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, 1994
-----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11353
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NATIONAL HEALTH LABORATORIES HOLDINGS INC.
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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.)
4225 EXECUTIVE SQUARE, SUITE 805 LA JOLLA, CALIFORNIA 92037
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(Address of principal executive offices) (Zip code)
619-657-9382
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of the issuer's common stock is
84,760,067 shares as of October 31, 1994, of which 20,176,729
shares are held by an indirect wholly owned subsidiary of Mafco
Holdings Inc.
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Millions, except per share data)
September 30, December 31,
1994 1993
------------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 19.6 $ 12.3
Accounts receivable, net 214.4 119.0
Prepaid expenses and other 29.3 21.7
Deferred income taxes 20.6 21.6
Income taxes receivable -- 8.7
-------- --------
Total current assets 283.9 183.3
Property, plant and equipment, net 138.7 100.1
Intangible assets, net 569.2 281.5
Other assets, net 26.2 20.6
-------- --------
$1,018.0 $ 585.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 50.0 $ 36.9
Dividend payable -- 6.8
Accrued expenses and other 91.7 55.6
Current portion of long-term debt 35.0 --
Current portion of accrued
settlement expenses 36.9 21.6
-------- --------
Total current liabilities 213.6 120.9
Revolving credit facility 193.0 278.0
Long-term debt, less current portion 360.0 --
Capital lease obligation 9.8 9.7
Accrued settlement expenses, less
current portion -- 11.5
Deferred income taxes 25.6 3.1
Other liabilities 60.2 21.5
Stockholders' equity:
Preferred stock, $0.10 par value;
10,000,000 shares authorized; none issued -- --
Common stock, $0.01 par value;
220,000,000 shares authorized;
84,755,692 and 99,354,492 shares issued at
September 30, 1994 and December 31, 1993,
respectively 0.8 1.0
Additional paid-in capital 153.4 226.3
Retained earnings 4.0 202.0
Minimum pension liability adjustment (2.4) (2.4)
Treasury stock, at cost; 14,603,800
shares of common stock at
December 31, 1993 -- (286.1)
-------- --------
Total stockholders' equity 155.8 140.8
-------- --------
$1,018.0 $ 585.5
======== ========
See notes to unaudited consolidated condensed financial statements.
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Dollars in Millions, except per share data)
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------- -------------------
1994 1993 1994 1993
-------- -------- -------- --------
Net sales $ 637.6 $ 591.6 $ 248.7 $ 194.8
Cost of sales 436.5 326.5 167.7 109.6
-------- -------- -------- --------
Gross profit 201.1 265.1 81.0 85.2
Selling, general and
administrative
expenses 105.6 90.4 41.1 29.3
Amortization of
intangibles and
other assets 11.9 6.4 5.4 2.2
-------- -------- -------- --------
Operating income 83.6 168.3 34.5 53.7
-------- -------- -------- --------
Other income
(expenses):
Litigation settlement
and related
expenses (21.0) -- (21.0) --
Other gains and
expenses, net -- 15.3 -- 15.3
Investment income 0.7 1.0 0.2 0.3
Interest expense (22.1) (7.1) (11.6) (3.1)
-------- -------- -------- --------
(42.4) 9.2 (32.4) 12.5
-------- -------- -------- --------
Earnings before
income taxes 41.2 177.5 2.1 66.2
Provision for
income taxes 18.8 72.5 1.9 28.0
-------- -------- -------- --------
Net earnings $ 22.4 $ 105.0 $ 0.2 $ 38.2
======== ======== ======== ========
Earnings per common
share $ 0.26 $ 1.16 $ -- $ 0.43
Dividends per common
share $ 0.08 $ 0.24 $ -- $ 0.08
See notes to unaudited consolidated condensed financial statements.
