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, 1996
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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)
(910) 229-1127
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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
122,923,705 shares as of November 1, 1996, of which 61,329,256
shares are held by indirect wholly owned subsidiaries of Roche
Holding Ltd.
The number of warrants outstanding to purchase shares of the
issuer's common stock is 22,151,308 as of November 1, 1996, 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 BALANCE SHEETS
(Dollars in Millions, except per share data)
September 30, December 31,
1996 1995
--------------- --------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 28.2 $ 16.4
Accounts receivable, net 494.4 425.6
Inventories 45.8 51.3
Prepaid expenses and other 20.9 21.4
Deferred income taxes 116.5 63.3
Income taxes receivable 9.9 21.9
-------- --------
Total current assets 715.7 599.9
Property, plant and equipment, net 289.3 304.8
Intangible assets, net 885.1 916.7
Other assets, net 18.3 15.8
-------- --------
$1,908.4 $1,837.2
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 74.2 $ 106.2
Accrued expenses and other 144.3 173.5
Current portion of long-term debt 93.8 70.8
Current portion of accrued settlement
costs 200.7 --
Revolving credit facility classified
as current 361.0 --
Long-term debt classified as current 637.5 --
-------- --------
Total current liabilities 1,511.5 350.5
Revolving credit facility -- 218.0
Long-term debt, less current portion -- 712.5
Accrued settlement costs, less current
portion 33.0 --
Capital lease obligation 9.8 9.6
Other liabilities 97.2 135.0
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;
122,923,705 shares and 122,908,698
shares issued and outstanding at
September 30, 1996 and December 31,
1995, respectively 1.2 1.2
Additional paid-in capital 411.0 411.0
Accumulated deficit (155.3) (0.6)
-------- -------
Total stockholders' equity 256.9 411.6
-------- --------
$1,908.4 $1,837.2
======== ========
See notes to unaudited consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Millions, except per share data)
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
---------------------- ------------------
1996 1995 1996 1995
--------- --------- -------- --------
Net sales $ 1,216.5 $ 1,028.6 $ 402.6 $ 417.5
Cost of sales 903.9 722.4 300.1 299.7
--------- --------- ------- -------
Gross profit 312.6 306.2 102.5 117.8
Selling, general and
administrative expenses 223.0 162.3 75.6 66.9
Amortization of intangibles
and other assets 22.1 19.2 7.3 7.7
Restructuring and non-
recurring charges 23.0 65.0 -- --
Provision for settlements and
related expenses 185.0 10.0 185.0 --
--------- --------- ------- -------
Operating income (loss) (140.5) 49.7 (165.4) 43.2
Other income (expense):
Investment income 1.5 1.1 0.6 0.4
Interest expense (51.4) (48.5) (17.7) (17.4)
--------- --------- ------- -------
Earnings (loss) before income
taxes and extraordinary item (190.4) 2.3 (182.5) 26.2
Provision for income taxes (35.7) 6.7 (36.1) 11.8
--------- --------- ------- -------
Earnings (loss) before
extraordinary item (154.7) (4.4) (146.4) 14.4
Extraordinary item -
Loss on early extinguishment
of debt, net of income tax
benefit of $5.2 -- (8.3) -- --
--------- --------- -------- --------
Net earnings (loss) $ (154.7) $ (12.7) $ (146.4) $ 14.4
========= ========= ======== ========
Net earnings (loss) per common
share:
Earnings (loss) per common
share before extra-
ordinary loss $ (1.26) $ (0.04) $ (1.19) $ 0.12
Extraordinary loss per
common share $ -- $ (0.08) $ -- $ --
--------- --------- --------- --------
Net earnings (loss) per common
share $ (1.26) $ (0.12) $ (1.19) $ 0.12
========= ========= ======== ========
Dividends per common share $ -- $ -- $ -- $ --
========= ========= ======== ========
See notes to unaudited consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Nine Months Ended
September 30,
--------------------
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(154.7) $ (12.7)
Adjustments to reconcile net loss to
net cash provided by (used for)
operating activities:
Restructuring and non-recurring
charges 23.0 65.0
Provision for settlements and
related expenses 185.0 10.0
Extraordinary loss, net of
income tax benefits -- 8.3
Depreciation and amortization 63.3 52.1
Deferred income taxes, net (27.4) (27.5)
Provision for doubtful accounts,
net 9.9 3.0
Change in assets and liabilities,
net of effects of acquisitions:
Increase in accounts receivable (78.7) (60.0)
Decrease in inventories 6.5 4.4
Decrease (increase)in prepaid
expenses and other (2.4) 6.5
Change in income taxes
receivable/payable, net 12.0 5.4
Decrease in accounts payable
and other (34.9) (7.0)
Payments for restructuring
and non-recurring charges (14.4) (6.7)
Payments for settlement and
related expenses (1.7) (32.1)
Other, net (3.1) (4.3)
-------- --------
Net cash provided by (used for)operating
activities (17.6) 4.4
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (46.3) (44.3)
Acquisitions of businesses (3.3) (38.7)
Investment in joint venture (2.5) --
-------- --------
Net cash used for investing
activities (52.1) (83.0)
(continued)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Dollars in Millions)
(Unaudited)
Nine Months Ended
September 30,
-----------------------
1996 1995
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities $ 223.0 $ 270.0
Payments on revolving credit facilities (80.0) (265.0)
Proceeds from long-term debt -- 800.0
Payments on long-term debt (52.1) (430.0)
Deferred payments on acquisitions (9.4) (10.3)
Proceeds from exercise of stock options -- 0.2
Dividends paid on common stock -- (474.8)
Cash received for issuance of
common stock -- 135.7
Cash received for warrants -- 51.0
--------- ---------
Net cash provided by financing
activities 81.5 76.8
--------- ---------
Net increase (decrease) in cash and
cash equivalents 11.8 (1.8)
Cash and cash equivalents at
beginning of year 16.4 26.8
--------- ---------
Cash and cash equivalents at
end of period $ 28.2 $ 25.0
========= =========
Supplemental schedule of cash
flow information:
Cash paid(received)during the period for:
Interest $ 55.1 $ 42.4
Income taxes (15.6) 22.0
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 $ 9.6 $ 775.7
Cash paid (3.4) (38.7)
Stock issued -- (539.6)
--------- ---------
Liabilities assumed $ 6.2 $ 197.4
========= =========
See notes to unaudited consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions, except per share data)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of
Laboratory Corporation of America Holdings and its wholly owned
subsidiaries (the "Company") after elimination of all material
intercompany accounts and transactions.
The accompanying consolidated condensed financial statements
of the Company and its subsidiaries are unaudited. In the opinion
of management, all adjustments (which include only normal
recurring accruals) necessary for a fair statement of the results
of operations have been made.
2. EARNINGS PER SHARE
Earnings per share are based upon the weighted average number
of shares outstanding during the three and nine months ended
September 30, 1996 of 122,922,495 shares and 122,917,281 shares,
respectively, and the weighted average number of shares
outstanding during the three and nine months ended September 30,
1995 of 122,908,722 and 106,424,055 shares respectively.
3. MERGER WITH ROCHE BIOMEDICAL LABORATORIES, INC.
On April 28, 1995, the Company completed its merger (the
"Merger") with Roche Biomedical Laboratories, Inc. ("RBL").
