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 JUNE 30, 1995
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11353
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LABORATORY CORPORATION OF AMERICA HOLDINGS
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3757370
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
358 SOUTH MAIN STREET, BURLINGTON, NORTH CAROLINA 27215
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(Address of principal executive offices) (Zip code)
800-222-7566
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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
122,908,698 shares as of August 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 August 3, 1995, of
which 8,325,000 are held by an indirect wholly-owned subsidiary
of Roche Holding Ltd.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Millions, except per share data)
June 30, December 31,
1995 1994
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 45.6 $ 26.8
Accounts receivable, net 403.0 205.4
Inventories 51.9 20.1
Prepaid expenses and other 17.9 8.3
Deferred income taxes 50.8 29.4
Income taxes receivable -- 3.0
-------- --------
Total current assets 569.2 293.0
Property, plant and equipment, net 285.9 140.1
Intangible assets, net 924.6 551.9
Other assets, net 16.1 27.7
-------- --------
$1,795.8 $1,012.7
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 49.8 $ 44.3
Accrued expenses and other 187.3 92.8
Current portion of long-term debt 68.8 39.0
Accrued settlement expenses 9.4 26.7
-------- --------
Total current liabilities 315.3 202.8
Revolving credit facility 194.0 213.0
Long-term debt, less current portion 731.3 341.0
Capital lease obligation 9.8 9.8
Deferred income taxes 1.2 20.6
Other liabilities 147.0 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;
122,908,698 shares and 84,761,817
shares issued and outstanding at
June 30, 1995 and December 31, 1994,
respectively 1.2 0.8
Additional paid-in capital 411.4 153.5
Retained earnings (Accumulated deficit) (15.4) 11.7
-------- --------
Total stockholders' equity 397.2 166.0
-------- --------
$1,795.8 $1,012.7
======== ========
See notes to unaudited consolidated condensed financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Millions, except per share data)
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
------------------- ------------------
1995 1994 1995 1994
------- ------- ------- -------
Net sales $ 611.1 $ 388.9 $ 367.3 $ 203.9
Cost of sales 422.7 268.8 258.4 136.5
------- ------- ------- -------
Gross profit 188.4 120.1 108.9 67.4
Selling, general and
administrative expenses 95.4 64.5 57.4 33.5
Amortization of intangibles
and other assets 11.5 6.5 6.7 3.4
Restructuring charges 65.0 -- 65.0 --
Provision for settlements 10.0 -- 10.0 --
------- ------- ------- -------
Operating income (loss) 6.5 49.1 (30.2) 30.5
------- ------- ------- -------
Other income (expense):
Investment income 0.7 0.5 0.3 0.3
Interest expense (31.1) (10.5) (17.4) (6.0)
------- ------- ------- -------
Earnings (loss) before
income taxes and
extraordinary item (23.9) 39.1 (47.3) 24.8
Provision for income taxes (5.1) 16.9 (15.7) 10.7
------- ------- ------- -------
Earnings (loss) before
extraordinary item (18.8) 22.2 (31.6) 14.1
Extraordinary item -
Loss on early extinguishment
of debt, net of income tax
benefit of $5.2 (8.3) -- (8.3) --
------- ------- ------- -------
Net earnings (loss) $ (27.1) $ 22.2 $ (39.9) $ 14.1
======= ======= ======= =======
Net earnings (loss) per
common share:
Earnings (loss) per common
share before extra-
ordinary loss $ (0.20) $ 0.26 $ (0.28) $ 0.16
Extraordinary loss per
common share $ (0.08) $ -- $ (0.08) $ --
-------- -------- -------- --------
Net earnings (loss) per
common share $ (0.28) $ 0.26 $ (0.36) $ 0.16
======== ======== ======== ========
Dividends per common share $ -- $ 0.08 $ -- $ --
======== ======== ======== ========
See notes to unaudited consolidated condensed financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Six Months Ended
June 30,
--------------------
1995 1994
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (27.1) $ 22.2
Adjustments to reconcile net earnings
to net cash provided by (used for)
operating activities:
Depreciation and amortization 32.7 19.4
Restructuring charges 65.0 --
Provision for settlements 10.0 --
Extraordinary loss, net of
income tax benefits 8.3 --
Provision for doubtful accounts,
net 0.4 0.2
Change in assets and liabilities,
net of effects of acquisitions:
Increase in accounts receivable (29.0) (42.5)
Decrease (increase) in inventories 5.5 (1.8)
Decrease in prepaid expenses
and other 1.2 0.8
Increase in deferred income
taxes, net (22.8) 6.3
Decrease in income taxes
receivable 3.7 7.5
Decrease in accounts payable,
accrued expenses and other (11.4) (1.1)
Payments for restructuring charges (4.9) --
Payments for settlement and
related expenses (27.3) (13.4)
Other, net (4.1) (2.5)
------- -------
