(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o).
(2) Such indeterminate number of Rights to purchase Preferred Stock as may be
issued to existing stockholders.
(3) Includes Preferred Stock to be issued in the form of dividends on
outstanding Preferred Stock in accordance with the terms thereof.
(4) To be issued in exchange for Preferred Stock at the option of the Company.
(5) $195,076 of which was previously paid.
The registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
==============================================================================
SUBJECT TO COMPLETION, DATED APRIL 11, 1997
10,000,000 Shares
LOGO
Laboratory Corporation of America Holdings
% Series A Convertible Exchangeable Preferred Stock
or
% Series B Convertible Pay-in-Kind Preferred Stock
(mandatorily redeemable , 2012; liquidation preference $50 per share)
Dividends payable , , , and
($500,000,000 aggregate liquidation preference)
---------------
Laboratory Corporation of America Holdings, a Delaware corporation (the
"Company"), is distributing to holders of record ("Recordholders") of its
common stock, par value $0.01 per share (the "Common Stock"), at the close
of business on , 1997 (the "Record Date"), transferable rights (the
"Rights") to subscribe for and purchase, at the election of the holders of
the Rights (the "Rights Holders"), up to an aggregate of 10,000,000 shares
(the "Underlying Shares") of either % Series A Convertible Exchangeable
Preferred Stock, par value $0.10 per share, of the Company (the "Series A
Exchangeable Preferred Stock") or % Series B Convertible Pay-in-Kind
Preferred Stock, par value $0.10 per share, of the Company (the "Series B
PIK Preferred Stock" and, together with the Series A Exchangeable Preferred
Stock, the "Preferred Stock"), for a cash price of $50 (the "Subscription
Price") per share. Payment of the Subscription Price will be held in a
segregated account to be maintained by the Subscription and Information
Agent (as defined herein) and will be applied to the purchase of Preferred
Stock. Rights Holders will be able to exercise their Rights until 5:00
p.m. New York time on , 1997 unless such time is extended by the Company
as described herein (the "Expiration Date").
Recordholders will receive of a Right for each share of Common Stock held
as of the Record Date (the "Rights Offering"). As soon as practicable
after the Record Date, transferable certificates evidencing the Rights
(the "Rights Certificates") will be delivered to the Recordholders. No
fractional Rights or cash in lieu thereof will be issued or paid by the
Company. The number of Rights issued by the Company to each
Recordholder will be rounded to the nearest whole number, with such
adjustments as may be necessary to ensure that no more than 10,000,000
shares of Preferred Stock are issued hereunder. Each Right consists of
a basic subscription privilege under which Rights Holders may purchase
at the Subscription Price one full share of Preferred Stock for each
Right held (the "Basic Subscription Privilege").
Rights Holders who exercise their Basic Subscription Privilege in full will
also be eligible to subscribe (the "Oversubscription Privilege") at the
Subscription Price for shares of Preferred Stock that are not otherwise
purchased pursuant to the exercise of Rights (the "Excess Shares") of the
same series as purchased pursuant to such Rights Holder's Basic
Subscription Privilege, subject to availability and proration. Once a
Rights Holder has exercised the Basic Subscription Privilege or the
Oversubscription Privilege such exercise may not be revoked.
HLR Holdings Inc. ("HLR") and Roche Holdings, Inc. ("Roche Holdings"),
wholly owned subsidiaries of Roche Holding Ltd. ("Roche") and the owners
of approximately 49.9% of the Common Stock currently outstanding, have
informed the Company that they intend to exercise their Basic Subscription
Privilege and Oversubscription Privilege in full for the Series B PIK
Preferred Stock (subject, in the case of the Oversubscription Privilege, to
reduction in certain circumstances). As a result, if no other Rights are
exercised, HLR and Roche Holdings will purchase 10,000,000 shares of Series
B PIK Preferred Stock.
(continued)
For a discussion of certain factors that should be considered in connection
with an investment in the Preferred Stock, see "Risk Factors" beginning on
page 19.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Subscription Dealer Manager Proceeds to
Price and Solicitation Fees(1) Company(2)
------------ --------------------- -----------
Per Share... $ $ $
Total(3).... $ $ $
(1) The fees payable to Credit Suisse First Boston Corporation ("Credit Suisse
First Boston"), the dealer manager for the Rights Offering, will vary
depending on the number of Rights exercised by Rights Holders other
than HLR and Roche Holdings. Credit Suisse First Boston will also
receive a financial advisory fee of $ .
(2) Before deducting other expenses of the Rights Offering and the Amended
Credit Agreement payable by the Company estimated at $ .
(3) Assumes that HLR and Roche Holdings purchase 4,988,751 shares of Preferred
Stock and that Rights Holders other than HLR and Roche Holdings
purchase the remaining shares. If no Rights Holder other than HLR and
Roche Holdings purchases Preferred Stock, the total Subscription Price,
total Dealer Manager and Solicitation Fees and total Proceeds to
Company would be , and , respectively.
The Dealer Manager for the Rights Offering is:
Credit Suisse First Boston
Prospectus dated , 1997.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
The annual dividend for each share of Series A Exchangeable
Preferred Stock offered hereby is $ , payable in cash. The annual
dividend for each share of Series B PIK Preferred Stock offered hereby is $
, payable in shares of Series B PIK Preferred Stock until , 2003
and cash thereafter. The Preferred Stock is convertible on or after
, 1997 in the case of the Series A Exchangeable Preferred Stock, and on or
after , 2000 in the case of the Series B PIK Preferred Stock, in each
case, at the option of the holder, unless previously redeemed, into shares of
Common Stock at a rate (subject to adjustment in certain events) of
shares of Common Stock for each share of Preferred Stock, equivalent to a
conversion price of $ for each share of Common Stock. The conversion
rate was determined by the Company, in consultation with Credit Suisse First
Boston. Among the factors considered by the Board of Directors in determining
the conversion rate were (i) the market value of the Common Stock; (ii) the
present and projected operating results and financial condition of the
Company; (iii) an assessment of the Company's management and management's
analysis of the growth potential of the Company and of the Company's market
area; (iv) the aggregate size of the Rights Offering; and (v) the conversion
rate which the Board of Directors believes investors would readily accept
under current economic circumstances. The shares of Series A Exchangeable
Preferred Stock will be exchangeable, subject to certain conditions, at the
option of the Company, in whole (but not in part), on any dividend payment
date on or after , 2000 for the Company's % Convertible
Subordinated Notes due 2012 (the "Notes") at a rate of $50 principal amount of
Notes for each share of Series A Exchangeable Preferred Stock. The Series B
PIK Preferred Stock will not be exchangeable for Notes. See "Description of
the Notes." Except as described above, the terms of the Series A Exchangeable
Preferred Stock and the Series B PIK Preferred Stock are identical in all
respects. The Preferred Stock is not redeemable prior to , 2000. On
or after such date, the Company may redeem the Preferred Stock, in whole or in
part at the prices set forth herein, plus in each case, accrued and unpaid
dividends. All shares of Preferred Stock issued and outstanding as of
, 2012 shall be redeemed by the Company at the redemption price of $50 per
share. Dividends on the Preferred Stock are cumulative from the date of
issuance and are payable quarterly in arrears commencing , 1997. See
"Description of Preferred Stock."
The Common Stock is traded on the New York Stock Exchange
("NYSE") under the symbol "LH." On February 26, 1997, the last full trading
day before announcement of the Rights Offering, the last reported sale of the
Common Stock on the NYSE Composite Tape was $3 3/4. On , 1997, the
last full day of trading prior to the effective date of the registration
statement of which this Prospectus forms a part, the last reported sale price
of the Common Stock on the NYSE Composite Tape was $ . Application has
been made to list the Preferred Stock on the NYSE. It is unlikely however
that the Series B PIK Preferred Stock will be accepted for listing on the NYSE
as it is expected that following the Rights Offering the Series B PIK
Preferred Stock will be held by fewer than 100 holders. It is expected that
the Rights will trade on the NYSE until the close of business on the last
trading day prior to the Expiration Date, at which time they will cease to
have value.
Upon consummation of the Rights Offering and satisfaction of
certain other conditions precedent, an amended and restated credit agreement
(the "Amended Credit Agreement") between the Company and its existing lenders
will become effective. See "Description of Amended Credit Agreement."
--------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
SECURITIES OFFERED HEREBY, INCLUDING STABILIZING TRANSACTIONS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION."
PROSPECTUS SUMMARY
The following summary is qualified in its entirety and should
be read in conjunction with the more detailed information and financial
statements, including the notes thereto, included or incorporated by reference
in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety. In connection with the Merger (as defined herein)
in April 1995, National Health Laboratories Holdings, Inc. ("NHL") changed its
name to Laboratory Corporation of America Holdings. Unless otherwise
indicated, all references herein to the "Company" refer to Laboratory
Corporation of America Holdings and its consolidated subsidiaries following
the Merger or NHL and its consolidated subsidiaries prior to the Merger, as
applicable.
THE COMPANY
General
Laboratory Corporation of America Holdings is one of the three
largest independent clinical laboratory companies in the United States based
on 1996 net revenues. Through a national network of laboratories, the Company
offers a broad range of testing services used by the medical profession in the
diagnosis, monitoring and treatment of disease and other clinical states.
Since its founding in 1971, the Company has grown into a network of 28 major
laboratories and approximately 1,500 service sites consisting of branches,
patient service centers and STAT laboratories, serving clients in 48 states.
For the year ended December 31, 1996, the Company had net sales of $1,607.7
million and EBITDA before a provision for settlements and related expenses,
restructuring charges and non-recurring expenses of $173.7 million. See
footnote (k) to "Summary Financial Data" for a discussion of certain matters
related to EBITDA. Primarily as a result of the Settlement Charge discussed
below, operating loss and net loss during such period were $118.8 million and
$153.5 million respectively.
The Company has achieved a substantial portion of its growth
through acquisitions. In June 1994, the Company acquired Allied Clinical
Laboratories, Inc. ("Allied"), then the sixth largest independent clinical
laboratory testing company in the United States (based on 1993 net revenues)
(the "Allied Acquisition"). In addition, in April 1995, the Company completed
a merger with Roche Biomedical Laboratories, Inc. ("RBL"), an indirect
subsidiary of Roche pursuant to an Agreement and Plan of Merger dated as of
December 13, 1994 (the "Merger"). In connection with the Merger, the Company
changed its name from National Health Laboratories Holdings, Inc. to
Laboratory Corporation of America Holdings. In addition to the Merger and the
Allied Acquisition, since 1993 the Company has acquired a total of 57 small
clinical laboratories with aggregate sales of approximately $182.4 million.
The Clinical Laboratory Testing Industry
Laboratory tests and procedures are used generally by
hospitals, physicians and other health care providers and commercial clients
to assist in the diagnosis, evaluation, detection, monitoring and treatment of
diseases and other medical conditions through the examination of substances in
the blood, tissues and other specimens. Clinical laboratory testing is
generally categorized as either clinical testing, which is performed on body
fluids including blood and urine, or anatomical pathology testing, which is
performed on tissue and other samples, including human cells. Clinical and
anatomical pathology procedures are frequently ordered as part of regular
physician office visits and hospital admissions in connection with the
diagnosis and treatment of illnesses. Certain of these tests and procedures
are used principally as tools in the diagnosis and treatment of a wide variety
of medical conditions such as cancer, AIDS, endocrine disorders, cardiac
disorders and genetic disease. The most frequently requested tests include
blood chemistry analyses, urinalyses, blood cell counts, PAP smears, AIDS
tests, microbiology cultures and procedures and alcohol and other
substance-abuse tests.
The clinical laboratory industry consists primarily of three
types of providers: hospital based laboratories, physician-office laboratories
and independent clinical laboratories, such as those owned by the Company.
The Company believes that in 1996 approximately 50 percent of the clinical
testing revenues in the United States were derived by hospital-based
laboratories, approximately 15 percent were derived by physicians in their
offices and laboratories and approximately 35 percent were derived by
independent clinical laboratories. The Health Care Financing
Administration ("HCFA") of the Department of Health and Human Services
("HHS") has estimated that in 1996 there were over 5,000 independent
clinical laboratories in the United States.
Business Strategy
During 1996, management began implementing a new business
strategy in response to the Company's declining performance. These new
strategic objectives are as follows: remaining a low cost provider of
clinical testing services; providing high quality customer service to its
clients; and improving account profitability. In addition, the Company is
focused on certain growth initiatives beyond routine clinical laboratory
testing. The Company believes that as a result of this change in focus it is
well positioned to achieve its goal of leading the clinical laboratory
industry by providing its customers with innovative, responsive, and high
quality services.
Low Cost Provider
The Company believes that due to synergy programs implemented
following the Merger, its standardized equipment and its focus on cost
containment, it is a low cost provider of clinical testing services. Since
the Merger, the Company has been able to effect substantial operating cost
reductions in the combined businesses and expects that the full effect of
these savings (approximately $120 million per year when compared to the
businesses' costs immediately prior to the Merger) will be realized during
1997. In addition, the Company is focused on other initiatives which are
expected to achieve significant cost savings in 1997. These plans include a
new agreement with a supplier of telecommunications services, additional
supply savings primarily due to increased efficiency, and further regional
laboratory consolidation. See "Management's Discussion and Analysis of
Results of Operations and Financial Position."
The Company has also developed and implemented sophisticated
management information systems to monitor operations and control costs. All
financial functions are centralized in Burlington, North Carolina including
purchasing and accounting. Management believes this provides greater control
over spending as well as increased supervision and monitoring of results of
operations.
Client Service
The Company competes primarily on the basis of the quality of
its testing, reporting and information systems, its reputation in the medical
community, the pricing of its services and its ability to employ qualified
personnel. The Company believes it is a leading provider of laboratory
testing in terms of its menu and quality of testing services. As a result of
the required focus on the consolidation process related to the Merger,
however, the Company believes that its level of client service has been
negatively impacted. Therefore, in 1997, with the consolidation process
substantially completed, one of the Company's goals is to improve client
service. An important factor in improving client service includes the
Company's initiatives to improve its billing process. See "Business--
Billing."
Account Profitability
Since the third quarter of 1996, the Company has begun an
active effort to improve the profitability of new and existing business. To
date this effort has focused primarily on reviewing existing contracts,
including those with managed care organizations, and selectively repricing or
discontinuing business with existing accounts which perform below Company
expectations. The Company believes that as a result of this effort, the
fourth quarter of 1996 was the second consecutive quarter since the Merger
that the Company's price per accession or specimen did not decline versus the
immediately preceding quarter. The Company is also targeting price increases
across most of its business lines, including specialty and niche testing which
have not seen price increases since the Merger. While such increases may
adversely affect volumes, the Company believes that such measures along with
other cost reduction programs, will improve its overall profitability.
Finally, the Company is reviewing its sales organization and expects to modify
its commission structure so that compensation is tied more directly to the
profitability of retained and new business instead of the current practice of
basing commissions primarily on revenue generated. The Company is also
reviewing alternatives relating to regions of the country and certain
businesses where profitability is not reaching internal goals and may enter
into joint ventures, alliances, or asset swaps with interested parties in
order to maximize regional operating efficiencies.
Focused Growth Initiatives
The Company plans to increase market share in certain sections
of the market by providing innovative services in three primary areas: (i)
hospital alliances; (ii) specialty and niche businesses; and (iii) direct
marketing to payors.
One of the Company's primary growth strategies is to develop an
increasing number of hospital alliances. These alliances can take several
different forms including laboratory management contracts, reference
agreements and joint ventures. Through these alliances the Company provides
testing services as well as contract management services. As hospitals
continue to be impacted by decreasing fee schedules from third party payors
and managed care organizations, the Company believes that they will seek the
most cost-effective laboratory services for their patients. The Company's
economies of scale as well as its delivery system enable it to assist the
hospital in achieving this goal. These alliances are generally more
profitable than the Company's core business due to the specialized nature of
many of the testing services offered in the alliance program. In 1996, the
Company added 6 alliance agreements with hospitals, physician groups and other
care provider organizations representing approximately $20 million of annual
sales. This increased the total number of alliances to 20 at December 31,
1996 from 14 at December 31, 1995.
Another primary growth strategy for the Company is growth of
its specialty and niche businesses. In general the specialty and niche
businesses are designed to serve two market segments: (i) markets which are
not served by the routine clinical testing laboratory and therefore are
subject to less stringent regulatory and reimbursement constraints; and (ii)
markets which are served by the routine testing laboratory but offer the
possibility of adding related services from the same supplier. The Company's
research and development group continually seeks new and improved technologies
for early diagnosis. For example, the Company believes its Center for
Molecular and Biology and Pathology ("CMBP") is a leader in molecular
diagnostics and polymerase chain reaction ("PCR") technologies which are often
able to provide earlier and more reliable information regarding HIV, genetic
diseases, cancer, and many viral and bacterial diseases. These technologies
may represent a significant savings to managed care organizations by
increasing the detection of early stage (treatable) diseases. Also, the
Company recently acquired Genetic Design, Inc. and management believes it is
now the largest provider of identity testing services in the United States.
Finally, in 1996 the Company also began to focus efforts on
selling its services directly to payors of laboratory services. As a result
of that focus, the Company entered into an agreement with PCS Health Systems,
Inc. ("PCS"), a leading pharmacy benefit management company with 58 million
covered lives, to provide laboratory services as an extension of the PCS
prescription card services. Through this agreement patients will be provided
with identification cards indicating beneficiary eligibility for both
prescription benefits and the Company's testing services. The Company will
provide the testing services as requested and bill PCS based on a
predetermined fee schedule. The Company will pay PCS certain percentage and
fixed fees for adjudication of claims. One of the advantages of the PCS
agreements is that patient eligibility will be determined at the time of
testing through interface with the PCS information system which will expedite
processing of the claim for reimbursement.
Recent Developments
During 1996 and the early part of 1997, the Company has
undergone significant changes in management with Thomas P. Mac Mahon assuming
the role of President and Chief Executive Officer in January 1997 in addition
to his position as Chairman. Prior to such time Mr. Mac Mahon served as
Senior Vice President of Hoffmann-La Roche and President of Roche
Diagnostics Group where he was responsible for the management of all United
States operations of the diagnostic businesses of Hoffmann-La Roche. In
addition to Mr. Mac Mahon, the Company is led by a new Chief Financial
Officer, Wesley R. Elingburg, formerly Senior Vice President-Finance, and
a new management committee.
As part of an examination of the rapid growth of Federal
expenditures for clinical laboratory services, several Federal agencies,
including the Federal Bureau of Investigation, the Office of the Inspector
General ("OIG") of HHS and the Department of Justice (the "DOJ"), have
investigated allegations of fraudulent and abusive conduct by health care
providers. On November 21, 1996, the Company reached a settlement with the
OIG and the DOJ regarding the prior billing practices of various of its
predecessor companies (the "1996 Government Settlement"). See
"Business--Regulation and Reimbursement--OIG Investigations--1996 Government
Settlement". Consistent with this overall settlement, the Company paid $187
million to the Federal Government (the "Settlement Payment") in December 1996
with proceeds from a loan from Roche Holdings (the "Roche Loan"). See
"--Relationship with Roche". As a result of negotiations related to the 1996
Government Settlement, the Company recorded a charge of $185 million in the
third quarter of 1996 (the "Settlement Charge") to increase reserves for the
1996 Government Settlement and other related expenses of government and
private claims resulting therefrom.
In March 1997, the Company entered into the Sixth Amendment and
Waiver (the "Sixth Amendment") to its credit agreement (the "Existing Credit
Agreement"). The Sixth Amendment eliminates amortization payments on its term
loan facility (the "Term Loan Facility") under the Existing Credit Agreement
for 1997 and modifies the interest coverage and leverage ratios for the
quarterly periods through December 31, 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Pursuant to this
amendment, the Company paid an amendment fee of 37.5 basis points on
commitments and will pay an additional fee of 62.5 basis points if the Rights
Offering is not completed by June 30, 1997.
In addition, the Roche Loan was originally due on March 31,
1997. In March 1997, the Company negotiated an amendment to the Roche Loan
which provided for an extension of the due date to March 31, 1998.
The Company also entered into the Amended Credit Agreement with
its lenders under the Existing Credit Agreement which will become effective
upon completion of the Rights Offering following satisfaction of certain
conditions precedent. Upon consummation of the Rights Offering and receipt of
$500 million in gross proceeds, the Amended Credit Agreement makes available
to the Company a term loan facility of $643.8 million (the "Amended Term Loan
Facility") and a $450.0 million revolving credit facility (the "Amended
Revolving Credit Facility"). See "Description of Amended Credit Agreement"
and Note 9 of the Notes to Consolidated Financial Statements for a complete
description of the Amended Credit Agreement.
The Company's principal executive offices are located at 358
South Main Street, Burlington, North Carolina 27215, and its telephone number
is (910) 229-1127.
RELATIONSHIP WITH ROCHE
In connection with the Merger, HLR, and its designee, Roche
Holdings, received 49.9% of the total outstanding Common Stock of the Company
and the Company, HLR, Roche Holdings and Hoffmann-La Roche, Inc. entered into
a Stockholder Agreement dated as of April 28, 1995 (the "Stockholder
Agreement"). As a result of its ownership interest and its rights under the
Stockholder Agreement, Roche is able to exercise significant influence on the
governance of the Company and on the composition of its board of directors.
See "Certain Relationships and Related Transactions--The Stockholder
Agreement." HLR and Roche Holdings have indicated that they intend to exercise
their Basic Subscription Privilege and Oversubscription Privilege in the
Rights Offering in full for Series B PIK Preferred Stock (subject, in the case
of the Oversubscription Privilege, to reduction in certain circumstances). As
a result, if no other Rights are exercised, HLR and Roche Holdings will
purchase 10,000,000 shares of Series B PIK Preferred Stock. Consequently,
following conversion of all of the Preferred Stock, HLR and Roche Holdings
will own a minimum of 49.9% and a maximum of % of the total outstanding
Common Stock of the Company. As mentioned above, in December, 1996, Roche
Holdings loaned $187 million to the Company to fund the Settlement Payment in
the form of a promissory note. Such note bears interest at a rate of 6.625%
per annum and matures on March 31, 1998. A portion of the proceeds of the
Rights Offering will be used to repay such loan. See "Use of Proceeds."
THE RIGHTS OFFERING
Securities Offered.................. A total of up to 10,000,000 shares of
Preferred Stock are being offered in
the Rights Offering pursuant to the
exercise of Rights. Once the Rights
are distributed and until the
Expiration Date, the Company will
not effect a reclassification of
the Company's equity securities
which could have the effect of
materially altering the value of the
Rights. See "Description of Rights
Offering" and "Description of
Preferred Stock."
Basic Subscription Privilege........ Recordholders at the close of business
on the Record Date will receive, at no
cost, of a Right for each share of
Common Stock owned of record at the
close of business on such date. Each
Right will entitle the Rights Holder to
subscribe for one Underlying Share at
the Subscription Price. Upon exercise
of the Rights, Rights Holders must
indicate on their Rights Certificate
whether they wish to receive either
shares of Series A Exchangeable
Preferred Stock or shares of Series B
PIK Preferred Stock. A failure to so
indicate on the Rights Certificate will
result in the issuance of Series A
Exchangeable Preferred Stock. No
fractional Rights or cash in lieu
thereof will be issued or paid.
Fractional Rights will be rounded to
the nearest whole number, with such
adjustments as may be necessary to
ensure that no more than 10,000,000
shares of Preferred Stock are issued
hereunder. ONCE A RIGHT HAS BEEN
PROPERLY EXERCISED, IT CANNOT BE
REVOKED. See "Description of Rights
Offering--The Rights" and
"--Subscription Privileges."
Oversubscription Privilege.......... Each Rights Holder who elects to
exercise the Basic Subscription
Privilege in full may also subscribe at
the Subscription Price for Excess
Shares of the same series as purchased
pursuant to such Rights Holder's Basic
Subscription Privilege, subject to
availability and proration. The
available Excess Shares will be
prorated among Rights Holders who
exercise their Oversubscription
Privilege based upon the respective
number of shares of Preferred Stock
each such Rights Holder shall have
subscribed for pursuant to the Basic
Subscription Privilege; provided,
however, that HLR and Roche Holdings
will not be allocated any Excess Shares
until all other Rights Holders
exercising the Oversubscription
Privilege have been allocated the
number of Excess Shares for which they
oversubscribed. All excess payments
shall be returned by mail without
interest or deduction promptly after
the Expiration Date and after all
prorations and adjustments contemplated
by the Rights Offering have been
effected. See "Description of Rights
Offering--Subscription Privileges."
Subscription Price.................. $50 per share of Preferred Stock.
Payment of the Subscription Price will
be held in a segregated account to be
maintained by the Subscription and
Information Agent and will be applied
to the purchase of Preferred Stock.
Record Date......................... , 1997.
Expiration Date..................... The Rights will expire, if not
exercised prior to 5:00 p.m., New York
time, on , 1997 unless extended
for up to 30 days in the sole
discretion of the Company. The number
and length of any such extensions will
be set at the time of any such
extension. See "Description of Rights
Offering--Expiration Date."
The Rights.......................... The Rights will be evidenced by
transferable certificates that will be
exercisable by a Rights Holder until the
Expiration Date. It is expected that
the Rights will trade on the NYSE until
the close of business on the last
trading day prior to the Expiration
Date, at which time they will cease to
have value.
Subscription and Information Agent.. American Stock Transfer &Trust Company.
Dealer Manager...................... The Company and Credit Suisse First
Boston (the "Dealer Manager") have
entered into a Dealer Manager Agreement
pursuant to which Credit Suisse First
Boston is acting as the dealer manager
in connection with the Rights Offering.
The Company has agreed to pay certain
fees to, and expenses of, the Dealer
Manager for its services in the Rights
Offering. See "Plan of Distribution."
Procedure for Exercising Rights..... The Basic Subscription Privilege and
the Oversubscription Privilege may be
exercised by properly completing the
Rights Certificate, and forwarding it
(or following the Guaranteed Delivery
Procedures), with payment of the
Subscription Price for each Underlying
Share subscribed for pursuant to the
Basic Subscription Privilege and the
Oversubscription Privilege, to the
Subscription and Information Agent, who
must receive such Rights Certificate or
Notice of Guaranteed Delivery and
payment on or prior to the Expiration
Date. If Rights Certificates are sent
by mail, Rights Holders are urged to
use insured, registered mail, return
receipt requested. See "Description
of Rights Offering--Method of
Subscription --Exercise of Rights."
If the aggregate Subscription Price
paid by an exercising Rights Holder is
insufficient to purchase the number of
Underlying Shares that the Rights
Holder indicates are being subscribed
for, or if no number of Underlying
Shares to be purchased is specified,
then the Rights Holder will be deemed
to have exercised the Basic
Subscription Privilege to purchase
Underlying Shares to the full extent of
the payment price tendered. If the
aggregate Subscription Price paid by an
exercising Rights Holder exceeds the
amount necessary to purchase the number
of Underlying Shares for which the
Rights Holder has indicated an
intention to subscribe, then the Rights
Holder will be deemed to have exercised
the Oversubscription Privilege to the
full extent of the excess payment
tendered, and any amount remaining
shall be returned to such Rights
Holder. See "Description of Rights
Offering--Method of
Subscription--Exercise of Rights."
ONCE A RIGHTS HOLDER HAS EXERCISED THE
BASIC SUBSCRIPTION PRIVILEGE OR THE
OVERSUBSCRIPTION PRIVILEGE, SUCH
EXERCISE MAY NOT BE REVOKED. RIGHTS
NOT EXERCISED PRIOR TO THE
EXPIRATION DATE WILL EXPIRE.
Persons Holding Common Stock, or
Wishing to Exercise Rights,
Through Others...................... Persons holding shares of Common Stock
beneficially and receiving the Rights
issuable with respect thereto, through
a broker, dealer, commercial bank,
trust company or other nominee, as well
as persons holding certificates for
Common Stock directly, who would prefer
to have such institutions effect
transactions relating to the Rights on
their behalf, should contact the
appropriate institution or nominee and
request it to effect such transaction
for them. See "Description of Rights
Offering--Method of
Subscription--Exercise of Rights."
Procedure for Exercising Rights
by Stockholders Outside of the
United States....................... Rights Certificates will not be mailed
to holders of Common Stock whose
addresses are outside the United States
or who have an Army Post Office ("APO")
or a Fleet Post Office ("FPO") address,
but will be held by the Subscription
and Information Agent for their
accounts. To exercise the Rights
represented thereby, such holders must
notify the Subscription and Information
Agent and take all other steps which
are necessary to exercise the Rights on
or prior to 5:00 p.m. New York time on
, 1997. If no contrary
instructions have been received by such
time, the Rights of such holders will
expire. See "Description of Rights
Offering--Foreign and Certain Other
Stockholders."
Federal Income Tax Consequences..... In the opinion of Davis Polk &
Wardwell, for United States Federal
income tax purposes, receipt of Rights
by a Recordholder pursuant to the
Rights Offering should be treated as a
nontaxable distribution with respect to
the Common Stock. See "Certain Federal
Income Tax Consequences."
Issuance of Preferred Stock......... Certificates representing shares of
Preferred Stock purchased pursuant
to the exercise of the Rights will
be delivered to subscribers as soon
as practicable after the Expiration
Date and after all prorations and
adjustments contemplated by the
terms of the Rights Offering have
been effected.
No Board or Financial Advisor
Recommendations..................... An investment in the Preferred Stock
must be made pursuant to each
investor's evaluation of such investor's
best interests. Accordingly, neither
the Board of Directors of the Company
nor Credit Suisse First Boston, as
financial advisor to the Company, makes
any recommendation to Rights Holders
regarding whether they should exercise
their Rights to purchase Preferred
Stock.
Principal Stockholders.............. HLR and Roche Holdings, the owners of
approximately 49.9% of the Common Stock
currently outstanding, have indicated
that they intend to exercise their Basic
Subscription Privilege and
Oversubscription Privilege in full for
Series B PIK Preferred Stock (subject,
in the case of the Oversubscription
Privilege, to reduction in certain
circumstances). As a result, if no
other Rights are exercised, HLR and
Roche Holdings will purchase 10,000,000
shares of Series B PIK Preferred Stock.
NYSE Symbol for Common Stock........ "LH"
NYSE Symbol for Rights.............. "LH RT"
NYSE Symbol for the Series A
Exchangeable Preferred Stock........ "LH PrA"
NYSE Symbol for
the Series B PIK Preferred Stock.... "LH PrB". While application has been
made to list the Series B PIK Preferred
Stock on the NYSE, it is unlikely that
the Series B PIK Preferred Stock will
be accepted for listing as it is
expected that following the Rights
Offering the Series B PIK Preferred
Stock will be held by fewer than 100
holders.
Use of Proceeds..................... The gross proceeds of the Rights
Offering will be used to (i) repay
$298 million outstanding under the
Existing Credit Agreement, (ii) pay
fees and expenses of approximately $15
million related to the Rights Offering
and the Amended Credit Agreement and
(iii) repay the $187 million loan from
Roche Holdings in order to fund the
Settlement Payment. See "Use of
Proceeds."
THE PREFERRED STOCK
Securities Offered.................. An aggregate of up to 10,000,000
shares of % Series A Convertible
Exchangeable Preferred Stock and %
Series B Convertible Pay-in-Kind
Preferred Stock. Except as
described below, the terms of the
Series A Exchangeable Preferred
Stock and the Series B PIK Preferred
Stock are identical in all respects.
Mandatory Redemption................ , 2012.
Dividends........................... Annual cumulative dividends of $
per share on the Preferred Stock are
payable quarterly on each ,
, and , when, as
and if declared by the Board of
Directors.
Annual cumulative dividends in the
case of the Series A Exchangeable
Preferred Stock are payable in cash
out of funds legally available
therefor, and in the case of the
Series B PIK Preferred Stock, are
payable in shares of Series B PIK
Preferred Stock until , 2003 and
cash thereafter.
The Company may not pay dividends on
the Preferred Stock unless it has
paid or declared and set apart for
payment or contemporaneously pays or
declares and sets apart for payment
accrued and unpaid dividends for all
dividend payment periods on any
class or series of stock having
parity with the Preferred Stock as
to dividends (which, in the case of
the Series A Exchangeable Preferred
Stock, will include the Series B PIK
Preferred Stock and vice versa)
ratably, so that the amount of
dividends declared and paid per
share on each series of Preferred
Stock will bear to each other the
same ratio that the accrued and
unpaid dividends to the date of
payment on each series of Preferred
Stock bear to each other.
Liquidation Preference.............. $50 per share of Preferred Stock,
plus accrued and unpaid dividends.
Conversion Rights................... Each share of Preferred Stock
will be convertible at any time at the
option of the holder thereof, in the
case of the Series A Exchangeable
Preferred Stock on or after , 1997
and in the case of the Series B PIK
Preferred Stock on or after , 2000,
into shares of Common Stock of the
Company, subject to adjustment in
certain events, including a
Fundamental Change (as defined
herein). See "Description of
Preferred Stock --Conversion
Rights."
Exchange for Notes.................. The Series A Exchangeable
Preferred Stock will be exchangeable,
subject to certain conditions, at the
option of the Company, in whole (but
not in part), on any dividend payment
date on or after , 2000 for
the Company's % Convertible
Subordinated Notes due 2012 in a
principal amount equal to $50 per
share of Series A Exchangeable
Preferred Stock. The Notes will be
convertible, at the option of the
holder thereof, into shares of
Common Stock initially at the
conversion price for the Series A
Exchangeable Preferred Stock at the
time of the exchange. Holders of
Notes will be entitled to the same
conversion rights as holders of
Series A Exchangeable Preferred
Stock. The Notes will bear interest
at the rate of % payable quarterly
in arrears on , , and
of each year, commencing on the
first such interest payment date
following the date of exchange. At
the Company's option, on or
after , 2000, the Notes will
be redeemable, in whole or in part,
at the redemption prices set forth
herein plus accrued and unpaid
interest. The Notes are not subject
to mandatory sinking fund payments.
The Notes will be subordinated to
all Senior Indebtedness (as defined
herein) of the Company.
Optional Redemption................. The Preferred Stock will not be
redeemable prior to , 2000.
On and after such date, the
Preferred Stock will be redeemable,
in whole or in part, at the option
of the Company, at the prices set
forth herein, plus in each case
accrued and unpaid dividends to the
redemption date.
Ranking............................. The Preferred Stock will rank, with
respect to dividend rights and rights
upon liquidation, winding up or
dissolution, senior to all classes
of the Company's common stock, on
parity with each other and junior to
any other series of preferred stock
that may hereafter be created with
the approval of the holders of
Preferred Stock that ranks senior
to the Preferred Stock.
Voting Rights....................... The holders of Preferred Stock will not
have any voting rights, except as
provided by applicable law and
except that, among other things,
holders will be entitled to vote
together as a separate class (with
the holders of shares of any other
series of preferred stock of the
Company having similar rights) to
elect two directors of the Company
if the equivalent of six quarterly
dividends payable on the Preferred
Stock are in arrears. In addition,
so long as any Preferred Stock is
outstanding the Company will not,
without the affirmative vote or
consent of the holders of at least
66 2/3% of all outstanding shares of
both series of Preferred Stock and
outstanding Parity Dividend Stock
(as defined herein) (voting as a
single class), take certain actions
so as adversely to affect the
relative rights, preferences,
qualifications, limitations, or
restrictions of either series of
Preferred Stock, authorize or issue,
or increase the authorized amount of
any Senior Dividend Stock, Senior
Liquidation Stock (as such terms are
defined herein) or any security
convertible into such Senior
Dividend Stock or Senior Liquidation
Stock or effect any reclassification
of either series of Preferred Stock.
Each share of Preferred Stock will be
entitled to one vote on matters on
which holders of such shares are
entitled to vote.
Federal Income Tax
Consequences........................ In the opinion of Davis Polk &
Wardwell, there are certain Federal
income tax consequences associated with
purchasing, holding and disposing of
the Preferred Stock, including the
fact that an exchange of the Series
A Exchangeable Preferred Stock for
Notes or a redemption of shares of
Preferred Stock for cash will be a
taxable transaction and may be
taxable as a dividend. See "Certain
Federal Income Tax Consequences."
SUMMARY FINANCIAL DATA
(a) The summary unaudited pro forma statement of operations data for the year
ended December 31, 1996 present the results of operations of the Company
assuming the Roche Loan, the Settlement Payment, the Rights Offering and
the application of the proceeds therefrom and effectiveness of the Amended
Credit Agreement had occurred as of the beginning of 1996. For a
complete description of the assumptions underlying the pro forma amounts,
see "Unaudited Pro Forma Financial Information."
(b) In April 1995, the Company completed the Merger. RBL's results of
operations have been included in the Company's results of operations since
April 28, 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General" and Note 2 of the Notes to
Consolidated Financial Statements.
(c) In June 1994, the Company completed the Allied Acquisition. Allied's
results of operations have been included in the Company's results of
operations since June 23, 1994. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--General" and Note 2 of
the Notes to Consolidated Financial Statements.
(d) 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 following the Merger. The Company recorded a
restructuring charge totaling $13.0 million for the shutdown of its La
Jolla, California administrative facility and other workforce reductions.
In addition, the Company recorded $10.0 million in non-recurring charges
in the second quarter of 1996 related to the integration of its operations
following the Merger. See Note 3 of the Notes to Consolidated Financial
Statements. As a result of negotiations with the OIG and DOJ related to
the 1996 Government Settlement, the Company recorded the Settlement Charge
of $185.0 million in the third quarter of 1996 to increase accruals for
settlements and related expenses of government and private claims
resulting from these investigations. See "Regulation and
Reimbursement--1996 Government Settlement."
(e) In 1995, following the Merger, the Company determined that it would be
beneficial to close certain laboratory facilities and eliminate duplicate
functions in certain geographic regions where duplicate NHL and RBL
facilities or functions existed at the time of the Merger. The Company
recorded restructuring charges of $65.0 million in connection with these
plans. See Note 3 of the Notes to Consolidated Financial Statements.
Also in 1995, the Company recorded a pre-tax special charge of $10.0
million in connection with the estimated costs of settling various
claims pending against the Company, substantially all of which were
billing disputes with various third party payors relating to the
contention that NHL improperly included tests for HDL cholesterol and
serum ferritin in its basic test profile without clearly offering an
alternative profile that did not include these medical tests. As of
December 31, 1996, the majority of these disputes have been settled.
(f) In the fourth quarter of 1992, the Company recorded a charge against
operating income of $136.0 million related to the 1992 NHL Government
Settlement (as defined herein). See "Regulation and Reimbursement--OIG
Settlement--1992 NHL Government Settlement."
(g) In 1994, the Company approved a settlement of shareholder class and
derivative litigation. In connection with the settlement, the Company
recorded a pre-tax special charge of $15.0 million and a $6.0 million
charge for expenses related to the settled litigation. Insurance payments
and payments from other defendants amounted to $55.0 million plus
expenses. The litigation consisted of two consolidated class action
suits filed in December 1992 and November 1993 and a consolidated
shareholder derivative action brought in Federal and state courts in
San Diego, California. The settlement involved no admission of
wrongdoing and all payments under the settlement agreement have been
paid.
(h) Represents a one-time pretax gain comprised of expense reimbursement and
termination fees of $21.6 million in connection with the Company's attempt
to purchase Damon Corporation, a competing independent clinical
laboratory, less related expenses and write-off of certain bank
financing costs of $6.3 million.
(i) In connection with the repayment in 1995 of existing revolving credit and
term loan facilities in connection with the Merger, the Company recorded
an extraordinary loss of approximately $13.5 million ($8.3 million, net of
tax), consisting of the write-off of deferred financing costs, related to
the early extinguishment of debt.
(j) The Company made the Settlement Payment in December 1996 with the proceeds
of the Roche Loan.
(k) EBITDA represents income (loss) before net interest expense, provision for
income taxes, depreciation and amortization expense and extraordinary
items. While EBITDA is not intended to represent cash flow from
operations as defined by generally accepted accounting principles
("GAAP") (and should not be considered as an indicator of operating
performance or an alternative to operating income or cash flow (as
measured by GAAP)), as a measure of liquidity, management believes it
provides additional information with respect to the ability of the
Company to meet its future debt service, capital expenditure and
working capital requirements. EBITDA may not be comparable to other
measures of liquidity and excludes components of net income (loss)
which are significant in understanding the Company's financial
performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
(l) Adjusted EBITDA represents income (loss) before net interest expense,
provision for income taxes, depreciation and amortization, extraordinary
items, a provision for settlements and related expenses, restructuring
charges and nonrecurring expenses. While Adjusted EBITDA is not intended
to represent cash flow from operations as defined by GAAP (and should not
be considered as an indicator of operating performance or an alternative
to operating income or cash flow (as measured by GAAP)), as a measure of
liquidity, management believes it provides additional information with
respect to the ability of the Company to meet its future debt service,
capital expenditure and working capital requirements. Adjusted EBITDA may
not be comparable to other measures of liquidity and excludes components
of net income (loss) which are significant in understanding the Company's
financial performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
(m) For the purpose of calculating the ratio of earnings to combined fixed
charges and preferred stock dividends (i) earnings consist of income
before provision for income taxes and fixed charges and (ii) fixed
charges consist of interest expense and one-third of rental expense
which is deemed representative of an interest factor. For the year
ended December 31, 1996, earnings were insufficient to cover fixed
charges and preferred stock dividends by $188.3 million. For the year
ended December 31, 1996, pro forma earnings would have been
insufficient to cover combined fixed charges and preferred stock
dividends by $227.4 million.
(n) The summary unaudited pro forma consolidated balance sheet data as of
December 31, 1996 presents the financial position of the Company
adjusted to give pro forma effect to the Roche Loan, the Settlement
Payment, the Rights Offering and the application of the proceeds
therefrom and effectiveness of the Amended Credit Agreement. For a
complete description of the assumptions underlying the pro forma
amounts, see "Unaudited Pro Forma Financial Information."
