UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11353
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LABORATORY CORPORATION OF AMERICA HOLDINGS
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3757370
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
358 SOUTH MAIN STREET, BURLINGTON, NORTH CAROLINA 27215
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(Address of principal executive offices) (Zip code)
(336) 229-1127
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
The number of shares outstanding of the issuer's common stock is 128,779,887
shares as of October 31, 1999, of which 61,329,256 shares are held by indirect
wholly owned subsidiaries of Roche Holding Ltd.
The number of warrants outstanding to purchase shares of the issuer's common
stock is 22,151,308 as of October 31, 1999, of which 8,325,000 are held by an
indirect wholly owned subsidiary of Roche Holding Ltd.
<PAGE>
<TABLE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19.7 $ 22.7
Accounts receivable, net 360.7 375.4
Inventories 26.4 30.7
Prepaid expenses and other 19.0 12.3
Deferred income taxes 75.7 78.0
-------- --------
Total current assets 501.5 519.1
Property, plant and equipment, net 272.2 259.1
Intangible assets, net 812.6 836.2
Other assets, net 25.7 26.5
-------- --------
$1,612.0 $1,640.9
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38.1 $ 50.2
Accrued expenses and other 144.5 128.7
Current portion of long-term debt 77.9 72.5
-------- --------
Total current liabilities 260.5 251.4
Revolving credit facility -- --
Long-term debt, less current portion 506.6 571.3
Capital lease obligations 4.5 4.2
Other liabilities 117.5 132.8
Commitments and contingent liabilities -- --
Mandatorily redeemable preferred stock
(30,000,000 shares authorized):
Series A 8 1/2% Convertible
Exchangeable Preferred Stock, $0.10 par value,
4,363,178 shares issued and outstanding at
September 30, 1999 and December 31, 1998
(aggregate preference value of $218.2 at
September 30, 1999 and December 31, 1998) 213.3 213.0
Series B 8 1/2% Convertible Pay-in-Kind
Preferred Stock, $0.10 par value, 6,826,900
and 6,409,548 shares issued and outstanding
at September 30, 1999 and December 31, 1998
respectively (aggregate preference value of 336.7 313.8
$341.3 and $320.5, respectively)
Shareholders' equity:
Common stock, $0.01 par value; 520,000,000
shares authorized; 128,774,554 and
125,280,346 shares issued and outstanding
at September 30, 1999 and December 31,
1998, respectively 1.3 1.2
Additional paid-in capital 423.9 415.7
Accumulated deficit (246.4) (260.5)
Unearned restricted stock compensation (4.3) --
Accumulated other comprehensive income (loss) (1.6) (2.0)
-------- --------
Total shareholders' equity 172.9 154.4
-------- --------
$1,612.0 $1,640.9
======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1999 1998 1999 1998
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $1,276.0 $1,204.8 $ 428.6 $ 414.7
Cost of sales 796.8 783.9 265.2 270.3
-------- -------- -------- --------
Gross profit 479.2 420.9 163.4 144.4
Selling, general and
administrative expenses 339.2 297.1 115.6 102.4
Amortization of intangibles
and other assets 23.4 22.8 7.7 7.7
-------- -------- -------- --------
Operating income 116.6 101.0 40.1 34.3
Other income (expenses):
Gain(loss)on sale of assets (1.4) 2.0 (0.1) 0.1
Net investment income (loss) (1.4) 0.8 (1.8) 0.2
Interest expense (31.2) (37.2) (10.4) (12.3)
-------- -------- -------- --------
Earnings before income taxes 82.6 66.6 27.8 22.3
Provision for income taxes 31.4 33.1 10.6 10.9
-------- -------- -------- --------
Net earnings 51.2 33.5 17.2 11.4
Less preferred stock dividends 36.4 33.4 12.9 11.1
Less accretion of mandatorily
redeemable preferred stock 0.7 0.6 0.2 0.2
-------- -------- -------- --------
Net earnings (loss)
attributable to common
shareholders $ 14.1 $ (0.5) $ 4.1 $ 0.1
======== ======== ======== ========
Basic and diluted earnings
(loss)per common share $ 0.11 $ (0.00) $ 0.03 $ 0.00
========= ========= ======== =========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 51.2 $ 33.5
