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
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________
Commission file number 1-11353
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LABORATORY CORPORATION OF AMERICA HOLDINGS
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3757370
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
358 South Main Street, Burlington, North Carolina 27215
(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.
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State the aggregate market value of the voting common equity held by
non-affiliates 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: $4,898,940,023 at February 28, 2002.
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date: 70,829,522 shares as of
February 28, 2002, of which 10,705,074 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
2001 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 2001 approximately 49% of the clinical
testing revenues in the United States were derived by hospital-based
laboratories, approximately 12% were derived by physicians in their offices
and laboratories, and approximately 39% 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 2001 there were approximately 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, 2001 such capitated
contracts accounted for approximately $106.3 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. In an effort to better promote this
appreciation in the marketplace, the Company recently announced
partnerships with Myriad Genetics, Inc., to make Myriad's predictive
medicine products broadly available to primary care physicians throughout
the United States; and EXACT Sciences, to exclusively license EXACT's
proprietary technologies for the detection of colorectal cancer.
Additional factors which may lead to future volume growth include: an
increase in the number and types of tests which are readily available
(due to advances in technology and increased cost efficiencies) 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, a
"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 281,000
patient specimens per day in 2001. 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 printing
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). In June 2001, the
Company acquired Minneapolis-based Viro-Med, Inc which offers molecular
microbial testing using real time PCR platforms. 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? to its portfolio of HIV resistance testing services. 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. Additionally, the Company provides comprehensive
testing for HCV including both PCR testing and genotyping at CMBP, NGI
and Viro-Med.
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. During 2001, The Company began offering PreGen-26, a DNA-based
colorectal cancer test (using EXACT Sciences Corporation's proprietary
genomics-based technology). PreGen-26 is intended to detect colorectal
cancer earlier when treatment is most effective.
Occupational Testing Services. The Company provides urine and hair
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, NGI and Viro-Med 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, 2001, no client or
group of clients under the same contract accounted for more than four
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. Fees for management
services are billed monthly at contractually agreed-upon rates.
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 monitor service and performance 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. For the year ended December 31, 2001, billings to the Company's
respective payors (based on the total volume of accessions) are as follows:
Revenue
Accession Volume as per
a % of Total Accession
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Private Patients 3.5% $111.28
Medicare, Medicaid and
Insurance 17.0% $ 31.59
Commercial Clients 38.9% $ 24.46
Managed Care 40.6% $ 29.27
Affiliations and Alliances
The Company's development of hospital relationships through
traditional and non-traditional business models exceeded all prior year
outcomes. The Company increased its focus on the traditional business
model with a hospital, whereby the Company enters into a reference service
agreement and establishes a Hospital Territory Manger (HTM) role. The
addition of this sales/service position sets the Company at an advantage
with specialized and targeted attention for the Company's Hospital
customers. Significant growth also occurred due to laboratory technical
support (management) contracts and shared services agreements.
In 2001 the Company added a number of new traditional and
nontraditional relationships with hospitals. These new hospital
relationships represent approximately $48.5 million of new annualized
sales.
Reference agreements, or traditional business model, 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.
A non-traditional business model is where 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.
Hospitals are increasingly looking beyond their in-house patient base
and seek to provide services to outreach patients within their greater
local community. The Company has a focus to develop cooperative testing
relationships with such hospitals in which the parties combine efforts to
support the needs of a specific community. These non-traditional
relationships center around capitalizing on a partner hospital's excess
capacity and ability to perform rapid response testing and the Company's
ability to provide low cost, high quality esoteric testing. These 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 non-traditional business 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
non-traditional business contracts. The Company generally bills the
hospital a monthly contractually-determined management fee in addition to
different fixed on-site and off-site fees per test. Highly esoteric tests
are generally billed under a separate fee schedule. 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, 2001, the
Company employed 235 generalists and 114 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, 2001,
the Company employed 290 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 2001, 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 2001, the Company continued to focus on its information systems
activities and substantially completed the consolidation of its 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 have been realized from the conversion of
its multiple billing systems into a centralized system and these benefits
will continue in the future as the Company takes advantage of this
standardization.
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 2001, the Company's days sales outstanding (DSO) were reduced
10 days from December 31, 2000 levels to 58 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 2001, the Chicago, San Antonio and Dallas locations were
converted.
2) 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 was 6%.
Although there can be no assurance of success, the Company has
developed a number of initiatives to address the complexity of the billing
process and to improve collection rates. These initiatives include: i)
installation of personal computer based products in client offices and
Company locations to help with the accuracy and completeness of billing
information captured on the front-end; ii) establishment of a project group
to focus on improvements in order entry; and iii) development and
implementation of enhanced eligibility checking to compare information to
payor records before billing. Additionally, the Company believes that it
can benefit from the conversion of its multiple billing systems into a
centralized system. Currently, 90% of the Company's billing is performed
on this centralized system. By the end of 2002, the Company plans to have
approximately 95% 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.
The Company's forensic crime laboratory, located at CMBP, is
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
223 ASCLD accredited crime laboratories worldwide, and is one of only six
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 2001 the entire United States clinical laboratory
testing industry had revenues exceeding $34 billion; approximately 49% of
such revenues were attributable to hospital-affiliated laboratories,
approximately 39% were attributable to independent clinical laboratories
and approximately 12% 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 $3.6 billion in revenues from clinical laboratory
testing in 2001.
In addition to the other national clinical laboratory, the Company
competes on a regional basis with many smaller regional independent
clinical laboratories as well as laboratories owned by hospitals and
physicians. The Company believes that the following factors, among others,
are often used by health care providers in selecting a laboratory: i)
pricing of the laboratory's test services; ii) accuracy, timeliness and
consistency in reporting test results; iii) number and type of tests
performed; iv) service capability and convenience offered by the
laboratory; and v) its reputation in the medical community. The Company
believes that it competes favorably with its principal competitors in each
of these areas and is currently implementing strategies to improve its
competitive position.
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 December 31, 2001, the Company had approximately 19,600 full-time
equivalent employees. A subsidiary of the Company has one collective
bargaining agreement which covers approximately 25 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") extend
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 performing high
complexity testing are required to meet more stringent requirements than
moderate complexity laboratories. Labs performing only waived tests, which
are tests determined by the Food and Drug Administration 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 regulation by 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 have
implemented 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 that 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.
Payment of Clinical Laboratory Services
In both 2001 and 2000, the Company derived approximately 16% 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 payment 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 limitation for clinical laboratory services furnished
to Medicaid recipients.
Since 1984, Congress has periodically reduced the ceilings on
Medicare payment 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 limitation from 76% of the
1984 national median to 74% of the 1984 national median. An additional
provision in the BBA froze the Consumer Price Index update for five years.
Because a significant portion of the Company's costs are relatively
fixed, Medicare payment 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 policy for billing of automated chemistry
profiles went into effect. The policy, which was developed by the Health
Care Financing Administration ("HCFA"), now known as the Center for
Medicare and Medicaid Services ("CMS"), working with the American Medical
Association, eliminated the old commonly used "19-22 test" automated
chemistry profile, sometimes referred to as a "SMAC" and replaced it with
four new panels of "clinically relevant" automated tests (each containing
from four to twelve chemistry tests). As a result of this 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 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 final rules were published on November 23,
2001 and will become generally effective on November 25, 2002. Due to the
variety of new rules (including limited coverage rules) which have been
adopted or proposed recently, and the lead time before the negotiated
rulemaking rule becomes effective, 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 government payment 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 the following provisions: 1) Transactions and Code Sets
- - standardized format for all electronic claims processing maintained by a
health plan, health care provider or health care data clearinghouse. The
compliance date for this provision is October 16, 2002. However, Congress
has approved a twelve-month extension for covered entities wishing to file
a formal compliance extension plan. 2) Privacy: a) standardize the
protections that must be provided for Protected Health Information ("PHI")
covering all forms and types of PHI and all methods of receipt, delivery
and storage; b) establish a formal privacy program and designate a privacy
officer. The compliance date for this provision is April 14, 2003.
The Company's HIPAA project plans have two phases: 1) assessment of
current systems, applications, processes and procedure testing and
validation for HIPAA compliance and; 2) remediation of affected systems,
applications, processes and procedure testing and validation for HIPAA
compliance.
The Company has completed the assessment phase of the Transactions and
Code Sets provision. Remediation is currently in progress and the Company
expects to meet the October 2002 required implementation date, but will
file for an extension if testing cannot be completed with all carriers. It
is currently estimated that the total future expenditures relating to the
Transactions and Code Sets project will be approximately $13.8, with $0.6
having been spent through December 31, 2001. The Company believes that
approximately 80% of this project will add new functionality to existing
systems and plans to capitalize these expenditures as incurred.
The Company is in the later stage of the assessment phase of the
Privacy provision. Upon completion of the assessment phase, financial
projections will be completed and remediation will be initiated. The
Company expects to meet the April 2003 required implementation date. The
total cost associated with the requirements of HIPAA is not expected to be
material to the Company's operations or cash flows.
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 attempts to gain referral of patients covered by private
insurance as well as federal programs.
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
reducing laboratory utilizations; 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 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 stated 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, any
significant criminal or civil penalty resulting from such proceedings could
have a material adverse affect on the Company's business.
Environmental and Occupational Safety
The Company is subject to licensing and regulation under Federal,
state and local laws and regulations relating to the protection of the
environment and human health and safety, including laws and regulations
relating to the handling, transportation and disposal of medical specimens,
infectious and hazardous waste and radioactive materials as well as to the
safety and health of laboratory employees. All Company laboratories are
subject to applicable Federal and state laws and regulations relating to
biohazard disposal of all laboratory specimens and the Company utilizes
outside vendors for disposal of such specimens. In addition, the Federal
Occupational Safety and Health Administration ("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.
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. During 2001, the Company
voluntarily implemented the use of safety needles at all of its service
locations at a cost of over $6.0 million.