(o) Total debt includes a capital lease obligation of $9.8 million, $9.6
million, $9.8 million, $9.7 million and $9.6 million at December 31, 1996,
1995, 1994, 1993 and 1992, respectively. Total debt also includes the
expected value of future contractual and contingent amounts to be paid to
the principals of acquired laboratories. Such payments are principally
based on a percentage of future revenues derived from the acquired
customer lists or specified amounts to be paid over a period of time.
At December 31, 1996, 1995, 1994, 1993 and 1992, such amounts were
$27.7 million, $23.3 million, $35.1 million, $26.8 million and $4.6
million, respectively. In December 1996, the Company received a loan
of $187 million from Roche Holdings to fund the Settlement Payment.
Such loan bears interest at a rate of 6.625% per annum and matures on
March 31, 1998.
RISK FACTORS
In addition to the other information in this Prospectus, the
following factors should be considered carefully in evaluating an investment
in the securities offered hereby.
Substantial Leverage. Following the Rights Offering, the
Company will continue to be highly leveraged. As of December 31, 1996, after
giving pro forma effect to the Rights Offering and the application of the
proceeds therefrom, the Company would have had total indebtedness of $823.0
million and stockholders' equity of $247.4 million. For the year ended
December 31, 1996, pro forma earnings would have been insufficient to cover
combined fixed charges and preferred stock dividends by $227.4 million. Pro
forma net interest expense for the fiscal year ended December 31, 1996 would
have been $56.6 million. The Company may incur additional indebtedness in the
future, including as a result of the exchange of the Series A Exchangeable
Preferred Stock for Notes, subject to limitations imposed by the Amended
Credit Agreement. See "Capitalization" and "Unaudited Pro Forma Financial
Statements." As a result of potential defaults under the Existing Credit
Agreement resulting from, among other things, the Company's performance and
higher than projected debt levels, the Settlement Charge and the Roche Loan,
the Company has entered into various amendments and obtained waivers of
certain covenants thereunder. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Borrowings under the
Company's revolving credit facility of $450.0 million (the "Revolving Credit
Facility") under the Existing Credit Agreement were $384.0 million as of March
31, 1997. Cash and cash equivalents on hand, cash flow from operations and
additional borrowing capabilities of $66.0 million as of March 31, 1997 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 through 1997. The Company's
ability to meet anticipated operating requirements, debt repayments,
including the Roche Loan which matures on March 31, 1998, and other
anticipated cash outlays beyond 1997 is substantially dependent upon the
completion of the Rights Offering. Failure to complete the Rights Offering
by the end of February 1998 will require additional waivers or amendments
to the Existing Credit Agreement. There can be no assurance that such
waivers or amendments can be obtained. Therefore, the failure to complete
the Rights Offering by the end of February 1998 could have a material
adverse effect on the Company's financial condition and liquidity.
The level of the Company's indebtedness could have important
consequences to holders of the Company's securities, including but not limited
to the following: (i) a substantial portion of the Company's cash flow from
operations will be required to be dedicated to debt service and will not be
available for other purposes; (ii) the Company's ability to obtain additional
debt financing in the future for working capital and capital expenditures
could be limited; (iii) the Company may be more vulnerable to extended
economic downturns and may be restricted in exploiting business
opportunities; (iv) the Amended Credit Agreement contains financial and
restrictive covenants that limit the ability of the Company to, among other
things, borrow additional funds, dispose of assets, pay cash dividends in
the event of a default, including dividends on the Preferred Stock and pay
interest on the Notes, and failure by the Company to comply with such
covenants could result in an event of default which, if not cured or
waived, could have a material adverse effect on the Company and (v) the
Company's level of indebtedness could limit its flexibility in planning
for, or reacting to, changes in market conditions, including adverse
governmental regulations (including reductions in the amounts reimbursable
to the Company under Medicare and Medicaid). See "--Limitations on Third
Party Payor Reimbursement of Health Care Costs." In addition, pursuant to
the terms of the Preferred Stock, if dividends on the Series A Exchangeable
Preferred Stock were to be limited pursuant to the Amended Credit Agreement
prior to , 2003, the Company's ability to pay dividends in kind on the
Series B PIK Preferred Stock would also be limited. Furthermore, the
ability of the Company to satisfy its obligations will be dependent upon
its future performance and market conditions, which will be subject to
prevailing economic conditions and to financial, business and other
factors, including factors beyond the Company's control. In addition,
because the borrowings outstanding under the Amended Credit Agreement bear
interest at a floating rate, the Company's financial performance may be
adversely affected by increases in interest rates. The Amended Credit
Agreement provides that in the event of a reduction of the percentage of
Common Stock held by HLR, Roche Holdings and their affiliates (other than
the Company and its subsidiaries) below 25%, the applicable interest
margins and facility fees on borrowings outstanding under the Amended
Credit Agreement will increase. The amount of the increase will depend, in
part, on the leverage ratio of the Company at the time of such reduction.
In addition, pursuant to the Amended Credit Agreement, the applicable
interest margins on borrowings outstanding thereunder are based upon the
leverage ratio. See "Description of Amended Credit Agreement".
In addition, Notes issued upon exchange of the Preferred Stock
will be subordinated to all Senior Indebtedness. Following the Rights
Offering, approximately $786.1 million of Senior Indebtedness will be
outstanding. There will be no restrictions on the creation of Senior
Indebtedness in the Indenture.
Limitations on Third Party Payor Reimbursement of Health Care
Costs. The health care industry is undergoing significant change as third
party payors, such as Medicare and Medicaid and insurers, increase their
efforts to control the cost of health care services. During the year ended
December 31, 1996, the Company derived approximately 18% and 5% of its net
revenues from tests performed for beneficiaries of Medicare and Medicaid
programs, respectively. The Company's business depends significantly on
continued participation in these programs and the Company is required by law
to accept reimbursement from Medicare and Medicaid as payment in full for
covered tests performed for Medicare and Medicaid beneficiaries. In an effort
to address the problem of increasing health care costs, legislation has been
proposed at both Federal and state levels to further regulate health care
delivery in general and clinical laboratories in particular and legislation
has been enacted that reduces the amounts reimbursable to the Company and
other independent clinical laboratories under Medicare and Medicaid, the
levels of which have declined steadily since 1984. See "Regulation and
Reimbursement--General--Regulation Affecting Reimbursement of Clinical
Laboratory Services." Such reductions have negatively impacted the Company's
net sales, cost of sales as a percentage of net sales and selling, general and
administrative expenses as a percentage of net sales. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Congress passed a bill (the Medicare Preservation Act) that would have further
reduced the amounts reimbursable to the Company and other clinical
laboratories, but the bill was vetoed by the President. In addition,
effective January 1, 1996, HCFA adopted a new policy on reimbursement for
chemistry panel tests. As of January 1, 1996, 22 automated tests (rather than
19 tests) became reimbursable by Medicare as part of an automated chemistry
profile. HCFA retains the authority to expand in the future the list of tests
included in a panel. Effective as of March 1, 1996, HCFA eliminated its prior
policy of permitting payment for all tests contained in an automated chemistry
panel when at least one of the tests in the panel is medically necessary.
Under the new policy, Medicare payment will not exceed the amount that would
be payable if only the tests that are "medically necessary" had been ordered.
In addition, since 1995 most Medicare carriers have begun to require clinical
laboratories to submit documentation supporting the medical necessity, as
judged by ordering physicians, for commonly ordered tests. The Company has
incurred and expects to continue to incur additional reimbursement reductions
and additional costs associated with the implementation of these requirements
of HCFA and Medicare carriers. These and other proposed changes affecting the
reimbursement policy of Medicare and Medicaid programs could have a material
adverse effect on the business, results of operations or financial condition
of the Company. In particular, the Company has experienced lower collection
rates beginning in the second quarter of 1996 as a result of these more
stringent medical necessity requirements. See "--Collection Rates from Third
Party Payors."
Collection Rates from Third Party Payors. During the fourth
quarter of 1995 and the second quarter of 1996, the Company recorded pre-tax
special charges of $15.0 million and $10.0 million, respectively, based on the
Company's determination that additional reserves were needed to cover
potentially lower collection rates from several third-party payors. In
addition, the Company increased its monthly provision for doubtful accounts
beginning in the third quarter of 1996. Increased medical necessity and
related diagnosis code requirements of the Medicare program were placed on the
Company by certain third party carriers in late 1995 and additional
requirements were placed on the Company at the beginning of 1996. The Company
expects accounts receivable balances to continue to exceed 1995 levels as a
result of these more stringent requirements. In addition, increased
difficulty in collecting amounts due from private insurance including certain
managed care plans has negatively impacted operating cash flow. Finally,
Merger related integration issues have also resulted in increased accounts
receivable balances as a result of the Company maintaining multiple billing
information systems. Although the Company currently has plans in place to
improve the collection of accounts receivable and stabilize collection rates,
to date, collection rates continue to decline despite these measures.
Moreover, additional changes in requirements of third-party payors could
increase the difficulties in collections. There can be no assurance that such
trends will be reversed or that additional reserves will not be required. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Role of Managed Care. Managed care organizations play a
significant role in the health care industry and their role is expected to
increase over the next several years. Managed care organizations typically
negotiate capitated payment contracts, whereby a clinical laboratory receives
a fixed monthly fee per covered individual, regardless of the number or cost
of tests performed per covered individual and regardless of the number or cost
of tests performed during the month (excluding certain tests, such as esoteric
tests and anatomic pathology services). Laboratory services agreements with
managed care organizations have historically been priced aggressively due to
competitive pressure and the expectation that a laboratory would capture not
only the volume of testing to be covered under the contract, but also the
additional fee-for-services business from patients of participating physicians
who are not covered under the managed care plan. However, as the number of
patients covered under managed care plans continues to increase, there is less
such fee-for-service business and, accordingly, less high margin business to
offset the low margin (and often unprofitable) managed care business.
Furthermore, increasingly, physicians are affiliated with more than one
managed care organization and as a result may be required to refer clinical
laboratory tests to different clinical laboratories, depending on the coverage
of their patients. As a result, a clinical laboratory might not receive any
fee-for-service testing from such physicians. The increase in managed care
has also resulted in declines in the utilization of laboratory testing
services. See "Business--Clients and Payors" and "Business--The Clinical
Laboratory Testing Industry." During the year ended December 31, 1996,
services to managed care organizations under capitated rate agreements
accounted for approximately 4% of the Company's net revenues from clinical
laboratory testing and approximately 10% of the volume of specimens or
accessions tested by the Company. As discussed below, the Company has
begun an active effort to improve the profitability of new and existing
business. The Company has experienced some volume declines as a result of
this effort, however, the fourth quarter of 1996 was the second consecutive
quarter since the Merger that the Company's price per accession or specimen
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 to other clinical laboratories who
continue to aggressively price laboratory services agreements with managed
care organizations. In addition, despite such efforts, the Company may
experience declines in per test revenue as managed care organizations
continue to increase their share of the health care insurance market.
Implementation of New Business Strategy. During the third
quarter of 1996, management began implementing a new business strategy in
response to the Company's declining performance. See "Business--Strategy."
Management expects this new business strategy will likely result in lower
volumes as a result of selectively repricing or discontinuing business with
existing accounts which perform below Company expectations. However,
management also believes that such measures along with other cost reduction
programs will improve the Company's overall profitability. The Company's
future results and financial condition are dependent on the successful
implementation of this new business strategy. While the Company believes that
this strategy will enable it to improve its financial results, there can be no
assurance that this new strategy will be successful, that the anticipated
benefits of this new strategy will be realized, that management will be able
to implement such strategy on a timely basis, that the Company will return to
profitability levels experienced prior to 1995 or that losses will not
continue in the future.
Recent Operating Losses. Following the Merger, the Company
experienced a loss in 1995 and 1996. While such losses are largely
attributable to costs incurred in connection with the Merger, the related
restructuring described below and the Settlement Charge, there can be no
assurance that losses will not continue in the future. See "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Result of Operations." As a result, the Company had
an accumulated deficit of $0.6 million and $154.1 million as of December 31,
1995 and December 31, 1996, respectively.
Recent Restructuring. In connection with the Merger, the
Company recorded a second quarter pre-tax special charge of $65.0 million in
1995 and $23.0 million in 1996 relating to the restructuring and integration
of its operations following the Merger. In addition, in the second quarter of
1995, the Company had an extraordinary loss of $8.3 million, net of taxes,
related to early extinguishment of debt in connection with the Merger. While
the Company believes that these charges should be sufficient to cover all
expenses associated with the Merger and related restructuring, in the event
such costs are higher than anticipated, or additional restructuring charges
are taken, either in connection with the Merger or otherwise, this could have
a material adverse effect on the Company's results of operations or financial
condition.
Intense Competition. The independent clinical laboratory
industry in the United States is intensely competitive. The following
factors, among others, are often used by health care providers in selecting a
laboratory: (i) pricing of the laboratory's testing services; (ii) accuracy,
timeliness and consistency in reporting test results; (iii) number and type
of tests performed; (iv) service capability and convenience offered by the
laboratory; and (v) its reputation in the medical community. The Company
believes that in 1996 approximately 50% of the revenues of the clinical
laboratory testing industry was generated by hospital-affiliated laboratories,
approximately 35% by independent clinical laboratories and 15% by thousands of
individual physicians in their offices and laboratories. Independent clinical
laboratories fall into two separate categories: (1) smaller, generally local,
laboratories that generally offer fewer tests and services and have less
capital than the larger laboratories, and (2) larger laboratories such as the
Company that provide a broader range of tests and services. The Company has
two major competitors that operate in the national market--SmithKline Beecham
Clinical Laboratories, Inc. ("SmithKline") and Quest Diagnostics Incorporated,
formally known as Corning Clinical Laboratories ("Quest"). There are also
many independent clinical laboratories that operate regionally and that
compete with the Company in these regions. In addition, hospitals are in
general both competitors and clients of independent clinical laboratories.
The independent clinical laboratory testing industry has experienced intense
price competition over the past several years, which has negatively impacted
the Company's profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." There can be no assurance
that the Company will be able to compete successfully with its existing or any
new competitors or that competitive pressures faced by the Company will not
materially and adversely affect its results of operations or financial
condition. See "Business--Competition."
Governmental Regulation. The clinical laboratory industry is
subject to significant governmental regulation at the Federal, state and local
levels. The Company's laboratories are required to be certified or licensed
under the Clinical Laboratory Improvement Act of 1967 and the Clinical
Laboratory Improvement Amendments of 1988 (collectively, as amended, "CLIA"),
and approved to participate in the Medicare and Medicaid programs. Currently,
all clinical laboratories, including most physician-office laboratories
("POLs"), are required to comply with CLIA. However, the Medicare
Preservation Act, passed in 1995 by both Houses of Congress, would have
largely exempted POLs from having to comply with CLIA (except with respect to
pap smear tests). Although this provision was not maintained by the House
Senate conference and was not included in the subsequent legislation, it could
be reintroduced at any time. The exemption of POLs from CLIA would
significantly reduce their costs, making them more financially viable and a
greater competitive challenge to the Company and would more likely encourage
physicians to establish laboratories in their offices.
A wide array of Medicare/Medicaid fraud and abuse provisions
apply to clinical laboratories participating in such programs. Penalties for
violations of these Federal laws include exclusion from participation in the
Medicare/Medicaid programs, asset forfeitures and other civil and criminal
penalties. Civil penalties for a wide range of offenses may be up to $10,000
per item plus three times the amount claimed. In the case of certain
offenses, exclusion from participation in Medicare and Medicaid is a mandatory
administrative penalty. The OIG interprets these fraud and abuse
administrative provisions liberally and enforces them aggressively.
Provisions in a bill enacted in August 1996 are likely to expand the Federal
government's involvement in curtailing fraud and abuse due to the
establishment of (i) an anti-fraud and abuse trust fund funded through the
collection of penalties and fines for violations of such laws and (ii) a
health care anti-fraud and abuse task force. As part of an examination of the
rapid growth of Federal expenditures for clinical laboratory services, several
Federal agencies, including the Federal Bureau of Investigation, the OIG and
the DOJ, have investigated allegations of fraudulent and abusive conduct by
health care providers. On November 21, 1996, the Company reached a settlement
with the OIG and the DOJ regarding the prior billing practices of various of
its predecessor companies. Consistent with this overall settlement, the
Company paid $187 million to the Federal Government in December 1996 with
proceeds from a loan from Roche Holdings. Additional investigations by the
OIG in 1992 and 1994 were settled for $111.4 million in 1992 and $4.9 million
in 1995, respectively. See "Regulation and Reimbursement--OIG
Investigations."
The Company is also subject to licensing and regulation under
Federal, state and local laws and regulations relating to the protection of
the environment and human health and safety, including those relating to the
handling, transportation and disposal of medical specimens, infectious and
hazardous waste and radioactive materials as well as to the safety and health
of laboratory employees. The sanction for failure to comply with these
regulations may be denial of the right to conduct business, significant fines
and criminal penalties. The loss of a license, imposition of a fine,
incurrence of liability under, or future changes in, such Federal, state and
local laws and regulations (or in the interpretation of current laws and
regulations) could have a material adverse effect on the Company and its
subsidiaries.
Professional Liability Litigation. As a general matter,
providers of clinical laboratory testing services may be subject to lawsuits
alleging negligence or other similar legal claims, which suits could involve
claims for substantial damages. Damages assessed in connection with, and the
costs of defending any such actions could be substantial. Litigation could
also have an adverse impact on the Company's client base. The Company
maintains liability insurance (subject to maximum limits and self-insured
retentions) for professional liability claims. This insurance does not cover
liability for the Settlement Payment. While there can be no assurance, the
Company's management believes that the levels of coverage are adequate to
cover currently estimated exposures. Although the Company believes that it
will be able to obtain adequate insurance coverage in the future at acceptable
costs, there can be no assurance that the Company will be able to obtain such
coverage or will be able to do so at an acceptable cost or that the Company
will not incur significant liabilities in excess of policy limits.
No Assurance of Dividends-received Deduction. There is no
assurance that the Company will have earnings and profits for Federal income
tax purposes. Dividends paid to corporate holders that are in excess of the
Company's earnings and profits would not qualify for the intercorporate
dividends-received deduction. See "Certain Federal Income Tax Consequences."
Substantial Stockholder; Ability of Substantial Stockholder to
Increase Ownership. As a result of the Merger, HLR and Roche Holdings
received 49.9% of the total outstanding Common Stock of the Company. In
connection with the Merger, the Company, HLR, Roche Holdings and Hoffmann-La
Roche Inc. entered into the Stockholder Agreement. As a result of its
ownership interest and its rights under the Stockholder Agreement, Roche is
able to exercise significant influence on the governance of the Company and on
the composition of its board of directors. Pursuant to the Stockholder
Agreement, the Board of Directors of the Company (subject to specified
exceptions) is comprised of seven members, consisting of three designees of
HLR and Roche Holdings (the "Roche Directors") and four Independent Directors
(as defined therein) nominated by the Nominating Committee of the board of
directors. The Nominating Committee consists of one Roche Director and two
Independent Directors and acts by a majority vote of the entire committee.
There can be no assurance that the interests of HLR and Roche Holdings will be
the same as those of the other stockholders of the Company. Pursuant to the
Stockholder Agreement, HLR, Roche Holdings and their affiliates (other than
the Company and its subsidiaries) have the right to acquire Equity Securities
(as defined therein) to the extent that, after giving effect thereto, their
Total Voting Power would not exceed 75%. Moreover, HLR, Roche Holdings and
their affiliates (other than the Company and its subsidiaries) may acquire
additional Equity Securities notwithstanding the fact that after giving effect
thereto, their Total Voting Power would exceed 75%, if HLR, Roche Holdings and
their affiliates (other than the Company and its subsidiaries) or any one of
them offers, prior to consummation of such purchase, to purchase all
outstanding Equity Securities and holders of Equity Securities totaling more
than 50% of the outstanding Equity Securities (excluding Equity Securities
held by HLR, Roche Holdings and their affiliates (other than the Company and
its subsidiaries)) accept such offer. After the third anniversary of the
Merger, the Stockholder Agreement does not restrict purchases by HLR, Roche
Holdings or their affiliates of Equity Securities. Certain provisions of the
Stockholder Agreement described above, including provisions limiting HLR's and
Roche Holding's representation on the Board of Directors of the Company to
three of seven members, would be suspended if the Total Voting Power of HLR,
Roche Holdings and their affiliates (other than the Company and its
subsidiaries) were to be increased to over 50%. HLR and Roche Holdings have
indicated that they intend to exercise their Basic Subscription Privilege and
Oversubscription Privilege in the Rights Offering in full for Series B PIK
Preferred Stock (subject, in the case of the Oversubscription Privilege, to
reduction in certain circumstances). As a result, if no other Rights are
exercised, HLR and Roche Holdings will purchase 10,000,000 shares of Series B
PIK Preferred Stock. Consequently, following conversion of all of the
Preferred Stock, HLR and Roche Holdings will own a minimum of 49.9% and a
maximum of % of the total outstanding Common Stock of the Company. See
"Certain Relationships and Related Transactions--The Stockholder Agreement."
In addition, as HLR and Roche Holdings will own a minimum of 49.9% of the
Preferred Stock, they will be in a position to exert significant influence on
any matter on which the Preferred Stock is entitled to vote. See "Description
of Preferred Stock--Voting Rights."
Special Majority Board Approval Required for Certain Actions.
Under the Stockholder Agreement, for so long as the Total Voting Power of HLR,
Roche Holdings and their affiliates (other than the Company and its
subsidiaries) or any one of them is at least 30%, a significant number of
types of major corporate actions cannot be taken without the approval of a
Special Majority of the Board of Directors (which is defined in the
Stockholder Agreement as a majority of the entire Board of Directors that
includes a majority of the Roche Directors and at least one Independent
Director). These actions include, among others, certain executive officer
appointments, certain business combinations, acquisitions or sales of assets,
amendments to the Company's Certificate of Incorporation or by-laws,
settlements of material litigation, changes in Board or committee composition,
material capital expenditures, issuance of securities and incurrence of
indebtedness.
Equity Market Considerations. There can be no assurance that
the market price of the Common Stock will not decline during or after the
subscription period or that, following the issuance of the Rights and the sale
of the Preferred Stock upon exercise of Rights, a subscribing Rights Holder
will be able to sell shares purchased in the Rights Offering at a price
greater than the Subscription Price. The election of a Rights Holder to
exercise Rights in the Rights Offering is irrevocable. Moreover, until
certificates are delivered, subscribing Rights Holders may not be able to sell
the Preferred Stock that they have purchased in the Rights Offering. In
addition, the Company reserves the right to extend the period for the Rights
Offering to a date not later than , 1997. Certificates
representing shares of Preferred Stock purchased in the Rights Offering will
be delivered as soon as practicable after the Expiration Date. There can be
no assurance that the market price of the Preferred Stock purchased pursuant
to the Rights Offering will not decline below the Subscription Price before
the certificates representing such shares have been delivered. No interest
will be paid to any subscriber in the Rights Offering.
No Prior Market for the Rights, the Preferred Stock or the
Notes. The Rights, Series A Exchangeable Preferred Stock and Series B PIK
Preferred Stock constitute new issues of securities with no established
trading market. Application has been made to have the Preferred Stock approved
for listing on the New York Stock Exchange. It is unlikely, however, that the
Series B PIK Preferred Stock will be accepted for listing on the NYSE as it is
expected that following the Rights Offering the Series B PIK Preferred Stock
will be held by fewer than 100 holders. In addition, there can be no
assurance that an active market for the Rights or the Series A Exchangeable
Preferred Stock will develop or be sustained in the future on the New York
Stock Exchange. Although Credit Suisse First Boston has indicated to the
Company that it intends to make a market in the Rights, and, following the
Rights Offering, the Preferred Stock, as permitted by applicable laws and
regulations, it is not obligated to do so and may discontinue any such
market-making at any time without notice. Accordingly, no assurance can be
given as to the liquidity of, or trading market for, the Rights or the
Preferred Stock, particularly the Series B PIK Preferred Stock.
There is currently no market for the Notes. The Company does
not intend to apply for listing of the Notes on any national securities
exchange. The Company has been advised by Credit Suisse First Boston that,
following exchange of the Series A Exchangeable Preferred Stock for Notes,
they presently intend to make a market in the Notes although they are under no
obligation to do so and may discontinue market-making activities at any time
without notice. Accordingly, there can be no assurance as to whether an
active public market for the Notes will develop or, if a public market
develops, as to the liquidity of the trading market for the Notes.
Insufficient Authorized Capital to Permit Conversion and
Payment of Dividends on Series B PIK Preferred Stock; Dilution. There are
currently insufficient shares of Common Stock authorized to permit conversion
of all of the Preferred Stock issued upon the exercise of Rights or as
dividends on the Series B PIK Preferred Stock and insufficient shares of
Preferred Stock authorized to permit the payment of dividends on the Series B
PIK Preferred Stock if all the Preferred Stock offered hereby is sold. In
connection with the next annual meeting of shareholders currently scheduled
for , 1997, the Board of Directors will propose amending the
Company's Certificate of Incorporation to increase (i) the authorized number
of shares of Common Stock to permit the conversion of all of the Preferred
Stock and (ii) the authorized number of shares of Preferred Stock to permit
the payment of dividends on the Series B PIK Preferred Stock. HLR, Roche
Holdings and the directors and executive officers of the Company have
indicated to the Company that they intend to vote in favor of such amendment.
Rights Holders may experience dilution of their percentage of equity ownership
interest and voting power in the Company if and when all of the shares of
Preferred Stock are converted into shares of Common Stock in accordance with
their terms, if they do not exercise the Basic Subscription Privilege. Even
if the Rights Holders exercise their Basic Subscription Privilege in full,
they may nevertheless still experience dilution in their voting rights and in
their proportional interest in any future net earnings of the Company if other
holders of Rights exercise the Oversubscription Privilege and such Rights
Holders elect not to exercise the Oversubscription Privilege, if and when all
of the shares of Preferred Stock are converted into shares of Common Stock in
accordance with their terms. In addition, Rights Holders who exercise Rights
for Series A Exchangeable Preferred Stock will experience dilution as
dividends on the Series B PIK Preferred Stock are paid in shares of Series B
PIK Preferred Stock.
Shares of Common Stock Eligible for Future Sale. In accordance
with the Sharing and Call Option Agreement dated as of December 13, 1994 (the
"Sharing and Call Option Agreement") among HLR, Mafco Holdings Inc. ("Mafco"),
all of the capital stock of which is owned by Mr. Ronald O. Perelman and
National Healthcare Group, Inc., ("NHCG"), a wholly owned subsidiary of Mafco,
the Company has filed with the Commission a registration statement on Form S-3
which has been declared effective by the Securities and Exchange Commission
(the "Commission") and includes a resale prospectus that permits NHCG (or any
of its pledgees) to sell shares of Common Stock and Warrants received by NHCG
in the Merger without restriction. In addition, pursuant to the Stockholder
Agreement and the Sharing and Call Option Agreement, HLR, Roche Holdings and
NHCG, have been granted demand and piggy-back registration rights with respect
to shares of Common Stock owned by them. HLR and Roche Holdings on the one
hand and NHCG on the other hand own 49.9% and 11.8%, respectively, of the
outstanding Common Stock of the Company. Although the Company cannot make any
prediction as to the effect, if any, that sales in the public market of shares
of Common Stock owned by HLR, Roche Holdings and NHCG would have on the market
price for the Preferred Stock or Common Stock prevailing from time to time,
sales of substantial amounts of Common Stock or the availability of such
shares for sale could adversely affect prevailing market prices.
Volatility of Price of Common Stock. The market price of the
Company's Common Stock has been highly volatile in recent years and on January
7, 1997 reached a 52-week low of $2 1/2. Factors such as quarter-to-quarter
variations in the Company's revenues and earnings have caused and are expected
to continue to cause the market price of the Company's securities to fluctuate
significantly. In addition, in recent years the stock markets have
experienced significant volatility, which often may be unrelated to the
operating performance of the affected companies. Such volatility may also
adversely affect the market price of the Company's securities. See "Common
Stock Price Range."
Forward Looking Statements
This Prospectus contains certain forward looking statements
concerning the Company's operations, economic performance and financial
condition, including, in particular, forward looking statements regarding the
Company's expectation of future performance following implementation of its
new business strategy, consummation of the Rights Offering and effectiveness
of the Amended Credit Agreement. Such statements are subject to various risks
and uncertainties. Actual results could differ materially from those
currently anticipated due to a number of factors, including those identified
under "Risk Factors," under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Prospectus.
USE OF PROCEEDS
The gross proceeds of the Rights Offering will be used to (i)
repay $298 million outstanding under the Existing Credit Agreement which bears
interest at LIBOR plus 1.0% per annum, (ii) pay fees and expenses of
approximately $15 million related to the Rights Offering and the Amended
Credit Agreement and (iii) repay the $187 million loan from Roche Holdings in
order to fund the Settlement Payment, which bears interest at 6.625% per annum
and matures on March 31, 1998.
COMMON STOCK PRICE RANGE
The Company's Common Stock is traded publicly on the New York
Stock Exchange under the symbol "LH." The following table sets forth for the
calendar periods indicated the high and low sales prices for the Common Stock
reported on the NYSE Composite Tape.
High Low
------ ------
1995
First Quarter........................... 15 1/2 12 5/8
Second Quarter.......................... 15 1/4 11 3/4
Third Quarter........................... 14 9 1/8
Fourth Quarter.......................... 10 8 1/8
1996
First Quarter........................... 9 3/8 7 1/4
Second Quarter.......................... 9 7 3/8
Third Quarter........................... 7 5/8 3 1/4
Fourth Quarter.......................... 3 7/8 2 3/8
1997
First Quarter........................... 4 2 1/2
Second Quarter (through April 7, 1997).. 3 3/8 2 3/4
On April 7, 1997 there were approximately 950 holders of record
of the Common Stock.
DIVIDEND POLICY
In connection with the Allied Acquisition in June 1994, the
Company discontinued its dividend payments for the foreseeable future. The
Amended Credit Agreement will expressly permit cash dividends including cash
dividends on the Preferred Stock in the absence of a default. In addition,
the Company may not pay dividends on the Preferred Stock unless it has paid or
declared and set apart for payment or contemporaneously pays or declares and
sets apart for payment accrued and unpaid dividends for all dividend payment
periods on any class or series of stock having parity with the Preferred Stock
as to dividends (which, in the case of the Series A Exchangeable Preferred
Stock, will include the Series B PIK Preferred Stock and vice versa) ratably,
so that the amount of dividends declared and paid per share on each series of
Preferred Stock will bear to each other the same ratio that the accrued and
unpaid dividends to the date of payment on each series of Preferred Stock bear
to each other.
CAPITALIZATION
The following table sets forth as of December 31, 1996, (i) the
cash and cash equivalents and total capitalization of the Company and (ii)
cash and cash equivalents and total capitalization, adjusted to give pro forma
effect to the Rights Offering, the execution of the Amended Credit Agreement,
the Roche Loan and the Settlement Payment. The proceeds of the Rights
Offering are assumed to be applied as set forth under "Use of Proceeds." See
also "Unaudited Pro Forma Financial Statements." This table should be read in
conjunction with the Consolidated Financial Statements of the Company included
elsewhere and incorporated by reference herein.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial statements for
the year ended December 31, 1996 present the results of operations of the
Company assuming that the Roche Loan, the Settlement Payment, the Rights
Offering and effectiveness of the Amended Credit Agreement had occurred as of
the beginning of the period, in the case of the pro forma statement of
operations, or December 31, 1996, in the case of the pro forma balance sheet.
The proceeds of the Rights Offering have been assumed to be applied as set
forth under "Use of Proceeds". In the opinion of management, the unaudited
pro forma financial statements for the year ended December 31, 1996 include
all material adjustments necessary to restate the Company's historical
results. The adjustments required to reflect such assumptions are described
in the Notes to the unaudited pro forma financial statements and are set forth
in the "Pro Forma Adjustments" columns.
The pro forma financial statements should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere and incorporated by reference herein. The pro forma
financial statements presented are for informational purposes only and may not
necessarily reflect the future results of operations or financial position or
what the results of operations or financial position would have been had the
Roche Loan, the Settlement Payment, the Rights Offering and effectiveness of
the Amended Credit Agreement occurred as assumed herein.
Pro Forma Condensed Combined Consolidated Statement of Operations
Year ended December 31, 1996
(Dollars in millions, except share data)
(Unaudited)
See accompanying Notes to Pro Forma Condensed Combined Consolidated Statements
of Operations.
Notes to Pro Forma Condensed Combined Consolidated Statements of Operations
(1) In December 1996, Roche Holdings loaned $187.0 million to the Company to
fund the Settlement Payment in the form of a promissory note. Such note
bears interest at a rate of 6.625% per annum and matures on March 31,
1998. Such note is assumed to be outstanding at the beginning of the
period and then repaid with proceeds from the Rights Offering. See
Note 2 below.
(2) Assumes the sale of approximately $250 million in Series B PIK Preferred
Stock to HLR and Roche Holdings and approximately $250 million in Series A
Exchangeable Preferred Stock to all other Rights Holders and the
application of the proceeds therefrom to (i) repay the Roche Loan, (ii)
pay fees and expenses of $15 million related to the Amended Credit
Agreement and the Rights Offering and (iii) repay approximately $248
million under the Revolving Credit Facility and $50 million under the
Term Loan Facility. The pro forma adjustment to interest expenses
(based on the interest rate assumptions shown below) reflects the
following:
Year ended
12/31/96
-------------
(in millions)
Paydown of Roche Loan ................................. 12.4
Paydown of Revolving Credit Facility................... 15.4
Paydown on Term Loan Facility.......................... 3.2
Incremental interest under Amended Credit Agreement.... (4.2)
Amortization of deferred financing costs............... (0.7)
Commitment fee on Amended Credit Agreement............. (1.1)
-----
$25.0
=====
The interest rate assumptions used in the foregoing were as follows:
Year ended
12/31/96
----------
Roche Loan................................................ 6.625%
Term Loan Facility........................................ 6.451%
Revolving Credit Facility................................. 6.201%
Incremental interest under Amended Credit Agreement....... 0.625%
Commitment fee on Amended Credit Agreement................ 0.250%
Incremental interest under the Amended Credit Agreement is calculated based
on (i) an average Revolving Credit Facility balance outstanding during the
period of $309.0 million times 0.625% and (ii) 0.625% times the actual
balance outstanding under the Term Loan Facility of $783.3 million on
January 1, 1996 less principal payments of $16.7 million on January 31,
1996, $16.7 million on April 30, 1996, $18.7 million on July 31, 1996
and $18.7 million on October 31, 1996.
The amortization of deferred financing costs is calculated based on total
deferred financing costs of $4.3 million and a weighted average life under
the Amended Credit Agreement of 6.3 years.
The commitment fee on the Amended Credit Agreement is calculated based on a
commitment of $450 million under the Amended Revolving Credit Facility
times 0.25%.
An increase or decrease in the interest rate of one-quarter of one percent
(0.25%) with respect to the pro forma debt capitalization of the Company
would increase or decrease interest expense as follows:
Year ended
12/31/96
----------
(in millions)
Revolving Credit Facility................... $0.5
Term Loan Facility.......................... 2.0
(3) Reflects the change in the provision for income taxes as a result of the
pro forma adjustments. Such tax adjustments were based on the historical
effective tax rates used for the Company's consolidated financial
statements.
(4) Dividends on Series B PIK Preferred Stock and Series A Exchangeable
Preferred Stock are calculated as follows:
Series A
Series B PIK Exchangeable
Preferred Stock (a) Preferred Stock
(in millions) (in millions)
Total liquidation preference $250.0 $250.0
Assumed dividend rate 8.5% 8.5%
DividendsQuarter ended March 31, 1996 $5.3 $5.3
Quarter ended June 30, 1996 5.4 5.3
Quarter ended September 30, 1996 5.6 5.3
Quarter ended December 31, 1996 5.7 5.3
$22.0 $21.2
===== =====
(a) Dividends on Series B PIK Preferred Stock are calculated based on the
initial shares outstanding after the Rights Offering and, in subsequent
quarters, on additional shares issued as paid in kind dividends.
(5) The primary and fully diluted shares assuming that HLR and Roche Holdings
purchase approximately $250 million of Series B PIK Preferred Stock and
that the remaining Rights Holders purchase approximately $250 million in
Series A Exchangeable Preferred Stock, are calculated as follows:
Year ended
12/31/96
--------------
(in thousands)
Historical weighted average shares outstanding............... 122,920
Weighted average shares used for primary earnings per share.. 122,920
Common Stock issuable upon conversion of Preferred Stock..... 181,818
Common Stock issuable upon conversion of PIK dividend........ 2,958
Weighted average shares used for diluted earnings per share.. 307,696
The primary and fully diluted shares, assuming that HLR and Roche Holdings
purchase $500 million of Series B PIK Preferred Stock, are calculated as
follows:
Year ended
12/31/96
--------------
(in thousands)
Historical weighted average shares outstanding.............. 122,920
Weighted average shares used for primary earnings per share. 122,920
Common Stock issuable upon conversion of Preferred Stock.... 181,818
Common Stock issuable upon conversion of PIK dividend....... 5,916
Weighted average shares used for diluted earnings per share. 310,654
(6) For the year ended December 31, 1996, actual and pro forma earnings would
have been insufficient to cover combined fixed charges and preferred stock
dividends by $188.3 million and $227.4 million, respectively.
Pro Forma Condensed Combined Consolidated Balance Sheet
As of December 31, 1996
(Dollars in millions)
(Unaudited)
Pro Forma Pro Forma
Actual Adjustments Combined
-------- ----------- ---------
ASSETS
Current assets:
Cash and cash equivalents.......... $ 29.3 $ 29.3
Accounts receivable, net........... 505.6 505.6
Inventories........................ 44.3 44.3
Prepaid expenses and other......... 21.8 21.8
Deferred income taxes.............. 66.2 66.2
Income taxes receivable............ 54.3 54.3
-------- ------ --------
Total current assets........... 721.5 721.5
Property, plant and equipment, net... 282.9 282.9
Intangible assets, net............... 891.1 891.1
Other assets, net.................... 21.5 4.3(1) 25.8
-------- ------ --------
$1,917.0 $ 4.3 $1,921.3
======== ====== ========
Pro Forma Pro Forma
Actual Adjustments Combined
-------- ----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................... $ 65.7 $ 65.7
Accrued expenses and other............... 168.4 168.4
Current portion of long-term debt........ 18.7 18.7(2)
-------- --------
Total current liabilities............ 252.8 252.8
Loan from affiliate ...................... 187.0 $(187.0)(3)(4) --
Revolving credit facility................. 371.0 (248.0)(4) 123.0
Long-term debt, less current portion...... 693.8 (50.0)(4) 643.8
Capital lease obligation.................. 9.8 9.8
Other liabilities......................... 144.5 144.5
Mandatorily redeemable
preferred stock.......................... -- 500.0 (4) 500.0
Stockholders' equity:
Common stock............................. 1.2 1.2
Additional paid-in capital............... 411.0 (10.7)(1) 400.3
Accumulated deficit...................... (154.1) 154.1
-------- ------- --------
Total stockholders' equity........... 258.1 (10.7) 247.4
-------- ------- --------
$1,917.0 $ 4.3 $1,921.3
======== ======= ========
See accompanying Notes to Pro Forma Condensed Combined Consolidated
Balance Sheet
Notes to Pro Forma Condensed Combined Consolidated Balance Sheet
(1) Reflects estimated fees and expenses of $15.0 million in connection with
the Rights Offering and Amended Credit Agreement, of which $4.3 million
has been capitalized as deferred financing costs and included in the
caption "Other assets". The remainder are deemed to be stock offering
costs and charged against additional paid-in-capital.
(2) In January 1997, the Company made a payment of $18.7 million on the Term
Loan Facility.
(3) In December 1996, Roche Holdings loaned $187.0 million to the Company to
fund the Settlement Payment in the form of a promissory note. Such note
bears interest at a rate of 6.625% per annum and matures on March 31,
1998. Such note is assumed to be repaid with a portion of the proceeds
from the Rights Offering.
(4) Reflects the issuance of approximately $500 million of Preferred Stock in
the Rights Offering and the application of the proceeds therefrom.
SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical financial data
of the Company at the dates and for each of the periods indicated. The
selected financial data as of and for each of the years ended December 31,
1996, 1995 and 1994 have been derived from the Consolidated Financial
Statements and the notes thereto included elsewhere and incorporated by
reference herein. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
As of December 31,
-------------------------------------------------------------------------------
1996 1995(a) 1994(b) 1993 1992
------------ ------------ ------------ ------------ ------------
(Dollars in millions)
Balance Sheet Data:
Cash and cash
equivalents............. $ 29.3 $16.4 $26.8 $12.3 $33.4
Working
capital(m).............. 468.7 249.4 90.2 62.4 32.0
Total assets............. 1,917.0 1,837.2 1,012.7 585.5 477.4
Total debt(m)............ 1,308.0 1,034.2 648.9 341.5 154.2
Total
stockholders' equity.... 258.1 411.6 166.0 140.8 212.5
(a) In April 1995, the Company completed the Merger. RBL's results of
operations have been included in the Company's results of operations since
April 28, 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General" and Note 2 of the Notes to
Consolidated Financial Statements.
(b) In June 1994, the Company completed the Allied Acquisition. Allied's
results of operations have been included in the Company's results of
operations since June 23, 1994. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--General" and Note 2 of
the Notes to Consolidated Financial Statements.
(c) 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 following the Merger. The Company recorded a
restructuring charge totaling $13.0 million for the shutdown of its La
Jolla, California administrative facility and other workforce reductions.