The following table provides unaudited pro forma operating
results as if the Merger had been completed at the beginning of
1995. The pro forma information does not include the restructuring
charges and extraordinary item related to the Merger. The pro
forma information has been prepared for comparative purposes only
and does not purport to be indicative of future operating results.
Nine Months Ended
September 30, 1995
------------------
Net sales $1,275.2
Net earnings 49.5
Net earnings per common share 0.41
4. SETTLEMENTS AND RELATED EXPENSES
As previously discussed in the Company's December 31, 1995
10-K and June 30, 1996 10-Q, the Office of Inspector General ("OIG")
of Health and Human Services and the Department of Justice ("DOJ")
is investigating certain past laboratory practices of the predecessor
companies of the Company - National Health Laboratories Holdings Inc.,
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions)
4. SETTLEMENTS AND RELATED EXPENSES - Continued
Roche Biomedical Laboratories, Inc. and Allied Clinical
Laboratories, Inc. The discussions have become more active in
recent months. As a result of on-going negotiations with the OIG
and DOJ, the Company recorded a special charge of $185.0 (the
"Settlement Charge") in the third quarter of 1996 to increase
reserves for settlements and related expenses of government and
private claims resulting from these investigations. Due to the
fact that the negotiations are on-going, the Company is unable
to predict with certainty the final outcome or payment terms of
a settlement if a settlement is reached. The aggregate accrual
at September 30, 1996 reflects the Company's current estimate of
the cost of the settlement and related expenses but, there can be
no assurance that the eventual settlement or other resolution of
these matters will not have a material adverse effect upon the
Company's financial condition, results of operations or cash flow.
See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources"
below for a discussion of the impact a settlement of these matters
could have on the Company's liquidity. Also see "Part II - Other
Information" for additional discussion of legal proceedings.
5. LONG-TERM DEBT
The Company obtained waivers for the quarter ended June 30,
1996 of certain covenants contained in its existing credit
agreement, as amended (the "Credit Agreement") and subsequently
successfully negotiated an amendment (the "Fourth Amendment") to
the Credit Agreement on September 23, 1996. The Fourth Amendment
modifies the interest coverage and leverage ratios applicable to
the quarters ending September 30 and December 31, 1996. The
Fourth Amendment also increases the interest rate margin on its
revolving credit facility (the "Revolving Credit Facility") from
0.25% to 0.875% and increases the interest rate margin on its term
loan facility (the "Term Loan Facility") from 0.375% to 1.00%. As
a result of the Settlement Charge taken in the third quarter of
1996, as described in Note 4, the Company obtained a waiver which
excludes the Settlement Charge from covenant calculations for the
periods covered by the most recent amendment. Because of the
limited period covered by the Fourth Amendment, approximately $998
million of the Company's debt that otherwise would have been
classified as long-term has been classified as current in the
September 30, 1996 consolidated balance sheet. Such
classification has created, and the terms of a settlement
agreement, as discussed in Note 4, could worsen, a material
deficiency in short-term liquidity.
The Company has commenced a comprehensive analysis of its
capital structure and is considering a range of alternatives for
recapitalizing its balance sheet including equity and/or debt
financing. Because of complexity and time frame necessary to
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions)
5. LONG-TERM DEBT -- Continued
complete any recapitalization, there can be no assurance of its
completion. The Company will be required to obtain an additional
waiver or amendment to the Credit Agreement at the earlier of thirty
days following the completion of a settlement with the OIG or March
31, 1997, if the Company is unable to complete a recapitalization
within such time periods. There can be no assurance that such a
waiver or amendment can be obtained. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
6. RESTRUCTURING AND NON-RECURRING CHARGES
In the second quarter of 1996, the Company recorded certain
charges of a non-recurring nature including additional charges
related to the restructuring of operations. The Company recorded
a restructuring charge totaling $13.0 for the shutdown of its La
Jolla, California administrative facility and other workforce
reductions. This amount includes approximately $8.1 for
severance, $3.5 for the future lease obligation of the La Jolla
facility and $1.4 for the write down of leasehold improvements and
fixed assets that will be abandoned or disposed of. The La Jolla
facility is expected to be substantially closed by the end of
1996. The remaining workforce reductions will take place in
various other areas of the Company and are expected to be
completed by the end of 1996.
In addition, the Company recorded certain non-recurring
charges in the second quarter of 1996 related to further
integration after the Merger. The Company decided to abandon
certain data processing systems and therefore wrote off
approximately $6.7 in capitalized software costs. In addition,
the Company relocated its principal drug testing facility to
accommodate consolidation of the RBL and Company operations and
will incur approximately $1.3 in costs primarily related to the
write off of leasehold improvements and building clean up.
Finally, the Company recorded a charge of $2.0 for various other
items including the write-off of certain supplies related to
changes in testing methodologies to increase efficiency. As a
result of these changes, some supplies were not compatible with
the new testing methods and were disposed of.
Following the Merger in 1995, 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. As part of the
Company's evaluation of its future obligations under these
restructuring activities, certain changes in the estimates were
made during the quarter ended June 30, 1996. These resulted in
the reclassification of certain accruals in the categories listed
below although the total liability did not change.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions)
6. RESTRUCTURING AND NON-RECURRING CHARGES - Continued
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, 1995 $ 12.8 $ 18.6 $ 18.9 $ 50.3
Additional restructuring
charges 8.1 1.4 3.5 13.0
Reclassifications 1.6 0.7 (2.3) --
Non cash items -- (10.8) -- (10.8)
Cash payments (11.9) -- (1.8) (13.7)
------ ------- ------- -------
Balance at
September 30, 1996 $ 10.6 $ 9.9 $ 18.3 $ 38.8
======= ======= ======= =======
Current $ 24.7
Non-current 14.1
-------
$ 38.8
=======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Millions)
This quarterly report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. In addition, from time to time, the
Company or its representatives have made or may make forward-
looking statements, orally or in writing. Such forward-looking
statements may be included in, but are not limited to, various
filings made by the Company with the Securities and Exchange
Commission, press releases or oral statements made by or with the
approval of an authorized executive officer of the Company. Actual
results could differ materially from those projected or suggested
in any forward-looking statements as a result of a wide variety of
factors and conditions, which have been described in the section
of the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, entitled, "Cautionary Statement for Purposes of
the `Safe Harbor' Provisions of the Private Securities Litigation
Reform Act of 1995" and other documents the Company files from
time to time with the Securities and Exchange Commission including
the Company's quarterly reports on Form 10-Q and current reports
on Form 8-K, and shareholders are specifically referred to these
documents with regard to factors and conditions that may affect
future results.
Many market-based changes in the clinical laboratory business
have occurred, most involving the shift away from traditional, fee-
for-service medicine to managed-cost health care. The growth of
the managed care sector presents various challenges to the Company
and other independent clinical laboratories. Managed care
providers typically contract with a limited number of clinical
laboratories and negotiate discounts to the fees charged by such
laboratories in an effort to control costs. Such discounts have
resulted in price erosion and have negatively impacted the
Company's operating margins. In addition, managed care providers
have used capitated payment contracts in an attempt to promote
more efficient use of laboratory testing services. Under a
capitated payment contract, the clinical laboratory and the
managed care provider agree to a per month payment to cover all
laboratory tests during the month, regardless of the number or
cost of the tests actually performed. Such contracts also shift
the risks of additional testing beyond that covered by the
capitated payment to the clinical laboratory. The increase in
managed care has also resulted in declines in the utilization of
laboratory testing services.