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 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; Houston, Texas; San Diego, California and Southaven,
Mississippi 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 was 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. Although the
Corporate Integrity Agreement expired on November 21, 2001, the Company
continues to operate pursuant to its compliance program. The objective of
the Company's compliance program is to develop, implement, and update
compliance safeguards as necessary. Emphasis is placed on developing
compliance policies and guidelines, personnel training programs and various
monitoring and audit procedures to attempt to achieve implementation of all
applicable 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, 2001.
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
Los Angeles, California 16,000 Lease expires 2002;
one 5 year
renewal option
19,000 Lease expires 2004
San Diego, California 48,000 Lease expires 2007
14,000 Lease expires 2002
Denver, Colorado 20,000 Lease expires 2002
Tampa, Florida 95,000 Lease expires 2010;
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
Eden Prairie, Minnesota 49,000 Lease expires 2014
Kansas City, Missouri 78,000 Owned
Reno, Nevada 16,000 Owned
14,000 Lease expires 2003;
one 2 year
renewal option
Portsmouth, New Hampshire 43,000 Lease expires 2006;
one 5 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
Dublin, Ohio 82,000 Owned
Southaven, Mississippi 17,000 Owned
Dallas, Texas 60,000 Lease expires 2004;
two 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
Richmond, Virginia 34,000 Lease expires 2006
Kent, Washington 42,000 Lease expires 2005;
one 5 year
renewal option
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
246,000 Leases expire
2002-2010;
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 purporting to be a nation-wide
class action involving the alledged overbilling of patients who are covered
by private insurance. The Company has reached a settlement with the class
that will not 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 claim has been stayed pending
appeal of the court approval of the settlement discussed above. The
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, and
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
------- -------
2000
First Quarter 23.438 15.625
Second Quarter 40.500 19.688
Third Quarter 66.250 38.125
Fourth Quarter 91.500 54.125
High Low
------- -------
2001
First Quarter 87.500 49.750
Second Quarter 82.500 56.450
Third Quarter 91.350 66.840
Fourth Quarter 90.000 73.000
High Low
------- -------
2002
First Quarter (through February 28, 2002) 88.800 76.300
During May 2000, the Company's shareholders approved a 1-for-10
reverse stock split and on June 11, 2001, the Company effected a 2-for-1
stock split. The reported sales prices reflect such stock splits.
On February 28, 2002 there were 653 holders of record of the Common
Stock.
It is currently the Company's policy not to pay dividends on its
common stock in order to increase its flexibility with respect to its
acquisition strategy. In addition, the Company's new $300 million senior
credit facilities, will place certain limits 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
five-year period ended December 31, 2001 are derived from consolidated
financial statements of the Company, which have been audited by
PricewaterhouseCoopers LLP, 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,
-----------------------------------
2001 2000 1999
---------- ---------- ----------
(Dollars in millions, except per share amounts)
Statement of Operations Data:
- -----------------------------
Net sales $ 2,199.8 $ 1,919.3 $ 1,698.7
Gross profit 925.6 766.6 629.1
Operating income (loss) 367.6 245.6(b) 149.7
Earnings (loss) before
extraordinary loss 182.7 112.1 65.4
Extraordinary loss, net of
tax benefit 3.2 -- --
Net earnings (loss) 179.5(a) 112.1 65.4
Basic earnings (loss)
per common share before
extraordinary loss $ 2.63 $ 1.65 $ 0.59
Extraordinary loss per
common share, net
of tax benefit $ 0.05 $ -- $ --
Basic earnings (loss)
per common share $ 2.58 $ 1.65 $ 0.59
Diluted earnings (loss)
per common share before
extraordinary loss $ 2.59 $ 1.61 $ 0.58
Extraordinary loss per
common share, net
of tax benefit $ 0.05 $ -- $ --
Diluted earnings (loss)
per common share $ 2.54 $ 1.61 $ 0.58
Basic weighted average common
shares outstanding
(in thousands) 69,419 47,081 25,332
Diluted weighted average common
shares outstanding
(in thousands) 70,539 48,150 25,754
Balance Sheet Data:
- -------------------
Cash and cash
equivalents $ 149.2 $ 48.8 $ 40.3
Intangible assets, net 968.5 865.7 803.9
Total assets 1,929.6 1,666.9 1,590.2
Long-term obligations and
redeemable preferred
stock (c) 509.2 355.8 1,041.5
Total shareholders'
equity 1,085.4 877.4 175.5
1998 1997
---------- ----------
(Dollars in millions, except per share amounts)
Statement of Operations Data:
- -----------------------------
Net sales $ 1,612.6 $ 1,579.9
Gross profit 563.4 499.4
Operating income (loss) 127.6 (92.0)(d)
Earnings (loss) before
extraordinary loss 68.8 (106.9)
Extraordinary loss, net of
tax benefit -- --
Net earnings (loss) 68.8 (106.9)
Basic earnings (loss)
per common share before
extraordinary loss $ 0.98 $ (5.30)
Extraordinary loss, net
of tax benefit $ -- $ --
Basic earnings (loss)
per common share $ 0.98 $ (5.30)
Diluted earnings (loss)
per common share before
extraordinary loss $ 0.98 $ (5.30)
Extraordinary loss, net
of tax benefit $ -- $ --
Diluted earnings (loss)
per common share $ 0.98 $ (5.30)
Basic weighted average common
shares outstanding
(in thousands) 24,969 24,648
Diluted weighted average common
shares outstanding
(in thousands) 24,969 24,648
Balance Sheet Data:
- -------------------
Cash and cash
equivalents $ 22.7 $ 23.3
Intangible assets, net 836.2 851.3
Total assets 1,640.9 1,658.5
Long-term obligations and
redeemable preferred
stock (c) 1,110.0 1,200.1
Total shareholders'
equity 154.4 129.1
(a) During the third quarter of 2001, the Company recorded an
extraordinary loss of $3.2 million (net of tax benefit) relating to the
write-off of unamortized bank fees associated with the Company's term debt,
which was repaid in September of 2001. The Company also recorded a charge
of $8.9 million as a result of a payment made to a bank to terminate an
interest rate swap agreement tied to the Company's term loan.
(b) 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.
(c) Long-term obligations include capital lease obligations of $6.1
million, $7.2 million, $4.4 million, $4.2 million and $5.8 million at
December 31, 2001, 2000, 1999, 1998 and 1997, 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, 2001, 2000,
1999, 1998 and 1997, such amounts were $0.3 million, $2.1 million, $0.0
million, $7.7 million and $9.6 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. During 2001, the Company sold $744.0 aggregate
principal amount at maturity of its zero coupon convertible subordinated
notes due 2021 in a private placement. The Company received approximately
$488.6 in net proceeds from the offering. The Company used a portion of
the proceeds to repay $412.5 million of its term loan outstanding
under its credit agreement
(d) 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 2001, the Company experienced strong growth, primarily as a
result of continued implementation of its strategic plan. The Company
further expanded its managed care business while strengthening its
scientific expertise and market share through acquisitions and strategic
partnerships.
The Company completed two important acquisitions during the current
year. Path Lab Holdings, Inc., acquired in May 2001, is the largest
regional laboratory in New England with annual revenues in 2000 of
approximately $51.6 million. This acquisition not only expanded the
Company's geographic coverage, but also helped leverage the Company's
expertise in esoteric testing. Path Lab has particular skill in servicing
hospitals in the New England market. Hospitals generally have a need for
higher-value esoteric testing. The acquisition of Minneapolis-based Viro-
Med Inc. in June 2001, further strengthened the Company's leadership
position in infectious disease testing. In addition, Viro-Med's
specialized laboratory space provides significant additional esoteric
testing capacity and the flexibility to more efficiently direct testing
workflow throughout the country. Viro-Med had clinical laboratory revenues
for the twelve months ended December 31, 2000 of approximately $25.2
million.
In December 2001, the Company entered into exclusive licensing and
marketing relationships with EXACT Sciences and Myriad Genetics. Under
the agreement with EXACT Sciences, the Company will be the only national
clinical laboratory to offer testing services based on certain of EXACT
Sciences' proprietary technologies for the detection of colorectal cancer.
The agreement with Myriad Genetics allows the Company to market Myriad's
predictive medicine markers for hypertension, melanoma, breast, ovarian and
colorectal cancers to the Company's more than 200,000 primary care
physicians. While the Company believes both of these agreements will have
a favorable impact on its operating results going forward, it is too early
in each relationship to reliably quantify their impact in 2002.
In addition to the acquisitions and relationships discussed above, the
Company believes future performance will be positively affected by several
factors: 1) The expansion of higher-value genomic tests such as Cystic
Fibrosis, HCV and HIV genotyping is occurring, along with the continued
growth of HIV viral loads and HPV testing; 2) Continued conversion of
traditional pap smears to the newer, high value monolayer technology; 3)
Additional product licensing and business relationships (such as Myriad
Genetics and Exact Sciences); 4) The Company's ongoing business acquisition
strategy; 5) Growing demand for genomic testing will create a positive
shift in test mix to higher value testing; and 6) Improving regulatory and
reimbursement environment in Washington.
Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets", is expected to have a positive impact on the 2002
financial statements. The application of this new statement will result in
a decrease in amortization expense of approximately $26.0 million for 2002.
During 2001, the Company was involved in several transactions
affecting its capital structure. On May 24, 2001, the Company's
shareholders approved an amendment to the restated certificate of
incorporation to increase the number of common shares authorized from 52
million shares to 265 million shares. On June 11, 2001, the Company
effected a two-for-one stock split through the issuance of a stock dividend
of one new share of common stock for each share of common stock held by
shareholders of record on June 4, 2001. The Company also assisted in the
successful placement of 12.0 million shares of the Company's common stock
formerly owned by Roche, and increased the number of shares traded in the
open market and available for purchase by other investors. During
September and October 2001, the Company sold $744.0 million aggregate
principal amount at maturity of its zero coupon convertible subordinated
notes (the "Notes") due 2021 in a private placement. The Company received
approximately $488.6 million net of approximately $11.2 million in
underwriting fees. See "Note 9 to the Consolidated Financial Statements"
for a further discussion of the Notes.