Net cash provided by (used for) operating
activities 0.2 (4.9)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (27.1) (24.7)
Acquisitions of businesses (10.4) (244.9)
------- -------
Net cash used for investing
activities (37.5) (269.6)
------- -------
(continued)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS, CONTINUED
(Dollars in Millions)
(Unaudited)
Six Months Ended
June 30,
--------------------
1995 1994
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities $ 236.0 $ 273.0
Payments on revolving credit facilities (255.0) (368.0)
Proceeds from long-term debt 800.0 400.0
Payments on long-term debt (430.0) --
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 (7.1) (1.7)
Other 0.3 (0.4)
------- -------
Net cash provided by financing
activities 56.1 289.3
------- -------
Net increase in cash and cash
equivalents 18.8 14.8
Cash and cash equivalents at
beginning of year 26.8 12.3
------- -------
Cash and cash equivalents at
end of period $ 45.6 $ 27.1
======= =======
Supplemental schedule of cash
flow information:
Cash paid during the period for:
Interest $ 23.8 $ 11.1
Income taxes 6.9 7.8
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 $ 742.2 $ 366.9
Cash paid (10.4) (244.9)
Stock issued (539.6) --
------- -------
Liabilities assumed $ 192.2 $ 122.0
======= =======
See notes to unaudited consolidated condensed financial statements.
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 six months
ended June 30, 1995 of 111,177,517 shares and 98,045,102 shares,
respectively, and the weighted average number of shares
outstanding during the three and six months ended June 30, 1994
of 84,751,763 and 84,751,231 shares respectively. The increase
in the total number of shares outstanding for the three and six
months ended June 30, 1995 resulted 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 footnote 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 theShare Conversion was 61,041,135. Also,
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
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 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 have been 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 will 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
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
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.
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.
Six Months Ended
June 30,
---------------------
1995 1994
------ ------
Net sales $857.7 $843.4
Net earnings 35.1 39.8
Earnings per common share $ 0.29 $ 0.32
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.
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
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 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.
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.
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.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in Millions)
4. RESTRUCTURING CHARGES - Continued
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. 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) (0.8) -- (1.1)
Cash payments (4.9) -- -- (4.9)
------ ------ ------ ------
Balance at
June 30, 1995 $ 19.0 $ 20.5 $ 19.5 $ 59.0
====== ====== ====== ======
Current $ 41.0
Non-current 18.0
------
$ 59.0
======
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 a cash settlement will be
made by the Company. As of June 30, 1995, approximately $4.0 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
---------------------
Six Months Ended June 30, 1995 compared with Six Months Ended
June 30, 1994.
Net sales for the six months ended June 30, 1995 were
$611.1, an increase of 57.1% from $388.9 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 $130.1 or
33.5%. 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 14.6%.
Growth in new accounts and acquisitions of small clinical
laboratory companies increased net sales by approximately 9.3%
and 5.1%, respectively. A price increase, effective on January
1, 1995, increased net sales by approximately 3.0% for the six
months ended June 30, 1995. However, 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 lower utilization of laboratory
testing and price erosion in the industry as a whole, comprised
the remaining reduction in net sales.
Cost of sales, which includes primarily laboratory and
distribution costs, increased to $422.7 for the six months ended
June 30, 1995 from $268.8 in the corresponding 1994 period. Of
the $153.9 increase, approximately $93.2 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 $29.9 due to higher testing volume and
approximately $3.7 due to an increase in compensation expense.
Reductions in several expense categories, including supplies,
insurance and fringe benefits decreased cost of sales by
approximately $17.7. Cost of sales as a percent of net sales was
69.2% for the six months ended June 30, 1995 and 69.1% in the
corresponding 1994 period.
