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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, 2000
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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
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, $0.10 par value 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. X
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State the aggregate market value of the voting common equity held by
non-affiliates of computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days: $3,778,795,308 at February 28, 2001.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date: 34,896,433 shares as of
February 28, 2001, of which 11,352,537 shares are held by indirect wholly
owned subsidiaries 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 2000 net revenues. Through a
national network of laboratories, the Company offers more than 4,000 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 24 primary
testing facilities and approximately 1,200 service sites consisting of
branches, patient service centers and STAT laboratories, serving clients in 50
states.
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 cytologic samples, 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, thin layer cytology
Pap smears, HIV 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 2000 approximately 49% 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 38% 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 2000
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 ten years, primarily as a result of 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 shift the risks of additional testing beyond that covered
by the capitated payment to the clinical laboratory. For the year ended
December 31, 2000 such capitated contracts accounted for approximately $101.9
million of the Company's 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 efforts to control the cost, utilization and delivery of health
care services. Measures to regulate health care delivery in general and
clinical laboratories in particular have resulted in reduced prices, 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.
Despite the market changes discussed above, the Company believes that the
volume of clinical laboratory testing will be positively influenced by several
factors, including: the expanded base of genomics knowledge which has led to
an enhanced appreciation of the value of gene-based diagnostic assays for
guiding both the development and stratification of patient-related data for
new therapeutics as well as an increased awareness by physicians that clinical
laboratory testing is 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 24 primary testing facilities, 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. Generally, "patient service
center" 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 260,000 patient
specimens per day in 2000. 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
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 approximately 4,000 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 HIV 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 24
primary testing facilities, 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. One of the primary growth strategies of the Company is
the continued expansion of its specialty and niche businesses, which involve
certain types of unique testing capabilities and/or client requirements. 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 (CMBP) is a leader in
molecular diagnostics and polymerase chain reaction (PCR) technologies which
are often able to provide earlier and more reliable information regarding HIV,
genetic diseases, cancer and many other viral and bacterial diseases. In
August 2000, the Company acquired Los Angeles-based National Genetics
Institute, Inc. (NGI), a leader in the development of PCR assays for Hepatitis
C (HCV). 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. In 2000, the Company
added HIV GenoSure-Trademark- to its portfolio of HIV resistance testing
services. Additionally, the Company provides comprehensive testing for HCV
including both PCR testing and genotyping at both CMBP and NGI. 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, molecular
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. At NGI, scientists have
novel assays for melanoma and breast cancer in varying stages of clinical
trials.
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.
CMBP and NGI also specialize 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, 2000, 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 provides 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 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, 2000 billings to the Company's respective
payors based on the total volume of accessions are as follows:
Revenue
Accession Volume as a % per
of Total Accession
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Private Patients 3.3% $102.87
Medicare, Medicaid and
Insurance 15.6% $ 29.80
Commercial Clients 40.9% $ 22.42
Managed Care 40.2% $ 29.25
AFFILIATIONS AND ALLIANCES
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 technical support (management) contracts,
reference agreements and cooperative testing arrangements. 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 in achieving these goals. These alliances allow
both parties to take advantage of synergies and/or best practices to provide
improved and cost effective services to the community. In 2000, the Company
added 43 agreements with hospitals, physician groups and other health care
provider organizations representing approximately $25 million of annual sales
associated with alliance activity.
The Company provides technical support services in a variety of health
care settings. In these relationships, 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. Under the typical laboratory
technical support 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.
Reference agreements provide a means for hospitals to outsource patient
laboratory testing services that are not time critical (e.g., test results
reported within twenty-four hours of drawing the specimen as opposed to those
requiring two to four hour turnaround). These agreements allow the hospital
to maintain their own stat/emergency lab on-site, while eliminating certain
costs of maintaining a full-service lab on their premises.
Hospitals increasingly look beyond their in-house patient base and seek
to provide services to outreach patients within their greater local community.
The Company has focused on developing cooperative testing relationships with
such hospitals in which the parties combine efforts to support the needs of a
specific community. These relationships center around capitalizing on a
partner hospital's ability to provide low cost, high quality esoteric testing.
These shared service agreements create ventures that provide communities with
synergistic high quality testing services within a single infrastructure.
An important advantage the Company offers to its clients is the
flexibility of the Company's information systems used for contract management
services and for creating bi-directional interfaces to support the Company's
cooperative testing arrangements. 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 alliance 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: (1) termination without
cause by either the Company or the contracted Provider after written notice
(generally 60 to 120 days prior to termination); (2) 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; (3) 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;
or (4) should the Company or Provider's service requirements change to the
extent that the new service requirements affect the profitability or stability
of the alliance relationship and the terms cannot be re-negotiated to the
satisfaction of both parties. While the Company believes that it will
maintain and renew its existing contracts, there can be no assurance of such
maintenance or renewal.
The Company has developed several different pricing formulas under its
alliance contracts. In certain cases, profitability may depend on the
Company's ability to accurately predict test volumes, patient encounters or
the number of admissions.
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, 2000, the Company employed 229
generalists and 113 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 regional service managers and 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, 2000, the Company
employed 296 AMs. AMs are compensated through 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 to one in which the
purchasing decisions for laboratory services are increasingly being made
by managed care organizations, insurance plans, employers and even by
patients themselves. In view of these changes, the Company has adapted its
sales and marketing structure to more appropriately address the opportunities
presented by this shift.
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 2000, 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. The Company employs a Chief Information Officer, whose responsibility
is to integrate, manage and develop the Company's information systems.
In 2000, the Company continued to focus its information systems
activities on the 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 substantially completed during 2001 and
2002. During 2000, 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 $7.0 to $9.0 million in such development and implementation costs
during 2001.
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. 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.
During 2000, the Company's days sales outstanding (DSO) were reduced 6
days from December 31, 1999 levels to 68 days as a result of Company-wide
efforts to increase cash collections from all payors, as well as on-going
improvements to claim submission processes. The Company is continuing to take
the steps necessary to improve DSO and cash collections by:
1. Conversion of decentralized billing locations to a centralized
billing system. During 2000, the Tampa, Louisville and Houston
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.
3. During the first quarter of 2000, the Company implemented an initiative to
reduce the number of requisitions received that are missing certain billing
information. This initiative involves measuring the number of clinical
requisitions received by ordering client, as well as what specific
information was not provided. The Company then identifies root causes of
why the information was missing and takes steps to ensure that information
is provided in the future. These steps include re-educating clients as to
what information is needed in order for the Company to bill and collect for
the test. During the year, the percentage of requisitions received which
were missing billing information decreased by over 20%.
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: 1) 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; 2) establishment of a project group to focus on improvements in
order entry; and 3) 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, 80% of the
Company's billing is performed on this centralized system. By the end of
2001, the Company plans to have approximately 90% of its billing performed on
the centralized system.
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 CMBP,
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 207 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 2000 the entire United States clinical laboratory testing
industry had revenues exceeding $32 billion; approximately 49% of such
revenues were attributable to hospital-affiliated laboratories, approximately
39% 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 $3.4 billion
in revenues from clinical laboratory testing in 2000.
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: 1) pricing of the
laboratory's test services; 2) accuracy, timeliness and consistency in
reporting test results; 3) number and type of tests performed; 4) service
capability and convenience offered by the laboratory; and 5) 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.
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 28, 2001, the Company had approximately 18,850 full-time
equivalent employees. A subsidiary of the Company has one collective
bargaining agreement which covers approximately 23 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. Laboratories
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
laboratory 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 2000 and 1999, the Company derived approximately 16% and 19%,
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.
