UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 1995 ----------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------- --------------- Commission file number 1-11353 ------------------------------------------ LABORATORY CORPORATION OF AMERICA HOLDINGS - ----------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-3757370 - ----------------------------------------------------------------- (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) 800-222-7566 - ----------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the issuer's common stock is 122,908,722 shares as of November 3, 1995, of which 61,329,256 shares are held by indirect wholly-owned subsidiaries of Roche Holding Ltd. The number of warrants outstanding to purchase shares of the issuer's common stock is 22,151,308 as of November 3, 1995, of which 8,325,000 are held by an indirect wholly owned subsidiary of Roche Holding Ltd.
<TABLE> LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in Millions, except per share data) <CAPTION> September 30, December 31, 1995 1994 ------------ ----------- (Unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 25.0 $ 26.8 Accounts receivable, net 436.4 205.4 Inventories 54.3 20.1 Prepaid expenses and other 13.5 8.3 Deferred income taxes 61.9 29.4 Income taxes receivable -- 3.0 -------- -------- Total current assets 591.1 293.0 Property, plant and equipment, net 292.2 140.1 Intangible assets, net 925.1 551.9 Other assets, net 18.5 27.7 -------- -------- $1,826.9 $1,012.7 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 61.6 $ 44.3 Accrued expenses and other 176.8 92.8 Current portion of long-term debt 68.8 39.0 Accrued settlement expenses 4.6 26.7 -------- -------- Total current liabilities 311.8 202.8 Revolving credit facility 218.0 213.0 Long-term debt, less current portion 731.2 341.0 Capital lease obligation 9.8 9.8 Deferred income taxes -- 20.6 Other liabilities 144.5 59.5 Stockholders' equity: Preferred stock, $0.10 par value; 10,000,000 shares authorized; none issued and outstanding -- -- Common stock, $0.01 par value; 220,000,000 shares authorized; 122,908,722 shares and 84,761,817 shares issued and outstanding at September 30, 1995 and December 31, 1994, respectively 1.2 0.8 Additional paid-in capital 411.4 153.5 Retained earnings (accumulated deficit) (1.0) 11.7 -------- -------- Total stockholders' equity 411.6 166.0 -------- -------- $1,826.9 $1,012.7 ======== ======== <FN> See notes to unaudited consolidated condensed financial statements. </TABLE>
<TABLE> LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Dollars in Millions, except per share data) (Unaudited) <CAPTION> Nine Months Ended Three Months Ended September 30, September 30, ------------------- ------------------- 1995 1994 1995 1994 --------- ------- ------- --------- <S> <C> <C> <C> <C> Net sales $ 1,028.6 $ 637.6 $ 417.5 $ 248.7 Cost of sales 722.4 436.5 299.7 167.7 --------- ------- ------- ------- Gross profit 306.2 201.1 117.8 81.0 Selling, general and administrative expenses 162.3 105.6 66.9 41.1 Amortization of intangibles and other assets 19.2 11.9 7.7 5.4 Restructuring charges 65.0 -- -- -- Provision for settlements 10.0 -- -- -- --------- ------- ------- ------- Operating income 49.7 83.6 43.2 34.5 --------- ------- ------- ------- Other income (expense): Litigation settlement and related expenses -- (21.0) -- (21.0) Investment income 1.1 0.7 0.4 0.2 Interest expense (48.5) (22.1) (17.4) (11.6) --------- ------- ------- ------- Earnings before income taxes and extra- ordinary item 2.3 41.2 26.2 2.1 Provision for income taxes 6.7 18.8 11.8 1.9 --------- ------- ------- ------- Earnings (loss) before extraordinary item (4.4) 22.4 14.4 0.2 Extraordinary item - Loss on early extinguishment of debt, net of income tax benefit of $5.2 (8.3) -- -- -- --------- ------- ------- ------- Net earnings (loss) $ (12.7) $ 22.4 $ 14.4 $ 0.2 ========= ======= ======= ======= Net earnings (loss) per common share: Earnings (loss) per common share before extra- ordinary loss $(0.04) $ 0.26 $ 0.12 $ -- Extraordinary loss per common share $(0.08) $ -- $ -- $ -- ------ ------ ------ ------ Net earnings (loss) per common share $(0.12) $ 0.26 $ 0.12 $ -- ====== ====== ====== ====== Dividends per common share $ -- $ 0.08 $ -- $ -- ====== ====== ====== ====== <FN> See notes to unaudited consolidated condensed financial statements. </TABLE>
<TABLE> LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in Millions) (Unaudited) <CAPTION> Nine Months Ended September 30, -------------------- 1995 1994 -------- -------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ (12.7) $ 22.4 -------- -------- Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 52.1 32.7 Restructuring charges 65.0 -- Provision for settlements 10.0 21.0 Extraordinary loss, net of income tax benefits 8.3 -- Provision for doubtful accounts, net 3.0 (1.2) Change in assets and liabilities, net of effects of acquisitions: Increase in accounts receivable (60.0) (57.4) Decrease (increase) in inventories 4.4 (1.1) Decrease in prepaid expenses and other 6.5 3.9 Decrease (increase) in deferred income taxes, net (27.5) 9.1 Decrease in income taxes receivable 5.4 6.8 Decrease in accounts payable, accrued expenses and other (7.0) (9.2) Payments for restructuring charges (6.7) -- Payments for settlement and related expenses (32.1) (17.2) Other, net (4.3) (3.7) -------- -------- Net cash provided by operating activities 4.4 6.1 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (44.3) (36.9) Acquisitions of businesses (38.7) (252.6) -------- -------- Net cash used for investing activities (83.0) (289.5) -------- -------- (continued) </TABLE>