In early 2002, Standard & Poor's upgraded the Company's corporate
credit and bank loan ratings from BBB to BBB+. This investment-grade
rating offers the Company additional financial flexibility as growth
opportunities are identified.
On February 21, 2002, the Company filed a Registration Statement on
Form S-3, seeking to register approximately 7.7 million shares (including
700,000 shares subject to an overallotment option) of the Company's common
stock, currently owned by Roche. It is anticipated that the offering of
these shares will be consummated sometime during March 2002 subject to
prevailing market conditions. The sale by Roche of these shares will
reduce their ownership interest in the Company's common stock to 5.24%
(4.25% if the overallotment option is exercised in full) compared to 15.13%
as of December 31, 2001.
Seasonality
Volume of testing generally declines during the year-end holiday
periods and other major holidays. 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.
Critical Accounting Policies
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported periods. Significant estimates include the
allowances for doubtful accounts and deferred tax assets, amortization
lives for intangible assets and accruals for self-insurance reserves.
The allowance for doubtful accounts is determined based on
historical collection trends, the aging of accounts, current economic
conditions and regulatory changes.
The deferred tax valuation allowance brings the Company's net
deferred tax assets to a level where management believes that it is more
likely than not the tax benefits will be realized.
Intangible assets 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 technology, 10 to 25 years for
customer lists and contractual lives for non-compete agreements.
Management periodically reviews the Company's operating and financial
performance in order to determine whether it should revise its estimates
of the useful lives or whether circumstances exist that indicate that the
carrying amount of the Company's goodwill or other long-lived assets may
not be recoverable.
Accruals for self-insurance reserves (including workers
compensation, auto, employee medical and professional liability) are
determined based on historical payment trends and claims history, along
with current and estimated future economic conditions.
While management believes these estimates are reasonable and
consistent; they are, by their very nature, estimates of amounts that
will depend on future events. Accordingly, actual results could differ
from these estimates. See "Note 1 to the Consolidated Financial
Statements" for further discussion of significant accounting policies.
Results of Operations
Year ended December 31, 2001 compared with Year ended December 31, 2000.
Net sales for 2001 were $2,199.8 million, an increase of 14.6% from
$1,919.3 million reported in the comparable 2000 period. Sales increased
approximately 8.2% due to an increase in volume and 5.9% 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 success in winning new business as well as
retaining and increasing business from existing customers. Excluding
acquisitions, revenues would have increased 10.6%.
Cost of sales, which includes primarily laboratory and distribution
costs, was $1,274.2 million for 2001 compared to $1,152.7 million in the
corresponding 2000 period, an increase of 10.5%. The majority of the
increase in cost of sales is due to an increase in volume (approximately
$95.0 million), with an additional increase of $13.0 million due to
increases in the volume of pap smear tests performed using monolayer
technology. In addition, the Company incurred incremental costs of
approximately $6.0 million as it implemented a self-mandated safety
needle program in all of its patient service centers. Cost of sales as a
percentage of net sales was 57.9% for 2001 and 60.0% in the corresponding
2000 period. The decrease in the cost of sales as a percentage of net
sales primarily resulted from higher margin test mix, continued cost
reduction efforts and economies of scale achieved through volume growth.
Selling, general and administrative expenses increased to $516.5
million in 2001 from $483.0 million in the same period in 2000 representing
an increase of $33.5 million or 6.9%. Selling, general and administrative
expenses were 23.5% and 25.2% as a percentage of net sales in 2001 and
2000, respectively. The increase in selling, general and administrative
expenses is primarily the result of the Company's acquisitions during the
year combined with additional bad debt expense as a result of the increase
in net sales.
Interest expense was $27.0 million in 2001 compared to $38.5 million
in 2000. During September 2001, the Company repaid its outstanding term
loan balance of $412.5 million with the proceeds from the sale of zero
coupon-subordinated notes. During the third quarter of 2001, the Company
recorded an $8.9 million loss relating to a payment made to terminate an
interest rate swap agreement tied to the Company's term loan. In addition,
the Company recorded a $3.2 million extraordinary loss, net of tax benefit,
representing the write-off of unamortized bank fees associated with the
retired term debt. See "Note 9 to Consolidated Financial Statements" for a
further discussion of zero coupon-subordinated notes. Also, see "Liquidity
and Capital Resources."
Provision for income taxes was $149.6 million in 2001 compared to
$95.5 million in 2000. The effective tax rate was 45.0% in 2001 and 46.0%
in 2000. The decrease in the effective rate reflects the increase in the
Company's pre-tax earnings relative to the amount of non-deductible
amortization of intangible assets. See "Note 14 to Consolidated Financial
Statements" for a further discussion of income taxes.
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 were absorbed by other Company
facilities. This restructuring was completed during the second quarter of
2001 and resulted in annualized cost reductions 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.
Provision for income taxes was $95.5 million in 2000 compared to $40.1
million in 1999. The effective rate was 46.0% in 2000 and 38.0% in 1999.
The increase in the effective rate was due primarily to the Company's
reduction in its deferred tax asset valuation allowance in 1999. See "Note
14 to Consolidated Financial Statements".
Liquidity and Capital Resources
Net cash provided by operating activities was $316.0 million, $246.7
million and $180.5 million, in 2001, 2000 and 1999, respectively. The
increase in cash flow from operations in both 2001 and 2000 primarily
resulted from overall improved operating results.
Capital expenditures were $88.1 million, $55.5 million and $69.4
million for 2001, 2000 and 1999, respectively. The Company expects capital
expenditures of approximately $85.0 million in 2002. These expenditures
are intended to continue to improve information 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 new
senior credit facilities.
The Company's DSO at the end of 2001 improved to 58 days as compared
to 68 days at the end of 2000. 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
continued to take steps necessary to improve DSO and cash collections by:
1. Substantially completing the conversion of decentralized billing
locations to a centralized billing system. During 2001, the Chicago,
San Antonio, and Dallas locations were converted.
2. Implementing an initiative to reduce the number of requisitions
received that are missing certain billing information.
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 50s by the end of 2002.
During September 2001, the Company repaid its outstanding balance of
$412.5 million on its term loan facility with the proceeds from the
issuance of zero coupon-subordinated notes. Interest expense on the zero
coupon-subordinated notes in the financial statements is computed based on
the notes' original issue discount amortization for an effective rate of 2%
per year. This non-cash interest expense will total approximately $12.0
million in 2002 as compared to interest expense of $27.0 million in 2001
(primarily related to the Company's retired term debt). As the Company
does not pay any interest on the zero coupon-subordinated notes prior to
their maturity on September 11, 2021 (unless certain contingencies are
met), the replacement of the Company's long-term debt with the zero coupon-
subordinated notes will result in increases to the Company's available
cash.
This reduction in cash interest expense and the resulting retention
of operating cash flows in the business is expected to provide the
Company increased flexibility in pursuing strategic investments through
possible acquisitions, technology purchases and key business
relationships.
In February 2002, the Company entered into two new senior credit
facilities with Credit Suisse First Boston, acting as Administrative
Agent, and a group of financial institutions totaling $300 million. The
new facilities will consist of a 364-day revolving credit facility in the
principal amount of $100 million and a three-year revolving credit
facility in the principal amount of $200 million. The new facilities
will be used for general corporate purposes, including working capital,
capital expenditures, funding or share repurchases and other payments,
and acquisitions.
Contractual Cash Obligations
Payments Due by Period
-------------------------------------
1 Yr 2-3 Yrs 4-5 Yrs > 5 Yrs
------- ------- -------- --------
Capital lease obligations $ 3.0 $ 5.4 $ 5.7 $ 1.2
Operating leases 43.7 60.2 33.1 38.9
Contingent future acquisition
Payments 17.5 7.0 -- --
Zero coupon-subordinated notes -- 530.5(a) -- --
------ ----- ----- -----
Total contractual cash
obligations $ 64.2 $603.1 $ 38.8 $ 40.1
===== ===== ===== =====
(a) Holders of the zero coupon-subordinated notes may require the Company
to purchase all or a portion of their notes on September 11, 2004,
2006 and 2011 at prices ranging from $712.97 to $819.54 per note. The
Company may choose to pay the purchase price in cash or common stock
or a combination of cash and common stock. If the holders elect to
require the Company to purchase their notes, it is the Company's
current intention to retire the notes by a cash payment. Based upon
current market conditions, the Company believes that the possibility
of the holders of the notes exercising this put feature of the notes
is remote. However, future market conditions are subject to change.
Should the holders put the notes to the Company on any of the dates
above, the Company believes that it will be able to obtain alternate
financing to satisfy this contingent cash obligation.
Other Commercial Commitments
At December 31, 2001, the Company provided letters of credit
aggregating approximately $36.6 million, primarily in connection with
certain insurance programs. These letters of credit are secured by the
Company's senior credit facilities and are renewed annually, around mid-
year.
Based on current and projected levels of operations, coupled with
availability under its new senior credit facilities, 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 zero coupon-subordinated
notes, see "Note 9 to Consolidated Financial Statements." For a
discussion of the Company's new senior credit facilities, see "Note 10 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 Needlestick Safety and Prevention Act
which may result in penalties and loss of licensure.
5. failure to comply with HIPAA, which could result in significant fines and
up to ten years in prison.
6. increased competition, including price competition.
7. changes in payor mix, including an increase in capitated managed-cost
health care.
8. our failure to obtain and retain new customers and alliance partners, or
a reduction in tests ordered or specimens submitted by existing
customers.
9. our failure to integrate newly acquired businesses and the cost related
to such integration.
10.adverse results in litigation matters.
