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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 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 ________________
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 (I.R.S. 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
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Common Stock, $0.01 par value New York Stock Exchange
Common Stock Purchase Warrants Currently not listed
Preferred Stock, $.10 par value-Series A New York Stock Exchange
Preferred Stock, $.10 par value-Series B New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
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State the aggregate market value of the voting stock held by non-affiliates of
the registrant, by reference to the price at which the stock was sold as of a
specified date within 60 days prior to the date of filing: $277,984,512 at
March 14, 2000.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date: 129,851,617 shares as of
March 14, 2000, of which 61,329,256 shares are held by indirect wholly owned
subsidiaries of Roche Holdings Ltd. The number of warrants outstanding to
purchase shares of the issuer's common stock is 22,151,308 as of March 14,
2000, of which 8,325,000 are held by an indirect wholly owned subsidiary of
Roche Holdings Ltd.
PART I
Item 1. DESCRIPTION OF BUSINESS
Laboratory Corporation of America Holdings (the "Company"),
headquartered in Burlington, North Carolina, is the second
largest independent clinical laboratory company in the United
States based on 1999 net revenues. Through a national network of
laboratories, the Company offers more than 2,000 different
clinical laboratory tests which are used by the medical
profession in routine testing, patient diagnosis, and in the
monitoring and treatment of disease. Since its founding in 1971,
the Company has grown into a network of 25 major laboratories and
approximately 1,200 service sites consisting of branches, patient
service centers and STAT laboratories, serving clients in 50
states.
The Company was formerly known as National Health
Laboratories Holdings Inc. ("NHL"). In conjunction with a merger
("Merger") in 1995 with Roche Biomedical Laboratories, Inc.
("RBL"), an indirect subsidiary of Roche Holdings, Inc.
("Roche"), the Company changed its name to Laboratory Corporation
of America Holdings.
RECENT DEVELOPMENTS
See "General" section of "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
THE CLINICAL LABORATORY TESTING INDUSTRY
Laboratory tests and procedures are used generally by
hospitals, physicians and 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 1999 approximately 50% of the
clinical testing revenues in the United States were derived by
hospital-based laboratories, approximately 13% were derived by
physicians in their offices and laboratories and approximately
37% were derived by independent clinical laboratories. The
Health Care Financing Administration ("HCFA") of the Department
of Health and Human Services ("HHS") has estimated that in 1999
there were over 5,000 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 over the past three to five years, 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 organizations
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 historically
resulted in price erosion and have negatively impacted the
Company's operating margins. In addition, managed care
organizations have used capitated payment contracts in an attempt
to fix the cost of laboratory testing services for their
enrollees. Under a capitated payment contract, the clinical
laboratory and the managed care organization agree to a per
member, 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. For the year ended December 31, 1999 such
contracts accounted for approximately $84.3 million in net sales.
The increase in managed care and insurance companies attempts to
control utilization of medical services overall has also resulted
in declines in the utilization of laboratory testing services.
In addition, Medicare (which principally services patients
65 and older), 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, added
costs and decreased 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. 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 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 may lead to future 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.
LABORATORY TESTING OPERATIONS AND SERVICES
The Company has 25 major laboratories, and approximately
1,200 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 or other
strategic location. 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 239,000 patient
specimens per day in 1999. 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 2,000 different 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, urinalyses, 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 25 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 unique testing capabilities and/or client requirements have
been developed into specialty or niche businesses by the Company
which have become a primary growth strategy for the Company. 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's research and development group
continually seeks new and improved technologies for early
diagnosis. For example, the Company's Center for Molecular
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. Management believes these
technologies may represent a significant savings to managed care
organizations by increasing the detection of early stage (treatable)
diseases. The following are specialty and niche businesses in which
the Company offers testing and related services:
Infectious Disease. The Company provides complete viral load
testing as well as HIV genotyping and phenotyping. The
Company's use of this leading-edge technology puts it in the
forefront of HIV drug resistance testing-one of the most
important issues surrounding the treatment of HIV.
Allergy Testing. The Company offers an extensive range of
allergen testing services as well as computerized analysis and
a treatment program that enables primary care physicians to
diagnose and treat many kinds of allergic disorders.
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.
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. Management believes it is now
the largest provider of identity testing services in the
United States.
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.
Occupational Testing Services. The Company provides urine
testing for the detection of drugs of abuse for private and
government customers, and also provides blood testing services
for the detection of drug 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. The Company
also provides other analytical testing and a variety of
management support services.
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 and Pathology 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, 1999,
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. The majority of the Company's managed care testing
is negotiated on a fee-for-service basis. Testing is sometimes
reimbursed on a capitated basis for managed care organizations.
Under a capitated payment contract, the Company agrees to cover
certain laboratory tests during a given month for which the managed
care organization agrees to pay a flat monthly fee for each covered
member. The tests covered under agreements of this type are negotiated
for each contract, but usually include 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, 1999 billings to the Company's respective
payors based on the total volume of accessions are as follows:
Accession Volume as a % Revenue
of Total per
1999 Accession
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Private Patients 3.8% $92.56
Medicare, Medicaid and
Insurance 19.1% $27.75
Commercial Clients 42.5% $22.36
Managed Care 34.6% $27.68
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
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 for
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.
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, discussed above, reference agreements and shared-
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. Management believes the
Company's economies of scale as well as its delivery system will
enable it to assist hospitals to achieve their 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 1999, the Company
added 40 alliance agreements with hospitals, physician groups and
other health care provider organizations representing
approximately $24 million of annual sales.
SALES AND MARKETING AND CLIENT SERVICE
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 December 31, 1999, the Company employed 232 generalists and
112 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 account managers ("AMs") to
interact with clients on an ongoing basis. AMs 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 December 31, 1999, the Company employed 271 AMs. AMs 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 specialist 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.
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. During 1999, one of the
Company's goals has been to improve client service. An important
factor in improving client service includes the Company's
initiatives to improve its billing process. See "-Billing."
INFORMATION SYSTEMS
The Company has developed and implemented management
information systems to monitor operations and control costs. All
financial functions are centralized in Burlington, North Carolina
including purchasing and accounting. Management believes this
provides greater control over spending as well as increased
supervision and monitoring of results of operations.
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. The Company's
Corporate Information Systems Division manages 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
employs a Chief Information Officer, whose responsibility is to
integrate, manage and develop the Company's information systems.
In 1999, information systems activities have been focused on
consolidation of the Company's multiple laboratory and billing
systems to standardized laboratory testing and billing systems.
The Company has established regional data centers to more
effectively handle the information processing needs of the
Company. The Company believes that benefits can be derived from
the conversion of its multiple billing systems into a centralized
system. Implementation of the billing systems conversion began
in 1997 and is expected to be completed over the next two years.
During 1999, the Company capitalized approximately $11.0 million
in information systems development and implementation costs
related directly or indirectly to billing systems. The Company
anticipates capitalizing an additional $6.0 to $7.0 million in
such development and implementation costs during 2000.
See "Impact of the Year 2000 Issue" section of "Management's
Discussion and Analysis of Financial Condition and Results of
Operations".
BILLING
Billing for laboratory services is a complex 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 intricate
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.
The Company's bad debt expense has increased in the last few
years principally due to three developments that have further
complicated the billing process: i) increased complexities in the
billing process due to requirements of managed care payors; ii)
increased medical necessity and diagnosis code requirements; and
iii) existence of multiple billing information systems. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Although there can be no assurance of success, the Company
has developed a number of initiatives to address the complexity
of the billing process and to improve collection rates. These
initiatives include: i) installation of personal computer based
products in client offices and Company locations to help with the
accuracy and completeness of billing information captured on the
front-end; ii) establishment of a project group to focus on
improvements in order entry; and iii) development and
implementation of enhanced eligibility checking to compare
information to payor records before billing. Additionally, the
Company believes that it can benefit from the conversion of its
multiple billing systems into a centralized system. Currently,
60% of the Company's billing is performed on this centralized
system. By the end of 2000, the Company plans to have
approximately 85% of its billing performed on the centralized
system, with the remainder converted in 2001.
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 Company 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 HCFA to
inspect clinical laboratories to determine adherence to the
Clinical Laboratory Improvement Act of 1967, and the Clinical
Laboratory Improvement Amendments of 1988 (collectively, as
amended, "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.
During 1998, the Company's forensic crime laboratory,
located at the Company's Center for Molecular Biology and
Pathology in Research
Triangle Park, North Carolina, was accredited by the American
Society of Crime Laboratory Directors, Laboratory Accreditation
Board ("ASCLD/LAB") in the category of DNA testing. Under the
Crime Laboratory Accreditation Program managed by the ASCLD/LAB,
a crime laboratory undergoes a comprehensive and in-depth
inspection to demonstrate that its management, operations,
employees, procedures and instruments, physical plant and security,
and personnel safety procedures meet stringent quality standards.
The Company is one of 192 ASCLD accredited crime laboratories
worldwide, and is one of only four private crime laboratories
holding the accreditation. Accreditation is granted for a period
of five years provided that a laboratory continues to meet the standards
during that period.
COMPETITION
The clinical laboratory business is intensely competitive.
The Company believes that in 1999 the entire United States
clinical laboratory testing industry had revenues exceeding $32
billion; approximately 50% of such revenues were attributable to
hospital-affiliated laboratories, approximately 37% were
attributable to independent clinical laboratories and
approximately 13% were attributable to physicians in their
offices and laboratories. There are presently two national
independent clinical laboratories: the Company, and Quest
Diagnostics Incorporated ("Quest"), which had approximately $3.3
billion in revenues from clinical laboratory testing in 1999.
During 1999, Quest acquired the clinical laboratory
operations of SmithKline Beecham plc ("SmithKline"). The
transaction was completed in August, 1999.
In addition to the other national clinical laboratory, 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
"-Clients" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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 laboratory 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.
EMPLOYEES
At February 29, 2000, the Company had approximately 17,960
full-time equivalent employees. A subsidiary of the Company has
one collective bargaining agreement which covers approximately 37
employees. The Company believes that its overall relations with
its employees are good.
REGULATION AND REIMBURSEMENT
General
The clinical laboratory industry is subject to significant
governmental regulation at the federal, state and sometimes local
levels. As described below, these regulations concern licensure
and operation of clinical laboratories, payment for laboratory
services, health care fraud and abuse, security and
confidentiality of health information, and environmental and
occupational safety.
Regulation of Clinical Laboratories
The Clinical Laboratory Improvement Amendments of 1988
("CLIA") extends federal oversight to virtually all clinical
laboratories by requiring that they be certified by the federal
government or by a federally-approved accreditation agency.
Pursuant to CLIA, clinical laboratories must meet quality
assurance, quality control and personnel standards. Labs also
must undergo proficiency testing and are subject to inspections.
Standards for testing under CLIA are based on the complexity
of the tests performed by the laboratory, with all tests
classified as either high complexity, moderate complexity, or
waived. Laboratories categorized as high complexity are required
to meet more stringent requirements than moderate complexity
laboratories. Labs performing only waived tests, which are tests
determined to have a low potential for error and requiring little
or no oversight, may apply for a certificate of waiver indicating
that they need not comply with most of the requirements of CLIA.
All major and many smaller Company facilities hold CLIA
certificates to perform high complexity testing. The Company's
remaining smaller testing sites hold CLIA certificates to perform
moderate complexity testing or have a certificate of waiver.
The sanction for failure to comply with CLIA requirements
may be suspension, revocation or limitation of a laboratory's
CLIA certificate, which is necessary to conduct business, as well
as significant fines and/or criminal penalties. The loss or
suspension of a license, imposition of a fine or other penalties,
or future changes in the CLIA law or regulations (or
interpretation of the law or regulations) could have a material
adverse effect on the Company.
The Company also is subject to state regulation in some
states. CLIA provides that a state may adopt regulations
different from or more stringent than those under federal law,
and a number of states do have their own lab regulatory schemes.
State laws may require that laboratory personnel meet certain
qualifications, specify certain quality controls, or require
maintenance of certain records. For example, some 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 those under federal law.
The Company believes it is in compliance with federal and
state laboratory requirements, and the Company's laboratories
have continuing programs to ensure that their operations meet all
applicable regulatory requirements, but no assurances can be
given that the Company's laboratories will pass all future
licensure or certification inspections.
Reimbursement of Clinical Laboratory Services
In 1999 and 1998, the Company derived approximately 20% and
22%, respectively, of its net sales from tests performed for
beneficiaries of the 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. Both governmental and private sector payors have made
efforts to contain or reduce health care costs, including
reimbursement for clinical laboratory services, in recent years.
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 bill the program directly and must accept
the scheduled amount as payment in full for covered tests
performed on behalf of Medicare beneficiaries. In addition,
state Medicaid programs are prohibited from paying more than the
Medicare fee schedule amount for clinical laboratory services
furnished to Medicaid recipients.
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.
In August 1997, Congress passed and the President signed the
Balanced Budget Act of 1997 ("BBA"), which included a provision
that reduced, effective January 1, 1998, the Medicare national
limitations from 76% of the 1984 national median to 74% of the
1984 national median. An additional provision in the BBA freezes
the Consumer Price Index update for five years.
Because a significant portion of the Company's costs are
relatively fixed, Medicare reimbursement reductions have a direct
adverse effect on the Company's net earnings and cash flows. The
Company cannot predict whether additional Medicare reductions
will be implemented.