<TABLE> LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS, CONTINUED (Dollars in Millions) (Unaudited) <CAPTION> Nine Months Ended September 30, -------------------- 1995 1994 -------- -------- <S> <C> <C> CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving credit facilities $ 270.0 $ 283.0 Payments on revolving credit facilities (265.0) (368.0) Proceeds from long-term debt 800.0 400.0 Payments on long-term debt (430.0) (5.0) Dividends paid on common stock (474.8) (13.6) Proceeds from issuance of common stock 135.7 -- Proceeds from issuance of Roche Warrants 51.0 -- Deferred payments on acquisitions (10.3) (5.2) Other 0.2 (0.5) ------- ------- Net cash provided by financing activities 76.8 290.7 ------- ------- Net increase (decrease) in cash and cash equivalents (1.8) 7.3 Cash and cash equivalents at beginning of year 26.8 12.3 ------- -------- Cash and cash equivalents at end of period $ 25.0 $ 19.6 ======= ======== Supplemental schedule of cash flow information: Cash paid during the period for: Interest $ 42.4 $ 21.4 Income taxes 22.0 9.5 Disclosure of non-cash financing and investing activities: Common stock issued in connection with an acquisition $ 539.6 $ -- Common stock issued in connection with the cancellation of employee stock options $ 6.9 $ -- In connection with business acquisitions, liabilities were assumed as follows: Fair value of assets acquired $ 775.7 $ 395.3 Cash paid (38.7) (252.6) Stock issued (539.6) -- -------- ------- Liabilities assumed $ 197.4 $ 142.7 ======== ======= <FN> See notes to unaudited consolidated condensed financial statements. </TABLE>
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in Millions, except per share data) 1. BASIS OF FINANCIAL STATEMENT PRESENTATION Prior to April 28, 1995, the Company's name was National Health Laboratories Holdings Inc. ("NHL"). On April 28, 1995, following approval at a special meeting of the stockholders of the Company, the name of the Company was changed to Laboratory Corporation of America Holdings. The consolidated financial statements include the accounts of Laboratory Corporation of America Holdings and its wholly- owned subsidiaries (the "Company") after elimination of all material intercompany accounts and transactions. The accompanying consolidated condensed financial statements of the Company and its subsidiaries are unaudited. In the opinion of management, all adjustments (which include only normal recurring accruals) necessary for a fair statement of the results of operations have been made. 2. EARNINGS PER SHARE Earnings per share are based upon the weighted average number of shares outstanding during the three and nine months ended September 30, 1995 of 122,908,722 shares and 106,424,055 shares, respectively, and the weighted average number of shares outstanding during the three and nine months ended September 30, 1994 of 84,754,089 and 84,752,194 shares respectively. The increase in the total number of shares outstanding for the three and nine months ended September 30, 1995 resulted primarily from the issuance of shares of common stock to HLR Holdings, Inc. ("HLR") and Roche Holdings, Inc. in connection with the merger with Roche Biomedical Laboratories, Inc. described in note 3 herein. 3. MERGER WITH ROCHE BIOMEDICAL LABORATORIES, INC. On April 28, 1995, the Company completed its merger with Roche Biomedical Laboratories, Inc. ("RBL") pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as of December 13, 1994 (the "Merger"). Pursuant to the Merger Agreement, each outstanding share of common stock, par value $0.01 per share of the Company ("Common Stock") (other than as provided in the Merger Agreement), was converted (the "Share Conversion") into (i) 0.72 of a share of Common Stock of the Company and (ii) $5.60 in cash per share, without interest. The aggregate number of shares issued and outstanding following the Share Conversion was 61,041,159. Also, an aggregate of 538,307 shares of Common Stock were issued in connection with the cancellation of certain employee stock options.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in Millions, except per share data) 3. MERGER WITH ROCHE BIOMEDICAL LABORATORIES, INC. - Continued In addition, pursuant to the Merger Agreement, an aggregate of 61,329,256 shares of Common Stock were issued to HLR and its designee, Roche Holdings, Inc. in exchange for all shares of common stock, no par value, of RBL outstanding immediately prior to the effective date of the Merger (other than treasury shares, which were canceled) and a cash contribution described below. The issuance of such shares of Common Stock constituted approximately 49.9% of the total outstanding shares of Common Stock outstanding immediately after the Merger. The Company also made a distribution (the "Warrant Distribution") to holders of record as of April 21, 1995, of 0.16308 of a warrant per outstanding share of Common Stock, each such warrant representing the right to purchase one newly issued share of Common Stock for $22.00 (subject to adjustment) on April 28, 2000 (each such warrant, a "Warrant"). Approximately 13,826,308 Warrants were issued to stockholders entitled to receive Warrants in the Warrant Distribution (including fractional Warrants, which were not distributed, but were liquidated in sales on the New York Stock Exchange and the proceeds thereof distributed to such stockholders). In addition, pursuant to the Merger Agreement on April 28, 1995 the Company issued to Hoffmann-La Roche Inc. ("Roche"), for a purchase price of approximately $51.0, 8,325,000 Warrants (the "Roche Warrants") to purchase shares of Common Stock, which Warrants have the terms described above. The aggregate cash consideration of approximately $474.8 paid to stockholders of the Company in the Merger was financed from three sources: a cash contribution (the "Company Cash Contribution") of approximately $288.1 out of the proceeds of borrowings under the Bank Facility (as described below), a cash contribution made by HLR to the Company in the amount of approximately $135.7 and the proceeds from the sale and issuance of the Roche Warrants. The exchange consideration of approximately $558.0 for the purchase of RBL consisted of the value of the stock issued to HLR and Roche Holdings, Inc., as well as other cash costs of the Merger, net of cash received from HLR. The Merger has been accounted for under the purchase method of accounting; as such RBL's assets and liabilities were recorded at their estimated fair values on the date of acquisition. The exchange consideration exceeded the fair value of acquired net tangible assets by approximately $380.3, which is estimated to consist of goodwill of approximately $296.6 and customer lists of approximately $83.7. These items are being amortized over periods of 40 and 25 years, respectively. The allocation of the purchase price will be finalized based on asset valuations which are not yet completed.