11.our ability to attract and retain experienced and qualified personnel.
12.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 associated with changes in interest rates, through a controlled
program of risk management that has included in the past, the use of
derivative financial instruments such as interest rate swap agreements.
There were no interest rate swap agreements outstanding as of December 31,
2001. The Company does not hold or issue derivative financial instruments
for trading purposes. The Company does not believe that its exposure to
market risk is material to the Company's financial position or results of
operations. There were no interest rate swap agreements outstanding as of
December 31, 2001.
The Company's zero coupon-subordinated notes contain the following
three features that are considered to be embedded derivative instruments
under FAS No. 133:
1) The Company will pay contingent cash interest on the zero coupon
subordinated notes after September 11, 2006, if the average market
price of the notes equals 120% or more of the sum of the issue price,
accrued original issue discount and contingent additional principal,
if any, for a specified measurement period.
2) Contingent additional principal will accrue on the zero coupon-
subordinated notes during the two year period from September 11, 2004
to September 11, 2006, if the Company's stock price is at or below
specified thresholds.
3) Holders may surrender zero coupon-subordinated notes for conversion
during any period in which the rating assigned to the zero coupon-
subordinated notes by Standard & Poor's Ratings Services is BB- or
lower.
Based upon independent appraisals, these embedded derivatives had no
fair market value at December 31, 2001.
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 2002 annual meeting of stockholders, which is to be filed
pursuant to Regulation 14A not later than April 30, 2002.
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 10.3 through 10.8 and 10.14 through 10.18 are
management contracts or compensatory plans or arrangements.
3.1 - Amended and Restated Certificate of Incorporation of the
Company dated May 24, 2001 (incorporated herein by reference
to the Company's Registration Statement on Form S-3, filed
with the Commission on October 19, 2001, File No. 333-
71896).
3.2 - Amended and Restated By-Laws of the Company dated April 28,
1995 (incorporated herein by reference to the Company's
report on Form 8-K, filed with the Commission on May 12
1995).
4.1* - Specimen of the Company's Common Stock Certificate.
4.2 - Indenture dated September 11, 2001 between the Company and
Bank of New York, as trustee (incorporated herein by
reference to the Company's Registration Statement on Form S-
3, filed with the Commission on October 19, 2001, File No.
333-71896).
4.3 - Registration Rights Agreement dated September 11, 2001
between the Company and Merrill Lynch, Pierce, Fenner &
Smith Incorporated (incorporated herein by reference to the
Company's Registration Statement on Form S-3, filed with the
Commission on October 19, 2001, File No. 333-71896).
4.4 - Rights Agreement dated December 13, 2001 between the Company
and American Stock Transfer & Trust Company, as rights Agent
(incorporated herein by reference to the Company's
Registration Statement on Form 8-A, filed with the
Commission on December 21, 2001, File No. 001-11353).
10.1 - National Health Laboratories Incorporated Pension
Equalization Plan (incorporated herein by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992).
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, filed with the
Commission on July 9, 1990, File No. 33-35782).
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*- Three-Year Credit Agreement dated February 20, 2002 among
the Company, the lenders named therein and Credit Suisse
First Boston, as administrative agent.
10.13*- 364-Day Credit Agreement dated February 20, 2002 among the
Company, the lenders named therein and Credit Suisse First
Boston, as administrative agent.
10.14 - Laboratory Corporation of America Holdings 1995 Stock Plan
for Non-Employee Directors dated September 26, 1995
(incorporated herein by reference to the Company's
Registration Statement on Form S-8, filed with the
Commission on September 26, 1995, File No. 33-62913).
10.15 - 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).
10.16 - 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).
10.17 - 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).
10.18 - 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).
10.19 - Support Agreement between Roche Biomedical Laboratories,
Inc. and Hoffmann-La Roche Inc., dated as of April 27, 1995.
10.20 - First Amendment to Support Agreement between Roche
Biomedical Laboratories, Inc. and Hoffmann-La Roche Inc.,
dated as of July 26, 1995.
10.21 - 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.
10.22 --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, 2001 was filed on
November 14, 2001 by the registrant, in connection with the press
release dated November 14, 2001 which announced that Thomas P. Mac
Mahon, chairman and chief executive officer, was scheduled to speak
at the CSFB Health Care Conference in Phoenix, AZ on Thursday,
November 15 at 9:30 a.m. Mountain Time.
(2) A current report on Form 8-K date November 28, 2001 was filed on
November 28, 2001 by the registrant, in connection with the press
release dated November 28, 2001 which announced that Bradford T.
Smith, executive vice president of public affairs, was scheduled to
speak at the SG Cowen Global Health Care Conference in Paris, France
on Thursday, November 29 at 10:20 a.m. (4:20 a.m. EST).
(3) A current report on Form 8-K dated December 4, 2001 was filed on
December 4, 2001 by the registrant and Myriad Genetics, Inc., in
connection with the press release dated December 4, 2001 which
announced their new partnership to make Myriad's predictive medicine
products broadly available to primary care physicians throughout the
United States.
(4) A current report on Form 8-K date December 6, 2001 was filed on
December 6, 2001 by the registrant, in connection with the press
release dated December 6, 2001, which announced that PreGen-26? - a
DNA-based colorectal cancer test - is now available through its
nationwide network to physicians and their patients.
(5) A current report on Form 8-K dated December 12, 2001 was filed on
December 13, 2001 by the registrant, in connection with the press
release dated December 12, 2001 which announced that its Board of
Directors adopted a Stockholder Rights Plan.
(6) A current report on Form 8-K dated January 4, 2002 was filed on
January 7, 2002 by the registrant, in connection with the press
release dated January 4, 2002 which announced that Bradford T. Smith,
executive vice president of public affairs, was scheduled to speak at
the JPMorgan H&Q Healthcare Conference in San Francisco on Monday,
January 7 at 3:30 p.m. PST (6:30 p.m. EST).
(7) A current report on Form 8-K dated January 15, 2002 was filed on
January 16, 2002 by the registrant, in connection with the press
release dated January 15, 2002 which announced that the Securities
and Exchange Commission declared effective its registration statement
on Form S-3 for the registration of the resale by the securityholders
listed in the prospectus contained in the registration statement from
time to time of up to $744,000,000 aggregate principal amount at
maturity of its zero coupon convertible subordinated notes due 2021
and the shares of its common stock issuable upon conversion of the
notes and the preferred stock purchase rights included in such shares
of common stock.
(8) A current report on Form 8-K dated January 28, 2002 was filed on
January 29, 2002 by the registrant, in connection with the press
release dated January 28, 2002 which announced that Thomas P. Mac
Mahon, chairman and chief executive officer, was scheduled to speak
at the US Bancorp Piper Jaffray Healthcare Conference in New York
City on Tuesday, January 29, 2002 at 8:30 a.m. Eastern Time.
(9) A current report on Form 8-K dated February 5, 2002 was filed on
February 5, 2002 by the registrant, in connection with the press
release dated February 5, 2002 which announced that Thomas P. Mac
Mahon, chairman and chief executive officer, was scheduled to speak
at the UBS Warburg Global Healthcare Services Conference in New York
City on Monday, February 6, 2002 at 3:00 p.m. Eastern Time.
(10) A current report on Form 8-K dated February 13, 2002 was filed on
February 13, 2002 by the registrant, in connection with the press
release dated February 13, 2002 which contained summary information
relating to the Company.
(11) A current report on Form 8-K dated February 13, 2002 was filed on
February 13, 2002 by the registrant, in connection with the press
release dated February 13, 2002 which announced results for the
quarter ended December 31, 2001.
(12) A current report on Form 8-K dated February 22, 2002 was filed on
February 22, 2002 by the registrant, in connection with the press
release dated February 22, 2002 which announced that it has entered
into $300 million of new senior credit facilities with Credit Suisse
First Boston, acting as Administrative Agent, and a group of
financial institutions.
(13) A current report on Form 8-K dated February 26, 2002 was filed on
February 26, 2002 by the registrant, in connection with the press
release dated February 26, 2002 which announced that it had signed an
expanded agreement with Aetna Inc. to provide clinical laboratory
testing and certain additional services to Aetna's Commercial HMO and
Quality Point-of-Service members in New York and New Jersey.
(14) A current report on Form 8-K/A dated February 13, 2002 was filed on
March 6, 2002 by the registrant which amended Form 8-K filed on
February 13, 2002.
(15) A current report on Form 8-K dated March 12, 2002 was filed on March
12, 2002 by the registrant, in connection with the press release
dated March 12, 2002 which announced an advanced suite of molecular
assays developed to improve the management of patients diagnosed with
the hepatitis B and/or hepatitis C virus.
(16) A current report on Form 8-K dated March 12, 2002 was filed on March
12, 2002 by the registrant, in connection with the press release
dated March 12, 2002 which announced that Bradford T. Smith,
executive vice president of public affairs, is scheduled to speak at
the SG Cowen Annual Healthcare Conference in Boston on Wednesday,
March 13 at 1:15 p.m. Eastern Time.