On April 1, 1997, Medicare's new policy for billing of
automated chemistry profiles went into effect. The policy, which
was developed by the Health Care Financing Administration
("HCFA") working with the American Medical Association,
eliminates the old commonly used "19-22 test" automated chemistry
profile, sometimes referred to as a "SMAC" and replaces it with
four new panels of "clinically relevant" automated tests (each
containing from four to twelve chemistry tests). As a result of
this new policy, all major laboratory companies, including the
Company, were required to eliminate the old chemistry profiles
from their standard test requisition forms and standard test
offerings by July 1, 1998. The Company developed and implemented
a new "universal" test requisition and "standard test offerings"
which successfully incorporated all required changes by the July
1, 1998 deadline. Estimated out-of-pocket costs associated with
these changes are over $5 million. The Company is unable to
estimate the indirect costs associated with these changes.
However, personnel time and effort to roll-out the new forms to
clients has been significant.
The new automated chemistry profile billing policy is
intended to reduce the number of non-Medicare covered "screening
tests" which Medicare believes have in the past been
inappropriately billed to Medicare. The BBA also required the
Department of Health and Human Services to adopt uniform
coverage, administration and payment policies for lab tests using
a negotiated rulemaking process. Consensus was reached by the
negotiated rulemaking committee which, among other things,
established policies limiting Medicare coverage for certain tests
to patients with specified medical conditions or diagnoses.
These uniform policies will replace local Medicare coverage
policies. The proposed rules reflecting the negotiated
rulemaking committee's report are expected to be published within
the next few days. However, the rules will not be effective
until one year after publication of final rules, and it is
uncertain when final rules will be published. Due to the variety
of new rules (including limited coverage rules) which have been
adopted or proposed recently to address these issues, the Company
does not believe a meaningful estimate of the potential revenue
impact of these developments can be made at this time. The
Company's analysis to date does not indicate a currently
measurable impact on revenues. The Company will continue to
monitor this issue going forward.
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. However, based on
currently available information, the Company is unable to predict
what type of legislation, if any, will be enacted into law.
Security and Confidentiality of Health Information
The Health Insurance Portability and Accountability Act of
1996 ("HIPAA") includes provisions that affect how electronically
transmitted patient information and claims are to be handled.
The reach of these provisions is quite broad because they apply
to all health information that is or ever has been electronically
transmitted or electronically maintained by a health plan, health
care provider or health care data clearinghouse. Pursuant to
HIPAA, proposed rules have been published addressing standards
for electronic data formatting, the security of electronic
transmission and maintenance of health information, and
protecting the privacy of health information. The final
regulations implementing HIPAA are not expected to be published
before Summer 2000, and the regulations do not become effective
until 2 years after the date of publication. Failure to comply
could result in significant civil and/or criminal penalties. As
it will be for virtually all healthcare-related organizations,
complying with the various HIPAA requirements will be a multi-
year, entity-wide effort likely requiring capital and internal
labor expenditures by the Company, but until the final
regulations are published, the Company is unable to estimate the
total cost of compliance.
In addition to the HIPAA provisions described above, which
have not yet been implemented, there are a number of state laws
regarding the confidentiality of medical information, some of
which apply to clinical laboratories. These laws vary widely,
and new laws in this area are pending, but they most commonly
restrict the use and disclosure of medical information without
patient consent. Penalties for violation of these laws include
sanctions against a laboratory's state licensure, as well as
civil and/or criminal penalties. The Company believes it is in
substantial compliance with applicable state laws concerning
confidentiality of medical information.
Fraud and Abuse Regulations
Existing federal laws governing Medicare and Medicaid, as
well as similar state laws, impose a variety of broadly described
fraud and abuse prohibitions on healthcare providers, including
clinical laboratories. These laws are interpreted liberally and
enforced aggressively by multiple government agencies, including
the U.S. Department of Justice, the U.S. Department of Health and
Human Services Office of the Inspector General ("OIG"), and the
states. The federal government's enforcement efforts have been
increasing, in part as a result of the enactment of the Health
Insurance Portability and Accountability Act of 1996, which,
among other things, provided for the establishment of a program
to coordinate federal, state and local law enforcement programs,
and to conduct investigations, audits and inspections relating to
payment for healthcare, and for the establishment of a federal
anti-fraud and abuse account for enforcement efforts, funded
through collection of penalties and fines for violations of the
healthcare anti-fraud and abuse laws. Moreover, over the last
several years, the clinical laboratory industry has been the
focus of major governmental enforcement initiatives.
The Medicare and Medicaid anti-kickback laws prohibit
intentionally providing 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 if all conditions of the
safe harbor are met. Failure to fall within a safe harbor does
not constitute a violation of the anti-kickback laws; rather, the
arrangement would remain subject to scrutiny by HHS. Most states
have their own Medicaid anti-kickback laws, and several states
also have anti-kickback laws that apply to referral of all
patients.
In October 1994, the Office of the Inspector General
("OIG")of HHS 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
federal 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 pick-up 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.
Recently, the OIG has provided additional guidance regarding
arrangements that may violate the anti-kickback laws. In a 1999
Advisory Opinion, the OIG concluded that a proposed arrangement
whereby a laboratory would offer physicians significant discounts
on laboratory tests billed to the physician might violate the
anti-kickback act. The OIG reasoned that if the discounts were
greater than could otherwise be justified, the proposed
arrangement could be viewed as the laboratory providing discounts
to the physician in exchange for referral by the physician of non-
discounted Medicare program business. Similarly, in a 1999
correspondence, the OIG stated that if any direct or indirect
link exists between a price discount that a laboratory offers to
a skilled nursing facility ("SNF") for Prospective Payment System
("PPS")-covered services and referrals of Medicare Part B
business, the anti-kickback statute would be implicated.
Moreover, the OIG concluded that it is continuing to monitor the
situation regarding potentially unlawful contracts between SNFs
and service providers, including laboratories.
Under another federal provision, known as the "Stark" law or
"self-referral" prohibition, physicians who have an investment or
compensation relationship with a clinical laboratory may not,
unless a statutory exception applies, refer Medicare or Medicaid
patients for testing to the laboratory, regardless of the intent
of the parties. Similarly, laboratories may not bill Medicare or
Medicaid or any other party for services furnished pursuant to a
prohibited referral. There are federal Stark law exceptions for
fair market value compensation to a physician for reasonable and
necessary services, and for discounts to physicians purchasing
laboratory services. There is also an exception for physician
investment in a laboratory company so long as the company's stock
is traded on a public exchange, the company has stockholder
equity exceeding $75,000,000, and the physician's shares may be
purchased on terms generally available to the public. State self-
referral laws exist as well, which apply to all patient
referrals, not just Medicare and Medicaid.
There are a variety of other types of federal and state
anti-fraud and abuse laws, including laws prohibiting submission
of false or otherwise improper claims to federal healthcare
programs, and laws limiting the extent of any differences between
the Company's charges to Medicare and Medicaid and its charges to
other parties. The Company seeks to structure its business to
comply with the federal and state anti-fraud and abuse laws.
However, the Company is unable to predict how these laws will be
applied in the future, and no assurances can be given that its
arrangements will not be subject to scrutiny under them.
Sanctions for violations of these laws may include exclusion from
participation in Medicare, Medicaid and other federal healthcare
programs, significant criminal and civil fines and penalties, and
loss of licensure. Any exclusion from participation in a federal
healthcare program, or any loss of licensure, arising from any
action by any federal or state regulatory or enforcement
authority, would have a material adverse affect on the Company's
business. Any significant criminal or civil penalty resulting
from such proceedings could have a material adverse affect on the
Company's business.
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-compliance
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.
SUMMARY
The Company seeks to structure its business to comply 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, which if imposed could have a material
adverse affect on the Company's business.
COMPLIANCE PROGRAM
Because of evolving interpretations of regulations and the
national debate over health care fraud and abuse, 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, in part mandated
by a comprehensive five-year Corporate Integrity Agreement with
the federal government. This agreement was part of the Company's
1996 settlement of federal and state claims related to billings
to Medicare and other federal programs for tests performed by the
Company and its predecessors. The agreement is similar to
corporate integrity agreements arising out of settlements of
similar claims by a number of other clinical laboratories
following a broad-based government investigation and enforcement
initiative. The objective of the Company's compliance program is
to develop, implement, and update as necessary compliance
safeguards. Emphasis is placed on developing personnel training
programs and various monitoring procedures to attempt to achieve
implementation of all rules and regulations.
The Company seeks to structure its business to comply 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, which
could have a material adverse affect on the Company's business.
ITEM 2. PROPERTIES
The following table summarizes certain information as to the
Company's principal operating and administrative facilities as of
December 31, 1999.
Approximate
Area Nature of
Location (in square feet) Occupancy
- --------------------- ---------------- ---------------
Operating Facilities:
Birmingham, Alabama 100,000 Lease expires 2005
Phoenix, Arizona 55,000 Lease expires 2009;
two 5 year renewal
options
San Diego, California 72,000 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 45,000 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;
one 10 year renewal
option
Kansas City, Missouri 78,000 Owned
Reno, Nevada 16,000 Owned
14,000 Lease expires 2003;
one 2 year renewal
option
Raritan, New Jersey 187,000 Owned
Uniondale, New York 108,000 Lease expires 2007;
two 5 year renewal
options
Burlington, North Carolina 275,000 Owned
Charlotte, North Carolina 25,000 Lease expires 2000;
one 1 year renewal
option
Research Triangle Park, 71,000 Lease expires 2008,three
North Carolina 5 year renewal options
111,000 Lease expires 2011;
three 5 year renewal
options
Memphis, Tennessee 45,000 Month to month
Dublin, Ohio 82,000 Owned
Southaven, Mississippi 17,000 Owned
5 year renewal option
Dallas, Texas 56,000 Lease expires 2004; one
5 year renewal option
Houston, Texas 70,000 Lease expires 2012; two
5 year renewal options
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
Approximate
Area Nature of
Location (in square feet) Occupancy
- ---------------------------- ---------------- ------------------
Operating Facilities cont.:
Chesapeake, Virginia 21,000 Lease expires 2002;three
5 year renewal options
Herndon, Virginia 80,000 Lease expires 2004; one
5 year renewal option
Richmond, Virginia 57,000 Lease expires 2001; one
5 year renewal option
Kent, Washington 42,000 Lease expires 2005
Fairmont, West Virginia 25,000 Lease expires 2005;three
5 year renewal options
Administrative facilities:
Burlington, North Carolina 293,000 Owned
229,000 Leases expire 2000-
2008; various options
to purchase or renew
All of the major laboratory facilities have been built or
improved for the single purpose of providing clinical laboratory
testing services. The Company believes that these facilities are
suitable and adequate and have sufficient production capacity for
its currently foreseeable level of operations. The Company
believes that if it were to lose the lease on any of the
facilities it presently leases, it could find alternate space at
competitive market rates and readily relocate its operations to
such new locations without material disruption to its operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation one of which purports
to be a 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 and individuals, 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 at this time and, with the
exception of the above, no 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 various claims and legal
actions arising in the ordinary course of business. These
matters include, but are not limited to, professional liability,
employee related matters, inquiries from governmental agencies
and Medicare or Medicaid carriers requesting comment on
allegations of billing 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 will not have a material adverse
effect on the financial position, results of operations or
liquidity of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
On May 1, 1995, the Common Stock commenced trading on the
New York Stock Exchange ("NYSE") under the symbol "LH". Prior to
such date and since April 24, 1991, the Common Stock traded on
the NYSE under the symbol "NH." Prior to April 24, 1991, the
Common Stock was quoted on the NASDAQ National Market under the
symbol "NHLI".
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, and the cash dividends
declared per share of Common Stock.
High Low
------ -------
1998
First Quarter 2 3/16 1 9/16
Second Quarter 2 3/4 1 13/16
Third Quarter 2 7/16 1 1/8
Fourth Quarter 1 7/8 1 3/16
High Low
------ -------
1999
First Quarter 2 5/16 1 1/4
Second Quarter 2 15/16 1 11/16
Third Quarter 3 1/4 2 1/4
Fourth Quarter 3 7/8 2 7/16
High Low
------ -------
2000
First Quarter (through February 29, 2000) 4 1/4 3 1/8
On February 29, 2000 there were 1,015 holders of record of
the Common Stock.
In 1994, the Company discontinued its dividend payments for
the foreseeable future in order to increase its flexibility with
respect to its acquisition strategy. In addition, the Company's
credit agreement, as amended, places certain restrictions, as
defined in the credit agreement, on the payment of dividends.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the
captions "Statement of Operations Data" and "Balance Sheet Data"
as of and for the three-year period ended December 31, 1999 are
derived from consolidated financial statements of the Company,
which have been audited by PricewaterhouseCoopers LLP,
independent accountants. The selected financial data presented
below under the captions "Statement of Operations Data" and
"Balance Sheet Data" as of and for each of the years in the two-
year period ended December 31, 1996 are derived from consolidated
financial statements of the Company, which have been audited by
other independent accountants. This data should be read in
conjunction with the accompanying notes, the Company's
consolidated financial statements and the related notes thereto,
and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," all included elsewhere herein.