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in Millions, except per share data) 3. MERGER WITH ROCHE BIOMEDICAL LABORATORIES, INC. - Continued The following table provides unaudited pro forma operating results as if the Merger and the acquisition of Allied Clinical Laboratories, Inc., which was acquired on June 23, 1994, had been completed at the beginning of each of the periods presented. The pro forma information does not include the restructuring charges and the extraordinary item related to the Merger. The pro forma information has been prepared for comparative purposes only and does not purport to be indicative of future operating results. Nine Months Ended September 30, --------------------- 1995 1994 -------- -------- Net sales $1,275.2 $1,278.2 Net earnings 49.5 49.0 Net earnings per common share $ 0.40 $ 0.40 The Company also entered into a credit agreement dated as of April 28, 1995 (the "Credit Agreement"), with the banks named therein (the "Banks") and Credit Suisse (New York Branch), as administrative agent (the "Bank Agent"), under which the Banks made available to the Company a senior term loan facility of $800.0 (the "Term Loan Facility") and a revolving credit facility of $450.0 (the "Revolving Credit Facility" and, together with the Term Loan Facility, the "Bank Facility"). The Bank Facility provided funds for the Company Cash Contribution for the refinancing of certain existing debt of the Company and its subsidiaries and RBL, for related fees and expenses of the Merger and for general corporate purposes of the Company and its subsidiaries, in each case subject to the terms and conditions set forth in the Credit Agreement. In connection with the Credit Agreement, the Company paid the Banks and Bank Agent customary underwriting, closing and participation fees, respectively. In addition, the Company will pay a facility fee based on the total Revolving Credit Facility commitment (regardless of usage) of 0.125% per annum. Availability of funds under the Bank Facility is conditioned on certain customary conditions, and the Credit Agreement contains customary representations, warranties, covenants and events of default. The Revolving Credit Facility matures in April 2000. The Term Loan Facility matures in December 2001, with repayments in each quarter prior to maturity based on a specified amortization schedule. For as long as HLR and its affiliates' ownership of outstanding Company common stock (the "HLR Group Interest") remains at least 25%, the Revolving Credit Facility bears interest, at the option of the
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in Millions) 3. MERGER WITH ROCHE BIOMEDICAL LABORATORIES, INC. - Continued Company, at (i) Credit Suisse's Base Rate (as defined in the Credit Agreement) or (ii) the Eurodollar Rate (as defined in the Credit Agreement) plus a margin of 0.25% and the Term Loan Facility bears interest, at the option of the Company, at (i) Credit Suisse's Base Rate (as defined in the Credit Agreement) or (ii) the Eurodollar Rate (as defined in the Credit Agreement) plus a margin of 0.375%. In the event there is a reduction in the HLR Group interest to below 25%, applicable interest margins will not be determined as set forth above, but instead will be determined based upon the Company's financial performance as described in the Credit Agreement. During the quarter ended September 30, 1995, the Company entered into interest rate swap agreements with certain major financial institutions to manage its interest rate exposure with respect to $600.0 of its floating rate debt under the Term Loan Facility. The agreements effectively changed the interest rate exposure on $600.0 of floating rate debt to a weighted average fixed interest rate of 6.01%, through requiring that the Company pay a fixed rate amount in exchange for the financial institutions paying a floating rate amount. The notional amounts of the agreements are used to measure the interest to be paid or received and do not represent the amount of exposure to credit loss. These agreements mature in September 1998. The Bank Facility is unconditionally and irrevocably guaranteed by certain of the Company's subsidiaries. On April 28, 1995, the Company borrowed $800.0 under the Term Loan Facility and $184.0 under the Revolving Credit Facility (i) to pay the Company Cash Contribution; (ii) to repay in full the existing revolving credit and term loan facilities of a wholly-owned subsidiary of the Company of approximately $640.0 including interest and fees; (iii) to repay approximately $50.0 of existing indebtedness of RBL; and (iv) for other transaction costs in connection with the Merger and for use as working capital and general corporate purposes of the Company and its subsidiaries. In connection with the repayment of existing revolving credit and term loan facilities, the Company recorded an extraordinary loss of approximately $13.5 ($8.3 net of tax), consisting of the write-off of deferred financing costs, related to the early extinguishment of debt.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in Millions) 4. RESTRUCTURING CHARGES Following the Merger, the Company determined that it would be beneficial to close Company laboratory facilities in certain geographic regions where duplicate Company and RBL facilities existed at the time of the Merger. In addition, the Company decided to downsize certain finance and administrative positions in La Jolla, California in order to eliminate duplicative functions. Under the restructuring plan, the Company originally estimated it would take a $76.0 charge in the second quarter of 1995 to cover the costs of the restructuring plan. In refining the plan, the Company later estimated that the charge required was $65.0 in the second quarter of 1995. The charge includes approximately $24.2 to reduce the workforce by approximately 2,200 individuals. The plan includes a reduction of approximately 1,520 laboratory operations personnel, approximately 80 sales and marketing personnel and approximately 600 finance and administrative personnel both at laboratory locations and in La Jolla, California. Approximately $21.3 of the restructuring charge consists of the reduction of certain assets to their net realizable values and primarily consists of the write-off of approximately $17.7 of leasehold improvements on facilities to be closed or significantly downsized. Lease and other facility obligations accounted for approximately $19.5 of the restructuring charge, including the future minimum lease payments and expenses from the estimated closing or downsizing date to the end of the contractual lease term for facilities to be significantly downsized or closed. The following represents the Company's restructuring activities for the period indicated: Asset Lease and Severance revaluations other facility Costs and write-offs obligations Total ---------- ------------- -------------- ------- Balance at December 31, 1994 $ -- $ -- $ -- $ -- Restructuring charge 24.2 21.3 19.5 65.0 Non cash items (0.3) (0.9) -- (1.2) Cash payments (6.6) -- -- (6.6) ------ ------- ------- ------ Balance at September 30, 1995 $ 17.3 $ 20.4 $ 19.5 $ 57.2 ====== ======= ======= ====== Current $ 39.2 Non-current 18.0 ------ $ 57.2 ======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Dollars in Millions) 5. PROVISION FOR SETTLEMENTS In the second quarter of 1995, the Company took a pre-tax special charge of $10.0 in connection with the estimated costs of settling various claims pending against the Company, substantially all of which are billing disputes, in which the Company believes it is probable that settlements will be made by the Company. As of September 30, 1995, approximately $5.7 in settlements and expenses have been paid.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Millions) RESULTS OF OPERATIONS - --------------------- Nine Months Ended September 30, 1995 compared with Nine Months Ended September 30, 1994. Net sales for the nine months ended September 30, 1995 were $1,028.6 an increase of 61.3% from $637.6 reported in the comparable 1994 period. Net sales from the inclusion of Roche Biomedical Laboratories, Inc. ("RBL"), which was acquired on April 28, 1995, increased net sales by approximately $317.8 or 49.8%. Also, net sales from the inclusion of Allied Clinical Laboratories, Inc. ("Allied"), which was acquired on June 23, 1994, increased net sales by approximately $56.6 or 8.9%. Growth in new accounts and acquisitions of small clinical laboratory companies increased net sales by approximately 8.5% and 2.8%, respectively. A price increase of 2.5%, effective on January 1, 1995, was substantially discounted as the year progressed and as a result increased net sales by approximately 1.0% for the nine months ended September 30, 1995. Lower utilization of laboratory testing and price erosion in the industry as a whole decreased net sales by approximately 5.0%. A reduction in Medicare fee schedules from 84% to 80% of the national limitation amounts on January 1, 1995, plus changes in reimbursement policies of various third party payors, reduced net sales by approximately 1.4%. Other factors, including accounts terminated by management, comprised the remaining reduction in net sales. Cost of sales, which includes primarily laboratory and distribution costs, increased to $722.4 for the nine months ended September 30, 1995 from $436.5 in the corresponding 1994 period. Of the $285.9 increase, approximately $232.9 was due to the inclusion of the cost of sales of RBL and approximately $44.8 was due to the inclusion of the cost of sales of Allied. Cost of sales increased by approximately $22.6 due to higher testing volume unrelated to the Merger or acquisition of Allied and approximately $6.1 due to an increase in compensation expense. Reductions in supplies of $5.0, insurance of $4.8, fringe benefits of $4.8 and other expense categories of $5.9 decreased cost of sales an aggregate of approximately $20.5. Cost of sales as a percent of net sales was 70.2% for the nine months ended September 30, 1995 and 68.5% in the corresponding 1994 period. Selling, general and administrative expenses increased to $162.3 for the nine months ended September 30, 1995 from $105.6 in the same period in 1994. Approximately $48.7 of the increase was due to the inclusion of the selling, general and administrative expenses of RBL
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Millions) RESULTS OF OPERATIONS - Continued - --------------------------------- Nine Months Ended September 30, 1995 compared with Nine Months Ended September 30, 1994. and approximately $7.7 due to the inclusion of the selling, general and administrative expenses of Allied. The remaining increase was primarily due to expansion of the data processing and billing departments due to increased volume unrelated to the Merger or purchase of Allied and to improve customer service. This increase was partially offset by decreases in other expense categories, including reductions in selling expenses, as a result of the Company's on-going cost-reduction program. As a percentage of net sales, selling, general and administrative expenses was 15.8% and 16.6% for the nine months ended September 30, 1995 and 1994, respectively. The decrease in the selling, general and administrative percentage primarily resulted from an increase in net sales in the first quarter of 1995 compared to the first quarter of 1994 and reductions in expenses due to the Company's on-going cost-reduction program. Management expects net sales to continue to grow through strategic acquisitions and the addition of new accounts, although there can be no assurance that the Company will experience such growth. A reduction in Medicare fee schedules, pursuant to the Omnibus Budget Reconciliation Act of 1993 ("OBRA '93"), to 76% of the median fee amounts, effective January 1, 1996 is expected to negatively impact net sales, cost of sales as a percentage of net sales and selling, general and administrative expenses as a percentage of net sales in the future. Management expects that price erosion and utilization declines will continue to negatively impact net sales and the results of operations for the foreseeable future. It is the objective of management to partially offset the increases in cost of sales as a percentage of net sales and selling, general and administrative expenses as a percentage of net sales through comprehensive cost reduction programs at each of the Company's regional laboratories, although there can be no assurance of the timing or success of such programs. Congress is also considering changes to the Medicare fee schedules in conjunction with certain budgetary bills pending in Congress. The ultimate outcome of these deliberations on pending legislation cannot be predicted at this time and management, therefore, cannot predict the impact, if any, such proposals, if enacted, would have on the results of operations of the Company.