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 were published on March 10, 2000. 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 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 Company is
currently performing a detailed evaluation of the recently published federal
regulations in order to establish resource and financial projections necessary
to meet the two-year implementation requirements after the date of
publication. Failure to comply could result in significant civil and/or
criminal penalties. As will be the case for virtually all healthcare-related
organizations, complying with the various HIPAA requirements will be a multi-
year, entity-wide effort requiring capital and personnel time and effort.
However, 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.
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. In addition, 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 ("OSHA") 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. In addition, on November 6, 2000,
Congress passed the Needlestick Safety and Prevention Act which required among
other things that companies include in their safety programs, the evaluation
and use of engineering controls such as safety needles if found to be
effective at reducing the risk of needlestick injuries in the workplace.
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; 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.
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 "1996
government settlement"). 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, 2000.
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
Los Angeles, California 16,000 Lease expires 2002;
one 5 year renewal
option
San Diego, California 48,000 Lease expires 2007
14,000 Lease expires 2002
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 2003
Research Triangle Park,
North Carolina 71,000 Lease expires 2008;
three 5 year renewal
options
111,000 Lease expires 2011;
three 5 year renewal
options
Memphis, Tennessee 45,000 Lease expires 2001
Dublin, Ohio 82,000 Owned
Southaven, Mississippi 17,000 Owned
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; two
5 year renewal option
Salt Lake City, Utah 20,000 Lease expires 2002; two
5 year renewal options
Chesapeake, Virginia 21,000 Lease expires 2002;three
5 year renewal options
Herndon, Virginia 80,000 Lease expires 2004;
one 5 year renewal
option
Richmond, Virginia 34,000 Lease Expires 2001; one
5 year renewal option
Kent, Washington 42,000 Lease expires 2005
Approximate
Area Nature of
Location (in square feet) Occupancy
- -------------------- ---------------- --------------------
Occupancy
Operating Facilities cont.:
Fairmont, West Virginia 25,000 Lease expires 2005;three
5 year renewal options
Mechelen, Belgium 20,000 Lease expires 2007
Administrative facilities:
Raritan, New Jersey 53,000 Owned
Burlington, North Carolina 293,000 Owned
235,000 Leases expire 2001- 2010;
various options
to purchase or renew
All of the Company's 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. The Company is carefully evaluating these claims and has entered
into settlement negotiations with the representatives of the parties. Based
upon these discussions, Management does not believe that the ultimate outcome
of these claims will exceed existing reserves or have a material adverse
affect on the Company. On January 9, 2001, the Company was served with a
complaint in North Carolina which purports to be a class action and makes
claims similar to those referred to above. The Company is carefully
evaluating this claim. Due to the early stage of the claim, its outcome
cannot be presently 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 is not expected to 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
The Common Stock trades on the New York Stock Exchange ("NYSE") under
the symbol "LH". The following table sets forth for the calendar periods
indicated the high and low sales prices for the Common Stock reported on the
NYSE Composite Tape.
High Low
------ ------
1999
First Quarter 23.125 12.500
Second Quarter 29.375 16.875
Third Quarter 32.500 22.500
Fourth Quarter 38.750 24.375
High Low
------ ------
2000
First Quarter 46.875 31.250
Second Quarter 81.000 39.375
Third Quarter 132.500 76.250
Fourth Quarter 183.000 108.250
High Low
------- -------
2001
First Quarter (through February 28, 2001) 162.000 119.500
During May 2000, the Company's shareholders approved a 1-for-10 reverse
stock split. The reported sales prices reflect such reverse stock split.
On February 28, 2001 there were 713 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 four-year
period ended December 31, 2000 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 the period ended December 31, 1996 is derived from consolidated
financial statements of the Company, which has 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,
-----------------------------------------
2000 1999 1998
------------ ---------- ---------
(Dollars in millions, except per share amounts)
Statement of Operations Data:
Net sales $1,919.3 $1,698.7 $1,612.6
Gross profit 766.6 629.1 563.4
Operating income (loss) 245.6 (a) 149.7 127.6
Net earnings (loss) 112.1 65.4 68.8
Basic earnings (loss) per
common share $ 3.29 $ 1.18 $ 1.95
Diluted earnings (loss) per
common share $ 3.22 $ 1.16 $ 1.95
Basic weighted average common
shares outstanding
(in thousands) 23,540 12,666 12,485
Diluted weighted average common
shares outstanding
(in thousands) 24,075 12,877 12,485
Balance Sheet Data:
Cash and cash equivalents $ 48.8 $ 40.3 $ 22.7
Intangible assets, net 865.7 803.9 836.2
Total assets 1,666.9 1,590.2 1,640.9
Long-term obligations and
redeemable preferred stock (c) 355.8 1,041.5 1,110.0
Due to affiliates (d) 1.4 3.5 1.7
Total shareholders' equity 877.4 175.5 154.4
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996
---------- ------------
Statement of Operations Data:
Net Sales $ 1,579.9 $ 1,676.2
Gross profit 499.4 492.3
Operating income (loss) (92.0)(e) (118.8)(b)
Net earnings (loss) (106.9) (153.5)
Basic earnings (loss) per
common share $ (10.61) $ (12.49)
Diluted earnings (loss) per
common share $ (10.61) $ (12.49)
Basic weighted average common
shares outstanding
(in thousands) 12,324 12,292
Diluted weighted average common
shares outstanding
(in thousands) 12,324 12,292
Ratio of earnings to combined
fixed charges and preferred
stock dividends (f) NA NA
Balance Sheet Data:
Cash and cash equivalents $ 23.3 $ 29.3
Intangible assets, net 851.3 891.1
Total assets 1,658.5 1,917.0
Long-term obligations and
redeemable preferred stock (c) 1,200.1 1,089.4
Due to affiliates (d) 2.2 190.5
Total shareholders' equity 129.1 258.1
(a) In the fourth quarter of 2000, the Company recorded a $4.5 million
restructuring charge relating to the closing of its Memphis drug testing
facility.
(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 of the Company in 1995 with
Roche Biomedical Laboratories, Inc. (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) Long-term obligations include capital lease obligations of $7.2 million,
$4.4 million, $4.2 million, $5.8 million and $9.8 million at December 31,
2000, 1999, 1998, 1997 and 1996, 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, 2000, 1999, 1998, 1997 and 1996, such amounts were $2.1
million, $0.0 million, $7.7 million, $9.6 million and $14.8 million,
respectively. Long-term obligations exclude amounts due to affiliates. On
June 6, 2000, the Company called for redemption all of its outstanding
redeemable preferred stock, resulting in the conversion of substantially all
of the preferred stock into common stock.
(d) 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 offering of preferred stock.
(e) 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.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
During 2000, the Company experienced strong growth primarily as a result
of continued implementation of its strategic plan. The Company continues to
emphasize customer satisfaction and expanding those laboratory services which
offer the greatest benefit to patients, clinicians, and the Company. While
the Company experienced solid growth in all areas, particular growth was
noted in the areas of molecular testing for HIV and hepatitis C, genetic
testing and oncology testing.
The Company implemented important new contracts with CIGNA Healthcare,
Aetna and UnitedHealthcare, the three largest national managed care companies.
These agreements provide the Company expanded opportunities to increase
business in new products and key markets. In addition, the Company's
agreements with HealthTrust Purchasing Group and AmeriNet expand its reach
to many new hospitals, surgery centers, clinics, and physicians, representing
a significant revenue opportunity.