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 18, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on March 18, 2002 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, 2001 and 2000 F-3
Consolidated Statements of Operations for
the three-year period ended December 31, 2001 F-4
Consolidated Statements of Changes in Shareholders'
Equity for the three-year period ended
December 31, 2001 F-6
Consolidated Statements of Cash Flows for the
three-year period ended December 31, 2001 F-7
Notes to Consolidated Financial Statements F-9
Financial Statement Schedule:
II - Valuation and Qualifying Accounts and Reserves F-30
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, 2001 and 2000, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, 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 8, 2002, except for Note 10,
as to which the date is February 20, 2002
PART I - FINANCIAL INFORMATION
Item 1. Financial Information
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions, Except Per Share Data)
December 31, December 31,
2001 2000
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 149.2 $ 48.8
Accounts receivable, net 365.5 368.0
Supplies inventories 38.7 31.6
Prepaid expenses and other 16.7 18.5
Deferred income taxes 54.4 44.8
------- -------
Total current assets 624.5 511.7
Property, plant and equipment, net 309.3 272.8
Intangible assets, net 968.5 865.7
Other assets, net 27.3 16.7
--------- --------
$ 1,929.6 $ 1,666.9
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 60.2 $ 52.8
Accrued expenses and other 141.0 127.1
Current portion of long-term debt -- 132.0
--------- --------
Total current liabilities 201.2 311.9
Zero coupon-subordinated notes 502.8 --
Long-term debt, less current portion -- 346.5
Capital lease obligations 6.1 7.2
Other liabilities 134.1 123.9
Commitments and contingent liabilities -- --
Shareholders' equity:
Common stock, $0.10 par value; 265,000,000
shares authorized;70,553,718 and
69,739,246 shares issued and outstanding
at December 31, 2001 and December 31,
2000, respectively 7.1 7.0
Additional paid-in capital 1,088.8 1,048.2
Retained earnings (deficit) 11.5 (168.0)
Unearned restricted stock compensation (13.2) (9.4)
Accumulated other comprehensive loss (8.8) (0.4)
--------- --------
Total shareholders' equity 1,085.4 877.4
--------- --------
$ 1,929.6 $ 1,666.9
========= ========
The accompanying notes are an integral part of these consolidated
financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Millions, Except Per Share Data)
Years Ended December 31,
------------------------------------
2001 2000 1999
--------- --------- ---------
Net sales $ 2,199.8 $ 1,919.3 $ 1,698.7
Cost of sales 1,274.2 1,152.7 1,069.6
------- ------- -------
Gross profit 925.6 766.6 629.1
Selling, general and
administrative expenses 516.5 483.0 448.2
Amortization of intangibles
and other assets 41.5 33.5 31.2
Restructuring charge -- 4.5 --
-------- ------- -------
Operating income 367.6 245.6 149.7
Other income (expenses):
Loss on sale of assets (1.8) (1.0) (1.7)
Net investment income (loss) 2.4 1.5 (0.9)
Termination of interest rate
swap agreement (8.9) -- --
Interest expense (27.0) (38.5) (41.6)
-------- -------- --------
Earnings before income taxes
and extraordinary loss 332.3 207.6 105.5
Provision for income taxes 149.6 95.5 40.1
-------- -------- --------
Earnings before
extraordinary loss 182.7 112.1 65.4
Extraordinary loss, net of
tax benefit 3.2 -- --
-------- -------- --------
Net earnings 179.5 112.1 65.4
Less preferred stock dividends -- (34.3) (49.6)
Less accretion of mandatorily
redeemable preferred stock -- (0.3) (0.8)
-------- -------- --------
Net earnings attributable to
common shareholders $ 179.5 $ 77.5 $ 15.0
======== ======== ========
Basic earnings per
common share before
extraordinary loss $ 2.63 $ 1.65 $ 0.59
Extraordinary loss, net of
tax benefit 0.05 -- --
--------- --------- ---------
Basic earnings per
common share $ 2.58 $ 1.65 $ 0.59
========= ========= =========
Diluted earnings per
common share before
extraordinary loss $ 2.59 $ 1.61 $ 0.58
Extraordinary loss, net of
tax benefit 0.05 -- --
Diluted earnings per --------- --------- ---------
common share $ 2.54 $ 1.61 $ 0.58
========= ========= =========
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)
Additional Retained
Common Paid-in Earnings
Stock Capital (Deficit)
-------- ---------- ---------
BALANCE AT DECEMBER 31, 1998 $ 2.4 $ 414.5 $ (260.5)
Comprehensive earnings:
Net earnings -- -- 65.4
Other comprehensive earnings:
Change in valuation allowance
on securities, net of tax -- -- --
Foreign currency translation
adjustments -- -- --
----- ------- -------
Comprehensive earnings -- -- 65.4
Issuance of common stock 0.2 3.6 --
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 2.6 422.6 (245.5)
Comprehensive earnings:
Net earnings -- -- 112.1
Other comprehensive earnings:
Foreign currency translation
adjustments -- -- --
----- ------- -------
Comprehensive earnings -- -- 112.1
Issuance of common stock 0.2 17.6 --
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 4.2 579.7 --
Preferred stock dividends -- -- (34.3)
Accretion of mandatorily
redeemable preferred stock -- -- (0.3)
----- ------- -------
BALANCE AT DECEMBER 31, 2000 7.0 1,048.2 (168.0)
Comprehensive earnings:
Net earnings -- -- 179.5
Other comprehensive earnings:
Cumulative effect of change
in accounting principle
(net of tax) -- -- --
Unrealized derivative loss
on cash flow hedge
(net of tax) -- -- --
Termination of interest
rate swap agreement -- -- --
Foreign currency translation
adjustments -- -- --
Minimum pension liability
adjustment -- -- --
----- ------- -------
Comprehensive earnings -- -- 179.5
Issuance of common stock 0.1 14.9 --
Issuance of restricted stock
awards -- 11.3 --
Amortization of unearned
restricted stock compensation -- -- --
Income tax benefit from stock
options exercised -- 14.4 --
----- ------- --------
BALANCE AT DECEMBER 31, 2001 $ 7.1 $1,088.8 $ 11.5
===== ======= ========
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Millions)
Unearned Accumulated
Restricted Other Total
Stock Comprehensive Shareholders'
Compensation Loss Equity
------------- ------------- ------------
BALANCE AT DECEMBER 31, 1998 $ -- $ (2.0) $ 154.4
Comprehensive earnings:
Net earnings -- -- 65.4
Other comprehensive earnings:
Change in valuation allowance
on securities, net of tax -- 2.0 2.0
Foreign currency translation
adjustments -- (0.1) (0.1)
-------- --------- ---------
Comprehensive earnings -- 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 earnings:
Net earnings -- -- 112.1
Other comprehensive earnings:
Foreign currency translation
adjustments -- (0.3) (0.3)
-------- --------- ---------
Comprehensive earnings -- (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
Comprehensive earnings:
Net earnings -- -- 179.5
Other comprehensive earnings:
Cumulative effect of change
in accounting principle
(net of tax) -- 0.6 0.6
Unrealized derivative loss
on cash flow hedge
(net of tax) -- (9.5) (9.5)
Termination of interest
rate swap agreement -- 8.9 8.9
Foreign currency translation
adjustments -- (0.6) (0.6)
Minimum pension liability
adjustment -- (7.8) (7.8)
-------- --------- --------
Comprehensive earnings -- (8.4) 171.1
Issuance of common stock -- -- 15.0
Issuance of restricted stock
awards (11.3) -- --
Amortization of unearned
restricted stock compensation 7.5 -- 7.5
Income tax benefit from stock
options exercised -- -- 14.4
-------- -------- --------
BALANCE AT DECEMBER 31, 2001 $ (13.2) $ (8.8) $ 1,085.4
======== ======== ========
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)
Years Ended December 31,
-----------------------------
2001 2000 1999
--------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 179.5 $ 112.1 $ 65.4
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 104.0 89.6 83.8
Deferred compensation 7.5 4.0 0.4
Net losses on sale of assets 1.8 1.0 1.7
Accreted interest on zero coupon-
subordinated notes 3.0 -- --
Extraordinary loss, net of
tax benefit 3.2 -- --
Termination of interest rate
swap agreement 8.9 -- --
Deferred income taxes 1.6 (3.2) 37.0
Investment loss -- -- 4.2
Change in assets and liabilities:
Net change in restructuring reserves (5.5) (1.2) (6.2)
Decrease (increase) in accounts
receivable, net 16.2 (15.9) 27.4
(Increase) decrease in inventories (3.6) (2.1) 1.6
Decrease (increase) in prepaid
expenses and other 5.8 21.3 (24.6)
Change in income taxes receivable -- -- 11.2
(Decrease) increase in accounts payable (3.4) 7.9 (6.2)
Increase (decrease) in accrued
expenses and other (2.0) 32.9 (15.4)
Other, net (1.0) 0.3 0.2
------ ------ ------
Net cash provided by operating activities 316.0 246.7 180.5
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (88.1) (55.5) (69.4)
Proceeds from sale of assets 4.4 1.4 1.1
Deferred payments on acquisitions (5.2) (1.0) (8.7)
Acquisition of businesses (141.1) (94.9) --
------ ------ ------
Net cash used for investing activities (230.0) (150.0) (77.0)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit
facilities $ 75.0 $ -- $ 40.0
Payments on revolving credit facilities (75.0) -- (40.0)
Proceeds from zero coupon-subordinated
notes 499.8 -- --
Payments on long-term debt (478.5) (95.0) (70.3)
Debt issuance costs (11.2) -- --
Termination of interest rate swap
agreement (8.9) -- --
Payments on long-term lease obligations (1.1) (1.2) (0.8)
Payment of preferred stock dividends -- (9.5) (18.5)
Net proceeds from issuance of stock to
employees 14.9 17.8 3.8
------ ------ ------
Net cash provided by (used for)
financing activities 15.0 (87.9) (85.8)
------ ------ ------
Effect of exchange rate changes on cash
and cash equivalents (0.6) (0.3) (0.1)
Net increase in cash and
cash equivalents 100.4 8.5 17.6
Cash and cash equivalents at
beginning of period 48.8 40.3 22.7
------ ------ ------
Cash and cash equivalents at
end of period $ 149.2 $ 48.8 $ 40.3
====== ====== ======
Supplemental schedule of cash
flow information:
Cash paid during the period for:
Interest $ 23.2 $ 40.7 $ 41.8
Income taxes, net of refunds 127.7 48.8 23.9
Disclosure of non-cash financing
and investing activities:
Preferred stock dividends -- 24.8 31.1
Accretion of mandatorily redeemable
preferred stock -- 0.3 0.8
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 2001 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
Company operates in one business segment.