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 63.0 62.9
Deferred compensation 0.2 --
Net (gains) losses on sale of assets 1.4 (2.0)
Investment loss 2.0 --
Deferred income taxes (4.0) 55.3
Change in assets and liabilities:
Decrease (increase) in accounts
receivable, net 14.6 (43.4)
Decrease in inventories 4.4 7.1
Increase in prepaid
expenses and other (6.2) (0.9)
Change in income taxes receivable -- (6.1)
Decrease in accounts payable (11.7) (7.1)
Increase (decrease) in accrued expenses
and other 16.5 (7.4)
Other, net (2.5) (2.0)
------- -------
Net cash provided by operating activities 128.9 89.9
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (53.6) (40.1)
Proceeds from sale of assets 0.7 12.4
Refund of lease guaranty -- 8.0
Acquisition of businesses -- (23.7)
------- -------
Net cash used for investing activities (52.9) (43.4)
------- -------
(continued)
<PAGE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
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<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities 40.0 20.0
Payments on revolving credit facilities (40.0) (60.0)
Payments on long-term debt (59.2) --
Payments on long-term lease obligations (0.7) (0.8)
Deferred payments on acquisitions (8.7) (6.5)
Payment of preferred stock dividends (13.9) (13.8)
Net proceeds from issuance of stock to
employees 3.8 2.9
------- -------
Net cash used for financing activities (78.7) (58.2)
------- -------
Effect of exchange rate changes on cash
and cash equivalents (0.3) --
------- -------
Net decrease in cash and cash equivalents (3.0) (11.7)
Cash and cash equivalents at
beginning of period 22.7 23.3
------- -------
Cash and cash equivalents at
end of period $ 19.7 $ 11.6
======= =======
Supplemental schedule of cash
flow information:
Cash (paid) received during the
period for:
Interest $ (34.9) $ (37.3)
Income taxes, net of refunds (22.8) 14.3
Disclosure of non-cash financing
and investing activities:
Preferred stock dividends 22.5 19.6
Accretion of mandatorily redeemable
preferred stock 0.7 0.6
Change in valuation allowance on
securities (net of tax) (0.7) 1.8
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
<TABLE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<CAPTION>
Additional
Common Paid-in Accumulated
Stock Capital Deficit
------ ---------- -----------
<S> <C> <C> <C>
PERIOD ENDED SEPTEMBER 30, 1998
Balance at beginning of year $ 1.2 $ 412.8 $ (284.9)
Comprehensive income:
Net income -- -- 33.5
Other Comprehensive income:
Change in valuation allowance
on securities, net of tax -- -- --
------- ------- --------
Comprehensive income -- -- 33.5
Issuance of common stock -- 2.9 --
Preferred stock dividends -- -- (33.4)
Accretion of mandatorily
redeemable preferred stock -- -- (0.6)
------- ------- --------
BALANCE AT SEPTEMBER 30, 1998 $ 1.2 $ 415.7 $ (285.4)
======= ======= ========
PERIOD ENDED SEPTEMBER 30, 1999
Balance at beginning of year $ 1.2 $ 415.7 $ (260.5)
Comprehensive income:
Net income -- -- 51.2
Other comprehensive income:
Foreign currency translation
adjustments -- -- --
Change in valuation allowance
on securities, net of tax -- -- --
------- ------- --------
Comprehensive income -- -- 51.2
Issuance of common stock 0.1 3.7 --
Issuance of restricted stock
awards -- 4.5 --
Amortization of unearned restricted
stock compensation -- -- --
Preferred stock dividends -- -- (36.4)
Accretion of mandatorily
redeemable preferred stock -- -- (0.7)
------- ------- --------
BALANCE AT SEPTEMBER 30, 1999 $ 1.3 $ 423.9 $ (246.4)
======= ======= ========
<PAGE>
Accumulated Unearned
Other Restricted Total
Comprehensive Stock Shareholders'
Income (loss) Compensation Equity
------------- ------------ ------------
<S> <C> <C> <C>
PERIOD ENDED SEPTEMBER 30, 1998
Balance at beginning of year $ -- $ -- $ 129.1
Comprehensive income:
Net income -- -- 33.5
Other Comprehensive income:
Change in valuation allowance
on securities, net of tax (1.8) -- (1.8)
------- -------- ---------
Comprehensive income (1.8) -- 31.7
Issuance of common stock -- -- 2.9
Preferred stock dividends -- -- (33.4)