In addition, Medicare (which principally serves patients 65 and
older) and Medicaid (which principally serves indigent patients)
and insurers, have increased their efforts to control the cost,
utilization and delivery of health care services. Measures to
regulate health care delivery in general and clinical laboratories
in particular have resulted in reduced prices and added costs for
the clinical laboratory industry by increasing complexity and
adding new regulatory requirements. From time to time, Congress
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
(Dollars in Millions)
has also considered changes to the Medicare fee schedules in
conjunction with certain budgetary bills. Any changes to the
Medicare fee schedules cannot be predicted at this time and
management, therefore, cannot predict the impact, if any, such
proposals, if enacted, would have on the results of operations of
the Company.
These market based factors have had a significant adverse
impact on the clinical laboratory industry, and on the Company's
profitability. Management expects that price erosion and
utilization declines will continue to negatively impact net sales
and the results of operations for the foreseeable future. It is
the objective of management to partially offset the increases in
cost of sales as a percentage of net sales and selling, general
and administrative expenses as a percentage of net sales through
the synergy program, as discussed below, and through comprehensive
cost reduction programs including, but not limited to, a six month
deferral on increasing wages and adding new positions implemented
on July 1, 1996. In addition, the Company has targeted business
development efforts in an attempt to become more judicious in
pricing new business and is selectively repricing or discontinuing
business with existing accounts not meeting Company targets. The
Company has experienced some volume declines as a result of this
strategy, however, the third quarter of 1996 was the first
quarter since the Merger that overall prices did not decline versus
the immediately preceding quarter. There can be no assurance,
however, of the timing or success of such measures or that the
Company will not lose market share as a result of such measures.
RESULTS OF OPERATIONS
- ---------------------
As a result of the Merger, the Company has realized and is
expected to continue to achieve substantial savings in operating
costs through the consolidation of certain operations and the
elimination of redundant expenses. Such savings are being
realized over time as the consolidation process is completed. As
of September 30, 1996, the Company has achieved annualized net
savings of approximately $111.5. Such savings include an
annualized reduction of $4.3 in corporate, general and
administrative expenses including the consolidation of
administrative staff. Combining the NHL sales force with the RBL
sales force where duplicate territories existed has added
approximately $17.8 of annualized synergies. Operational savings
have resulted in approximately $74.9 of annualized synergies.
These include closing of overlapping laboratories and other
facilities and savings realized from additional buying power by
the larger Company. The Company has also realized annualized
savings of approximately $14.5 relating to employee benefits as a
result of changes to certain benefit arrangements. Additional
annualized savings of $8.5 are expected to be achieved over the
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
(Dollars in Millions)
RESULTS OF OPERATIONS - Continued
- ---------------------
remainder of the consolidation process. These savings will be
principally achieved in operational areas from the further
consolidation overlapping laboratories. To date, however, these
savings have been largely offset by price erosion and utilization
declines resulting from the increase in managed care and to a
lesser extent from increases in other expenses such as bad debt
expenses as a result of increased medical necessity requirements
placed on the Company by various third-party payors. The effects
of price erosion and utilization declines on the Company's results
of operations would have been greater but for the savings achieved
through the synergy program. There can be no assurance that the
estimated additional cost savings expected to be achieved 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 by increases in other expenses.
Nine Months Ended September 30, 1996 compared with Nine Months
- ------------------------------------------------------------------
Ended September 30, 1995.
- -------------------------
Net sales for the nine months ended September 30, 1996 were
$1,216.5, an increase of 18.3% from $1,028.6 reported in the
comparable 1995 period. Net sales from the inclusion of RBL
increased net sales by approximately $243.5 or 23.7%.
Acquisitions of small clinical laboratory companies increased net
sales by approximately 1.4%. Such increases were partially offset
by price erosion in the industry as a whole, lower utilization of
laboratory testing and lost accounts, net of growth in new
accounts and price increases in selective markets. Lower utilization
of laboratory testing and price erosion primarily resulted from
continued changes in payor mix brought on by the increase in managed
care. The Company has targeted business development efforts in an
attempt to become more judicious in pricing new business and is
selectively repricing or discontinuing business with existing
accounts not meeting Company targets. The Company has experienced
some volume declines as a result of this strategy, however, the
third quarter of 1996 was the first quarter since the Merger that
overall prices did not decline versus the immediately preceding
quarter. A reduction in Medicare fee schedules from 80% to
76% of the national limitation amounts on January 1, 1996, reduced
net sales by approximately 1.3%. Severe weather in January and
February of 1996 also negatively impacted net sales.
Cost of sales, which includes primarily laboratory and
distribution costs, was $903.9 for the nine months ended September
30, 1996 compared to $722.4 in the corresponding 1995 period, an
increase of $181.5 or 225.1%. Cost of sales increased approximately
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
(Dollars in Millions)
RESULTS OF OPERATIONS - Continued
- ---------------------
$181.9 or 5.2% due to the inclusion of the cost of sales of RBL.
Costs of sales increased approximately $23.2 as a result of wage
increases prior to the implementation of a six-month deferral on
wage rate increases implemented on July 1, 1996, approximately
$5.0 as a result of higher overtime and temporary employee
expenses related to the acceleration of the Company's synergy
program and other operational factors, approximately $6.0 due to
higher depreciation and maintenance of lab equipment as a result
of the Company's purchase of more sophisticated equipment to
improve efficiency, and approximately $8.6 in outside collection
and reference testing fees. These increases were partially offset
by decreases in salaries and benefits of $36.9, rental of premises
of $2.9 and several other expense categories aggregating approximately
$3.4 primarily as a result of the Company's synergy and cost
reduction programs. Cost of sales as a percentage of net sales was
74.3% for the nine months ended September 30, 1996 and 70.2% in
the corresponding 1995 period. The increase in the cost of sales
percentage of net sales primarily resulted from a reduction in net
sales due to price erosion and utilization declines, each of which
provided little corresponding reduction in costs, and, to a lesser
extent, due to severe weather in January and February of 1996 and
a reduction in Medicare fee schedules.
Selling, general and administrative expenses increased to
$223.0 for the nine months ended September 30, 1996 from $162.3 in
the same period in 1995 representing an increase of $60.7 or
37.4%. The inclusion of the selling, general and administrative
expenses of RBL since April 28, 1995 increased expenses by
approximately $36.5 or 22.5%. Increases in salaries, overtime and
temporary employee expenses, primarily related to billing issues,
and related telephone and data processing costs, aggregated
approximately $15.5. Also, increased medical necessity and
related diagnosis code requirements of third-party payors placed
on the Company at the beginning of 1996 have resulted in increased
accounts receivable balances and therefore the Company has
increased its monthly provision for doubtful accounts. This
resulted in an increase of approximately $3.9 in the monthly
provision for doubtful accounts for the nine months ended
September 30, 1996 compared to the same 1995 period. In addition
to increasing the monthly provision for doubtful accounts, the
Company recorded $10.0 of additional provision for doubtful
accounts in the second quarter of 1996 which reflects the lower
collection rates experienced beginning in the second quarter as a
result of the more stringent medical necessity requirements.