Year Ended December 31,
------------------------------------------------
1999 1998 1997
---------------- ------------ -------------
(Dollars in millions, except per share amounts)
Statement of Operations Data:
Net sales $ 1,698.7 $ 1,612.6 $ 1,579.9
Gross profit 629.1 563.4 499.4
Operating income (loss) 149.7 127.6 (92.0)(g)
Earnings (loss) before
extraordinary loss 65.4 68.8 (106.9)
Extraordinary loss -- -- --
--------- --------- ---------
Net earnings (loss) $ 65.4 $ 68.8 $ (106.9)
========= ========= =========
Earnings (loss)per common share
before extraordinary loss $ 0.12 $ 0.20 $ (1.06)
Extraordinary loss per common
share -- -- --
---------- ---------- ----------
Net earnings (loss) per common
share $ 0.12 $ 0.20 $ (1.06)
========== ========== ==========
Dividends per common share $ -- $ -- $ --
Weighted average common shares
outstanding (in thousands) 126,662 124,847 123,241
Ratio of earnings to combined
fixed charges and preferred
stock dividends (h) 1.22 1.11 NA
Balance Sheet Data:
Cash and cash equivalents $ 40.3 $ 22.7 $ 23.3
Intangible assets, net 803.9 836.2 851.3
Total assets 1,590.2 1,640.9 1,658.5
Long-term obligations and
redeemable preferred stock (e) 1,041.5 1,136.1 1,200.1
Due to affiliates (f) 3.5 1.7 2.2
Total shareholders' equity 175.5 154.4 129.1
Year Ended December 31,
-----------------------------------------------
1996 1995 (a)
-------------------- ---------------------
(Dollars in millions, except per share amounts)
Statement of Operations Data:
Net sales $ 1,676.2 $ 1,513.5
Gross profit 492.3 489.2
Operating income (loss) (118.8)(b) 67.2(c)
Earnings (loss) before
extraordinary loss (153.5) (4.0)
Extraordinary loss -- (8.3)(d)
--------- ---------
Net earnings (loss) $ (153.5) $ (12.3)
========= =========
Earnings (loss)per common share
before extraordinary loss $ (1.25) $ (0.03)
Extraordinary loss per common
share -- (0.08)
---------- ----------
Net earnings (loss) per common
share $ (1.25) $ (0.11)
========== ==========
Dividends per common share $ -- $ --
Weighted average common shares
outstanding (in thousands) 122,920 110,579
Ratio of earnings to combined
fixed charges and preferred
stock dividends (h) NA 1.04
Balance Sheet Data:
Cash and cash equivalents $ 29.3 $ 16.4
Intangible assets, net 891.1 916.7
Total assets 1,917.0 1,837.2
Long-term obligations and
redeemable preferred stock (e) 1,089.4 948.6
Due to affiliates (f) 190.5 0.9
Total shareholders' equity 258.1 411.6
(a) In April 1995, the Company completed a merger with Roche
Biomedical Laboratories, Inc. ("RBL"), an indirect subsidiary of
Roche Holdings, Inc. ("Roche"), pursuant to an Agreement and Plan
of Merger dated as of December 13, 1994 (the "Merger"). RBL's
results of operations have been included in the Company's results
of operations since April 28, 1995. In connection with the
Merger, the Company changed its name from National Health
Laboratories Holdings Inc. ("NHL") to Laboratory Corporation of
America Holdings.
(b) In the second quarter of 1996, the Company recorded certain
pre-tax 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. As a result of
negotiations with the Office of the Inspector General of the
Department of Health and Human Services and the Department of
Justice related to the 1996 government settlement, the Company
recorded a 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.
(c) 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 pre-tax restructuring
charges of $65.0 million in connection with these plans. See
Note 2 of the Notes to Consolidated Financial Statements which
sets forth the Company's restructuring activities for the years
ended December 31, 1999, 1998 and 1997. 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 were
billing disputes with various third party payors relating to the
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. As of December 31, 1999, the majority of these
disputes have been settled.
(d) In connection with the repayment in 1995 of existing
revolving credit and term loan facilities in connection with the
Merger, 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.
(e) Long term obligations include capital lease obligations of
$4.4 million, $4.2 million, $5.8 million, $9.8 million and $9.6
million at December 31, 1999, 1998, 1997, 1996 and 1995,
respectively. Long-term obligations also include the long-term
portion of the expected value of future contractual amounts to be
paid to the former 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 December 31, 1999, 1998, 1997,
1996 and 1995, such amounts were $0.0 million, $7.7 million, $9.6
million, $14.8 million and $14.7 million, respectively. Long
term obligations exclude amounts due to affiliates.
(f) In December 1996, Roche loaned $187.0 million to the Company
to fund the 1996 government settlement in the form of a
promissory note. Such note bore interest at a rate of 6.625% per
annum and was repaid in June, 1997 with proceeds from the
Preferred Stock Offering. See Note 9 of the Notes to
Consolidated Financial Statements. The remaining amounts shown
represent trade payables to affiliated companies.
(g) During the fourth quarter of 1997 the Company recorded a
provision for doubtful accounts of $182.0 million, which was
approximately $160.0 million greater than the amount recorded in
the fourth quarter of 1996 and a $22.7 million provision for
restructuring certain laboratory operations.
(h) 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 years ended December 31, 1997 and 1996,
earnings were insufficient to cover fixed charges and preferred
stock dividends by $196.8 million and $188.3 million,
respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
During 1999, the Company experienced growth as a result of
continued implementation of its strategic plan, rather than
through acquisitions. The Company continues to emphasize
customer satisfaction and expanding those laboratory services
which offer the greatest benefit to patients, clinicians, and the
Company. The areas of particular growth emphasis are higher
margin esoteric testing, genetic testing, oncology testing and
infectious disease testing.
Approximately $300 million in annual revenue comes from
specialty testing generated through the Company's Center for
Esoteric Testing in Burlington, and the Center for Molecular
Biology and Pathology ("CMBP"), in Research Triangle Park.
Annual revenue for the Center for Esoteric Testing is around $180
million annually, and growing at about 6-7% per year. The annual
revenue for CMBP is approximately $100 million, with a number of
test categories growing at an annual rate of about 15-20%.
Medically advanced infectious disease testing represented
approximately $57 million in revenues in 1999. The Company
expects medically advance infectious disease volume growth in the
near term of 30-40% annually. This volume growth is anticipated
to come primarily from HIV and hepatitus C testing. HIV
resistance testing has recently received strong support from the
FDA's Antiretroviral Advisory Committee for use in drug
development. Resistance testing has also received strong support
by the Department of Health and Human Services' Panel on Clinical
Practices for treatment of HIV infection for use in clinical
practice. The Company is currently the only laboratory with a
historical database of multiple viral load and resistance tests
on the same patient - information that has high value in the
management of HIV.
Genetic testing is primarily performed at CMBP, and
represented approximately $33 million in CMBP revenue at the end
of 1999. The Company expects volume growth over the next several
years to be about 10% annually. Demand for molecular genetic
tests has doubled over the past year.
Company-wide, oncology testing, including pathology, tumor
markers and molecular oncology, represented in excess of $200
million in revenue in 1999. Oncology testing has high growth
potential, with increased demand for oncology testing anticipated
once more therapies and tests for cancer are available. The
Company will continue to add new, higher-margin tests, such as
those for cervical cancer like monolayer PAP and HPV testing.
The Company's national presence, the volume of testing performed
and its expertise as a technology leader permits it to be one of
the first labs in the country to offer new tests, helping to
quickly increase awareness of new diagnostic tools.
Overall, the Company expects its current performance trends
to continue into 2000. Consolidated revenues are forecast to
increase by 4% to 5%, with operating expenses increasing between
2% to 3%. The effective income tax rate is forecasted to be
approximately 46% for 2000.
The Company plans to continue increasing "connectivity" with
customers through test ordering and result receiving products
such as the LabCorp Communication Manager software, and through
external alliances, such as the recently announced agreements
with Healtheon/WebMD, AHT Corporation, and ProxyMed, all e-
commerce health care companies. Recent strategic alliances with
Kingston and Benedictine Hospitals in New York state, McAllen
Medical center Hospital and Edinburg regional Medical Center in
Texas, and more than 170 statewide sites of the Florida Health
Department and county clinics, are benefiting from the Company's
state-of-the-art information network that provide clients access
to emergin technology sooner.
During the year, the clinical trials testing business of the
Company opened a full-service laboratory in Belgium, in order to
service the global pharmaceutical industry.
The Company's industry continues to be affected by
significant government regulation, price competition and
increased influence of managed care organizations. 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 has presented various challenges to the Company and
other independent clinical laboratories such as increased
discounts and the use of capitated payment contracts. These
practices have negatively impacted the Company's operating
margins. 50% of the U.S. population and 85% of employees are
members of managed care plans. However, recent trends indicate
that membership in restrictive HMO plans has peaked, with
enrollment expected to shift into plans offering more
patient/provider choice, such as preferred provider organizations
and point of service models. As a result, the Company is
experiencing better pricing and improved margins on its managed
care business. During 1999, the Company's revenue from capitated
payment contracts decreased by $5.7 million, to $84.3 million,
while total revenue from all managed care contracts increased by
$78.3 million, to a total of $584.0 million.
IMPACT OF THE YEAR 2000 ISSUE
The Company successfully completed its Year 2000 project in
regards to year end items. It has experienced only a few minor
isolated Year 2000 related issues. Each issue has been quickly
remediated, tested and validated. The Company continues to test
and validate for any lagging Year 2000 issues.
The total expenditures to complete the Year 2000 work plan
were $17.3 million, with approximately $3.0 million charged to
earnings during the year ended 1998 and $7.6 million charged to
earnings and an additional $6.7 million in related purchases
capitalized during the twelve months ended December 31, 1999.
The amounts required to address Year 2000 readiness do not
include significant investments in new systems which have been
made in the normal course of business and are Year 2000
compliant.
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
quarters 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.
The Company experienced positive growth in both its net
revenues and operating cash flows during the third and fourth
quarters of 1999 in comparison to the prior year. However, there
can be no assurances that this trend will extend into the future.
RESULTS OF OPERATIONS
Year ended December 31, 1999 compared with Year ended December
31, 1998.
Net sales for 1999 were $1,698.7 million, an increase of
5.3% from $1,612.6 million reported in the comparable 1998
period. Sales increased 3.1% due to an increase in price per
accession (which reflects actual price increases and changes in
the mix of tests performed) and 2.2% due to an increase in
volume. These increases occurred as a result of specific
initiatives in the Company's strategic plan that have created an
improved business climate.
Cost of sales, which includes primarily laboratory and
distribution costs, was $1,069.6 million for 1999 compared to
$1,049.2 million in the corresponding 1998 period, an increase of
1.9%. Cost of sales increased approximately $23.0 million due to
an increase in volume, approximately $2.0 million due to an
increase in medical consulting fees and approximately $5.6
million due to an increase in testing supplies. These increases
were offset by a decrease in salaries of $2.5 million due to
streamlining of operations, and decreases in insurance ($2.6
million), telephone ($3.8 million) and freight ($1.3 million)
expenses as a result of continued cost control measures. Cost of
sales as a percentage of net sales was 63.0% for 1999 and 65.1%
in the corresponding 1998 period. The decrease in the cost of
sales percentage of net sales primarily resulted from the cost
reduction efforts mentioned above and economies of scale achieved
through volume growth.
Selling, general and administrative expenses increased to
$448.2 million in 1999 from $405.0 million in the same period in
1998 representing an increase of $43.2 million or 10.7%.
Selling, general and administrative expenses were 26.4% and 25.1%
as a percentage of net sales in 1999 and 1998, respectively. The
increase in selling, general and administrative expenses is
primarily the result of the increase in the provision for
doubtful accounts of $27.2 million from the amount recorded in
1998 and increases of approximately $14.2 in sales incentives and
commissions.
Interest expense was $41.6 million in 1999 compared to $48.7
million in 1998. This decrease is related to the Company's
overall reduction in its outstanding debt. See "Liquidity and
Capital Resources."
Provision for income taxes was $40.1 million in 1999
compared to $12.7 million in 1998. See "Note 10 to Consolidated
Financial Statements" for a further discussion of income taxes.
Year ended December 31, 1998 compared with Year ended December
31, 1997.
Net sales for 1998 were $1,612.6 million, an increase of
approximately 2.1% from $1,579.9 million reported in the
comparable 1997 period. Sales increased 3.2% due to an increase
in price per accession (which reflects actual price increases and
changes in the mix of tests performed), which was a direct result
of the Company's effort to negotiate better pricing on new
contracts, raising prices on existing contracts that do not meet
Company profitability targets and other pricing initiatives.
This increase was offset by a 1.2% decline in sales as a result
of lower testing volume, resulting from industry-wide trends as
well as the Company's program of selectively eliminating
unprofitable accounts and carefully evaluating the acceptability
of new business.
Cost of sales, which includes primarily laboratory and
distribution costs, was $1,049.2 million for 1998 compared to
$1,080.5 million in the corresponding 1997 period, a decrease of
2.9%. Cost of sales decreased approximately $22.4 million due to
a decrease in testing supplies, approximately $12.9 million due
to the decrease in volume, and approximately $4.6 million due to
a decrease in consulting fees. These decreases were partially
offset by an increase in salaries due to scheduled salary
increases as well as the Michigan and Delaware acquisitions. The
reduction in testing supplies is the result of ongoing efforts by
the Company to consolidate suppliers and inventory item usage.