The Company completed several laboratory acquisitions during 2000 which
contributed to the strong growth. The largest acquisition was National
Genetics Institute (NGI) in Los Angeles, which was acquired at the end of July
and has enhanced our leadership position in genomic testing. The Company
believes that NGI's reputation with leading biotech and pharmaceutical firms
will continue to play an important role helping to expand the Company's
clinical testing opportunities. In addition to hepatitis C, NGI is developing
assays for melanoma and breast cancer, two areas targeted by many companies
for new drug development.
In addition to the new contracts and relationships discussed above, the
Company believes future performance will be positively affected by the following
factors:
1. As noted in the latest census information, the South, Southwest and
West all had sizeable gains in overall population. With this population
growth, increased demand for testing is anticipated in these areas and
management believes the Company is well positioned to benefit from this
increased demand.
2. The aging of America and the increase in life expectancy is expected to
lead to more testing, both routine and esoteric.
3. Over the past year and a half, managed-care providers have been shifting
their approach to delivering health care by more frequently using
diagnostic testing to improve outcomes and achieve greater economic
benefit. Approximately 40% of the Company's revenues are derived from
managed care. As a result, this recognition of the predictive value of
early diagnostic testing should positively impact our volumes in both
routine and esoteric testing.
During the first half of the year, the Company was involved in several
transactions affecting its capital structure. During May 2000, the Company's
stockholders approved a 1-for-10 reverse stock split. On June 6, the Company
called for redemption all of its outstanding Series A and Series B Preferred
Stock resulting in the conversion of substantially all of the preferred stock
into common stock. The Company also assisted in the successful placement of
6.5 million shares of the Company's stock formerly owned by Roche, and
increased the number of shares traded in the open market and available for
purchase by other investors.
In November 2000, Standard & Poor's upgraded the Company's corporate
credit and bank loan ratings two levels, from BB+ to BBB. This investment-
grade rating offers the Company additional financial flexibility as growth
opportunities are identified.
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 2000 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, 2000 compared with Year ended December 31, 1999.
Net sales for 2000 were $1,919.3 million, an increase of 13.0% from
$1,698.7 million reported in the comparable 1999 period. Sales increased
approximately 9.0% due to an increase in volume and 4.0% due to an increase in
price per accession (which reflects actual price increases and changes in the
mix of tests performed). These increases occurred as a result of the
Company's ability to win new business and successfully retain and increase
business from existing customers. Excluding acquisitions, revenues would have
increased 11.6%.
Cost of sales, which includes primarily laboratory and distribution
costs, was $1,152.7 million for 2000 compared to $1,069.6 million in the
corresponding 1999 period, an increase of 7.8%. Cost of sales increased
approximately $91.0 million due to an increase in volume offset by labor
efficiencies due to streamlining of operations. Cost of sales as a
percentage of net sales was 60.0% for 2000 and 63.0% in the corresponding
1999 period. The decrease in the cost of sales as a percentage of net sales
primarily resulted from continued cost reduction efforts and economies of
scale achieved through volume growth.
Selling, general and administrative expenses increased to $483.0 million
in 2000 from $448.2 million in the same period in 1999 representing an
increase of $34.8 million or 7.8%. Selling, general and administrative
expenses were 25.2% and 26.4% as a percentage of net sales in 2000 and 1999,
respectively. The increase in selling, general and administrative expenses is
primarily the result of the Company's acquisitions during the year combined
with billing conversion-related costs such as salaries and telephone expenses.
During the fourth quarter of 2000, the Company recorded a $4.5 million
restructuring charge relating to the closing of its Drug Testing laboratory in
Memphis, Tennessee. These operations are being absorbed by other Company
facilities. This restructuring is expected to be completed by the second
quarter of 2001 and is expected to result in annualized savings of
approximately $7.0 million.
Interest expense was $38.5 million in 2000 compared to $41.6 million in
1999. This decrease is related to the Company's reduction in its outstanding
debt of approximately $95.0 million. See "Liquidity and Capital Resources."
Provision for income taxes was $95.5 million in 2000 compared to $40.1
million in 1999. See "Note 11 to Consolidated Financial Statements" for a
further discussion of income taxes.
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 has created an improved
business climate.
Cost of sales 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 11 to Consolidated Financial Statements" for a
further discussion of income taxes.
Liquidity and Capital Resources
Net cash provided by operating activities was $246.7 million, $180.5
million and $125.1 million, in 2000, 1999 and 1998, respectively. The
increase in cash flow from operations in 2000 primarily resulted from improved
earnings and improved days sales outstanding (DSO).
Capital expenditures were $55.5 million, $69.4 million and $58.7 million
for 2000, 1999 and 1998, respectively. The Company expects capital
expenditures to be between $70.0 million and $75.0 million in 2001. 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 DSO at the end of 2000 improved to 68 days as compared to
74 days at the end of 1999. 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. Converting decentralized billing locations to a centralized billing
system. During 2000, the Tampa, Louisville, and Houston 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.
3. Implementing an initiative to reduce the number of requisitions received
that are missing certain billing information.
With the completion of the conversion of the Tampa, Louisville, and
Houston facilities, approximately 80% of the Company's billings are performed
on the Company's centralized system. By the end of the year 2001, management
anticipates that approximately 90% of billings will be performed on that
system with the remainder converted during 2002. The billing system
conversions, combined with improvements in front-end processes, that enhance
data capture for billing, are expected to reduce DSO to 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 2000, the Company repaid approximately $95.0 million on its term
loan facility. There were no outstanding balances due on its revolving credit
facility at the end of 2000 and 1999.
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 9 to Consolidated Financial Statements."
FORWARD-LOOKING STATEMENTS
The Company has made in this report, and from time to time may otherwise
make in its public filings, press releases and discussions with Company
management, forward-looking statements concerning the Company's operations,
performance and financial condition, as well as its strategic objectives. Some
of these forward-looking statements can be identified by the use of forward-
looking words such as "believes", "expects", "may", "will", "should", "seeks",
"approximately", "intends", "plans", "estimates", or "anticipates" or the
negative of those words or other comparable terminology. Such forward-looking
statements are subject to various risks and uncertainties and the Company claims
the protection afforded by the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995. Actual
results could differ materially from those currently anticipated due to a
number of factors in addition to those discussed elsewhere herein and in the
Company's other public filings, press releases and discussions with Company
management, including:
1) future changes in federal, state, local and third-party payor
regulations or policies (or in the interpretation of current
regulations) affecting governmental and third-party reimbursement
for clinical laboratory testing.
2) adverse results from investigations of clinical laboratories by the
government, which may include significant monetary damages and/or
exclusion from the Medicare and Medicaid programs.
3) loss or suspension of a license or imposition of a fine or penalties
under, or future changes in, the law or regulations of the Clinical
Laboratory Improvement Act of 1967, and the Clinical Laboratory
Improvement Amendments of 1988, or those of Medicare, Medicaid or
other federal, state or local agencies.
4) failure to comply with the Federal Occupational Safety and Health
Administration requirements and the recently passed Needlestick
Safety and Prevention Act which may result in penalties and loss
of licensure.
5) increased competition, including price competition.
6) changes in payor mix, including an increase in capitated managed-cost
health care.
7) our failure to obtain and retain new customers and alliance partners,
or a reduction in tests ordered or specimens submitted by existing
customers.
8) our failure to integrate newly acquired businesses and the cost related
to such integration.
9) adverse results in litigation matters.
10) our ability to attract and retain experienced and qualified personnel.
11) failure to maintain our days sales outstanding levels.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company addresses its exposure to market risks, principally the
market risk of changes in interest rates, through a controlled program of risk
management that includes the use of derivative financial instruments. The
Company does not hold or issue derivative financial instruments for trading
purposes. The Company enters into interest rate swap agreements to mitigate
the risk of changes in interest rates associated with its variable rate bank
debt in accordance with the terms of the Company's Credit Agreement. The
Company does not believe that its exposure to market risk is material to the
Company's financial position or results of operations.