In addition, the Company recorded $10.0 million in non-recurring charges in
the second quarter of 1996 related to the integration of its operations
following the Merger. See Note 3 of the Notes to Consolidated Financial
Statements. As a result of negotiations with the OIG and DOJ related to
the 1996 Government Settlement, the Company recorded a special charge of
$185.0 million in the third quarter of 1996 to increase accruals for
settlements and related expenses of government and private claims resulting
from these investigations. See "Regulation and Reimbursement--1996
Government Settlement."
(d) In 1995, following the Merger, the Company determined that it would be
beneficial to close certain laboratory facilities and eliminate duplicate
functions in certain geographic regions where duplicate NHL and RBL
facilities or functions existed at the time of the Merger. The Company
recorded restructuring charges of $65.0 million in connection with these
plans. See Note 3 of the Notes to Consolidated Financial Statements. Also
in 1995, the Company recorded a pre-tax special charge of $10.0 million in
connection with the estimated costs of settling various claims pending
against the Company, substantially all of which are billing disputes, with
various third party payors relating to the contention that NHL improperly
included tests for HDL cholesterol and serum ferritin in its basic test
profile without clearly offering an alternative profile that did not
include these medical tests. As of December 31, 1996, the majority of
these disputes have been settled.
(e) In the fourth quarter of 1992, the Company recorded a charge against
operating income of $136.0 million related to the 1992 NHL Government
Settlement. See "Regulation and Reimbursement--OIG Settlement--1992 NHL
Government Settlement."
(f) In 1994, the Company approved a settlement of shareholder class and
derivative litigation. In connection with the settlement, the Company
recorded a pre-tax special charge of $15.0 million and a $6.0 million
charge for expenses related to the settled litigation. Insurance payments
and payments from other defendants amounted to $55.0 million plus expenses.
The litigation consisted of two consolidated class action suits filed in
December 1992 and November 1993 and a consolidated shareholder derivative
action brought in Federal and state courts in San Diego, California. The
settlement involved no admission of wrongdoing and all payments under the
settlement agreement have been paid.
(g) Represents a one-time pretax gain comprised of expense reimbursement and
termination fees of $21.6 million in connection with the Company's attempt
to purchase Damon Corporation, a competing independent clinical laboratory,
less related expenses and write-off of certain bank financing costs of $6.3
million.
(h) In connection with the repayment in 1995 of existing revolving credit and
term loan facilities in connection with the Merger, the Company recorded an
extraordinary loss of approximately $13.5 million ($8.3 million, net of
tax), consisting of the write-off of deferred financing costs, related to
the early extinguishment of debt.
(i) The Company made the Settlement Payment in December 1996 with the proceeds
of the Roche Loan.
(j) EBITDA represents income (loss) before net interest expense, provision for
income taxes, depreciation and amortization expense and extraordinary
items. While EBITDA is not intended to represent cash flow from operations
as defined by GAAP (and should not be considered as an indicator of
operating performance or an alternative to operating income or cash flow
(as measured by GAAP)), as a measure of liquidity, management believes it
provides additional information with respect to the ability of the Company
to meet its future debt service, capital expenditure and working capital
requirements. EBITDA may not be comparable to other measures of liquidity
and excludes components of net income (loss) which are significant in
understanding the Company's financial performance. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
(k) Adjusted EBITDA represents income (loss) before net interest expense,
provision for income taxes, depreciation and amortization, extraordinary
items, a provision for settlements and related expenses, restructuring
charges and nonrecurring expenses. While Adjusted EBITDA is not intended
to represent cash flow from operations as defined by GAAP (and should not
be considered as an indicator of operating performance or an alternative to
operating income or cash flow (as measured by GAAP)), as a measure of
liquidity, management believes it provides additional information with
respect to the ability of the Company to meet its future debt service,
capital expenditure and working capital requirements. Adjusted EBITDA may
not be comparable to other measures of liquidity and excludes components of
net income (loss) which are significant in understanding the Company's
financial performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
(l) For the purpose of calculating the ratio of earnings to combined fixed
charges and preferred stock dividends (i) earnings consist of income before
provision for income taxes and fixed charges and (ii) fixed charges consist
of interest expense and one-third of rental expense which is deemed
representative of an interest factor. For the year ended December 31,
1996, earnings were insufficient to cover fixed charges and preferred stock
dividends by $188.3 million. For the year ended December 31, 1996, pro
forma earnings would have been insufficient to cover combined fixed charges
and preferred stock dividends by $227.4 million.
(m) Total debt includes a capital lease obligation of $9.8 million, $9.6
million, $9.8 million, $9.7 million and $9.6 million at December 31, 1996,
1995, 1994, 1993 and 1992, respectively. Total debt also includes the
expected value of future contractual and contingent amounts to be paid to
the principals of acquired laboratories. Such payments are principally
based on a percentage of future revenues derived from the acquired customer
lists or specified amounts to be paid over a period of time. At December
31, 1996, 1995, 1994, 1993 and 1992, such amounts were $27.7 million, $23.3
million, $35.1 million, $26.8 million and $4.6 million, respectively. In
December 1996, the Company received a loan of $187 million from Roche
Holdings to fund the Settlement Payment. Such loan bears interest at a
rate of 6.625% per annum and matures on March 31, 1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company has grown significantly over the last several
years, a substantial portion of which growth has been achieved through
acquisitions. In June 1994, the Company acquired Allied for approximately
$191.5 million in cash plus the assumption of $24.0 million of Allied
indebtedness. In April 1995, the Company completed the Merger with RBL. In
connection with the Merger, the Company issued 61,329,256 shares of Common
Stock to HLR and Roche Holdings in exchange for all outstanding shares of
RBL and $135.7 million in cash. The exchange consideration of
approximately $558.0 million for the purchase of RBL consisted of the value
of the stock issued to HLR and Roche Holdings, as well as other cash costs
of the Merger, net of cash received from HLR. The Allied Acquisition and
the Merger have been accounted for under the purchase method of accounting;
as such, the acquired assets and liabilities were recorded at their
estimated fair values on the date of acquisition. Allied's and RBL's
results of operations have been included in the Company's results of
operations since June 23, 1994 and April 28, 1995, respectively. See Note
2 of Notes to Consolidated Financial Statements. In addition to the Merger
and the Allied Acquisition, since 1993 the Company has acquired a total of
57 small clinical laboratories with aggregate sales of approximately $182.4
million.
Following the Merger in 1995, the Company determined that it
would be beneficial to close certain laboratory facilities and eliminate
duplicate functions in certain geographic regions where both NHL and RBL
facilities or functions existed at the time of the Merger. The Company
recorded restructuring charges of $65.0 million in connection with these
plans in 1995. In addition, in the second quarter of 1995, the Company had
an extraordinary loss of $8.3 million, net of taxes, related to early
extinguishment of debt related to the Merger. In the second quarter of
1996, the Company recorded certain additional charges related to the
restructuring of operations following the Merger. The Company recorded a
restructuring charge totaling $13.0 million for the shutdown of its La
Jolla, California administrative facility and other workforce reductions
and $10.0 million in non-recurring charges related to the integration of
its operations following the Merger. See Note 3 of the Notes to
Consolidated Financial Statements. Future cash payments under the
restructuring plan are expected to be $16.1 million in the year ended
December 31, 1997 and $9.1 million thereafter.
In the last several years, the Company's business has been
affected by significant government regulation, price competition and
increased influence of managed care organizations resulting from payors'
efforts to control the cost, utilization and delivery of health care
services. As a result of these factors, the Company's profitability has
been impacted by changes in the volume of testing, the prices and costs of
its services, the mix of payors and the level of bad debt expense.
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. For the year
ended December 31, 1996, such contracts accounted for approximately $64.5
million in net sales. The increase in managed-cost health 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 and decreasing test utilization for the
clinical laboratory industry by increasing complexity and adding new
regulatory and administrative requirements. From time to time, Congress
has also considered changes to the Medicare fee schedules in conjunction
with certain budgetary bills. Any future 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 or financial condition 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 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 cost savings the Company expects to realize following
the Merger, and through comprehensive cost reduction programs as discussed
below. In addition, since the third quarter of 1996 the Company has
expanded its efforts to improve the profitability of new and existing
business. To date this effort has focused primarily on reviewing existing
contracts, including those with managed care organizations, and selectively
repricing or discontinuing business with existing accounts which perform
below Company expectations. The Company believes that as a result of this
effort, the fourth quarter of 1996 was the second consecutive quarter since
the Merger that the Company's price per accession or specimen did not
decline versus the immediately preceding quarter. The Company is also
targeting price increases across most of its business lines including
specialty and niche testing, which have not seen price increases since the
Merger. While such increases may adversely affect volumes, the Company
believes that such measures along with other cost reduction programs, will
improve its overall profitability. 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 these measures. Finally, the Company is
reviewing its sales organization and expects to modify its commission
structure so that compensation is tied more directly to the profitability
of retained and new business instead of the current practice of basing
commissions primarily on revenue generated. The Company is also reviewing
alternatives relating to regions of the country and certain businesses
where profitability is not reaching internal goals and may enter into joint
ventures, alliances or asset swaps with interested parties in order to
maximize regional operating efficiencies.
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. Since the Merger, the Company has been
able to effect substantial operating cost reductions in the combined
businesses and expects that the full effect of these savings (in excess of
$120 million per year when compared to the businesses' costs immediately
prior to the Merger) will be realized during 1997. Such savings include an
annualized reduction of $4.7 million 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 million of
annualized synergies. Operational savings have resulted in approximately
$94.8 million 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 $14.2 million relating to
employee benefits as a result of changes to certain benefit arrangements.
The realization of the savings have been partially offset by increased
temporary help and overtime expenses during the consolidation process.
These costs are expected to reduce to normal levels at the conclusion of
the consolidation process in early 1997. In addition, 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 discussed below. The effects
of price erosion and utilization declines on the Company's results of
operations, however, would have been greater but for savings achieved
through the synergy program. In addition, the Company is focused on
additional initiatives which are expected to achieve incremental cost
savings in 1997. These plans include further regional laboratory
consolidation, a new agreement with a supplier of telecommunications
services and additional supply savings primarily due to increased
efficiency. 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.
As part of an examination of the rapid growth of Federal
expenditures for clinical laboratory services, several Federal agencies,
including the Federal Bureau of Investigation, the OIG and the DOJ, have
investigated allegations of fraudulent and abusive conduct by health care
providers. On November 21, 1996, the Company reached a settlement with the
OIG and the DOJ regarding the prior billing practices of various of its
predecessor companies. See "Regulation and Reimbursement--OIG
Investigations--1996 Government Settlement." Consistent with this overall
settlement the Company paid $187.0 million to the Federal Government in
December 1996, with proceeds from the Roche Loan. As a result of
negotiations related to the 1996 Government Settlement, the Company
recorded a charge of $185.0 million in the third quarter of 1996 to
increase accruals for the 1996 Government Settlement, and other related
expenses of government and private claims resulting therefrom.
In March 1997, the Company entered into the Sixth Amendment
which eliminates amortization payments on the Term Loan Facility for 1997
and modifies the interest coverage and leverage ratios for the quarterly
periods through December 31, 1997. Pursuant to this amendment, the Company
paid an amendment fee of 37.5 basis points on commitments and will pay an
additional fee of 62.5 basis points if the Rights Offering is not completed
by June 30, 1997. In addition, the Roche Loan which originally matured on
March 31, 1997 was amended to extend the maturity thereof to March 31,
1998.
The Company also entered into the Amended Credit Agreement
which will become effective upon completion of the Rights Offering
following satisfaction of certain conditions precedent. Upon consummation
of the Rights Offering and the receipt of $500 million in gross proceeds,
the Amended Credit Agreement makes available to the Company a term loan
facility of $643.8 million and a $450.0 million revolving credit facility.
See "Description of Amended Credit Agreement" below and Note 9 of the Notes
to Consolidated Financial Statements for a complete description of the
Amended Credit Agreement.
Seasonality
Volume of testing generally declines during the summer
months, year-end holiday periods and other major holidays, resulting in net
revenues and cash flows in the third and fourth quarter below the annual
average. In addition, volume declines due to inclement weather may reduce
net revenues and cash flows. Therefore, comparison of the results of
successive quarters may not accurately reflect trends or results for the
full year.
Results of Operations
Year Ended December 31, 1996 compared with Year Ended
December 31, 1995
Net sales increased by $175.7 million to $1,607.7 million in
1996, an increase of 12.3% from $1,432.0 million reported in 1995. The
inclusion of RBL as a result of the Merger increased net sales by
approximately $243.5 million or 17.0%. Acquisitions of small clinical
laboratory companies increased net sales by approximately 1.8%. Also
contributing to the increases in net sales was growth in new accounts and
price increases in selective markets. Such increases were partially offset
by price erosion in the industry as a whole, lower utilization of
laboratory testing and lost accounts. Price erosion and lower utilization
of laboratory testing primarily resulted from continued changes in payor
mix brought on by the increase in managed care. 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, increased to $1,183.9 million in 1996 from $1,024.3
million in 1995. Of the $159.6 million increase, approximately $181.9
million or 17.8% was due to the inclusion of the cost of sales of RBL.
Cost of sales increased (i) approximately $23.8 million as a result of wage
increases prior to the implementation of a six-month deferral on wage rate
increases implemented on July 1, 1996, (ii) approximately $5.0 million as a
result of higher overtime and temporary employee expenses related to the
acceleration of the Company's synergy program and other operational
factors, (iii) approximately $7.5 million due to higher depreciation and
maintenance of lab equipment as a result of the Company's purchase in 1996
of more sophisticated equipment to improve efficiency, and (iv)
approximately $8.0 million in outside collection and reference testing
fees. These increases were partially offset by decreases due to lower
volume of approximately $14.7 million. Additional decreases in salaries
and benefits of $49.5 million, and several other expense categories
aggregating approximately $2.4 million were primarily a result of the
Company's synergy and cost reduction programs. Cost of sales as a
percentage of net sales was 73.6% in 1996 and 71.5% in 1995. 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
$305.0 million in 1996 from $238.5 million in the same period in 1995
representing an increase of $66.5 million or 27.9%. The inclusion of the
selling, general and administrative expenses of RBL since April 28, 1995
increased expenses by approximately $36.5 or 15.3%. Increases in salaries,
overtime and temporary employee expenses, primarily related to billing
issues, and related telephone and data processing costs, aggregated
approximately $24.8. Also, increased medical necessity and related
diagnosis code requirements of third-party payors placed on the Company in
late 1995 and additional requirements placed on the Company at the
beginning of 1996 have resulted in lower collection rates. As a result the
provision for doubtful accounts for 1996 increased approximately $16.6
million, including a charge of $10.0 million in the second quarter of 1996
compared to 1995 which included a $15.0 million charge in the fourth
quarter of 1995. The 1995 charge was necessitated by the deterioration in
the Company's accounts receivable collection rates in the fourth quarter of
1995 primarily due to the effect of increased medical necessity and
diagnosis code requirements of third party payors placed on the Company in
the second half of 1995. Additional such requirements were placed on the
Company at the beginning of 1996, which resulted in a further deterioration
in accounts receivable collection rates in the second quarter of 1996. As
a result of this further deterioration, the Company recorded the special
charge of $10.0 million in the second quarter of 1996. In addition, the
Company increased its monthly provision for doubtful accounts beginning in
the third quarter of 1996 as a result of continued lower collection rates.
These increases were partially offset by decreases in legal expenses,
excluding settlement expenses, insurance and several other expense
categories aggregating approximately $1.9 million. Selling, general and
administrative expenses were 19.0% and 16.7% as a percentage of net sales
in 1996 and 1995, respectively. The increase in the selling, general and
administrative percentage primarily resulted from increased employee
expenses related to billing and collection activities, 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.
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 million for the shutdown of its La Jolla, California
administrative facility and other workforce reductions. In addition, the
Company recorded $10.0 million of non-recurring charges in the second
quarter of 1996 related to the abandonment of certain data processing
systems, relocation of its principal drug testing facility and various
other items including the write-off of certain laboratory testing supplies
related to changes in testing methodologies to increase efficiency.
As a result of negotiations related to the 1996 Government
Settlement, the Company recorded the Settlement Charge of $185.0 million in
the third quarter of 1996 to increase reserves for the 1996 Government
Settlement described above, and other related expenses of government and
private claims resulting therefrom.
The increase in amortization of intangibles and other assets
to $29.6 million in 1996 from $27.0 million in 1995 primarily resulted from
the Merger in April 1995.
Net interest expense was $69.5 million in 1996 compared to
$64.1 million in 1995. The increase resulted primarily from increased
borrowings due to higher accounts receivable balances and a higher
effective borrowing rate as a result of an amendment to the Company's
credit agreement. See "Liquidity and Capital Resources."
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
in 1996 has increased from 1995 as a result of increased non-deductible
amortization and lower earnings before income taxes.
Year Ended December 31, 1995 compared with Year Ended
December 31, 1994.
Net sales increased by $559.5 million to $1,432.0 million in
1995, an increase of 64.1% from $872.5 million reported in 1994. Net sales
from the inclusion of RBL increased net sales by approximately $514.7
million or 59.0%. Also, net sales from the inclusion of Allied, which was
acquired on June 23, 1994, increased net sales by approximately $56.6
million or 6.5%. Growth in new accounts and acquisitions of small clinical
laboratory companies increased net sales by approximately 8.6% and 2.8%,
respectively. Lower utilization of laboratory testing and price erosion in
the industry as a whole decreased net sales by approximately 5.0%. A
reduction in Medicare fee schedules from 84% to 80% of the national
limitation amounts on January 1, 1995, plus changes in reimbursement
policies of various third-party payors, reduced net sales by approximately
1.5%. Other factors, including accounts terminated by management,
comprised the remaining reduction in net sales.
Cost of sales increased to $1,024.3 million in 1995 from
$597.0 million in 1994. Of the $427.3 million increase, approximately
$368.8 million was due to the inclusion of the cost of sales of RBL and
approximately $44.8 million was due to the inclusion of the cost of sales
of Allied. Cost of sales increased by approximately $26.1 million due to
higher testing volume unrelated to the Merger or acquisition of Allied and
approximately $4.5 million due to increases in other expenses. Reductions
in compensation and benefit expense of $9.2 million, insurance of $4.8
million, and other expense categories of $2.9 million decreased cost of
sales an aggregate of approximately $16.9 million. These decreases
resulted from the consolidation of operations as a result of the Merger and
the Company's on-going cost-reduction program. As a percentage of net
sales, cost of sales increased to 71.5% in 1995 from 68.4% in 1994. The
increase in the cost of sales percentage primarily resulted from a
reduction in net sales due to a reduction in Medicare fee schedules,
pricing pressures and utilization declines, each of which provided little
corresponding reduction in costs.
Selling, general and administrative expenses increased to
$238.5 million in 1995 from $149.3 million in 1994, an increase of $89.2
million. Approximately $74.3 million of the increase was due to the
inclusion of the selling, general and administrative expenses of RBL and
approximately $7.7 million due to the inclusion of the selling, general and
administrative expenses of Allied. In the fourth quarter of 1995, the
Company recorded an additional $15.0 million of provision for doubtful
accounts which reflects the Company's determination, based on trends that
became evident in the fourth quarter, that additional reserves were needed
primarily to cover potentially lower collection rates from several third-
party payors. The increase in selling, general and administrative expenses
was partially offset by decreases in other expense categories, including
reductions in selling expenses, as a result of the elimination of
duplicative functions in connection with the Merger and the Company's on-
going cost-reduction program. Before the increase to the provision for
doubtful accounts, selling, general and administrative expenses as a
percentage of net sales was 15.6% in 1995 and 17.1% in 1994. The decrease
in the selling, general and administrative percentage primarily resulted
from reductions in expenses as discussed above.
The increase in amortization of intangibles and other assets
to $27.0 million in 1995 from $16.3 million in 1994 primarily resulted from
the Merger in April 1995 and the acquisition of Allied in June 1994.
See Note 3 of the Notes to Consolidated Financial Statements
which sets forth the Company's restructuring activities for the year ended
December 31, 1995.
In the second quarter of 1995, the Company took a pre-tax
special charge of $10.0 million in connection with the estimated costs of
settling various claims pending against the Company, substantially all of
which were billing disputes with various third party payors relating to the
contention that NHL improperly included tests for HDL cholesterol and serum
ferritin in its basic test profile without clearly offering an alternative
profile that did not include these medical tests. As of December 31, 1996,
the majority of these disputes have been settled.
Net interest expense was $64.1 million in 1995 compared to
$33.5 million in 1994. The change resulted primarily from increased
borrowings used to finance the Merger with RBL and the acquisition of
Allied and, to a lesser extent, due to a higher effective borrowing rate in
the first four months of 1995.
In connection with the repayment of the Company's existing
revolving credit and term loan facilities at the time of the Merger, the
Company recorded an extraordinary loss from the early extinguishment of
debt of approximately $13.5 million ($8.3 million 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 a percentage of earnings before
income taxes for 1995 is not comparable to prior periods.
Liquidity and Capital Resources
Net cash (used for) provided by operating activities (after
payment of settlement and related expenses of $188.9 million, $32.1 million
and $29.8 million, respectively) was $(186.8) million, $47.0 million and
$14.7 million, in 1996, 1995 and 1994, respectively. The decrease in cash
flow from operations in 1996 primarily resulted from the Settlement
Payment, 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 as discussed above.
Capital expenditures were $54.1 million, $75.4 million and
$48.9 million for 1996, 1995 and 1994, respectively. The Company expects
capital expenditures to be approximately $65.0 million in 1997 and $70.0
million in 1998 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 credit facilities.
Increased medical necessity and related diagnosis code
requirements of the Medicare program were placed on the Company by certain
third party carriers in late 1995 and additional requirements were placed
on the Company at the beginning of 1996. The Company has experienced lower
collection rates as a result of these more stringent requirements. In
addition, increased difficulty in collecting amounts due from private
insurance carriers, including certain managed care plans, has negatively
impacted cash flow from operations. Finally, Merger related integration
issues have also resulted in increased accounts receivable balances as a
result of the Company maintaining multiple billing information systems.
The Company currently has plans in place to stabilize collection rates and
improve the collection of accounts receivable. See "Business--Billing".
To date, however, collection rates have continued to decline 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.
In connection with the Merger, the Company entered into the
Existing Credit Agreement, with the banks named therein (the "Banks") and
an administrative agent (the "Bank Agent"), which made available to the
Company the Term Loan Facility of $800.0 million and the Revolving Credit
Facility of $450.0 million. On April 28, 1995, the Company borrowed $800.0
million under the Term Loan Facility and $184.0 million under the Revolving
Credit Facility (i) to pay the cash payment to shareholders in connection
with the Merger; (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 million including interest and fees; (iii) to repay
approximately $50.0 million 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. Availability of funds under the Existing Credit Agreement is
conditioned on certain customary conditions, and the Existing Credit
Agreement, as amended, contains customary representations, warranties,
covenants and events of default.
As a result of potential defaults under the Existing Credit
Agreement resulting from among other things, the Company's performance and
higher than projected debt levels, the Settlement Charge, and the Roche
Loan, the Company has obtained several amendments and waivers to the
Existing Credit Agreement. In September 1996, the Company negotiated an
amendment (the "Fourth Amendment") to the Existing Credit Agreement. The
Fourth Amendment modified the interest coverage and leverage ratios
applicable to the quarters ending September 30 and December 31, 1996. The
Fourth Amendment also increased the interest rate margin on its revolving
credit facility from 0.25% to 0.875% and increased the interest rate margin
on its term loan facility from 0.375% to 1.00%. As a result of the
Settlement Charge in the third quarter of 1996, as described above, the
Company obtained a waiver (the "Third Waiver") which excluded the special
charge from covenant calculations for the periods covered by the most
recent amendment until 30 days after the 1996 Government Settlement. As a
result of the Roche Loan and the 1996 Government Settlement, the Company
negotiated a Fifth Amendment and Fourth Waiver (the "Fifth Amendment") to
the Existing Credit Agreement. The Fifth Amendment extended the Third
Waiver until January 31, 1997 and excluded the Roche Loan from covenant
calculations for the quarters ending December 31, 1996 and March 31, 1997.
On January 27, 1997, the Company negotiated a waiver (the "Fifth Waiver")
which further extended the Third Waiver until March 31, 1997.
As mentioned above, in March 1997, the Company entered into
the Sixth Amendment which eliminates amortization payments on the Term Loan
Facility for 1997 and modifies the interest coverage and leverage ratios
for the quarterly periods through December 31, 1997. As a result of the
Sixth Amendment certain amounts outstanding under the Revolving Credit
Facility and Term Loan Facility that were classified as current liabilities
in the September 30, 1996 financial statements have been reclassified to
long-term debt in the December 31, 1996 financial statements. Under the
Sixth Amendment, maturities under the term loan facility aggregate $243.8
million, $162.5 million, $187.5 million and $100.0 million in 1998 through
2001, respectively.
In March 1997 the Company also entered into the Amended
Credit Agreement which will become effective upon completion of the Rights
Offering following satisfaction of certain conditions precedent. Upon
consummation of the Rights Offering and receipt of $500 million in gross
proceeds, the Amended Credit Agreement makes available to the Company the
Amended Term Loan Facility of $643.8 million and the Amended Revolving
Credit Facility of $450.0 million.
As in the Existing Credit Agreement, the senior unsecured
credit facilities under the Amended Credit Agreement are composed of the
Amended Term Loan Facility and the Amended Revolving Credit Facility. The
Amended Revolving Credit Facility includes a $50.0 million letter of credit
sublimit. The Amended Credit Agreement maturity dates are extended
approximately three years for the Amended Term Loan Facility to March 31,
2004 and approximately two years for the Amended Revolving Credit Facility
to March 31, 2002. See "Description of Amended Credit Agreement."
Borrowings under the Revolving Credit Facility were $384.0
million as of March 31, 1997. In addition, in December 1996, the Company
received a loan of $187.0 million from Roche Holdings to fund the
Settlement Payment in the form of a promissory note which bears interest at
6.625% per annum and originally matured on March 31, 1997. As discussed
above, in late March 1997, the Company obtained an extension of the Roche
Loan to March 31, 1998. The Company subsequently made the Settlement
Payment in December 1996. The Roche Loan is expected to be repaid with a
portion of the proceeds from the Rights Offering.
Cash and cash equivalents on hand, cash flow from operations
and additional borrowing capabilities of $66.0 million under the Revolving
Credit Facility as of March 31, 1997 are expected to be sufficient to
meet anticipated operating requirements, debt repayments and provide funds
for capital expenditures and working capital through 1997. The Company's
ability to meet anticipated operating requirements, debt repayments,
including the Roche Loan, and other anticipated cash outlays beyond 1997 is
substantially dependant upon the completion of the Rights Offering.
Failure to complete the Rights Offering or to complete it by the end of
February 1998 will require additional waivers or amendments to the Existing
Credit Agreement. There can be no assurance that such waivers or
amendments can be obtained. Therefore, the failure to complete the Rights
Offering or complete it by the end of February 1998 could have a material
adverse effect on the Company's financial condition and liquidity.
At December 31, 1996, the Company was 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 changed the interest rate
exposure on $600.0 million of floating rate debt to a weighted average
fixed interest rate, of 6.01%, through requiring that the Company pay a
fixed rate in exchange for the financial institutions paying a floating
rate amount. Amounts paid by the Company in 1996 were $2.0 million. 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 cost at
which the Company could terminate such agreements was 0.9 million at
December 31, 1996.
The gross proceeds of the Rights Offering will be used to
(i) repay $298 million outstanding under the Existing Credit Agreement,
(ii) pay fees and expenses of approximately $15 million related to the
Rights Offering and the Amended Credit Agreement and (iii) repay the $187
million loan from Roche Holdings made in December 1996 in order to fund the
Settlement Payment. See "Use of Proceeds."
Changes in Accounting Standards
On March 3, 1997, the FASB issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share," replacing
Accounting Principles Board ("APB") Opinion No. 15, "Earnings per Share."
SFAS No. 128 replaces "primary" and "fully diluted" earnings per share
("EPS") under APB Opinion No. 15 with "basic" and "diluted" EPS. Unlike
primary EPS, basic EPS excludes the dilutive effects of options, warrants
and other convertible securities. Dilutive EPS reflects the potential
dilution of securities that could share in the earnings of an entity,
similar to fully diluted EPS. However, under SFAS No. 128, the Company
would use the average market price for its stock during the reporting
period to determine the cost of options as opposed to the greater of the
closing price at the end of the period or the average market price during
the period, as currently required by APB Opinion No. 15. SFAS No. 128 is
effective for years ending after December 15, 1997. The Company is
currently evaluating the impact of the implementation of SFAS No. 128.
Forward Looking Statements
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995
provides a new "safe harbor" for forward-looking statements so long as
those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those projected in the
statement. Included herein are certain forward-looking statements
concerning the Company's operations, economic performance and financial
condition, including, in particular, forward-looking statements regarding
the Company's expectation of future performance following implementation of
its new business strategy. Such statements are subject to various risks
and uncertainties. Accordingly, the Company hereby identifies the
following important factors that could cause the Company's actual financial
results to differ materially from those projected, forecast, estimated, or
budgeted by the Company in such forward-looking statements.
(a) Heightened competition, including intensification of
price competition.
(b) Impact of changes in payor mix, including the shift from
traditional, fee-for service medicine to managed-cost
health care.
(c) Adverse actions by governmental or other third-party
payors, including unilateral reduction of fee schedules
payable to the Company.
(d) The impact upon the Company's collection rates or
general or administrative expenses resulting from
compliance with Medicare administrative policies
including specifically the HCFA's recent requirement
that laboratories performing certain automated blood
chemistry profiles to obtain and provide documentation
of the medical necessity of tests included in the
profiles for each Medicare beneficiary.
(e) Adverse results from investigations of clinical
laboratories by the Federal Bureau of Investigation and
the OIG including specifically significant monetary
damages and/or exclusion from the Medicare and Medicaid
programs.
(f) Failure to obtain new customers, retain existing
customers or reduction in tests ordered or specimens
submitted by existing customers.
(g) Adverse results in significant litigation matters.
(h) Denial of certification or licensure of any of the
Company's clinical laboratories under CLIA, by Medicare
and Medicaid programs or other Federal, state or local
agencies.
(i) Adverse publicity and news coverage about the Company or
the clinical laboratory industry.
(j) Inability to carry out marketing and sales plans.
(k) Inability to successfully integrate the operations of or
fully realize the costs savings expected from the
consolidation of certain operations and the elimination
of duplicative expenses resulting from the April 28,
1995 merger of the Company and RBL or risk that
declining revenues or increases in other expenses will
offset such savings.
(l) Ability of the Company to attract and retain experienced
and qualified personnel.
(m) Changes in interest rates causing an increase in the
Company's effective borrowing rate.
(n) The effect of the Company's effort to improve account
profitability by selectively repricing or discontinuing
business with existing accounts which perform below
Company expectations.
(o) The failure to consummate the Rights Offering by the end
of the second quarter of 1997.
BUSINESS
Overview
Laboratory Corporation of America Holdings is one of the three
largest independent clinical laboratory companies in the United States based
on 1996 net revenues. Through a national network of laboratories, the Company
offers a broad range of testing services used by the medical profession in the
diagnosis, monitoring and treatment of disease and other clinical states.
Since its founding in 1971, the Company has grown into a network of 28 major
laboratories and approximately 1,500 service sites consisting of branches,
patient service centers and STAT laboratories, serving clients in 48 states.
For the year ended December 31, 1996, the Company had net sales of $1,607.7
million and EBITDA before a provision for settlements and related expenses,
restructuring charges and non-recurring expenses of $173.7 million. See
footnote (j) to "Selected Financial Data" for a discussion of certain matters
related to EBITDA. Primarily as a result of the Settlement Charge, operating
loss and net loss during such period were $118.8 million and $153.5 million,
respectively.
The Company has achieved a substantial portion of its growth
through acquisitions. In June 1994 the Company acquired Allied Clinical
Laboratories, Inc., then the sixth largest independent clinical laboratory
testing company in the United States (based on 1993 net revenues). On April
28, 1995, the Company completed a merger with RBL, an indirect subsidiary of
Roche pursuant to an Agreement and Plan of Merger dated as of December 13,
1994. In connection with the Merger, the Company changed its name from
National Health Laboratories Holdings Inc. to Laboratory Corporation of
America Holdings. In addition to the Merger and the Allied Acquisition, since
1993, the Company has acquired a total of 57 small clinical laboratories with
aggregate sales of approximately $182.4 million.
During 1996 and the early part of 1997, the Company has
undergone significant changes in management with Thomas P. Mac Mahon assuming
the role of President and Chief Executive Officer in January 1997 in addition
to his position as Chairman. Prior to such time Mr. Mac Mahon served as
Senior Vice President of Roche and President of Roche Diagnostics Group where
he was responsible for the management of all United States operations of the
diagnostic businesses of Roche. In addition to Mr. Mac Mahon, the Company is
led by a new Chief Financial Officer, Wesley R. Elingburg, formerly Senior
Vice President--Finance, and a new management committee.
The Clinical Laboratory Testing Industry
Overview
Laboratory tests and procedures are used generally by
hospitals, physicians and other health care providers and commercial clients
to assist in the diagnosis, evaluation, detection, monitoring and treatment of
diseases and other medical conditions through the examination of substances in
blood, tissues and other specimens. Clinical laboratory testing is generally
categorized as either clinical testing, which is performed on body fluids
including blood and urine, or anatomical pathology testing, which is performed
on tissue and other samples, including human cells. Clinical and anatomical
pathology procedures are frequently ordered as part of regular physician
office visits and hospital admissions in connection with the diagnosis and
treatment of illnesses. Certain of these tests and procedures are used
principally as tools in the diagnosis and treatment of a wide variety of
medical conditions such as cancer, AIDS, endocrine disorders, cardiac
disorders and genetic disease. The most frequently requested tests include
blood chemistry analyses, urinalyses, blood cell counts, PAP smears, AIDS
tests, microbiology cultures and procedures and alcohol and other
substance-abuse tests.
The clinical laboratory industry consists primarily of three
types of providers: hospital based laboratories, physician-office laboratories
and independent clinical laboratories, such as those owned by the Company. The
Company believes that in 1996 approximately 50 percent of the clinical testing
revenues in the United States were derived by hospital-based laboratories,
approximately 15 percent was derived by physicians in their offices and
laboratories and approximately 35 percent went to independent clinical
laboratories. The HCFA has estimated that in 1996 there were over 5,000
independent clinical laboratories in the United States.
Effect of Market Changes on the Clinical Laboratory Business
Many market-based changes in the clinical laboratory business
have occurred, 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. For the
year ended December 31, 1996 such contracts accounted for approximately $64.5
million in net sales. The increase in managed-cost health care has also
resulted in declines in the utilization of laboratory testing services.
In addition, Medicare and Medicaid and insurers, have increased
their effort 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 and
decreasing test utilization for the clinical laboratory industry by increasing
complexity and adding new regulatory and administrative requirements. From
time to time, Congress has also considered changes to the Medicare fee
schedules in conjunction with certain budgetary bills. Any future 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.
The Company believes that the volume of clinical laboratory
testing will be positively influenced by several factors, including primarily:
an expanded base of scientific knowledge which has led to the development of
more sophisticated specialized tests and increased the awareness of physicians
of the value of clinical laboratory testing as a cost-effective means of
prevention, early detection of disease and monitoring of treatment.
Additional factors which have contributed to recent volume growth include: an
increase in the number and types of tests which are, due to advances in
technology and increased cost efficiencies, readily available on a more
affordable basis to physicians; expanded substance-abuse testing by
corporations and governmental agencies; increased testing for sexually
transmitted diseases such as AIDS; and the general aging of the population in
the United States. The impact of these factors is expected to be partially
offset by declines in volume as a result of increased controls over the
utilization of laboratory services by Medicare and other third party payors,
particularly managed care organizations.
Business Strategy
During 1996, management began implementing a new business
strategy in response to the Company's declining performance. These new
strategic objectives are as follows: remaining a low cost provider of
clinical testing services; providing high quality customer service to its
clients; and improving account profitability. In addition, the Company is
focused on certain growth initiatives beyond routine clinical laboratory
testing. The Company believes that as a result of this change in focus it is
well positioned to achieve its goal of leading the clinical laboratory
industry by providing its customers with innovative, responsive, and high
quality services.
Low Cost Provider
The Company believes that due to synergy programs implemented
following the Merger, its standardized equipment and its focus on cost
containment, it is a low cost provider of clinical testing services. Since
the Merger, the Company has been able to effect substantial operating cost
reductions in the combined businesses and expects that the full effect of
these savings (approximately $120 million per year when compared to the
businesses' costs immediately prior to the Merger) will be realized during
1997. In addition, the Company is focused on other initiatives which are
expected to achieve significant cost savings in 1997. These plans include a
new agreement with a supplier of telecommunications services, additional
supply savings primarily due to increased efficiency, and further regional
laboratory consolidation. See "Management's Discussion and Analysis of
Results of Operations and Financial Position."
The Company has also developed and implemented sophisticated
management information systems to monitor operations and control costs. All
financial functions are centralized in Burlington, North Carolina including
purchasing and accounting. Management believes this provides greater control
over spending as well as increased supervision and monitoring of results of
operations.
Client Service
The Company competes primarily on the basis of the quality of
its testing, reporting and information systems, its reputation in the medical
community, the pricing of its services and its ability to employ qualified
personnel. The Company believes it is a leading provider of laboratory
testing in terms of its menu and quality of testing services. As a result of
the required focus on the consolidation process related to the Merger,
however, the Company believes that its level of client service has been
negatively impacted. Therefore, in 1997, with the consolidation process
substantially completed, one of the Company's goals is to improve client
service. An important factor in improving client service includes the
Company's initiatives to improve its billing process. See "--Billing."
Account Profitability
Since the third quarter of 1996, the Company has begun an
active effort to improve the profitability of new and existing business. To
date this effort has focused primarily on reviewing existing contracts,
including those with managed care organizations, and selectively repricing or
discontinuing business with existing accounts which perform below Company
expectations. The Company believes that as a result of this effort, the
fourth quarter of 1996 was the second consecutive quarter since the Merger
that the Company's price per accession or specimen did not decline versus the
immediately preceding quarter. The Company is also targeting price increases
across most of its business lines, including specialty and niche testing which
have not seen price increases since the Merger. While such increases may
adversely affect volumes, the Company believes that such measures along with
other cost reduction programs, will improve its overall profitability.
Finally, the Company is reviewing its sales organization and expects to modify
its commission structure so that compensation is tied more directly to the
profitability of retained and new business instead of the current practice of
basing commissions primarily on revenue generated. The Company is also
reviewing alternatives relating to regions of the country and certain
businesses where profitability is not reaching internal goals and may enter
into joint ventures, alliances, or asset swaps with interested parties in
order to maximize regional operating efficiencies.
Focused Growth Initiatives
The Company plans to increase market share in certain sections
of the market by providing innovative services in three primary areas: (i)
hospital alliances; (ii) specialty and niche businesses; and (iii) direct
marketing to payors.
One of the Company's primary growth strategies is to develop an
increasing number of hospital alliances. These alliances can take several
different forms including laboratory management contracts, reference
agreements and joint ventures. Through these alliances the Company provides
testing services as well as contract management services. As hospitals
continue to be impacted by decreasing fee schedules from third party payors
and managed care organizations, the Company believes that they will seek the
most cost-effective laboratory services for their patients. Management
believes the Company's economies of scale as well as its delivery system will
enable it to assist the hospital in achieving this goal. These alliances are
generally more profitable than the Company's core business due to the
specialized nature of many of the testing services offered in the alliance
program. In 1996, the Company added 6 alliance agreements with hospitals,
physician groups and other care provider organizations representing
approximately $20 million of annual sales. This increased the total number of
alliances to 20 at December 31, 1996 from 14 at December 31, 1995.
Another primary growth strategy for the Company is growth of
its specialty and niche businesses. In general the specialty and niche
businesses are designed to serve two market segments: (i) markets which are
not served by the routine clinical testing laboratory and therefore are
subject to less stringent regulatory and reimbursement constraints; and (ii)
markets which are served by the routine testing laboratory but offer the
possibility of adding related services from the same supplier. The Company's
research and development group continually seeks new and improved technologies
for early diagnosis. For example, the Company believes its Center for
Molecular and Biology and Pathology is a leader in molecular diagnostics and
polymerase chain reaction technologies which are often able to provide earlier
and more reliable information regarding HIV, genetic diseases, cancer and many
viral and bacterial diseases. These technologies may represent a significant
savings to managed care organizations by increasing the detection of early
stage (treatable) diseases. Also, the Company recently acquired Genetic
Design, Inc. and management believes it is now the largest provider of
identity testing services in the United States.
Finally, in 1996 the Company also began to focus efforts on
selling its services directly to payors of laboratory services. As a result
of that focus, the Company entered into an agreement with PCS Health Systems,
Inc., a leading pharmacy benefit management company with 58 million covered
lives, to provide laboratory services as an extension of the PCS prescription
card services. Through this agreement patients will be provided with
identification cards indicating beneficiary eligibility for both prescription
benefits and the Company's testing services. The Company will provide the
testing services as requested and bill PCS based on a predetermined fee
schedule. The Company will pay PCS certain percentage and fixed fees for
adjudication of claims. One of the advantages of the PCS agreements is that
patient eligibility will be determined at the time of testing through
interface with the PCS information system which will expedite processing of
the claim for reimbursement.
Laboratory Testing Operations and Services
The Company has 28 major laboratories, and approximately 1,500
service sites consisting of branches, patient service centers and STAT
laboratories. A "branch" is a central office which collects specimens in a
region for shipment to one of the Company's laboratories for testing. Test
results can be printed at a branch and conveniently delivered to the client.