Accretion of mandatorily
redeemable preferred stock -- -- (0.6)
------- -------- ---------
BALANCE AT SEPTEMBER 30, 1998 $ (1.8) $ -- $ 129.7
======= ======== =========
PERIOD ENDED SEPTEMBER 30, 1999
Balance at beginning of year $ (2.0) $ -- $ 154.4
Comprehensive income:
Net income -- -- 51.2
Other comprehensive income:
Foreign currency translation
adjustments (0.3) -- (0.3)
Change in valuation allowance
on securities, net of tax 0.7 -- 0.7
------- -------- ---------
Comprehensive income 0.4 -- 51.6
Issuance of common stock -- -- 3.8
Issuance of restricted stock
awards -- (4.5) --
Amortization of unearned restricted
stock compensation -- 0.2 0.2
Preferred stock dividends -- -- (36.4)
Accretion of mandatorily
redeemable preferred stock -- -- (0.7)
-------- -------- ---------
BALANCE AT SEPTEMBER 30, 1999 $ (1.6) $ (4.3) $ 172.9
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
<PAGE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The condensed 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 condensed consolidated financial statements of the
Company are unaudited. In the opinion of management, all adjustments (which
include only normal recurring accruals) necessary for a fair presentation of
such financial statements have been included. Interim results are not
necessarily indicative of results for a full year.
The financial statements and notes are presented in accordance with the
rules and regulations of the Securities and Exchange Commission and do not
contain certain information included in the Company's annual report.
Therefore, the interim statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in the Company's
annual report.
2. RECLASSIFICATIONS
In 1999, the Company reclassified $47.4 for the nine-months ended
September 30, 1998 and $16.4 for the three-months ended September 30, 1998 to
selling, general and administrative expenses from net sales adjustments to be
consistent with the 1999 classification. The reclassification had no effect
on operating income.
3. EARNINGS PER SHARE
Basic and diluted earnings (loss) per share are based upon the weighted-
average number of shares outstanding during the three- and nine-months ended
September 30, 1999 of 127,072,911 shares and 126,493,066 shares, respectively,
and the weighted-average number of shares outstanding during the three- and
nine-months ended September 30, 1998 of 125,199,880 shares and 124,704,341
shares, respectively.
The effect of conversion of the Company's redeemable preferred stock, or
exercise of the Company's stock options, restricted stock awards, or warrants
was not included in the computation of diluted earnings per common share as it
would have been antidilutive for all applicable periods presented.
<PAGE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The following table summarizes the potential common shares not included
in the computation of dilutive earnings per share because their impact would
have an antidilutive effect on earnings per share:
SEPTEMBER 30,
----------------------------
1999 1998
--------- ----------
Stock Options 10,587,591 9,714,707
Restricted Stock Awards 1,620,000 --
Warrants 22,151,308 22,151,308
Series A convertible exchangeable
preferred stock 79,330,430 79,330,430
Series B convertible pay-in-kind
preferred stock 124,125,330 114,112,286
4. RESTRUCTURING CHARGES
The following represents the Company's restructuring activities for the
period indicated:
Asset Lease and
Severance revaluations other facility
costs and write-offs obligations Total
--------- -------------- -------------- -----
Balance at
December 31, 1998 $ 2.5 $ 3.5 $ 27.0 $ 33.0
Cash payments (1.9) (0.4) (2.7) (5.0)
------ ------ ------ ------
Balance at
September, 1999 $ 0.6 $ 3.1 $ 24.3 $ 28.0
====== ====== ====== ======
Current $ 13.5
Non-current 14.5
------
$ 28.0
======
5. ACCUMULATED OTHER COMPREHENSIVE INCOME
At September 30, 1999, the Company recorded an other than temporary loss
on its investments in equity securities and recorded a related reduction in
unrealized loss on securities of $2.0 net of taxes of $0.8.