/TABLE
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Nine Months Ended
September 30,
---------------------
1994 1993
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 22.4 $ 105.0
Adjustments to reconcile net earnings to -------- --------
net cash flows provided by (used for)
operating activities:
Depreciation and amortization 32.7 26.8
Provision for doubtful accounts, net (1.2) 1.1
Litigation settlement and related expenses 21.0 --
Other gains and expenses, net -- (15.3)
Change in assets and liabilities,
net of effects of acquisitions:
Increase in accounts receivable (57.4) (34.3)
Decrease (increase) in prepaid expenses
and other 2.8 (1.7)
Decrease in deferred income
taxes, net 9.1 14.8
Decrease in income taxes
receivable 6.8 10.4
(Decrease) increase in accounts
payable, accrued expenses
and other (9.2) 2.5
Payments for settlement
and related expenses (17.2) (45.6)
Other, net (3.7) (5.0)
Net cash (used for) provided by -------- --------
operating activities 6.1 58.7
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (36.9) (18.3)
Acquisitions of businesses (252.6) (45.4)
Restricted investments -- 0.8
Other gains and expenses, net -- 15.3
-------- --------
Net cash used for investing activities (289.5) (47.6)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities 283.0 263.0
Payments on revolving credit facilities (368.0) (139.0)
Proceeds from long-term debt 400.0 --
Payments on long-term debt (5.0) --
Deferred payments on acquisitions (5.2) (1.3)
Purchase of treasury stock -- (125.5)
Dividends paid on common stock (13.6) (22.1)
Other (0.5) (0.9)
Net cash provided by (used for) -------- --------
financing activities 290.7 (25.8)
-------- --------
Net increase (decrease) in cash
and cash equivalents 7.3 (14.7)
Cash and cash equivalents at
beginning of period 12.3 33.4
-------- --------
Cash and cash equivalents at
end of period $ 19.6 $ 18.7
======== ========
See notes to unaudited consolidated condensed financial statements.
/TABLE
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS, CONTINUED
(Dollars in Millions)
(Unaudited)
Nine Months Ended
September 30,
---------------------
1994 1993
-------- --------
Supplemental schedule of cash
flow information:
Cash paid during the period for:
Interest $ 21.4 $ 5.9
Income taxes 9.5 54.4
Disclosure of non-cash financing
and investing activities:
Dividends declared and unpaid on
common stock $ -- $ 6.9
In connection with business
acquisitions, liabilities were
assumed as follows:
Fair value of assets acquired $ 395.3 $ 62.6
Cash paid, net of cash acquired (252.6) (45.4)
-------- --------
Liabilities assumed $ 142.7 $ 17.2
======== ========
See notes to unaudited consolidated condensed financial statements.
/TABLE
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts
of National Health Laboratories Holdings Inc. (the "Company") and
its wholly owned subsidiaries after elimination of all material
intercompany accounts and transactions. Approximately 24% of the
outstanding common stock of the Company is owned by National
Health Care Group, Inc. ("NHCG") which is an indirect wholly
owned subsidiary of Mafco Holdings Inc. ("Mafco").
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, 1994 of 84,754,089 shares and 84,752,194
shares, respectively, and the weighted average number of shares
outstanding during the three and nine months ended September 30,
1993 of 88,575,433 shares and 90,871,612 shares, respectively.
The change in the total number of shares outstanding resulted
from the purchase and subsequent cancellation by the Company of a
portion of its outstanding shares of common stock, net of
additional shares issued upon the exercise of options pursuant to
the Company's stock option plans.
3. LITIGATION SETTLEMENT
The Company approved a proposed settlement of previously
disclosed shareholder class and derivative litigation. In
connection with the settlement, the Company took a pre-tax
special charge of $15.0 and a $6.0 charge for expenses related to
the settled litigation. Insurance payments and payments from
other defendants amount to $55.0 plus expenses. As previously
disclosed, the litigation consisted of two consolidated class
action suits and a consolidated shareholder derivative action
brought in federal and state courts in San Diego, California.
The proposed settlement involves no admission of wrongdoing and
is subject to execution of a definitive agreement and court
approval.
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions, except per share data)
4. ACQUISITION OF ALLIED CLINICAL LABORATORIES, INC.
On May 3, 1994, the Company entered into a definitive
agreement to acquire Allied Clinical Laboratories, Inc.