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
2001, the Company added two new subsidiaries through acquisitions: Path Lab
Holdings, Inc. and Viro-Med Inc. 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 $9.3 and $11.6 at December 31, 2001 and 2000,
respectively.
Inventories:
Inventories, consisting primarily of purchased laboratory supplies,
are stated at the lower of cost (first-in, first-out) or market.
Derivative Financial Instruments:
Interest rate swap agreements, which have been used by the Company
from time to time 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. The Company had no interest rate swap agreements in
place at December 31, 2001.
The Company's zero coupon-subordinated notes contain
the following three features that are considered to be embedded
derivative instruments under FAS No. 133:
1) The Company will pay contingent cash interest on the zero coupon-
subordinated notes after September 11, 2006, if the average
market price of the notes equals 120% or more of the sum of the
issue price, accrued original issue discount and contingent
additional principal, if any, for a specified measurement period.
2) Contingent additional principal will accrue on the zero coupon-
subordinated notes during the two year period from September 11, 2004
to September 11, 2006, if the Company's stock price is at or below
specified thresholds.
3) Holders may surrender zero coupon-subordinated notes for
conversion during any period in which the rating assigned to the
zero coupon-subordinated notes by Standard & Poor's Ratings
Services is BB- or lower.
Based upon independent appraisals, these embedded derivatives had no
fair market value at December 31, 2001.
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 to
their short-term nature. The fair market value of the zero coupon-
subordinated notes, based on market pricing, was approximately $529.2 as of
December 31, 2001.
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 $12.0 at December
31, 2001. Cash equivalents at December 31, 2001, totaled $131.7, which
includes amounts invested in treasury bills and short-term bonds.
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.
Accounts receivable balances (gross) from Medicare and Medicaid were
$91.2 and $87.3 at December 31, 2001 and 2000, respectively.
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 2001, 2000 and 1999,
approximately 16%, 16% and 20%, respectively, of the Company's revenues
were derived from tests performed for beneficiaries of Medicare and
Medicaid programs.
Income Taxes:
The Company accounts for income taxes utilizing the asset and
liability method. Under this method deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and for tax loss carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. Future tax benefits, such
as net operating loss carryforwards, are recognized to the extent that
realization of such benefits are more likely than not.
Stock Splits:
On May 2, 2000, the Company effected a one-for-ten common stock
reverse split whereby the number of authorized shares of common stock
decreased from 520 million to 52 million and the par value increased from
$0.01 to $0.10.
On May 24, 2001, the Company's shareholders approved an amendment
to the restated certificate of incorporation to increase the number of
common shares authorized from 52 million shares to 265 million shares.
On June 11, 2001, the Company effected a two-for-one stock split
through the issuance of a stock dividend of one new share of common
stock for each share of common stock held by shareholders of record on
June 4, 2001. All references 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 June 11,2001 two-for-one 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 earnings, 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 (redeemed in 2000), 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,
2001 2000 1999
----------------------------------------
Basic 69,418,875 47,080,668 25,332,376
Assumed conversion/exercise
of:
Stock options 558,199 710,500 245,296
Restricted stock awards 561,647 358,358 176,646
---------- ---------- ----------
Diluted 70,538,721 48,149,526 25,754,318
========== ========== ==========
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 the years ended
December 31, 2001, 2000 and 1999, 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,
2001 2000 1999
-------- -------- ---------
Stock Options 14,869 234,924 1,745,842
Series A convertible exchangeable
Preferred stock -- -- 15,866,086
Series B convertible pay-in-kind
Preferred stock -- -- 25,352,592
The Company's zero-coupon subordinated notes are contingently
convertible into 4,988,818 shares of common stock and are not currently
included in the earnings per share calculation.
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. During 1999, the Company recorded an other than
temporary loss on its investments in equity securities totaling $4.2.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reported periods. Significant estimates include the allowances
for doubtful accounts and deferred tax assets, amortization lives for
intangible assets and accruals for self-insurance reserves. The allowance
for doubtful accounts is determined based on historical collection trends,
the aging of accounts, current economic conditions and regulatory changes.
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 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 technology, 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 technology, 10 to 25 years for customer lists and
contractual lives for non-compete agreements.
Effective January 1 2002, the Company will adopt Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible
Assets". This standard requires that goodwill and other intangibles that
are acquired in business combinations and that have indefinite useful lives
are not to be amortized and are to be reviewed for impairment annually
based on an assessment of fair value. The adoption of this new standard is
expected to result in a reduction in annual amortization expense of
approximately $26.0.
2. BUSINESS ACQUISITIONS
The Company acquired two important companies in 2001, as described
below. Both 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. The results of each operation have
been included in the consolidated financial results of the Company from the
date of acquisition. The impact of these acquisitions is not considered
significant to the Company's operations.
On April 30, 2001, the Company completed the acquisition of all of the
outstanding stock of Path Lab Holdings, Inc. (Path Lab), which is based in
Portsmouth, New Hampshire for approximately $83.0 in cash and contingent
future payments of $25.0 ($5.5 earned and paid in 2001) based upon
attainment of specific earnings targets. Path Lab's revenues for the year
ended December 31, 2000 were approximately $51.6.
On June 4, 2001, the Company completed the acquisition of Minneapolis-
based Viro-Med Inc. for approximately $31.7 in cash and contingent future
payments of $12.0 ($7.9 earned and paid in 2001) based upon attainment of
specific earnings targets. Viro-Med's revenues for the year ended December
31, 2000 were approximately $25.2.
3. RESTRUCTURING AND NON-RECURRING CHARGES
The following represents the Company's restructuring activities for
each of the years in the three years ended December 31, 2001:
Lease and
Severance Other Facility
Costs Costs Total
---------- -------------- ------
Balance at January 1, 1999 $ 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
Reclassifications 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
Reclassifications and
non-cash items (0.7) 0.2 (0.5)
Cash payments (1.0) (4.5) (5.5)
------ ------ ------
Balance at December 31, 2001 $ 0.2 $ 15.8 $ 16.0
====== ====== ======
Current $ 8.6
Non-current 7.4
------
$ 16.0
======
4. ACCOUNTS RECEIVABLE, NET
December 31, December 31,
2001 2000
------------ ------------
Gross accounts receivable $ 485.0 $ 491.0
Less allowance for doubtful accounts (119.5) (123.0)
-------- --------
$ 365.5 $ 368.0
======== ========
The provision for doubtful accounts was $202.5, $195.9 and $191.9 in 2001,
2000 and 1999, respectively.
5. PROPERTY, PLANT AND EQUIPMENT, NET
December 31, December 31,
2001 2000
------------ ------------
Land $ 9.9 $ 9.5
Buildings and building improvements 79.2 68.5
Machinery and equipment 367.5 323.4
Leasehold improvements 66.4 63.0
Furniture and fixtures 19.9 17.8
Construction in progress 22.4 35.6
Buildings under capital leases 5.4 5.4
Equipment under capital leases 3.8 3.8
-------- --------
574.5 527.0
Less accumulated depreciation
and amortization of capital lease assets (265.2) (254.2)
-------- --------
$ 309.3 $ 272.8
======== ========
Depreciation expense and amortization of capital lease assets was
$59.6, $56.1 and $52.6 for 2001, 2000 and 1999, respectively.
6. INTANGIBLE ASSETS, NET
December 31, December 31,
2001 2000
------------ ------------
Goodwill $ 911.3 $ 860.5
Other intangibles, principally patents,
customer lists, non-compete
agreements, and technology 338.8 245.6
------- -------
1,250.1 1,106.1
Less accumulated amortization (281.6) (240.4)
------- -------
$ 968.5 $ 865.7
======= =======
Amortization of intangible assets was $41.5, $33.5 and $31.2 in 2001,
2000 and 1999, respectively.
7. ACCRUED EXPENSES AND OTHER
December 31, December 31,
2001 2000
------------ ------------
Employee compensation and benefits $ 72.6 $ 57.5
Acquisition related accruals 6.9 13.3
Restructuring reserves 8.6 12.4
Accrued taxes 4.2 10.1
Self-insurance reserves 31.5 21.1
Interest payable 0.2 3.7
Royalty payable 5.5 5.1
Other 11.5 3.9
------- -------
$ 141.0 $ 127.1
======= =======
8. OTHER LIABILITIES
December 31, December 31,
2001 2000
------------ ------------
Acquisition related accruals $ 2.0 $ 8.8
Restructuring reserves 7.4 9.6
Deferred income taxes 63.5 28.5
Post-retirement benefit obligation 40.2 36.9
Self-insurance reserves 20.7 37.8
Other 0.3 2.3
------- -------
$ 134.1 $ 123.9
======= =======
9. ZERO COUPON-SUBORDINATED NOTES
In September 2001, the Company sold $650.0 aggregate principal
amount at maturity of its zero coupon convertible subordinated notes (the
"notes") due 2021 in a private placement. The Company received
approximately $426.8 (net of underwriter's fees of approximately $9.8) in
net proceeds from the offering. In October 2001, the underwriters exercised
their rights to purchase an additional $94.0 aggregate principal amount
pursuant to an overallotment option from which the Company received
approximately $61.8 in net proceeds (net of underwriters fees of approximately
$1.4). The notes, which are subordinate to the Company's bank debt, were sold
at an issue price of $671.65 per $1,000 principal amount at maturity
(representing a yield to maturity of 2.0% per year). Each one thousand dollar
principal amount at maturity of the notes is convertible into 6.7054 shares of
the Company's common stock, subject to adjustment in certain circumstances,
if one of the following conditions occurs:
1) If the sales price of the Company's common stock reaches specified
thresholds during specified measurement periods.
2) If the credit rating assigned to the notes by Standard & Poor's
Ratings Services is at or below BB-.
3) If the notes are called for redemption.
4) If specified corporate transactions have occurred.