Selling, general and administrative expenses increased to
$95.4 for the six months ended June 30, 1995 from $64.5 in the
same period in 1994. Approximately $19.6 of the increase was due
to the inclusion of the selling, general and administrative
expenses of RBL 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 and to
improve customer service. As a percentage of net sales, selling,
general and
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
---------------------
Six Months Ended June 30, 1995 compared with Six Months Ended
June 30, 1994.
administrative expenses was 15.6% and 16.6% for the six months
ended June 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 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 $11.5 for the six months ended June 30, 1995 from $6.5 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. See note 4 of the
Notes to Unaudited Consolidated Condensed Financial Statements
which sets forth the Company s restructuring activities for the
six months ended June 30, 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
---------------------
Six Months Ended June 30, 1995 compared with Six Months Ended
June 30, 1994.
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 cash settlements will be
made by the Company. As of June 30, 1995, approximately $4.0 in
settlements and expenses have been paid related to these claims.
Interest expense was $31.1 for the six months ended June 30,
1995 compared with $10.5 for the same period in 1994. The change
resulted from increased borrowings used primarily 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 also 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.
As a result of the restructuring charges and extraordinary
loss, the provision for income taxes as percentage of earnings
before income taxes for the six months ended June 30, 1995 is not
comparable to prior periods.
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 June 30, 1995 compared with Three Months Ended
June 30, 1994.
Net sales for the three months ended June 30, 1995 were
$367.3, an increase of 80.1% from $203.9 reported in the
comparable 1994 period. Net sales from the inclusion of RBL
increased net sales by approximately $130.1 or 63.8%. Also, net
sales from the inclusion of Allied increased net sales by
approximately $22.9 or 11.2%. Growth in new accounts and
acquisitions of small clinical laboratory companies increased net
sales by approximately 9.0% and 4.0%, respectively. A price
increase, effective on January 1, 1995, increased net sales by
approximately 2.8% for the three months ended June 30, 1995.
However, 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 lower
utilization of laboratory testing and price erosion in the
industry as a whole, comprised the remaining reduction in net
sales.
Cost of sales, which includes primarily laboratory and
distribution costs, increased to $258.4 for the six months ended
June 30, 1995 from $136.5 in the corresponding 1994 period. Of
the $121.9 increase, approximately $93.2 was due to the inclusion
of the cost of sales of RBL and approximately $18.1 was due to
the inclusion of the cost of sales of Allied. Approximately $12.2
of the increase was the result of higher testing volume and
approximately $2.6 was due to an increase in compensation
expense. These increases were partially offset by decreases in
supplies, insurance and fringe benefits, as well as other cost
categories, in connection with the Company s on-going cost-
reduction program. Cost of sales as a percent of net sales was
70.4% for the three months ended June 30, 1995 and 66.9% in the
corresponding 1994 period. The increase in the cost of sales
percentage 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, pricing pressures and utilization
declines, each of which provided little corresponding reduction
in costs.
Selling, general and administrative expenses increased to
$57.4 for the three months ended June 30, 1995 from $33.5 in the
same period in 1994. Approximately $19.6 of the increase was due
to the inclusion of the selling, general and administrative
expenses of RBL and approximately $3.1 due to the inclusion of
the selling, general and administrative expenses of Allied. The
remaining
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 June 30, 1995 compared with Three Months Ended
June 30, 1994.
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 15.6% and 16.4% for the three
months ended June 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 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
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 $6.7 for the three months ended June 30, 1995 from $3.4 in the
corresponding period in 1994 primarily resulted from the Merger
in April 1995 and 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. See note 4 of the
Notes to Unaudited Consolidated Condensed Financial Statements
which sets forth the Company s restructuring activities for the
six months ended June 30, 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 June 30, 1995 compared with Three Months Ended
June 30, 1994
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 cash settlements will be
made by the Company. As of June 30, 1995, approximately $4.0 in
settlements and expenses have been paid related to these claims.
Interest expense was $17.4 for the three months ended June
30, 1995 compared with $6.0 for the same period in 1994. The
change resulted from increased borrowings used primarily 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.
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.
As a result of the restructuring charges and extraordinary
loss, the provision for income taxes as percentage of earnings
before income taxes for the three months ended June 30, 1995 is
not comparable to prior periods.