("Allied"). Pursuant to the agreement, on May 9, 1994, a
subsidiary of the Company commenced a cash tender offer for all
shares of Allied common stock for $23 per share. The agreement
provided that any shares not tendered and purchased in the offer
were to be exchanged for $23 per share in cash in a second-step
merger. In connection with the Company's acquisition of Allied,
the Company and Allied became aware that the nature of the
possible problems associated with billing practices of Allied's
Cincinnati, Ohio clinical laboratory, concerning which Allied had
received a subpoena on April 5, 1994 from the Office of Inspector
General of the Department of Health and Human Services (the
"OIG") requiring Allied to produce certain documents and
information regarding the Medicare billing practices of such
laboratories with respect to certain cancer screening tests, may
have been both different and greater than previously perceived by
the Company and Allied. As a result, on June 7, 1994, the
Company entered into an agreement whereby the price payable in
such cash tender offer and such second-step merger was reduced
from $23 per share to $21.50 per share, or an aggregate of
approximately $12.6. The Company and Allied are continuing to
investigate these possible problems and have communicated with
the OIG regarding its subpoena, and they intend to cooperate
fully with the OIG's investigation. However, in the opinion
of management, the ultimate disposition of these matters is not
likely to have a material adverse effect on the financial position
or results of operations of the Company.
A subsidiary of the Company acquired Allied as a wholly
owned subsidiary on June 23, 1994, for approximately $191.5 in
cash plus the assumption of $24.0 of Allied indebtedness and the
recognition of approximately $19.9 of Allied net liabilities (the
"Allied Acquisition"). The Allied Acquisition was accounted for
using the purchase method of accounting; as such, Allied's assets
and liabilities were recorded at their estimated fair values on
the date of acquisition. The purchase price exceeded the fair
value of acquired net tangible assets by approximately $235.4,
which consists of goodwill and the right to the Allied name of
$182.6 and other intangible assets of $52.8. These items are
being amortized over periods between 25 and 40 years on a
straight-line basis. The allocation of the purchase price will
be finalized during the fourth quarter of 1994 upon completion of
asset valuations. Allied's results of operations have been
included in the Company's results of operations beginning June
23, 1994.
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions, except per share data)
4. ACQUISITION OF ALLIED CLINICAL LABORATORIES, INC. - Continued
The following table provides unaudited pro forma operating
results of the Company giving effect to the Allied Acquisition as
if it had been completed at the beginning of the periods
presented. 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,
--------------------
1994 1993
-------- --------
Net sales $ 727.9 $ 710.7
Net earnings 19.0 99.5
Earnings per common share $ 0.22 $ 1.09
5. CORPORATE REORGANIZATION
On June 7, 1994, the stockholders of National Health
Laboratories Incorporated ("NHLI") approved a proposed corporate
reorganization of NHLI, as a result of which National Health
Laboratories Holdings Inc., a Delaware corporation, now owns,
through NHL Intermediate Holdings Corp. I, a Delaware corporation
and a wholly owned subsidiary of the Company ("Intermediate
Holdings I"), and NHL Intermediate Holdings Corp. II, a Delaware
corporation and a wholly owned subsidiary of Intermediate
Holdings I ("Intermediate Holdings II"), all the outstanding
capital stock of NHLI.
In connection with the corporate reorganization on June 7,
1994, all of the 14,603,800 treasury shares held by NHLI were
cancelled. As a result, the $286.1 value assigned to such
treasury shares was eliminated with corresponding decreases in
the par value, additional paid-in capital and retained earnings
accounts of $0.2, $72.3 and $213.6, respectively.