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 to the registrant's definitive proxy statement
for its 2001 annual meeting of stockholders, which is to be filed pursuant to
Regulation 14A not later than April 30, 2001.
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
Exhibits:
Exhibits 10.1 through 10.8 and 10.16 through 10.20 are management
contracts or compensatory plans or arrangements.
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 - Certificate of Amendment to the Certificate of Incorporation
of the Company (incorporated herein by reference to Annex
II of the Company's 2000 Annual Proxy Statement filed with
the Commission on April 7, 2000).
3.3 - Amended and Restated By-Laws of the Company (incorporated
herein by reference to the April 28, 1995 Form 8-K).
4.1 - 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 Pension
Equalization Plan (incorporated herein by reference to the
1992 10-K).
10.2 - Settlement Agreement dated November 21, 1996 between the
Company and the United States of America.
10.3 - 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")).
10.4 - 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).
10.5 - 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).
10.6 - 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).
10.7 - 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).
10.8 - 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).
10.9 - 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).
10.10 - 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).
10.11 - 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).
10.12 - 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 (incorporated
herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 filed with the
Commission on April 11, 1997, File No. 1-11353).
10.13 - 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 (incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997 filed with the Commission on March 30, 1998,
File No. 1-11353).
10.14 - 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).
10.15 - Fourth Amendment to the Amended and Restated Credit
Agreement dated as of June 7, 2000 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, 2000 filed with the Commission on August 14, 2000,
File No. 1-11353).
10.16 - Laboratory Corporation of America Holdings 1995 Stock Plan
for Non-Employee Directors (incorporated herein by reference
to the report of Form S-8 dated September 26, 1995, filed
with the Commission on September 26, 1995).
10.17 - Laboratory Corporation of America Holdings 1997 Employee
Stock Purchase Plan (incorporated herein by reference to
Annex I of the Company's 1996 Annual Proxy Statement filed
with the Commission on October 25, 1996).
10.18 - Amendments to the Laboratory Corporation of America Holdings
1997 Employee Stock Purchase Plan (incorporated herein by
reference to Annex II of the Company's 1999 Annual Proxy
Statement filed with the Commission on June 16, 1999).
10.19 - Laboratory Corporation of America Holdings Amended and
Restated 1999 Stock Incentive Plan (incorporated herein by
reference to Annex I of the Company's 1999 Annual Proxy
Statement filed with the Commission of June 16, 1999).
10.20 - Laboratory Corporation of America Holdings 2000 Stock
Incentive Plan (incorporated herein by reference to Annex I
of the Company's 2000 Annual Proxy Statement filed with the
Commission on April 7, 2000).
10.21 - Support Agreement between Roche Biomedical Laboratories,
Inc. and Hoffmann-La Roche Inc., dated as of April 27, 1995.
10.22 - First Amendment to Support Agreement between Roche Biomedical
Laboratories, Inc. and Hoffmann-La Roche Inc., dated as of
July 26, 1995.
10.23 - 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.
10.24 - 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.
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.
* Filed herewith.
(b) Reports on Form 8-K
(1) A current report on Form 8-K dated November 14, 2000 was filed on
November 15, 2000 by the registrant, in connection with the press
release dated November 14, 2000 announcing that the Company had
entered into a multi-year contract extension with UnitedHealthcare
as a national provider of its clinical laboratory testing.
(2) A current report on Form 8-K date December 12, 2000 was filed on
December 12, 2000 by the registrant, in connection with the press
release dated December 12, 2000 announcing the introduction of
HIV GENOSURE, a new genotypic resistance assay, to its portfolio
of HIV resistance testing services.
(3) A current report on Form 8-K date February 14, 2001 was filed on
February 14, 2001 by the registrant, in connection with the press
release dated February 14, 2001 announcing the results for the
quarter and twelve-months ended December 31, 2000.
(4) A current report on Form 8-K date February 14, 2001 was filed on
February 14, 2001 by the registrant, in connection with summary
information of the Company dated February 14, 2001.
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 9, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on March 9, 2001 in the
capacities indicated.
Signature Title
--------- -----
/s/ THOMAS P. MAC MAHON Chairman of the Board,
- -------------------------------- President and Chief
Thomas P. Mac Mahon Executive Officer
(Principal Executive Officer)
/s/ WESLEY R. ELINGBURG Executive Vice President,
- -------------------------------- Chief Financial Officer
Wesley R. Elingburg 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, 2000 and 1999 F-3
Consolidated Statements of Operations for
the three-year period ended December 31, 2000. F-4
Consolidated Statements of Changes in Shareholders'
Equity for the three-year period ended
December 31, 2000 F-5
Consolidated Statements of Cash Flows for the
three-year period ended December 31, 2000. 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, 2000 and 1999, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. 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 of America, 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 our opinion.
PricewaterhouseCoopers LLP
Charlotte, North Carolina
February 9, 2001
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share data)
December 31,
-----------------------
2000 1999
------ ------
ASSETS
Current assets:
Cash and cash equivalents $ 48.8 $ 40.3
Accounts receivable, net 368.0 348.0
Inventories 31.6 29.1
Prepaid expenses and other 18.5 37.5
Deferred income taxes 44.8 44.6
--------- ---------
Total current assets 511.7 499.5
Property, plant and equipment, net 272.8 273.2
Intangible assets, net 865.7 803.9
Other assets, net 16.7 13.6
--------- ---------
$ 1,666.9 $ 1,590.2
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 52.8 $ 43.6
Accrued expenses and other 127.1 107.0
Current portion of long-term debt 132.0 95.0
--------- ---------
Total current liabilities 311.9 245.6
Revolving credit facility -- --
Long-term debt, less current portion 346.5 478.4
Capital lease obligations 7.2 4.4
Other liabilities 123.9 127.6
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 (aggregate
preference value of $218.2 at
December 31, 1999) -- 213.4
Series B 8 1/2% Convertible Pay-in-Kind
Preferred Stock, $0.10 par value,
6,971,970 shares issued and outstanding
at December 31, 1999 (aggregate
preference value of $348.6 at
December 31, 1999) -- 345.3
Shareholders' equity:
Common stock, $0.10 par value; 52,000,000
shares authorized; 34,869,623
and 12,878,958 shares issued and
outstanding at December 31,
2000 and 1999, respectively 3.5 1.3
Additional paid-in capital 1,051.7 423.9
Accumulated deficit (168.0) (245.5)
Unearned restricted stock compensation (9.4) (4.1)
Accumulated other comprehensive loss (0.4) (0.1)
--------- ---------
Total shareholders' equity 877.4 175.5
--------- ---------
$ 1,666.9 $ 1,590.2
========= =========
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,
----------------------------------
2000 1999 1998
--------- --------- ---------
Net sales $ 1,919.3 $ 1,698.7 $ 1,612.6
Cost of sales 1,152.7 1,069.6 1,049.2
--------- --------- ---------
Gross profit 766.6 629.1 563.4
Selling, general and
administrative expenses 483.0 448.2 405.0
Amortization of intangibles
and other assets 33.5 31.2 30.8
Restructuring charges 4.5 -- --
--------- --------- ---------
Operating income 245.6 149.7 127.6
Other income (expenses):
Gain (loss) on sale of assets (1.0) (1.7) 1.6
Net investment income (loss) 1.5 (0.9) 1.0
Interest expense (38.5) (41.6) (48.7)