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
----------------------------------------------------
For the six months ended June 30, 1995 and 1994, net cash
provided by (used in) operating activities (after payment of
settlement and related expenses of $27.3 and $13.4 in 1995 and
1994, respectively) was $0.2 and ($4.9), respectively. Capital
expenditures were $27.1 and $24.7 for the six months ended June
30, 1995 and 1994, respectively. The Company expects capital
expenditures to be approximately $100.0 in 1995 to integrate the
Company, RBL and Allied, to accommodate expected growth, to
further automate laboratory processes and improve efficiency.
The Company acquired four small laboratory companies during
the six months ended June 30, 1995 for an aggregate amount of
$3.2 in cash and the recognition of $1.9 of liabilities. During
the corresponding period in 1994, the Company acquired seven
small laboratory companies for a total of $36.5 in cash and the
recognition of $2.7 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 (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 61,041,135. 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.
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 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 have been 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 will 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 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.
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
----------------------------------------------------
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.
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. See note 4 of the
Notes to Unaudited Consolidated Condensed Financial Statements
which sets forth the Company s restructuring activities for the
six months ended June 30, 1995. Future cash payments under the
restructuring plan are expected to be $20.5 over the next twelve
months and $18.0 thereafter.
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
----------------------------------------------------
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 a cash settlement will be
made by the Company. As of June 30, 1995, approximately $4.0 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
$90.0 to $100.0 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 exists, 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 2. Changes in Securities
(a) In connection with the Merger, the Company, HLR,
Roche and Roche Holdings, Inc. ("Holdings")
entered into a stockholder agreement dated as of
April 28, 1995 (the "Stockholder Agreement") which
sets forth, among other things, certain agreements
and understandings regarding the governance of the
Company following the Merger, including but not
limited to the composition of the Board of
Directors. The Stockholder Agreement was filed as
an exhibit to the Company's report on Form 8-K
which was filed on May 12, 1995 in connection with
the merger and is incorporated herein by
reference.
In connection with the Merger, the Company made a
distribution to stockholders of record of shares
of Common Stock as of April 21, 1995 consisting 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) pursuant
to a warrant agreement between the Company and
American Stock Transfer & Trust Company (the
"Warrant Agreement") dated as of April 10, 1995
which sets forth the terms of the warrants. The
Warrant Agreement was filed as an exhibit to the
Company's report on Form 8-K dated April 28, 1995
which was filed on May 12, 1995 in connection with
the Merger and is incorporated herein by
reference.
(b) Not applicable
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
PART II - OTHER INFORMATION - Continued
Item 4. Submission of Matters to a Vote of Security Holders
(a) A Special Meeting of the Stockholders of the
Company was held on April 28, 1995.
(b) Not applicable.
(c) The matters voted upon were the approval and
adoption of the Merger Agreement and the approval
of a proposed amendment to Article I of the
Certificate of Incorporation of the Company to
change the name of the Company to "Laboratory
Corporation of America Holdings." The results of
the vote were as follows:
Votes Votes Votes
Topic For Against Abstained
------------------------ --------- ------- ---------
Approval and adoption
of the Merger Agreement: 66,972,092 50,182 38,702
Approval of name change: 66,962,170 57,404 41,402
(d) Not applicable.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
PART II - OTHER INFORMATION - Continued
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
20 Press release of the Registrant dated
August 1, 1995.*
27 Financial Data Schedule (electronically
filed version only).
(b) Reports on Form 8-K
A report on Form 8-K was filed on May 12,
1995, in connection with the consummation
of the Merger on April 28, 1995.
A report on Form 8-K dated August 1, 1995
was filed on August 2, 1995 in connection
with the press release dated August 1, 1995
announcing operating results of the
Registrant for the three and six month
periods ended June 30, 1995 as well as
certain other information.
* Incorporated by reference herein to the report on Form 8-K
filed with the Securities and Exchange Commission on August
2, 1995.
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: August 11, 1995
5
0000920148
LABORATORY CORPORATION OF AMERICA HOLDINGS
1000
6-MOS
DEC-31-1995
JUN-30-1995
45,600
0
447,500
44,500
51,900
569,200
398,600
112,700
1,795,800
315,300
935,100
1,200
0
0
396,000
1,795,800
611,100
611,100
422,700
422,700
181,900
0
31,100
(23,900)
(5,100)
(18,800)
0
(8,300)
0
(27,100)
(.28)
(.28)