6. LONG-TERM DEBT
On June 21, 1994, Intermediate Holdings II entered into a
credit agreement dated as of such date (the "Credit Agreement"),
with the banks named therein (the "Banks"), Citicorp USA, Inc.,
as administrative agent (the "Bank Agent"), and certain co-agents
named therein, which made available to Intermediate Holdings II a
term loan facility of $400.0 (the "Term Facility") and a
revolving credit facility of $350.0 (the "Revolving Credit
Facility" and, together with the Term Facility, the "Bank
Facility"). The Bank Facility provided funds for the acquisition
of Allied, for the refinancing of certain existing debt of Allied
and NHLI, to pay related fees and expenses and for general
corporate purposes of Intermediate Holdings II and its
subsidiaries, in each case subject to the terms and conditions
set forth therein.
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
6. LONG-TERM DEBT - Continued
The Credit Agreement provides that the Banks and the Bank
Agent will receive from Intermediate Holdings II customary
facility and administrative agent fees, respectively.
Intermediate Holdings II will pay a commitment fee on the average
daily unused portion of the Bank Facility of 0.5% per annum,
subject to a reduction to 0.375% per annum if certain financial
tests are met. Availability of funds under the Bank Facility is
conditioned on certain customary conditions, and the Credit
Agreement contains customary representations, warranties and
events of default. The Credit Agreement also requires the
Company to maintain certain financial ratios and tests, including
minimum debt service coverage ratios and net worth tests.
The Revolving Credit Facility matures in June 1999, with
semi-annual reductions of availability of $50.0, commencing in
December 1997. The Term Facility matures in December 2000, with
repayments in each quarter prior to maturity based on a specified
amortization schedule. The Bank Facility bears interest, at the
option of Intermediate Holdings II, at (i) Citibank, N.A.'s Base
Rate (as defined in the Credit Agreement), plus a margin of up to
0.75% per annum, based upon the Company's financial performance
or (ii) the Eurodollar rate for one, two, three or six month
interest periods (as selected by Intermediate Holdings II), plus
a margin varying between 1.25% and 2.00% per annum based upon the
Company's financial performance.
The Bank Facility is guaranteed by Intermediate Holdings I
and certain subsidiaries of Intermediate Holdings II and is
secured by pledges of stock and other assets of Intermediate
Holdings II and its subsidiaries.
On June 21, 1994, $400.0 available under the Term Facility
was borrowed by Intermediate Holdings II and loaned to NHLI and
was used by NHLI to repay in full its existing revolving credit
facilities and for working capital and general corporate
purposes. On June 23, 1994, Intermediate Holdings II borrowed
$185.0 of the amount available under the Revolving Credit
Facility to consummate the Allied Acquisition.
NATIONAL HEALTH LABORATORIES HOLDINGS INC. 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, 1994 compared with Nine Months
-----------------------------------------------------------------
Ended September 30, 1993
------------------------
Net sales for the nine months ended September 30, 1994 were
$637.6, an increase of 7.8% from $591.6 reported in the
comparable 1993 period. Net sales from the inclusion of Allied
since June 23, 1994 increased net sales by approximately $52.7 or
8.9%. Growth in new accounts and numerous acquisitions of small
clinical laboratory companies increased net sales by
approximately 9.7% and 11.9%, respectively. A price increase,
effective on April 1, 1994, increased net sales by approximately
1.7% for the nine months ended September 30, 1994. However, a
reduction in Medicare fee schedules from 88% to 84% of the
national limitation amounts on January 1, 1994, plus changes in
reimbursement policies of various third party payors, reduced net
sales by approximately 3.6%. Other factors, in order of
decreasing magnitude, comprised the remaining reduction in net
sales: declines in the level of HDL and ferritin testing, lower
utilization of laboratory testing, price erosion in the industry
as a whole and severe weather in the first quarter of 1994.
Cost of sales, which primarily includes laboratory and
distribution costs, increased to $436.5 for the nine months ended
September 30, 1994 from $326.5 in the corresponding 1993 period.
Of the $110.0 increase, approximately $49.2 was the result of
higher testing volume, approximately $6.3 was due to an increase
in phlebotomy staffing to improve client service and meet
competitive demand and approximately $34.3 was due to the
inclusion of the cost of sales of Allied. The remaining increase
resulted mainly from higher compensation and insurance expenses.
