- 27, 1997
Wendy E. Lane
/s/ Robert E. Mittelstaedt, Jr. Director February
- ------------------------------- 27, 1997
Robert E. Mittelstaedt, Jr.
/s/ James B. Powell, M.D. Director February
- ------------------------------- 27, 1997
James B. Powell, M.D.
/s/ David B. Skinner, M.D. Director February
- ------------------------------- 27, 1997
David B. Skinner, M.D.
/s/ Andrew G. Wallace, M.D. Director February
- ------------------------------- 27, 1997
Andrew G. Wallace, M.D.
</TABLE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit No. Description Numbered Page
- ----------- ----------- -------------
<S> <C> <C>
1.1 Form of Dealer Manager Agreement*
4.1 Form of Certificate of Designation of the Series A Exchangeable Preferred
Stock*
4.2 Form of Certificate of Designation of the Series B Preferred Stock*
4.3 Form of Indenture*
4.4 Form of Note (included in Exhibit 4.3 hereto)
4.5 Form of Rights Certificate*
5.1 Opinion of Davis Polk & Wardwell*
8.1 Opinion of Davis Polk & Wardwell (re: tax matters)*
10.1 Form of Amended Credit Agreement*
10.2 The Settlement Agreement and Release*
10.3 Corporate Integrity Agreement*
12.1 Statement regarding Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends*
23.1 Consent of Price Waterhouse LLP
23.2 Consent of KPMG Peat Marwick LLP
filed as Exhibits 5.1 and 8.1 hereto)*
23.3 Consent of Davis Polk & Wardwell (contained in the Opinion of Counsel
filed as Exhibits 5.1 and 8.1 hereto)*
24.1 Power of Attorney (included on signature page)
25.1 Statement of Eligibility under the Trust Indenture Act of 1939, as amended
of , as Trustee under the Indenture*
99.1 Form of Subscription and Information Agency Agreement*
99.2 Form of Instructions for Rights Certificates*
99.3 Form of Notice of Guaranteed Delivery of Rights Certificates*
- ----------
* To be filed by amendment.
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of our report
dated February 15, 1995 with respect to the consolidated statement of
operations and cash flows of Roche Biomedical Laboratories, Inc. for the year
ended December 31, 1994, appearing on page F-2 of the National Health
Laboratories Holdings Inc. Registration Statement on Forms S-4/S-3, dated
April 25, 1995 (Registration No. 33-58775) filed under the Securities Act of
1933, as amended. We also consent to the reference to us under the "Experts"
heading in such Prospectus.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Raleigh, North Carolina
February 25, 1997
EXHIBIT 23.2
Independent Auditors' Consent
The Board of Directors
Laboratory Corporation of America Holdings:
We consent to the use of our reports included herein and incorporated herein
by reference and to the reference to our firm under the heading "Experts" in
the Prospectus.
/s/ KPMG Peat Marwick LLP
Raleigh, North Carolina
February 25, 1997