A branch also is used as a base for sales staff. A "patient service center"
generally is a facility maintained by the Company to serve the physicians in a
medical professional building or other strategic locations. The patient
service center collects the specimens as requested by the physician. The
specimens are sent, principally through the Company's in-house courier system
(and, to a lesser extent, through independent couriers), to one of the
Company's major laboratories for testing. Some of the Company's patient
service centers also function as "STAT labs", which are laboratories that have
the ability to perform certain routine tests quickly and report results to the
physician immediately. The Company processed an average of approximately
250,000 patient specimens per day in 1996. Patient specimens are delivered to
the Company accompanied by a test request form. These forms, which are
completed by the client, indicate the tests to be performed and provide the
necessary billing information.
Each specimen and related request form is checked for
completeness and then given a unique identification number. The unique
identification number assigned to each specimen helps to assure that the
results are attributed to the correct patient. The test request forms are
sent to a data entry terminal where a file is established for each patient and
the necessary testing and billing information is entered. Once this
information is entered into the computer system, the tests are performed and
the results are entered primarily through computer interface or manually,
depending upon the tests and the type of equipment involved. Most of the
Company's computerized testing equipment is directly linked with the Company's
information systems. Most routine testing is completed by early the next
morning, and test results are printed and prepared for distribution by service
representatives that day. Some clients have local printer capability and have
reports printed out directly in their offices. Clients who request that they
be called with a result are so notified in the morning. It is Company policy
to notify the client immediately if a life-threatening result is found at any
point during the course of the testing process.
Testing Services
Routine Testing
The Company currently offers over 1,700 different clinical
laboratory tests or procedures. Several hundred of these are frequently used
in general patient care by physicians to establish or support a diagnosis, to
monitor treatment or medication or to search for an otherwise undiagnosed
condition. The most frequently requested routine tests include blood
chemistry analyses, urinanalyses, blood cell counts, pap smears and AIDS
tests. These routine procedures are most often used by practicing physicians
in their outpatient office practices. Physicians may elect to send such
procedures to an independent laboratory or they may choose to establish an
in-house laboratory to perform some of the tests.
The Company performs this core group of routine tests in each
of its 28 major regional laboratories, which constitutes a majority of the
testing performed by the Company. The Company generally performs and reports
most routine procedures within 24 hours, utilizing a variety of sophisticated
and computerized laboratory testing instruments.
Specialty and Niche Testing
While the information provided by many routine tests may be
used by nearly all physicians, regardless of specialty, many other procedures
are more specialized in nature. Certain types of unique testing capabilities
and/or client requirements have been developed into specialty or niche
businesses by the Company which have become a primary growth strategy for the
Company. In general the specialty and niche businesses are designed to serve
two market segments; (i) markets which are not served by the routine clinical
testing laboratory and therefore are subject to less stringent regulatory and
reimbursement constraints; and (ii) markets which are served by the routine
testing laboratory and offer the possibility of adding related services from
the same supplier. The following are specialty and niche businesses in which
the Company offers testing and related services:
Allergy Testing. ......................... The Company offers an extensive range of allergen testing services as
well as computerized analysis and a treatment program that enables
primary care physicians to diagnose and treat many kinds of allergic
disorders.
Ambulatory Monitoring..................... The Company performs a computer assisted analysis of
electrocardiograms and blood pressure measurements. Many of these
analyses are submitted by physicians who require extended (up to 24
hours) monitoring of these parameters for patients.
Clinical Research Testing. ............... The Company regularly performs clinical laboratory testing for
pharmaceutical companies conducting clinical research trials on new
drugs. This testing often involves periodic testing of patients
participating in the trial over several years.
Diagnostic Genetics. ..................... The Company offers cytogenetic, biochemical and molecular genetic
tests.
Identity Testing. ........................ The Company provides forensic identity testing used in connection
with criminal proceedings and parentage evaluation services which are
used to assist in the resolution of disputed parentage in child support
litigation. Parentage testing involves the evaluation of immunological
and genetic markers in specimens obtained from the child, the mother
and the alleged father.
Industrial Hygiene Testing. .............. The Company maintains a separate testing facility in Richmond,
Virginia, dedicated to the analysis of potentially toxic substances in
the workplace environment.
Kidney Stone Analysis. ................... The Company offers specialized patient analysis assessing the risk of
kidney stones based on laboratory measurements and patient history.
Oncology Testing. ........................ The Company offers an extensive series of testing technologies that
aid in diagnosing and monitoring certain cancers and predicting the
outcome of certain treatments.
Substance Abuse Testing. ................. The Company provides urinalysis testing for the detection of drugs of
abuse for private and government customers, and also provides blood
testing services for the detection of drugs of abuse and alcohol. These
testing services are designed to produce "forensic" quality test results
that satisfy the rigorous requirements for admissibility as evidence in
legal proceedings.
Veterinary Testing. ...................... The Company offers clinical laboratory testing of animal specimens
for veterinarians which require specialized testing procedures and
handling due to their differing characteristics.
The specialized or niche testing services noted above, as well
as other complex procedures, are sent to designated facilities where the
Company has concentrated the people, instruments and related resources for
performing such procedures so that quality and efficiency can be most
effectively monitored. The Company's Center for Molecular Biology and
Pathology in Research Triangle Park, North Carolina, also specializes in new
test development and education and training related thereto.
Clients
The Company provides testing services to a broad range of
health care providers. During the year ended December 31, 1996, no client or
group of clients under the same contract accounted for more than two percent
of the Company's net sales. The primary client groups serviced by the Company
include:
Independent Physicians and Physician Groups
Physicians requiring testing for their patients who are
unaffiliated with a managed care plan are one of the Company's primary sources
of testing services. Fees for clinical laboratory testing services rendered
for these physicians are billed either to the physician, to the patient or the
patient's third party payor such as insurance companies, Medicare and
Medicaid. Billings are typically on a fee-for service basis. If the billings
are to the physician, they are based on the wholesale or customer fee schedule
and subject to negotiation. Otherwise, the patient is billed at the
laboratory's retail or patient fee schedule and subject to third party payor
limitations and negotiation by physicians on behalf of their patients.
Medicare and Medicaid billings are based on government set fee schedules.
Hospitals
The Company serves hospitals with services ranging from routine
and specialty testing to contract management services. Hospitals generally
maintain an on-site laboratory to perform immediately needed testing on
patients receiving care. However, they also refer less time sensitive
procedures, less frequently needed procedures and highly specialized
procedures to outside facilities, including independent clinical laboratories
and larger medical centers. The Company typically charges hospitals for any
such tests on a fee-for-service basis which is derived from the Company's
customer fee schedule.
HMOs and Other Managed Care Groups
The Company serves HMOs and other managed care organizations.
These medical service providers typically contract with a limited number of
clinical laboratories and then designate the laboratory or laboratories to be
used for tests ordered by participating physicians. Testing is mostly
performed on a capitated basis for managed care organizations. Under a
capitated payment contract, the Company agrees to cover all laboratory tests
during a given month for which the managed care organization agrees to pay a
flat monthly fee. The tests covered under agreements of this type are
negotiated for each contract, but usually include mostly routine tests and
exclude highly specialized tests. Many of the national and large regional
managed care organizations prefer to use large independent clinical labs such
as the Company because they can service them on a national basis.
Other Institutions
The Company serves other institutions, including governmental
agencies, large employers and other independent clinical laboratories that do
not have the breadth of the Company's testing capabilities. The institutions
typically pay on a negotiated or bid fee-for-service basis.
Payors
Most testing services are billed to a party other than the
"client" that ordered the test. In addition, tests performed by a single
physician may be billed to different payors depending on the medical benefits
of a particular patient. Payors other than the direct patient, include, among
others, insurance companies, managed care organizations, Medicare and
Medicaid. Based on the year ended December 31, 1996 billings to the Company's
respective payors based on the total volume of accessions are as follows:
Accession Volume
as a % of Total
---------------- Revenue per
1996 Accession
---------------- -----------
Private Patients.................... 3 - 5% $65 - 75
Medicare, Medicaid and Insurance.... 25 - 30% $25 - 35
Commercial Clients.................. 45 - 50% $15 - 25
Managed Care........................ 15 - 20% $10 - 30
Affiliations and Alliances
The Company provides management services in a variety of health
care settings. The Company generally supplies the laboratory manager and
other laboratory personnel, as well as, equipment and testing supplies, to
manage a laboratory that is owned by a hospital, managed care organization or
other health care provider. In addition, the Company maintains a data
processing system to organize and report test results and to provide billing
and other pertinent information related to the tests performed in the managed
laboratory. Under the typical laboratory management agreement, the laboratory
manager, who is employed by the Company, reports to the hospital or clinic
administration. Thus, the hospital or clinic ("Provider") maintains control
of the laboratory. A pathologist designated by the Provider serves as medical
director for the laboratory.
An important advantage the Company offers to its clients is the
flexibility of the Company's information systems used in contract management
services. In addition to the ability to be customized for a particular user's
needs, the Company's information systems also interface with several hospital
and clinic systems, giving the user more efficient and effective information
flow.
The Company's management service contracts typically have terms
between three and five years. However, most contracts contain a clause that
permits termination prior to the contract expiration date. The termination
terms vary but they generally fall into one of the following categories: (i)
termination without cause by either the Company or the contracted Provider
after written notice (generally 60 to 90 days prior to termination); (ii)
termination by the contracted Provider only if there are uncorrected
deficiencies in the Company's performance under the contract after notice by
the contracted Provider; or (iii) termination by the contracted Provider if
there is a loss of accreditation held by any Company laboratory that services
the contracted Provider, which accreditation is not reinstated within 30 days
of the loss, or up to 30 days' notice if there is a decline in the quality of
services provided under such contract which remains uncorrected after a 15-day
period. While the Company believes that it will maintain and renew its
existing contracts, there can be no assurance of such maintenance or renewal.
As part of its marketing efforts, and as a way to focus on a
contract management client's particular needs, the Company has developed
several different pricing formulas for its management services agreements. In
certain cases, profitability may depend on the Company's ability to accurately
predict test volumes, patient encounters or the number of admissions in the
case of an inpatient facility.
One of the Company's primary growth strategies is to develop an
increasing number of hospital alliances. See "Growth Strategies."
PCS Health Systems, Inc.
In 1996, the Company began to focus efforts on selling its
services directly to payors of laboratory services. As a result of that
focus, the Company entered into an agreement with PCS to provide laboratory
services as an extension of its prescription card services. PCS, a wholly-
owned subsidiary of Eli Lilly and Company, is one of the leading pharmacy
benefit management companies in the United States with 58 million members
covered by its programs and services. The arrangement with PCS is modeled
after the current PCS prescription benefit plan. Patients will be provided
with identification cards indicating beneficiary eligibility for both PCS
prescription benefits and Company testing services. The Company will
provide testing services as requested and bill PCS based on a predetermined
fee schedule. The Company will pay PCS certain percentage and fixed fees
for adjudication of claims.
The process begins when a test sample is collected at the
physician's office or local Company service center. Patient eligibility will
be determined at the time of testing through interface with the PCS
information system which will expedite processing of the claim for
reimbursement. The laboratory sample will be sent via the courier to the
Company testing facility. After tests are completed, the results are
forwarded to the physician and the billing information regarding the tests
performed are sent to PCS for plan processing and claim remittance.
The benefits to the client under the PCS arrangement include
the ability to tailor the program to meet the specific needs of client
companies and their employees and the ability to provide (i) combined
utilization reporting for potential outcomes measurement and disease
management and (ii) consistent, cost effective, quality laboratory services to
employees in several geographic locations through the Company's national
presence. The benefits to the Company are the ability to ensure eligibility
at the time of specimen collection, pricing above the Company's current
composite price per accession despite a significant discount to the client and
improved cash flow through contracted reimbursement. The Company expects to
begin to realize revenues from this agreement beginning in the second half of
1997.
Sales and Marketing and Client Service
The Company offers its services through a combination of direct
sales generalists and specialists. Sales generalists market the mainstream or
traditional routine laboratory services primarily to physicians, while
specialists concentrate on individual market segments, such as hospitals or
managed care organizations, or on testing niches, such as identity testing or
genetic testing. Specialist positions are established when an in-depth level
of expertise is necessary to effectively offer the specialized services. When
the need arises, specialists and generalists work cooperatively to address
specific opportunities. At December 31, 1996, the Company employed
approximately 267 generalists and 81 specialists. The Company's sales
generalists and specialists are compensated through a combination of salaries,
commissions and bonuses, at levels commensurate with each individual's
qualifications and responsibilities. Commissions are primarily based upon the
individual's productivity in generating new business for the Company.
The Company also employs customer service associates ("CSAs")
to interact with clients on an ongoing basis. CSAs monitor the status of the
services being provided to clients, act as problem-solvers, provide
information on new testing developments and serve as the client's regular
point of contact with the Company. At December 31, 1996, the Company
employed approximately 370 CSAs. CSAs are compensated with a combination of
salaries and bonuses commensurate with each individual's qualifications and
responsibilities.
The Company believes that the clinical laboratory service
business is shifting away from the traditional direct sales structure and into
one in which the purchasing decisions for laboratory services are increasingly
made by managed care organizations, insurance plans, employers and
increasingly by patients themselves. In view of these changes, the Company
has adapted its sales and marketing structure to more appropriately address
the new opportunities. For example, the Company has expanded its specialists
sales positions in both its primary business and its niche businesses in order
to maximize the Company's competitive strengths of advanced technology and
marketing focus. Additionally, the Company has begun to integrate selected
traditional sales and customer support functions into a new position, the
Account Manager, which will have responsibility for certain sales, service and
daily operational contact with physician-clients.
The Company competes primarily on the basis of the quality of
its testing, reporting and information systems, its reputation in the medical
community, the pricing of its services and its ability to employ qualified
personnel. As a result of the required focus on the consolidation process
related to the Merger, however, the Company believes that its level of client
service has been negatively impacted. Therefore, in 1997, with the
consolidation process substantially completed, one of the Company's goals is
to improve client service. An important factor in improving client service
includes the Company's initiatives to improve its billing process. See "--
Billing,"
Information Systems
The Company has developed and implemented sophisticated
management information systems to monitor operations and control costs. All
financial functions are centralized in Burlington, North Carolina including
purchasing and accounting. Management believes this provides greater control
over spending as well as increased supervision and monitoring of results of
operations.
The Company believes that the health care provider's need for
data will continue to place high demands on its information systems staff. The
Company operates several systems to handle laboratory, billing and financial
data and transactions. The Company believes that the efficient handling of
information involving clients, patients, payors and other parties will be a
critical factor in the Company's future success. The Corporate Information
Systems Division manages its information resources and programs on a
consolidated basis in order to achieve greater efficiency and economies of
scale. In addition, as a key part of its response to these challenges, the
Company employs a Chief Information Officer, whose responsibility is to
integrate, manage and develop the Company's information systems.
In 1996, information systems activities have been focused on
selection and consolidation of the Company's multiple laboratory and
billing systems to standardized laboratory testing and billing systems.
The Company has also been focused on the establishment of regional data
centers to handle all of the information processing needs of the Company.
The Company believes that it can benefit from the conversion of its
multiple billing systems into a centralized system which it plans to
implement once problems with the collection of accounts receivable balances
resulting from increased medical necessity and diagnosis code requirements
are corrected. These conversions are expected to be completed within two
years. The Company does not anticipate that the conversion costs will
result in a significant increase in capital expenditures over the levels
spent during the last several years.
Billing
Billing for laboratory services is a complicated process.
Laboratories must bill many different payors such as doctors, patients,
hundreds of different insurance companies, Medicare, Medicaid and employer
groups, all of whom have different billing requirements. The Company
believes that a majority of its bad debt expense is the result of non-
credit related issues which slow the billing process, create backlogs of
unbilled requisitions and generally increase the aging of accounts
receivable. A primary cause of bad debt expense is missing or incorrect
billing information on requisitions. The Company believes that this
experience is similar to that of its primary competitors. The Company
performs the requested tests and returns back the test results regardless
of whether billing information has been provided at all or has been
provided incorrectly. The Company subsequently attempts to obtain any
missing information or rectify any incorrect billing information received
from the health care provider. Among the many other factors complicating
the billing process are more complicated billing arrangements due to
contracts with third-party administrators, disputes between payors as to
the party responsible for payment of the bill and auditing for specific
compliance issues. Ultimately, if all issues are not resolved in a timely
manner, the related receivables are written off.
The Company's bad debt expense has increased since the Merger
principally due to three developments that have further complicated the
billing process: (1) increased complexities in the billing process due to
requirements of managed care payors; (2) increased medical necessity and
diagnosis code requirements; and (3) existence of multiple billing information
systems. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
During the fourth quarter of 1995 and the second quarter of
1996, the Company recorded pre-tax special charges of $15 million and $10
million, respectively, based on the Company's determination that additional
reserves were needed to cover potentially lower collection rates from several
third-party payors. The 1995 charge was necessitated by the deterioration in
the Company's accounts receivable collection rates in the fourth quarter of
1995 primarily due to the effect of increased medical necessity and diagnosis
code requirements of third party payors placed on the Company in the second
half of 1995. Additional such requirements were placed on the Company at the
beginning of 1996, which resulted in a further deterioration in accounts
receivable collection rates in the second quarter of 1996. As a result of
this further deterioration, the Company recorded the special charge of $10.0
million in the second quarter of 1996. In addition, the Company increased its
monthly provision for doubtful accounts beginning in the third quarter of 1996
as a result of continued lower collection rates. To date, accounts receivable
balances have continued to grow even though revenues have not increased.
Although there can be no assurance of success, the Company has recently
developed a number of initiatives to address the complexity of the billing
process and to improve collection rates. These initiatives include:
reorganization of departments to allow for more focus on specific issues;
retention of management consultants to assess the situation and assist in
re-engineering the billing process; establishment of a project group to
address inaccurate and missing billing information captured when the specimen
is received; addition of staff in each operating division to train field
personnel in billing matters and to review and approve contracts with
third-party payors to ensure that contracts can be properly billed; and
training of clients related to limited coverage tests and the importance of
providing diagnosis codes pertaining to such tests. Additionally, the Company
believes that it can benefit from the conversion of its multiple billing
systems into a centralized system which it plans to implement once the growth
in accounts receivable is stabilized.
Quality Assurance
The Company considers the quality of its tests to be of
critical importance, and it has established a comprehensive quality assurance
program for all of its laboratories and other facilities, designed to help
assure accurate and timely test results. In addition to the compulsory
external inspections and proficiency programs demanded by HCFA and other
regulatory agencies, Company-wide systems and procedures are in place to
emphasize and monitor quality assurance. All of the Company's regional
laboratories are subject to on-site evaluations, the College of American
Pathologists ("CAP") proficiency testing program, state surveys and the
Company's own internal quality control programs.
External Proficiency/Accreditations. The Company participates
in numerous externally-administered, blind quality surveillance programs,
including the CAP program. The blind programs supplement all other quality
assurance procedures and give Company management the opportunity to review its
technical and service performance from the client's perspective.
Internal Quality Control. The Company regularly performs
internal quality control testing by running quality control samples with known
values with patient samples submitted for testing. All quality control sample
test results are entered into the Company's national laboratory computer,
which connects the Company's facilities nationwide to a common on-line quality
control database. This system helps technologists and technicians check
quality control values and requires further prompt verification if any quality
control value is out of range. The Company has an extensive, internally
administered program of blind sample proficiency testing (i.e. the testing
laboratory does not know the sample being tested is a quality control sample),
as part of which the Company's locations receive specimens from the Company's
Quality Assurance and Corporate Technical Services departments for analysis.
The CAP accreditation program involves both on-site inspections
of the laboratory and participation in the CAP's proficiency testing program
for all categories in which the laboratory is accredited by the CAP. The CAP
is an independent non-governmental organization of board certified
pathologists which offers an accreditation program to which laboratories can
voluntarily subscribe. The CAP has been accredited by HCFA to inspect
clinical laboratories to determine CLIA standards. A laboratory's receipt of
accreditation by the CAP satisfies the Medicare requirement for participation
in proficiency testing programs administered by an external source. All of
the Company's major laboratories are accredited by the CAP.
Competition
The clinical laboratory business is intensely competitive. The
Company believes that in 1996 the entire United States clinical laboratory
testing industry had revenues exceeding $36 billion; approximately 50% of such
revenues were attributable to hospital-affiliated laboratories, approximately
35% were attributable to independent clinical laboratories and approximately
15% were attributable to physicians in their offices and laboratories. As
recently as 1993, there were seven laboratories that provided clinical
laboratory testing services on a national basis: NHL, RBL, Quest, SmithKline,
Damon Corporation, Allied and Nichols Institute. Apart from the Merger and
the Allied Acquisition, Quest acquired Nichols Institute in August 1994 and
Damon Corporation in August 1993. In addition, in the last several years a
number of large regional laboratories have been acquired by national clinical
laboratories. There are presently three national independent clinical
laboratories: the Company; Quest, which had approximately $1.6 billion in
revenues from clinical laboratory testing in 1996; and SmithKline, which had
approximately $1.3 billion in revenues from clinical laboratory testing in
1996.
In addition to the two other national clinical laboratories,
the Company competes on a regional basis with many smaller regional
independent clinical laboratories as well as laboratories owned by hospitals
and physicians. The Company believes that the following factors, among
others, are often used by health care providers in selecting a laboratory: (i)
pricing of the laboratory's test services; (ii) accuracy, timeliness and
consistency in reporting test results; (iii) number and type of tests
performed; (iv) service capability and convenience offered by the laboratory;
and (v) its reputation in the medical community. The Company believes that it
competes favorably with its principal competitors in each of these areas and
is currently implementing strategies to improve its competitive position. See
"--Clients" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The Company believes that consolidation will continue in the
clinical laboratory testing business. In addition, the Company believes that
it and the other large independent clinical laboratory testing companies will
be able to increase their share of the overall clinical laboratories testing
market due to a number of external factors including cost efficiencies
afforded by large-scale automated testing, Medicare reimbursement reductions
and the growth of managed health care entities which require low-cost testing
services and large service networks. In addition, legal restrictions on
physician referrals and the ownership of laboratories as well as increased
regulation of laboratories are expected to contribute to the continuing
consolidation of the industry.
Properties
The following table summarizes certain information as to the
Company's principal operating and administrative facilities as of December 31,
1996.
Approximate Area
Nature of Location (in square feet) Nature of Occupancy
______________________________________ __________________ __________________________________
Operating Facilities:
Birmingham, Alabama 100,000 Lease expires 2005
Phoenix, Arizona 43,000 Lease expires 2001; one 5 year
renewal option
San Diego, California 54,000 Lease expires 2007
Denver, Colorado 20,000 Lease expires 2001; two 5 year
renewal options
Tampa, Florida 95,000 Lease expires 2009; one 5 year
renewal option
Chicago, Illinois 40,000 Lease expires 2003; two 5 year
renewal options
Louisville, Kentucky 60,000 Lease expires 2002; three 5 year
renewal options
Detroit, Michigan 32,000 Lease expires 2004; two 5 year
renewal options
Kansas City, Missouri 78,000 Owned
Reno, Nevada 16,000 Owned
14,000 Lease expires 1999; 2 year renewal
option
Raritan, New Jersey 186,000 Owned
Uniondale, New York 108,000 Lease expires 2007; two 5 year
renewal options
Burlington, North Carolina 205,000 Owned
Charlotte, North Carolina 25,000 Lease expires 1997; renewal option
every 3 years
Research Triangle Park,
North Carolina 74,000 Lease expires 2008, three 5 year
renewal options
111,000 Lease expires 2011; three 5 year
renewal options
Winston-Salem,
North Carolina 73,000 Lease expires 2009; one 5 year
renewal option
Dublin, Ohio 82,000 Owned
Memphis, Tennessee 30,000 Lease expires 1999; one 5 year
renewal option
Dallas, Texas 54,000 Lease expires 2004; one 5 year
renewal option
Houston, Texas 32,000 Lease expires 1997
San Antonio, Texas 44,000 Lease expires 2004; one 5 year
renewal option
Salt Lake City, Utah 20,000 Lease expires 2002; two 5 year
renewal options
Chesapeake, Virginia 21,000 Lease expires 2002; two 5 year
renewal options
Herndon, Virginia 64,000 Leases expire 1999, 2004; one 5 year
renewal option, one five year
renewal option
Richmond, Virginia 57,000 Lease expires 2001; one 5 year
renewal option
Seattle, Washington 42,000 Lease expires 1998; two 5 year
renewal options
Fairmont, West Virginia 25,000 Lease expires 2005; three 5 year
renewal options
Administrative Facilities:
Burlington, North Carolina 160,000 Owned
188,000 Leases expire 1997-2008; various
options to purchase or renew
All of the major laboratory facilities have been built or
improved for the single purpose of providing clinical laboratory testing
services. The Company believes that these facilities are suitable and
adequate and have sufficient production capacity for its currently foreseeable
level of operations. The Company believes that if it were to lose the lease
on any of the facilities it presently leases, it could find alternate space at
competitive market rates and readily relocate its operations to such new
locations without material disruption to its operations.
Employees
At December 31, 1996, the Company employed approximately 22,000
people. These include approximately 18,000 full-time employees and
approximately 4,000 part-time employees, which represents the equivalent of
approximately 19,300 persons full-time. Of the approximately 19,300 full-time
equivalent employees, approximately 400 are sales personnel, approximately
17,000 are laboratory and distribution personnel and approximately 1,900 are
administrative and data processing personnel. A subsidiary of the Company
has one collective bargaining agreement which covers approximately 20
employees. The Company believes that its overall relations with its
employees are good.
Legal Proceedings
The Company is involved in certain claims and legal actions
arising in the ordinary course of business. In the opinion of management,
based upon the advice of counsel, the ultimate disposition of these matters
will not have a material adverse effect on the financial position or results
of operations of the Company. The Company has recently been contacted by
representatives of certain insurance companies, and individuals in a
purported class action, who have asserted claims for private reimbursement
which are similar to the Government claims recently settled. The Company
is carefully evaluating these claims, however, due to the early stage of
the claims, the ultimate outcome cannot presently be predicted.
REGULATION AND REIMBURSEMENT
General
The clinical laboratory industry is subject to significant
governmental regulation at the Federal, state and local levels. Under CLIA,
virtually all clinical laboratories, including those owned by the Company,
must be certified by the Federal government. Many clinical laboratories must
also meet governmental standards, undergo proficiency testing and are subject
to inspection. Certifications or licenses are also required by various state
and local laws.
The health care industry is undergoing significant change as
third-party payors, such as Medicare and Medicaid and insurers, increase
their efforts to control the cost, utilization and delivery of health care
services. In an effort to address the problem of increasing health care
costs, legislation has been proposed or enacted at both the Federal and
state levels to regulate health care delivery in general and clinical
laboratories in particular. Some of the proposals include managed
competition, global budgeting and price controls. Although the Clinton
Administration's health care reform proposal, initially advanced in 1994,
was not enacted, such proposal or other proposals may be considered in the
future. In particular, the Company believes that reductions in
reimbursement for Medicare services will continue to be implemented from
time to time. Reductions in the reimbursement rates of other third-party
payors are likely to occur as well. The Company cannot predict the effect
health care reform, if enacted, would have on its business, and there can
be no assurance that such reforms, if enacted, would not have a material
adverse effect on the Company's business and operations.
Regulation of Clinical Laboratories
CLIA extends Federal oversight to virtually all clinical
laboratories by requiring that laboratories be certified by the government.
Many clinical laboratories must also meet governmental quality and
personnel standards, undergo proficiency testing and be subject to biennial
inspection. Rather than focusing on location, size or type of laboratory,
this extended oversight is based on the complexity of the tests performed
by the laboratory.
In 1992, HHS published regulations implementing CLIA. The
quality standards and enforcement procedure regulations became effective in
1992, although certain personnel, quality control and proficiency testing
requirements are currently being phased in by HHS. The quality standards
regulations divide all tests into three categories (waivered, moderate
complexity and high complexity) and establish varying requirements
depending upon the complexity of the test performed. A laboratory that
performs high complexity tests must meet more stringent requirements than a
laboratory that performs only moderate complexity tests, while those that
perform only one or more of approximately twelve routine "waivered" tests
may apply for a waiver from most requirements of CLIA. All major and many
smaller company facilities are certified by CLIA to perform high complexity
testing. The remaining smaller testing sites of the Company are certified
by CLIA to perform moderate complexity testing or have obtained a waiver
from most requirements of CLIA. Generally, the HHS regulations require,
for laboratories that perform high complexity or moderate complexity tests,
the implementation of systems that ensure the accurate performance and
reporting of test results, establishment of quality control systems,
proficiency testing by approved agencies and biennial inspections.
The sanction for failure to comply with these regulations
may be suspension, revocation or limitation of a laboratory's CLIA
certificate necessary to conduct business, significant fines and criminal
penalties. The loss of a license, imposition of a fine or future changes
in such Federal, state and local laws and regulations (or in the
interpretation of current laws and regulations) could have a material
adverse effect on the Company.
The Company is also subject to state regulation. CLIA
provides that a state may adopt more stringent regulations than Federal
law. For example, state law may require that laboratory personnel meet
certain qualifications, specify certain quality controls, maintain certain
records and undergo proficiency testing. For example, certain of the
Company's laboratories are subject to the State of New York's clinical
laboratory regulations, which contain provisions that are more stringent
than Federal law.
The Company's laboratories have continuing programs to
ensure that their operations meet all applicable regulatory requirements.
Regulation Affecting Reimbursement of Clinical Laboratory
Services
Containment of health care costs, including reimbursement
for clinical laboratory services, has been a focus of ongoing governmental
activity. In 1984, Congress established a Medicare fee schedule for
clinical laboratory services performed for patients covered under Part B of
the Medicare program. Subsequently, Congress imposed a national ceiling on
the amount that can be paid under the fee schedule. Laboratories bill the
program directly and must accept the scheduled amount as payment in full
for covered tests performed on behalf of Medicare beneficiaries. In
addition, state Medicaid programs are prohibited from paying more than the
Medicare fee schedule amount for clinical laboratory services furnished to
Medicaid recipients. In 1996 and 1995 the Company derived approximately
23% and 28%, respectively, of its net sales from tests performed for
beneficiaries of Medicare and Medicaid programs. In addition, the
Company's other business depends significantly on continued participation
in these programs because clients often want a single laboratory to perform
all of their testing services. Since 1984, Congress has periodically
reduced the ceilings on Medicare reimbursement to clinical laboratories
from previously authorized levels. In 1993, pursuant to provisions in the
Omnibus Budget and Reconciliation Act of 1993 ("OBRA '93"), Congress
reduced, effective January 1, 1994, the Medicare national limitations from
88% of the 1984 national median to 76% of the 1984 national median, which
reductions were implemented on a phased-in basis from 1994 through 1996 (to
84% in 1994, 80% in 1995 and 76% in 1996). The 1996 reduction to 76% was
implemented as scheduled on January 1, 1996. OBRA '93 also eliminated the
provision for annual fee schedule increases based upon the consumer price
index for 1994 and 1995. These reductions were partially offset, however,
by annual consumer price index fee schedule increases of 3.2% and 2.7% in
1996 and 1997, respectively. Because a significant portion of the
Company's costs are relatively fixed, these Medicare reimbursement
reductions have a direct adverse effect on the Company's net earnings and
cash flows. The Company cannot predict if additional Medicare reductions
will be implemented.
On January 1, 1993, numerous changes in the Physicians'
Current Procedural Terminology ("CPT") were published. The CPT is a coding
system that is published by the American Medical Association. It lists
descriptive terms and identifying codes for reporting medical and medically
related services. The Medicare and Medicaid programs require suppliers,
including laboratories, to use the CPT codes when they bill the programs
for services performed. HCFA implemented these CPT changes for Medicare on
August 1, 1993. The CPT changes have altered the way the Company bills
third-party payors for some of its services, thereby reducing the
reimbursement the Company receives from those programs for some of its
services. For example, certain codes for calculations, such as LDL
cholesterol, were deleted and are no longer a payable service under
Medicare and Medicaid.
Moreover, Medicare denied reimbursement to NHL for claims
submitted for HDL cholesterol and serum ferritin (a measure of iron in the
blood) tests from September 1993 to December 1993, at which time NHL
removed such tests from its basic test profiles.
In 1996, the HCFA implemented changes in the policies used
to administer Medicare payments to clinical laboratories for the most
frequently performed automated blood chemistry profiles. Among other
things, the changes established a consistent standard nationwide for the
content of the automated chemistry profiles. Another change incorporated
in the HCFA policy requires laboratories performing certain automated blood
chemistry profiles to obtain and provide documentation of the medical
necessity of tests included in the profiles for each Medicare beneficiary.
The Company expects to incur additional costs associated with the
implementation of these requirements. The amount of additional costs and
potential reductions in reimbursement for certain components of chemistry
profiles and the impact on the Company's financial condition and results of
operations have not yet been determined.
Future changes in Federal, state and local regulations (or
in the interpretation of current regulations) affecting governmental
reimbursement for clinical laboratory testing could have a material adverse
effect on the Company. The Company is unable to predict, however, whether
and what type of legislation will be enacted into law.
Fraud and Abuse Regulations
The Medicare and Medicaid anti-kickback laws prohibit
intentionally paying anything of value to influence the referral of
Medicare and Medicaid business. HHS has published safe harbor regulations
which specify certain business activities that, although literally covered
by the laws, will not violate the Medicare/Medicaid anti-kickback laws.
Failure to fall within a safe harbor does not constitute a violation of the
anti-kickback laws if all conditions of the safe harbor are met; rather,
the arrangement would remain subject to scrutiny by HHS.
In October 1994, the OIG issued a Special Fraud Alert, which
set forth a number of practices allegedly engaged in by clinical
laboratories and health care providers that the OIG believes violate the
anti-kickback laws. These practices include providing employees to collect
patient samples at physician offices if the employees perform additional
services for physicians that are typically the responsibility of the
physicians' staff; selling laboratory services to renal dialysis centers at
prices that are below fair market value in return for referrals of Medicare
tests which are billed to Medicare at higher rates; providing free testing
to a physician's HMO patients in situations where the referring physicians
benefit from such lower utilization; providing free pickup and disposal of
bio-hazardous waste for physicians for items unrelated to a laboratory's
testing services; providing facsimile machines or computers to physicians
that are not exclusively used in connection with the laboratory services
performed; and providing free testing for health care providers, their
families and their employees (professional courtesy testing). The OIG
stressed in the Special Fraud Alert that when one purpose of the
arrangements is to induce referral of program-reimbursed laboratory
testing, both the clinical laboratory and the health care provider or
physician may be liable under the anti-kickback laws and may be subject to
criminal prosecution and exclusion from participation in the Medicare and
Medicaid programs.
According to the 1995 work plan of the OIG, its recently
established Office of Civil Fraud and Administrative Adjudication ("OCFAA")
will be responsible for protecting the government-funded health care
programs and deterring fraudulent conduct by health care providers through
the negotiation and imposition of civil monetary penalties, assessments and
program exclusions. The OCFAA works very closely with the Department of
Justice, the Office of General Counsel and the OIG investigative and audit
offices in combating fraud and abuse. In addition, the OIG has stated in
its 1995 work plan that it will determine the extent to which laboratories
supply physicians' offices with phlebotomists (blood-drawing technicians),
offer management services or medical waste pick-up to physicians, provide
training to physicians or engage in other financial arrangements with
purchasers of laboratories' services. The OIG will assess the potential
benefits of such arrangements as well as the extent to which such
arrangements might be unlawful.
In March 1992, HCFA published proposed regulations to
implement the Medicare statute's prohibition (with certain exceptions) on
referrals by physicians who have an investment interest in or a
compensation arrangement with laboratories. The prohibition on referrals
also applies where an immediate family member of a physician has an
investment interest or compensation arrangement with a laboratory. The
proposed regulations would define remuneration that gives rise to a
compensation arrangement as including discounts granted by a laboratory to
a physician who sends testing business to the laboratory and who pays the
laboratory for such services. If that definition of remuneration were to
have become effective, it could have had an impact on the way the Company
prices its services to physicians. However, in August 1993, the referenced
Medicare statute was amended by OBRA '93. One of these amendments makes it
clear that day-to-day transactions between laboratories and their
customers, including, but not limited to, discounts granted by laboratories
to their customers, are not affected by the compensation arrangement
provisions of the Medicare statute.
Environmental and Occupational Safety
The Company is subject to licensing and regulation under
Federal, state and local laws and regulations relating to the protection of
the environment and human health and safety, including laws and regulations
relating to the handling, transportation and disposal of medical specimens,
infectious and hazardous waste and radioactive materials as well as to the
safety and health of laboratory employees. All Company laboratories are
subject to applicable Federal and state laws and regulations relating to
biohazard disposal of all laboratory specimens and the Company utilizes
outside vendors for disposal of such specimens. In addition, the Federal
Occupational Safety and Health Administration has established extensive
requirements relating to workplace safety for health care employers,
including clinical laboratories, whose workers may be exposed to blood-
borne pathogens such as HIV and the hepatitis B virus. These regulations,
among other things, require work practice controls, protective clothing and
equipment, training, medical follow-up, vaccinations and other measures
designed to minimize exposure to, and transmission of, blood-borne
pathogens. Although the Company is not aware of any current material non-
compliances with such Federal, state and local laws and regulations,
failure to comply could subject the Company to denial of the right to
conduct business, fines, criminal penalties and/or other enforcement
actions.
Drug Testing
Drug testing for public sector employees is regulated by the
Substance Abuse and Mental Health Services Administration ("SAMSHA")
(formerly the National Institute on Drug Abuse), which has established
detailed performance and quality standards that laboratories must meet in
order to be approved to perform drug testing on employees of Federal
government contractors and certain other entities. To the extent that the
Company's laboratories perform such testing, each must be certified as
meeting SAMSHA standards. The Company's Research Triangle Park, North
Carolina; Memphis, Tennessee; Raritan, New Jersey; Seattle, Washington;
Herndon, Virginia and Reno, Nevada laboratories are SAMSHA certified.
Controlled Substances
The use of controlled substances in testing for drugs of
abuse is regulated by the Federal Drug Enforcement Administration.
OIG Investigations
Several Federal agencies are responsible for investigating
allegations of fraudulent and abusive conduct by health care providers,
including the Federal Bureau of Investigation, the OIG and the DOJ. In its
published work plan for 1992-1993, the OIG indicated its intention to
target certain laboratory practices for investigation and prosecution.
Pursuant to one such project described in such work plan, entitled
"Laboratory Unbundle," laboratories that offer packages of tests to
physicians and "unbundle" them into several "tests to get higher
reimbursement when billing Medicare and Medicaid" will be identified and
"suitable cases will be presented for prosecution." Under another project
described in such work plan, laboratories "that link price discounts to the
volume of physician referrals, 'unbundle' tests in order to bill Medicare
at a higher total rate, and conduct unnecessary tests... will be identified
to coordinate investigations through the country."
1996 Government Settlement
In August 1993, RBL and Allied each received a subpoena from
the OIG requesting documents and information concerning pricing and billing
practices. In September 1993, NHL received a subpoena from the OIG which
required NHL to provide documents to the OIG concerning its regulatory
compliance procedures. Among other things, the OIG subpoena received by
RBL and Allied called for the production of documents regarding 14 blood
chemistry tests which were being or had been performed by certain
independent clinical laboratories in conjunction with automated chemistry
profiles and which were being or had been billed separately to Medicare or
Medicaid. An automated chemistry profile is a grouping of tests that can
be performed together on a single specimen and that Medicare and Medicaid
pay under the Medicare fee schedule. The government's investigations
covered billings for tests performed by NHL, RBL and Allied from 1988 to
1994. These tests were deemed by regulators to be medically unnecessary.
The investigations were part of a broad-based federal inquiry into Medicare
and related billings that have resulted in financial settlements with a
number of other clinical laboratories. The inquiries have also prompted
the imposition of more stringent regulatory compliance requirements
industry-wide. In November 1996, the Company agreed to enter into a
comprehensive Corporate Integrity Agreement and to pay $182 million to
settle civil claims involving Medicare and related government billings for
tests performed by NHL, RBL and Allied. These claims arose out of the
government's contention that laboratories offering profiles containing
certain test combinations had the obligation to notify ordering physicians
how much would be billed to the government for each test performed for a
patient whose tests are paid for by Medicare, Medicaid or other government
agency. The government contended claims submitted for tests ordered by
physicians and performed by the laboratories were improper. The Company
settled these allegations without an admission of fault. The Corporate
Integrity Agreement, among other things, requires that detailed
notifications be made to physicians. In addition, as part of the overall
settlement, a San Diego laboratory that was formerly part of Allied agreed
to plead guilty to a charge of filing a false claim with Medicare and
Medicaid in 1991 and to pay $5 million to the Federal government. The
assets of the San Diego laboratory were sold by Allied in 1992, two years
before the Allied Acquisition. As is customary with asset sales, Allied
retained the liability for conduct preceding the sale--a liability the
Company later succeeded to, following the Allied Acquisition and Merger.
As a result of negotiations related to the 1996 Government Settlement, the
Company recorded a charge of $185.0 million in the third quarter of 1996 to
increase reserves for the 1996 Government Settlement described above and
other related expenses of government and private claims resulting
therefrom. The Company has recently been contacted by representatives of
certain insurance companies, and individuals in a purported class action,
who have asserted claims for private reimbursement which are similar to the
Government claims recently settled. The Company is carefully evaluating
these claims, however, due to the early stage of the claims, the ultimate
outcome cannot presently be predicted.
Pursuant to the 1996 Government Settlement, the Company paid
$187 million in December 1996. The Settlement Payment was paid from the
proceeds of a $187 million loan made by Roche to the Company in December
1996. See "Certain Relationships and Related Transactions--Other
Transactions with Roche."
1992 NHL Government Settlement
In November 1990, NHL became aware of a grand jury inquiry
relating to its pricing practices being conducted by the United States
Attorney for the San Diego area (the Southern District of California) with
the assistance of the OIG. On December 18, 1992, NHL entered into a
settlement with the United States Attorney (the "1992 NHL Government
Settlement"), which related to the government's contention that NHL
improperly included tests for HDL cholesterol and serum ferritin in its
basic test profile, without clearly offering an alternative profile that
did not include these medical tests. The government also contended that,
in certain instances, physicians were told that these additional tests
would be included in the basic test profile at no extra charge. As a
result, the government contended, NHL's marketing activities denied
physicians the ability to exercise their judgment as to the medical
necessity of these tests.