Cost of sales as a percent of net sales was 68.5% for the nine
months ended September 30, 1994 and 55.2% in the corresponding
1993 period. The increase in the cost of sales percentage
primarily resulted from a reduction in net sales due to a
reduction in Medicare fee schedules, pricing pressures and
utilization declines, each of which provided little corresponding
reduction in costs.
Selling, general and administrative expenses increased to
$105.6 for the nine months ended September 30, 1994 from $90.4 in
the same period in 1993. Approximately $12.7 of the increase was
due to the inclusion of the selling, general and administrative
expenses of Allied since June 23, 1994. The remaining increase
was primarily due to expansion of data processing and billing
departments due to increased volume and to improve customer
service. As a percentage of net sales, selling, general and
administrative expenses was 16.6% and 15.3% for the nine months
ended September 30, 1994 and 1993, respectively. The increase in
the selling, general and administrative percentage primarily
resulted from a reduction in net sales as discussed above.
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions, except per share data)
RESULTS OF OPERATIONS - Continued
Nine Months Ended September 30, 1994 compared with Nine Months
-----------------------------------------------------------------
Ended September 30, 1993
------------------------
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. Reductions in Medicare fee schedules, pursuant to the
Omnibus Budget Reconciliation Act of 1993 ("OBRA '93"), to 80% of
the median fee amounts, effective January 1, 1995, followed by an
additional reduction to 76% of such amounts on January 1, 1996
are 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
does not expect increases in cost of sales as a percentage of net
sales and selling, general and administrative expenses as a
percentage of net sales of the magnitude experienced in the nine
months ended September 30, 1994. Management cannot predict if
price erosion or utilization declines will continue or what their
ultimate effect on net sales or results of operations will be.
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 success of such programs.
The increase in amortization of intangibles and other
assets to $11.9 for the nine months ended September 30, 1994 from
$6.4 in the corresponding period in 1993 primarily resulted from
the acquisition of Allied in June 1994 and numerous small
laboratory companies during both 1994 and 1993.
The Company approved a proposed settlement of previously
disclosed shareholder class and derivative litigation. In 1994 in
connection with the settlement, the Company took a pre-tax special
charge of $15.0 and a $6.0 charge for expenses related to the
settled litigation. Insurance payments and payments from other
defendants amount to $55.0 plus expenses. As previously disclosed,
the litigation consisted of two consolidated class action suits
and a consolidated shareholder derivative action brought in federal
and state courts in San Diego, California. The proposed settlement
involves no admission of wrongdoing and is subject to execution of
a definitive agreement and court approval.
NATIONAL HEALTH LABORATORIES HOLDINGS INC. 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, 1994 compared with Nine Months
---------------------------------------------------------------
Ended September 30, 1993
------------------------
Other gains and expenses in 1993 included expense
reimbursement and termination fees of $21.6 received in
connection with the Company's attempt to purchase Damon
Corporation less related expenses and the write-off of certain
bank financing costs aggregating $6.3, resulting in a one-time
pre-tax gain of $15.3.
Interest expense was $22.1 for the nine months ended
September 30, 1994 compared with $7.1 for the same period in
1993. The change resulted primarily from increased borrowings
used to finance repurchases by the Company of its common stock in
1993 and to finance the acquisition of Allied in June 1994 and
numerous small laboratory companies during both 1994 and 1993.
Higher average interest rates also contributed to the increase in
interest expense.
The provision for income taxes as a percentage of earnings
before income taxes was 45.6% and 40.8% for the nine months ended
September 30, 1994 and 1993, respectively. The change was mainly
due to a higher effective tax rate for both federal and state
income taxes because of the impact of permanent differences on
lower pre-tax income in the third quarter of 1994.