<PAGE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
6. INTEREST RATE SWAP
The existing rate collar transaction and swap have effectively changed
the interest exposure on $500.0 of floating rate debt to a weighted-average
fixed interest rate of 6.08%. The notional amounts of the agreements are used
to measure interest to be paid or received and do not represent the amount of
exposure to credit loss.
7. LONG-TERM DEBT
The Company made scheduled loan payments of $11.2 on September 30, 1999
on its Amended Term Loan Facility. During the third quarter of 1999, the
Company repaid $20.0 of the outstanding balance on its revolving credit
facility.
8. RESTRICTED STOCK PLAN
Effective June 16, 1999, the Company's shareholders approved the issuance
of shares of Common Stock to key employees under a restricted stock plan. At
September 30, 1999, 1,620,000 shares had been issued under this plan.
Restrictions limit the sale or transfer of these shares during a six-year
period when the restrictions lapse. Upon issuance of stock under the plan,
unearned compensation equivalent to the market value at the date of the grant
is charged to shareholders' equity as unearned restricted stock compensation
and subsequently amortized to expense over the six-year vesting period. The
plan provides for accelerated vesting of outstanding shares in percentages of
33.3%, 66.7% or 100%, if certain predefined profitability targets are achieved
as of December 31, 2001.
9. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation which purports to be a class action
("class action") brought on behalf of certain patients, private insurers and
benefit plans that paid for laboratory testing services during the time frame
covered by the 1996 Government Settlement. The Company has also received
certain similar claims brought on behalf of certain other insurance companies,
some of which have been resolved for immaterial amounts. These claims for
private reimbursement are similar to the government claims settled in 1996.
However, no amount of damages has been specified in the class action to date
and, with the exception of the above, no material settlement discussions have
taken place. The Company is carefully evaluating these claims, however, due
to the early stage of the claims, the ultimate outcome of these claims cannot
presently be predicted.
The Company is also involved in certain claims and legal actions arising
in the ordinary course of business. These matters include, but are not
limited to, inquiries from governmental agencies and Medicare or Medicaid
carriers requesting comment on allegations of billing
<PAGE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
irregularities that are brought to their attention through billing audits or
third parties. In the opinion of management, based upon the advice of counsel
and consideration of all facts available at this time, the ultimate
disposition of these matters is not expected to have a material adverse effect
on the financial position, results of operations or liquidity of the Company.
OVERVIEW
This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. In
addition, from time to time, the Company or its representatives have made
or may make forward-looking statements, orally or in writing. Such forward-
looking statements may be included in, but are not limited to, various filings
made by the Company with the Securities and Exchange Commission, press
releases or oral statements made by or with the approval of an authorized
executive officer of the Company. Actual results could differ materially from
those projected or suggested in any forward-looking statements as a result of
a wide variety of factors and conditions, which have been described in the
section of the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, entitled, "Cautionary Statement for Purposes of the `Safe
Harbor' Provisions of the Private Securities Litigation Reform Act of 1995"
and other documents the Company files from time to time with the Securities
and Exchange Commission including the Company's quarterly reports on Form 10-Q
and current reports on Form 8-K, and shareholders are specifically referred to
these documents with regard to factors and conditions that may affect future
results.
RESULTS OF OPERATIONS
Three Months ended September 30, 1999 compared with Three Months ended
September 30, 1998.