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Millions) RESULTS OF OPERATIONS - Continued - --------------------------------- Nine Months Ended September 30, 1995 compared with Nine Months Ended September 30, 1994. The increase in amortization of intangibles and other assets to $19.2 for the nine months ended September 30, 1995 from $11.9 in the corresponding period in 1994 primarily resulted from the Merger in April 1995 and the acquisition of Allied in June 1994. Following the Merger, the Company determined that it would be beneficial to close Company laboratory facilities in certain geographic regions where duplicate Company and RBL facilities existed at the time of the Merger. In addition, the Company decided to downsize certain finance and administrative positions in La Jolla, California in order to eliminate duplicative functions. Under the restructuring plan, the Company originally estimated it would take a $76.0 charge to cover the costs of the restructuring plan. In refining the plan, the Company later estimated that the charge required was $65.0. This charge was recorded in the second quarter of 1995. See note 4 of the Notes to Unaudited Consolidated Condensed Financial Statements which sets forth the Company's restructuring activities for the nine months ended September 30, 1995. In the second quarter of 1995, the Company took a pre-tax special charge of $10.0 in connection with the estimated costs of settling various claims pending against the Company, substantially all of which are billing disputes, in which the Company believes it is probable that settlements will be made by the Company. As of September 30, 1995, approximately $5.7 in settlements and expenses have been paid related to these claims. Interest expense was $48.5 for the nine months ended September 30, 1995 compared with $22.1 for the same period in 1994. The change resulted primarily from increased borrowings used to finance the Company Cash Contribution, the repayment of existing indebtedness of RBL and certain other costs of the Merger and the acquisition of Allied and, to a lesser extent, due to a higher effective borrowing rate in the first four months of 1995. In connection with the repayment of the Company's existing revolving credit and term loan facilities at the time of the Merger, the Company recorded an extraordinary loss from the early extinguishment of debt of approximately $13.5 ($8.3 net of tax) consisting of the write-off of deferred financing costs.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Millions) RESULTS OF OPERATIONS - Continued - --------------------------------- Nine Months Ended September 30, 1995 compared with Nine Months Ended September 30, 1994. As a result of the restructuring charges and extraordinary loss, the provision for income taxes as percentage of earnings before income taxes for the nine months ended September 30, 1995 is not comparable to prior periods. Three Months Ended September 30, 1995 compared with Three Months Ended September 30, 1994. Net sales for the three months ended September 30, 1995 were $417.5, an increase of 67.9% from $248.7 reported in the comparable 1994 period. Net sales from the inclusion of RBL increased net sales by approximately $188.3 or 75.7%. Growth in new accounts and acquisitions of small clinical laboratory companies increased net sales by approximately 7.4% and 1.3%, respectively. Lower utilization of laboratory testing and price erosion in the industry as a whole, decreased net sales by approximately 9.0%. A reduction in Medicare fee schedules from 84% to 80% of the national limitation amounts on January 1, 1995, plus changes in reimbursement policies of various third party payors, reduced net sales by approximately 1.4%. Other factors, including accounts terminated by management, comprised the remaining reduction in net sales. Cost of sales, which includes primarily laboratory and distribution costs, was $299.7 for the three months ended September 30, 1995 compared to $167.7 in the corresponding 1994 period, an increase of $132.0. Cost of sales increased approximately $139.7 due to the inclusion of the cost of sales of RBL, approximately $3.5 due to higher testing volume and approximately $2.2 due to an increase in compensation expense. These increases were partially offset by decreases in supplies of $1.9 and insurance of $2.2, as well as other cost categories totaling an aggregate of $9.3, in connection with the Company's on-going cost-reduction program. Cost of sales as a percentage of net sales was 71.8% for the three months ended September 30, 1995 and 67.4% in the corresponding 1994 period. The increase in the cost of sales percentage of net sales primarily resulted from inclusion of RBL's cost of sales in 1995 and a reduction in net sales due to a reduction in Medicare fee schedules, price erosion and utilization declines, each of which provided little corresponding reduction in costs.