Holders of the notes may require the Company to purchase all or a
portion of their notes on September 11, 2004, 2006 and 2011 at prices
ranging from $712.97 to $819.54, plus any accrued contingent additional
principal and any accrued original issue discount thereon. The Company may
choose to pay the purchase price in cash, common stock or a combination of cash
and common stock. If the holders elect to require the Company to purchase
their notes it is the Company's current intention to retire the notes by a
cash payment.
The Company may redeem for cash all or a portion of the notes at any
time on or after September 11, 2006 at specified redemption prices per one
thousand dollar principal amount at maturity of the notes ranging from $741.92
at September 11, 2001 to $1,000.00 at September 11, 2021 (assuming no
contingent additional principal accrues on the notes).
The Company used a portion of the proceeds to repay $412.5 of its term
loan outstanding under its credit agreement and to pay $8.9 to terminate the
interest rate swap agreement tied to the Company's term loan. The Company
recorded an extraordinary loss of $3.2 (net of taxes of $2.3) relating to the
write-off of unamortized bank fees associated with the Company's term debt.
The Company has registered the notes and the shares of common
stock issuable upon conversion of the notes with the Securities and
Exchange Commission.
10. SENIOR CREDIT FACILITIES
In February 2002, the Company entered into two new senior credit
facilities with Credit Suisse First Boston, acting as Administrative
Agent, and a group of financial institutions totaling $300.0. The new
facilities will consist of a 364-day revolving credit facility in the
principal amount of $100.0 and a three-year revolving credit facility
in the principal amount of $200.0. The new facilities will be used
for general corporate purposes, including working capital, capital
expenditures, funding or share repurchases and other payments, and
acquisitions. The Company's existing $450.0 revolving
credit facility with a major financial institution had no amounts
outstanding and was terminated on the effective date of the new credit
facilities.
The new senior credit facilities agreements bear interest at varying
rates based upon the Company's credit rating with Standard & Poor's Rating
Services. Based upon the Company's current rating, the effective rate under
these agreements is LIBOR plus 75 basis points.
The agreements contain certain debt covenants which require that the
Company maintain leverage and interest coverage ratios.
11. STOCKHOLDER RIGHTS PLAN
The Company adopted a stockholder rights plan effective as of
December 13, 2001 that provides that each common stockholder of record
on December 21, 2001, received a dividend of one right for each share
of common stock held. Each right entitles the holder to purchase from
the Company one-hundredth of a share of a new series of participating
preferred stock at an initial purchase price of four hundred dollars.
These rights will become exercisable and will detach from the
Company's common stock if any person becomes the beneficial owner of
15% or more of the Company's common stock. In that event, each right
will entitle the holder, other than the acquiring person, to purchase,
for the initial purchase price, shares of the Company's common stock
having a value of twice the initial purchase price. The rights
will expire on December 13, 2011, unless earlier exchanged or
redeemed.
12. LOSS ON INTEREST RATE SWAP AGREEMENT
In conjunction with the early retirement of its long-term debt, the
Company terminated its interest rate swap agreement with a bank by making a
settlement payment of $8.9 with a portion of the proceeds from the sale of
zero coupon-subordinated notes. In accordance with the provisions of
SFAS No. 133, as amended, this interest rate swap agreement had been
designated as a cash flow hedge and carried on the balance sheet at
fair value with a corresponding offset in accumulated other
comprehensive loss.
13. 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.
14. INCOME TAXES
The provisions for income taxes in the accompanying consolidated
statements of operations consist of the following:
Years Ended December 31,
----------------------------
2001 2000 1999
Current: ------ ------ ------
Federal $ 122.8 $ 85.2 $ 0.5
State 25.2 13.5 2.6
------ ------ ------
148.0 98.7 3.1
------ ------ ------
Deferred:
Federal $ (2.3) $ (8.6) $ 29.1
State 3.9 5.4 7.9
------ ------ ------
$ 1.6 $ (3.2) $ 37.0
------ ------ ------
$ 149.6 $ 95.5 $ 40.1
====== ====== ======
The tax benefit associated with dispositions from stock plans reduced
taxes currently payable by approximately $14.3 and $19.0 in 2001 and 2000,
respectively. Tax benefits related to stock plans in 1999 were immaterial.
Such benefits are credited to additional paid-in-capital.
The effective tax rates on earnings before income taxes is reconciled
to statutory federal income tax rates as follows:
Years Ended December 31,
----------------------------
2001 2000 1999
------ ------ ------
Statutory federal rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal income tax effect 4.9 5.0 5.1
Non-deductible amortization of
intangible assets 2.3 3.1 5.7
Change in valuation allowance -- -- (9.5)
Other 2.8 2.9 1.7
----- ----- -----
Effective rate 45.0% 46.0% 38.0%
===== ===== =====
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,
2001 2000
Deferred tax assets: ------------ ------------
Accounts receivable 25.9 12.0
Self-insurance reserves 20.4 21.7
Postretirement benefit obligation 15.8 13.9
Acquisition and restructuring reserves 9.8 18.8
State net operating loss carryforwards 1.6 6.1
Employee benefits 8.2 7.4
Other 10.8 10.2
-------- --------
92.5 90.1
Less valuation allowance (4.5) (4.5)
-------- --------
Net deferred tax assets 88.0 85.6
-------- --------
Deferred tax liabilities:
Intangible assets (64.0) (46.9)
Property, plant and equipment (29.4) (22.7)
Zero coupon-subordinated notes (4.1) --
Other (1.2) (1.2)
-------- --------
Total gross deferred tax liabilities (98.7) (70.8)
--------- --------
Net deferred tax assets (liabilities) $ (10.7) $ 14.8
======== ========
The current valuation allowance brings the Company's net deferred tax
assets to a level where management believes that it is more likely than not
the tax benefits will be realized.
The years 2000, 1999 and 1998 are currently under examination by the
Internal Revenue Service. Management believes that adequate provisions
have been recorded relating to the current examinations. The Company has
state tax loss carryforwards of approximately $27.1 which expire 2002
through 2018.
15. 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 3.4
million additional shares for issuance under the plan. The effect of the
2000 Incentive Plan was to increase to an aggregate of 5.2 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 2001, there were 1,048,088 options granted to officers and
key employees of the Company. The exercise price for these options
ranged from $66.125 to $68.50 per share. Also, during 2001, 170,200
shares of restricted stock were issued to senior management under
the 2000 Incentive Plan at a market value on the date of grant of
$66.575. 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 $11.3
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
three-year profitability targets are achieved as of December 31, 2003.
The unearned restricted stock compensation is being amortized to
expense over the applicable vesting periods. For 2001, 2000 and 1999,
total restricted stock compensation expense was $7.5, $4.0 and $0.4,
respectively. Total restricted shares granted in 2000 and 1999 were
262,800 and 324,000, respectively. At December 31, 2001, there were
1,589,251 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 2001, 2000 and 1999 were $39.44, $22.36 and
$8.40 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),
.5, and 0% for each of the three years ended December 31, 2001.
Interest rate assumptions were 4.3%, 5.0% and 6.0% for the years ended
December 31, 2001, 2000 and 1999, respectively.
The Company has an employee stock purchase plan, begun in 1997 and
amended in 1999, with 1,500,000 shares of common stock for authorized
issuance. The plan permits substantially all employees to purchase a
limited number of shares of the Corporation stock at 85% of market value.
The Company issues shares to participating employees semi annually in
January and July of each year. A summary of shares issued is as follows:
1999 2000 2001 2002
------- ------- ------ ------
January 192,226 105,176 51,314 36,757
July 173,548 91,044 30,876
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:
2001 - 5.8% and 3.5%; 2000 - 5.5% and 6.1%; and 1999 - 5.5% and 4.9% and
volatility rates for each of the following six month periods: 2001 - .4 and
.3; 2000 - .5 and .5; and 1999 - .5 and .4.
The per share weighted average grant date fair value of the benefits
under the employee stock purchase plan for the first and second six-month
periods is as follows:
2001 2000 1999
------ ------ ------
First six months $23.02 $ 5.09 $1.98
Second six months $17.58 $10.43 $3.74
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,
2001 2000 1999
------- ------- -------
Net earnings As reported $ 179.5 $ 112.1 $ 65.4
Pro forma 167.3 108.0 62.8
Basic earnings per
common share As reported $ 2.58 $ 1.65 $ 0.59
Pro forma 2.41 1.56 0.49
Diluted earnings per
common share As reported $ 2.54 $ 1.61 $ 0.58
Pro forma 2.37 1.53 0.48
Pro forma net earnings reflects options granted in 1998 through 2001.
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, 1999 1,942,899 $16.278
(564,992 exercisable)
Options granted 178,472 $13.786
Canceled (115,178) $20.813
Exercised (5,028) $11.267
---------
Outstanding at December 31, 1999 2,001,165 $15.807
(1,088,413 exercisable)
Options granted 829,498 $36.696
Canceled (70,724) $23.890
Exercised (1,194,562) $12.738
---------
Outstanding at December 31, 2000 1,565,377 $28.852
(335,969 exercisable)
Options granted 1,048,088 $66.138
Canceled (96,062) $43.363
Exercised (560,952) $19.935
---------
Outstanding at December 31, 2001 1,956,451 $50.671
=========
Exercisable at December 31, 2001 364,786 $31.978
=========
The weighted-average remaining life of options outstanding at December
31, 2001 is approximately 8.4 years.
The following table summarizes information concerning currently
outstanding and exercisable options.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------- --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ---------------------------------------------------------------------------
$ 9.69 - 13.75 204,217 6.66 $12.145 160,084 $11.703
$14.69 - 31.56 190,879 7.98 $20.954 20,915 $19.969
$35.38 - 35.38 248,921 8.43 $35.375 62,710 $35.375
$53.41 - 65.00 283,470 7.58 $55.708 118,501 $58.913
$66.13 - 68.50 1,028,964 9.09 $66.142 2,576 $67.655
--------- -------
1,956,451 364,786
========= =======
16. RELATED PARTY TRANSACTIONS
At December 31, 2001 and 2000, 10,705,074 and 22,705,074 shares of the
Company's outstanding common stock, or approximately 15.2% at December 31,
2001 and 32.6% at December 31, 2000, were owned by Roche Holdings, Inc.