NATIONAL HEALTH LABORATORIES HOLDINGS INC. 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, 1994 compared with Three Months
----------------------------------------------------------------
Ended September 30, 1993
------------------------
Net sales for the three months ended September 30, 1994
were $248.7, an increase of 27.7% from $194.8 reported in the
comparable 1993 period. Net sales from the inclusion of Allied
increased net sales by approximately $48.3 or 24.8%. Growth in
new accounts and numerous acquisitions of small clinical
laboratory companies increased net sales by approximately 9.0%
and 12.3%, respectively. A price increase, effective on April 1,
1994, increased net sales by approximately 2.5% for the three
months ended September 30, 1994. However, a reduction in
Medicare fee schedules from 88% to 84% of the national limitation
amounts on January 1, 1994, plus changes in reimbursement
policies of various third party payors, reduced net sales by
approximately 2.2%. The remaining reduction in net sales was due
to declines in the level of HDL and ferritin testing, and, to a
lesser extent, lower utilization of laboratory testing.
Cost of sales, which primarily includes laboratory and
distribution costs, increased to $167.7 for the three months
ended September 30, 1994 from $109.6 in the corresponding 1993
period. Of the $58.1 increase, approximately $16.3 was the
result of higher testing volume, approximately $1.0 was due to an
increase in phlebotomy staffing to improve client service and
meet competitive demand and approximately $31.7 was due to the
inclusion of the cost of sales of Allied. The remaining increase
resulted mainly from higher compensation and insurance expenses.
Cost of sales as a percent of net sales was 67.4% for the three
months ended September 30, 1994 and 56.3% in the corresponding
1993 period. The increase in the cost of sales percentage
primarily resulted from a reduction in net sales due to a
reduction in Medicare fee schedules, pricing pressures and
utilization declines, each of which provided little corresponding
reduction in costs.
Selling, general and administrative expenses increased to
$41.1 for the three months ended September 30, 1994 from $29.3 in
the same period in 1993. Approximately $11.6 of the increase was
due to the inclusion of the selling, general and administrative
expenses of Allied. As a percentage of net sales, selling,
general and administrative expenses was 16.5% and 15.0% for the
three months ended September 30, 1994 and 1993, respectively.
The increase in the selling, general and administrative
percentage primarily resulted from a reduction in net sales as
discussed above.
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions, except per share data)
RESULTS OF OPERATIONS - Continued
Three Months Ended September 30, 1994 compared with Three Months
----------------------------------------------------------------
Ended September 30, 1993
------------------------
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. Reductions in Medicare fee schedules, pursuant to OBRA
'93, to 80% of the median fee amounts, effective January 1, 1995,
followed by an additional reduction to 76% of such amounts on
January 1, 1996 are 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 does not expect increases in cost of sales as
a percentage of net sales and selling, general and administrative
expenses as a percentage of net sales of the magnitude
experienced in the three months ended September 30, 1994 compared
to the same 1993 period. Management cannot predict if price
erosion or utilization declines will continue or what their
ultimate effect on net sales or results of operations will be.
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 success of such programs.
The increase in amortization of intangibles and other
assets to $5.4 for the three months ended September 30, 1994 from
$2.2 in the corresponding period in 1993 primarily resulted from
the acquisition of Allied in June 1994 and numerous small
laboratory companies during both 1994 and 1993.
The Company approved a proposed settlement of previously
disclosed shareholder class and derivative litigation. In 1994 in
connection with the settlement, the Company took a pre-tax special
charge of $15.0 and a $6.0 charge for expenses related to the
settled litigation. Insurance payments and payments from other
defendants amount to $55.0 plus expenses. As previously disclosed,
the litigation consisted of two consolidated class action suits
and a consolidated shareholder derivative action brought in federal
and state courts in San Diego, California. The proposed settlement
involves no admission of wrongdoing and is subject to execution
of a definitive agreement and court approval.
Other gains and expenses in 1993 included expense
reimbursement and termination fees of $21.6 received in
connection with the Company's attempt to purchase Damon
Corporation less related expenses and the write-off of certain
bank financing costs aggregating $6.3, resulting in a one-time
pre-tax gain of $15.3.