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Millions) RESULTS OF OPERATIONS - Continued - --------------------------------- Three Months Ended September 30, 1995 compared with Three Months Ended September 30, 1994. Selling, general and administrative expenses increased to $66.9 for the three months ended September 30, 1995 from $41.1 in the same period in 1994. The inclusion of the selling, general and administrative expenses of RBL since April 28, 1995 increased expenses by approximately $29.4. This increase was partially offset by decreases in several expense categories, including selling expenses, as a result of the Company's on-going cost- reduction program. As a percentage of net sales, selling, general and administrative expenses was 16.0% and 16.5% for the three months ended September 30, 1995 and 1994, respectively. The decrease in the selling, general and administrative percentage primarily resulted from the Company's on-going cost-reduction program. Management expects net sales to continue to grow through strategic acquisitions and the addition of new accounts, although there can be no assurance that the Company will experience such growth. A reduction in Medicare fee schedules, pursuant to the Omnibus Budget Reconciliation Act of 1993 ("OBRA '93"), to 76% of the median fee amounts, effective January 1, 1996 is expected to negatively impact net sales, cost of sales as a percentage of net sales and selling, general and administrative expenses as a percentage of net sales in the future. Management expects that price erosion and utilization declines will continue to negatively impact net sales and the results of operations for the foreseeable future. It is the objective of management to partially offset the increases in cost of sales as a percentage of net sales and selling, general and administrative expenses as a percentage of net sales through comprehensive cost reduction programs at each of the Company's regional laboratories, although there can be no assurance of the timing or success of such programs. Congress is also considering changes to the Medicare fee schedules in conjunction with certain budgetary bills pending in Congress. The ultimate outcome of these deliberations on pending legislation cannot be predicted at this time and management, therefore, cannot predict the impact, if any, such proposals, if enacted, would have on the results of operations of the Company. The increase in amortization of intangibles and other assets to $7.7 for the three months ended September 30, 1995 from $5.4 in the corresponding period in 1994 primarily resulted from the Merger in April 1995.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Millions) RESULTS OF OPERATIONS - Continued - --------------------------------- Three Months Ended September 30, 1995 compared with Three Months Ended September 30, 1994. Interest expense was $17.4 for the three months ended September 30, 1995 compared with $11.6 for the same period in 1994. The change resulted primarily from increased borrowings used to finance the Company Cash Contribution, the repayment of existing indebtedness of RBL and certain other costs of the Merger. In connection with the repayment of the Company's existing revolving credit and term loan facilities at the time of the Merger, the Company recorded an extraordinary loss from the early extinguishment of debt of approximately $13.5 ($8.3 net of tax) consisting of the write-off of deferred financing costs. The provision for income taxes as a percentage of earnings before taxes was 45.0% for the three months ended September 30, 1995 This percentage is not comparable to the three months ended September 30, 1994 as a result of the litigation settlement and related expenses in the third quarter of 1994. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES - ---------------------------------------------------- For the nine months ended September 30, 1995 and 1994, net cash provided by operating activities (after payment of settlement and related expenses of $32.1 and $17.2 in 1995 and 1994, respectively) was $4.4 and 6.1, respectively. Capital expenditures were $44.3 and $36.9 for the nine months ended September 30, 1995 and 1994, respectively. The Company expects capital expenditures to be approximately $75.0 in 1995 and approximately $90.0 in 1996 to integrate the Company and RBL, to accommodate expected growth, to further automate laboratory processes and improve efficiency. The Company acquired seven small laboratory companies during the nine months ended September 30, 1995 for an aggregate amount of $31.5 in cash and the recognition of $7.2 of liabilities. During the corresponding period in 1994, the Company acquired nine small laboratory companies for a total of $44.2 in cash and the recognition of $26.9 of liabilities. On April 28, 1995, the Company completed its merger with Roche Biomedical Laboratories, Inc. ("RBL") pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as of December 13, 1994
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Millions, except per share data) FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES - Continued - ---------------------------------------------------------------- (the "Merger"). The Merger was accounted for under the purchase method of accounting. Pursuant to the Merger Agreement, each outstanding share of common stock, par value $0.01 per share of the Company ("Common Stock") (other than as provided in the Merger Agreement), was converted (the "Share Conversion") into (i) 0.72 of a share of Common Stock of the Company and (ii) $5.60 in cash per share, without interest. The aggregate number of shares issued and outstanding following the Share Conversion was 61,041,159. Also, an aggregate of 538,307 shares of Common Stock were issued in connection with the cancellation of certain employee stock options. In addition, pursuant to the Merger Agreement, an aggregate of 61,329,256 shares of Common Stock were issued to HLR Holdings Inc. ("HLR") and its designee, Roche Holdings, Inc. in exchange for all shares of common stock, no par value, of RBL outstanding immediately prior to the effective date of the Merger (other than treasury shares, which were canceled) and a cash contribution described below. The issuance of such shares of Common Stock constituted approximately 49.9% of the total outstanding shares of Common Stock outstanding immediately after the Merger. The Company also made a distribution (the "Warrant Distribution") to holders of record as of April 21, 1995, of 0.16308 of a warrant per outstanding share of Common Stock, each such warrant representing the right to purchase one newly issued share of Common Stock for $22.00 (subject to adjustment) on April 28, 2000 (each such warrant, a "Warrant"). Approximately 13,826,308 Warrants were issued to stockholders entitled to receive Warrants in the Warrant Distribution (including fractional Warrants, which were not distributed, but were liquidated in sales on the New York Stock Exchange and the proceeds thereof distributed to such stockholders). In addition, pursuant to the Merger Agreement on April 28, 1995 the Company issued to Hoffmann-La Roche Inc. ("Roche"), for a purchase price of approximately $51.0, 8,325,000 Warrants (the "Roche Warrants") to purchase shares of Common Stock, which Warrants have the terms described above. The aggregate cash consideration of approximately $474.8 paid to stockholders of the Company in the Merger was financed from three sources: a cash contribution (the "Company Cash Contribution") of approximately $288.1 out of the proceeds of borrowings under the Bank