(Roche). The reduction in Roche's ownership of the Company's common stock
is a result of the sale by Roche of 12.0 million shares in 2001.
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 $62.3, $42.7, and
$38.3 in 2001, 2000 and 1999, respectively. In addition, the Company made
royalty payments to Roche in the amounts of $4.4 in 2001, $2.8 in 2000 and
$2.9 in 1999. Revenue received from Roche for laboratory services was $2.6
in 2001, $1.3 in 2000 and $0.9 in 1999. Amounts owed to Roche and its
affiliates at December 31, 2001 and 2000 were $4.6 and $1.4, respectively.
17. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in litigation purporting to be a nation-wide
class action involving the alleged overbilling of patients who are covered by
private insurance. The Company has reached a settlement with the class that
will not 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 Claim has been stayed pending appeal of the court
approval of the settlement discussed above. The 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, and 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, professional and vehicle liability,
certain medical costs and workers' compensation. The self-insured
retentions are on a per occurrence basis without any aggregate annual
limit. Provisions for losses expected under these programs are recorded
based upon the Company's estimates of the aggregated liability of claims
incurred. At December 31, 2001 and 2000, the Company had provided letters
of credit aggregating approximately $36.6 and $28.2, 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, 2001
are as follows:
Operating Capital
--------- -------
2002 $ 43.7 $ 3.0
2003 34.2 2.8
2004 26.0 2.6
2005 19.4 2.8
2006 13.7 2.9
Thereafter 38.9 1.2
----- -----
Total minimum lease payments 175.9 15.3
Less:
Amounts included in
restructuring accruals -- 3.9
Amount representing interest -- 4.2
Total minimum operating ----- -----
lease payments and
present value of minimum
capital lease payments $175.9 $ 7.2
===== =====
Current $ 1.1
Non-current 6.1
-----
$ 7.2
=====
Rental expense, which includes rent for real estate, equipment and
automobiles under operating leases, amounted to $74.8, $71.3 and $67.0 for
the years ended December 31, 2001, 2000 and 1999, respectively.
18. 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 $8.3, $7.5 and $7.5 in 2001, 2000
and 1999, respectively.
In addition, substantially all employees of the Company are covered by
a defined benefit retirement plan (the "Company Plan"). The benefits to be
paid under the Company Plan are based on years of credited service and
average final compensation. The Company's policy is to fund the Company
Plan with at least the minimum amount required by applicable regulations.
The Company has a second defined benefit plan which covers its senior
management group that provides for the payment of the difference, if any,
between the amount of any maximum limitation on annual benefit payments
under the Employee Retirement Income Security Act of 1974 and the annual
benefit that would be payable under the Company Plan but for such
limitation. This plan is an unfunded plan.
The components of net periodic pension cost for both of the defined
benefit plans are summarized as follows:
Company Plans
------------------------
Years ended
December 31,
2001 2000 1999
------------------------
Components of net periodic benefit cost
Service cost $ 11.2 $ 10.6 $ 10.5
Interest cost 11.4 10.6 9.2
Expected return on plan assets (13.5) (12.3) (12.1)
Net amortization and deferral (1.5) (1.5) (1.6)
----- ----- -----
Net periodic pension cost $ 7.6 $ 7.4 $ 6.0
===== ===== =====
Company Plans
----------------
December 31,
2001 2000
----------------
Change in benefit obligation
Benefit obligation at beginning of year $152.3 $138.3
Service cost 11.2 10.6
Interest cost 11.4 10.6
Actuarial loss 9.0 2.1
Benefits paid (10.2) (9.4)
----- -----
Benefit obligation at end of year 173.7 152.2
----- -----
Change in plan assets
Fair value of plan assets at beginning of year 151.1 138.1
Actual return on plan assets -- 13.8
Employer contributions 10.2 8.6
Benefits paid (10.2) (9.4)
----- -----
Fair value of plan assets at end of year 151.1 151.1
----- -----
Funded status, end of year 22.6 1.2
Unrecognized net actuarial loss (33.7) (11.2)
Unrecognized prior service cost 5.5 7.0
Additional minimum liability 15.4 --
----- -----
Accrued pension liability (asset) $ 9.8 $ (3.0)
===== =====
At December 31, 2001, the additional minimum liability of the
Company's Cash Balance Retirement Plan exceeded the unrecognized prior
service cost by $7.8. This amount has been recorded as an increase to
accumulated other comprehensive loss.
Assumptions used in the accounting for the defined benefit plans
were as follows:
Company Plans
---------------
2001 2000
---------------
Weighted-average discount rate 7.25% 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,
2001 2000 1999
------------ ------------ ------------
Service cost $ 1.0 $ 0.8 $ 1.0
Interest cost 3.4 2.5 2.6
Net amortization and deferral (1.1) (0.6) (0.1)
Actuarial loss 0.7 -- --
------- ------- -------
Postretirement benefit costs $ 4.0 $ 2.7 $ 3.5
======= ======= =======
A summary of the components of the accumulated postretirement
benefit obligation follows:
December 31,
2001 2000
--------------
Retirees $ 13.1 $ 11.3
Fully eligible active plan participants 12.5 12.4
Other active plan participants 20.0 19.4
----- -----
$ 45.6 $ 43.1
===== =====
Reconciliation of the funded status of the December 31,
postretirement benefit plan and accrued liability 2001 2000
-------------
Accumulated postretirement benefit obligation,
beginning of year $ 43.1 $ 31.9
Changes in benefit obligation due to:
Service cost 1.0 0.8
Interest cost 3.4 2.5
Plan participants contributions 0.2 0.2
Actuarial (gain) loss (1.1) 11.9
Amendments -- (3.0)
Benefits paid (1.0) (1.2)
----- -----
Accumulated post retirement benefit obligation,
end of year 45.6 43.1
Unrecognized net actuarial loss (10.4) (12.2)
Unrecognized prior service cost 5.0 6.0
----- -----
Accrued postretirement benefit obligation $ 40.2 $ 36.9
===== =====
The weighted-average discount rates used in the calculation of the
accumulated postretirement benefit obligation was 7.3% and 7.8% as of
December 31, 2001 and 2000, respectively. The health care cost trend rate-
medical was assumed to be 7.5% and the trend rate-prescription was assumed
to be 12.0% as of December 31, 2001 and 2000, declining gradually to 5.0%
in the year 2011. 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, 2001 by $7.7. 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 of $0.8 or decrease of $0.6.
19. QUARTERLY DATA (UNAUDITED)
The following is a summary of unaudited quarterly data:
Year ended December 31, 2001
--------------------------------------------------
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
-------- -------- -------- -------- --------
Net sales $ 525.4 $ 549.7 $ 560.9 $ 563.8 $2,199.8
Gross profit 221.6 240.9 238.0 225.1 925.6
Net earnings 43.5 52.1 43.1 40.8 179.5
Basic earnings per
common share 0.63 0.75 0.62 0.59 2.58
Diluted earnings per
common share 0.62 0.74 0.61 0.58 2.54
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 0.42 0.49 0.49 0.30 1.65
Diluted earnings per
common share 0.38 0.47 0.47 0.30 1.61
20. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations," was issued. This Statement supersedes APB
Opinion No. 16, "Business Combinations" and SFAS No. 38. "Accounting for
Preacquisition Contingencies of Purchased Enterprises" and eliminates the
pooling method of accounting for business acquisitions. This Statement
requires all business combinations to be accounted for using the purchase
method for all transactions initiated after June 30, 2001.
In June 2001, SFAS No. 142 "Goodwill and Other Intangible Assets" was
also issued. This Statement supersedes APB No. 17 "Intangible Assets" and
addresses how intangible assets that are acquired individually or with a
group of other assets (but not those acquired in a business combination)
should be accounted for in financial statements upon their acquisition.
This Statement also addresses how goodwill and other intangible assets
should be accounted for after they have been initially recognized in the
financial statements. Goodwill and intangible assets that have indefinite
useful lives will not be amortized but rather will be reviewed at least
annually for impairment.
Intangible assets that have finite lives will continue to be amortized
over their useful lives, but without the constraint of the 40-year useful
life amortization ceiling. The provisions of this Statement are required to
be applied starting with fiscal years beginning after December 15, 2001,
however, goodwill and intangible assets acquired after June 30, 2001, will
be subject immediately to the nonamortization and amortization provisions
of this Statement. The impact of the adoption of SFAS No. 142 on the 2002
financial statements, will be a decrease to amortization expense of
approximately $26.0.
In June 2001, SFAS No. 143, "Accounting for Asset Retirement
Obligations" was issued. This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-
lived assets and the associated legal obligations of such asset retirement
costs. This Statement is effective for fiscal years beginning after June
15, 2002. The Company does not expect that implementation of this standard
will have a significant financial impact.
In August 2001, SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" was issued. This Statement supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of" and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions". This Statement
retains the requirements of SFAS No. 121 to recognize an impairment
loss only if the carrying amount of a long-lived asset is not
recoverable from its undiscounted cash flows and to measure an
impairment loss as the difference between the carrying amount and the
fair value of the asset. However, this standard removes goodwill from
its scope and revises the approach for evaluating impairment. This
Statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company is evaluating the impact of
the adoption of SFAS No. 144.
Schedule II
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 31, 2001, 2000 and 1999
(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, 2001:
Applied against asset
accounts:
Allowance for
doubtful accounts $ 123.0 $ 202.5 $ (206.0) $ 119.5
======= ======= ======= =======
Valuation allowance-
deferred tax assets $ 4.5 $ -- $ -- $ 4.5
======= ======= ======= =======
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
======= ======= ======= =======
35
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