There can be no assurance that the Company can achieve this level
of reduction in the future. Cost of sales as a percentage of net
sales was 65.1% for 1998 and 68.4% in the corresponding 1997
period. The decrease in the cost of sales percentage of net sales
primarily resulted from the cost reduction efforts mentioned
above.
Selling, general and administrative expenses decreased to
$405.0 million in 1998 from $538.1 million in the same period in
1997 representing a decrease of $133.1 million or 24.7%.
Selling, general and administrative expenses were 25.1% and 34.1%
as a percentage of net sales in 1998 and 1997, respectively. The
decrease in selling, general and administrative expenses is
primarily the result of the decrease in the provision for
doubtful accounts of $146.8 million from the amount recorded in
1997. This decrease was partially offset by increases in 1998 in
personnel expenses ($13.0 million), bad debt expense ($11.3
million) and telephone ($2.0 million).
Net interest expense was $48.7 million in 1998 compared to
$71.7 million in 1997.
Provision for income taxes was an expense of $12.7 million
in 1998 compared to a tax benefit of $54.4 million in 1997. See
"Note 10 to Consolidated Financial Statements" for a further
discussion of income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $180.5
million, $125.1 million and $144.4 million, in 1999, 1998 and
1997, respectively. The increase in cash flow from operations in
1999 primarily resulted from decreases in accounts receivable.
Capital expenditures were $69.4 million, $58.7 million and
$34.5 million for 1999, 1998 and 1997, respectively. The Company
expects capital expenditures to be between $65.0 million and
$75.0 million in 2000. These expenditures are intended to
continue to improve billing systems and further automate
laboratory processes. Such expenditures are expected to be
funded by cash flow from operations as well as borrowings under
the Company's credit facilities.
The Company's days sales outstanding (DSO) at the end of
1999 improved to 74 days as compared to 83 days at the end of
1998. During the fourth quarter of 1999, the Company decreased
its bad debt expense in response to a fourth quarter improvement
in cash collection rates. This improvement was due to Company
wide efforts to increase cash collections from all payors, as
well as on-going improvements to claim submission processes. In
addition, the Company is continuing to take the steps necessary
to improve DSO and cash collections by:
1. Accelerating the conversion of decentralized billing
locations to a centralized billing system. During 1999, the Long
Island, northern Virginia and Michigan locations were converted.
2. Assigning focused, cross functional billing operations teams
to implement best practices throughout the Company, with
particular emphasis on geographic areas with higher DSO's, and
identifying underlying causes for and solutions to payment
delays.
With the completion of the conversion of the Long Island,
northern Virginia and Michigan facilities, approximately 60% of
the Company's billings are performed on the Company's centralized
system. By the end of the year 2000, Management anticipates that
approximately 85% of billings will be performed on that system
with the remainder converted during 2001. The billing system
conversions, combined with improvements in front-end processes,
that enhance data capture for billing, are expected to reduce DSO
to approximately 69 days by the end of 2000 and the mid 60s by
the end of 2001.
The Company expects that these conversions will lower DSO
and have a positive impact on the timing of cash collections.
The positive effects of these conversions will most likely be
realized some time after the completion of the conversions.
There can be no assurance that the planned billing conversions
will improve the Company's DSO and cash collections.
During 1999, the Company repaid approximately $70.3 million
on its term loan facility. There were no outstanding balances
due on its revolving credit facility at the end of 1999 and 1998.
Based on current and projected levels of operations, coupled
with availability under its revolving credit facility, the
Company believes it has sufficient liquidity to meet both its
short-term and long-term cash needs. For a discussion of the
Company's long-term debt and revolving credit facility, see "Note
8 to Consolidated Financial 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
evidences Congress' determination that the disclosure of forward-
looking information is desirable for investors and encourages
such disclosure by providing a safe harbor for forward-looking
statements by corporate management. This Annual Report,
including the Letter to Our Shareholders and the Management's
Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements that involve risk
and uncertainty. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause
the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in
the Company's forward-looking statements.
The risks and uncertainties that may affect the operations,
performance, development, growth projections and results of the
Company's business include, but are not limited to, the growth of
the economy, interest rate movements, timely development by the
Company of technology enhancements of its operating systems, the
impact of competitive services and pricing, customer business
requirements, Congressional legislation and similar matters.
Readers of this report are cautioned not to place undue reliance
on forward-looking statements which are subject to influence by
the named risk factors and unanticipated future events. Actual
results, accordingly, may differ materially from management
expectations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
The Company has no material information to disclose.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index on Page F-1 of the
Financial Report included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
PART III
The information required by Part III, Items 10 through 13,
of Form 10-K is incorporated by reference from the registrant's
definitive proxy statement for its 2000 annual meeting of
stockholders, which is to be filed pursuant to Regulation 14A not
later than April 30, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) List of documents filed as part of this Report:
(1) Consolidated Financial Statements and Independent
Auditors' Reports included herein:
See Index on page F-1
(2) Financial Statement Schedules:
See Index on page F-1
All other schedules are omitted as they are inapplicable or
the required information is furnished in the Consolidated
Financial Statements or notes thereto.
(3) Index to and List of Exhibits
(a) Exhibits:*
Exhibits 10.1 through 10.3 and 10.6 through 10.13 are
management contracts or compensatory plans or arrangements.
2.1 - Agreement and Plan of Merger among the Company, NHL Sub
Acquisition Corp. and NHLI (incorporated herein by reference
to the Company's Registration Statement on Form S-4 filed with
the Securities and Exchange Commission (the "Commission") on
March 14, 1994, File No. 33-52655 (the "1994 S-4")).
2.2 - Agreement and Plan of Merger dated as of May 3, 1994 of NHLI
and N Acquisition Corp. (incorporated herein by reference to
Exhibit (c)(1) of Schedule 14D-1 and Schedule 13D ("Schedule
14D-1 and Schedule 13D") filed with the Commission on May 9,
1994).
2.3 - Agreement dated as of June 7, 1994, among N Acquisition Corp.,
the Company and NHLI (incorporated herein by reference to
Exhibit (c)(7) of amendment No. 2 to Schedule 14D-1 and
Schedule 13D of NHLI and N Acquisition Corp filed with
the Commission on June 8, 1994).
2.4 - Agreement and Plan of Merger dated as of December 13, 1994
among the Company, HLR Holdings Inc., Roche Biomedical
Laboratories, Inc. and (for the purposes stated therein)
Hoffmann-La Roche Inc. (incorporated herein by reference to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1994 filed with the Commission on March 3,
1995, File No. 1-11353 (the "1994 10-K")).
2.5 - Stock Purchase Agreement dated December 30, 1994 between
Reference Pathology Holding Company, Inc. and Allied Clinical
Laboratories, Inc. ("Allied") (incorporated herein by
reference to the 1994 10-K).
3.1 - Certificate of Incorporation of the Company (amended pursuant
to a Certificate of Merger filed on April 28, 1995)
(incorporated by reference herein to the report on Form 8-K
dated April 28, 1995, filed with the Commission on May 12,
1995, File No. 1-11353 (the "April 28, 1995 Form 8-K")).
3.2 - Amended and Restated By-Laws of the Company (incorporated
herein by reference to the April 28, 1995 Form 8-K).
4.1 - Warrant Agreement dated as of April 10, 1995 between the
Company and American Stock Transfer & Trust Company
(incorporated herein by reference to the April 28, 1995 Form
8-K).
4.2 - Specimen of the Company's Warrant Certificate (included in the
Exhibit to the Warrant Agreement included therein as Exhibit
4.1 hereto) (incorporated herein by reference to the April 28,
1995 Form 8-K).
4.3 - Specimen of the Company's Common Stock Certificate
(incorporated herein by reference to the April 28, 1995 Form
8-K).
10.1 - National Health Laboratories Incorporated Employees' Savings
and Investment Plan (incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991 filed with the Commission on February 13,
1992, File No. 1-10740** (the "1991 10-K")).
10.2 - National Health Laboratories Incorporated Employees'
Retirement Plan (incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1992 filed with the Commission on March 26,
1993, File No. 1-10740 (the "1992 10-K")).
10.3 - National Health Laboratories Incorporated Pension Equalization
Plan (incorporated herein by reference to the 1992 10-K).
10.4 - Settlement Agreement dated December 18, 1992 between the
Company and the United States of America (incorporated herein
by reference to the 1992 10-K).
10.5 - Settlement Agreement dated November 21, 1996 between the
Company and the United States of America.
10.6 - National Health Laboratories 1988 Stock Option Plan, as
amended (incorporated herein by reference to the Company's
Registration Statement on Form S-1 (No. 33- 35782) filed with
the Commission on July 9, 1990 (the "1990 S-1")).
10.7 - National Health Laboratories 1994 Stock Option Plan
(incorporated herein by reference to the Company's
Registration Statement on Form S-8 filed with the
Commission on August 12, 1994, File No. 33-55065).
10.8 - Laboratory Corporation of America Holdings Performance Unit
Plan (incorporated by reference to Annex II of the Company's
1995 Annual Proxy Statement filed with the Commission on
August 17, 1995 (the "1995 Proxy")).
10.9 - Laboratory Corporation of America Holdings Annual Bonus
Incentive Plan (incorporated by reference to Annex III of the
1995 Proxy).
10.10 - Laboratory Corporation of America Holdings Master Senior
Executive Severance Plan (incorporated herein by reference to
the report on Form 8-K dated October 24, 1996 (the "October
24, 1996 8-K") filed with the Commission on October 24, 1996,
File No. 1-11353).
10.11 - Special Severance Agreement dated June 28, 1996 between the
Company and Timothy J. Brodnik (incorporated herein by
reference to the October 24, 1996 8-K).
10.12 - Special Severance Agreement dated July 12, 1996 between the
Company and John F. Markus (incorporated herein by reference
to the October 24, 1996 8-K).
10.13 - Special Severance Agreement dated June 28, 1996 between the
Company and Robert E. Whalen (incorporated herein by reference
to the October 24, 1996 8-K).
10.14 - Tax Allocation Agreement dated as of June 26, 1990 between
MacAndrews & Forbes Holding Inc., Revlon Group Incorporated,
New Revlon Holdings, Inc. and the subsidiaries of Revlon set
forth on Schedule A thereto (incorporated herein by reference
to the 1990 S-1).
10.15 - Loan Agreement dated August 1, 1991 among the Company,
Frequency Property Corp. and Swiss Bank Corporation, New York
Branch (incorporated herein by reference to the 1991 10-K).
10.16 - Sharing and Call Option Agreement dated as of December 13,
1994 among HLR Holdings Inc., Roche Biomedical Laboratories,
Inc., Mafco Holdings Inc., National Health Care Group, Inc.
and (for the purposes stated therein) the Company
(incorporated by reference herein to the 1994 10-K).
10.17 - Stockholder Agreement dated as of April 28, 1995 among the
Company, HLR Holdings Inc., Hoffmann-La Roche Inc. and Roche
Holdings, Inc. (incorporated herein by reference to the April
28, 1995 Form 8-K).
10.18 - Exchange Agent Agreement dated as of April 28, 1995 between
the Company and American Stock Transfer & Trust Company
(incorporated herein by reference to the April 28, 1995 Form
8-K).
10.19 - Credit Agreement dated as of April 28, 1995, among the
Company, the banks named therein, and Credit Suisse (New York
Branch), as Administrative Agent (incorporated herein by
reference to the April 28, 1995 Form 8-K).
10.20 - First Amendment to Credit Agreement dated as of September 8,
1995 among the Company, the banks named therein, and Credit
Suisse (New York Branch), as Administrative Agent.
(incorporated by reference herein to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995
filed with the Commission on November 14, 1995, File No. 1-
11353).
10.21 - Second Amendment to Credit Agreement dated as of February
16, 1996 among the Company, the banks named therein,
and Credit Suisse (New York Branch), as Administrative
Agent (incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended December 31,
1995 filed with the Commission on March 29, 1996, File No.
1-11353).
10.22 - Third Amendment and Second Waiver to Credit Agreement
dated as of July 10, 1996 among the Company, the banks named
therein and Credit Suisse (New York Branch) as
Administrative Agent (incorporated herein by reference
to the Company's quarterly report on Form 10-Q for the
quarter ended June 30, 1996 filed with the Commission on
August 14, 1996, File No. 1-11353).
10.23 - Fourth Amendment to the Credit Agreement dated as of September
23, 1996 among the Company, the banks named therein and Credit
Suisse (New York Branch), as Administrative Agent
(incorporated herein by reference to the report in Form 8-K
dated September 23, 1996, filed with the Commission on
September 30, 1996, File No. 1-11353).
10.24 - Third Waiver to the Credit Agreement dated as of November 4,
1996 among the Company, the banks named therein and Credit
Suisse (New York Branch), as Administrative Agent
(incorporated herein by reference to the Company's quarterly
report on Form 10-Q for the quarter ended September 30, 1996
filed with the Commission on November 14, 1996, File No.
1-11353).