Net sales for the three months ended September 30, 1999 were $428.6, an
increase of approximately 3.3% from $414.7 for the comparable 1998 period.
The sales increase is a result of a 3.1% increase in price and a 0.2%
increase in testing volume.
Cost of sales, which includes primarily laboratory and distribution
costs, was $265.2 for the three months ended September 30, 1999 compared to
$270.3 in the corresponding 1998 period, a decrease of $5.1. This decrease is
primarily due to the decrease in salaries and benefits resulting from the
ongoing consolidation of the Mid-Atlantic and Northeast regions. Cost of sales
as a percentage of net sales was 61.9% for the three months ended September
30, 1999 and 65.2% in the corresponding 1998 period. The decrease in the cost
of sales percentage of net sales resulted from the Company's continuing cost
reduction efforts as noted above.
<PAGE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Selling, general and administrative expenses increased to $115.6 for the
three months ended September 30, 1999 from $102.4 in the same period in 1998.
The primary reason for the increase is due to an increase of $8.8 in bad
debt expense and $2.4 of expenses related to Year 2000 projects. As a
percentage of net sales, selling, general and administrative expenses were
27.0% and 24.7% for the three months ended September 30, 1999 and 1998,
respectively. The increase in the selling, general and administrative
percentage primarily resulted from the items noted above.
The amortization of intangibles and other assets was $7.7 for the three
months ended September 30, 1999 and 1998.
Net interest expense was $10.2 for the three months ended September 30,
1999 compared with $12.1 for the same period in 1998. As previously
discussed, the interest rate that the Company pays on its debt is linked to
the Company's financial performance. As of September 30, 1998, the interest
rate that the Company pays on its long-term debt was reduced from LIBOR plus
1.0% to LIBOR plus 0.5% and from 0.75% to 0.3125% on its revolving debt. This
decrease, along with the reduction of outstanding indebtedness, has reduced
the Company's interest by $1.9.
The provision for income taxes as a percentage of earnings before taxes
was 38.0% for the three months ended September 30, 1999 compared to 48.9% for
the three months ended September 30, 1998. During the three months ended
September 30, 1999, the Company reduced its valuation allowance applied
against its deferred tax assets by $2.5, thereby reducing its provision for
income taxes as a percentage of earnings before taxes.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1998.
Net sales for the nine months ended September 30, 1999 were $1,276.0, an
increase of approximately 5.9% from $1,204.8 reported in the comparable 1998
period. The sales increase is a result of a 2.6% increase in volume and a 3.3%
increase in price.
Cost of sales, which includes primarily laboratory and distribution
costs, was $796.8 for the nine months ended September 30, 1999 compared to
$783.9 in the corresponding 1998 period, an increase of $12.9. Cost of sales
increased approximately $20.2 due to the increase in volume and approximately
$10.1 due to increases in testing supplies and consulting fees. These
increases were partially offset by decreases totaling $13.6 in
telephone, depreciation, report and request forms and insurance expenses.
Cost of sales as a percentage of net sales was 62.4% for the nine months ended
September 30, 1999 and 65.1% in the corresponding 1998 period.
<PAGE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The decrease in the cost of sales percentage of net sales primarily resulted
from the Company's continued cost reduction efforts.
Selling, general and administrative expenses increased to $339.2 for the
nine months ended September 30, 1999 from $297.1 in the same period in 1998.
The primary reason for the increase is due to an increase to bad debt expense
of $31.9 and $5.1 of expenses related to Year 2000 projects. As a percentage
of net sales, selling, general and administrative expenses were 26.6% and
24.7% for the nine months ended September 30, 1999 and 1998, respectively. The
increase in the selling, general and administrative percentage primarily
resulted from the items noted above.
The amortization of intangibles and other assets was $23.4 and $22.8 for
the nine months ended September 30, 1999 and 1998, respectively.