NATIONAL HEALTH LABORATORIES HOLDINGS INC. 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, 1994 compared with Three Months
----------------------------------------------------------------
Ended September 30, 1993
------------------------
Interest expense was $11.6 for the three months ended
September 30, 1994 compared with $3.1 for the same period in
1993. The change resulted primarily from increased borrowings
used to finance repurchases by the Company of its common stock
during 1993 and to finance the acquisition of Allied in June 1994
and numerous small laboratory companies during both 1994 and
1993. Higher average interest rates also contributed to the
increase interest expense.
The provision for income taxes as percentage of earnings
before income taxes was 90.5% and 42.3% for the three months
ended September 30, 1994 and 1993, respectively. The change was
mainly due to the impact of permanent differences on lower pre-
tax income in the third quarter of 1994.
NATIONAL HEALTH LABORATORIES HOLDINGS INC. 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
----------------------------------------------------
For the nine months ended September 30, 1994 and 1993, net
cash provided by operating activities (after payment of
settlement and related expenses of $17.2 and $45.6 in 1994 and
1993, respectively) was $6.1 and $58.7, respectively. Cash used
for capital expenditures was $36.9 and $18.3 for the nine months
ended September 30, 1994 and 1993, respectively. The Company
expects capital expenditures to be approximately $50.0 in 1994 to
accommodate expected growth, to further automate laboratory
processes, improve efficiency and integrate the Company and
Allied.
On May 3, 1994, the Company entered into a definitive
agreement to acquire Allied. Pursuant to the agreement, on May
9, 1994, a subsidiary of the Company commenced a cash tender
offer for all shares of Allied common stock for $23 per share.
The agreement provided that any shares not tendered and purchased
in the offer were to be exchanged for $23 per share in cash in a
second-step merger. On June 7, 1994, the Company entered into an
agreement whereby the price payable in such cash tender offer and
such second-step merger was reduced to $21.50 per share, or an
aggregate of approximately $12.6. A subsidiary of the Company
acquired Allied as a wholly owned subsidiary on June 23, 1994,
for approximately $191.5 in cash plus the assumption of $24.0 of
Allied indebtedness and the recognition of approximately $19.9 of
Allied net liabilities.
The Company acquired nine small laboratory companies during
the nine months ended September 30, 1994 for an aggregate amount
of $44.2 in cash and the recognition of $26.9 of liabilities.
During the corresponding period in 1993, the Company acquired
nineteen laboratory companies for a total of $45.4 in cash and
the recognition of $17.2 of liabilities.
On June 21, 1994, Intermediate Holdings II entered into the
Credit Agreement dated as of such date, with the banks named
therein, Citicorp USA, Inc., as administrative agent, and certain
co-agents named therein, which made available to Intermediate
Holdings II the Term Facility of $400.0 and the Revolving Credit
Facility of $350.0. The Bank Facility provided funds for the
acquisition of Allied, for the refinancing of certain existing
debt of Allied and NHLI, to pay related fees and expenses and for
general corporate purposes of Intermediate Holdings II and its
subsidiaries, in each case subject to the terms and conditions
set forth therein.
The Credit Agreement provides that the Banks and the Bank
Agent will receive from Intermediate Holdings II customary
facility and administrative agent fees, respectively.
Intermediate Holdings II will pay a commitment fee on the average
daily unused portion of the Bank Facility of 0.5% per annum,
subject to a reduction to
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions)
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES - Continued
----------------------------------------------------------------
0.375% per annum if certain financial tests are met.
Availability of funds under the Bank Facility is conditioned on
certain customary conditions, and the Credit Agreement contains
customary representations, warranties and events of default. The
Credit Agreement also requires the Company to maintain certain
financial ratios and tests, including minimum debt service
coverage ratios and net worth tests.
The Revolving Credit Facility matures in June 1999, with
semi-annual reductions of availability of $50.0, commencing in
December 1997. The Term Facility matures in December 2000, with
repayments in each quarter prior to maturity based on a specified
amortization schedule. The Bank Facility bears interest, at the
option of Intermediate Holdings II, at (i) Citibank, N.A.'s Base
Rate (as defined in the Credit Agreement), plus a margin of up to
0.75% per annum, based upon variations in certain financial tests
or (ii) the Eurodollar rate for one, two, three or six month
interest periods (as selected by Intermediate Holdings II), plus
a margin varying between 1.25% and 2.00% per annum based upon the
Company's financial performance.