These increases were partially offset by decreases in legal
expenses, excluding settlement expenses, of $2.0, insurance of
$1.3 and several other expense categories aggregating
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
(Dollars in Millions)
RESULTS OF OPERATIONS - Continued
- ---------------------
approximately $1.9. Selling, general and administrative expenses
were 18.3% and 15.8% of net sales for the nine months ended
September 30, 1996 and 1995, respectively. The increase in the
selling, general and administrative percentage primarily resulted
from increased employee expenses related to billing and the
increases in the provision for doubtful accounts discussed above
and to a lesser extent, from a reduction in net sales due to price
erosion and utilization declines, each of which provided little
corresponding reduction in costs.
As previously discussed in the Company's December 31, 1995 10-K
and June 30, 1996 10-Q, the Office of Inspector General ("OIG")
of Health and Human Services and the Department of Justice ("DOJ")
is investigating certain past laboratory practices of the
predecessor companies of the Company - National Health
Laboratories Holdings Inc., Roche Biomedical Laboratories, Inc.
and Allied Clinical Laboratories, Inc. The discussions have become
more active in recent months. As a result of on-going
negotiations with the OIG and DOJ, the Company recorded a special
charge of $185.0 (the "Settlement Charge") in the third quarter of
1996 to increase reserves for settlements and related expenses
of government and private claims resulting from these investigations.
Due to the fact that the negotiations are on-going, the Company
is unable to predict with certainty the final outcome or payment
terms of a settlement if a settlement is reached. The aggregate
accrual at September 30, 1996 reflects the Company's current
estimate of the cost of the settlement and related expenses but,
there can be no assurance that the eventual settlement or other
resolution of these matters will not have a material adverse
effect upon the Company's financial condition, results of
operations or cash flow. See "Liquidity and Capital Resources"
below for a discussion of the impact a settlement of these
matters could have on the Company's liquidity. Also see "Part II
- - Other Information" for additional discussion of legal proceedings.
The increase in amortization of intangibles and other assets
to $22.1 for the nine months ended September 30, 1996 from $19.2
in the corresponding period in 1995 primarily resulted from the
Merger in April 1995.
Interest expense was $51.4 for the nine months ended
September 30, 1996 compared with $48.5 for the same period in
1995. The change resulted primarily from increased borrowings used
to finance the Merger and increased accounts receivable balances
partially offset by a lower effective borrowing rate. As a result
of the Fourth Amendment, which resulted in increased borrowing
margins, the Company's interest rate will increase by
approximately 0.625% beginning in the fourth quarter of 1996.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
(Dollars in Millions)
RESULTS OF OPERATIONS - Continued
- ---------------------
As a result of the restructuring and non-recurring charges in
1996 and 1995, the provision for income taxes is not comparable
between periods. However, before charges, the Company's effective
income tax rate for the nine months ended September 30, 1996 has
increased from the same 1995 period as a result of increased non-
deductible amortization and lower earnings before income taxes.
Three Months Ended September 30, 1996 compared with Three Months
- ------------------------------------------------------------------
Ended September 30, 1995.
- -------------------------
Net sales for the three months ended September 30, 1996 were
$402.6, a decrease of 3.6% from $417.5 reported in the comparable
1995 period. Acquisitions of small clinical laboratory companies
increased net sales by approximately 1.0%. Price erosion in the
industry as a whole, lower utilization of laboratory testing and
lost accounts, net of growth in new accounts and price increases in
selective markets, accounted for the primarily offsetting reduction
in net sales. Lower utilization of laboratory testing and price
erosion primarily resulted from continued changes in payor mix
brought on by the increase in managed care. The Company has
targeted business development efforts in an attempt to become
more judicious in pricing new business and is selectively repricing
or discontinuing business with existing accounts not meeting
Company targets. The Company has experienced some volume declines
as a result of this strategy, however, the third quarter of 1996
is the first quarter since the Merger that overall prices did not
decline, versus the immediately preceeding quarter. A reduction in
Medicare fee schedules from 80% to 76% of the national limitation
amounts on January 1, 1996, reduced net sales by approximately 1.2%.
Cost of sales, which includes primarily laboratory and
distribution costs, was $300.1 for the three months ended
September 30, 1996 compared to $299.7 in the corresponding 1995
period. Costs of sales increased approximately $7.7 as a result of
wage increases prior to the implementation of a six-month deferral
on wage rate increases implemented on July 1, 1996, approximately
$3.5 due to higher depreciation and maintenance of lab equipment
as a result of the Company's purchase of more sophisticated
equipment to improve efficiency, and approximately $3.3 in outside
collection and reference testing fees. These increases were
partially offset by decreases in salaries and benefits of $10.3,
rental of premises of $2.9 and several other expense categories
aggregating approximately $0.9 primarily as a result of the
Company's synergy and cost reduction programs. Cost of sales as a
percentage of net sales was 74.5% for the three months ended
September 30, 1996 and 71.8% in the corresponding 1995 period. The
increase in the cost of sales percentage of net sales primarily
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
(Dollars in Millions)
RESULTS OF OPERATIONS - Continued
- ---------------------
resulted from a reduction in net sales due to price erosion and
utilization declines, each of which provided little corresponding
reduction in costs, and, to a lesser extent, due to severe weather
in January and February of 1996 and a reduction in Medicare fee
schedules.
Selling, general and administrative expenses increased to
$75.6 for the three months ended September 30, 1996 from $66.9 in
the same period in 1995, an increase of $8.7 or 13.0%. Increases
in salaries, overtime and temporary employee expenses, primarily
related to billing issues, and related telephone and data
processing costs, aggregated approximately $7.7. In addition,
increased medical necessity and related diagnosis code
requirements of third-party payors placed on the Company at the
beginning of 1996 have resulted in increased accounts receivable
balances and therefore the Company has increased its monthly
provision for doubtful accounts. This resulted in an additional
$3.2 in provision for doubtful accounts in the quarter ended
September 30, 1996 compared to the same 1995 period. These
increases were partially offset by decreases of approximately $2.2
primarily in legal expenses, excluding settlement expenses, and
insurance. Selling, general and administrative expenses were 18.8%
and 16.0% of net sales for the three months ended September 30,
1996 and 1995, respectively. The increase in the selling, general
and administrative percentage primarily resulted from increased
employee expenses related to billing and the increases in the
provision for doubtful accounts discussed above and to a lesser
extent, from a reduction in net sales due to price erosion and
utilization declines, each of which provided little corresponding
reduction in costs.
Interest expense was $17.7 for the three months ended
September 30, 1996 compared with $17.4 for the same period in
1995. The change resulted primarily from a higher average debt
balances. As a result of the Fourth Amendment, which resulted in
increased borrowing margins, the Company's interest rate will
increase by approximately 0.625% beginning in the fourth quarter
of 1996.