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Millions) FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES - Continued - ---------------------------------------------------------------- Facility (as described below), a cash contribution made by HLR to the Company in the amount of approximately $135.7 and the proceeds from the sale and issuance of the Roche Warrants. The Company also entered into a credit agreement dated as of April 28, 1995 (the "Credit Agreement"), with the banks named therein (the "Banks") and Credit Suisse (New York Branch), as administrative agent (the "Bank Agent"), which made available to the Company a senior term loan facility of $800.0 (the "Term Loan Facility") and a revolving credit facility of $450.0 (the "Revolving Credit Facility" and, together with the Term Loan Facility, the "Bank Facility"). The Bank Facility provided funds for the Company Cash Contribution for the refinancing of certain existing debt of the Company and its subsidiaries and RBL, for related fees and expenses of the Merger and for general corporate purposes of the Company and its subsidiaries, in each case subject to the terms and conditions set forth in the Credit Agreement. In connection with the Credit Agreement, the Company paid the Banks and Bank Agent customary underwriting, closing and participation fees, respectively. In addition, the Company will pay a facility fee based on the total Revolving Credit Facility commitment (regardless of usage) of 0.125% per annum. Availability of funds under the Bank Facility is conditioned on certain customary conditions, and the Credit Agreement contains customary representations, warranties, covenants and events of default. The Revolving Credit Facility matures in April 2000. The Term Loan Facility matures in December 2001, with repayments in each quarter prior to maturity based on a specified amortization schedule. For as long as HLR and its affiliates ownership of Company common stock (the "HLR Group Interest") remains at least 25%, the Revolving Credit Facility bears interest, at the option of the Company, at (i) Credit Suisse's Base Rate (as defined in the Credit Agreement) or (ii) the Eurodollar Rate (as defined in the Credit Agreement) plus a margin of 0.25% and the Term Loan Facility bears interest, at the option of the Company, at (i) Credit Suisse's Base Rate (as defined in the Credit Agreement) or (ii) the Eurodollar Rate (as defined in the Credit Agreement) plus a margin of 0.375%. In the event there is a reduction in the HLR Group Interest to below 25%, applicable interest margins will not be determined as set forth above, but instead will be determined based upon the Company's financial performance as described in the Credit Agreement.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Millions) FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES - Continued - ----------------------------------------------------------------- During the quarter ended September 30, 1995, the Company entered into interest rate swap agreements with certain major financial institutions to manage its interest rate exposure with respect to $600.0 of its floating rate debt under the Term Loan Facility. The agreements effectively changed the interest rate exposure on $600.0 of floating rate debt to a weighted average fixed interest rate of 6.01%, through requiring that the company pay a fixed rate amount in exchange for the financial institutions paying a floating rate amount. The notional amounts of the agreements are used to measure the interest to be paid or received and do not represent the amount of exposure to credit loss. These agreements mature in September 1998. The Bank Facility is unconditionally and irrevocably guaranteed by certain of the Company's subsidiaries. On April 28, 1995, the Company borrowed $800.0 under the Term Loan Facility and $184.0 under the Revolving Credit Facility (i) to pay the Company Cash Contribution; (ii) to repay in full the existing revolving credit and term loan facilities of a wholly-owned subsidiary of the Company of approximately $640.0 including interest and fees; (iii) to repay approximately $50.0 of existing indebtedness of RBL; and (iv) for other transaction costs in connection with the Merger and for use as working capital and general corporate purposes of the Company and its subsidiaries. Following the Merger, the Company determined that it would be beneficial to close Company laboratory facilities in certain geographic regions where duplicate Company and RBL facilities existed at the time of the Merger. In addition, the Company decided to downsize certain finance and administrative positions in La Jolla, California in order to eliminate duplicative functions. Under the restructuring plan, the Company originally estimated it would take a $76.0 charge to cover the costs of the restructuring plan. In refining the plan, the Company later estimated that the charge required was $65.0. This charge was recorded in the second quarter of 1995. See note 4 of the Notes to Unaudited Consolidated Condensed Financial Statements which sets forth the Company's restructuring activities for the nine months ended September 30, 1995. Future cash payments under the restructuring plan are expected to be $18.8 over the next year and $18.0 thereafter. In the second quarter of 1995, the Company took a pre-tax special charge of $10.0 in connection with the estimated costs of settling various claims pending against the Company, substantially all of which are billing disputes, in which the Company believes it