10.25 - Fifth Amendment and Fourth Waiver to the Credit Agreement
dated as of December 23, 1996 among the Company, the banks
named therein and Credit Suisse (New York Branch), as
Administrative Agent (incorporated herein by reference to
the report on Form 8-K filed with the Commission on January 6,
1997, File No. 1-11353(the "January 6, 1997 8-K")).
10.26 - Fifth Waiver to the Credit Agreement dated as of January 27,
1997 among the Company, the banks named therein and Credit
Suisse (New York Branch) as Administrative Agent.
10.27 - Sixth Amendment and Waiver to the Credit Agreement dated as of
March 31, 1997 among the Company, the banks named therein and
Credit Suisse First Boston as Administrative Agent.
10.28 - Amended and Restated Credit Agreement dated as of March 31,
1997 among the Company, the banks named therein and Credit
Suisse First Boston as Administrative Agent.
10.29 - Second Amendment to the Amended and Restated Credit
Agreement dated as of February 25, 1998 among the Company, the
banks named therein and Credit Suisse First Boston as
Administrative Agent.
10.30 - Third Amendment to the Amended and Restated Credit Agreement
dated as of May 7, 1999 among the Company, the banks named
therein and Credit Suisse First Boston as Administrative Agent
(incorporated herein by reference to the Company's quarterly
report on Form 10-Q for the quarter ended June 30, 1999 filed
with the Commission on August 16, 1999, File No. 1-11353).
10.31 - Laboratory Corporation of America Holdings 1995 Stock Plan for
Non-Employee Directors (incorporated by reference herein to
the report of Form S-8 dated September 26, 1995, filed with
the Commission on September 26, 1995).
10.32 - Laboratory Corporation of America Holdings 1997 Employee Stock
Purchase Plan (incorporated by reference herein to Annex I of
the Company's 1996 Annual Proxy Statement filed with the
Commission on October 25, 1996.
10.33 - Amendments to the Laboratory Corporation of America Holdings
1997 Employee Stock Purchase Plan (incorporated by reference
herein to Annex II of the Company's 1999 Annual Proxy
Statement filed with the Commission on June 16, 1999).
10.34 - Laboratory Corporation of America Holdings Amended and
Restated 1999 Stock Incentive Plan (incorporated by reference
herein to Annex I of the Company's 1999 Annual Proxy Statement
filed with the Commission of June 16, 1999).
10.35 - Promissory note dated December 30, 1996 between the Company
and Roche Holdings Inc. (incorporated herein by reference
to the January 6, 1997 8-K).
10.36 - First Amendment to promissory note given by the Company to
Roche Holdings Inc.
10.37 - Support Agreement between Roche Biomedical Laboratories, Inc.
and Hoffmann-La Roche Inc., dated as of April 27, 1995.
10.38 - First Amendment to Support Agreement between Roche Biomedical
Laboratories, Inc. and Hoffmann-La Roche Inc., dated as of
July 26, 1995.
10.39 - Second Amendment to Support Agreement between Laboratory
Corporation of America Holdings, Hoffmann-La Roche Inc., Roche
Molecular Systems, Inc. and Roche Diagnostic Systems, Inc.,
dated as of January 1, 1997.
10.40 - Third Amendment to Support Agreement between Laboratory
Corporation of America Holdings, Hoffmann-La Roche Inc., Roche
Molecular Systems, Inc. and Roche Diagnostic Systems, Inc.,
dated as of October 1, 1997.
10.41 - Consulting Agreement between Laboratory Corporation of America
Holdings and its subsidiaries and affiliates and Larry L.
Leonard, dated as of September 1, 1998.
12.1* - Statement regarding Computation of Ratio of Earnings to
Combined Fixed Charges and Preferred Stock Dividends.
21* - List of Subsidiaries of the Company
23.1* - Consent of PricewaterhouseCoopers LLP
24.1* - Power of Attorney of Jean-Luc Belingard
24.2* - Power of Attorney of Wendy E. Lane
24.3* - Power of Attorney of Robert E. Mittelstaedt, Jr.
24.4* - Power of Attorney of James B. Powell, M.D.
24.5* - Power of Attorney of David B. Skinner
24.6* - Power of Attorney of Andrew G. Wallace, M.D.
27 - Financial Data Schedule
(electronically filed version only).
(b) Reports on Form 8-K
(1) A current report on Form 8-K dated November 18,
1999 was filed on December 1, 1999, by the registrant
along with Healthworks Alliance, Inc., in connection
with the press release dated November 18, 1999
announcing that the Company would utilize Healthworks'
connectivity tools to electronically receive orders
from (and transmit results to) the Company's joint
venture hospital partners.
(2) A current report on Form 8-K dated November 22,
1999 was filed on December 1, 1999, by the registrant,
in connection with the press release dated November
22, 1999 announcing a contract to be the national
provider of laboratory services for CIGNA HealthCare's
traditional indemnity, preferred-provider organization
and HMO products in select markets. The Company also
announced that its Board of Directors declared
dividends on the Company's 8 1/2 percent Series A
Convertible Exchangeable Preferred Stock and the
Company's 8 1/2 percent Series B Convertible Pay-in-Kind
Preferred Stock.
(3) A current report on Form 8-K dated December 13,
1999 was filed on December 22, 1999, by the registrant,
in connection with the press release dated December 13,
1999 announcing that an agreement with Humana's
Employers Health Insurance Company (EHI) was finalized.
Under this agreement, the Company will service EHI's
1.4 million covered lives throughout the country and,
in the future, will be a cornerstone laboratory
services provider for Humana's ChoiceCare Network.
(4) A current report on Form 8-K dated December 16,
1999 was filed on December 22, 1999, by the registrant,
in connection with the press release dated December 16,
1999 announcing that it was awarded a contract by the
Commonwealth of Virginia Department of Mental Health,
Mental Retardation and Substance Abuse Services to
perform clinical laboratory testing services.
* Filed herewith.
** Previously filed under File No. 0-17031 which has been
corrected to File No. 1-10740.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company 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 of the Board, President
and Chief Executive Officer
Dated: March 15, 2000
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed by the following persons on
March 15, 2000 in the capacities indicated.
Signature Title
- --------------------------- -------------------------
/s/ THOMAS P. MAC MAHON
- -------------------------------- Chairman of the Board,
Thomas P. Mac Mahon President and Chief
Executive Officer
(Principal Executive Officer)
/s/WESLEY R. ELINGBURG
- -------------------------------- Executive Vice President,
Wesley R. Elingburg Chief Financial Officer
and Treasurer (Principal
Financial Officer and Principal
Accounting Officer)
/s/ JEAN-LUC BELINGARD*
- -------------------------------- Director
Jean-Luc Belingard
/s/ WENDY E. LANE*
- -------------------------------- Director
Wendy E. Lane
/s/ ROBERT E. MITTELSTAEDT, JR.*
- -------------------------------- Director
Robert E. Mittelstaedt, Jr.
/s/ JAMES B. POWELL, M.D.*
- -------------------------------- Director
James B. Powell, M.D.
/s/ DAVID B. SKINNER, M.D.*
- -------------------------------- Director
David B. Skinner, M.D.
/s/ ANDREW G. WALLACE, M.D.*
- -------------------------------- Director
Andrew G. Wallace, M.D.
* Bradford T. Smith, by his signing his name hereto, does hereby
sign this report on behalf of the directors of the Registrant
after whose typed names asterisks appear, pursuant to powers of
attorney duly executed by such directors and filed with the
Securities and Exchange Commission.
By:/s/ BRADFORD T. SMITH
_________________________________
Bradford T. Smith
Attorney-in-fact
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page
Report of Independent Accountants F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of
December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for
the three-year period ended December 31, 1999. F-4
Consolidated Statements of Changes in Shareholders'
Equity for the three-year period ended
December 31, 1999 F-5
Consolidated Statements of Cash Flows for the
three-year period ended December 31, 1999. F-6
Notes to Consolidated Financial Statements F-8
Financial Statement Schedule:
II - Valuation and Qualifying Accounts and Reserves F-29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Laboratory Corporation of America Holdings
In our opinion, the consolidated financial statements listed
in the accompanying index present fairly, in all material
respects, the financial position of Laboratory Corporation of
America Holdings and its subsidiaries (the Company) at December
31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles
generally accepted in the United States. In addition, in our
opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the
information set forth therein, when read in conjunction with the
related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility
of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States, which 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, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Charlotte, North Carolina
February 12, 2000
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share data)
December 31,
-------------------------
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 40.3 $ 22.7
Accounts receivable, net 348.0 375.4
Inventories 29.1 30.7
Prepaid expenses and other 37.5 12.3
Deferred income taxes 44.6 78.0
--------- --------
Total current assets 499.5 519.1
Property, plant and equipment, net 273.2 259.1
Intangible assets, net 803.9 836.2
Other assets, net 13.6 26.5
--------- ---------
$ 1,590.2 $ 1,640.9
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 43.6 $ 50.2
Accrued expenses and other 107.0 128.7
Current portion of long-term debt 95.0 72.5
--------- ---------
Total current liabilities 245.6 251.4
Revolving credit facility -- --
Long-term debt, less current portion 478.4 571.3
Capital lease obligations 4.4 4.2
Other liabilities 127.6 132.8
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 December 31, 1999
and 1998, (aggregate preference value
of $218.2 at December 31, 1999 and 1998) 213.4 213.0
Series B 8 1/2% Convertible Pay-in-Kind
Preferred Stock, $0.10 par value,
6,971,970 and 6,409,548 shares issued
and outstanding at December 31, 1999
and 1998, respectively (aggregate
preference value of $348.6 and $320.5
at December 31, 1999 and 1998, respectively) 345.3 313.8
Shareholders' equity:
Common stock, $0.01 par value; 520,000,000
shares authorized; 128,789,579 and
125,280,346 shares issued and outstanding
at December 31, 1999 and 1998, respectively 1.3 1.2
Additional paid-in capital 423.9 415.7
Accumulated deficit (245.5) (260.5)
Unearned restricted stock compensation (4.1) --
Accumulated other comprehensive loss (0.1) (2.0)
--------- ---------
Total shareholders' equity 175.5 154.4
--------- ---------
$ 1,590.2 $ 1,640.9
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
Net sales $ 1,698.7 $ 1,612.6 $ 1,579.9
Cost of sales 1,069.6 1,049.2 1,080.5
--------- --------- ---------
Gross profit 629.1 563.4 499.4
Selling, general and
administrative expenses 448.2 405.0 538.1
Amortization of intangibles
and other assets 31.2 30.8 30.6
Restructuring and non-recurring charges -- -- 22.7
--------- --------- ---------
Operating income (loss) 149.7 127.6 (92.0)
Other income (expenses):
Gain (loss) on sale of assets (1.7) 1.6 --
Net investment income (loss) (0.9) 1.0 2.4
Interest expense (41.6) (48.7) (71.7)
--------- --------- ---------
Earnings (loss) before income taxes 105.5 81.5 (161.3)
Provision for income taxes 40.1 12.7 (54.4)
--------- --------- ---------
Net earnings (loss) 65.4 68.8 (106.9)
Less preferred stock dividends (49.6) (43.6) (23.4)
Less accretion of mandatorily redeemable
preferred stock (0.8) (0.8) (0.5)
--------- --------- ---------
Net earnings (loss) attributable to
common shareholders $ 15.0 $ 24.4 $ (130.8)
========= ========= =========
Basic and diluted earnings (loss)
per common share: $ 0.12 $ 0.20 $ (1.06)
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Additional
Common Paid-in Accumulated
Stock Capital Deficit
-------- ----------- -----------
BALANCE AT JANUARY 1,1997 $ 1.2 $ 411.0 $ (154.1)
Comprehensive loss -- -- (106.9)
Issuance of common stock -- 1.8 --
Preferred stock dividends -- -- (23.4)
Accretion of mandatorily
redeemable preferred stock -- -- (0.5)
-------- --------- ---------
BALANCE AT DECEMBER 31, 1997 1.2 412.8 (284.9)
Comprehensive income:
Net income -- -- 68.8
Other comprehensive income:
Change in valuation allowance
on securities, net of tax -- -- --
-------- --------- ---------
Comprehensive income -- -- 68.8
Issuance of common stock -- 2.9 --
Preferred stock dividends -- -- (43.6)
Accretion of mandatorily
redeemable preferred stock -- -- (0.8)
-------- --------- ---------
BALANCE AT DECEMBER 31, 1998 1.2 415.7 (260.5)
Comprehensive income:
Net income -- -- 65.4
Other comprehensive income:
Foreign currency translation
adjustments -- -- --
Change in valuation allowance
on securities, net of tax -- -- --
-------- --------- ---------
Comprehensive income -- -- 65.4
Issuance of common stock 0.1 3.7 --
Issuance of restricted stock awards -- 4.5 --
Amortization of unearned
restricted stock compensation -- -- --
Preferred stock dividends -- -- (49.6)
Accretion of mandatorily
redeemable preferred stock -- -- (0.8)
-------- --------- ---------
BALANCE AT DECEMBER 31, 1999 $ 1.3 $ 423.9 $ (245.5)
======== ========= =========
Unearned Accumulated
Restricted Other Total
Stock Comprehensive Shareholders'
Compensation Income (loss) Equity
------------ ------------- ------------
BALANCE AT JANUARY 1, 1997 $ -- $ -- $ 258.1
Comprehensive loss -- -- (106.9)
Issuance of common stock -- -- 1.8
Preferred stock dividends -- -- (23.4)
Accretion of mandatorily
redeemable preferred stock -- -- (0.5)
-------- -------- ---------
BALANCE AT DECEMBER 31, 1997 -- -- 129.1
Comprehensive income:
Net income -- -- 68.8
Other Comprehensive income:
Change in valuation allowance
on securities, net of tax -- (2.0) (2.0)
-------- -------- ---------
Comprehensive income -- (2.0) 66.8
Issuance of common stock -- -- 2.9
Preferred stock dividends -- -- (43.6)
Accretion of mandatorily
redeemable preferred stock -- -- (0.8)
-------- -------- ----------
BALANCE AT DECEMBER 31, 1998 -- (2.0) 154.4
Comprehensive income:
Net income -- -- 65.4
Other comphrehensive income:
Foreign currency translation
adjustments -- (0.1) (0.1)
Change in valuation allowance
on securities, net of tax -- 2.0 2.0
-------- -------- ---------
Comprehensive income -- 1.9 67.3
Issuance of common stock -- -- 3.8
Issuance of restricted stock awards (4.5) -- --
Amortization of unearned
restricted stock compensation 0.4 -- 0.4
Preferred stock dividends -- -- (49.6)
Accretion of mandatorily
redeemable preferred stock -- -- (0.8)
-------- -------- ---------
BALANCE AT DECEMBER 31, 1999 $ (4.1) $ (0.1) $ 175.5
======== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
----------------------------
1999 1998 1997
------ ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 65.4 $ 68.8 $ (106.9)
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Net (gains) losses on disposals 1.7 (1.6) --
Depreciation and amortization 84.5 84.2 86.8
Deferred compensation 0.4 -- --
Investment loss 4.2 -- --
Deferred income taxes 37.0 30.6 (43.0)
Change in assets and liabilities,
Net change in restructuring reserves (6.2) (5.6) 5.6
Decrease(increase)in accounts
receivable, net 27.4 (46.6) 175.0
Decrease in inventories 1.6 5.2 8.3
Decrease(increase)in prepaid
expenses and other (24.6) 4.7 4.5
Change in income taxes
receivable 11.2 (2.4) 45.5
Decrease in accounts payable (6.2) (5.7) (9.9)
Decrease in accrued
expenses and other (15.4) (5.0) (20.4)
Other, net (0.5) (1.5) (1.1)
------- ------ ------
Net cash provided by operating
activities 180.5 125.1 144.4
------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (69.4) (58.7) (34.5)
Proceeds from sale of assets 1.1 12.6 1.6
Acquisitions of businesses -- (23.7) --
Deferred payments on acquisitions (8.7) (6.8) (5.2)
Refund of lease guaranty -- 8.0 --
------- ------ ------
Net cash used for investing
activities (77.0) (68.6) (38.1)
------- ------ ------
(continued)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit
facilities $ 40.0 $ 40.0 $ 35.0
Payments on revolving credit
facilities (40.0) (80.0) (366.0)
Payment on affiliate loan -- -- (187.0)
Payments on long-term debt (70.3) -- (68.7)
Payments on long-term lease
obligations (0.8) (1.5) --
Deferred financing fees -- -- (4.6)
Sale of redeemable preferred stock,
net of issuance costs -- -- 486.9
Payment of preferred stock dividends (18.5) (18.5) (9.7)
Net proceeds from issuance of stock
to employees 3.8 2.9 1.8
-------- ------- -------
Net cash used for financing activities (85.8) (57.1) (112.3)
-------- ------- -------
Effect of exchange rate changes on
cash and cash equivalents (0.1) -- --
Net increase (decrease) in cash
and cash equivalents 17.6 (0.6) (6.0)
Cash and cash equivalents at
beginning of year 22.7 23.3 29.3
-------- ------- -------
Cash and cash equivalents at
end of year $ 40.3 $ 22.7 $ 23.3
======== ======= =======
Supplemental schedule of cash
flow information:
Cash paid (received) during the
year for:
Interest $ 41.8 $ 47.5 $ 69.2
Income taxes, net of refunds 23.9 (12.2) (55.0)
Disclosure of non-cash financing
and investing activities:
Preferred stock dividends 31.1 25.1 13.7
Accretion of mandatorily
redeemable preferred stock 0.8 0.8 0.5
Acquisition liabilities assumed -- 1.3 --
Unrealized loss on securities
available-for-sale (net of tax) -- 2.0 --
Obligations incurred under capital
leases -- -- 4.6
The accompanying notes are an integral part of these consolidated financial
statements.
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 FINANCIAL STATEMENT PRESENTATION:
Laboratory Corporation of America Holdings and its
subsidiaries ("Company") is one of the largest independent
clinical laboratory company in the United States based on 1999
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 25 major laboratories and
approximately 1,200 service sites consisting of branches, patient
service centers and STAT laboratories, serving clients in 50
states.
The consolidated financial statements include the accounts
of Laboratory Corporation of America Holdings and its
subsidiaries after elimination of all material intercompany
accounts and transactions.
The financial statements of the Company's foreign subsidiary
are measured using the local currency as the functional currency.
Assets and liabilities are translated at exchange rates as of the
balance sheet date. Revenues and expenses are translated at
average monthly exchange rates prevailing during the year.
Resulting translation adjustments are included in "Accumulated
other comprehensive loss".
CASH EQUIVALENTS:
Cash equivalents (primarily investments in money market
funds, time deposits, commercial paper and Eurodollars 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 purchased 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.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are 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 building improvements 35
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 are charged to operations as incurred. Retirements,
sales and other disposals of assets are recorded by removing the
cost and accumulated depreciation from the related accounts with
any resulting gain or loss reflected in operations.
CAPITALIZED SOFTWARE COSTS:
The Company capitalizes purchased software which is ready
for service and capitalizes software development costs incurred
on significant projects starting from the time management commits
to funding a project until the project is substantially complete
and the software is ready for its intended use. Research and
development costs and other computer software maintenance costs
related to software development are expensed as incurred.
Capitalized software costs are amortized using the straight-line
method over the estimated useful life of the underlying system,
generally five years.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents, accounts
receivable, income taxes receivable and accounts payable are
considered to be representative of their respective fair values
due to their short-term nature. The carrying amounts 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.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
CONCENTRATION OF CREDIT RISK:
Substantially all of the Company's accounts receivable are
with companies and individuals in the health care industry.
However, concentrations of credit risk are limited due to the
number 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 contractual
discounts and 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 as an adjustment to
revenue. In 1999, 1998 and 1997, approximately 20%, 22% and 20%,
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 utilizing the asset
and liability method. Under this method 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 and for tax loss carryforwards. 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.
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. Future tax benefits, such as net operating loss
carryforwards, are recognized to the extent that realization of
such benefits are more likely than not.
STOCK COMPENSATION PLANS:
The Company accounts for its employee stock option plans
using the intrinsic method under APB Opinion No. 25 and related
Interpretations. Accordingly, compensation for stock options is
measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee
must pay to acquire the stock. The Company's employee stock
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
purchase plan is also accounted for under APB Opinion No. 25 and
is treated as non-compensatory. The Company provides
supplementary disclosures using the fair value method under SFAS
No. 123.
Compensation cost for restricted stock awards is recorded by
allocating their aggregate grant date fair value over their
vesting period.
EARNINGS PER SHARE:
Basic earnings per share is computed by dividing net income
(loss), less preferred stock dividends, by the weighted average
number of common shares outstanding. Dilutive earnings per share
is computed by dividing net income (loss), by the weighted
average number of common shares outstanding plus potentially
dilutive shares, as if they had been issued at the beginning of
the period presented. Potentially dilutive common shares result
primarily from the Company's mandatorily redeemable preferred
stock, restricted stock awards and outstanding stock options and
warrants. However, the effect of conversion of the Company's
redeemable preferred stock, or exercise of certain of the
Company's stock options or warrants was not included in the
computation of diluted earnings per common share as it would have
been anti-dilutive for all periods presented, except for the
fourth quarter of 1998.
Basic and diluted earnings per share were calculated based
on the following weighted average shares:
Years ended December 31,
1999 1998 1997
-----------------------------------------
Basic 126,661,882 124,846,812 123,241,222
Diluted 128,771,593 124,846,812 123,241,222
The following table summarizes the potential common shares
not included in the computation of diluted earnings per share
because their impact would have been antidilutive:
December 31,
1999 1998 1997
------------------------------------------
Stock Options 8,729,212 9,714,707 4,788,718
Warrants 22,151,308 22,151,308 22,151,308
Series A convertible exchangeable
Preferred stock 79,330,430 79,330,430 79,330,430
Series B convertible pay-in-kind
Preferred stock 126,762,964 116,537,120 107,136,166
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
INVESTMENTS:
Investments in equity securities are reported at fair value
with unrealized gains or losses, net of tax, recorded as a
separate component of shareholders' equity. At December 31,
1998, the Company recorded an unrealized loss on equity
investments of $2.0, net of related deferred tax benefit of $1.3.
During 1999, the Company recorded an other than temporary loss on
its investments in equity securities totaling $4.2.
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. Significant estimates include the allowances for
doubtful accounts and deferred tax assets, amortization lives for
intangible assets and accruals for self-insurance reserves. Actual
results could differ from those estimates.
LONG-LIVED ASSETS:
Long-lived assets, including goodwill, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amounts may not be recoverable. Recoverability
of assets to be held and used is determined by the Company at the
entity level by a comparison of the carrying amount of the assets
to future undiscounted net cash flows before interest expense and
income taxes expected to be generated by the assets. Impairment,
if any, is measured by the amount by which the carrying amount of
the assets exceed the fair value of the assets (based on
discounted cash flows). Assets to be disposed of are reported at
the lower of the carrying amount or net realizable value.
INTANGIBLE ASSETS:
Intangible assets, consisting of goodwill and other
intangibles (i.e., customer lists and non-compete agreements),
are amortized on a straight-line basis over the expected periods
to be benefited, generally ranging from 25 to 40 years for
goodwill, 10 to 25 years for customer lists and approximately 5
years for non-compete agreements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
RECLASSIFICATIONS:
The amounts shown as "deferred payments on acquisitions"
have been reclassified in the Consolidated Statements of Cash
Flows to Cash Flows from Investing Activities from Cash Flows
from Financing Activities.
2. RESTRUCTURING AND NON-RECURRING CHARGES
During the fourth quarter of 1997, the Company recorded pre-
tax charges of $22.7, related primarily to the downsizing of its
Long Island, New York facility and the consolidation into its
Raritan, New Jersey facility. This amount included approximately
$5.2 for severance and $12.5 for future lease obligations and
other facilities related charges. The net workforce reduction as
a result of this activity was approximately 260 employees,
primarily in the laboratory's operations.
In the second quarter of 1997, the Company determined that
approximately $12.6 of existing reserves were excessive due
largely to proceeds from subleases and asset disposals. Also,
in the second quarter of 1997, the Company decided to consolidate
its Winston-Salem, North Carolina laboratory and redirect
specimen volumes to other company facilities. Restructuring
charges related to the closing of the Winston-Salem laboratory
totaled $12.6.
The following represents the Company's restructuring
activities for the periods indicated:
Total
Balance at December 31, 1996 $ 34.6
Long Island downsizing 22.7
Winston-Salem closure 12.6
Adjustments (12.6)
Reclassifications and non-cash items (1.6)
Cash payments (17.1)
-------
Balance at December 31, 1997 38.6
Cash payments (5.6)
-------
Balance at December 31, 1998 33.0
Cash payments (6.2)
-------
Balance at December 31, 1999 $ 26.8
=======
Current 12.7
Non-current 14.1
-------
$ 26.8
=======
The cash payments for all periods presented represent
disbursements made primarily for lease obligations and employee
severance. The balance remaining in restructuring reserves at
December 31, 1999, relates primarily to future lease obligations.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
3. ACCOUNTS RECEIVABLE, NET
December 31, December 31,
1999 1998
------------ ------------
Gross accounts receivable $ 495.1 $ 569.4
Less allowance for doubtful accounts (147.1) (194.0)
-------- --------
$ 348.0 $ 375.4
======== ========
The provision for doubtful accounts was $191.9, $164.7 and
$311.5 in 1999, 1998 and 1997, respectively.