As a result of the restructuring and non-recurring charges in
1996, the provision for income taxes is not comparable between
periods. However, before charges, the Company's effective income
tax rate for the three months ended September 30, 1996 has
increased from the same 1995 period as a result of lower earnings
before income taxes.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
(Dollars in Millions)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by (used for) operating activities (after
payment of settlement and related expenses of $1.7 and $32.1 in
1996 and 1995, respectively) for the nine months ended September
30, 1996 and 1995 was $(17.6) and $4.4, respectively. The decrease
in cash flow from operations primarily resulted from an increase
in accounts receivable related to increased medical necessity and
related diagnosis code requirements of third-party payors placed
on the Company at the beginning of 1996 and reflects the lower
collection rates experienced beginning in the second quarter as a
result of the more stringent requirements. In addition, increased
difficulty in collecting amounts due from private insurance
carriers, including certain managed care plans, has negatively
impacted operating cash flow. Finally, Merger related integration
issues have also resulted in increased accounts receivable
balances. The Company currently has plans in place to stabilized
collection rates and improve the collection of accounts
receivable, such as additional billing personnel and the creation
of a special task force to identify effective methods to address
the more stringent requirements. To date, however, collection
rates have continued to decline despite such measures and
additional changes in requirements of third-party payors could
increase the difficulty in collections. There can be no assurance
of the success of the Company's plans to improve collections and
due to changes in medical necessity requirements, the Company
expects accounts receivable balances to continue to exceed 1995
levels. Capital expenditures were $46.3 and $44.3 for 1996 and
1995, respectively. The Company expects additional capital
expenditures to be approximately $13.7 in 1996 to continue the
Merger-related integration and to further automate laboratory
processes and to improve efficiency. Such expenditures are
expected to be funded by cash flow from operations as well as
borrowings under the Company's revolving credit facility as
discussed below.
As previously discussed in the Company's December 31, 1995
10-K and June 30, 1996 10-Q, the Office of Inspector General
("OIG") of Health and Human Services and the Department of Justice
("DOJ") is investigating certain past laboratory practices of the
predecessor companies of the Company - National Health
Laboratories Holdings Inc., Roche Biomedical Laboratories, Inc.
and Allied Clinical Laboratories, Inc. The discussions have become
more active in recent months. As a result of on-going
negotiations with the OIG and DOJ, the Company recorded a special
charge of $185.0 in the third quarter of 1996 to increase reserves
for settlements and related expenses of government and private
claims resulting from these investigations. Due to the fact that
the negotiations are on-going, the Company is unable to predict
with certainty the final outcome or payment terms of a settlement
if a settlement is reached. The aggregate accrual at September 30,
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
(Dollars in Millions)
LIQUIDITY AND CAPITAL RESOURCES - Continued
- -------------------------------
1996 reflects the Company's current estimate of the cost of the
settlement and related expenses but, there can be no assurance that
the eventual settlement or other resolution of these matters will
not have a material adverse effect upon the Company's financial
condition, results of operations or cash flow. Also see "Part II -
Other Information" for additional discussion of legal proceedings.
The Company obtained waivers for the quarter ended June 30,
1996 of certain covenants contained in its existing credit
agreement, as amended (the "Credit Agreement") and subsequently
successfully negotiated an amendment (the "Fourth Amendment") to
the Credit Agreement on September 23, 1996. The Fourth Amendment
modifies the interest coverage and leverage ratios applicable to
the quarters ending September 30 and December 31, 1996. The
Fourth Amendment also increases the interest rate margin on its
revolving credit facility (the "Revolving Credit Facility") from
0.25% to 0.875% and increases the interest rate margin on its term
loan facility (the "Term Loan Facility") from 0.375% to 1.00%. As
a result of the Settlement Charge taken in the third quarter of
1996, as described above, the Company obtained a waiver which
excludes the special charge from covenant calculations for the
periods covered by the most recent amendment. Because of the
limited period covered by the Fourth Amendment, approximately $998
million of the Company's debt that otherwise would have been
classified as long-term has been classified as current in the
September 30, 1996 consolidated balance sheet. Such classification
has created, and payments which may become due in connection with
an OIG settlement, as discussed above, could worsen, a material
deficiency in short-term liquidity.
The Company has commenced a comprehensive analysis of its
capital structure and is considering a range of alternatives for
recapitalizing its balance sheet including equity and/or debt
financing from both public and private sources. Because of the
complexity and time frame necessary to complete any recapitalization,
there can be no assurance of its completion. The Company will be
required to obtain an additional waiver or amendment to the Credit
Agreement at the earlier of thirty days following the completion of
a settlement with the OIG or March 31, 1997, if the Company is
unable to complete a recapitalization within such time period.
There can be no assurance that such a waiver or amendment can be
obtained.
As of September 30, 1996 the Company had available, under the
Credit Agreement, a revolving credit facility of $450.0 (the
"Revolving Credit Facility"). Borrowings under the Revolving
Credit Facility were $361.0 as of September 30, 1996, however, in
October 1996, the Company borrowed an additional $60.0 to meet a
scheduled payment on the Term Loan Facility and provide cash for
operations. Cash and cash equivalents on hand and additional
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
(Dollars in Millions)
LIQUIDITY AND CAPITAL RESOURCES - Continued
- -------------------------------
borrowing capabilities of $29.0 under the Revolving Credit Facility
are expected to be sufficient to meet anticipated operating
requirements, debt repayments and provide funds for capital
expenditures and working capital for the near term, however,
further deterioration in cash flow from operations in the fourth
quarter of 1996, payments which may become due in connection with
an OIG settlement, or the failure to secure additional equity and/
or debt financing in the first quarter of 1997 could result in
a cash deficiency.
The Company is a party to interest rate swap agreements with
certain major financial institutions, rated A or better by Moody's
Investor Service, solely to manage its interest rate exposure with
respect to $600.0 million of its floating rate debt under the Term
Loan Facility. The agreements effectively change the interest
rate exposure on $600.0 of floating rate debt to a weighted
average fixed interest rate of 6.01%, through requiring that the
Company pay a fixed rate amount in exchange for the financial
institutions paying a floating rate amount. Amounts paid by the
Company in the nine months ended September 30, 1996 were
approximately $1.5. The notional amounts of the agreements are
used to measure the interest to be paid or received and do not
represent the amount of exposure to credit loss. These agreements
mature in September 1998. The estimated unrealized loss on such
agreements was approximately $1.7 at October 31, 1996.
See Note 6 of the Notes to Unaudited Consolidated Financial
Statements which sets forth the Company's restructuring activities
for 1996. Future cash payments under the restructuring plan are
expected to be $14.8 over the next twelve months and $14.1
thereafter.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As previously discussed in the Company's December 31, 1995 10-K
(the "1995 10-K"), the Office of Inspector General ("OIG") of
Health and Human Services and the Department of Justice ("DOJ") is
investigating certain past laboratory practices of NHL, RBL, and
Allied Clinical Laboratories, Inc. ("Allied"), a Company
subsidiary. These investigations and related settlement
discussions have become more active in recent months. If
settlement is not reached, the government is likely to proceed to
trial on civil and possibly criminal claims. If the OIG or DOJ
were to successfully prove a violation of laws related to the
Medicare and Medicaid programs, potential sanctions may include
significant fines, recovery of treble amounts paid to the clinical
laboratory for the tests involved, and in the case of a criminal
conviction, mandatory exclusion from the Medicare and Medicaid
programs for a period of at least five years. A successful
prosecution of a civil fraud or false claims action could also
result in the exercise of the OIG's authority to seek the
permissive exclusion of the offending entity or entities from
participation in the Medicare and Medicaid programs for a set
period of years. Although neither the 1992 Government Settlement
entered into by NHL (as more fully discussed in the 1995 10-K)
nor, based on published reports, any settlement agreements with
the OIG entered into by other major clinical laboratory companies,
provided for the exclusion from participation in the Medicare and
Medicaid programs, there can be no assurance that the Company will
be able to negotiate settlement agreements with similar terms.