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Millions) FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES - Continued - ---------------------------------------------------------------- is probable that settlements will be made by the Company. As of September 30, 1995, approximately $5.7 in settlements and expenses have been paid related to these claims. As a result of the Merger, the Company is expected to achieve substantial savings in operating costs through the consolidation of certain operations and the elimination of redundant expenses. Such savings are expected to be realized over time as the consolidation process is completed. The Company expects to realize approximate annualized net savings of between $100.0 to $110.0 within three years following the Merger. The synergies expected to be realized by the Company will be derived from several sources, including corporate, general and administrative expenses, including the consolidation of administrative staff. Other reductions in sales staff where duplicate territories exist, operational savings, including the closing of overlapping laboratories and other facilities, and savings to be realized from the additional buying power of the larger Company, are expected to generate significant savings. It is also expected that savings will be realized from certain changes in employee benefits. These estimated savings are anticipated to be partially offset by a loss of existing business during the conversion process. Realization of improvements in profitability is dependent, in part, on the extent to which the revenues of the combined companies are maintained and will be influenced by many factors, including factors outside the control of the Company. There can be no assurance that the estimated cost savings described above will be realized or achieved in a timely manner or that improvements, if any, in profitability will be achieved or that such savings will not be offset be increases in other expenses. The Company expects that its cash needs for working capital, capital expenditures and the cash costs of the restructuring and operations of the Company after the Merger will be met by its cash flow from operations and borrowings under the Revolving Credit Facility.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of the Stockholders of the Company was held on September 20, 1995. (b) The following individuals were elected to the board of directors: James R. Maher Thomas P. MacMahon James B. Powell, M.D. Jean-Luc Belingard Linda Gosden Robinson David B. Skinner, M.D. Andrew G. Wallace, M.D. (c) The matters voted upon were the election of directors, approval and adoption of the 1995 Stock Plan for Non-Employee Directors, approval and adoption of the Performance Unit Plan, approval and adoption of the Annual Bonus Incentive Plan and the ratification of the appointment of KPMG Peat Marwick LLP as the Company's independent auditors for the fiscal year ending December 31, 1995. Each of such matters was described in the proxy statement dated August 17, 1995 which was distributed to stockholders in connection with the annual meeting of the stockholders of the Company. The results of the vote were as follows: Votes Votes Votes Topic For Against Abstained Unvoted - ----------------------- ---------- ------------ ---------- -------- Election of the members of the board of directors: James R. Maher 106,546,487 297,098 - - Thomas P. MacMahon 106,546,919 296,666 - - James B. Powell, M.D. 106,546,415 297,170 - - Jean-Luc Belingard 106,546,415 297,170 - - Linda Gosden Robinson 106,546,415 297,170 - - David B. Skinner, M.D. 106,546,919 296,666 - - Andrew G. Wallace, M.D. 106,546,415 297,170 - - Approval and adoption of the 1995 Stock Plan for Non-Employee Directors: 102,164,945 4,632,472 46,118 - Approval and adoption of the Performance Unit Plan:106,562,559 219,063 61,963 - Approval and adoption of the Annual Bonus Incentive Plan: 105,370,276 1,424,477 48,822 10
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES PART II - OTHER INFORMATION - Continued Votes Votes Votes Topic For Against Abstained Unvoted - --------------------- --------- ----------- ----------- ----------- Ratification of the appoint- ment of KPMG Peat Marwick LLP as the Company's independent auditors for the fiscal year 1995: 106,759,120 53,117 31,068 280 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Amendment dated as of September 19, 1995 to the Employment Agreement dated as of January 1, 1991, as amended on April 1, 1991, June 6, 1991, January 1, 1993, April 1, 1994 and April 28, 1995, between La Jolla Management Corp., a Delaware corporation and a wholly-owned subsidiary of the Company, and David C. Flaugh.(1) 10.2 First Amendment to Credit Agreement dated as of September 8, 1995 among the Company, the banks named therein, and Credit Suisse (New York Branch), as Administrative Agent. 27 Financial Data Schedule (electronically filed version only). (1) Incorporated by reference herein to the current report on Form 8-K filed with the Securities and Exchange Commission on September 21, 1995.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES PART II - OTHER INFORMATION - Continued (b) Reports on Form 8-K A current report on Form 8-K dated September 19, 1995 was filed on September 21, 1995 in connection with the Company's press release dated September 19, 1995 containing certain financial and other information relating to the Company, announcing the resignation of David C. Flaugh, the then Executive Vice President and Chief Operating Officer of the Company, effective September 19, 1995, the results of the annual meeting of the stockholders held on September 20, 1995, and certain other actions of the Board of Directors. A current report on Form 8-K dated October 25, 1995 was filed on October 30, 1995 in connection with the Company's press release dated October 25, 1995 announcing operating results of the Registrant for the three and nine month periods ended September 30, 1995 as well as certain other information.
S I G N A T U R E Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LABORATORY CORPORATION OF AMERICA HOLDINGS Registrant By:/s/ WESLEY R. ELINGBURG -------------------------- Wesley R. Elingburg Senior Vice President, Finance (Principal Accounting Officer) Date: November 14, 1995