Pursuant to the 1992 NHL Government Settlement, NHL pleaded
guilty to the charge of presenting two false claims to the Civilian Health
and Medical Program of the Uniformed Services ("CHAMPUS") and paid a $1
million fine. In connection with pending and threatened civil claims, NHL
also agreed to pay $100 million to the Federal Government in installments.
As of December 31, 1995, all such payments due to the government under the
1992 NHL Government Settlement had been made. Concurrent with the 1992 NHL
Government Settlement, NHL settled related Medicaid claims with states that
account for over 99.5% of its Medicaid business and paid $10.4 million to
the settling states.
1994 Allied Government Settlement
In April 1994, Allied received a subpoena from the OIG
requesting documents and certain information regarding the Medicare billing
practices of its Cincinnati, Ohio clinical laboratory with respect to
certain cancer screening tests. In March 1995, Allied resolved the issues
raised by the April 1994 subpoena and a related qui tam action commenced in
Cincinnati, Ohio Federal court by entering into agreements with, among
others, HHS, the United States Department of Justice and the relators in
the qui tam action pursuant to which it agreed to pay $4.9 million to
settle all pending claims and inquiries regarding these billing practices
and certain others. NHL had previously established reserves that were
adequate to cover such settlement payments. In connection with the
settlement, Allied agreed with HHS, among other things, to implement a
corporate integrity program to ensure that Allied and its representatives
remain in compliance with applicable laws and regulations and to provide
certain reports and information to HHS regarding such compliance efforts.
Compliance Program
Because of evolving interpretations of regulations and the
national debate over health care, compliance with all Medicare, Medicaid
and other government-established rules and regulations has become a
significant factor throughout the clinical laboratory industry. The
Company has implemented a comprehensive company-wide compliance program.
The objective of the program is to develop, implement and update as
necessary aggressive and reliable compliance safeguards. Emphasis is
placed on developing training programs for personnel to attempt to assure
the strict implementation of all rules and regulations. Further, in-depth
reviews of procedures, personnel and facilities are conducted to assure
regulatory compliance throughout the Company. Such sharpened focus on
regulatory standards and procedures will continue to be a priority for the
Company in the future.
The Company believes that it is in compliance in all
material respects with all statutes, regulations and other requirements
applicable to its clinical laboratory operations. The clinical laboratory
testing industry is, however, subject to extensive regulation, and many of
these statutes and regulations have not been interpreted by the courts.
There can be no assurance therefore that applicable statutes and
regulations might not be interpreted or applied by a prosecutorial,
regulatory or judicial authority in a manner that would adversely affect
the Company. Potential sanctions for violation of these statutes and
regulations include significant fines and the loss of various licenses,
certificates and authorizations.
MANAGEMENT
The following table sets forth the directors and executive
officers of the Company:
Name Age Position
- -------------------------------- ---- -------------------------------------
Thomas P. Mac Mahon 50 Chairman of the Board, President,
Chief Executive Officer and Director
Jean-Luc Belingard 48 Director
Wendy E. Lane 45 Director
Robert E. Mittelstaedt, Jr. 53 Director
James B. Powell, M.D. 58 Director
David B. Skinner, M.D. 61 Director
Andrew G. Wallace, M.D. 61 Director
Wesley R. Elingburg 40 Executive Vice President,
Chief Financial Officer and
Treasurer
Larry L. Leonard 55 Executive Vice President
Richard L. Novak 56 Executive Vice President
Bradford T. Smith 43 Executive Vice President,
General Counsel, Corporate
Compliance Officer and Secretary
Stevan R. Stark 49 Executive Vice President
Ronald B. Sturgill 60 Executive Vice President
William M. Meilahn 56 Senior Vice President,
Chief Information Officer
Thomas P. Mac Mahon has served as Chairman of the Board and
Director since April 28, 1996. Prior to such date and since April 28, 1995 he
served as Vice Chairman and Director. Mr. Mac Mahon has been President and
Chief Executive Officer since January 1997. Mr. Mac Mahon was Senior Vice
President of Hoffmann-La Roche Inc. from 1993 to January 1997 and President of
Roche Diagnostics Group and a Director and member of the Executive Committee
of Hoffmann-La Roche Inc. from 1988 to January 1997. Mr. Mac Mahon was also a
Director of HLR until January 1997. As Senior Vice President of Hoffmann-La
Roche Inc. and President of Roche Diagnostics Group, Mr. Mac Mahon was
responsible for the management of all United States operations of the
diagnostic business of Hoffmann-La Roche Inc. Mr. Mac Mahon is also
Chairman of the Board of AutoCyte, Inc. ("AutoCyte"). Mr. Mac Mahon is a
member of the management committee of the Company.
Jean-Luc Belingard has served as a Director of the Company
since the Merger. Mr. Belingard is Director General of the Diagnostics
Division and member of the Executive Committee of F. Hoffmann-La Roche Ltd
("F. Hoffmann-La Roche"), Basel, Switzerland, a subsidiary of Roche. He
joined F. Hoffmann-La Roche in 1982, and held various positions prior to being
named to his current positions in 1990. His current responsibilities include
the management of the worldwide diagnostic business of F. Hoffmann-La Roche.
Mr. Belingard is also a director of Perkin-Elmer Corporation, Norwalk,
Connecticut and a Foreign Trade Advisor to the French Government.
Wendy E. Lane has been a Director of the Company since November
1996. Ms. Lane has been Chairman of Lane Holdings, Inc., a private investment
firm, since 1992. Prior to forming Lane Holdings, Inc., Ms. Lane was a
Principal and Managing Director of Donaldson, Lufkin & Jenrette, an investment
banking firm, serving in these and other positions from 1980 to 1992. Ms.
Lane also serves as a director of Watts Industries, Inc.
Robert E. Mittelstaedt, Jr. has been a Director of the Company
since November 1996. Mr. Mittelstaedt is Vice Dean of The Wharton School of
the University of Pennsylvania, Director of the Aresty Institute of Executive
Education. Mr. Mittelstaedt has held these and other positions with the
Wharton school since 1973, with the exception of the period from 1985 to 1989
when he founded, served as President and Chief Executive Officer, and sold
Intellego, Inc., a company engaged in practice management, systems development
and service bureau billing operations in the medical industry. Mr.
Mittelstaedt is also a director of A.G. Simpson Automotive Systems, Inc. and
IS&S Inc.
James B. Powell, M.D. has served as a Director of the Company
since the Merger. From the Merger to January 1997, Dr. Powell served as
President and Chief Executive Officer. Previously, Dr. Powell was President
of RBL from 1982 until the Merger. Dr. Powell has been President, Chief
Executive Officer and Director of Auto Cyte, Inc. since January 1997. Auto
Cyte is a newly formed company specializing in the development of advanced,
automated pap-smear testing technologies. Dr. Powell is a principal
investor in Auto Cyte. He is a medical doctor and became certified in
anatomic and clinical pathology in 1969.
David B. Skinner, M.D. has served as a Director of the Company
since the Merger. Dr. Skinner has been President and Chief Executive Officer
of New York Hospital and Professor of Surgery at Cornell Medical School since
1987. He was the Chairman of the Department of Surgery and Professor of
Surgery at the University of Chicago Hospitals and Clinics from 1972 to 1987.
Andrew G. Wallace, M.D. has served as a Director of the Company
since the Merger. Dr. Wallace has served as both the Dean of Dartmouth
Medical School and Vice President for Health Affairs at Dartmouth College
since 1990. He was the Vice Chancellor for Health Affairs at Duke University
and the Chief Executive Officer of Duke Hospital from 1981 to 1990.
Wesley R. Elingburg has served as Executive Vice President,
Chief Financial Officer and Treasurer since October 24, 1996. Prior to this
date and since the Merger, Mr. Elingburg was Senior Vice President, Finance.
Mr. Elingburg is responsible for the day to day supervision of the finance
function of the Company, including treasury functions. Previously, Mr.
Elingburg served as Senior Vice President-Finance and Treasurer of RBL from
1988 through April 1995 and Assistant Vice President of Hoffmann-La Roche from
1989 until the Merger in April 1995. Mr. Elingburg is a member of the
management committee of the Company.
Larry L. Leonard has served as Executive Vice President of the
Company since 1993. He joined the Company in 1978. Dr. Leonard, who holds a
Ph.D degree in microbiology, was named Senior Vice President of the Company
in 1991 and previously was Vice President-Division Manager. Dr. Leonard
oversees Western Operations of the Company which includes the Central, Great
Lakes, Midlands, Southwest and West Divisions. Dr. Leonard is a member of the
management committee of the Company.
Richard L. Novak has served as Executive Vice President of the
Company since March 1997. Previous to joining the Company, Mr. Novak was
employed by SmithKline Beecham Clinical Laboratories for more than the past
five years serving in a variety of senior management positions including
Senior Vice President, U.S. Operations and most recently President,
International. Mr. Novak oversees operations of the Company's Eastern
Operations which includes the Mid-Atlantic, Northeast, South and South
Atlantic Divisions. Mr. Novak is a member of the management committee of
the Company.
Bradford T. Smith has served as Executive Vice President,
General Counsel and Secretary since the Merger. He was appointed Corporate
Compliance Officer in August 1996. Previously, Mr. Smith served as Assistant
General Counsel of HLR, Division Counsel of RBL and Assistant Secretary and
member of RBL's Senior Management Committee from 1988 until April 1995. Mr.
Smith served as Assistant Secretary of HLR from 1989 until the Merger and as
an Assistant Vice President of HLR during 1992 and 1993. Mr. Smith is a
member of the management committee of the Company.
Stevan R. Stark was appointed Executive Vice President in
October 1996 and was Senior Vice President, New York Division, Cranford Region
and Alliance/Hospital Division since the Merger in April 1995. Mr. Stark
oversees the Company's sales operations including business alliances, managed
care and new business development. Previously, Mr. Stark was a Vice President
and Division Manager from 1991 to 1995 and a Division Manager from 1986 to
1991. He joined the Company in 1983. Mr. Stark is a member of the management
committee of the Company.
Ronald B. Sturgill has served as Executive Vice President since
October 1996. Mr. Sturgill oversees operations in the Company's South
Atlantic Division and certain corporate functions. Prior to that date and
since the Merger, Mr. Sturgill served as Senior Vice President, South Atlantic
Division. Mr. Sturgill served as Senior Vice President, Administration of RBL
from 1987 until the Merger where his duties included the supervision of
Information Systems, Human Resources, Sales Support and Training. Mr.
Sturgill is a member of the management committee of the Company.
William M. Meilahn has served as Senior Vice President and
Chief Information Officer since December 1995. Previously, Mr. Meilahn was
Executive Vice President, MIS and a director of Eduserv Technologies, Inc.
from 1993 through 1996, and was a Vice President in various capacities for
Automatic Data Processing, Inc. from 1983 through 1993. Mr. Meilahn is a
member of the management committee of the Company.
OWNERSHIP OF CAPITAL STOCK
The following table sets forth as of April 8, 1997, the total
number of shares of Common Stock beneficially owned, and the percent so owned,
by (i) each director of the Company who is a beneficial owner of any shares of
Common Stock, (ii) each person known to the Company to be the beneficial owner
of more than 5% of the outstanding Common Stock, (iii) certain executive
officers and (iv) all directors and officers as a group. The number of shares
owned are those "beneficially owned," as determined under the rules of the
Commission, and such information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership
includes any shares as to which a person has sole or shared voting power or
investment power and any shares of common stock which the person has the right
to acquire within 60 days through the exercise of any option, warrant or
right, through conversion of any security, or pursuant to the automatic
termination of power of attorney or revocation of trust, discretionary account
or similar arrangement.
Percent of
Common
Number of Shares Stock
Beneficial Owner Beneficially Owned Outstanding
- ------------------------------------ -------------------- ----------------
Roche Holdings, Inc................. 61,329,256(1) 49.9%
15 East North Street
Dover, DE 19901
Ronald O. Perelman.................. 14,527,244(2) 11.8%
35 East 62nd Street
New York, NY 10021
Thomas P. Mac Mahon................. 170,663(3) *
James B. Powell, M.D................ -- *
Jean-Luc Belingard.................. 3,996 *
Wendy E. Lane....................... 946 *
Robert E. Mittelstaedt, Jr.......... 946 *
David B. Skinner, M.D............... 3,996 *
Andrew G. Wallace, M.D.............. 3,996 *
All current directors and
executive officers as a
group (14 persons)................. 308,257(3) *
_____________
* Less than 1%
(1) As reported on the Schedule 13D filed with the Commission on May 8, 1995,
on behalf of Roche Holdings, 49,008,538 of these shares are directly
held by HLR, and 12,320,718 of these shares are directly held by Roche
Holdings. Both HLR and Roche Holdings are indirect wholly owned
subsidiaries of Roche. Dr. H.C. Paul Sacher, an individual and
citizen of Switzerland has, pursuant to an agreement, the power to vote
a majority of the voting shares of Roche Holdings.
(2) As reported in the Schedule 13G/A filed with the Commission on February
13, 1997, on behalf of Mafco, all shares are owned by NHCG, an indirect
wholly owned subsidiary of Mafco. All of the capital stock of Mafco is
owned by Mr. Ronald O. Perelman.
(3) Beneficial ownership by officers and directors of the Company includes
shares of Common Stock which such officers and directors have the right
to acquire upon the exercise of options which either are vested or
which may vest within 60 days. The number of shares of Common Stock
included in the table as beneficially owned which are subject to such
options is as follows: Mr. Mac Mahon -- 166,667; all directors and
executive officers as a group (not including Messrs. Brodnik,
Cochrane, Flaugh, Markus and Whalen who are no longer employed by the
Company) -- 282,732.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Stockholder Agreement
In connection with the Merger, the Company, HLR, Roche
Holdings and Hoffmann-La Roche Inc. entered into a stockholder agreement
dated as of April 28, 1995. The Stockholder Agreement contains certain
provisions relating to (i) the governance of the Company following the
Merger, including but not limited to the composition of the Board of
Directors, (ii) the issuance, sale and transfer of the Company's Equity
Securities (as defined therein) by the Company and Roche, (iii) the
acquisition of additional Equity Securities and (iv) the registration
rights granted by the Company to HLR, Roche Holdings and Roche with respect
to the Company's Equity Securities. A copy of the Stockholder Agreement
was included as an exhibit to the current report on Form 8-K of the Company
filed with the Commission on May 12, 1995 in connection with the
consummation of the Merger.
Pursuant to the Stockholder Agreement, the Board of
Directors of the Company will (subject to specified exceptions) be
comprised of seven members, consisting of three designees of HLR and Roche
Holdings (the "Roche Directors") and four Independent Directors (as defined
therein) nominated by the Nominating Committee of the Board of Directors.
The Stockholder Agreement also provides that, among other
things, certain actions by the Company will require approval by a majority
of the Roche Directors and at least one Independent Director (a "Special
Majority Vote"). Included in these items is any change in the size or
composition of the Board of Directors or any committee thereof and the
establishment of a new committee of the Board of Directors, and with
certain exceptions, the issuance of securities by the Company.
The Stockholder Agreement also provides that, except under
certain circumstances, which include the issuance of Common Stock pursuant
to a public offering, the Company may not issue any equity securities
unless HLR and Roche Holdings are offered the opportunity to purchase an
amount of such stock necessary to maintain their interest.
Pursuant to the Stockholder Agreement, HLR, Roche Holdings
and their affiliates (other than the Company and its subsidiaries) have the
right to acquire Equity Securities (as defined therein) to the extent that,
after giving effect thereto, their Total Voting Power would not exceed 75%.
Moreover, HLR, Roche Holdings and their affiliates (other than the Company
and its subsidiaries) may acquire additional Equity Securities
notwithstanding the fact that after giving effect thereto, their Total
Voting Power would exceed 75%, if HLR, Roche Holdings and their affiliates
(other than the Company and its subsidiaries) or any one of them offers,
prior to consummation of such purchase, to purchase all outstanding Equity
Securities and holders of Equity Securities totaling more than 50% of the
outstanding Equity Securities (excluding Equity Securities held by HLR,
Roche Holdings and their affiliates (other than the Company and its
subsidiaries)) accept such offer. After the third anniversary of the
Merger, the Stockholder Agreement does not restrict purchases by HLR, Roche
Holdings or their affiliates of Equity Securities.
In addition, the Stockholder Agreement contains a Demand
Registration provision pursuant to which the Company is obligated, upon the
request of HLR, Roche Holdings, or Roche, to file registration statements
with the Commission covering any shares of Common Stock owned by those
parties which are restricted securities within the meaning of Rule
144(a)(3) of the Securities Act of 1933, as amended (the "Securities Act").
HLR, Roche Holdings and Roche will also have the right to include such
securities in any registration statement filed by the Company offering
securities for its own account or for the account of any holder other than
Mafco or any of its affiliates, subject to certain reductions if the
managing underwriter determines that the size of the offering or the
combination of securities offered would materially interfere with the
offering.
The Sharing and Call Option Agreement
In connection with the Merger Agreement, HLR, Mafco, NHCG,
and the Company entered into the Sharing and Call Option Agreement. The
Sharing and Call Option Agreement provides, among other things, that at any
time after the third anniversary of the Merger, HLR or one of its
affiliates (other than the Company) may exercise the right, which right may
only be exercised once, to purchase all, but not less than all, of the
shares of Common Stock then owned by NHCG, Mafco or any of their controlled
affiliates. The Sharing and Call Option Agreement provides that HLR or one
of its affiliates will, if it elects to exercise this purchase right, pay a
price per share for the shares to be purchased equal to 102% of the average
closing price per share of such security for the 30 trading days before the
date of such exercise.
In addition, in accordance with the Sharing and Call Option
Agreement, the Company has filed with the Commission a registration
statement on Form S-3 (the "NHGC Registration Statement") which has been
declared effective by the Commission and includes a resale prospectus that
permits NHCG (or any of its pledgees) to sell shares of Common Stock and
Warrants received by NHCG in the Merger without restriction. The Company
has agreed to use its best efforts to prepare and file with the Commission
such post-effective amendments to the NHCG Registration Statement or other
filings as may be necessary to keep such NHCG Registration Statement
continuously effective for a period ending on the third anniversary of the
date of the Sharing and Call Option Agreement and during such period to use
its best efforts to cause the resale prospectus to be supplemented by any
required prospectus supplement. The Company has also agreed to pay the
applicable Registration Expenses (as defined therein) arising from exercise
of the registration rights set forth in the Sharing and Call Option
Agreement. A copy of the Sharing and Call Option Agreement was filed with
the Commission by the Company as an exhibit to the Company's December 31,
1994 Form 10-K.
Registration Rights Agreement
In addition to those registration rights granted to NHCG
under the Sharing and Call Option Agreement, the Company and NHCG also are
parties to a registration rights agreement dated as of April 30, 1991 (the
"Registration Rights Agreement") pursuant to which the Company is
obligated, upon the request of NHCG, to file registration statements
("Demand Registration Statements") from time to time with the Commission
covering the sale of any shares of Common Stock owned by NHCG upon the
completion of certain public offerings by the Company of shares of Common
Stock in 1991. Such Demand Registration Statements may also cover the
resale from time to time of any shares of Common Stock that NHCG may
purchase in the open market at a time when it is deemed to be an affiliate
(as such term is defined under Rule 144 under the Securities Act of 1933,
as amended), and certain securities issued in connection with a combination
of shares, recapitalization, reclassification, merger or consolidation, or
other pro rata distribution. NHCG will also have the right to include such
Common Stock and other securities in any registration statement filed by
the Company for the underwritten public offering of shares of Common Stock
(whether or not for the Company's account), subject to certain reductions
in the amount of such Common Stock and securities if the managing
underwriters of such offering determine that the inclusion thereof would
materially interfere with the offering. The Company agreed not to effect
any public or private sale, distribution or purchase of any of its
securities which are the same as or similar to the securities covered by
any Demand Registration Statement during the 15-day period prior to, and
during the 45-day period beginning on, the closing date of each
underwritten offering under such registration statement and NHCG agreed to
a similar restriction with respect to underwritten offerings by the
Company. NHCG's rights under the Registration Rights Agreement are
transferable as provided therein.
Until the third anniversary of the Sharing and Call Option
Agreement, when the Company's obligation to keep the NHCG Registration
Statement effective expires, the registration rights granted to NHCG
pursuant to the Registration Rights Agreement are substantially duplicative
of those granted pursuant to the Sharing and Call Option Agreement. After
such date and only to the extent that NHCG still holds shares of Common
Stock or Warrants that it held as of or received in the Merger, NHCG will
continue to be entitled to the registration rights described in the
preceding paragraph, unless the Rights Agreement has been otherwise amended
or terminated.
Tax Allocation Arrangement
Until May 7, 1991, the Company was included in the
consolidated federal income tax returns, and in certain state income tax
returns, of Mafco, M&F Holdings, Revlon Group and Revlon. As a result of
the reduction of M&F Holdings' indirect ownership interest in the Company
on May 7, 1991, the Company is no longer a member of the Mafco consolidated
tax group. For periods subsequent to May 7, 1991, the Company files its
own separate Federal, state and local income tax returns. Nevertheless,
the Company will remain obligated to pay to M&F Holdings (or other members
of the consolidated group of which M&F Holdings is a member) any income
taxes the Company would have had to pay (in excess of those which it has
already paid) if it had filed separate income tax returns for taxable
periods beginning on or after January 1, 1985 (but computed without regard
to (i) the effect of timing differences (i.e., the liability or benefit
that otherwise could be deferred will be, instead, includible in the
determination of current taxable income) and (ii) any gain recognized on
the sale of any asset not in the ordinary course of business). In
addition, despite the reduction of M&F Holdings' indirect ownership of the
Company, the Company will continue to be subject under existing federal
regulations to several liability for the consolidated federal income taxes
for any consolidated return year in which it was a member of any
consolidated group of which Mafco, M&F Holdings, Revlon Group or Revlon was
the common parent. However, Mafco, M&F Holdings, Revlon Group and Revlon
have agreed to indemnify the Company for any federal income tax liability
(or any similar state or local income tax liability) of Mafco, M&F
Holdings, Revlon Group, Revlon or any of their subsidiaries (other than
that which is attributable to the Company or any of its subsidiaries) that
the Company would be required to pay.
Other Transactions with Roche
In December 1996, the Company received a loan from Roche
Holdings of $187.0 million to fund the Settlement Payment in the form of a
promissory note which bears interest at 6.625% per annum. In March 1997,
the original maturity of March 31, 1997 of such note was extended to March
31, 1998. Such note will be repaid with a portion of the proceeds from the
Rights Offering.
The Company has certain on-going arrangements with Roche for
the purchase by the Company of certain products and the licensing by the
Company from Roche of certain diagnostics technologies, with an aggregate
value of approximately $9.1 million in 1996. The Company provides certain
diagnostic testing and support services to Roche in connection with Roche's
clinical pharmaceutical trials, with an aggregate value of approximately
$2.4 million in 1996. In addition, in connection with the Merger, the
Company and Roche entered into a transition services agreement for the
provision by Roche to the Company of certain payroll and other corporate
services for a limited transition period following the Merger. These
services were charged to the Company based on the time involved and the
Roche personnel providing the service. The Company paid Roche a total of
approximately $267,000 in 1996 for these services. Each of these
arrangements was entered into in the ordinary course of business, on an
arm's length basis and on terms which the Company believes are no less
favorable to it than those obtainable from unaffiliated third parties.
HLR and Roche Holdings have indicated that they intend to
exercise their Basic Subscription Privilege and Oversubscription Privilege
in the Rights Offering in full for Series B PIK Preferred Stock (subject,
in the case of the Oversubscription Privilege, to reduction in certain
circumstances). As a result, if no other Rights are exercised, HLR and
Roche Holdings will purchase 10,000,000 shares of Series B PIK Preferred
Stock.
DESCRIPTION OF THE AMENDED CREDIT AGREEMENT
The Amended Credit Agreement will become effective upon
consummation of the Rights Offering subject to satisfaction of certain
conditions precedent referred to below. A copy of the Amended Credit
Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The following summaries of certain
provisions of the Amended Credit Agreement do not purport to be complete
and where reference is made to particular provisions of the Amended Credit
Agreement such provisions, including definitions of certain terms are
incorporated by reference as a part of such summaries or terms, which are
qualified in their entirety by such reference.
Following consummation of the Rights Offering and the
receipt of $500 million in gross proceeds, the Amended Credit Agreement
makes available to the Company the Amended Term Loan Facility of $643.8
million and the Amended Revolving Credit Facility of $450.0 million.
Following the Rights Offering, the Company estimates that availability
under the Amended Credit Agreement will be approximately $327.0 million.
Such availability will be conditioned on certain customary conditions
contained in the Amended Credit Agreement.
Facilities and Maturity Dates
As in the Existing Credit Agreement, the senior unsecured
credit facilities under the Amended Credit Agreement are composed of the
Amended Term Loan Facility and the Amended Revolving Credit Facility. The
Amended Revolving Credit Facility includes a $50 million letter of credit
sublimit. The Amended Credit Agreement extends maturity dates by
approximately three years for the Amended Term Loan Facility to March 31,
2004 and approximately two years for the Amended Revolving Credit Facility
to March 31, 2002.
Interest Margins and Facility Fee
As in the Existing Credit Agreement, both the Amended Term
Loan Facility and the Amended Revolving Credit Facility bear interest, at
the option of the Company, at (i) the base rate plus the applicable base
rate margin or (ii) the eurodollar rate plus the applicable eurodollar rate
margin. The Amended Credit Agreement provides that in the event of a
reduction of the percentage of Common Stock held by HLR, Roche Holdings and
their affiliates (other than the Company and its subsidiaries) below 25%,
the applicable interest margins and facility fees on borrowings outstanding
under the Amended Credit Agreement will increase. The amount of the
increase will depend, in part, on the leverage ratio of the Company at the
time of such reduction. In addition, pursuant to the Amended Credit
Agreement, the applicable interest margins on borrowings outstanding
thereunder are based upon the leverage ratio.
Amendment Fees
The Company will pay each lender an amendment fee based on
the sum of its revolving credit commitments and term loans.
Letter of Credit Issuers, Fronting Fee and Letter of Credit Fee
Any lender that is party to the Amended Credit Agreement may
serve as a letter of credit issuer under the Amended Credit Agreement, as
agreed between the Company and such lender. The fronting fee payable to
each letter of credit issuer will be as negotiated between the Company and
such issuer, but will not exceed 0.125% per annum of the outstanding amount
of such issuer's letter of credit. Each lender will be deemed to have
purchased a participating interest in each letter of credit, and in
addition to the fronting fee the Company will pay a letters of credit fee
for the account of all the lenders equal to the applicable Amended
Revolving Credit Facility Eurodollar Rate Margin minus 0.125% per annum.
Term Facility Amortization
Total amortization of the Amended Term Loan Facility for each
twelve-month period following consummation of the Rights Offering will be
reduced significantly for the first three years, and will be made (in
quarterly installments) in accordance with the following table:
Year Amount
------ --------
(in millions)
1997................................ $ 0
1998................................ $ 0
1999................................ $ 46.4
2000................................ $ 92.8
2001................................ $ 139.2
2002................................ $ 139.2
2003................................ $ 139.2
3/31/2004........................... $ 87.0
Mandatory and Optional Prepayments and Commitment Reductions
As in the Existing Credit Agreement, the amounts available
under the Amended Revolving Credit Facility are subject to certain mandatory
permanent reduction and prepayment requirements and the Amended Term Loan
Facility is subject to specified mandatory prepayment requirements. In the
Amended Credit Agreement, required amounts will first be applied to repay
scheduled Amended Term Loan Facility payments until the Amended Term Loan
Facility is repaid in full and then to reduce the commitments and advances
under the Amended Revolving Credit Facility. Required payments and reductions
will include (i) the proceeds of debt issuances, subject to certain
exceptions; (ii) the proceeds of certain asset sales, unless reinvested within
one year of the applicable asset sale in productive assets of a kind then used
or usable in the business of the Company and its subsidiaries; (iii) the
proceeds of sales of equity securities in excess of certain amounts; and (iv)
under certain circumstances, a percentage of excess cash flow, as calculated
annually.
Representations and Warranties
The Amended Credit Agreement contains representations and
warranties substantially similar to those set forth in the Existing Credit
Agreement.
Conditions Precedent
Conditions precedent to effectiveness of the Amended Credit
Agreement include, without limitation, receipt of appropriate certificates and
legal opinions, accuracy in all material respects of representations and
warranties, including absence of material adverse change in the Company and
its subsidiaries (taken as a whole) since December 31, 1996, absence of
defaults, evidence of authority, and payment of transaction fees.
Covenants
The Amended Credit Agreement contains customary covenants
similar to, and in the case of limitations on acquisitions and incurrence of
additional debt more restrictive than, the covenants set forth in the Existing
Credit Agreement.
Financial Covenants
Like the Existing Credit Agreement, the Amended Credit
Agreement contains financial covenants with respect to a leverage ratio, an
interest coverage ratio and minimum stockholders' equity. The covenant levels
are less restrictive than under the Existing Credit Agreement, and will be
tested quarterly.
Events of Default
The Amended Credit Agreement contains events of default
substantially similar to those set forth in the Existing Credit Agreement.
DESCRIPTION OF RIGHTS OFFERING
The Rights
The Company is hereby issuing transferable Rights at no cost to
each record holder of Common Stock as of the close of business on the Record
Date of , 1997. The Company will issue of a Right for each
share of Common Stock held on the Record Date. The Rights will be evidenced
by transferable Rights Certificates, which are being distributed to each
Recordholder contemporaneously with the delivery of this Prospectus. The
Rights permit the holder thereof to purchase an equal amount of either Series
A Exchangeable Preferred Stock or Series B PIK Preferred Stock. Except as to
payment of dividends, conversion and exchangeability as described in
"Description of Preferred Stock," the terms of the Series A Exchangeable
Preferred Stock and the Series B PIK Preferred Stock are identical in all
respects.
No fractional Rights or cash in lieu thereof will be issued or
paid. Instead, the number of Rights issued to a Recordholder will be rounded
to the nearest whole number, with such adjustments as may be necessary to
ensure that no more than 10,000,000 shares of Preferred Stock are issued
hereunder.
Because the number of Rights issued to each Recordholder will
be rounded to the nearest whole number, with such adjustments as may be
necessary to ensure that no more than 10,000,000 shares of Preferred Stock are
issued hereunder, beneficial owners of Common Stock who are also Recordholders
of their shares may receive more Rights under certain circumstances than
beneficial owners of Common Stock who are not Recordholders of their shares.
Beneficial owners of Common Stock who are not Recordholders may obtain a
separate Rights Certificate upon request to the nominee Recordholder. See
"Method of Subscription--Exercise of Rights."
Once the Rights are distributed and until the Expiration Date,
the Company will not effect a reclassification of the Company's equity
securities which could have the effect of materially altering the value of the
Rights.
Expiration Date
The Rights will expire at 5:00 p.m., New York time, on ,
1997 subject to extension in the sole discretion of the Company for up to 30
additional days. The Company does not currently contemplate any extensions.
After the Expiration Date, unexercised Rights will be null and void. The
Company will not be obligated to honor any purported exercise of Rights
received by the American Stock Transfer & Trust Company (the "Subscription and
Information Agent") or any transfer of Rights into the Subscription and
Information Agent's Account at the Depository Trust Company ("DTC") after the
Expiration Date, regardless of when the documents relating to that exercise
were sent, except pursuant to the Guaranteed Delivery Procedures described
below. The Company may extend the Expiration Date by giving oral or written
notice to the Subscription and Information Agent on or before the Expiration
Date, followed by a press release no later than 9:00 a.m. New York time on the
next business day after the previously scheduled Expiration Date. The Rights
Offering will not be extended to a time later than 5:00 p.m., New York time,
on , 1997.
Subscription Privileges
Basic Subscription Privilege. Each Right will entitle the
holder thereof to purchase at the Subscription Price one Underlying Share.
Upon exercise of Rights, Rights Holders must indicate on their Rights
Certificate whether they wish to receive either shares of Series A
Exchangeable Preferred Stock or shares of Series B PIK Preferred Stock. A
failure to so indicate on the Rights Certificate will result in issuance of
Series A Exchangeable Preferred Stock. Each Rights Holder is entitled to
subscribe for all, or any portion of, the Underlying Shares which may be
acquired through the exercise of Rights held by it; provided, that all of the
Underlying Shares purchased must be either Series A Exchangeable Preferred
Stock or Series B PIK Preferred Stock. Payment of the Subscription Price
will be held in a segregated account to be maintained by the Subscription
and Information Agent and will be applied to the purchase of Preferred
Stock. The certificates representing Underlying Shares purchased pursuant
to the Basic Subscription Privilege will be delivered to subscribers as
soon as practicable after the Expiration Date.
Oversubscription Privilege. Subject to availability and
proration as described below, Rights Holders who fully exercise the Basic
Subscription Privilege will be eligible to subscribe, at the Subscription
Price, for additional shares of the same series of Preferred Stock purchased
pursuant to such Rights Holder's Basic Subscription Privilege available after
satisfaction of all subscriptions pursuant to the Basic Subscription
Privilege. This Oversubscription Privilege must be exercised at the same time
as the Basic Subscription Privilege is exercised.
Shares of Preferred Stock will be available for purchase
pursuant to the Oversubscription Privilege only to the extent that any
Underlying Shares are not subscribed for through exercise of the Basic
Subscription Privilege. The Excess Shares will be allocated pro rata
(subject to the elimination of fractional shares) among the Rights Holders
who exercise their Oversubscription Privilege in proportion to the
respective number of shares of Preferred Stock each such Rights Holder
subscribes for pursuant to the Basic Subscription Privilege; provided,
however, that if such pro rata allocation results in any Rights Holder
being allocated a greater number of Excess Shares than such holder
subscribed for pursuant to the exercise of the Oversubscription Privilege,
then each Rights Holder will be allocated only that number of Excess Shares
for which such holder oversubscribed, and the remaining Excess Shares will
be allocated among all other Rights Holders exercising the Oversubscription
Privilege on the same pro rata basis outlined above; such proration will be
repeated until all Excess Shares have been allocated to the full extent of
the Oversubscription Privilege exercised; provided further, however, that
HLR and Roche Holdings will not be allocated any Excess Shares until all
other Rights Holders exercising the Oversubscription Privilege have been
allocated the number of Excess Shares for which they oversubscribed.
Payment for oversubscription will be deposited upon receipt by the
Subscription and Information Agent and held in a segregated account with
the Subscription and Information Agent pending a final determination of the
number of Underlying Shares to be issued pursuant to such Oversubscription
Privilege. THEREFORE, RIGHTS HOLDERS WHO PLACE OVERSUBSCRIPTION ORDERS
PRIOR TO THE EXPIRATION DATE WILL LOSE ACCESS TO FUNDS TENDERED FOR AN
INDETERMINATE PERIOD OF TIME UP TO DAYS AFTER THE EXPIRATION DATE
AND MAY NOT ACTUALLY ACQUIRE SHARES OF PREFERRED STOCK SUBSCRIBED FOR. If
a proration of the Excess Shares results in a Rights Holder receiving fewer
Excess Shares than such Rights Holder subscribed for pursuant to the
Oversubscription Privilege, then the excess funds paid by that holder at
the Subscription Price for shares not issued will be returned without
interest or deduction. Certificates representing Underlying Shares
purchased pursuant to the Oversubscription Privilege, together with
certificates representing Underlying Shares purchased pursuant to the Basic
Subscription Privilege, will be delivered to subscribers as soon as
practicable after the Expiration Date.
Subscription Price
The Subscription Price is $50 per Underlying Share subscribed
for pursuant to the Basic Subscription Privilege and the Oversubscription
Privilege.
No Board or Financial Advisor Recommendation
An investment in the Preferred Stock must be made pursuant to
each investor's evaluation of such investor's best interests. Accordingly,
neither the Board of Directors of the Company nor Credit Suisse First Boston,
as financial advisor to the Company, makes any recommendation to Rights
Holders regarding whether they should exercise their Rights to subscribe for
shares of Preferred Stock.
Method of Subscription --Exercise of Rights
Rights Holders may exercise their Rights by delivering to the
Subscription and Information Agent, at the addresses specified below, at or
prior to the Expiration Date, the properly completed and executed Rights
Certificate(s) evidencing those Rights, with any signatures guaranteed as
required, together with payment in full of the Subscription Price for each
Underlying Share subscribed for pursuant to the Basic Subscription
Privilege and the Oversubscription Privilege. Payment may be made only (i)
by check or bank draft drawn upon a U.S. bank, or postal, telegraphic or
express money order, payable to the Subscription and Information Agent; or
(ii) by wire transfer of funds to the escrow account maintained by the
Subscription and Information Agent for the purpose of accepting
subscriptions (the "Subscription Account"). In the case of Rights that are
held of record through DTC, exercises of the Basic Subscription Privilege
and Oversubscription Privilege may be effected by instructing
DTC to transfer Rights from the DTC account of such holder to the DTC
account of the Subscription and Information Agent, together with
certification as to the aggregate number of Rights exercised and the number
of shares of Preferred Stock thereby subscribed for pursuant to the Basic
Subscription Privilege and the Oversubscription Privilege by each
beneficial owner of Rights on whose behalf such nominee Recordholder is
acting, and payment of the Subscription Price for each share of Preferred
Stock subscribed for pursuant to the Subscription Privilege. Requests for
information by Rights Holders, including with respect to payment by wire
transfer to the Subscription Account, should be directed to the
Subscription and Information Agent at (800) 937-5449 or (718) 921-8200.
The Subscription Price will be deemed to have been received by the
Subscription and Information Agent only upon (i) clearance of any
uncertified check; (ii) receipt by the Subscription and Information Agent
of any certified check or bank draft drawn upon a U.S. bank or any postal,
telegraphic or express money order; or (iii) receipt of collected funds in
the Subscription Account. Funds paid by uncertified personal check may
take up to five business days to clear. Accordingly, Rights Holders who
wish to pay the Subscription Price by means of an uncertified personal
check are urged to make payment sufficiently in advance of the Expiration
Date to ensure that such payment is received and clears by such time and
are urged to consider, in the alternative, payment by means of certified
check, bank draft, money order or wire transfer. All funds received in
payment of the Subscription Price shall be held by the Subscription and
Information Agent and invested at the direction of the Company in short-
term certificates of deposit, short-term obligations of the United States or
any state or any agency thereof or money market mutual funds investing in the
foregoing instruments. The account in which such funds will be held will not
be insured by the FDIC. Any interest earned on such funds will be retained by
the Company.
The Rights Certificates and payment of the Subscription Price
or, if applicable, Notices of Guaranteed Delivery, as defined below, must be
delivered to the Subscription and Information Agent by one of the methods
described below.
(1) BY FIRST CLASS MAIL; EXPRESS MAIL OR OVERNIGHT COURIER;
AND BY HAND:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(2) BY FACSIMILE:
FOR NOTICE OF GUARANTEED DELIVERY ONLY
(718) 234-5001
Delivery to an address or facsimile other than those above does
not constitute valid delivery.
The Company will pay the fees and expenses of the Subscription
and Information Agent and has also agreed to indemnify the Subscription and
Information Agent from certain liabilities which it may incur in connection
with the Rights Offering. All commissions, fees and other expenses (including
brokerage commissions and transfer taxes) incurred in connection with the
purchase, sale or exercise of Rights will be for the account of the transferor
of the Rights, and none of such commissions, fees or expenses will be paid by
the Company or the Subscription and Information Agent.
If a Rights Holder wishes to exercise Rights, but time will not
permit such Rights Holder to cause the Rights Certificate(s) evidencing those
Rights to reach the Subscription and Information Agent prior to the Expiration
Date, such Rights may nevertheless be exercised if all of the following
conditions (the "Guaranteed Delivery Procedures") are met:
(i) the Rights Holder has caused payment in full of the
Subscription Price for each Underlying Share being
subscribed for pursuant to the Basic Subscription
Privilege and, if applicable, the Oversubscription
Privilege to be received (in the manner set forth
above) by the Subscription and Information Agent at or
prior to the Expiration Date;
(ii) the Subscription and Information Agent receives, on or
prior to the Expiration Date, a guarantee notice (a
"Notice of Guaranteed Delivery"), guaranteed by a
member firm of a registered national securities
exchange or a member of the National Association of
Securities Dealers, Inc., or from a commercial bank or
trust company having an office or correspondent in the
United States, giving the name of the exercising Rights
Holder, the number of Underlying Shares being
subscribed for pursuant to the Basic Subscription
Privilege and, if any, pursuant to the Oversubscription
Privilege and guaranteeing the delivery to the
Subscription and Information Agent of the Rights
Certificate(s) evidencing those Rights within two (2)
business days following the date of the Notice of
Guaranteed Delivery; and
(iii) the properly completed Rights Certificate(s) evidencing
the Rights being exercised, with any signatures
guaranteed as required, is received by the Subscription
and Information Agent or such Rights are transferred to
the DTC account of the Subscription and Information
Agent within two (2) business days following the date
of the Notice of Guaranteed Delivery relating thereto.
The Notice of Guaranteed Delivery may be delivered to
the Subscription and Information Agent in the same
manner as Rights Certificates at the address set forth
above or may be delivered to the Subscription and
Information Agent by telegram or facsimile
transmission. Additional copies of the form of Notice
of Guaranteed Delivery are available upon request from
the Subscription and Information Agent at the address
and telephone number set forth below.