Any such exclusion would likely have a material adverse effect on
the Company, including on the Company's non-Medicare and non-
Medicaid testing business. As a result of on-going negotiations
with the OIG and DOJ, the Company recorded the Settlement Charge
of $185.0 in the third quarter of 1996 to increase reserves for
settlements and related expenses of government and private claims
resulting from these investigations. Due to the fact that the
negotiations are on-going, the Company is unable to predict with
certainty the final outcome or payment terms of a settlement if
a settlement is reached. The aggregate accrual at September 30,
1996 reflects the Company's current estimate of the cost of the
settlement and related expenses but, there can be no assurance that
the eventual settlement or other resolution of these matters will
not have a material adverse effect upon the Company's financial
condition, results of operations or cash flow.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Third Waiver to the Credit Agreement dated
as of November 4, 1996 among the Company,
the banks named therein and Credit Suisse
(New York Branch) as Administrative Agent.
(a)
10.1 Fourth Amendment to the Credit Agreement
dated as of September 23, 1996 among the
Company, the banks named therein and Credit
Suisse (New York Branch) as Administrative
Agent.(b)
10.2 Special Severance Agreement dated June 28,
1996 between the Company and Timothy J.
Brodnik.(c)
10.3 Special Severance Agreement dated July 12,
1996 between the Company and John F.
Markus.(c)
10.4 Special Severance Agreement dated June 28,
1996 between the Company and Robert E.
Whalen. (c)
10.5 Laboratory Corporation of America Holdings
Master Senior Executive Severance Plan.(c)
20 Press release of the Registrant dated
September 27, 1996. (b)
20.1 Press release of the Registrant dated
November 14, 1996. (a)
27 Financial Data Schedule (electronically
filed version only).
(b) Reports on Form 8-K
1) A report on Form 8-K dated September 23,
1996 was filed on September 30, 1996 in
connection with Fourth Amendment to the
Credit Agreement dated September 23, 1996.
2) A report on Form 8-K dated October 24,
1996 was filed on October 24, 1996 in
connection with certain changes in
executive officers of the Registrant.
- -------------------
(a) Filed herewith
(b) Incorporated by reference herein to the report on Form 8-K
filed with the Securities and Exchange Commission ("SEC") on
September 30, 1996.
(c) Incorporated by reference herein to the report on Form 8-K
filed with the SEC on October 24, 1996.
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.
LABORATORY CORPORATION OF AMERICA HOLDINGS
Registrant
By:/s/ WESLEY R. ELINGBURG
---------------------------------
Wesley R. Elingburg
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Accounting Officer)
Date: November 14, 1996
THIRD WAIVER TO CREDIT AGREEMENT
THIRD WAIVER TO CREDIT AGREEMENT, dated as of
November 4, 1996 (this "Waiver"), by the Required Lenders,
in favor of the Borrower (each such term as defined in the
Credit Agreement referred to below).
Reference is made to the Credit Agreement dated as
of April 28, 1995 (as heretofore amended, the "Credit
Agreement") among Laboratory Corporation of America Holdings
(formerly known as National Health Laboratories Holdings
Inc.) (the "Borrower"), the Banks identified therein and
Credit Suisse (New York Branch), as Administrative Agent
thereunder. Unless otherwise defined herein, the terms
defined in the Credit Agreement are used herein as therein
defined.
ARTICLE I
WAIVERS
SECTION 1.01. Special Charge. The undersigned
Required Lenders hereby waive compliance by the Borrower
with the covenants set forth in Sections 5.01(i), 5.01(j)
and 5.01(k) of the Credit Agreement, solely in respect of
the Borrower's four fiscal quarters ending September 30,
1996 and December 31, 1996 (in the case of Sections 5.01(i)
and 5.01(j)) or as of September 30, 1996 and December 31,
1996 (in the case of Section 5.01(k)); provided that in each
case:
(a) such covenants are complied with no
later than March 31, 1997;
(b) such covenants would be complied with in
respect of the Borrower's four fiscal quarters ending
September 30, 1996 and December 31, 1996 (or as of
September 30, 1996 and December 31, 1996 with respect
to the covenant set forth in Section 5.01(k)) had the
Borrower not taken a special charge against operating
income of no more than $185 million (or a net after-tax
charge of no more than $150 million) in the Borrower's
fiscal quarter ending September 30, 1996 (the "Special
Charge") for the estimated cost to settle claims made
by the Office of Inspector General of the U.S.
Department of Health and Human Services and other third
party payor claimants regarding billing disputes to
which the Borrower or any of its Subsidiaries is a
party; and
(c) the schedules furnished by the Borrower
with the financial statements for the fiscal quarters
ending September 30, 1996 and December 31, 1996
pursuant to Section 5.01(l)(iii)(B) of the Credit
Agreement include computations with respect to the
covenants contained in Sections 5.01(i), 5.01(j) and
5.01(k) of the Credit Agreement both including and
excluding the Special Charge described above.
Notwithstanding any contrary provision in the
Credit Agreement, it is expressly agreed that solely for
purposes of Section 3.02(ii) of the Credit Agreement during
the period commencing January 1, 1997 through March 31,
1997, the Special Charge shall not be included in the
calculation, on a pro forma basis, of the Leverage Ratio,
the Interest Coverage Ratio or Stockholders' Equity.
SECTION 1.02 Termination of Waiver.
Notwithstanding any contrary provision herein, unless
earlier terminated the effectiveness of this Waiver shall
terminate thirty (30) days after the date the settlement
with the Office of Inspector General of the U.S. Department
of Health and Human Services becomes binding on the Borrower
unless the Required Lenders shall consent in writing to
extend the effectiveness of this Waiver.
ARTICLE II
MISCELLANEOUS
SECTION 2.01. Governing Law. This Waiver shall
be governed by, and construed in accordance with, the laws
of the State of New York, without regard to the conflicts of
law principles thereof.
SECTION 2.02. Execution in Counterparts. This
Waiver may be executed in any number of counterparts and by
any combination of the parties hereto in separate
counterparts, each of which counterparts shall be an
original and all of which taken together shall constitute
one and the same instrument. Delivery of an executed
counterpart of a signature page to this Waiver by facsimile
shall be effective as delivery of a manually executed
counterpart of this Waiver.
SECTION 2.03. Effect on the Credit Agreement.
Except as expressly modified hereby, all of the terms and
conditions of the Credit Agreement shall remain unaltered
and in full force and effect. This Waiver shall become
effective as of the date first above written when
counterparts hereof shall have been executed by the Required
Lenders. This Waiver is subject to the provisions of
Section 8.01 of the Credit Agreement.
Each of the undersigned has caused this Waiver to
be executed by its respective officer or officers thereunto
duly authorized, as of the date first written above.