4. PROPERTY, PLANT AND EQUIPMENT, NET
December 31, December 31,
1999 1998
------------- ------------
Land $ 9.4 $ 9.7
Buildings and building improvements 67.8 64.6
Machinery and equipment 312.1 306.6
Leasehold improvements 58.7 57.3
Furniture and fixtures 21.4 26.1
Construction in progress 48.8 32.7
Buildings under capital leases 5.4 5.4
Equipment under capital leases 3.5 4.6
-------- --------
527.1 507.0
Less accumulated depreciation and
amortization of capital lease assets (253.9) (247.9)
-------- --------
$ 273.2 $ 259.1
======== ========
5. INTANGIBLE ASSETS, NET
December 31, December 31,
1999 1998
------------ ------------
Goodwill $ 780.6 $ 782.9
Other intangibles, principally customer
lists and non-compete agreements 231.2 231.2
-------- --------
1,011.8 1,014.1
Less accumulated amortization (207.9) (177.9)
-------- --------
$ 803.9 $ 836.2
======== ========
Amortization of intangible assets was $31.2, $30.8 and $30.6
in 1999, 1998 and 1997, respectively.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
6. ACCRUED EXPENSES AND OTHER
December 31, December 31,
1999 1998
------------ ------------
Employee compensation and benefits $ 48.9 $ 45.9
Acquisition related accruals 13.8 16.7
Restructuring reserves 12.7 17.5
Accrued taxes -- 11.2
Self-insurance reserves 20.0 22.6
Interest payable 3.5 5.7
Other 8.1 9.1
-------- --------
$ 107.0 $ 128.7
======== ========
7. OTHER LIABILITIES
December 31, December 31,
1999 1998
------------ ------------
Acquisition related accruals $ 8.9 $ 16.8
Restructuring reserves 14.1 15.5
Deferred income taxes 31.2 29.4
Post-retirement benefit obligation 35.2 32.5
Self-insurance reserves 37.8 37.8
Other 0.4 0.8
-------- --------
$ 127.6 $ 132.8
======== ========
8. LONG-TERM DEBT
The Company entered into an Amended and Restated Credit
Agreement dated as of March 31, 1997 (the "Amended Credit
Agreement"), with the banks named therein (the "Banks") and
Credit Suisse First Boston, as administrative agent (the "Bank
Agent"), under which the Banks made available to the Company a
senior term loan facility of $693.8 (the "Amended Term Loan
Facility") and a revolving credit facility of $450.0 (the
"Amended Revolving Credit Facility" and, together with the Term
Loan Facility, the "Bank Facility") which includes a $50.0
letter of credit sublimit. The Bank Facility is unconditionally
and irrevocably guaranteed by certain of the Company's
subsidiaries.
Under the Amended Credit Agreement and a contractual formula
contained therein, maturities under the Amended Term Loan
Facility are $88.3 in 2000 (to be paid in quarterly
installments), $132.0 in 2001 through 2003 and $82.4 in 2004 (all
paid in quarterly installments). The Amended Revolving Credit
Facility expires in March 31, 2002. The Company repaid
approximately $70.3 during the year ended December 31, 1999 on
its Amended Term Loan Facility. The Company will also make a
special payment on its Amended Term Loan Facility during the
second quarter of 2000 of approximately $6.7, based on a
contractual formula contained in the Amended Credit Agreement.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Both the Amended Term Loan Facility and the Amended
Revolving Credit Facility bear interest, at the option of the
Company, at (i) the base rate (the higher of the Bank Agent's
base commercial loan rate or 50 basis points above the Federal
Funds 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 Roche and its
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. In addition, pursuant to the Amended Credit
Agreement, the applicable interest margins on borrowings
outstanding thereunder are based upon the leverage ratio.
The Amended Credit Agreement contains certain debt
covenants, the most restrictive of which limit payment of
dividends and place a cap on business acquisitions and capital
expenditures. The covenants also require that the Company
maintain certain leverage and interest coverage ratios as well as
minimum levels of shareholders' equity.
At December 31, 1999 and 1998 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
$500.0 of its floating rate debt. This effectively fixed the
interest rate exposure on the floating rate debt to a weighted-
average fixed interest rate of 6.11% and 6.20%, respectively.
These swaps require that the Company pay a fixed rate amount in
exchange for the financial institutions paying a floating rate
amount. The amounts paid by the Company in 1999 and 1998 were
$1.9 and $0.3, respectively. 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. The current agreements mature in September 2002 and
January 2003. The estimated (benefit) cost at which the Company
could have terminated these agreements as of December 31, 1999
and 1998 was approximately $(11.0) and $6.9, respectively. This
fair value was estimated by discounting the expected cash flows
using rates currently available for interest rate swaps with
similar terms and maturities. Interest rates in effect for both
the long-term and revolving credit agreement as of December 31,
1999 and 1998 were 6.7% and 5.8%, respectively.
9. ISSUANCE OF MANDATORILY REDEEMABLE PREFERRED STOCK
On May 19, 1997 the Board of Directors of the Company decla
red a dividend of 10,000,000 transferable subscription rights
which were then issued pro rata to holders of its common stock on
May 29, 1997 entitling them to purchase up to an aggregate of
$500.0 of redeemable convertible preferred stock issuable in two
series at a subscription price of $50 per share (the "Preferred
Stock Offering"). The subscription period ended on June 16,
1997. On that date, rights
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
were exercised to purchase 4,363,202 shares of Series A 8 1/2%
Convertible Exchangeable Preferred Stock ("Series A") and
5,636,798 shares of Series B 8 1/2% Convertible Pay-in-Kind
Preferred Stock ("Series B"), each at a subscription price of $50
per share. Roche exercised its basic subscription privilege in
full for 4,988,751 shares of Series B and other rights holders
purchased the remaining 5,011,249 shares.
The Series A is currently convertible at the option of the
holder into common stock, will pay cash dividends and will be
exchangeable on or after June 30, 2000 at the Company's option
for 8 1/2% Convertible Subordinated Notes due June 30, 2012. The
Series B will be convertible at the option of the holder after
June 30, 2000 into common stock, will pay dividends in-kind until
June 30, 2003, and in cash thereafter, and will not be
exchangeable for notes. The conversion rate for both series of
preferred stock is 18.1818 shares of common stock per share of
preferred stock. Each series of preferred stock will be
mandatorily redeemable after June 30, 2012 at $50 per share and
will be redeemable at the option of the Company after July 7,
2000 at prices declining from $52.83 to $50.00 in 2006 and
thereafter. Neither series of preferred stock entitles the holder
to any voting rights in the Company. Net proceeds from the
Preferred Stock Offering were $486.9 and were used to repay a
loan from Roche, including accrued interest, and to reduce
amounts outstanding under the Company's term loan and revolving
credit facilities.
Offering costs of $13.1 were recorded against the aggregate
preference value of the preferred stock and will be accreted up
to the date of mandatory redemption. Accretion for the year
ended December 31, 1999 was $0.8.
10. INCOME TAXES
The provisions for income taxes in the accompanying
consolidated statements of operations consist of the following:
Years Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Current:
Federal $ 0.5 $ (17.6) $ (12.3)
State 2.6 1.0 0.9
------- ------- -------
3.1 (16.6) (11.4)
------- ------- -------
Deferred:
Federal 29.1 45.2 (35.5)
State 7.9 (15.9) (7.5)
------- ------- -------
37.0 29.3 (43.0)
------- ------- -------
$ 40.1 $ 12.7 $ (54.4)
======= ======= =======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The effective tax rates on earnings (loss) before income
taxes is reconciled to statutory federal income tax rates as
follows:
Years Ended December 31,
-----------------------------
1999 1998 1997
------- ------- ------
Statutory federal rate 35.0% 35.0% (35.0)%
State and local income taxes,
net of federal income tax effect 5.1 8.5 (2.4)
Non deductible amortization of
intangible assets 5.7 8.6 4.3
Change in valuation allowance (9.5) (33.8) 6.2
Adjustments of deferred tax balances -- -- (6.2)
Other 1.7 (2.7) (0.6)
------ ------ ------
Effective rate 38.0% 15.6% (33.7)%
====== ====== ======
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are as follows:
December 31, December 31,
1999 1998
------------ -----------
Deferred tax assets:
Settlement and related expenses $ 13.0 $ 13.0
Accounts receivable 2.1 23.0
Self-insurance reserves 4.3 6.0
Postretirement benefit obligation 13.9 13.7
Acquisition and restructuring reserves 30.9 37.2
State net operating loss carryforwards 15.3 15.7
Other 8.6 22.7
------- -------
88.1 131.3
Less valuation allowance (4.5) (14.5)
------- -------
Net deferred tax assets 83.6 116.8
------- -------
Deferred tax liabilities:
Intangible assets (43.6) (54.3)
Property, plant and equipment (26.9) (12.2)
Other (1.5) (1.7)
------- -------
Total gross deferred tax liabilities (72.0) (68.2)
------- -------
Net deferred tax assets $ 11.6 $ 48.6
======= =======
In 1996, a valuation allowance of $32.0 was established
because at the time the realization of the deferred tax asset
related to the state net operating loss carryforwards, the
postretirement benefit obligation as well as certain other
temporary differences was considered less likely than not. The
increase in the valuation allowance of $10.0 from December 31,
1996 to December 31, 1997 was due to the uncertain realization of
the state tax effect of certain temporary differences. Based on
improved current and projected
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
operating results, the Company reduced its valuation allowance
applied against its deferred tax assets relating to state net
operating loss carryforwards and certain acquisition and
restructuring reserves by approximately $27.5 during the fourth
quarter of 1998 and an additional $10.0 during 1999. These were
reflected as a reduction in the provision for income taxes. These
adjustments bring the Company's net deferred tax assets to a
level where management believes that it is more likely than not
the tax benefits will be realized.
During 1999, the Company received a revised Revenue Agents
Report (RAR) from the Internal Revenue Service, concluding audits
of the tax years ended 1993, 1994, and 1995 and a RAR concluding
the audits of the tax years 1996 and 1997. The revised RAR for
the tax years 1993-1995, reflects the fact that the IRS conceded
their previous adjustments for additional taxes of $14.6.
Previously, the Company had recorded a net income tax refund
receivable related to 1993-1997 amended tax returns, coupled
with adjustments agreed-upon from the 1993-1995 RAR. During
1999, an additional net income tax refund receivable was recorded
due to the RAR being received for 1996 and 1997. The total net
income tax refund receivable of $17.4 is reflected in the
accompanying Consolidated Balance Sheet as of December 31, 1999
in prepaid expenses and other.
The Company has state tax loss carryforwards of
approximately $244.5 which expire, starting in 2001, through
2018.
11. STOCK COMPENSATION PLANS
The Company has a number of stock option plans which
authorize and reserve shares of common stock for issuance
pursuant to options and stock appreciation rights that may be
granted under these plans.
In June 1999, the shareholders approved further amendments
to its 1997 Stock Option Plan and the incorporation of these
amendments into an amended and restated version of the plan (the
amended and restated plan, the "1999 Incentive Plan"). The
principal purpose of the amendments was to permit the issuance of
shares of restricted stock and authorize 3.2 million additional
shares for issuance under the plan. The effect of the amendment
was to increase to an aggregate of 9.2 million shares available
for issuance under the current plan.
During 1999, there were 867,384 options granted to officers
and key employees of the Company. The exercise price for these
options ranged from $2.75 to $2.94 per share. Also, during 1999
1,620,000 shares of restricted stock were issued to senior
management under the 1999 Incentive Plan at the market value on
the date of grant of $2.75. 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 of $4.5 was recorded as additional paid-in
capital and an opposite amount was charged to shareholders'
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
equity as unearned restricted stock compensation, which is being
amortized to expense over the six-year vesting period. During
1999, compensation expense of $0.4 was recorded. 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. At
December 31, 1999, there were 1,715,033 additional shares
available for grant under the Company's Stock Option Plans.
The proforma weighted average fair values at date of grant
for options issued during 1999, 1998 and 1997 were $1.68, $1.10
and $1.56 respectively, and were estimated using the Black-
Scholes option pricing model. Weighted average assumptions for
the expected life in years, volatility and dividend yield were 5
years, .5, and 0% for each of the three years ended December 31,
1999. Interest rates assumptions were 6%, 4.4% and 5.6% for the
years ended December 31, 1999, 1998 and 1997, respectively.
The Company has an employee stock purchase plan, begun in
1997 and amended in 1999, with 7,500,000 shares of common stock
for authorized issuance. The plan permits substantially all
employees to purchase a limited number of shares of the
Corporation stock at 85% of market value. The Company issues
shares to participating employee's semi annually in January and
July of each year. A summary of shares issued is as follows:
1997 1998 1999 2000
------- ------- ------- -------
January 923,335 961,122 525,873
July 607,536 730,197 867,736
Pro-forma compensation expense is calculated for the fair value
of the employee's purchase right using the Black-Scholes model.
Assumptions include a weighted average life of approximately one-
half year, dividend yield of 0%, risk free interest rates for
each six month period as follows: 1999 - 5.5% and 4.9%; 1998 -
5.3% and 5.1%; and 1997 - 5.2% and 5.1% and volatility rates for
each of the following six month periods: 1999 - .5 and .4; 1998 -
.6 and .8; and 1997 - .7 and .6.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The per share weighted average grant date fair value of the
benefits under the Plan for the first and second months is as
follows:
1997 1998 1999
------ ------ ------
First six months $.39 $.50 $.90
Second six months $.75 $.78 $.80
The Company applies the provisions of APB Opinion No. 25 in
accounting for its plans and, accordingly, no compensation cost
has been recognized for its stock compensation plans in the
financial statements. Had the Company determined compensation
cost based on the fair value method as defined in SFAS No. 123,
the impact on the Company's net earnings (loss) on a pro forma
basis is indicated below:
Years ended
December 31,
1999 1998 1997
------- ------- --------
Net earnings (loss) As reported $ 65.4 $ 68.8 $(106.9)
Pro forma 62.8 66.1 (108.8)
Net earnings (loss) per
common share As reported $ 0.12 $ 0.20 $ (1.06)
Pro forma 0.10 0.17 (1.07)
Pro forma net earnings (loss) reflects only options granted
in 1999, 1998 and 1997. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma amounts presented above
because compensation cost for options granted prior to January 1,
1996 is not considered.