--------- --------- ---------
Earnings before income taxes 207.6 105.5 81.5
Provision for income taxes 95.5 40.1 12.7
--------- --------- ---------
Net earnings 112.1 65.4 68.8
Less preferred stock dividends (34.3) (49.6) (43.6)
Less accretion of mandatorily
redeemable preferred stock (0.3) (0.8) (0.8)
--------- --------- ---------
Net earnings attributable to
common shareholders $ 77.5 $ 15.0 $ 24.4
========= ========= =========
Basic earnings per common share: $ 3.29 $ 1.18 $ 1.95
========== ========== ==========
Diluted earnings per common share $ 3.22 $ 1.16 $ 1.95
========== ========== ==========
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 DECEMBER 31, 1997 $ 1.2 $ 412.8 $ (284.9)
Comprehensive earnings:
Net earnings -- -- 68.8
Other comprehensive earnings:
Change in valuation
allowance on securities,
net of tax -- -- --
-------- --------- ---------
Comprehensive earnings -- -- 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 earnings:
Net earnings -- -- 65.4
Other comprehensive earnings:
Foreign currency translation
adjustments -- -- --
Change in valuation allowance
on securities, net of tax -- -- --
-------- --------- ---------
Comprehensive earnings -- -- 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)
Comprehensive earnings:
Net earnings -- -- 112.1
Other comprehensive earnings:
Foreign currency translation
adjustments -- -- --
-------- ---------- ---------
Comprehensive earnings -- -- 112.1
Issuance of common stock 0.1 17.7 --
Issuance of restricted stock awards -- 9.3 --
Amortization of unearned
restricted stock compensation -- -- --
Income tax benefit from stock
options exercised -- 19.0 --
Conversion of preferred stock
into common stock 2.1 581.8 --
Preferred stock dividends -- -- (34.3)
Accretion of mandatorily
redeemable preferred stock -- -- (0.3)
--------- --------- ---------
BALANCE AT DECEMBER 31, 2000 $ 3.5 $ 1,051.7 $ (168.0)
========= ========= =========
Unearned Accumulated
Restricted Other Total
Stock Comprehensive Shareholders'
Compensation Income (loss) Equity
------------ ------------- ------------
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 comprehensive 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
Comprehensive income:
Net income -- -- 112.1
Other comprehensive income:
Foreign currency translation
adjustments -- (0.3) (0.3)
------ ------ -------
Comprehensive income -- (0.3) 111.8
Issuance of common stock -- -- 17.8
Issuance of restricted stock awards (9.3) -- --
Amortization of unearned
restricted stock compensation 4.0 -- 4.0
Income tax benefit from stock
options exercised -- -- 19.0
Conversion of preferred stock
into common stock -- -- 583.9
Preferred stock dividends -- -- (34.3)
Accretion of mandatorily
redeemable preferred stock -- -- (0.3)
------ ------ -------
BALANCE AT DECEMBER 31, 2000 $ (9.4) $ (0.4) $ 877.4
====== ====== =======
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,
-------------------------------
2000 1999 1998
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 112.1 $ 65.4 $ 68.8
Adjustments to reconcile net earnings
to net cash provided by
operating activities:
Net (gains) losses on disposals 1.0 1.7 (1.6)
Depreciation and amortization 89.6 83.8 82.8
Deferred compensation 4.0 0.4 --
Investment loss -- 4.2 --
Deferred income taxes (3.2) 37.0 29.3
Change in assets and liabilities:
Net change in restructuring
reserves (1.2) (6.2) (5.6)
Decrease(increase)in accounts
receivable, net (15.9) 27.4 (46.6)
Decrease (increase)in inventories (2.1) 1.6 5.2
Decrease(increase)in prepaid
expenses and other 21.3 (24.6) 4.7
Change in income taxes
receivable -- 11.2 (2.4)
Increase (decrease) in accounts
payable 7.9 (6.2) (5.7)
Increase (decrease) in accrued
expenses and other 32.9 (15.4) (5.0)
Other, net 0.3 0.2 1.2
------- ------- ------
Net cash provided by operating
activities 246.7 180.5 125.1
------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (55.5) (69.4) (58.7)
Proceeds from sale of assets 1.4 1.1 12.6
Acquisitions of businesses (94.9) -- (23.7)
Deferred payments on acquisitions (1.0) (8.7) (6.8)
Refund of lease guaranty -- -- 8.0
------- ------ ------
Net cash used for investing
activities (150.0) (77.0) (68.6)
------- ------ ------
(continued)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions, except per share data)
Years Ended December 31,
--------------------------------
2000 1999 1998
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit
facilities $ -- $ 40.0 $ 40.0
Payments on revolving credit
facilities -- (40.0) (80.0)
Payments on long-term debt (95.0) (70.3) --
Payments on long-term lease obligations (1.2) (0.8) (1.5)
Payment of preferred stock dividends (9.5) (18.5) (18.5)
Net proceeds from issuance of stock
to employees 17.8 3.8 2.9
------- ------- -------
Net cash used for
financing activities (87.9) (85.8) (57.1)
------- ------- -------
Effect of exchange rate changes on
cash and cash equivalents (0.3) (0.1) --
Net increase (decrease) in cash
and cash equivalents 8.5 17.6 (0.6)
Cash and cash equivalents at
beginning of year 40.3 22.7 23.3
------- ------- -------
Cash and cash equivalents at
end of year $ 48.8 $ 40.3 $ 22.7
======= ======= =======
Supplemental schedule of cash
flow information:
Cash paid (received) during the year
for:
Interest $ 40.7 $ 41.8 $ 47.5
Income taxes, net of refunds 48.8 23.9 (12.2)
Disclosure of non-cash financing
and investing activities:
Preferred stock dividends 24.8 31.1 25.1
Accretion of mandatorily redeemable
preferred stock 0.3 0.8 0.8
Unrealized loss on securities available-
for-sale (net of tax) -- -- 2.0
Conversion of preferred stock into
common stock 583.9 -- --
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 the second largest independent clinical laboratory company in
the United States based on 2000 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 24 primary testing facilities 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. During 2000, the Company
added two new subsidiaries through acquisitions: POISONLAB, INC. and National
Genetics Institute, Inc. (NGI). Disclosure of certain business
combination transactions is included in Note 2 - Business Acquisitions.
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. As a result of the Company's cash management system,
checks issued but not presented to the banks for payment may create negative
book cash balances. Such negative balances are included in trade accounts
payable and totaled $11.6 and $10.7 at December 31, 2000 and 1999,
respectively.
Inventories:
Inventories, consisting primarily of purchased laboratory supplies, are
stated at the lower of cost (first-in, first-out) or market.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Financial Instruments:
Interest rate swap agreements, which are used by the Company in the
management of interest rate exposure, are accounted for on an accrual basis.
Amounts to be paid or received under such agreements are recognized as
interest income or expense in the periods in which they accrue.
Property, Plant and Equipment:
Property, plant and equipment 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 that the preliminary project stage is completed and
management commits to funding a project until the project is substantially
complete and the software is ready for its intended use. Capitalized costs
include direct material and service costs and payroll and payroll-related
costs. 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
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
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.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents
and accounts receivable.
The Company maintains cash and cash equivalents with various major
financial institutions. The total cash balances on deposit that exceeded the
balances insured by the F.D.I.C., was approximately $42.0 at December 31,
2000.
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 2000, 1999 and 1998, approximately
16%, 20% and 22%, 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.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
Reverse Stock Split:
All refereces to common stock, common shares outstanding, average number
of common shares outstanding, stock options, restricted shares and per share
amounts in the Consolidated Financial Statements and Notes to Consolidated
Financial Statements have been restated to reflect the May 2, 2000 1-for-10
common stock split on a retroactive basis.