The Bank Facility is guaranteed by Intermediate Holdings I
and certain subsidiaries of Intermediate Holdings II and is
secured by pledges of stock and other assets of Intermediate
Holdings II and its subsidiaries.
On June 21, 1994, $400.0 available under the Term Facility
was borrowed by Intermediate Holdings II and loaned to NHLI and
was used by NHLI to repay in full its existing revolving credit
facilities and for working capital and general corporate
purposes. On June 23, 1994, Intermediate Holdings II borrowed
$185.0 of the amount available under the Revolving Credit
Facility to consummate the Allied acquisition.
In connection with the Allied Acquisition, the Company
announced that it terminated its 10 million share repurchase
program, under which 7,795,800 common shares had been
repurchased, and established a new $50.0 stock repurchase program
through which the Company will acquire additional shares of the
Company's common stock from time to time in the open market. As
of September 30, 1994, there were no stock repurchases under the
new stock repurchase program.
NATIONAL HEALTH LABORATORIES HOLDINGS INC. 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 nine months ended September 30, 1993, the
Company purchased 7,582,700 of its outstanding shares of common
stock for an aggregate amount of $125.5. The purchase was
financed by borrowings under the revolving credit facilities in
existence at such time and cash on hand. In connection with the
corporate reorganization on June 7, 1994, all of the 14,603,800
treasury shares held by NHLI were cancelled. As a result, the
$286.1 value assigned to such treasury shares was eliminated with
corresponding decreases in the par value, additional paid-in
capital and retained earnings accounts of $0.2, $72.3 and $213.6,
respectively.
The Company announced, also in connection with the Allied
Acquisition, that it is discontinuing its dividend payments for
the foreseeable future in order to increase its flexibility with
respect to both its acquisition strategy and stock repurchase
plan.
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been cooperating fully with the
government to resolve its concerns with regard to the
matters described under "Legal Proceedings" in the Form
10-Q for the six months ended June 30, 1994.
The Company approved a proposed settlement of
previously disclosed shareholder class and derivative
litigation. In connection with the settlement, the
Company took a pre-tax special charge of $15.0 million
and a $6.0 million charge for expenses related to the
settled litigation. Insurance payments and payments
from other defendants amount to $55.0 million plus
expenses. As previously disclosed, the litigation
consisted of two consolidated class action suits and a
consolidated shareholder derivative action brought in
federal and state courts in San Diego, California. The
proposed settlement involves no admission of wrongdoing
and is subject to execution of a definitive agreement
and court approval.
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION, Continued
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(electronically filed version only)
(b) Reports on Form 8-K
A report on Form 8-K dated June 23, 1994 was
filed on July 7, 1994 in connection with the
Allied Acquisition. The Form 8-K incorporated
by reference the historical financial
statements included in Allied's Annual Report
on Form 10-K for the year ended December 31,
1993 and Allied's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994. The Form
8-K also included unaudited pro forma financial
data of the Company.
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
NATIONAL HEALTH LABORATORIES HOLDINGS INC.
Registrant
By:/s/ David C. Flaugh
---------------
David C. Flaugh
Senior Executive Vice
President and Chief Operating
Officer (Acting Principal
Financial and Accounting
Officer)
Date: November 14, 1994
INDEX TO EXHIBITS
Exhibit No.
27 Financial Data Schedule (electronically
filed version only)
5
0000920148
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
1000
9-MOS
DEC-31-1994
SEP-30-1994
19,600
0
230,600
16,200
0
283,900
229,600
90,900
1,018,000
213,600
562,800
800
0
0
155,000
1,018,000
637,600
637,600
436,500
436,500
138,500
0
22,100
41,200
18,800
22,400
0
0
0
22,400
.26
.26