Net interest expense was $30.6 for the nine months ended September 30,
1999 compared with $36.4 for the same period in 1998. As of September 30,
1998, the interest rate that the Company pays on its long term debt was
reduced from LIBOR plus 1.0% to LIBOR plus 0.5% and from 0.75% to 0.3125% on
its revolving debt. This decrease, along with the reduction of outstanding
indebtedness, has reduced the Company's interest by $5.8.
The provision for income taxes as a percentage of earnings before taxes
was 38.0% for the nine months ended September 30, 1999 compared to 49.7% for
the nine months ended September 30, 1998. During the nine months ended
September 30, 1999, the Company reduced its valuation allowance applied
against its deferred tax assets by $7.5, thereby reducing its provision for
income taxes as a percentage of earnings before taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $128.9 and $89.9 for the
nine months ended September 30, 1999 and September 30, 1998, respectively.
The increase in cash flow from operations primarily resulted from improved
earnings and a decrease in accounts receivable. Capital expenditures were
$53.6 and $40.1 for the first nine months of 1999 and 1998, respectively.
The Company's days sales outstanding (DSO) at September 30, 1999 was 76
days, compared to 79 days at the end of the second quarter of 1999. Since the
end of 1998, the Company has reduced its DSO by a total of 7 days. The
Company is focusing on reducing its DSO through the conversion of the entire
Company to a single, centralized billing system. The Company expects its
multiple billing systems to be substantially converted to the new single
billing system by the end of the year 2000.
<PAGE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Driving down DSO has been a major Company-wide goal, engaging significant
resources across the country. Significant initiatives undertaken include the
following:
1. Focusing on front-end billing processes, including reducing order entry
errors and identifying and correcting problems which cause accounts to
provide incomplete or inaccurate billing information
2. Improving processes related to claims submissions to third-party payors
3. Aggressive actions with slow-paying third-party payors
The Company will evaluate the effect, if any, the DSO trend has on
its provision for bad debts during the fourth quarter of 1999.
For a discussion of legal proceedings which may impact the Company's
liquidity and capital resources see "Note 9 to the Company's Unaudited
Condensed Consolidated Financial Statements".
Cash and cash equivalents on hand, cash flows from operations and
additional borrowing capabilities under the Amended Revolving Credit Facility
are expected to be sufficient to meet anticipated operating requirements and
provide funds for capital expenditures, potential acquisitions and working
capital for the foreseeable future.
YEAR 2000 UPDATE
The Company has an ongoing effort to identify and remediate data
recognition problems that may be caused in computer systems, software, and lab
equipment by the change in date from the year 1999 to the year 2000. The
Company is also working to address potential problems in systems and equipment
that contain imbedded hardware or software that may have a time element
(referred to as "non-IT" systems). The Company's Year 2000 project has five
phases: i) inventory of the business critical functional equipment and
systems affected by the Year 2000 issue; ii) assessment of the key elements
identified by the inventory including development of strategies to address
affected critical equipment and systems; iii) contingency planning; iv)
remediation of affected equipment and systems; and v) testing and validation
of its systems for Year 2000 date recognition.
Inventories of business critical functional equipment and systems have
been completed. Follow-up assessments of the key elements identified by the
inventories and the development of strategies to address key equipment and
systems have also been completed. Contingency planning has been substantially
completed at the end of October 1999. Completion of all material phases of
remediation for business critical equipment and systems is scheduled for mid-
November 1999. All material phases of testing and validation for business
critical equipment and systems is scheduled to be completed by mid-November
1999.
<PAGE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The Company is also working to assess Year 2000 readiness on the part of
its significant service providers, vendors, suppliers, customers and
governmental entities. There can be no guarantee that the failure by these
other companies to successfully and timely achieve Year 2000 compliance would
not have an adverse effect on the Company's operations.