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 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, less
preferred stock dividends and accretion, by the weighted average number of
common shares outstanding. Dilutive earnings per share is computed by
dividing net income, 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.
The following represents a reconciliation of the weighted average shares
used in the calculation of basic and diluted earnings per share:
Years ended December 31,
2000 1999 1998
------------------------------------
Basic 23,540,334 12,666,188 12,484,681
Assumed conversion/exercise
of:
Stock options 355,250 122,648 --
Restricted stock awards 179,179 88,323 --
---------- ---------- ----------
Diluted 24,074,763 12,877,159 2,484,681
========== ========== =========
The effect of conversion of the Company's redeemable preferred stock, or
exercise of certain of the Company's stock options was not included in the
computation of diluted earnings per common share for
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
the years ended December 31, 2000, 1999 and 1998, as it would have been
antidilutive.
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,
2000 1999 1998
----------------------------------
Stock Options 117,462 872,921 971,471
Series A convertible exchangeable
Preferred stock -- 7,933,043 7,933,043
Series B convertible pay-in-kind
Preferred stock -- 12,676,296 11,653,712
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 forself-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 market prices in an active
market or on discounted cash flows). Assets to be disposed of
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
are reported at the lower of the carrying amount or net realizable value.
Intangible Assets:
Intangible assets, consisting of goodwill and other intangibles (patents
and technological know-how, customer lists and non-compete agreements), are
amortized on a straight-line basis over the expected periods to be benefited,
generally ranging from 20 to 40 years for goodwill, legal life for patents and
technological know-how, 10 to 25 years for customer lists and approximately 3
to 5 years for non-compete agreements.
2. BUSINESS ACQUISITIONS
The Company acquired several companies in 2000, as described below. All
companies acquired have been accounted for as purchases with the excess of the
purchase price over the estimated fair value of the net assets acquired
recorded as goodwill. Additions to goodwill for current year acquisitions
totaled $49.5 and will be amortized on a straight-line basis over a period of
20 years. The results of each operation have been included in the
consolidated financial results of the Company from the date of acquisition.
On March 6, 2000, the Company completed the acquisition of all of the
stock of San Diego-based POISONLAB, Inc.'s ccupational substance abuse and
clinical toxicology testing business for $4.4 in cash and future payments of
$1.8 which are contingent upon performance of the business.
On April 19, 2000, the Company completed the acquisition of certain
clinical testing assets of Bio-Diagnostics Laboratories,which is based in
Torrance, California, for approximately $8.5 in cash and future payments of
$2.1.
On June 27, 2000, the Company completed the acquisition of the laboratory
testing business of San Diego-based Pathology Medical Laboratories for
approximately $14.5 in cash.
On August 1, 2000, the Company completed the acquisition of all of the
stock of National Genetics Institute, Inc. (NGI), which is based in Los
Angeles, California, for approximately $56.0 in cash and future payments of
$16.0.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
3. RESTRUCTURING AND NON-RECURRING CHARGES
The following represents the Company's restructuring activities for the
periods indicated:
Lease and
Severance other facility
costs costs Total
-------------- -------------- -----
Balance at
January 1, 1998 $ 3.7 $ 34.9 $ 38.6
Cash payments (1.2) (4.4) (5.6)
------ ------ ------
Balance at
December 31, 1998 2.5 30.5 33.0
Cash payments (2.0) (4.2) (6.2)
------ ------ ------
Balance at
December 31, 1999 0.5 26.3 26.8
Memphis closure 3.0 1.5 4.5
Reclassification and
non-cash items -- (3.7) (3.7)
Cash payments (1.6) (4.0) (5.6)
------ ------ ------
Balance at
December 31, 2000 $ 1.9 $ 20.1 $ 22.0
====== ====== ======
4. ACCOUNTS RECEIVABLE, NET
December 31, December 31,
2000 1999
------------ -----------
Gross accounts receivable $ 491.0 $ 495.1
Less allowance for doubtful accounts (123.0) (147.1)
------- --------
$ 368.0 $ 348.0
======= ========
The provision for doubtful accounts was $195.9, $191.9 and $164.7 in
2000, 1999 and 1998, respectively.
5. PROPERTY, PLANT AND EQUIPMENT, NET
December 31, December 31,
2000 1999
------------ ------------
Land $ 9.5 $ 9.4
Buildings and building improvements 68.5 67.8
Machinery and equipment 323.4 312.1
Leasehold improvements 63.0 58.7
Furniture and fixtures 17.8 21.4
Construction in progress 35.6 48.8
Buildings under capital leases 5.4 5.4
Equipment under capital leases 3.8 3.5
------- ------
527.0 527.1
Less accumulated depreciation
and amortization of capital
lease assets (254.2) (253.9)
------- -------
$ 272.8 $ 273.2
======= =======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
Depreciation expense and amortization of capital lease assets was $56.1,
$52.6 and $52.0 for 2000, 1999 and 1998, respectively.
6. INTANGIBLE ASSETS, NET
December 31, December 31,
2000 1999
------------ ------------
Goodwill $ 860.5 $ 780.6
Other intangibles, principally patents,
customer lists and non-compete
agreements 245.6 231.2
-------- --------
1,106.1 1,011.8
Less accumulated amortization (240.4) (207.9)
-------- --------
$ 865.7 $ 803.9
======== ========
Amortization of intangible assets was $33.5, $31.2 and $30.8 in 2000,
1999 and 1998, respectively.
7. ACCRUED EXPENSES AND OTHER
December 31, December 31,
2000 1999
------------ ------------
Employee compensation and benefits $ 57.5 $ 48.9
Acquisition related accruals 13.3 13.8
Restructuring reserves 12.4 12.7
Accrued taxes 10.1 --
Self-insurance reserves 21.1 20.0
Interest payable 3.7 3.5
Other 9.0 8.1
------- -------
$ 127.1 $ 107.0
======= =======
8. OTHER LIABILITIES
December 31, December 31,
2000 1999
------------ ------------
Acquisition related accruals $ 8.8 $ 8.9
Restructuring reserves 9.6 14.1
Deferred income taxes 28.5 31.2
Post-retirement benefit obligation 36.9 35.2
Self-insurance reserves 37.8 37.8
Other 2.3 0.4
------- -------
$ 123.9 $ 127.6
======= =======
9. 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
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
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 $132.0 in 2001
(to be paid in quarterly installments), $132.0 in 2002 and 2003 and $82.5 in
2004 (all paid in quarterly installments). The Amended Revolving Credit
Facility expires in March 31, 2002. The Company repaid approximately $95.0
during the year ended December 31, 2000 on its Amended Term Loan Facility.
The Company also made 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.
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, 2000 and 1999 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 $350.0 and $500.0, respectively, 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 6.27% and 6.32%, 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
(received) paid by the Company in 2000 and 1999 were ($3.0) and $1.9,
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 Company unwound the $150.0 rate collar transaction on
December 20, 2000. The total proceeds received, including quarterly interest,
was
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
$0.5. The remaining agreement matures in January 2003. The estimated benefit
at which the Company could have terminated these agreements as of December 31,
2000 and 1999 was approximately $1.6 and $11.0, 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, 2000 and 1999 were 7.0% and 6.7%, respectively.
10. MANDATORILY REDEEMABLE PREFERRED STOCK
On June 6, 2000, the Company called for redemption all of its outstanding
Series A and Series B preferred stock at $52.83 per share, in accordance with
the terms of the Preferred Stock Offering, by July 6, 2000. Substantially all
of the holders of the Series A and Series B preferred stock elected to convert
their shares into common stock. As of July 31, 2000, the Series A preferred
stock was converted into 7,930,174 shares of common stock and the Series B
preferred stock was converted into 13,241,576 shares of common stock.