If an exercising Rights Holder does not indicate the number of
Rights being exercised, or does not forward full payment of the aggregate
Subscription Price for the number of Rights that the Rights Holder indicates
are being exercised, then the Rights Holder will be deemed to have exercised
the Basic Subscription Privilege with respect to the maximum number of Rights
that may be exercised for the aggregate payment delivered by the Rights Holder
and, to the extent that the aggregate payment delivered by a Rights Holder
exceeds the product of the Subscription Price multiplied by the number of
Rights evidenced by the Rights Certificates delivered by a Rights Holder (such
excess being the "Subscription Excess"), the Rights Holder will be deemed to
have exercised the Oversubscription Privilege to purchase, to the extent
available, that number of whole Excess Shares equal to the quotient obtained
by dividing the Subscription Excess by the Subscription Price. Any amount
remaining after application of the foregoing procedures shall be returned to
the Rights Holder promptly by mail without interest or deduction.
Certificates for shares of Preferred Stock issued pursuant to
the exercise of Rights will be registered in the name of the Rights Holder
exercising such Rights. There can be no assurance that the value of the
Preferred Stock will not decline below the Subscription Price before such
shares of Preferred Stock are delivered.
A Rights Holder who subscribes for fewer than all of the shares
represented by its Right Certificates may, under certain circumstances,
receive from the Subscription and Information Agent a new Rights Certificate
representing the remaining Rights. See "--Partial Exercise Procedures."
Recordholders who hold shares of Common Stock for the account
of others, such as brokers, trustees or depositories for securities, should
contact the respective beneficial owners of such shares as soon as possible to
ascertain these beneficial owners' intentions and to obtain instructions with
respect to their Rights. If a beneficial owner so instructs, the
Recordholders of that beneficial owner's Rights should complete appropriate
Rights Certificates and submit them to the Subscription and Information Agent
with the proper payment. In addition, beneficial owners of Rights through
such a nominee holder should contact the nominee holder and request the
nominee holder to effect transactions in accordance with the beneficial
owners' instructions. If a beneficial owner wishes to obtain a separate
Rights Certificate he, she or it should contact the nominee as soon as
possible and request that a separate Rights Certificate be issued. A nominee
may request any Rights Certificate held by it to be split into such smaller
denominations as it wishes, provided that the Rights Certificate is received
by the Subscription and Information Agent, properly endorsed, no later than
5:00 p.m., New York time, on , 1997.
The instructions as to use of Laboratory Corporation of America
Holdings Rights Certificates (the "Instructions") accompanying the Rights
Certificates should be read carefully and followed in detail. RIGHTS
CERTIFICATES SHOULD BE SENT WITH PAYMENT TO THE SUBSCRIPTION AND INFORMATION
AGENT. DO NOT SEND RIGHTS CERTIFICATES OR PAYMENTS TO THE COMPANY.
THE METHOD OF DELIVERY OF RIGHTS CERTIFICATES AND PAYMENT OF
THE SUBSCRIPTION PRICE TO THE SUBSCRIPTION AND INFORMATION AGENT WILL BE AT
THE ELECTION AND RISK OF THE RIGHTS HOLDERS. IF RIGHTS CERTIFICATES AND
PAYMENTS ARE SENT BY MAIL, RIGHTS HOLDERS ARE URGED TO SEND SUCH MATERIALS
BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, AND
ARE URGED TO ALLOW A SUFFICIENT NUMBER OF DAYS TO ENSURE DELIVERY TO THE
SUBSCRIPTION AND INFORMATION AGENT AND CLEARANCE OF PAYMENT PRIOR TO THE
EXPIRATION DATE. BECAUSE UNCERTIFIED CHECKS MAY TAKE AT LEAST FIVE
BUSINESS DAYS TO CLEAR, RIGHTS HOLDERS ARE STRONGLY URGED TO PAY, OR
ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED CHECK, BANK DRAFT, MONEY ORDER
OR WIRE TRANSFER.
Certain directors and officers of the Company will assist the
Company in the Rights Offering by, among other things, participating in
informational meetings regarding the Rights Offering, generally being
available to answer questions of potential subscribers and soliciting
orders in the Rights Offering. None of such directors and officers will
receive additional compensation for such services. None of such directors
and officers are registered as securities brokers or dealers under the
Federal or applicable state securities laws, nor are any of such persons
affiliated with any broker or dealer. Because none of such persons are in
the business of either effecting securities transactions for others or
buying and selling securities for their own account, they are not required
to register as brokers or dealers under the Federal securities laws. In
addition, the proposed activities of such directors and officers are
exempted from registration pursuant to a specific safe-harbor provision
under Rule 3a4-1 under the Exchange Act. Substantially similar exemptions
from registration are available under applicable state securities laws.
All questions concerning the timeliness, validity, form and
eligibility of any exercise of Rights will be determined by the Company, whose
determination will be final and binding. The Company, in its sole discretion,
may waive any defect or irregularity, or permit a defect or irregularity to be
corrected within such time as it may determine. Rights Certificates will not
be deemed to have been received or accepted until all irregularities have been
waived or cured within such time as the Company determines, in its sole
discretion. Neither the Subscription and Information Agent nor the Company
will be under any duty to give notification of any defect or irregularity in
connection with the submission of Rights Certificates or incur any liability
for failure to give such notification. The Company reserves the right to
reject any exercise if such exercise is not in accordance with the terms of
the Rights Offering or not in proper form or if the acceptance thereof or the
issuance of the Preferred Stock pursuant thereto could be deemed unlawful.
Any questions or requests for assistance concerning the method
of subscribing for shares of Preferred Stock or for additional copies of this
Prospectus, the Instructions or the Notice of Guaranteed Delivery may be
directed to the Subscription and Information Agent at the address and
telephone number below:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
(800) 937-5449
(718) 921-8200
Partial Exercise Procedures
A new Rights Certificate will be issued to a submitting Rights
Holder or transferred according to the Rights Holder's Instructions
upon the partial exercise of Rights only if the Subscription and
Information Agent receives a properly endorsed Rights Certificate no later
than the fourth business day prior to the Expiration Date. After such time
and date no new Rights Certificates will be issued. Accordingly, after such
time and date a Rights Holder exercising less than all of its Rights will lose
the power to exercise its remaining Rights. A new Rights Certificate will be
sent by first class mail to the submitting Rights Holder if the Subscription
and Information Agent receives the properly completed Rights Certificate by
5:00 p.m. New York time, on , 1997. Unless the submitting Rights Holder
makes other arrangements with the Subscription and Information Agent, a new
Rights Certificate received by the Subscription and Information Agent after
5:00 p.m. New York time, on , 1997 will be held for pick-up by the
submitting Rights Holder at the Subscription and Information Agent's hand
delivery address provided above. All deliveries of newly issued Subscription
Right Certificates will be at the risk of the sub mitting Rights Holder.
Foreign and Certain Other Stockholders
Rights Certificates will not be mailed to Recordholders whose
addresses are outside the United States and Canada or who have an APO or FPO
address, but will be held by the Subscription and Information Agent for each
Recordholder's account. To exercise their Rights, such persons must notify
the Subscription and Information Agent at or prior to 5:00 p.m., New York
time, on , 1997. Such Rights Holder's rights expire at the Expiration
Date.
Subscription by Principal Stockholder
HLR and Roche Holdings have informed the Company that they
intend to exercise their Basic Subscription Privilege and Oversubscription
Privilege in full for the Series B PIK Preferred Stock (subject, in the case
of the Oversubscription Privilege, to reduction in certain circumstances). As
a result, if no other Rights are exercised, HLR and Roche Holdings will
purchase 10,000,000 shares of Series B PIK Preferred Stock.
No Revocation
ONCE A RIGHTS HOLDER HAS PROPERLY EXERCISED THE BASIC
SUBSCRIPTION PRIVILEGE OR THE OVERSUBSCRIPTION PRIVILEGE, SUCH EXERCISE MAY
NOT BE REVOKED.
Dilution
Rights Holders may experience dilution of their percentage of
equity ownership interest and voting power in the Company if and when all of
the shares of Preferred Stock are converted into shares of Common Stock in
accordance with their terms if they do not exercise the Basic Subscription
Privilege. Even if the Rights Holders exercise their Basic Subscription
Privilege in full, they may nevertheless still experience dilution in their
voting rights and in their proportional interest in any future net earnings of
the Company if other holders of Rights exercise the Oversubscription Privilege
and such Rights Holders elect not to exercise the Oversubscription Privilege,
if and when all of the shares of Preferred Stock are converted into shares of
Common Stock in accordance with their terms. In addition, Rights Holders who
exercise Rights for Series A Exchangeable Preferred Stock will experience
dilution as dividends on the Series B PIK Preferred Stock are paid in shares
of Series B PIK Preferred Stock.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of
220,000,000 shares of Common Stock, par value $.01 per share, and 10,000,000
shares of preferred stock, par value $0.10 per share. As of February 14,
1997, 122,935,081 shares of Common Stock were issued and outstanding. Prior
to the Rights Offering, no shares of preferred stock were issued and
outstanding.
There are currently insufficient shares of Common Stock
authorized to permit conversion of all of the Preferred Stock issued upon the
exercise of Rights or as dividends on the Series B PIK Preferred Stock and
insufficient shares of Preferred Stock authorized to permit the payment of
dividends on the Series B PIK Preferred Stock if all the Preferred Stock
offered hereby is sold. In connection with the next annual meeting of
shareholders currently scheduled for , 1997, the Board of Directors
will propose amending the Company's Certificate of Incorporation to increase
(i) the authorized number of shares of Common Stock to permit conversion of
the Preferred Stock and the Notes, if applicable and (ii) the authorized
number of shares of preferred stock to permit the payment of dividends on
the Series B PIK Preferred Stock. HLR, Roche Holdings and the directors
and executive officers of the Company have indicated to the Company that
they intend to vote in favor of such amendment.
Common Stock
Each holder of Common Stock is entitled to one vote for each
share held on all matters to be voted upon by the stockholders. The holders
of outstanding shares of Common Stock, subject to any preferences that may be
applicable to any outstanding series of Preferred Stock, are entitled to
receive ratably such dividends out of assets legally available therefor at
such times and in such amounts as the Board of Directors may from time to time
determine. Upon liquidation or dissolution of the Company, the holders of
Common Stock of the Company will be entitled to share ratably in the assets of
the Company legally available for distribution to shareholders after payment
of liabilities and subject to the prior rights of any holders of preferred
stock then outstanding. Holders of Common Stock generally have no conversion,
sinking fund, redemption, preemptive or subscription rights. However,
pursuant to the Stockholder Agreement, HLR and Roche Holdings were granted
certain preemptive rights. See "Certain Relationships and Related
Transactions--The Stockholder Agreement". In addition, the Common Stock does
not have cumulative voting rights. Shares of Common Stock are not liable to
further calls or assessments by the Company and holders of Common Stock are
not liable for any liabilities of the Company.
The transfer agent and registrar for the Common Stock is
American Stock Transfer & Trust Company.
Warrant Agreement
In connection with the Merger, the Company entered into a
warrant agreement dated April 10, 1995 (the "Warrant Agreement"). Pursuant to
the Warrant Agreement, the Company distributed a dividend consisting of
warrants to purchase an aggregate of approximately 13,826,308 shares of Common
Stock to stockholders of record as of April 21, 1995, including NHCG. In
addition, pursuant to the Merger, on April 28, 1995, Roche purchased from the
Company warrants (the "Roche Warrants") to purchase 8,325,000 shares of Common
Stock for an aggregate purchase price of $51,048,900. The Warrant Agreement
provides that each Warrant may be exercised on the fifth anniversary (the
"Warrant Expiration Date") of issuance to purchase one share of Common Stock
at a purchase price of $22.00 per share (subject to adjustment); $ per
share following the Rights Offering (subject to further adjustment). The
Company has the option, exercisable by notice 60 days prior to the Warrant
Expiration Date, to redeem the Warrants on the Warrant Expiration Date for a
cash redemption price per Warrant equal to the average closing price of the
Common Stock over a specified period prior to the Warrant Expiration Date
minus the exercise price.
Preferred Stock
The Board of Directors is authorized to issue up to an
aggregate of 10,000,000 shares of preferred stock in one or more classes or
series, and to fix for each such class or series such voting powers, full or
limited, or no voting powers, and such distinctive designations, preferences
and relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such class or series and as may be permitted by
the Delaware General Corporate Law ("DGCL"), including, without limitation,
the authority to provide that any such class or series may be (i) subject to
redemption at such time or times and at such price or prices; (ii) entitled to
receive dividends (which may be cumulative or non-cumulative) at such rates,
on such conditions, and at such times, and payable in preference to, or in
such relation to, the dividends payable on any other class or classes or any
other series; (iii) entitled to such rights upon the dissolution of, or upon
any distribution of the assets of, the Company; or (iv) convertible into, or
exchangeable for, shares of any other class or classes of stock, or of any
other series of the same or any other class or classes of stock, of the
Company at such price or prices or at such rates of exchange and with such
adjustments; all as may be stated in such resolution or resolutions. See
"Description of Preferred Stock" for a description of the Preferred Stock
being offered hereby.
DESCRIPTION OF PREFERRED STOCK
General
The Preferred Stock consists of the Series A Exchangeable
Preferred Stock and the Series B PIK Preferred Stock, each of which has been
authorized as a new series of preferred stock, which in the aggregate will
consist of 10,000,000 shares (plus up to 6,564,000 shares of Series B PIK
Preferred Stock to be issued in the form of dividends). The Company's
Certificate of Incorporation authorizes the Company to issue without any
action on the part of its stockholders, an aggregate of 10,000,000 shares of
Preferred Stock, par value $0.10 per share. When issued in accordance with
the terms of the Rights Offering, the Preferred Stock will be fully paid and
nonassessable. The holders of the Preferred Stock will have no preemptive
rights with respect to any shares of capital stock of the Company or any other
securities of the Company convertible into, or carrying rights or options to
purchase, any such shares. The Preferred Stock will not be subject to any
sinking fund. Unless converted, exchanged or redeemed by the Company prior to
, 2012, on such date all of the Preferred Stock shall be redeemed by
the Company at the redemption price set forth herein. The following summary
description of the terms of the Preferred Stock does not purport to be
complete and is qualified in its entirety by reference to the Certificate
of Designation, Preferences and Rights for the Series A Exchangeable
Preferred Stock (the "Series A Certificate of Designation") and the
Certificate of Designation, Preferences and Rights for the Series B PIK
Preferred Stock (the "Series B Certificate of Designation" and together
with the Series A Certificate of Designation, the "Certificates of
Designation"), copies of which are filed as exhibits to the Registration
Statement of which this Prospectus forms a part. Upon request, the
transfer agent for the Preferred Stock will furnish holders a copy of the
applicable Certificate of Designation.
Dividends and Ranking
Dividends on Series A Exchangeable Preferred Stock. Holders of
shares of Series A Exchangeable Preferred Stock will be entitled to receive,
when, as and if declared by the Board of Directors of the Company out of funds
legally available for payment, dividends at an annual rate of % of the
Liquidation Preference (as defined) of the Preferred Stock, or $ per share
of Series A Exchangeable Preferred Stock payable in cash quarterly in arrears
on , , and of each year,
commencing , 1997 (with respect to the period from the date of
issuance of such shares of Preferred Stock to such date), except that if any
such date is a Saturday, Sunday or legal holiday then such dividend will be
payable on the next day that is not a Saturday, Sunday or legal holiday.
Dividends will accrue and be cumulative from such date of issuance and will be
payable to holders of record as they appear on the stock transfer books on
such record dates as are fixed by the Board of Directors (provided that no
record date shall be later than (a) the sixth business day prior to the date
fixed for any redemption of the Preferred Stock or, (b) in the case of the
dividend payment date occurring on , the tenth business day prior
to such date).
Dividends on Series B PIK Preferred Stock. Holders of shares
of Series B PIK Preferred Stock will be entitled to receive, when, as and if
declared by the Board of Directors of the Company, dividends at an annual rate
of % of the Liquidation Preference (as defined) of the Preferred Stock, or
$ per share of Series B PIK Preferred Stock, payable in shares of Series B
PIK Preferred Stock until , 2003 and in cash thereafter, quarterly
in arrears on , , and of each year,
commencing , 1997 (with respect to the period from the date of
issuance of such shares of Preferred Stock to such date), except that if any
such date is a Saturday, Sunday or legal holiday then such dividend will be
payable on the next day that is not a Saturday, Sunday or legal holiday.
Dividends will accrue and be cumulative from such date of issuance and will be
payable to holders of record as they appear on the stock transfer books on
such record dates as are fixed by the Board of Directors (provided that no
record date shall be later than (a) the sixth business day prior to the date
fixed for any redemption of the Preferred Stock or, (b) in the case of the
dividend payment date occurring on , the tenth business day prior to
such date). No fractional shares of Series B PIK Preferred Stock will be
issued, so that the number of shares to be paid as a dividend pursuant to the
Series B PIK Preferred Stock shall be rounded to the nearest whole number of
shares. All dividends paid in additional shares of Series B PIK Preferred
Stock shall be deemed issued on the applicable dividend payment date, and will
thereupon be duly authorized, validly issued, fully paid and nonassessable and
free and clear of all liens and charges.
The Preferred Stock will be junior as to dividends to any
series or class of stock hereafter issued that ranks senior as to dividends to
the Preferred Stock, when and if issued ("Senior Dividend Stock"), and if at
any time the Company has failed to pay or declare and set apart for payment
accrued and unpaid dividends on any Senior Dividend Stock, the Company may not
pay any dividend on the Preferred Stock. The Preferred Stock will have
priority as to dividends over the Common Stock and any other series or class
of the Company's stock hereafter issued that ranks junior as to dividends to
the Preferred Stock, when and if issued (collectively, "Junior Dividend
Stock"), and no dividend (other than dividends payable solely in stock that is
Junior Dividend Stock and that ranks junior to the Preferred Stock as to
distributions of assets upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary (such stock that is junior as to
liquidation rights, "Junior Liquidation Stock") (the Common Stock and any
other capital stock of the Company that is both Junior Dividend Stock and
Junior Liquidation Stock, "Junior Stock")) may be paid on any Junior Dividend
Stock, and no payment may be made on account of the purchase, redemption,
retirement, or other acquisition of Junior Dividend Stock or Junior
Liquidation Stock (other than such acquisitions pursuant to employee or
director incentive or benefit plans or arrangements, or in exchange solely for
Junior Stock), unless all accrued and unpaid dividends on the Preferred Stock
for all dividend payment periods ending on or before the date of payment of
such dividends on Junior Dividend Stock, or such payment for such Junior
Dividend Stock or Junior Liquidation Stock, as the case may be, have been paid
or declared and set apart for payment. The Company may not pay or declare
and set apart for payment dividends on the Preferred Stock unless it has
paid or declared and set apart for payment or contemporaneously pays or
declares and sets apart for payment accrued and unpaid dividends for all
dividend payment periods on any class or series of stock having parity with
the Preferred Stock as to dividends ("Parity Dividend Stock" which, in the
case of the Series A Exchangeable Preferred Stock, will include the Series
B PIK Preferred Stock and vice versa) ratably, so that the amount of
dividends declared and paid per share on the Preferred Stock and such
Parity Dividend Stock will bear to each other the same ratio that the
accrued and unpaid dividends to the date of payment on Preferred Stock and
such Parity Dividend Stock bear each other. No payment may be made on
account of the purchase, redemption, retirement or other acquisition of
shares of Parity Dividend Stock or other class or series of the Company's
capital stock ranking on a parity with the Preferred Stock as to
distributions of assets upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary (such stock that has parity with
the Preferred Stock as to liquidation rights which, in the case of the
Series A Exchangeable Preferred Stock, will include the Series B PIK
Preferred Stock and vice versa, "Parity Liquidation Stock" and, together
with Parity Dividend Stock, "Parity Stock") (other than such acquisitions
pursuant to employee or director or incentive or benefit plans or
arrangements, or in exchange solely for Junior Stock) unless all accrued
and unpaid dividends on the Preferred Stock for all dividend payment
periods ending on or before the date of payment on account of such
acquisition of such Parity Dividend Stock or Parity Liquidation Stock shall
have been paid or declared and set apart for payment. The respective
definitions of Senior Dividend Stock, Senior Liquidation Stock (as defined
herein), Parity Dividend Stock, Parity Liquidation Stock, Junior Dividend
Stock and Junior Liquidation Stock shall also include any warrants, rights,
calls or options, exercisable for or convertible into any of the Senior
Dividend Stock, Senior Liquidation Stock, Parity Dividend Stock, Parity
Liquidation Stock, Junior Dividend Stock and Junior Liquidation Stock, as
the case may be.
The amount of dividends payable per share of Preferred Stock
for each quarterly dividend period will be computed by dividing the annual
dividend amount by four. The amount of dividends payable for the initial
period and for any period shorter than a full quarterly dividend period will
be computed on the basis of a 360-day year of twelve 30-day months. No
interest will be payable in respect of any dividend payment on the Preferred
Stock which may be in arrears.
Under Delaware law, the Company may declare and pay dividends
on its capital stock only out of surplus, as defined in the Delaware General
Corporation Law (the "DGCL") or, if there is no such surplus, out of its net
profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. Surplus under the DGCL is generally defined to mean
the excess, at any given time, of the net assets of a corporation over the
amount of the corporation's capital. No dividends or distributions may be
declared, paid or made if the Company is or would be rendered insolvent by
virtue of such dividend or distribution, or if such declaration, payment or
distribution would contravene the certificate of incorporation of the
corporation. The Company is also subject to restrictions on cash dividend
payments pursuant to the terms of the Amended Credit Agreement. See "Dividend
Policy".
Liquidation Rights
In the case of the voluntary or involuntary liquidation,
dissolution or winding up of the Company, holders of shares of Preferred Stock
are entitled to receive the liquidation preference of $50 per share (the
"Liquidation Preference"), plus an amount equal to any accrued and unpaid
dividends to the payment date, before any payment or distribution is made to
the holders of Common Stock or any Junior Liquidation Stock, but the holders
of the shares of the Preferred Stock will not be entitled to receive the
liquidation preference of such shares until the liquidation preference of any
other series or class of stock hereafter issued that ranks senior as to
liquidation rights to the Preferred Stock ("Senior Liquidation Stock") has
been paid in full. The holders of Preferred Stock and Parity Liquidation
Stock are entitled to share ratably, in accordance with the respective
preferential amounts payable on such stock, in any distribution (after payment
of the liquidation preference of the Senior Liquidation Stock) which is not
sufficient to pay in full the aggregate of the amounts payable thereon. After
payment in full of the liquidation preference of the shares of the Preferred
Stock, the holders of such shares will not be entitled to any further
participation in any distribution of assets by the Company. Neither a
consolidation nor merger of the Company with another corporation nor a sale or
transfer of all or substantially all of the Company's property or assets will
be considered a liquidation, dissolution or winding up of the Company.
Voting Rights
The holders of the Preferred Stock will not have voting rights
except as described below or as required by law. In exercising any such vote,
each outstanding share of Preferred Stock will be entitled to one vote,
excluding shares held by any entity controlled by the Company, which shares
shall have no voting rights.
Whenever dividends on the Preferred Stock or any outstanding
shares of Parity Dividend Stock have not been paid in an aggregate amount
equal to at least six quarterly dividends on such shares (whether or not
consecutive), the number of members of the Company's Board of Directors will
be increased by two, and the holders of the Preferred Stock, voting separately
as a class with the holders of Parity Dividend Stock on which like voting
rights have been conferred and are exercisable, will be entitled to elect such
two additional directors who shall continue to serve so long as such dividends
remain in arrears. Such voting rights will terminate when all such dividends
accrued and unpaid have been declared and paid or set apart for payment. The
term of office of all directors so elected will terminate immediately upon the
termination of such voting rights and the number of members of the Board of
Directors will be reduced by two.
In addition, so long as any Preferred Stock is outstanding, the
Company will not, without the affirmative vote or consent of the holders of at
least (a) 66 2/3% of all outstanding shares of each series of Preferred Stock
and outstanding Parity Dividend Stock (voting as a single class), (i) amend,
alter or repeal (by merger or otherwise) any provision of the Certificate of
Incorporation, Certificates of Designation or the bylaws of the Company so
as to affect adversely the relative rights, preferences, qualifications,
limitations, or restrictions of the Preferred Stock, (ii) authorize or
issue, or increase the authorized amount of any Senior Dividend Stock,
Senior Liquidation Stock or any security convertible into such Senior
Dividend Stock or such Senior Liquidation Stock or (iii) effect any
reclassification of the Preferred Stock or (b) a majority of all
outstanding shares of Preferred Stock and outstanding Parity Dividend
Stock, authorize or issue, or increase the authorized amount of any
additional class of Parity Stock or any security convertible into such
Parity Stock.
Redemption
The Preferred Stock may not be redeemed prior to ,
2000. On or after such date, each series of Preferred Stock may be redeemed
by the Company, at its option, in whole or in part at any time, subject to the
limitations, if any, imposed by applicable law, at a cash redemption price per
share, if redeemed during the 12-month period beginning of the
years indicated below, plus, in each case, accrued and unpaid dividends
thereon to the date of redemption:
Redemption
Price
Year Per Share
---- ----------
2000...................................... %
2001......................................
2002......................................
2003......................................
2004......................................
2005......................................
2006 and thereafter....................... 100
If fewer than all the outstanding shares of a series of Preferred Stock are to
be redeemed, the Company will select those shares to be redeemed pro rata or
by lot or in such other manner as the Board of Directors may determine to be
fair. On , 2012, all of the outstanding Preferred Stock will be
mandatorily redeemed by the Company at a redemption price of $50 per share.
If at any time dividends on the Preferred Stock are in arrears, the Company
may not redeem less than all of the then outstanding shares of the
applicable series of Preferred Stock until all accrued dividends for all
past dividend periods have been paid in full.
Notice of redemption will be mailed at least 30 days but not
more than 60 days before the date fixed for redemption to each holder of
record of shares of the applicable series of Preferred Stock to be redeemed at
the address shown on the stock transfer books. No fractional shares of
Preferred Stock will be issued upon a redemption of less than all of the
Preferred Stock, but in lieu thereof, an appropriate amount will be paid in
cash based on the Closing Price (as defined in the Certificates of
Designation) on the date fixed for redemption. After the date fixed for
redemption (unless the Company defaults on the payment of the redemption
price), dividends will cease to accrue on the shares of Preferred Stock called
for redemption and other rights of the holders of such shares will terminate,
except the right to receive the redemption price without interest.
Conversion Rights
The holder of any shares of Preferred Stock will have the right
at any time on or after , 1997 in the case of the Series A
Exchangeable Preferred Stock and on or after , 2000 in the case of
the Series B PIK Preferred Stock, at the holder's option, to convert any or
all shares into Common Stock at the conversion rate (subject to adjustment as
described below) of shares for each share of Preferred Stock,
equivalent to an initial conversion price of $ for each share of Common
Stock. The conversion rate was determined by the Company, in consultation
with Credit Suisse First Boston. Among the factors considered by the Board of
Directors in determining the conversion rate were (i) the market value of the
Common Stock; (ii) the present and projected operating results and financial
condition of the Company; (iii) an assessment of the Company's management and
management's analysis of the growth potential of the Company and of the
Company's market area; (iv) the aggregate size of the Rights Offering; and (v)
the conversion rate which the Board of Directors believes investors would
readily accept under current economic circumstances. If the Preferred Stock
is called for redemption, the conversion right will terminate at 5:00 p.m. New
York City time on the business day prior to the date fixed for such redemption
and if not exercised prior to such time, such conversion right will be lost,
unless the Company defaults in making the payment due upon redemption.
Except as provided in the next paragraph, no payment or adjustment will be
made upon any conversion of any share of Preferred Stock or on account of
any dividends on the Common Stock issued upon conversion (except that if a
converting holder of Preferred Stock is eligible for a dividend on both the
Preferred Stock and the Common Stock issued upon conversion, the holder is
entitled to the higher of such dividend amounts). Following conversion,
the holder will no longer have any right to payment of dividends on the
shares surrendered for conversion. No fractional shares of Common Stock
will be issued upon conversion but, in lieu thereof, an appropriate amount
will be paid in cash based on the Closing Price for the shares of Common
Stock on the day of such conversion.
If the Company, by dividend or otherwise, declares or makes a
distribution on its Common Stock referred to in clause (iv) or (v) of the next
following paragraph, the holders of the Preferred Stock, upon the conversion
thereof subsequent to the close of business on the date fixed for the
determination of shareholders entitled to receive such distribution and prior
to the effectiveness of the conversion price adjustment in respect of such
distribution, will be entitled to receive for each share of Common Stock into
which each such share of Preferred Stock is converted the portion of the
shares of Common Stock, rights, warrants, evidences of indebtedness, shares of
capital stock, cash and assets so distributed applicable to one share of
Common Stock; provided, however, that the Company may, with respect to all
holders so converting, in lieu of distributing any portion of such
distribution not consisting of cash or securities of the Company, pay such
holder cash equal to the fair market value thereof (as determined by the Board
of Directors).
The conversion price will be subject to adjustment in
certain events including, without duplication: (i) dividends (and other
distributions) payable in Common Stock on any class of capital stock of the
Company; (ii) the issuance to all holders of Common Stock of rights or
warrants, entitling holders of such rights or warrants to subscribe for or
purchase Common Stock at less than the then current market price (as
defined in the Certificates of Designation); (iii) subdivisions and
combinations of Common Stock; (iv) distributions to all holders of Common
Stock of evidences of indebtedness of the Company, shares of capital stock,
cash or assets (including securities, but excluding those rights, warrants,
dividends and distributions referred to above and dividends and
distributions paid exclusively in cash); and (v) distributions consisting
of cash, excluding (A) cash that is part of a distribution referred to in
(iv) above, and (B) any cash representing an amount per share of Common
Stock of any quarterly cash dividend to the extent it does not exceed the
amount per share of Common Stock of the next preceding quarterly cash
dividend (as adjusted to reflect any of the events referred to in clauses
(i) through (iv) of this sentence) or all of any such quarterly cash
dividends if the amount thereof per share of Common Stock multiplied by
four does not exceed % of the current market price of Common Stock on the
trading day (as defined in the Certificates of Designation) next preceding
the date of declaration of such dividend. Promptly, following certain
adjustments to the conversion price, notice of such event will be mailed to
the holders of the Preferred Stock.
The foregoing adjustments to the conversion price are designed
to compensate the holders of the Preferred Stock for the value of the cash,
securities or other assets that they would have otherwise received had they
converted their Preferred Stock into shares of Common Stock prior to such
distribution. Such adjustment would generally result in a reduced conversion
price, which would entitle the holders of Preferred Stock to receive a greater
number of shares of Common Stock upon conversion of the Preferred Stock into
Common Stock.
The Company from time to time may reduce the conversion price
by an amount for any period of time of at least 20 days, in which case the
Company shall give at least 15 days' notice of such reduction, if the Board of
Directors of the Company has made a determination that such reduction would be
in the best interest of the Company, which determination shall be conclusive.
In the event that the Company is a party to any transaction
(including, without limitation, a merger, consolidation, sale of all or
substantially all of the Company's assets, recapitalization or
reclassification of the Common Stock (each of the foregoing being referred to
as a "Company Transaction")), in each case (except in the case of a Common
Stock Fundamental Change (as defined)) as a result of which shares of Common
Stock shall be converted into the right to receive securities, cash or other
property, each share of the Preferred Stock shall thereafter be convertible
into the kind and amount of securities, cash and other property receivable
upon the consummation of such Company Transaction by a holder of that number
of shares of Common Stock into which one share of the Preferred Stock was
convertible immediately prior to such Company Transaction (or in the case of a
Common Stock Fundamental Change, common stock of the kind received by the
holders of Common Stock as a result of such Common Stock Fundamental Change)
(but after giving effect to any adjustment discussed in the next paragraph
relating to a Fundamental Change (as defined) if such Company Transaction
constitutes a Fundamental Change, and subject to funds being legally available
for such purpose under applicable law at the time of such conversion).
Notwithstanding any other provision in the preceding paragraphs
to the contrary, if any Fundamental Change occurs, then the conversion price
in effect will be adjusted immediately after such Fundamental Change as
described below. In addition, in the event of a Common Stock Fundamental
Change, each share of the Preferred Stock shall be convertible solely into
common stock of the kind received by holders of Common Stock as the result of
such Common Stock Fundamental Change. For purposes of calculating any
adjustment to be made pursuant to this paragraph in the event of a Fundamental
Change, immediately after such Fundamental Change:
(i) in the case of a Non-Stock Fundamental Change (as
defined), the conversion price of the Preferred Stock will thereupon become
the lower of (A) the conversion price in effect immediately prior to such
Non-Stock Fundamental Change, but after giving effect to any other prior
adjustments, and (B) the result obtained by multiplying the greater of the
Applicable Price (as defined) or the then applicable Reference Market Price
(as defined) by a fraction of which the numerator will be $50 and the
denominator will be the then current redemption price per share (or, for
periods prior to , 2000, an amount per share determined in accordance with
the Certificates of Designation); and
(ii) in the case of a Common Stock Fundamental Change, the
conversion price of the Preferred Stock in effect immediately prior to such
Common Stock Fundamental Change, but after giving effect to any other prior
adjustments, will thereupon be adjusted by multiplying such conversion price
by a fraction, of which the numerator will be the Purchaser Stock Price (as
defined) and the denominator will be the Applicable Price; provided, however,
that in the event of a Common Stock Fundamental Change in which (A) 100% of
the value of the consideration received by a holder of Common Stock is common
stock of the successor, acquiror or other third party (and cash, if any, is
paid with respect to any fractional interests in such common stock resulting
from such Common Stock Fundamental Change) and (B) all of the Common Stock
will have been exchanged for, converted into, or acquired for, common stock
(and cash with respect to fractional interests) of the successor, acquiror or
other third party, the conversion price of the Preferred Stock in effect
immediately prior to such Common Stock Fundamental Change will thereupon be
adjusted by dividing such conversion price by the number of shares of common
stock of the successor, acquiror, or other third party received by a holder of
one share of Common Stock as a result of such Common Stock Fundamental Change.
The foregoing conversion price adjustments in the event of a
Non-Stock Fundamental Change will apply in situations whereby all or
substantially all of the Common Stock is acquired in a transaction in which
50% or less of the value received by holders of Common Stock consists of
common stock that has been admitted for listing on a national securities
exchange or quoted on the Nasdaq National Market. If the market price of the
Common Stock immediately prior to a Non-Stock Fundamental Change is lower than
the applicable conversion price of the Preferred Stock then in effect, the
conversion price will be adjusted as described in (i) above and the holders of
the Preferred Stock will be entitled to receive the amount and kind of
consideration that would have been received if the Preferred Stock had been
converted into Common Stock prior to the Non-Stock Fundamental Change after
giving effect to such adjustment.
The foregoing conversion price adjustments in the event of a
Common Stock Fundamental Change will apply in situations whereby more than 50%
of the value received by holders of Common Stock consists of common stock of
another company that has been admitted for listing on a national securities
exchange or quoted on the Nasdaq National Market, in which case the Preferred
Stock will become convertible into shares of common stock of the other
company. If consideration for the Common Stock consists partly of common
stock of another company and partly of other securities, cash or property,
each share of Preferred Stock will be convertible solely into a number of
shares of such common stock determined so that the initial value of such
shares (measured as described in the definition of Purchaser Stock Price
below) equals the value of the shares of Common Stock into which such share of
Preferred Stock was convertible immediately before the transaction (measured
as described in the definition of Applicable Price below). If consideration
for Common Stock is solely common stock of another company, each share of
Preferred Stock will be convertible into the same number of shares of such
common stock receivable by a holder of the number of shares of Common Stock
into which such share of Preferred Stock was convertible immediately before
such transaction.
Depending upon whether the Fundamental Change is a Non-Stock
Fundamental Change or Common Stock Fundamental Change, a holder may receive
significantly different consideration upon conversion. In the event of a
Non-Stock Fundamental Change, the holder has the right to convert each share
of the Preferred Stock into the kind and amount of shares of stock and other
securities or property or assets receivable by a holder of the number of
shares of Common Stock issuable upon conversion of such share of the Preferred
Stock immediately prior to such Non-Stock Fundamental Change, but after giving
effect to the adjustment described above. However, in the event of a Common
Stock Fundamental Change in which less than 100% of the value of the
consideration received by a holder of Common Stock is common stock of the
acquiror or other third party, a holder of a share of the Preferred Stock who
converts a share following the Common Stock Fundamental Change will receive
consideration in the form of such common stock only, whereas a holder who has
converted his share prior to the Common Stock Fundamental Change will receive
consideration in the form of common stock as well as any other securities or
assets (which may include cash) receivable thereupon by a holder of the number
of shares of Common Stock issuable upon conversion of such share of Preferred
Stock immediately prior to such Common Stock Fundamental Change.
The term "Applicable Price" means (i) in the event of a
Non-Stock Fundamental Change in which the holders of the Common Stock receive
only cash, the amount of cash received by the holder of one share of Common
Stock and (ii) in the event of any other Non-Stock Fundamental Change or any
Common Stock Fundamental Change, the average of the Closing Prices (as
defined) for the Common Stock during the ten trading days (as defined in the
Certificate of Designation) prior to and including the record date for the
determination of the holders of Common Stock entitled to receive cash,
securities, property or other assets in connection with such Non-Stock
Fundamental Change or Common Stock Fundamental Change, or, if there is no such
record date, the date upon which the holders of the Common Stock shall have
the right to receive such cash, securities, property or other assets, in each
case, as adjusted in good faith by the Board of Directors or the Company to
appropriately reflect any of the events referred to in clauses (i) through (v)
of the third paragraph of this Conversion Rights subsection.
The term "Closing Price" of any common stock means on any day
the last reported sale price regular way on such day or in case no sale takes
place on such day, the average of the reported closing bid and asked prices
regular way in each case on the NYSE or, if the common stock is not quoted on
such system, on the principal national securities exchange or quotation system
on which such stock is listed or admitted to trading or quoted, or, if not
listed or admitted to trading on any national securities exchange or quotation
system, the average of the closing bid and asked prices in the
over-the-counter market on such day, or, if not so available in such manner,
as furnished by any NYSE Member firm selected by the Company for that purpose.
The term "Common Stock Fundamental Change" means any
Fundamental Change in which more than 50% of the value (as determined in good
faith by the Board of Directors of the Company) of the consideration received
by holders of Common Stock consists of common stock that for each of the ten
consecutive trading days referred to in the second preceding paragraph has
been admitted for listing or admitted for listing subject to notice of
issuance on a national securities exchange or quoted on the Nasdaq National
Market, provided, however, that a Fundamental Change shall not be a Common
Stock Fundamental Change unless either (i) the Company continues to exist
after the occurrence of such Fundamental Change and the outstanding shares of
Preferred Stock continue to exist as outstanding Preferred Stock, or (ii) not
later than the occurrence of such Fundamental Change, the outstanding shares
of Preferred Stock are converted into or exchanged for shares of preferred
stock of a corporation succeeding to the business of the Company, which
preferred stock has powers, preferences and relative, participating, optional
or other rights, and qualifications, limitations and restrictions,
substantially similar to those of the Preferred Stock.
The term "Fundamental Change" means the occurrence of any
transaction or event in connection with a plan pursuant to which all or
substantially all of the Common Stock shall be exchanged for, converted into,
acquired for or constitute solely the right to receive cash, securities,
property or other assets (whether by means of an exchange offer, liquidation,
tender offer, consolidation, merger, combination, reclassification,
recapitalization or otherwise) provided, in the case of a plan involving more
than one such transaction or event, for purposes of adjustment of the
conversion price, such Fundamental Change shall be deemed to have occurred
when substantially all of the Common Stock of the Company shall be exchanged
for, converted into, or acquired for or constitute solely the right to receive
cash, securities, property or other assets, but the adjustment shall be based
upon the highest weighted average per share consideration which a holder of
Common Stock could have received in such transactions or events as a result of
which more than 50% of the Common Stock of the Company shall have been
exchanged for, converted into, or acquired for or constitute solely the right
to receive cash, securities, property or other assets.
The term "Non-Stock Fundamental Change" means any Fundamental
Change other than a Common Stock Fundamental Change.
The term "Purchaser Stock Price" means, with respect to any
Common Stock Fundamental Change, the average of the Closing Prices for the
common stock received in such Common Stock Fundamental Change for the ten
consecutive trading days prior to and including the record date for the
determination of the holders of Common Stock entitled to receive such common
stock, or if there is no such record date, the date upon which the holders of
the Common Stock shall have the right to receive such common stock, in each
case, as adjusted in good faith by the Board of Directors to appropriately
reflect any of the events referred to in clauses (i) through (v) of the third
paragraph of this subsection; provided, however, that if no such Closing
Prices exist, the Purchaser Stock Price shall be set at a price determined in
good faith by the Board of Directors of the Company.
The term "Reference Market Price" shall mean $ (which is
an amount equal to 66 2/3% of the reported last sale price for the Common
Stock on the NYSE on , 1997) and in the event of any adjustment to
the conversion price other than as a result of a Fundamental Change, the
Reference Market Price shall also be adjusted so that the ratio of the
Reference Market Price to the conversion price after giving effect to any such
adjustment shall always be the same ratio of $ to the initial conversion
price specified in the first sentence of this subsection.
Notwithstanding the foregoing provisions, the issuance of any
shares of Common Stock pursuant to any plan providing for the reinvestment of
dividends or interest payable on securities of the Company and the investment
of additional optional amounts in shares of Common Stock under any such plan,
and the issuance of any shares of Common Stock or options or rights to
purchase such shares pursuant to any employee benefit plan or program of the
Company or pursuant to any option, warrant, right or exercisable, exchangeable
or convertible security outstanding as of the date the Preferred Stock was
first designated shall not be deemed to constitute an issuance of Common Stock
or exercisable, exchangeable or convertible securities by the Company to which
any of the adjustment provisions described above applies. There shall also be
no adjustment of the conversion price in case of the issuance of any stock (or
securities convertible into or exchangeable for stock) of the Company, except
as specifically described above. If any action would require adjustment of
the conversion price pursuant to more than one of the provisions described
above, only one adjustment shall be made and such adjustment shall be the
amount of adjustment which has the highest absolute value to holders of the
Preferred Stock. No adjustment in the conversion price will be required
unless such adjustment would require an increase or decrease of at least 1% of
the conversion price, but any adjustment that would otherwise be required to
be made shall be carried forward and taken into account in any subsequent
adjustment.