The following table summarizes grants of non-qualified
options made by the Company to officers and key employees under
all 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, options vest ratably
over a period of two to three years on the anniversaries of the
grant date, subject to their earlier expiration or termination.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Changes in options outstanding under the plans for the
periods indicated were as follows:
Weighted-Average
Number Exercise Price
of Options per Option
---------- ---------------
Outstanding at January 1, 1997 1,298,218 $14.637
Options granted 4,080,000 $ 2.900
Canceled (589,500) $ 9.508
---------
Outstanding at December 31, 1997 4,788,718 $ 4.963
(1,769,893 exercisable)
Granted 5,249,880 $ 1.939
Canceled (323,891) $ 7.149
---------
Outstanding at December 31, 1998 9,714,707 $ 3.256
(2,825,940 exercisable)
Options granted 867,384 $ 2.752
Canceled (601,234) $ 4.273
Exercised (25,167) $ 2.253
---------
Outstanding at December 31, 1999 9,955,690 $ 3.153
=========
Exercisable at December 31, 1999 5,424,883 $ 3.990
=========
The weighted-average remaining life of options outstanding
at December 31, 1999 is approximately 7.8 years.
The following table summarizes information concerning
currently outstanding and exercisable options.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------ ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ------------------------------------------------------ ----------------------
$ 1.938 - 3.125 9,251,365 8.0 $ 2.372 4,720,558 $ 2.584
$11.293 - 16.481 704,325 5.5 $13.416 704,325 $13.416
--------- ---------
9,955,690 5,424,883
========= =========
12. RELATED PARTY TRANSACTIONS
At December 31, 1999 and 1998, 61,329,256 shares of the
Company's outstanding common stock, or approximately 47.6% at
December 31, 1999 and 49.0% at December 31, 1998, were owned by
Roche. In addition, Roche owned 6,170,140 shares of the
Company's
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
redeemable convertible preferred stock at December 31, 1999, or
approximately 54.4% and 5,672,399 shares (52.7%) at December 31,
1998. No voting rights are associated with the redeemable
preferred shares.
As of December 31, 1999 and 1998, the number of warrants
outstanding to purchase the Company's common stock was
22,151,308, of which 8,325,000 warrants were held by an affiliate
of Roche. These warrants are exercisable at a price of $22.00
per share and expire on April 28, 2000.
The Company purchases certain items, primarily laboratory
testing supplies from various affiliates of Roche. Total
purchases from these affiliates, which are recorded in cost of
sales, were $38.3, $33.0, and $25.2 in 1999, 1998 and 1997,
respectively. In addition, the Company made royalty payments to
Roche in the amounts of $2.9 in 1999, $2.9 in 1998 and $3.7 in
1997. Revenue received from Roche for laboratory services was
$0.9 in 1999, $0.5 in 1998 and $1.6 in 1997. Amounts owed to
affiliates at December 31, 1999 and 1998 were $3.5 and $1.7,
respectively.
A member of the Company's Board of Directors is President
and Chief Executive Officer of TriPath Imaging, Inc. and has
ownership of approximately 8.0% of TriPath's common stock. The
Company's Chief Executive Officer has ownership of less than 1%
of TriPath's common stock.
The Company has certain on-going arrangements with TriPath
Imaging, Inc. for the purchase by the Company of certain products
with an aggregate value of approximately $0.4 in 1999, less than
$0.7 in 1998 and less than $0.1 in 1997.
In 1998, TriPath leased a portion of the Company's facility
in Elon College, North Carolina and purchased cytology services
for total payments of less than $0.1.
13. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in litigation which purports to be a
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 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 at this time and, with the exception of the above, no
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.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The Company is also involved in various claims and legal
actions arising in the ordinary course of business. These
matters include, but are not limited to, professional liability,
employee related matters, inquiries from governmental agencies
and Medicare or Medicaid carriers requesting comment on
allegations of billing irregularities that have been 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.
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.
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, certain medical costs
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, 1999 and 1998, the Company had
provided letters of credit aggregating approximately $24.0 and
$23.0, respectively, primarily in connection with certain
insurance programs.
The Company leases various facilities and equipment under
non-cancelable lease arrangements. Future minimum rental
commitments for leases with noncancellable terms of one year or
more at December 31, 1999 are as follows:
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Operating Capital
--------- -------
2000 $ 43.4 $ 2.8
2001 30.9 2.9
2002 24.1 2.9
2003 18.9 2.7
2004 13.9 2.6
Thereafter 51.9 7.1
------ ------
Total minimum lease payments 183.1 21.0
Less:
Amounts included in
restructuring accruals -- 12.5
Amount representing interest -- 3.5
------ ------
Total minimum operating
lease payments and
present value of minimum
capital lease payments $183.1 $ 5.0
====== ======
Current $ 0.6
Non-current 4.4
------
$ 5.0
======
Rental expense, which includes rent for real estate,
equipment and automobiles under operating leases, amounted to
$67.0, $67.5 and $67.9 for the years ended December 31, 1999,
1998 and 1997, 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 $7.5, $7.1 and $6.9 in 1999, 1998 and 1997, respectively.
In addition, substantially all employees of the Company are
covered by a defined benefit retirement plan (the "Company
Plan"). The benefits to be paid under the Company Plan are based
on years of credited service and average final compensation. The
Company's policy is to fund the Company Plan with at least the
minimum amount required by applicable regulations.
The Company has a second defined benefit plan which covers
its senior management group that provides for the payment of the
difference, if any, between the amount of any maximum limitation
on annual benefit payments under the Employee Retirement Income
Security Act of 1974 and the annual benefit that would be payable
under the Company Plan but for such limitation. This plan is an
unfunded plan.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The components of net periodic pension cost for both of the
defined benefit plans are summarized as follows:
Company Plan
-------------------------
Years ended
December 31,
1999 1998 1997
------ ------ ------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 10.5 $ 10.5 $ 10.4
Interest cost 9.2 8.6 8.3
Expected return on plan assets (12.1) (11.0) (8.7)
Net amortization and deferral (1.6) (1.6) (1.2)
------ ------ ------
Net periodic pension cost $ 6.0 $ 6.5 $ 8.8
====== ====== ======
Company Plan
---------------
December 31,
1999 1998
---------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $140.3 $134.1
Service cost 10.5 10.5
Interest cost 9.2 8.6
Actuarial gain (11.7) (4.0)
Benefits paid (10.0) (8.9)
------ ------
Benefit obligation at end of year 138.3 140.3
------ ------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 135.9 118.5
Actual return on plan assets 3.5 9.9
Employer contributions 8.7 16.4
Benefits paid (10.0) (8.9)
------ ------
Fair value of plan assets at end of year 138.1 135.9
------ ------
Funded status, end of year 0.2 4.4
Unrecognized net actuarial loss (10.7) (14.3)
Unrecognized prior service cost 8.6 10.6
------ ------
Accrued pension liability (asset) $ (1.9) $ 0.7
====== ======
Assumptions used in the accounting for the defined benefit plans
were as follows:
Company Plan
--------------
1999 1998
--------------
Weighted-average discount rate 7.75% 6.75%
Weighted-average rate of increase
in future compensation levels 4.0% 4.0%
Weighted-average expected long-
term rate of return 9.0% 9.0%
The Company assumed obligations under a subsidiary's
postretirement medical plan. Coverage under this plan is
restricted to a limited number of existing employees of the
subsidiary. This plan is unfunded and the Company's policy is to
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
fund benefits as claims are incurred. The components of
postretirement benefit expense are as follows:
Year ended Year ended
December 31, December 31,
1999 1998
------------ ------------
Service cost $ 1.0 $ 1.0
Interest cost 2.6 2.7
Net amortization and deferral (0.1) 0.1
------ ------
Postretirement benefit costs $ 3.5 $ 3.8
====== ======
A summary of the components of the accumulated postretirement
benefit obligation follows:
December 31,
1999 1998
---------------
Retirees $ 8.0 $ 9.3
Fully eligible active plan participants 9.3 11.5
Other active plan participants 14.6 18.0
------ ------
$ 31.9 $ 38.8
====== ======
RECONCILIATION OF THE FUNDED STATUS OF THE December 31,
POSTRETIREMENT BENEFIT PLAN AND ACCRUED LIABILITY: 1999 1998
---------------
Accumulated postretirement benefit obligation,
beginning of year $ 38.8 $ 40.6
Changes in benefit obligation due to:
Service cost 1.0 1.0
Interest cost 2.6 2.7
Plan participants contributions 0.1 0.1
Actuarial gain (9.7) (3.7)
Amendments -- (1.1)
Benefits paid (0.9) (0.8)
------ ------
Accumulated post retirement benefit obligation,
end of year 31.9 38.8
Unrecognized net actuarial loss (0.3) (10.5)
Unrecognized prior service cost 3.6 4.2
------ ------
Accrued postretirement benefit obligation $ 35.2 $ 32.5
====== ======
The weighted-average discount rates used in the calculation
of the accumulated postretirement benefit obligation were 7.8%
and 6.8%, respectively, as of December 31, 1999 and 1998. The
health care cost trend rate was assumed to be 7.0% and 7.5%,
respectively, declining gradually to 5.0% in the year 2006 and
thereafter. The health care cost trend rate has a significant
effect on the amounts reported. Increasing the assumed health
care cost trend rates by a percentage point in each year would
increase the accumulated postretirement benefit obligation as of
December 31, 1999 by $5.4. The impact of a percentage point
increase on the aggregate of the service cost and interest cost
components of the net periodic postretirement benefit cost
results in an increase of $0.7.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
15. QUARTERLY DATA (UNAUDITED)
The following is a summary of unaudited quarterly data:
Year ended December 31, 1999
------------------------------------------------
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ---------
Net sales $ 417.9 $ 429.5 $ 428.6 $ 422.7 $ 1,698.7
Gross profit 151.4 164.3 163.4 150.0 629.1
Net earnings 14.1 19.8 17.2 14.3 65.4
Less preferred dividends 11.0 12.5 12.9 13.2 49.6
Less accretion of mandatorily
redeemable preferred stock 0.2 0.2 0.2 0.2 0.8
Net earnings attributable
to common shareholders 2.9 7.1 4.1 0.9 15.0
Basic and diluted earnings
per common share 0.02 0.06 0.03 0.01 0.12
Year ended December 31, 1998
------------------------------------------------
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ---------
Net sales $ 387.7 $ 402.4 $ 414.7 $ 407.8 $ 1,612.6
Gross profit 132.0 144.6 144.4 142.4 563.4
Net earnings 9.3 12.8 11.4 35.3 68.8
Less preferred dividends 11.0 11.3 11.1 10.2 43.6
Less accretion of mandatorily
redeemable preferred stock 0.2 0.2 0.2 0.2 0.8
Net earnings (loss)
attributable to common
shareholders (1.9) 1.3 0.1 24.9 24.4
Basic earnings (loss) per
common share (0.01) 0.01 0.00 0.20 0.20
Diluted earnings (loss) per
common share (0.01) 0.01 0.00 0.11 0.20
In the fourth quarter of 1998, the Company reclassified
certain amounts for the three quarters ended September 30, 1998,
to selling, general and administrative expenses from net sales
adjustments to be consistent with the 1998 classification. The
reclassified amounts are as follows: $14.7, first quarter of
1998; $16.3, second quarter of 1998; $16.4, third quarter of
1998.
For the fourth quarter of 1998, basic and diluted earnings
per common share is calculated based on the weighted average
number of shares outstanding for the quarter (125,269,903 and
318,739,501 shares, respectively).
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
16. NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No.
133" was issued. This Statement delays the effective date of
FASB Statement No. 133 for one year to fiscal years beginning
after June 15, 2000. FASB Statement No. 133 standardizes the
accounting for derivative instruments by requiring that an entity
recognize those items as assets or liabilities and measure them
at fair value. Adoption is not expected to have a material
impact on the Company's financial position or results of
operations.
SCHEDULE II
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Millions)
- --------------------------------------------------------------------------------
Balance Charged Other
at to (Deduct- Balance
beginning Costs and ions) at end
of year Expenses Additions of year
- --------------------------------------------------------------------------------
Year ended December 31, 1999:
Applied against asset
accounts:
Allowance for
doubtful accounts $ 194.0 $ 191.9 $ (238.8) $ 147.1
======= ======= ======== =======
Valuation allowance-
deferred tax assets $ 14.5 $ (10.0) $ -- $ 4.5
======= ======= ======== =======
Year ended December 31, 1998:
Applied against asset
accounts:
Allowance for
doubtful accounts $ 195.4 $ 164.7 $ (166.1) $ 194.0
======= ======= ======== =======
Valuation allowance-
deferred tax assets $ 42.0 $ (27.5) $ -- $ 14.5
======= ======= ======== =======
Year ended December 31, 1997:
Applied against asset
accounts:
Allowance for
doubtful accounts $ 111.6 $ 311.5 $ (227.7) $ 195.4
======= ======= ======== =======
Valuation allowance-
deferred tax assets $ 32.0 $ 10.0 $ -- $ 42.0
======= ======= ======== =======