11. INCOME TAXES
The provisions for income taxes in the accompanying consolidated
statements of operations consist of the following:
Years Ended December 31,
----------------------------------
2000 1999 1998
--------- -------- --------
Current:
Federal $ 85.2 $ 0.5 $ (17.6)
State 13.5 2.6 1.0
------- ------ -------
98.7 3.1 (16.6)
------- ------ -------
Deferred:
Federal (8.6) 29.1 45.2
State 5.4 7.9 (15.9)
------- ------ -------
(3.2) 37.0 29.3
------- ------ -------
$ 95.5 $ 40.1 $ 12.7
======= ====== =======
The tax benefit associated with non-statutory stock options under the
Company's stock plan reduced taxes payable by approximately $19.0 in 2000.
Tax benefits related to stock plans in 1999 and 1998 were immaterial. Such
benefits are credited to additional paid-in-capital.
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 before income taxes is reconciled to
statutory federal income tax rates as follows:
Years Ended December 31,
---------------------------------
2000 1999 1998
-------- ------- -------
Statutory federal rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal income tax effect 5.0 5.1 8.5
Non-deductible amortization of
intangible assets 3.1 5.7 8.6
Change in valuation allowance -- (9.5) (33.8)
Other 2.9 1.7 (2.7)
----- ----- -----
Effective rate 46.0% 38.0% 15.6%
===== ===== =====
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,
2000 1999
------------ ------------
Deferred tax assets:
Settlement and related expenses $ 13.0 $ 13.0
Accounts receivable 12.0 2.1
Self-insurance reserves 8.7 7.6
Postretirement benefit obligation 13.9 13.9
Acquisition and restructuring reserves 18.8 24.4
State net operating loss carryforwards 6.1 15.3
Employee benefits 7.4 3.3
Other 10.2 8.5
------- -------
90.1 88.1
Less valuation allowance (4.5) (4.5)
------- -------
Net deferred tax assets 85.6 83.6
------- -------
Deferred tax liabilities:
Intangible assets (46.9) (43.6)
Property, plant and equipment (22.7) (26.9)
Other (1.2) (1.5)
------- -------
Total gross deferred tax liabilities (70.8) (72.0)
------- -------
Net deferred tax assets $ 14.8 $ 11.6
======= =======
Historically, when deferred tax assets were less likely than not to be
realized, valuation allowances were established. Based on improved current
and projected 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
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
to a level where management believes that it is more likely than not the tax
benefits will be realized.
The Internal Revenue Service has concluded their examination of the 1993,
1994, 1995, 1996 and 1997 tax years. All years are currently under review by
the Joint Committee on Taxation. Management believes that adequate provisions
have been recorded relating to the concluded examinations. The Company has
state tax loss carryforwards of approximately $103.5 which expire, starting in
2001, through 2018.
12. 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 May 2000, the shareholders approved the 2000 Stock Incentive Plan.
The principal purpose of the 2000 Stock Incentive Plan was to authorize 1.7
million additional shares for issuance under the plan. The effect of the 2000
Incentive Plan was to increase to an aggregate of 2.6 million shares available
for issuance under all stock option plans (the 2000 Stock Incentive Plan, the
Amended and Restated 1999 Stock Incentive Plan and the 1994 Stock Option
Plan).
During 2000, there were 414,749 options granted to officers and key
employees of the Company. The exercise price for these options ranged from
$41.25 to $106.81 per share. Also, during 2000, 131,400 shares of restricted
stock were issued to senior management under the 2000 Incentive Plan at market
values on the dates of grant of $40.00, $66.88 and $106.31. Restrictions
limit the sale or transfer of these shares during a six-year period when
the restrictions lapse. Upon issuance of stock under the 2000 Incentive Plan,
unearned compensation of $9.3 was recorded as additional paid-in capital and
an opposite amount was charged to shareholders' equity as unearned restricted
stock compensation. 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 and 2002. The
unearned restricted stock compensation is being amortized to expense over the
applicable vesting periods. During 2000, total restricted stock compensation
expense was $4.0. At December 31, 2000, there were 1,363,044 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 2000, 1999 and 1998 were $44.71, $16.80 and $10.97 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
7 years (5 years in 1999 and 1998), .5, and 0% for each of the three years
ended December 31, 2000. Interest rates
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
assumptions were 5.0%, 6.0% and 4.4% for the years ended December 31, 2000,
1999 and 1998, respectively.
The Company has an employee stock purchase plan, begun in 1997 and
amended in 1999, with 750,000 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 employees semi annually in January and July of each
year. A summary of shares issued is as follows:
1998 1999 2000 2001
------ ------ ------ ------
January 92,334 96,113 52,588 25,657
July 73,020 86,774 45,522
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: 2000 - 5.5%
and 6.1%; 1999 - 5.5% and 4.9%; and 1998 - 5.3% and 5.1% and volatility rates
for each of the following six month periods: 2000 - .5 and .5; 1999 - .5 and
.4; and 1998 - .6 and .8.
The per share weighted average grant date fair value of the benefits under
the Plan for the first and second six-month periods is as follows:
2000 1999 1998
------ ----- -----
First six months $10.18 $3.95 $5.00
Second six months $20.86 $7.48 $7.84
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 on a pro forma basis is
indicated below:
Years ended
December 31,
2000 1999 1998
------ ------ ------
Net earnings As reported $112.1 $ 65.4 $ 68.8
Pro forma 108.0 62.8 66.1
Basic earnings per
common share As reported $ 3.29 $ 1.18 $ 1.95
Pro forma 3.12 0.98 1.74
Diluted earnings per
common share As reported $ 3.22 $ 1.16 $ 1.95
Pro forma 3.05 0.96 1.74
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
Pro forma net earnings reflects options granted in 1997 through 2000.
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.
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, 1998 478,844 $49.620
(176,957 exercisable)
Options granted 524,988 $19.389
Canceled (32,385) $71.469
---------
Outstanding at December 31, 1998 971,447 $32.555
(282,496 exercisable)
Options granted 89,236 $27.571
Canceled (57,588) $41.626
Exercised (2,514) $22.533
---------
Outstanding at December 31, 1999 1,000,581 $31.613
(544,090 exercisable)
Options granted 414,749 $73.392
Canceled (35,363) $47.778
Exercised (597,281) $25.477
---------
Outstanding at December 31, 2000 782,686 $57.705
=========
Exercisable at December 31, 2000 167,848 $63.886
=========
The weighted-average remaining life of options outstanding at December
31, 2000 is approximately 8.2 years.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
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
- ------------------------------------------------- ---------------------
$19.38 - 27.50 302,586 7.41 $22.229 98,813 $23.888
$29.38 - 41.25 130,666 8.93 $40.359 8,800 $31.072
$63.13 - 70.75 159,924 9.43 $70.456 -- --
$106.81- 164.81 189,510 7.98 $115.547 60,235 $134.294
------- -------
782,686 167,848
======= =======
13. RELATED PARTY TRANSACTIONS
At December 31, 2000 and 1999, 11,352,537 and 6,132,926 shares of the
Company's outstanding common stock, or approximately 32.6% at December 31,
2000 and 47.6% at December 31, 1999, were owned by Roche Holdings, Inc.
(Roche). The reduction in Roche's ownership of the Company's common stock is
a result of the sales by Roche of 2.5 million shares in June 2000 and 4.0
million shares in October 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 $42.7, $38.3, and $33.0
in 2000, 1999 and 1998, respectively. In addition, the Company made royalty
payments to Roche in the amounts of $2.8 in 2000, $2.9 in 1999 and $2.9 in
1998. Revenue received from Roche for laboratory services was $1.3 in 2000,
$0.9 in 1999 and $0.5 in 1998. Amounts owed to Roche and its affiliates at
December 31, 2000 and 1999 were $1.4 and $3.5, respectively.