BORROWER: LABORATORY CORPORATION OF AMERICA
HOLDINGS
By: /s/ WESLEY R. ELINGBURG
-------------------------------
Name: Wesley R. Elingburg
Title: Executive Vice President, Chief Financial
Officer and Treasurer
ADMINISTRATIVE
AGENT: CREDIT SUISSE (NEW YORK BRANCH),
as Administrative Agent
By: /s/ IRA LUBINSKY
------------------------------
Name: Ira Lubinsky
Title: Associate
and
By: /s/ SEAN BERNARD
-----------------------------
Name: Sean Bernard
Title: Associate
LENDERS: CREDIT SUISSE (NEW YORK BRANCH)
By: /s/ KARL STUDER
----------------------------
Name: Karl Studer
Title: Member of Senior Management
By: /s/ DANIELA HESS
---------------------------
Name: Daniela Hess
Title: Associate
BANK OF AMERICA ILLINOIS
By: /s/ WENDY L. LORING
--------------------------
Name: Wendy L. Loring
Title: Vice President
BANQUE NATIONALE DE PARIS
By: /s/ RICHARD L. STED
----------------------------
Name: Richard L. Sted
Title: Senior Vice President
By: /s/ BONNIE G. EISENSTAT
---------------------------------
Name: Bonnie G. Eisenstat
Title: Corporate Banking Division
BAYERISCHE LANDESBANK GIROZENTRALE
By: /s/ WILFRIED FREUDENBERGER
------------------------------
Name: Wilfried Freudenberger
Title: Executive Vice President
and General Manager
By: /s/ PETER OBERMANN
-------------------------------
Name: Peter Obermann
Title: Senior Vice President
Manager Lending Division
THE CHASE MANHATTAN BANK
By: /s/ SCOTT S. WARD
---------------------
Name: Scott S. Ward
Title: Vice President
CREDIT LYONNAIS CAYMAN ISLAND BRANCH
By: /s/ FARBOUD TAVANGAR
-------------------------------
Name: Farboud Tavangar
Title: Authorized Signature
DEUTSCHE BANK AG NEW YORK BRANCH
and/or CAYMAN ISLANDS BRANCH
By: /s/ WOLF A. KLUGE
------------------------------
Name: Wolf A. Kluge
Title: Vice President
By: /s/ ERIKA M. STEVER
-----------------------------
Name: Erika M. Stever
Title: Associate
FIRST UNION NATIONAL BANK
By: /s/ ANN M. DODD
-----------------------------
Name: Ann M. Dodd
Title: Senior Vice President
THE FUJI BANK, LTD. (NEW YORK BRANCH)
By: /s/ MASANOBU KOBAYASHI
----------------------------
Name: Masanobu Kobayashi
Title: Vice President & Manager
NATIONSBANK, N.A.
By: /s/ MICHAEL SYLVESTER
---------------------------
Name: Michael Sylvester
Title: Officer
SOCIETE GENERALE
By: /s/ RICHARD CUENE-GRANDIDIER
-------------------------------
Name: Richard Cuene-Grandidier
Title: Vice President
SUMITOMO BANK
By: /s/ SURESH S. TATA
-------------------------------
Name: Suresh S. Tata
Title: Senior Vice President
SWISS BANK CORPORATION
By: /s/ HANNO HUBER
---------------------------
Name: Hanno Huber
Title: Associate Director
Corporate Clients
Switzerland
By: /s/ GUIDO W. SCHULER
---------------------------
Name: Guido W. Schuler
Title: Executive Director
Corporate Clients
Switzerland
WACHOVIA BANK OF GEORGIA, N.A.
By: /s/ HOLGER B. EBERT
-----------------------
Name: Holger B. Ebert
Title: Vice President
WESTDEUTSCHE LANDESBANK
By: /s/ DONALD F. WOLF
-----------------------
Name: Donald F. Wolf
Title: Vice President
By: /s/ CATHERINE RUHLAND
-------------------------
Name: Catherine Ruhland
Title: Vice President
COMMERZBANK AKTIENGESELLSCHAFT,
Atlanta Agency
By: /s/ ANDREAS K. BREMER
----------------------------
Name: Andreas K. Bremer
Title: Senior Vice President
By: /s/ HARRY K. BREMER
---------------------------
Name: Harry K. Bremer
Title: Vice President
BANK BRUSSELS LAMBERT,
New York Branch
By: /s/
---------------------------
Name:
Title:
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
Summarized Financial Information
(Dollars in Millions, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- --------------------------------------------------
(1) (1) (1) (1) (1) (1)
Before Charges After Charges
Before After Before After and Extra and Extra-
Charges Charges Charges Charges ordinary Item ordinary Item
1996 1996 1995 1996 1996 1995 1995
------------------------ --------------------------------------------------
Net sales $ 402.6 $ 402.6 $ 417.5 $ 1,216.5 $ 1,216.5 $ 1,028.6 $ 1,028.6
======= ======= ======= ========= ========= ========= =========
Operating income (loss) $ 19.6 $(165.4) $ 43.2 $ 77.5 $ (140.5) $ 124.7 $ 49.7
======= ======= ======= ========= ========= ========= =========
Earnings (loss) before income taxes $ 2.5 $(182.5) $ 26.2 $ 27.6 $ (190.4) $ 77.4 $ 2.3
and extraordinary item
Provision for income taxes (2.1) 36.1 (11.8) (15.4) 35.7 (35.0) (6.7)
------- ------ ------- --------- --------- -------- ---------
Earnings (loss) before extraordinary item $ 0.4 $(146.4) $ 14.4 $ 12.2 $ (154.7) $ 42.4 $ (4.4)
Extraordinary Item - Loss on early extinguishment
of debt, net of income tax benefit of $5.2 - - - - - - (8.3)
------- ------- ------- --------- --------- --------- ---------
Net earnings (loss) $ 0.4 $(146.4) $ 14.4 $ 12.2 $ (154.7) $ 42.4 $ (12.7)
======= ======= ======= ========= ========= ========= =========
Earnings (loss) per common share (2):
Earnings (loss) per common share before
extraordinary item - $ (1.19) $ 0.12 $ 0.10 $ (1.26) $ 0.40 $ (0.04)
Extraordinary loss per common share - - - - - - (0.08)
------- ------- ------- --------- --------- --------- ---------
Net earnings (loss) per common share - $(1.19) $ 0.12 $ 0.10 $ (1.26) $ 0.40 $ (0.12)
======= ======= ======= ========= == ====== ========= =========
(1) Charges in 1996 include $185.0 million for settlements and related expenses in the quarter ended
September 30,1996, $23.0 million for restructuring and other non-recurring items and $10.0 million
to increase the provision for doubtful accounts in the second quarter of 1996. Charges in 1995 include
$65.0 million for restructuring related to the merger with Roche Biomedical Laboratories, Inc. on
April 28, 1995 and a $10.0 million provision for settlements related to various matters including billing
matters.
(2) Earnings (loss) per common share are based on the weighted average number of shares outstanding
during the three- and nine-month periods ended September 30, 1996 of 122,922,495 shares and 122,917,281
shares, respectively and the weighted average number of shares outstanding during the three- and nine-months
ended September 30, 1995 of 122,908,722 shares and 106,424,055 shares, respectively.
FOR IMMEDIATE RELEASE Contact: Pamela
Sherry
Telephone: (910)584-5171
Ext. 6768
LABORATORY CORPORATION OF AMERICA REPORTS
RESULTS FOR THIRD QUARTER
Announces Special Charge of $185.0 Million
Related to Ongoing Government Investigations
Continues to Develop Recapitalization Program
Burlington, NC, November 14, 1996 -- Laboratory Corporation
of America Holdings (LabCorp) (NYSE: LH) today announced
results for the third quarter and nine months ended
September 30, 1996.
Third Quarter Results
Net sales for the three months ended September 30, 1996,
were $402.6 million, versus $417.5 million in the third
quarter of 1995. The Company posted operating income in the
third quarter of 1996 of $19.6 million, before a special
pretax charge of $185.0 million. This compares with
operating income of $43.2 million in the prior year period.