Exchange Provisions
The Series A Exchangeable Preferred Stock may be exchanged, in
whole but not in part, at the option of the Company, for Notes on any
, , or , on or after , 2000 (a "Notes
Exchange Date") through the issuance of Notes, in redemption of and in
exchange for shares of Series A Exchangeable Preferred Stock, provided certain
conditions described below are met. See "Description of the Notes." Holders
of the Series A Exchangeable Preferred Stock will be entitled to receive Notes
at the rate of $50 principal amount of Notes for each share of Series A
Exchangeable Preferred Stock. The Company will mail notice of its intention
to redeem through such an exchange to each holder of record of the Series A
Exchangeable Preferred Stock not less than 30 nor more than 60 days before the
Notes Exchange Date. If notice of exchange has been given (unless the Company
defaults in issuing Notes in redemption of an exchange for the Series A
Exchangeable Preferred Stock or fails to pay or set aside for payment accrued
and unpaid dividends on the Series A Exchangeable Preferred Stock) on the
Notes Exchange Date the holders of the Series A Exchangeable Preferred Stock
will cease to be stockholders with respect to such shares and will have no
interests in or claims against the Company by virtue thereof (except the right
to receive Notes in exchange therefor and accrued and unpaid dividends on the
Series A Exchangeable Preferred Stock to the Notes Exchange Date) and will
have no voting, conversion or other rights with respect to such shares, and
all shares of Series A Exchangeable Preferred Stock will no longer be
outstanding. No shares of Series A Exchangeable Preferred Stock may be
exchanged for Notes unless the Company has paid or set aside for the benefit
of the holders of the Series A Exchangeable Preferred Stock all accrued and
unpaid dividends on the Series A Exchangeable Preferred Stock to the Notes
Exchange Date. The ability of the Company to exchange Series A Exchangeable
Preferred Stock for the Notes is restricted under the terms of the Amended
Credit Agreement. See "Risk Factors--Substantial Leverage." The ability of
the Company to exchange Series A Exchangeable Preferred Stock for Notes is
also subject to certain conditions contained in the Indenture relating to the
Notes and to limitations imposed under the DGCL and by applicable laws
protecting the rights of creditors.
Lack of Established Market for the Preferred Stock
There is currently no public market for the Preferred Stock.
While application has been made to list the Series B PIK Preferred Stock on
the NYSE, it is unlikely that the Series B PIK Preferred Stock will be
accepted for listing as it is expected that following the Rights Offering the
Series B PIK Preferred Stock will be held by fewer than 100 holders. In
addition, there can be no assurance that an active market for the Preferred
Stock will develop or that, if the Preferred Stock is approved for such
listing, such listing will continue while the Preferred Stock is outstanding.
Future trading prices for the Preferred Stock will depend on many factors,
including, among others, the Company's financial results, the market for
similar securities and the volume of trading activity in the Preferred Stock.
Transfer Agent
The transfer agent of the Preferred Stock will be American
Stock Transfer & Trust Company.
DESCRIPTION OF THE NOTES
If the Company elects to issue Notes in exchange for the Series
A Exchangeable Preferred Stock, the Company will issue the Notes under an
Indenture (the "Indenture") between the Company and , as
trustee (the "Trustee") at a rate of $50 principal amount of Notes for each
share of Series A Exchangeable Preferred Stock exchanged. The Indenture has
been filed as an exhibit to the Registration Statement of which this
Prospectus is a part and is available for inspection at the office of the
Trustee. The Indenture is governed by the Trust Indenture Act of 1939, as
amended. The following summaries of certain provisions of the Indenture do
not purport to be complete and where reference is made to particular
provisions of the Indenture, such provisions, including definitions of certain
terms, are incorporated by reference as part of such summaries, which are
qualified in their entirety by such reference.
General
The Notes will be unsecured, subordinated obligations of the
Company, will be limited in aggregate principal amount to $250,000,000 and
will mature on , 2012. The Company will pay interest on the Notes
quarterly in cash on , , and of each
year, at the rate of % per annum. Interest on the Notes will be paid to
the persons who are registered holders at the close of business on the ,
, and next preceding the interest payment dates.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. Principal (and premium, if any) and interest will be payable, and the
Notes may be presented for conversion, exchange or registration of transfer,
at the office or agency of the Company maintained for such purposes in New
York, New York or at such other office or agency as may be maintained by the
Company for such purpose, except that payment of interest may, at the option
of the Company, be made by check mailed to the address of the person entitled
thereto as it appears on the security register. The Notes are to be issued
only in registered form, without coupons, in denominations of $50 or any
integral multiple thereof.
Conversion Rights
The holders of Notes will have the right at any time, through
the close of business on the maturity date, subject to prior redemption, to
convert any Notes (or any portion thereof that is an integral multiple of $50)
into shares of Common Stock, initially at the conversion rate in effect on the
Preferred Stock at the date of exchange of the Series A Exchangeable Preferred
Stock for Notes (subject to adjustment as described below). If a Note is
called for redemption, the conversion right will terminate at 5:00 p.m. New
York City time on the business day prior to the date fixed for redemption.
Except as described below, no payment of interest and no adjustment in
respect of dividends on the Shares of Common Stock will be made upon the
conversion of any Notes, and the holder will lose any right to payment of
interest on the Notes surrendered for conversion. Notes surrendered for
conversion during the period from the regular record date for an interest
payment to the corresponding interest payment date (except Notes called for
redemption during such period) must be accompanied by payment of an amount
equal to the interest thereon which the holder is to receive on such
interest payment date. No fractional shares of Common Stock will be issued
upon conversion but, in lieu thereof, an appropriate amount will be paid in
cash based on the last reported sale price for the shares of Common Stock
on the NYSE on the day of such conversion. The provisions in the Indenture
for adjustment of the conversion rate will be substantially the same as
those applicable to the Preferred Stock described under "Description of
Preferred Stock--Conversion Rights."
Subordination
Payment of the principal of (and premium, if any) and interest
on the Notes will be subordinated in right of payment, as set forth in the
Indenture, to the prior payment in full of all Senior Indebtedness when due in
accordance with the terms thereof. Senior Indebtedness will be defined in the
Indenture as the principal of (and premium, if any) and unpaid interest on,
and all other sums, whether direct or contingent including, without
limitation, costs and expenses of collection and enforcement (including the
reasonable fees and expenses of legal counsel engaged for such purpose)
payable by the Company relating to, the following (whether outstanding at the
date of the Indenture or thereafter incurred or created): (a) indebtedness for
money borrowed (including purchase money obligations) evidenced by notes or
other written obligations including, without limitation, letters of credit and
bankers acceptances, (b) indebtedness evidenced by notes, bonds or other
securities issued under the provisions of an indenture or similar instrument,
(c) obligations as lessee under capitalized leases and under leases of
property made as part of any sale and leaseback transactions, (d) indebtedness
of others of any of the kinds described in the preceding clauses (a) through
(c) assumed or guaranteed and (e) renewals, extensions and refunding of
indebtedness and obligations of the kinds described in the preceding clauses
(a) through (d); provided, however, that the following will not constitute
Senior Indebtedness: (i) any indebtedness or obligation as to which, in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is expressly provided that such indebtedness or obligation is
subordinate in right of payment to all other indebtedness, (ii) any
indebtedness or obligation which by its terms refers explicitly to the Notes
and states that such indebtedness or obligation shall not be senior in right
of payment thereto, (iii) any indebtedness or obligation in respect of the
Notes and (iv) any indebtedness or obligation to a subsidiary.
Following the Rights Offering, $786.1 million of Senior
Indebtedness will be outstanding. There will be no restrictions on the
creation of Senior Indebtedness in the Indenture.
By reason of such subordination, in the event of dissolution,
insolvency, bankruptcy or other similar proceeding, creditors (other than
holders of Senior Indebtedness or Notes) may recover less, ratably, than the
holders of Senior Indebtedness and may recover more, ratably, than the holders
of the Notes and, upon any distribution of assets, the holders of Notes will
be required to pay over their share of such distribution to the holders of
Senior Indebtedness until such Senior Indebtedness is paid in full. In
addition, such subordination may affect the Company's obligation to make
principal and interest payments with respect to the Notes, and the rights of
the Trustee or the holders of the Notes to exercise certain remedies under the
Indenture (including the right to declare the Notes due and payable prior to
their stated maturity), in the event of any default on the payment of
principal (or premium, if any) or interest on any Senior Indebtedness beyond
any applicable grace period, or in the event of any default with respect to
Senior Indebtedness that would permit or automatically effect acceleration of
the maturity thereof or if any Notes are declared due and payable prior to
their stated maturity.
Redemption at Option of Company
The Notes are not redeemable prior to , 2000. On or
after such date the Notes may be redeemed by the Company, at its option, in
whole or in part at any time, subject to the limitations, if any, imposed by
applicable law, at a redemption price, expressed as a percentage of the
principal amount, together with accrued and unpaid interest to the date fixed
for redemption, if redeemed during the twelve month period beginning
of the years indicated below:
Year Redemption Price
---- ----------------
2000................................... %
2001...................................
2002...................................
2003...................................
2004...................................
2005...................................
2006 and thereafter.................... 100%
Notes in any denomination equal to or larger than $50 may be
redeemed in whole or in part in multiples of $50. On and after the redemption
date, interest will cease to accrue on Notes or portions thereof called for
redemption.
Notice of redemption will be mailed at least 30 but not more
than 60 days prior to the redemption date to each holder of Notes to be
redeemed at the address appearing in the security register maintained by the
Company. If less than all the outstanding Notes are to be redeemed, the
Trustee will select the Notes (or portion thereof equal to $50 or any integral
multiple thereof) to be redeemed by such method as the Trustee shall deem fair
and appropriate.
Consolidation, Merger and Sale of Assets
The Company, without the consent of any holders of Notes may
consolidate or merge with or into any person, or convey, transfer or lease its
assets substantially as an entirety to any person, and any person may
consolidate or merge with, or into, or transfer or lease its assets
substantially as an entirety to the Company, provided that (i) the person (if
other than the Company) formed by such consolidation or into which the Company
is merged or which acquires or leases the assets of the Company substantially
as an entirety is organized and existing under the laws of the United States,
any state thereof or the District of Columbia, and assumes the Company's
obligations on the Notes and under the Indenture, (ii) after giving effect to
such transaction, no event of default and no event that, after notice or lapse
of time or both, would become an event of default shall have happened and be
continuing and (iii) certain other conditions are met.
The provisions of the Indenture may not necessarily afford the
holders of the Notes protection in the event of a highly leveraged
transaction, including a reorganization, restructuring, merger or similar
transaction involving the Company that may adversely affect the holders.
Reports
The Indenture will provide that whether or not the Company is subject to
the reporting requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Company shall
deliver to the Trustee and to each Holder, within 15 days after it is or
would have been required to file such with the Commission, annual and
quarterly financial statements substantially equivalent to financial
statements that would have been included in reports filed with the
Commission if the Company were subject to the requirements of Section 13 or
15(d) of the Exchange Act, including, with respect to annual information
only, a report thereon by the Company's certified independent public
accountants as such would be required in such reports to the Commission,
and in each case, together with management's discussion and analysis of
financial condition and results of operations which would be so required.
Defaults and Remedies
An event of default under the Indenture is defined as: default
for 30 days in payment of interest on the Notes; default in payment of
principal of (or premium, if any, on) the Notes; failure by the Company for 60
days after written notice to it to comply with any of its other covenants in
the Indenture; and certain events of bankruptcy, insolvency or reorganization
relative to the Company. If an event of default occurs and is continuing, the
Trustee or holders of at least 25% in aggregate principal amount of the Notes
outstanding may, subject to the applicable subordination provisions, declare
the Notes to be due and payable immediately, but under certain conditions such
acceleration may be rescinded by the holders of a majority in principal amount
of the Notes then outstanding.
Holders of Notes may not enforce the Indenture except as
provided in the Indenture and except that, subject to the applicable
subordination provisions, nothing shall prevent the holders of Notes from
enforcing payment of the principal (or premium, if any) or interest on, or
conversion of, their Notes. The Trustee may refuse to enforce the Indenture
unless it receives reasonable security or indemnity. Subject to certain
limitations, holders of a majority in principal amount of the Notes may direct
the Trustee in its exercise of any trust or power under the Indenture.
The Company will annually furnish the Trustee with an officers'
certificate with respect to compliance with the terms of the Indenture.
Modification
Modification and amendment of the Indenture may be effected by
the Company and the Trustee with the consent of the holders of not less than a
majority in aggregate principal amount of the Notes, provided that no such
modification or amendment may, without the consent of each holder affected
thereby, (i) reduce the rate or change the time or place for payment of
interest on any Notes, (ii) reduce the principal of (or premium, if any) or
change the fixed maturity of, any Notes, (iii) make any Notes payable in a
currency other than that stated in the Notes, (iv) impair the right to
institute suit for the enforcement of any payment on or with respect of any
Notes, (v) make any change that adversely affects the right to convert any
Notes, (vi) modify the subordination provisions in a manner adverse to the
holders or (vii) reduce the amount of Notes whose holders must consent to a
modification or amendment or waive compliance with certain provisions of the
Indenture. The Indenture also contains provisions permitting the Company and
the Trustee to effect certain minor modifications of the Indenture not
adversely affecting the rights of holders of Notes in any material respect.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Davis Polk & Wardwell, the following
discussion is a summary of certain Federal income tax considerations relevant
to the receipt, ownership and disposition of the Rights, the Preferred Stock
and the Notes, but does not purport to be a complete analysis of all the
potential tax effects thereof. This summary is based on the Internal Revenue
Code of 1986, as amended to the date hereof (the "Code"), administrative
pronouncements, judicial decisions and existing and proposed Treasury
Regulations, changes to any of which subsequent to the date of this Prospectus
may affect the tax consequences described herein. In this connection, it
should be noted that as used in the discussion below, the term "earnings and
profits" refers to the Company's earnings and profits as determined under the
Code. There is no assurance that the Company will have earnings and profits
for any particular taxable year. This summary addresses only initial
distributees of the Rights who hold all their Common Stock, the Rights, the
Preferred Stock and the Notes as capital assets within the meaning of section
1221 of the Code. It does not discuss all of the tax consequences that may be
relevant to a holder in light of its particular circumstances or to holders
subject to special rules, such as certain financial institutions, insurance
companies, dealers in securities and holders that are, for Federal income tax
purposes, non-resident alien individuals or foreign corporations. Holders
should consult their tax advisors with regard to the application of the
Federal income tax laws to their particular situations as well as any tax
consequences arising under the laws of any state, local or foreign taxing
jurisdiction.
On February 6, 1997, the Clinton Administration released
several revenue proposals that, if adopted, may, with respect to certain
holders, affect the Federal income tax consequences of holding the Preferred
Stock. Among such proposals is the proposal to reduce the dividend-
received deduction rate from 70% to 50% for any corporation that owns less
than 20% (by vote and value) of the stock of the Company. There can be no
assurance as to whether or when any of such proposals will become
effective.
The Rights
For Federal income tax purposes, receipt of Rights by a
shareholder pursuant to the Rights Offering should be treated as a nontaxable
distribution with respect to the Common Stock, and the remainder of this
discussion assumes the correctness of this treatment.
If the fair market value of the Rights is less than 15% of the
fair market value of the Common Stock on the date of distribution, then
pursuant to section 307(b) of the Code, the Rights will be allocated a zero
basis, unless the shareholder affirmatively elects to allocate basis in
proportion to their relative fair market values determined on such date. Such
election must be made in the shareholder's tax return for the taxable year in
which the Rights are received. On the other hand, if the fair market value of
the Rights equals or exceeds 15% of the fair market value of the Common Stock
on such date, then the shareholder's basis in the Common Stock must be
allocated between the Common Stock and the Rights received in proportion to
their relative fair market values.
In the case of exercise, any basis allocated to the Rights
should be added to the basis of the Preferred Stock that is so acquired. An
initial distributee shareholder would not be able to claim a loss if its
Rights expire unexercised. If a shareholder elects to sell its Rights, the
shareholder should include its holding period in the Common Stock with respect
to which the Rights were distributed in determining the holding period of the
Rights.
If the Company has, as of the date of the issuance of the
Rights, current or accumulated earnings and profits, then the Rights will,
with respect to the initial distributees of such Rights, be treated as
"section 306 stock." In that event, each Right, with respect to an initial
distributee, shall carry section 306 "taint" in the amount equal to the lesser
of (i) the fair market value of the Right on the date of distribution, or (ii)
the allocable share of the Company's current or accumulated earnings and
profits. Under such circumstances, subject to certain exceptions, an initial
distributee shareholder who disposes of the Rights must treat the proceeds as
ordinary income to the extent of the "taint" and cannot recognize a loss on
the sale of the Rights.
The Preferred Stock
Dividends. Cash dividends paid on the Series A Exchangeable
Preferred Stock will be taxable as ordinary income to the extent of the
Company's earnings and profits. To the extent that the amount of cash
distributions paid on the Series A Exchangeable Preferred Stock exceeds the
Company's earnings and profits, such distributions will be treated first as a
return of capital and will be applied against and reduce the adjusted tax
basis of the Series A Exchangeable Preferred Stock in the hands of the
shareholder. Any remaining amount after the holder's basis has been
reduced to zero will be taxable.
Dividends paid in kind on the Series B PIK Preferred Stock will
be taxable as ordinary income in an amount equal to the lesser of (i) the fair
market value of the Series B PIK Preferred Stock paid in kind and (ii) the
Company's earnings and profits. Thus, holders of Series B PIK Preferred Stock
may recognize income without the receipt of cash to pay the tax attributable
to such income. To the extent that the fair market value of distributions in
Series B PIK Preferred Stock exceed the Company's earnings and profits, such
distributions will be treated first as a return of capital and applied against
and reduce the basis of the Series B PIK Preferred Stock with respect to which
such distributions were made. Any amount remaining after such basis has been
reduced to zero will be taxable. A recipient's adjusted basis in the Series B
PIK Preferred Stock received as a dividend will equal the fair market value of
such shares on the date of distribution, and the holding period for such
shares will begin on the date following the date of distribution.
For purposes of the remainder of this discussion, the term
"dividend" refers to a distribution taxable as ordinary income as described
above unless the context indicates otherwise. Dividends received by corporate
shareholders will be eligible for a dividends-received deduction under section
243 of the Code, subject to the limitations contained in sections 246 and 246A
of the Code.
Under certain circumstances, section 1059 of the Code would
require a corporate shareholder to reduce its basis in the Preferred Stock by
the "nontaxed portion" of any "extraordinary dividend." Generally, the
nontaxed portion of an extraordinary dividend is the amount excluded from
income under section 243 of the Code (relating to the dividends-
received deduction). Under the Code, the term "extraordinary dividend"
includes any redemption of stock that is treated as a dividend and that is
non-pro rata as to all shareholders, including holders of common stock,
irrespective of holding period, as well as all dividends on "disqualified
preferred stock." An "extraordinary dividend" may arise from an exchange of
Preferred Stock for Notes or cash, and the Preferred Stock may constitute
"disqualified preferred stock." Corporate shareholders should consult their
tax advisors with respect to the possible application of the extraordinary
dividend rules.
Redemption and Exchange for the Notes. Subject to the
discussion below with respect to section 306 of the Code, the redemption of
Preferred Stock for cash will be treated as a distribution that is taxable as
a dividend to the extent of the Company's allocable earnings and profits
unless the redemption (a) results in a "complete termination" of the
shareholder's stock interest in the Company, (b) is "substantially
disproportionate," or (c) is "not essentially equivalent to a dividend" under
section 302 of the Code. In determining whether any of these tests has been
met, shares considered to be owned by the shareholder by reason of certain
constructive ownership rules set forth in section 318 of the Code, as well as
shares actually owned, must generally be taken into account. A distribution
to a shareholder will be "not essentially equivalent to a dividend" if it
results in a "meaningful reduction" in the shareholder's stock interest in the
Company. The Internal Revenue Service has issued a published ruling
indicating that a redemption which results in a reduction in the proportionate
interest in the Company (taking into account the section 318 constructive
ownership rules) of a shareholder whose relative stock interest is minimal (an
interest of less than 1% should satisfy this requirement) and who exercises no
control over Company affairs should be treated as being "not essentially
equivalent to a dividend." If any of these three tests is met, the redemption
of the Preferred Stock for cash would be treated, as to that shareholder, as
an exchange under section 302(a) of the Code giving rise to capital gain or
loss.
If the Rights are treated as "section 306 stock," then the
Preferred Stock acquired pursuant to the exercise by the initial distributee
shareholder of such Rights would constitute "section 306 stock" in the hands
of such shareholder to the extent of the original "taint" on the Rights.
Under section 306(a)(2) of the Code, proceeds equal to the amount of such
"taint" received upon the redemption of the Preferred Stock will be taxable as
ordinary income to the extent of the Company's earnings and profits at the
time of the redemption, unless the "complete termination" test described above
is met.
A redemption of the Series A Exchangeable Preferred Stock in
exchange for Notes cannot qualify under the "complete termination" or
"substantially disproportionate" tests described above. The redemption would,
therefore, be treated as a distribution to the extent of the fair market value
of the Notes and taxable as a dividend to the extent of the shareholder's
allocable share of the Company's earnings and profits unless it satisfies the
"not essentially equivalent to a dividend" test. The Internal Revenue Service
has ruled that a holder of convertible notes is considered to own the
underlying stock for purposes of the section 318 constructive ownership rules,
and further that a redemption which does not result in any reduction in the
interest of a shareholder does not satisfy the meaningful reduction standard
even if such shareholder holds only a minimal interest. Therefore, under a
literal interpretation of the statute, regulations and rulings, the receipt of
Notes in exchange for the Series A Exchangeable Preferred Stock will be
taxable as a dividend to the extent of the shareholder's allocable share of
the Company's earnings and profits. Accordingly, each shareholder should
consult its tax advisor regarding this issue, including the possible effect of
the disposition of a portion of its interest in the Company contemporaneously
and as part of an integrated plan with the exchange for Notes.
If a shareholder is treated as having received a dividend upon
a redemption for cash or an exchange for Notes, the basis of its Preferred
Stock so redeemed or exchanged will be transferred to any remaining
stockholdings in the Company. If the shareholder does not retain any stock
ownership in the Company, it may be permitted to transfer such basis to any
Notes received in the exchange or it may lose such basis entirely.
Sale of Preferred Stock. Subject to the discussion below with
respect to section 306 of the Code, a holder will recognize taxable gain or
loss upon the sale or disposition (other than a redemption or an exchange for
Notes as discussed above) of shares of Preferred Stock equal to the difference
between the amount of cash or the fair market value of property received and
the holder's tax basis in the shares. Such gain or loss will be capital gain
or loss and will be long-term capital gain or loss if the holder has held the
shares of Preferred Stock for more than one year.
If the Rights constitute "section 306 stock" as described
above, then upon the sale or disposition of the Preferred Stock acquired
through the exercise of the Rights, the proceeds received will be taxable as
ordinary income to the extent of the "taint." Furthermore, no loss will be
recognized upon the sale or disposition; any unrecovered basis would revert
to the shareholder's remaining Common Stock holdings or possibly to its
Preferred Stock holdings, or, if the shareholder does not retain any such
holding, it may lose such basis entirely.
The Notes
Original Issue Discount. For purposes of the following
discussion, it is assumed that the Notes will constitute debt for Federal
income tax purposes and will not constitute "applicable high-yield discount
obligations" under section 163(i) of the Code, and that the Notes or the
Series A Exchangeable Preferred Stock will be readily tradeable on an
established securities market at the time of exchange of the Notes for the
Series A Exchangeable Preferred Stock. In general, if a Note's stated
redemption price at maturity exceeds its "issue price," it will be considered
to have been issued at an original issue discount ("OID") in an amount equal
to such excess. For these purposes, the issue price of a Note will be equal
to the fair market value of the Note (including the value of the conversion
feature) as of the issue date or, if the Note is not traded on an established
securities market within 30 days of the issue date, the fair market value of
the Series A Exchangeable Preferred Stock on such date. The stated redemption
price at maturity of a Note will equal the sum of all payments required under
the Note other than payments of "qualified stated interest." "Qualified stated
interest" is stated interest unconditionally payable as a series of payments
in cash or property (other than interest payments payable in debt instruments
of the Company) at least annually during the entire term of the Note and equal
to the outstanding principal balance of the Note multiplied by a single fixed
rate of interest.
If the difference between a Note's stated redemption price at
maturity and its issue price is less than a de minimis amount, i.e., 1/4 of 1
percent of the stated redemption price at maturity multiplied by the number of
complete years to maturity, then the Note will not be considered to have OID.
A holder will be required to include any qualified stated
interest payments in income in accordance with the holder's method of
accounting for Federal income tax purposes. A holder will also be required to
include any OID in income for Federal income tax purposes as it accrues, in
accordance with a constant yield method based on a compounding of interest,
before the receipt of cash payments attributable to such income. Under this
method, a holder generally will be required to include in income increasingly
greater amounts of OID in successive accrual periods.
Bond Premium. If the issue price of the Note reduced by the
portion attributable to the conversion feature exceeds the amount payable at
maturity, a holder will have "amortizable bond premium" equal in amount to
such excess, and may elect (in accordance with applicable Code provisions) to
amortize such premium, using a constant yield method. A holder who elects to
amortize bond premium must reduce its tax basis in the Note by the amount of
the premium amortized in any year. An election to amortize bond premium
applies to all taxable debt obligations then owned and thereafter acquired by
the taxpayer and may be revoked only with the consent of the Internal Revenue
Service.
Redemption or Sale of Notes. Generally, any redemption or sale
of Notes by a holder will result in taxable gain or loss equal to the
difference between the amount of cash received (except to the extent that cash
received is attributable to interest which has not been included in income)
and the holder's tax basis in the Notes. Unless the exchange for the Notes
was treated as a dividend, the tax basis of a holder in a Note will generally
be equal to the issue price of the Note plus any OID included in the holder's
income prior to sale or redemption of the Note, reduced by any bond premium
amortized prior to such sale or redemption. Such gain or loss will be capital
gain or loss and will be long-term capital gain or loss if the holding period
exceeds one year.
Conversion of Preferred Stock or Notes into Common Stock
Generally, no gain or loss will be recognized for Federal
income tax purposes on conversion of Preferred Stock or Notes solely into
shares of Common Stock, except with respect to any cash received in lieu of a
fractional share interest (in an amount equal to the difference between the
cash received and the holder's adjusted tax basis allocable to such fractional
shares). A holder's basis in the Common Stock received upon conversion will
be the same as its basis in the Preferred Stock (assuming there are no
dividend arrearages) or Notes, excluding the basis allocated to any fractional
share as described above. The holding period of the Common Stock received
upon conversion of Preferred Stock will include the holding period of the
Preferred Stock. With respect to any Common Stock acquired upon the
conversion of a Note, except for the portion, if any, of each full share of
Common Stock attributable to interest accrued within the meaning of section
354(a)(2)(B) of the Code on or after the date on which the holder acquired the
Note, the Common Stock will have a holding period commencing on the day after
the date on which the holder acquired the Note.
If a shareholder converts Preferred Stock when dividends are in
arrears, it may be deemed to receive a distribution taxable as a dividend.
Under such circumstances, the shareholder is advised to consult its tax
advisor concerning the calculation of the amount of the dividend and the
determination of the holding period of the Common Stock received upon
conversion.
Conversion Adjustments for the Preferred Stock and the Notes
The conversion price of the Preferred Stock and Notes is
subject to adjustment under certain circumstances. Holders may be deemed to
receive a dividend to the extent of the Company's earnings and profits if the
conversion price is adjusted to reflect a taxable distribution of property to
holders of Common Stock or in certain other circumstances involving conversion
price adjustments. Such deemed dividend would be includible in gross income,
although the holder would not receive any cash.
Backup Withholding and Information Reporting
A holder of Common Stock, Rights, Preferred Stock or Notes may
be subject to information reporting and to backup withholding at the rate of
31% with respect to dividends or interest paid on, or the proceeds of a sale,
exchange or redemption thereof, as the case may be, unless such holder
provides proof of an applicable exemption or a correct taxpayer identification
number, and otherwise complies with applicable requirements of the backup
withholding rules. The amounts withheld under the backup withholding rules
are not an additional tax and may be refunded or credited against the holder's
Federal income tax liability, provided the required information is furnished
to the Internal Revenue Service on a timely basis.
PLAN OF DISTRIBUTION
The Company has retained Credit Suisse First Boston to act as
dealer manager in connection with the Rights Offering. The Dealer Manager
will provide marketing assistance and financial advisory services in
connection with the Rights Offering and will solicit the exercise of Rights by
Rights Holders.
In its capacity as financial advisor, Credit Suisse First
Boston provided advice to the Company regarding the structure of the Rights
Offering and with respect to marketing the shares of Preferred Stock to be
issued in the Rights Offering.
The Company has agreed to pay the Dealer Manager a fee of $
per share for each Underlying Share issued pursuant to the exercise of
Rights other than any Underlying Shares issued to HLR and Roche Holdings. The
maximum compensation that the Dealer Manager would receive under this
arrangement is $ .
In addition, the Company has agreed to indemnify the Dealer
Manager with respect to certain liabilities, including civil liabilities under
the Securities Act, or contribute to payments which the Dealer Manager may be
required to make in respect thereof.
The Company is also required to pay to Credit Suisse First
Boston, as financial advisor, a fee in the amount of $ . In addition,
the Company has agreed to reimburse Credit Suisse First Boston, upon request
made from time to time, for certain out-of-pocket expenses incurred in
connection with its activities as financial advisor.
Credit Suisse First Boston has not prepared any report or
opinion constituting a recommendation or advice to the Company or its
stockholders, nor has Credit Suisse First Boston prepared an opinion as to the
fairness of the Subscription Price or the terms of the Rights Offering to the
Company or its current stockholders. Credit Suisse First Boston expresses no
opinion and makes no recommendation to holders of Rights as to the purchase by
any person of Underlying Shares. Credit Suisse First Boston also expresses no
opinion as to the prices at which shares to be distributed in connection with
the Rights Offering may trade if and when they are issued or at any future
time.
Other than the Dealer Manager, the Company has not employed any
brokers, dealers or underwriters in connection with the solicitation of
exercise of Rights, and, except as described above, no other commissions, fees
or discounts will be paid in connection with the Rights Offering. Certain
employees of the Company may solicit responses from Rights Holders, but such
employees will not receive any commissions or compensation for such services
other than their normal employment compensation.
An affiliate of the Dealer Manager will receive proceeds from
the Rights Offering in connection with its role as a lender under the
Company's Existing Credit Agreement and Amended Credit Agreement.
The Dealer-Manager may engage in stabilizing transactions in
accordance with Regulation M under the Exchange Act. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Such stabilizing
transactions may cause the price of the securities to be higher than it
would otherwise be in the absence of such transactions. These transactions
may be effected on the NYSE or otherwise and, if commenced, may be
discontinued at any time.
LEGAL MATTERS
The validity of the Preferred Stock and Notes and certain other
matters will be passed upon for the Company by Davis Polk & Wardwell. Davis
Polk & Wardwell from time to time provides legal services to the Company and
its affiliates.
EXPERTS
The consolidated financial statements and schedule of the
Company as of December 31, 1996 and 1995, and for each of the years in the
three-year period ended December 31, 1996, have been included or incorporated
by reference herein and in the Registration Statement in reliance upon the
reports of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein or incorporated by reference herein upon the
authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act and in accordance therewith files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and
other information filed by the Company may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
Commission's following Regional Offices: Chicago Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and New
York Regional Office, 7 World Trade Center, New York, New York 10048. Copies
of such material can also be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549-1004. The Commission maintains an Internet web
site that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the Commission.
The address of that site is http://www.sec.gov. The Company's Common Stock is
listed on the New York Stock Exchange, Inc. and reports and other information
concerning the Company can also be inspected at the office of the New York
Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a Registration
Statement on Form S-3 under the Securities Act with respect to the securities
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
where such contract or other document has been filed as an exhibit to the
Registration Statement, reference is made to the exhibit so filed, each such
statement being qualified in all respects by such reference. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement and exhibits thereto. The
information so omitted, including exhibits, may be obtained from the
Commission at its principal office in Washington, D.C. upon the payment of the
prescribed fees, or may be inspected without charge at the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549-1004.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, the Company's Reports on Form 8-K dated January 6,
1997, February 27, 1997 and March 3, 1997 and the Company's Report on Form
8-K/A dated February 26, 1997 are hereby incorporated by reference in this
Prospectus except as superseded or modified herein. All documents filed with
the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act, after the date of this Prospectus and prior to the termination of the
offering shall be deemed to be incorporated by reference into this Prospectus
and to be a part hereof from the date of filing of such documents. Any
statement contained in any document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes
of this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as
modified or superseded, to constitute a part of this Prospectus. The Company
will provide without charge to each person, including any beneficial owner, to
whom this Prospectus is delivered, upon written or oral request of such
person, a copy of any and all of the documents that have been or may be
incorporated by reference herein (other than exhibits to such documents which
are not specifically incorporated by reference into such documents). Such
requests should be directed to Attention: Bradford T. Smith, Secretary,
Laboratory Corporation of America Holdings, 358 South Main Street, Burlington,
North Carolina 27215, (910) 229-1127.
LABORATORY CORPORATION OF AMERICA HOLDINGS
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULE
Page
----
Independent Auditors' Report...............................F-2
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1996 and 1995..............................F-3
Consolidated Statements of Operations for
each of the years in the three-year
period ended December 31, 1996..........................F-4
Consolidated Statements of Stockholders'
Equity for each of the years in the
three-year period ended December 31, 1996...............F-5
Consolidated Statements of Cash Flows for
each of the years in the three-year
period ended December 31, 1996..........................F-6
Notes to Consolidated Financial Statements..............F-8
Financial Statement Schedule:
II - Valuation and Qualifying Accounts and Reserves....F-26
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Laboratory Corporation of America Holdings:
We have audited the consolidated financial statements of Laboratory
Corporation of America Holdings and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Laboratory
Corporation of America Holdings and subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick LLP
Raleigh, North Carolina
February 14, 1997 except for Notes 9
and 10 as to which the date is March 31, 1997.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share data)
December 31
----------------------
1996 1995
ASSETS ---------- ----------
Current assets:
Cash and cash equivalents .................... $ 29.3 $ 16.4
Accounts receivable, net ..................... 505.6 426.8
Inventories .................................. 44.3 50.1
Prepaid expenses and other ................... 21.8 21.4
Deferred income taxes ........................ 66.2 63.3
Income taxes receivable ...................... 54.3 21.9
---------- ----------
Total current assets ........................... 721.5 599.9
Property, plant and equipment, net ............. 282.9 304.8
Intangible assets, net ......................... 891.1 916.7
Other assets, net .............................. 21.5 15.8
---------- ----------
$ 1,917.0 $ 1,837.2
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................ $ 65.7 $ 106.2
Accrued expenses and other .................. 168.4 173.5
Current portion of long-term debt ........... 18.7 70.8
---------- ----------
Total current liabilities ..................... 252.8 350.5
Loan from affiliate ........................... 187.0 --
Revolving credit facility ..................... 371.0 218.0
Long-term debt, less current portion .......... 693.8 712.5
Capital lease obligation ...................... 9.8 9.6
Other liabilities ............................. 144.5 135.0
Stockholders' equity:
Preferred stock, $0.10 par value;
10,000,000 shares authorized;
none issued ................................ -- --
Common stock, $0.01 par value;
220,000,000 shares authorized; 122,935,080
and 122,908,722 shares issued and
outstanding at December 31, 1996 and 1995,
respectively ............................... 1.2 1.2
Additional paid-in capital .................... 411.0 411.0
Accumulated deficit ........................... (154.1) (0.6)
---------- ----------
Total stockholders' equity .................. 258.1 411.6
---------- ----------
$ 1,917.0 $ 1,837.2
========== ==========
See notes to consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
Years Ended December 31,
-----------------------------------
1996 1995 1994
----------- ----------- ---------
Net Sales .......................................................... $ 1,607.7 $ 1,432.0 $ 872.5
Cost of sales ...................................................... 1,183.9 1,024.3 597.0
---------- ---------- --------
Gross profit ....................................................... 423.8 407.7 275.5
Selling, general and administrative expenses ....................... 305.0 238.5 149.3
Amortization of intangibles and other assets ....................... 29.6 27.0 16.3
Restructuring and non-recurring charges ............................ 23.0 65.0 --
Provision for settlements and related expenses ..................... 185.0 10.0 --
---------- ---------- --------
Operating income (loss) ............................................ (118.8) 67.2 109.9
Other income (expenses):
Litigation settlement and related expenses ....................... -- -- (21.0)
Investment income ................................................ 2.2 1.4 1.0
Interest expense ................................................. (71.7) (65.5) (34.5)
---------- ---------- --------
Earnings (loss) before income taxes and extraordinary loss ......... (188.3) 3.1 55.4
Provision for income taxes ......................................... (34.8) 7.1 25.3
---------- ---------- --------
Earnings (loss) before extraordinary loss .......................... (153.5) (4.0) 30.1
Extraordinary loss from extinguishment of debt, net of early ....... -- (8.3) --
income tax benefit of $5.2 ---------- ---------- --------
Net earnings (loss) ................................................ $ (153.5) $ (12.3) $ 30.1
=========== =========== =========
Earnings (loss) per common share:
Earnings (loss) per common share before extraordinary Item........ $ (1.25) $ (0.03) $ 0.36
Extraordinary loss per common share .............................. -- (0.08) --
---------- ---------- --------
Net earnings (loss) per common share ............................... $ (1.25) $ (0.11) $ 0.36
=========== =========== =========
Dividends per common share ......................................... $ -- $ -- $ 0.08
=========== =========== =========
See notes to consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in millions, except per share data)
Common Additional Retained Pension Minimum
Stock $0.01 Paid-in Earnings Liability Treasury
Par Value Capital Adjustment Stock Total
----------- ---------- --------- ---------- -------- --------
Balance, December 31, 1993 ..... $ 1.0 $ 226.3 $ 202.0 $ (2.4) $ (286.1) $ 140.8
Net earnings ................. -- -- 30.1 -- -- 30.1
Exercise of stock options .... -- 0.1 -- -- -- 0.1
Dividends to stockholders .... -- -- (6.8) -- -- (6.8)
Retirement of treasury stock . (0.2) (72.3) (213.6) -- 286.1 --
Adjustment for minimum pension
liability................... -- -- -- 2.4 -- 2.4
Other ........................ -- (0.6) -- -- -- (0.6)
------ -------- -------- ------ ------- --------
Balance, December 31, 1994 ..... 0.8 153.5 11.7 -- -- 166.0
Net loss ..................... -- -- (12.3) -- -- (12.3)
Exercise of stock options .... -- 0.2 -- -- -- 0.2
Cancellation of stock options -- 6.9 -- -- -- 6.9
Distribution to stockholders . 0.2 (474.5) -- -- -- (474.7)
Issuance of common stock ..... 0.6 674.6 -- -- -- 675.2
Issuance of warrants ......... -- 51.0 -- -- -- 51.0
Other ........................ -- (0.7) -- -- -- (0.7)
------ -------- -------- ------ ------- --------
Balance, December 31, 1995 ..... 1.2 411.0 (0.6) -- -- 411.6
Net loss ..................... -- -- (153.5) -- -- (153.5)
------ -------- -------- ------ ------- --------
Balance, December 31, 1996 ..... $ 1.2 $ 411.0 $ (154.1) -- -- $ 258.1
====== ======== ======== ====== ======= ========
See notes to consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions, except per share data)
Years Ended December 31,
----------------------------------
1996 1995 1994
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ........................................................ $ (153.5) $ (12.3) $ 30.1
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Restructuring and non-recurring charges .................................. 23.0 65.0 --
Provision for settlements and related expenses ........................... 185.0 10.0 21.0
Extraordinary loss, net of income tax benefit ............................ -- 8.3 --
Depreciation and amortization, net ....................................... 84.5 72.4 44.4
Deferred income taxes, net ............................................... 30.3 (21.6) 11.0
Provision for doubtful accounts, net ..................................... 22.2 12.4 (1.4)
Change in assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable .......................................... (102.2) (58.6) (54.0)
Decrease (increase) in inventories ....................................... 8.0 5.1 (0.9)
Decrease (increase) in prepaid expenses and other ........................ (3.1) 1.0 5.1
Change in income taxes receivable/payable, net ........................... (32.4) (11.7) 5.5
Increase (decrease) in accounts payable, accrued expenses and other ...... (33.4) 27.9 (13.1)
Payments for restructuring and non-recurring charges ..................... (18.8) (13.4) --
Payments for settlement and related expenses ............................. (188.9) (32.1) (29.8)
Other, net ............................................................... (7.5) (5.4) (3.2)
-------- -------- --------
Net cash provided by (used for) operating activities ......................... (186.8) 47.0 14.7
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ....................................................... (54.1) (75.4) (48.9)
Proceeds from sale of subsidiary ........................................... -- -- 10.1
Acquisitions of businesses ................................................. (5.0) (39.6) (254.8)
-------- -------- --------
Net cash used for investing activities ..................................... (59.1) (115.0) (293.6)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities .................................. $ 293.0 $ 308.0 $ 308.0
Payments on revolving credit facilities .................................... (140.0) (303.0) (373.0)
Proceeds from long-term debt ............................................... -- 800.0 400.0
Loan from affiliate ........................................................ 187.0 -- --
Payments on long-term debt ................................................. (70.8) (446.7) (20.0)
Deferred payments on acquisitions .......................................... (10.4) (12.9) (7.6)
Dividends paid on common stock ............................................. -- -- (13.6)
Distribution to stockholders ............................................... -- (474.7) --
Cash received for issuance of common stock ................................. -- 135.7 --
Cash received for issuance of warrants ..................................... -- 51.0 --
Other ...................................................................... -- 0.2 (0.4)
Net cash provided by financing activities .................................. 258.8 57.6 293.4
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ....................... 12.9 (10.4) 14.5
Cash and cash equivalents at beginning of year ............................. 16.4 26.8 12.3
-------- -------- --------
Cash and cash equivalents at end of year ................................... $ 29.3 $ 16.4 $ 26.8
======== ======== ========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest ................................................................... $ 65.1 $ 58.6 $ 34.2
Income taxes ............................................................... (15.2) 27.2 14.8
Disclosure of non-cash financing and investing activities:
Common stock issued in connection with 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 .............................................. $ 23.4 $ 777.7 $ 399.4
Cash paid .................................................................. (5.0) (39.6) (254.8)
Stock issued ............................................................... -- (539.5) --
Liabilities assumed ........................................................ $ 18.4 $ 198.6 $ 144.6
======== ======== ========
See notes to consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
Laboratory Corporation of America Holdings is one of the three largest
independent clinical laboratory companies in the United States based on 1996
net revenues. Through a national network of laboratories, the Company offers
a broad range of testing services used by the medical profession in the
diagnosis, monitoring and treatment of disease and other clinical states.