The total cost associated with required Year 2000 modifications and
related activities is not expected to be material to the Company's financial
position and is expected to be funded by cash flows from operations as well as
borrowings under the Company's credit facilities. The Company estimates total
Year 2000 expenditures to be $18.0 - $20.0 with approximately $3.0 charged to
earnings during the year ended 1998 and $5.1 charged to earnings and an
additional $5.2 in related purchases capitalized during the nine months ended
September 30, 1999. The amounts required to address Year 2000 readiness do
not include significant investments in new systems which have been and are
being incurred in the normal course of business and are Year 2000 compliant.
The estimates and conclusions herein contain forward-looking statements
and are based on management's best estimates of future events. To the extent
the Company experiences material Year 2000 problems and does not have any
contingency plan in effect for remedying such problems, such Year 2000
problems could have a material adverse effect on the Company's results of
operation, liquidity and financial condition. While the Company believes the
occurrence of such a scenario is unlikely, a possible worst case scenario
might include (a) delays, inaccuracies or other difficulties with respect to
billing customers or the loss of customer records, (b) key vendors not being
able to supply goods and services on a timely basis, and (c) the inability of
our customers to remit payment for services rendered on a timely basis. The
financial impact of any or all of the above worst case scenarios has not been
and cannot be estimated by management due to the numerous uncertainties and
variables associated with such scenarios.
<PAGE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See "Note 9 to the Company's Unaudited Condensed
Consolidated Financial Statements" for the nine months ended
September 30, 1999.
Item 6. Exhibits and Reports on Form 8-K-
(a) Exhibits
27 Financial Data Schedule (electronically filed
version only).
(b) Reports on Form 8-K
(1) A current report on Form 8-K dated August 18, 1999
was filed on August 31, 1999, by the registrant, in
connection with the press release dated August 18, 1999
announcing that its Board of Directors declared
dividends on the Company's 8 1/2% Series A Convertible
Exchangeable Preferred Stock and the Company's 8 1/2%
Series B Convertible Pay-in-Kind Preferred Stock.
(2) A current report on Form 8-K dated September 1,
1999 was filed on October 4, 1999, by the registrant,
in connection with the press release dated September 1,
1999 announcing an agreement for Healtheon Corporation
to process the Company's lab requests and reports for
physicians with its Web browser-based solution,
Healtheon DX.
(3) A current report on Form 8-K dated September 22,
1999 was filed on October 4, 1999, by the registrant
along with AHT Corporation, in connection with the press
release dated September 22, 1999 announcing an agreement
whereby AHT will provide computer interfaces for the
Company's reference laboratory, hospital and managed
care clients. The agreement provides for AHT to develop
and install specific interfaces, which allows the
Company and its hospital partners to exchange laboratory
results, demographics, eligibility information, and
laboratory orders.
<PAGE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
(b) Reports on Form 8-K (continued)
(4) A current report on Form 8-K dated September 30, 1999 was
filed on October 4, 1999, by the registrant along with
Hycor Biomedical Inc., in connection with the press
release dated September 30, 1999 announcing the signing
of a three-year supply agreement. Under the terms of the
agreement, Hycor will serve as the primary supplier of IN
VITRO allergy testing reagents to the Company.
(5) A current report on Form 8-K dated October 4,1999 was filed
on October 12, 1999, by the registrant along with Healtheon
Corporation, in connection with the press release dated
October 4, 1999, announcing that the Company had selected
BenefitCentral, Healtheon's online enrollment and benefits
management service, to streamline the process of benefits
management for its approximately 18,400 employees.
(6) A current report on Form 8-K dated October 20, 1999 was
filed on November 3, 1999, by the registrant, in connection
with the press release dated October 20, 1999 announcing
operating results of the Company for the quarter ended
September 30, 1999.
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LABORATORY CORPORATION OF AMERICA HOLDINGS
Registrant
By:/s/THOMAS P. MAC MAHON
--------------------------------
Thomas P. Mac Mahon
Chairman, President and Chief
Executive Officer
By:/s/WESLEY R. ELINGBURG
-------------------------------
Wesley R. Elingburg
Executive Vice President, Chief
Financial Officer and Treasurer
November 12, 1999
<PAGE>
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