Before the third quarter charge in 1996, net income was $0.4
million. This compares to net income of $14.4 million and
earnings per share of $0.12 for the same period in 1995.
After the special charge, LabCorp had an operating loss of
$165.4 million and a net loss of $146.4 million or $1.19 per
share.
The third quarter 1996 special charge is to increase
reserves for anticipated government and private claims
resulting from the government's industry-wide investigations
of certain past laboratory marketing practices at a number
of laboratories, including those of LabCorp's predecessor
companies -- National Health Laboratories Holdings Inc.
(NHL), Roche Biomedical Laboratories, Inc. (RBL) and Allied
Clinical Laboratories, Inc., a Company subsidiary. As
previously disclosed, these investigations and related
settlement discussions have become more active in recent
months. Due to the nature of these discussions, the Company
is still unable to predict with certainty the final outcome
of these negotiations.
"We have made great progress in our negotiations with the
government on the matters at hand," said Dr. James B.
Powell, President and Chief Executive Officer. "As we near
a resolution, we look forward to putting all outstanding
issues behind us. Importantly, we have been working with the
government to help establish clear industry guidelines.
These guidelines will be of great value in ensuring
consistent future compliance with regulatory standards that
have been the focal point of government investigations."
Nine Month Results
Net sales for the nine month period ended September 30,
1996, were $1,216.5 million. Operating income for the nine
month period ended September 30, 1996, before special
pretax charges was $77.5 million, net income $12.2 million
and earnings per share $0.10. The special charges were
$23.0 million related to additional merger restructuring and
nonrecurring charges and $10.0 million to increase the
allowance for doubtful accounts, occurring in the second
quarter, and the previously mentioned third quarter charge.
After the special charges in 1996, the Company posted a nine
month operating loss of $140.5 million and a net loss of
$154.7 million or $1.26 per share.
The 1995 nine month results reflect the April 28, 1995,
merger of LabCorp's predecessor companies -- NHL and RBL --
and, therefore, are not directly comparable to the same
period in 1996. For the nine months ended September 30,
1995, net sales were $1,028.6 million, operating income was
$124.7 million, net earnings were $42.4 million, and net
earnings per share were $0.40, before a special charge in
the second quarter of 1995 of $75.0 million relating to
initial merger restructuring and other provisions and before
an extraordinary loss of $8.3 million, net of taxes, related
to the early extinguishment of debt in connection with the
merger on April 28, 1995. After the special charge and
extraordinary loss in 1995, LabCorp had operating income of
$49.7 million, a net loss of $12.7 million and a net loss
per share of $0.12.
Key Factors Affecting Results
"Volume erosion, largely due to the prevailing influence of
managed care on utilization, but also impacted by the
Company's more disciplined approach to poorly priced volume,
continued to impact our results for the quarter," said Dr.
Powell. "As we see volume declines from these factors, we
are prepared to adjust our cost structure further. Even
though our prices were lower than the prior year comparable
period, this is the first quarter since the merger that we
have seen a stabilization in pricing compared to the
immediately preceding quarter."
Lower collection rates and higher bad debt expense related
to medical necessity and diagnosis code requirements of
third-party payors also impacted results. "These regulatory
changes are fundamentally affecting the current and future
practice of medicine," said Dr. Powell. "Recognizing that
the requirements dramatically affect not only the way labs
bill and collect, but the specific way physicians must order
and document the medical necessity of their test requests,
we have intensified our efforts to stabilize our accounts
receivable through education, training, internal control
systems, and the redesign of test order forms. We have also
contracted for an independent third-party review of our
billing processes to identify improvements that simplify and
expedite collections. Although the results of these
programs are not immediately evident, we believe they will
benefit LabCorp's future collection rates and cash flow."
Dr. Powell concluded, "These results are disappointing but
consistent with industry trends. Even though pricing has
stabilized in the quarter, we will continue to monitor this
critical aspect of our business closely in order to respond
quickly to any opportunities. Future quarterly performance
will still be difficult to predict because of volume
variances and the lag time to adjust capacity and costs more
appropriately to volume. As a result, we must adhere to our
strategies of increasing prices and implementing other cost
cutting initiatives in addition to building volume from new
strategic alliances and institutional relationships."
LabCorp indicated that it is making progress in its merger-
related cost savings programs, with the programs continuing
on schedule with respect to timing and amount of savings
achieved. Other expense control measures initiated by the
Company are also achieving desired results.
Recent Alliances and Acquisitions
During the quarter, LabCorp made progress in its strategic
alliance program when it entered into an agreement with
Arcon HealthCare Inc. of Nashville, Tennessee, to provide
laboratory management and reference testing services to
Arcon's healthcare centers planned throughout rural regions
of the Southeast and West. LabCorp also entered into an
agreement with Desert Hospital of Palm Springs, California,
to manage its hospital laboratory operation.
In early November, LabCorp completed the acquisition of
Genetic Design, Inc., a Greensboro, North Carolina genetic
testing laboratory, in an asset purchase transaction. The
acquisition complements LabCorp's existing paternity testing
operation at its Burlington, North Carolina laboratory.
Financial Update
As previously announced, the Company obtained waivers for
the quarter ended June 30, 1996, of certain covenants
contained in its existing credit agreement, and subsequently
successfully negotiated an amendment to the agreement. The
amendment modifies the interest coverage and leverage ratios
applicable to the quarters ending September 30 and December
31, 1996, and results in increased interest rate margins
through the periods covered by the amendment. As a result of
the special charge taken in the third quarter of 1996,
LabCorp obtained an additional waiver which excludes the
special charge from covenant calculations for the periods
covered by the most recent amendment. The Company's ability
to satisfy payments which may become due in connection with
a settlement agreement is dependent upon a successful
recapitalization of the Company, which is in its very
preliminary stages. While LabCorp cannot be assured of a
successful recapitalization, it believes that both public
and private sources of funds may be available to it to
complete such a program by March 31, 1997. LabCorp will be
required to obtain an additional waiver or amendment to its
credit agreement at the earlier of 30 days following the
completion of a settlement agreement or March 31, 1997, if a
recapitalization is not completed within such time periods.
There can be no assurance that such a waiver or amendment
can be obtained.
The Company noted that each of the above forward-looking
statements was subject to change based on various important
factors, including without limitation, competitive actions
in the marketplace and adverse actions of governmental and
other third-party payors. Further information on potential
factors which could affect the Company's financial results
is included in the Company's Form 10-K for the year ended
December 31, 1995.
Laboratory Corporation of America Holdings (LabCorp) is a
national clinical laboratory organization with estimated
annualized revenues of $1.6 billion. The Company operates
primary testing facilities nationally, offering more than
1,700 different clinical assays, from routine blood analysis
to more sophisticated technologies. LabCorp performs
diagnostic tests for physicians, managed care organizations,
hospitals, clinics, long-term care facilities, industrial
companies and other clinical laboratories.
5
0000920148
LABORATORY CORPORATION OF AMERICA HOLDINGS
1000
9-MOS
DEC-31-1996
SEP-30-1996
28,200
0
593,900
99,500
45,800
715,700
451,800
162,500
1,908,400
1,511,500
0
0
0
1,200
255,700
1,908,400
1,216,500
1,216,500
903,900
903,900
453,100
0
51,400
(190,400)
(35,700)
(154,700)
0
0
0
(154,700)
(1.26)
(1.26)