A member of the Company's Board of Directors is former President and
Chief Executive Officer of TriPath Imaging, Inc. and has ownership of
approximately 4.0% of TriPath's common stock at December 31, 2000.
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 $0.5 in 2000, $0.4 in 1999, and $0.7 in 1998.
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.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
14. COMMITMENTS AND CONTINGENT LIABILITIES
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. The Company is carefully evaluating these claims and has entered
into settlement negotiations with the representatives of the parties. Based
upon these discussions, management does not believe that the ultimate outcome
of these claims will exceed existing reserves or have a material adverse affect
on the Company. On January 9, 2001, the Company was served with a complaint
in North Carolina which purports to be a class action and makes claims similar
to the cases referred to above. The Company is carefully evaluating this
claim. Due to the early stage of the claim, its outcome cannot be
presently 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.
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.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
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, 2000 and 1999, the Company had provided
letters of credit aggregating approximately $28.2 and $24.0, 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, 2000 are as follows:
Operating Capital
--------- -------
2001 $ 41.9 $ 3.0
2002 32.6 3.0
2003 25.0 2.8
2004 18.8 2.6
2005 14.0 2.8
Thereafter 42.3 4.4
------- ------
Total minimum lease payments 174.6 18.6
Less:
Amounts included in
restructuring accruals -- 4.6
Amount representing interest -- 5.8
------- ------
Total minimum operating
lease payments and
present value of minimum
capital lease payments $ 174.6 $ 8.2
======= ======
Current $ 1.0
Non-current 7.2
------
$ 8.2
======
Rental expense, which includes rent for real estate, equipment and
automobiles under operating leases, amounted to $71.3, $67.0 and $67.5 for the
years ended December 31, 2000, 1999 and 1998, respectively.
15. 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, $7.5 and $7.1 in 2000, 1999 and 1998, 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
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
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.
The components of net periodic pension cost for both of the defined benefit
plans are summarized as follows:
Company Plans
------------------------
Years ended
December 31,
2000 1999 1998
------------------------
Components of net periodic benefit cost
Service cost $ 10.6 $ 10.5 $ 10.5
Interest cost 10.6 9.2 8.6
Expected return on plan assets (12.3) (12.1) (11.0)
Net amortization and deferral (1.5) (1.6) (1.6)
------ ------ ------
Net periodic pension cost $ 7.4 $ 6.0 $ 6.5
====== ====== ======
Company Plans
-----------------
December 31,
2000 1999
-----------------
Change in benefit obligation
Benefit obligation at beginning of year $138.3 $140.3
Service cost 10.6 10.5
Interest cost 10.6 9.2
Actuarial (gain) loss 2.1 (11.7)
Benefits paid (9.4) (10.0)
------ ------
Benefit obligation at end of year 152.2 138.3
------ ------
Change in plan assets
Fair value of plan assets at beginning of year 138.1 135.9
Actual return on plan assets 13.8 3.5
Employer contributions 8.6 8.7
Benefits paid (9.4) (10.0)
------ ------
Fair value of plan assets at end of year 151.1 138.1
------ ------
Funded status, end of year 1.2 0.2
Unrecognized net actuarial loss (11.2) (10.7)
Unrecognized prior service cost 7.0 8.6
------ ------
Accrued pension asset $ (3.0) $ (1.9)
====== ======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
Assumptions used in the accounting for the defined benefit plans were as
follows:
Company Plans
---------------
2000 1999
---------------
Weighted-average discount rate 7.75% 7.75%
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 fund benefits as claims are incurred. The components of
postretirement benefit expense are as follows:
Year ended Year ended Year ended
December 31, December 31, December 31,
2000 1999 1998
------------ ----------- ------------
Service cost $ 0.8 $ 1.0 $ 1.0
Interest cost 2.5 2.6 2.7
Net amortization and deferral (0.6) (0.1) 0.1
------- ------- -------
Postretirement benefit costs $ 2.7 $ 3.5 $ 3.8
======= ======= =======
A summary of the components of the accumulated postretirement benefit
obligation follows:
December 31,
2000 1999
---------------
Retirees $ 11.3 $ 8.0
Fully eligible active plan participants 12.4 9.3
Other active plan participants 19.4 14.6
------ ------
$ 43.1 $ 31.9
====== ======
December 31,
2000 1999
----------------
Reconciliation of the funded status of the
postretirement benefit plan and accrued liability
Accumulated postretirement benefit obligation,
beginning of year $ 31.9 $ 38.8
Changes in benefit obligation due to:
Service cost 0.8 1.0
Interest cost 2.5 2.6
Plan participants contributions 0.2 0.1
Actuarial (gain) loss 11.9 (9.7)
Amendments (3.0) --
Benefits paid (1.2) (0.9)
------ ------
Accumulated post retirement benefit obligation,
end of year 43.1 31.9
Unrecognized net actuarial loss (12.2) (0.3)
Unrecognized prior service cost 6.0 3.6
------ ------
Accrued postretirement benefit obligation $ 36.9 $ 35.2
====== ======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
The weighted-average discount rates used in the calculation of the
accumulated postretirement benefit obligation was 7.8% as of December 31, 2000
and 1999. The health care cost trend rate-medical was assumed to be 7.5% and
6.5% and the trend rate-Rx was assumed to be 12.0% and 6.5%, as of December
31, 2000 and 1999, respectively, declining gradually to 5.0% in the year 2010.
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, 2000 by $7.2. The impact of a percentage point
change on the aggregate of the service cost and interest cost components of
the net periodic postretirement benefit cost results in an increase or
decrease of $0.6.
16. QUARTERLY DATA (UNAUDITED)
The following is a summary of unaudited quarterly data:
Year ended December 31, 2000
------------------------------------------------
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- --------
Net sales $ 462.7 $ 482.4 $ 488.1 $ 486.1 $1,919.3
Gross profit 183.5 201.2 196.7 185.2 766.6
Net earnings 25.7 32.7 32.8 20.9 112.1
Less preferred dividends 14.7 19.6 -- -- 34.3
Less accretion of mandatorily
redeemable preferred stock 0.2 0.1 -- -- 0.3
Net earnings attributable
to common shareholders 10.8 13.0 32.8 20.9 77.5
Basic earnings per common
share 0.85 0.97 0.98 0.61 3.29
Diluted earnings per
common share 0.75 0.94 0.94 0.60 3.22
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 earnings per common
share 0.23 0.56 0.32 0.07 1.18
Diluted earnings per common
Share 0.23 0.56 0.32 0.06 1.16
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in millions, except per share data)
17. NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities (SFAS 133). SFAS 133 establishes accounting and reporting
standards which require that derivative instruments be recorded as either an
asset or liability measured at fair value. Changes in fair value are to be
recognized in current earnings or other comprehensive income, depending on
the purpose for which the derivative is held. The Company's use of
derivative instruments is not significant. Upon adoption of SFAS 133, the
Company held one derivative in the form of an interest rate swap. This hedge
is considered highly effective resulting in minimal earnings impact.
Schedule II
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 31, 2000, 1999 and 1998
(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, 2000:
Applied against asset
accounts:
Allowance for
doubtful accounts $ 147.1 $ 195.9 $(220.0) $ 123.0
======= ======= ======= =======
Valuation allowance-
deferred tax assets $ 4.5 $ -- $ -- $ 4.5
======= ======= ======= =======
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
======= ======= ======= =======