Since its founding in 1971, the Company has grown into a network of 28 major
laboratories and approximately 1,500 service sites consisting of branches,
patient service centers and STAT laboratories, serving clients in 48 states.
The consolidated financial statements include the accounts of Laboratory
Corporation of America Holdings and its subsidiaries ("Company") after
elimination of all material intercompany accounts and transactions. 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.
Cash Equivalents:
Cash equivalents (primarily investments in money market funds, time
deposits and commercial paper which have original maturities of three months or
less at the date of purchase) are carried at cost which approximates market.
Inventories:
Inventories, consisting primarily of laboratory supplies, are stated at the
lower of cost (first-in, first-out) or market.
Financial Instruments:
Interest rate swap agreements, which are used by the Company in the
management of interest rate exposure, are accounted for on an accrual basis.
Amounts to be paid or received under such agreements are recognized as
interest income or expense in the periods in which they accrue.
Property, Plant and Equipment:
Property, plant and equipment are recorded at cost. The cost of properties
held under capital leases is equal to the lower of the net present value of
the minimum lease payments or the fair value of the leased property at the
inception of the lease. Depreciation and amortization expense is computed on
all classes of assets based on their estimated useful lives, as indicated
below, using principally the straight-line method.
Years
-----
Buildings and building improvements ........................... 35-40
Machinery and equipment ....................................... 3-10
Furniture and fixtures ........................................ 5-10
Leasehold improvements and assets held under capital leases are amortized
over the shorter of their estimated lives or the period of the related leases.
Expenditures for repairs and maintenance charged against earnings in 1996,
1995 and 1994 were $34.2, $28.3 and $16.5, respectively.
Fair Value of Financial Instruments:
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures
About Fair Value of Financial Instruments", requires that fair values be
disclosed for most of the Company's financial instruments. The carrying
amount of cash and cash equivalents, accounts receivable, accounts payable and
accrued expenses are considered to be representative of their respective fair
values. The carrying amount of the revolving credit facility and long-term
debt are considered to be representative of their respective fair values as
their interest rates are based on market rates. The carrying value of the
loan from affiliate is considered to be representative of its fair value due
to the related party nature of the obligation.
Concentration of Credit Risk:
Concentrations of credit risk with respect to accounts receivable are
limited due to the diversity of the Company's clients as well as their
dispersion across many different geographic regions.
Revenue Recognition:
Sales are recognized on the accrual basis at the time test results are
reported, which approximates when services are provided. Services are
provided to certain patients covered by various third-party payor programs
including the Medicare and Medicaid programs. Billings for services under
third-party payor programs are included in sales net of allowances for
differences between the amounts billed and estimated program payment amounts.
Adjustments to the estimated payment amounts based on final settlement with
the programs are recorded upon settlement. In 1996, 1995 and 1994,
approximately 23%, 28% and 35%, respectively, of the Company's revenues were
derived from tests performed for beneficiaries of Medicare and Medicaid
programs.
Income Taxes:
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes" ("Statement 109"). Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment
date.
Stock Option Plans:
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation", which permits entities to recognize
as expense over the vesting period the fair value of all stock-based awards
on the date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma
net income and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company has elected to continue
to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
Earnings per Common Share:
For the years ended December 31, 1996, 1995 and 1994, earnings per common
share is calculated based on the weighted average number of shares outstanding
during each year (122,919,767, 110,579,096, and 84,754,183 shares,
respectively).
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported periods. Actual results could differ from those estimates.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of:
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
on January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Adoption of this Statement did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
Intangible assets, consisting of goodwill, net of amortization, of $696.1
and $700.1 at December 31, 1996 and 1995, respectively, and other intangibles
(i.e., customer lists and non-compete agreements), net of amortization, of
$195.0 and $216.6 at December 31, 1996 and 1995, respectively, are being
amortized on a straight-line basis over a period of 40 years and 3-25 years,
respectively. Total accumulated amortization for intangible assets aggregated
$116.9 and $87.4 at December 31, 1996 and 1995, respectively.
Reclassifications:
Certain amounts in the prior years' financial statements have been
reclassified to conform with the 1996 presentation.
2. MERGER AND ACQUISITIONS
In April 1995, the Company completed a merger (the "Merger") with Roche
Biomedical Laboratories, Inc. ("RBL"). In connection with the Merger, the
Company issued 61,329,256 shares of Common Stock to HLR Holdings Inc. ("HLR")
and Roche Holdings Inc. ("Roche") in exchange for all outstanding shares of
RBL and $135.7 in cash. The exchange consideration of approximately $558.0
for the purchase of RBL consisted of the value of the stock issued to HLR and
Roche, as well as other cash costs of the Merger, net of cash received from
HLR. In June 1994, the Company acquired Allied Clinical Laboratories, Inc.
("Allied") for approximately $191.5 in cash plus the assumption of $24.0 of
Allied indebtedness (the "Allied Acquisition"). The Allied Acquisition and the
Merger have been accounted for under the purchase method of accounting; as
such, the acquired assets and liabilities were recorded at their estimated
fair values on the date of acquisition. RBL's and Allied's results of
operations have been included in the Company's results of operations since
April 28, 1995 and June 23, 1994, respectively.
During 1996, the Company acquired four small clinical laboratory companies
for an aggregate purchase price, including assumption of liabilities, of
$23.4. During 1995 and 1994, the Company acquired nine and eleven
laboratories, respectively, for an aggregate purchase price, including
assumption of liabilities, of $41.7 and $79.3, respectively. The acquisitions
were accounted for as purchase transactions. The excess of cost over the fair
value of net tangible assets acquired during 1996, 1995 and 1994 was $22.5,
$28.2, and $72.1, respectively, which is included under the caption
"Intangible assets, net" in the accompanying consolidated balance sheets. The
consolidated statements of operations reflect the results of operations of
these purchased businesses from dates of acquisition.
3. 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 was substantially closed by the end of
1996. The remaining workforce reductions took place in other areas of the
Company and were substantially completed by the end of 1996. The net work
force reduction as a result of these activities was approximately 250
employees. Payments for severance are expected to continue through 1997.
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 a result, the Company recorded a restructuring charge of $65.0 in the second
quarter of 1995. 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. These restructuring activities
have been substantially completed as of December 31, 1996 and have resulted in
a net reduction of approximately 1,600 employees.
The following represents the Company's restructuring activities for the
period indicated:
Asset Lease and
revaluations other
Severance and write- facility
Costs offs obligations Total
--------- ------------ ----------- -------
Balance at December 31, 1994 $ -- $ -- $ -- $ --
Restructuring charges .... 24.2 21.3 19.5 65.0
Non cash items ........... (0.3) (2.7) -- (3.0)
Cash payments ............ (11.1) -- (0.6) (11.7)
------- ------- ------- -------
Balance at December 31, 1995 $ 12.8 $ 18.6 $ 18.9 $ 50.3
Restructuring charges .... 8.1 1.4 3.5 13.0
Reclassifications ........ 1.6 0.7 (2.3) --
Non cash items ........... -- (11.3) -- (11.3)
Cash payments ............ (14.2) -- (3.2) (17.4)
------- ------- ------- -------
Balance at December 31, 1996 $ 8.3 $ 9.4 $ 16.9 $ 34.6
======= ======= ======= =======
Current .................. $ 25.5
Non-current .............. 9.1
-------
$ 34.6
=======
4. ACCOUNTS RECEIVABLE, NET
December 31, December 31,
1996 1995
------------ ------------
Gross accounts receivable ..................................... $ 617.2 $ 517.2
Less contractual allowances and allowance for doubtful accounts (111.6) (90.4)
-------- --------
$ 505.6 $ 426.8
======== ========
5. PROPERTY, PLANT AND EQUIPMENT, NET
December 31, December 31,
1996 1995
------------ ------------
Land .......................................................... $ 9.2 $ 7.0
Buildings and building improvements ........................... 64.2 54.7
Machinery and equipment ....................................... 289.3 268.1
Leasehold improvements ........................................ 58.3 70.3
Furniture and fixtures ........................................ 27.0 27.3
Buildings under capital leases ................................ 9.6 9.6
-------- --------
457.6 437.0
Less accumulated depreciation and amortization ................ (174.7) (132.2)
-------- --------
$ 282.9 $ 304.8
======== ========
6. ACCRUED EXPENSES AND OTHER
December 31, December 31,
1996 1995
------------ ------------
Employee compensation and benefits ............................ $ 49.5 $ 50.5
Deferred acquisition related payments.......................... 12.9 14.8
Acquisition related reserves .................................. 17.2 39.4
Restructuring reserves ........................................ 25.5 32.3
Accrued taxes ................................................. 15.4 14.0
Interest payable .............................................. 12.8 7.4
Other ......................................................... 35.1 15.1
-------- --------
$ 168.4 $ 173.5
======== ========
7. OTHER LIABILITIES
December 31, December 31,
1996 1995
------------ ------------
Deferred acquisition related payments.......................... $ 14.8 $ 8.5
Acquisition related reserves .................................. 12.3 68.2
Restructuring reserves ........................................ 9.1 18.0
Deferred income taxes ......................................... 38.7 5.1
Post-retirement benefit obligation ............................ 27.0 25.1
Other ......................................................... 42.6 10.1
-------- --------
$ 144.5 $ 135.0
======== ========
8. SETTLEMENTS
As previously discussed in the Company's December 31, 1995 10-K, the Office
of Inspector General ("OIG") of Health and Human Services and the Department
of Justice ("DOJ") had been investigating certain past laboratory practices of
the predecessor companies of the Company - NHL, RBL and Allied. On November
21, 1996, the Company reached a settlement with the OIG and the DOJ regarding
the prior billing practices of these predecessor companies (the "1996
Government Settlement"). Consistent with this overall settlement, the Company
paid $187.0 to the Federal Government in December 1996 (the "Settlement
Payment") with proceeds from a loan from Roche (the "Roche Loan"). As a
result of negotiations related to the 1996 Government Settlement, the Company
recorded a charge of $185.0 in the third quarter of 1996 (the "Settlement
Charge") to increase reserves for the 1996 Government Settlement described
above, and other related expenses of government and private claims resulting
therefrom.
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 were billing disputes with
various third party payors relating to the contention that NHL improperly
included tests for HDL cholesterol and serum ferritin in its basic test
profile without clearly offering an alternative profile that did not include
these medical tests. As of December 31, 1996, the majority of these disputes
have been settled.
In the third quarter of 1994, the Company approved a settlement of
previously disclosed shareholder class and derivative litigation. The
litigation consisted of two consolidated class action suits and a consolidated
shareholder derivative action brought in Federal and state courts in San
Diego, California. The settlement involved no admission of wrongdoing. In
connection with the settlement, the Company took a pre-tax special charge of
$15.0 and a $6.0 charge for expenses related to the settled litigation.
Insurance payments and payments from other defendants aggregated $55.0 plus
expenses.
9. LONG-TERM DEBT
The Company entered into a credit agreement dated as of April 28, 1995 (the
"Existing Credit Agreement"), with the banks named therein (the "Banks") and
Credit Suisse First Boston, 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 is unconditionally and irrevocably
guaranteed by certain of the Company's subsidiaries.
As a result of potential defaults under the Existing Credit Agreement,
resulting from, among other things, the Company's performance and higher than
projected debt levels, the Settlement Charge and the Roche Loan, the Company
has obtained several amendments and waivers to the Existing Credit Agreement.
In September 1996, the Company negotiated an amendment (the "Fourth
Amendment") to the Existing Credit Agreement. The Fourth Amendment modified
the interest coverage and leverage ratios applicable to the quarters ending
September 30 and December 31, 1996. The Fourth Amendment also increased the
interest rate margin on its revolving credit facility from 0.25% to 0.875% and
increased the interest rate margin on its term loan facility from 0.375% to
1.00%. As a result of the Settlement Charge in the third quarter of 1996, as
described above, the Company obtained a waiver (the "Third Waiver") which
excluded the special charge from covenant calculations for the periods covered
by the most recent amendment until 30 days after the 1996 Government
Settlement. As a result of the Roche Loan and the 1996 Government Settlement,
the Company negotiated a Fifth Amendment and Fourth Waiver (the "Fifth
Amendment") to the Existing Credit Agreement. The Fifth Amendment extended
the Third Waiver until January 31, 1997 and excluded the Roche Loan from
covenant calculations for the quarters ending December 31, 1996 and March 31,
1997. On January 27, 1997, the Company negotiated a waiver (the "Fifth
Waiver") which further extended the Third Waiver until March 31, 1997.
In March 1997, the Company entered into the Sixth Amendment and Waiver (the
"Sixth Amendment") which eliminates amortization payments on the Term Loan
Facility for 1997 and modifies the interest coverage and leverage ratios for
the quarterly periods through December 31, 1997. As a result of the Sixth
Amendment certain amounts outstanding under the Revolving Credit Facility and
Term Loan Facility that were classified as current liabilities in the September
30, 1996 financial statements have been reclassified to long-term debt in the
December 31, 1996 financial statements. Pursuant to this amendment, the
Company paid an amendment fee of 37.5 basis points on commitments and will pay
an additional fee of 62.5 basis points if the Rights Offering, as described in
Note 17, is not completed by June 30, 1997. Under the Sixth Amendment,
maturities under the Term Loan Facility aggregate $243.8, $162.5, $187.5 and
$100.0 in 1998 through 2001, respectively.
In March 1997, the Company also entered into an amended and restated credit
agreement (the "Amended Credit Agreement") which will become effective upon
completion of the Rights Offering following satisfaction of certain conditions
precedent. The Amended Credit Agreement makes available to the Company a term
loan facility of $693.8 (the "Amended Term Loan Facility") and a $450.0
revolving credit facility (the "Amended Revolving Credit Facility"). The
Amended Revolving Credit Facility will include a $50.0 letter of credit
sublimit. The maturities under the Amended Credit Agreement are extended
approximately three years for the Amended Term Loan Facility to March 31, 2004
and approximately two years for the Amended Revolving Credit Facility to March
31, 2002.
As in the Existing Credit Agreement, both the Amended Term Loan Facility
and the Amended Revolving Credit Facility bear interest, at the option of the
Company, at (i) the base rate plus the applicable base rate margin or (ii) the
eurodollar rate plus the applicable eurodollar rate margin. The Amended Credit
Agreement provides that in the event of a reduction of the percentage of
Common Stock held by HLR, Roche Holdings and their affiliates (other than the
Company and its subsidiaries) below 25%, the applicable interest margins and
facility fees on borrowings outstanding under the Amended Credit Agreement
will increase. The amount of the increase will depend, in part, on the
leverage ratio of the Company at the time of such reduction. In addition,
pursuant to the Amended Credit Agreement, the applicable interest margins on
borrowings outstanding thereunder are based upon the leverage ratio.
Total amortization of the Amended Term Loan Facility for each twelve-month
period following the closing date of the Rights Offering will be reduced
significantly for the first three years, and will be made (in quarterly
installments) in accordance with the following table:
Year Amount
---- -------
1997 $ --
1998 --
1999 50.0
2000 100.0
2001 150.0
2002 150.0
2003 150.0
3/21/2004 93.8
Conditions precedent to effectiveness of the Amended Credit Agreement
include, without limitation, gross cash proceeds from the Rights Offering in an
aggregate amount equal to at least $250.0, receipt of appropriate certificates
and legal opinions, accuracy in all material respects of representations and
warranties, including absence of material adverse change in the Company and
its subsidiaries (taken as a whole) since December 31, 1996, absence of
defaults and material litigation, evidence of authority, and payment of
transaction fees.
The Amended Credit Agreement contains customary covenants similar to, and
in the case of limitations on acquisitions and incurrence of additional debt
more restrictive than, the covenants set forth in the Existing Credit
Agreement.
Like the Existing Credit Agreement, the Amended Credit Agreement contains
financial covenants with respect to a leverage ratio, an interest coverage
ratio and minimum stockholders' equity. The covenant levels are less
restrictive than under the Existing Credit Agreement, and will be tested
quarterly.
At December 31, 1996, the Company was 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 of its floating rate debt under the Term Loan Facility. The
agreements effectively changed the interest rate exposure on $600.0 of
floating rate debt to a weighted average fixed interest rate of 6.01%, through
requiring that the Company pay a fixed rate amount in exchange for the
financial institutions paying a floating rate amount. Amounts paid by the
Company in 1996 were $2.0. 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 cost at which the Company could terminate these agreements as of
December 31, 1996 was approximately $0.9. The fair value was estimated by
discounting the expected cash flows using rates currently available for
interest rate swaps with similar terms and maturities.
In connection with the repayment of existing revolving credit and term loan
facilities in 1995, 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.
Prior to April 28, 1995, the Company had a credit agreement with a group of
banks which provided the Company with a $400.0 term loan facility and a
revolving credit facility of $350.0. This credit agreement provided funds for
the Allied Acquisition, to refinance certain existing debt of Allied and the
Company, and for general corporate purposes. The credit agreement was repaid
in full on April 28, 1995. At December 31, 1994, the Company's effective
borrowing rate on this credit agreement was 8.16%.
10. LOAN FROM AFFILIATE
In December 1996, the Company financed the Settlement Payment with the
proceeds of a $187.0 loan from Roche. The promissory note bears interest at
6.625% per annum and was originally due March 31, 1997. In March 1997, the
Company renegotiated the term of the note and it is now due March 31, 1998.
The note is unsecured and ranks pari passu with the Company's bank
obligations. The Company subsequently made the Settlement Payment in December
1996.
11. STOCKHOLDERS' EQUITY
In connection with a corporate reorganization on June 7, 1994, all of the
14,603,800 treasury shares held by National Health Laboratories Incorporated
were canceled. As a result, the $286.1 cost of such treasury shares was
eliminated with corresponding decreases in the par value, additional paid-in
capital and retained earnings accounts of $0.2, $72.3 and $213.6, respectively.
12. INCOME TAXES
The provisions for income taxes in the accompanying consolidated statements
of operations consist of the following:
Year Ended December 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
Current:
Federal .............. $ (54.4) $ 10.4 $ 16.2
State ................ 2.3 1.5 3.0
------- ------- -------
(52.1) 11.9 19.2
------- ------- -------
Deferred:
Federal .............. 15.2 (4.6) 4.9
State ................ 2.1 (0.2) 1.2
------- ------- -------
17.3 (4.8) 6.1
------- ------- -------
$ (34.8) $ 7.1 $ 25.3
======= ======= =======
The effective tax rates on earnings before income taxes is reconciled to
statutory federal income tax rates as follows:
Years Ended December 31,
----------------------------------
1996 1995 1994
------- ------- -------
Statutory federal rate ........................................................... (35.0)% 35.0% 35.0%
State and local income taxes, net of federal income tax benefit .................. (3.0) 28.0 4.9
Non-deductible amortization of intangible assets ................................. 3.0 166.0 4.9
Change in valuation allowance .................................................... 17.0 -- --
Other ............................................................................ (0.5) 7.0 0.9
----- ----- ----
Effective rate ................................................................... (18.5)% 236.0% 45.7%
===== ===== ====
The significant components of deferred income tax expense are as follows:
Years Ended December 31,
----------------------------------
1996 1995 1994
------- ------- ------
Acquisition related reserves ..................................................... $ 2.7 $ (17.7) $ (1.2)
Settlement and related expenses................................................... -- 8.8 2.5
Reserve for doubtful accounts .................................................... (9.5) (4.3) 0.9
Insurance accrual ................................................................ (1.9) -- --
Change in valuation allowance .................................................... 32.0 -- --
Other ............................................................................ (6.0) 8.4 3.9
------- ------- ------
$ 17.3 $ (4.8) $ 6.1
======= ======= ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1995 are as follows:
December 31, December 31,
1996 1995
------------ ------------
Deferred tax assets:
Settlement and related expenses, principally due to accrual for financial reporting
purposes........................................................................... $ 19.2 $ 1.8
Accounts receivable, principally due to allowance for doubtful accounts ............. 31.1 21.9
Self insurance reserves, principally due to accrual for financial reporting purposes 7.9 4.8
Postretirement benefit obligation, principally due to accrual for financial reporting
purposes........................................................................... 10.7 9.9
Compensated absences, principally due to accrual for financial reporting purposes ... -- --
Acquisition related reserves, principally due to accrual for financial reporting
purposes........................................................................... 43.1 81.0
State net operating loss carryforwards .............................................. 11.8 7.4
Other ............................................................................... 18.1 13.7
-------- --------
141.9 140.5
Less valuation allowance .......................................................... (32.0) --
-------- --------
Net deferred tax asset ............................................................ 109.9 140.5
Deferred tax liabilities:
Intangible assets, principally due to differences in amortization ................... (60.2) (59.5)
Property, plant and equipment, principally due to differences in depreciation ....... (20.9) (16.4)
Other ............................................................................... (1.3) (6.4)
-------- --------
Total gross deferred tax liabilities .............................................. (82.4) (82.3)
-------- --------
Net deferred tax asset ................................................................ $ 27.5 $ 58.2
======== ========
There was no valuation allowance for deferred tax assets as of December 31,
1995 and 1994. At December 31, 1996 the valuation allowance for deferred tax
assets was $32.0. Realization of the deferred tax assets related to the state
net operating loss carry forwards, the post retirement benefit obligation as
well as certain other temporary differences is considered uncertain, and
therefore a valuation allowance has been established for these items. The
Company believes that it is more likely than not that the results of future
operations and carry back availability will generate sufficient taxable income
to realize the remaining deferred tax assets.
13. STOCK OPTIONS
In 1988, the Company adopted the 1988 Stock Option Plan, reserving
2,000,000 shares of common stock for issuance pursuant to options and stock
appreciation rights that may be granted under the plan. The Stock Option Plan
was amended in 1990 to limit the number of options to be issued under the Stock
Option Plan to 550,000 in the aggregate (including all options previously
granted). In 1991, the number of shares authorized for issuance under the
Stock Option Plan was increased to an aggregate of 2,550,000.
In 1994, the Company adopted the 1994 Stock Option Plan, reserving
3,000,000 shares of common stock for issuance pursuant to options and stock
appreciation rights that may be granted under the plan.
In connection with the Merger, all options outstanding as of December 13,
1994 became vested and employees were given the choice to (i) cancel options
outstanding as of December 13, 1994 and receive cash and shares of common
stock according to a formula included in the merger agreement or (ii) convert
such options into new options based on a formula included in the merger
agreement. The amount of cash and shares of common stock issued was equal to
the product of (i) the number of shares of common stock subject to such
options submitted for cancellation and (ii) the excess of (1) $18.50 over (2)
the per share exercise price of such options (such product, the "Option Value
Amount"). The Option Value Amount was paid as follows: 40% of such amount was
paid in cash, and 60% of such amount (the "Option Stock Amount") was paid in
the number of shares of common stock obtained by dividing the Option Stock
Amount by $15.42. In connection with the cancellation of stock options, the
Company paid a total of $5.5 in cash and issued 538,307 shares of common stock
to option holders. The value of such amounts were considered transaction
costs of the merger and therefore were not treated as compensation expense.
Also, a total of 562,532 options were reissued as a result of option
conversions at exercise prices between $11.293 and $16.481.
At December 31, 1996, there were 3,427,316 additional shares available for
grant under the Company's Stock Option Plans. There were no options granted
in 1996. The per share weighted-average fair value of stock options granted
during 1995 was $8.54 per share on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: -
expected dividend yield 0.0%, risk-free interest rate of 6.86%, and an
expected life of ten years.
The Company applies the provisions of APB Opinion No. 25 in accounting
for its Plan and, accordingly, no compensation cost has been recognized for
its stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income would have been
reduced to the pro forma amounts indicated below:
Years Ended
December 31,
---------------------------
1996 1995
---------- ----------
Net loss
As reported .......................... $ (153.5) $ (12.3)
Pro forma ............................ (154.7) (14.5)
Earnings per share
As reported .......................... $ (1.25) $ (0.11)
Pro forma ............................ (1.26) (0.13)
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options
vesting period of two years and compensation cost for options granted prior to
January 1, 1995 is not considered.
The following table summarizes grants of non-qualified options made by the
Company to officers and key employees under both plans. Stock options are
generally granted at an exercise price equal to or greater than the fair
market price per share on the date of grant. Also, for each grant, one-third
of the options vested on the date of grant and one-third vest on each of the
first and second anniversaries of such date, subject to their earlier
expiration or termination.
Changes in options outstanding under the plans for the periods indicated
were as follows:
Weighted Average
Number of Exercise Price per
Options Option
--------- ------------------
Outstanding at January 1, 1994 ............. 1,564,336 $ 17.366
Granted .................................. 2,042,000 $ 12.600
Exercised ................................ (11,125) $ 7.717
Canceled or expired ...................... (92,498) $ 16.649
---------
Outstanding at December 31, 1994 ........... 3,502,713 $ 14.637
Granted .................................. 1,378,000 $ 13.000
Merger-related grants .................... 562,532 $ 15.870
Exercised ................................ (20,542) $ 10.297
Merger-related cancellations ............. (3,459,167) $ 14.653
Canceled or expired ...................... (222,291) $ 14.816
---------
Outstanding at December 31, 1995 ........... 1,741,245 $ 14.637
Canceled or expired ...................... (443,027) $ 14.104
---------
Outstanding at December 31, 1996 ......... 1,298,218 $ 14.637
=========
Exercisable at December 31, 1996 ........... 993,429 $ 13.748
=========
The weighted average remaining life of options outstanding at December 31,
1996 is approximately 8.4 years.
14. COMMITMENTS AND CONTINGENCIES
The Company is involved in certain claims and legal actions arising in the
ordinary course of business. In the opinion of management, based upon the
advice of counsel, the ultimate disposition of these matters will not have a
material adverse effect on the financial position or results of operations of
the Company.
Under the Company's present insurance programs, coverage is obtained for
catastrophic exposures as well as those risks required to be insured by law
or contract. The Company is responsible for the uninsured portion of losses
related primarily to general, product and vehicle liability and workers'
compensation. The self-insured retentions are on a per occurrence basis
without any aggregate annual limit. Provisions for losses expected under
these programs are recorded based upon the Company's estimates of the
aggregated liability of claims incurred. At December 31, 1996 and 1995, the
Company had provided letters of credit aggregating approximately $17.6 and
$8.6, respectively, primarily in connection with certain insurance programs.
During 1991, the Company guaranteed a $9.0, five-year loan to a third party
for construction of a new laboratory to replace one of the Company's existing
facilities. Following its completion in November of 1992, the building was
leased to the Company by this third party. Such transaction is treated as a
capital lease for financial reporting purposes. The associated lease term
continues for a period of 15 years, expiring in 2007. Under the terms of this
guarantee, as modified, the Company is required to maintain 105% of the
outstanding loan balance including any overdue interest as collateral in a
custody account established and maintained at the lending institution. As of
December 31, 1996 and 1995, the Company had placed $9.5 of investments in the
custody account. Such investments are included under the caption "Other
assets, net" in the accompanying consolidated balance sheets.
The Company does not anticipate incurring any loss as a result of this loan
guarantee due to protection provided by the terms of the lease. Accordingly,
the Company, if required to repay the loan upon default of the borrower (and
ultimate lessor), is entitled to a rent abatement equivalent to the amount of
repayment made by the Company on the borrower's behalf, plus interest thereon
at a rate equal to 2% over the prime rate.
The Company leases various facilities and equipment under non-cancelable
lease arrangements. Future minimum rental commitments for leases with
noncancellable terms of one year or more at December 31, 1996 are as follows:
Operating Capital
--------- -------
1997 ........................................... 44.9 1.6
1998 ........................................... 36.3 1.7
1999 ........................................... 29.4 1.8
2000 ........................................... 24.2 1.9
2001 ........................................... 16.5 2.0
Thereafter ..................................... 65.9 13.1
----- ----
Total minimum lease payments 217.2 22.1
Less amount representing interest -- 12.3
------- -----
Total minimum operating lease payments and
present value of minimum capital lease payments. $ 217.2 $ 9.8
======= =====
Rental expense, which includes rent for real estate, equipment and
automobiles under operating leases, amounted to $70.6, $60.4 and $34.6 for the
years ended December 31, 1996, 1995 and 1994, respectively.
15. PENSION AND POSTRETIREMENT PLANS
The Company maintains a defined contribution pension plan for all eligible
employees. Eligible employees are defined as individuals who are age 21 or
older and have been employed by the Company for at least six consecutive
months and completed 1,000 hours of service. Company contributions to the plan
are based on a percentage of employee contributions. The cost of this plan
was $7.5, $5.8, and $3.6 in 1996, 1995, and 1994, respectively.
In addition, substantially all employees of the Company are covered by a
defined benefit retirement plan (the "Company Plan"). The benefits to be paid
under the Company Plan are based on years of credited service and average
final compensation.
Effective December 31, 1994, the Company adopted certain amendments to the
Company Plan which resulted in a decrease of approximately $9.5 in the
projected benefit obligation.
Under the requirements of SFAS No. 87, "Employers Accounting for Pensions",
the Company recorded an additional minimum pension liability representing the
excess accumulated benefit obligation over plan assets at December 31, 1993.
A corresponding amount was recognized as an intangible asset to the extent of
unrecognized prior service cost, with the balance recorded as a separate
reduction of stockholders' equity.
The Company recorded an additional liability of $3.0, an intangible asset
of $0.6, and a reduction of stockholders' equity of $2.4. Such amounts were
eliminated as a result of the amendments to the Company Plan effective
December 31, 1994.
In connection with the Merger, the Company assumed obligations under the
RBL defined benefit pension plan ("RBL Plan"). Effective July 1, 1995, the
plan was amended to provide benefits similar to the Company Plan, as amended.
Certain employees of RBL were grandfathered so that their benefits were not
affected by the amendment. On January 1, 1996, the two plans were merged.
The Company's policy is to fund the Company Plan with at least the minimum
amount required by applicable regulations. The components of net periodic
pension cost for each of the RBL plans are summarized as follows:
Company Plan RBL Plan
---------------------------- ------------
Eight months
ended
Years ended December 31, December 31,
----------------------------- ------------
1996 1995 1994 1995
-------- ------- ------- ------------
Service cost ........ $ 10.3 $ 3.2 $ 5.5 $ 2.6
Interest cost ....... 7.0 2.7 3.5 2.3
Actual return
on plan assets...... (11.9) (7.6) 0.1 (4.3)
Net amortization
and deferral........ 3.3 4.2 (1.4) 1.2
-------- ------- ------- ------------
Net periodic
pension cost........ $ 8.7 $ 2.5 $ 7.7 $ 1.8
========= ========= ========= ============
The status of the plans are as follows:
Company Plan RBL Plan
-------------------- ------------
December 31, December 31,
-------------------- ------------
1996 1995 1995
-------- ------- ------------
Actuarial present value of benefit obligations:
Vested benefits .............................. $ 86.2 $ 36.2 $ 38.8
Non-vested benefits .......................... 11.2 4.4 6.4
-------- ------- -------
Accumulated benefit obligation .................. 97.4 40.6 45.2
Effect of projected future salary increases ..... 6.3 2.2 1.6
-------- ------- -------
Projected benefit obligation .................... 103.7 42.8 46.8
Fair value of plan assets, principally
corporate equity securities and
fixed income investments...................... 96.2 40.8 46.6
-------- ------- -------
Unfunded projected benefit obligation ........... 7.5 2.0 0.2
Unrecognized prior service cost ................. 17.4 6.6 12.7
Unrecognized net loss ........................... (14.9) (7.1) (9.4)
-------- ------- -------
Accrued pension cost ............................ $ 10.0 $ 1.5 $ 3.5
======== ======= =======
Assumptions used in the accounting for the plans were as follows:
Company Plan RBL Plan
-------------- --------
1996 1995 1995
----- ----- --------
Weighted average discount rate ................................ 7.75% 7.5% 7.5%
Weighted average rate of increase
in future compensation levels ................................ 4.0% 4.0% 5.4%
Weighted average expected long-term rate of return ............ 9.0% 9.0% 9.5%
In addition, the Company assumed obligations under RBL's postretirement
medical plan effective with the Merger. Effective July 1, 1995, coverage under
the plan was restricted to certain existing RBL employees. This plan is
unfunded and the Company's policy is to fund benefits as claims are incurred.
The components of postretirement benefit expense are as follows:
Eight months
Year Ended ended
December 31, December 31,
1996 1995
------------ ------------
Service cost ............................ $ 0.9 $ 1.1
Interest cost ........................... 1.4 1.4
------ ------
Postretirement benefit costs ............ $ 2.3 $ 2.5
====== ======
The status of the plan is as follows:
December 31,
-----------------
1996 1995
------- -------
Accumulated postretirement benefit obligation ........ $ 28.6 $ 27.2
Unrecognized net loss ................................ (1.6) (2.1)
------- -------
Accrued postretirement benefit obligation ............ $ 27.0 $ 25.1
======= =======
The weighted average discount rate used in the calculation of the
accumulated postretirement benefit obligation and the net postretirement
benefit cost was 7.85% and 7.6%, respectively. The health care cost trend
rate was assumed to be 8.5%, declining gradually to 5.0% in the year 2006,
remaining level thereafter. The health care cost trend rate has a significant
effect on the amounts reported. To illustrate, a one percentage point
increase in the assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation as of December 31, 1996 by
approximately $5.2, and the aggregate of the service and interest components
of 1996 net periodic postretirement benefit cost by approximately $0.5.
16. QUARTERLY DATA (UNAUDITED)
The following is a summary of unaudited quarterly data:
Year ended December 31, 1996
------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
----------- ----------- ----------- ---------- -----------
Net Sales ........................ $ 403.9 $ 410.0 $ 402.6 $ 391.2 $ 1,607.7
Gross Profit ..................... 100.6 109.5 102.5 111.2 423.3
Net earnings ..................... 5.9 (14.2) (146.4) 1.2 (153.5)
Earnings per common share ........ 0.05 (0.12) (1.19) 0.01 (1.25)
Year ended December 31, 1995
------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Full Year
---------- ----------- ----------- ----------- -----------
Net sales ............................................ $ 243.8 $ 367.3 $ 417.5 $ 403.4 $ 1,432.0
Gross profit ......................................... 79.5 108.9 117.8 101.5 407.7
Earnings (loss) before extraordinary item ............ 12.8 (31.6) 14.4 0.4 (4.0)
Extraordinary item ................................... -- (8.3) -- -- (8.3)
Net earnings (loss) .................................. 12.8 (39.9) 14.4 0.4 (12.3)
Earnings (loss) per common share before .............. 0.15 (0.28) 0.12 -- (0.03)
extraordinary loss
Extraordinary loss per common share .................. -- (0.08) -- -- (0.08)
Earnings (loss) per common share ..................... 0.15 (0.36) 0.12 -- (0.11)
In the third quarter of 1996, the Company recorded a charge of $185.0 to
increase reserves related to the 1996 Government Settlement and other related
expenses of government and private claims resulting therefrom.
In the second quarter of 1996, the Company recorded a charge of $23.0
relating to the shutdown of its La Jolla administrative facility and other
non-recurring charges. In addition, the company recorded an additional $10.0
provision for doubtful accounts which was based on the Company's determination
that additional reserves were needed, based on trends that became evident in
the second quarter, for lower collection rates primarily from Medicare.
In the fourth quarter of 1995, the Company recorded an additional $15.0 of
provision for doubtful accounts which reflects the Company's determination,
based on trends that became evident in the fourth quarter, that additional
reserves were needed primarily to cover potentially lower collection rates
from several third-party payors.
In the second quarter of 1995, the Company took a pre-tax special charge of
$65.0 to cover the costs of the restructuring plan related to the Merger. The
charge includes approximately $24.2 to reduce the workforce, $21.3 to reduce
certain assets to their net realizable values, and $19.5 for lease and other
facility obligations. Also in the second quarter of 1995, the Company took a
pre-tax special charge of $10.0 in connection with the estimated costs of
settling various claims pending against the Company, substantially all of
which are billing disputes, in which the Company believes it is probable that
settlements will be made by the Company.
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) in the second quarter of 1995, consisting of the write-off
of deferred financing costs, related to the early extinguishment of debt.
17. SUBSEQUENT EVENT (UNAUDITED)
In February 1997, the Company filed a registration statement with the
Securities and Exchange Commission (the "Commission") relating to the proposed
offering of an aggregate of $500.0 of convertible preferred stock issuable in
two series pursuant to transferable subscription rights to be granted on a pro
rata basis to each stockholder of the Company (the "Rights Offering"). Rights
holders who exercise their rights in full will also be entitled to subscribe
for additional shares of preferred stock issuable pursuant to any unexercised
rights.
The subscription rights will give the holder thereof the option of purchase
one of two series of preferred stock, each of which will be convertible at the
option of the holder into common stock. One series will pay cash dividends
and will be exchangeable at the Company's option for convertible subordinated
notes due 2012. The other series will pay dividends in kind and will not be
exchangeable for notes. Each series of preferred stock will be mandatorily
redeemable in 2012 and will be redeemable at the option of the Company after
three years.
The Company has recently been contacted by representatives of certain
insurance companies, and individuals in a purported class action, who have
asserted claims for private reimbursement which are similar to the
Government claims recently settled. The Company is carefully evaluating
these claims, however, due to the early stage of the claims, the ultimate
outcome cannot presently be predicted.
Schedule II
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 31, 1996, 1995 and 1994
(Dollars in Millions)
Balance at Charged to Other
beginning of costs and (Deductions) Balance at
year Acquisitions expenses Additions end of year
------------ ------------ ---------- ------------ -----------
Year ended December 31, 1996:
Applied against asset accounts:
Contractual allowances and allowance
for doubtful accounts .......................... $ 904.0 $ 0.0 $ 148.8 $ (127.6) $ 111.6
======== ======= ======== ======== ========
Year ended December 31, 1995:
Applied against asset accounts:
Contractual allowances and allowance
for doubtful accounts .......................... $ 65.3 $ 33.2 $ 147.6 $ (155.7) $ 90.4
======== ======= ======== ======== ========
Year ended December 31, 1994
Applied against asset accounts:
Contractual allowances and allowance
for doubtful accounts ........................... $ 51.0 $ 18.5 $ 91.5 $ (95.7) $ 65.3
======== ======= ======== ======== ========
===============================================
No dealer, salesman or any other person has
been authorized to give any information or to
make any representation not contained or
incorporated by reference in this Prospectus,
and, if given or made, such information or
representation must not be relied upon as
having been authorized by the Company or
the Dealer Manager. This Prospectus does
not constitute an offer to sell or a solicitation
of an offer to buy any of the securities
offered hereby in any jurisdiction to any
person to whom it is unlawful to make such
an offer in such jurisdiction. Neither the
delivery of this Prospectus nor any sale
made hereunder shall, under any circum
stances, create any implication that the infor
mation contained herein is correct as of any
date subsequent to the date hereof or that
there has been no change in the affairs of the
Company since such date.
TABLE OF CONTENTS
Page
----
Prospectus Summary......................... 4
Risk Factors............................... 20
Use of Proceeds............................ 27
Common Stock Price Range................... 28
Dividend Policy............................ 28
Capitalization............................. 29
Unaudited Pro forma Financial
Statements............................... 30
Selected Historical Financial Data......... 36
Management's Discussion and Analysis
of Financial Condition and Results of
Operations............................... 39
Business................................... 48
Regulation and Reimbursement............... 61
Management................................. 67
Ownership of Capital Stock................. 70
Certain Relationships and Related
Transactions............................. 71
Description of the Amended Credit
Agreement................................ 74
Description of Rights Offering............. 77
Description of Capital Stock............... 83
Description of Preferred Stock............. 85
Description of the Notes................... 94
Certain Federal Income Tax
Consequences............................. 98
Plan of Distribution....................... 103
Legal Matters.............................. 104
Experts.................................... 104
Available Information...................... 104
Incorporation of Certain Documents by
Reference................................ 105
Index to Financial Statements.............. F-1
===============================================
===============================================
Laboratory Corporation
of America Holdings
10,000,000 Shares
% Series A Convertible
Exchangeable
Preferred Stock
or
% Series B Convertible
Pay-in-Kind
Preferred Stock
PROSPECTUS
Credit Suisse First Boston
===============================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the fees and expenses payable
by the Company in connection with the Rights Offering other than dealer
manager and solicitation fees. All of such expenses except the Securities
and Exchange Commission registration fee, the NASD filing fee and the NYSE
listing fee are estimated:
Securities and Exchange Commission registration fee........ $ 250,970
NASD filing fee............................................ 30,500
NYSE listing fee...........................................
Printing expense...........................................
Accounting fees and expenses...............................
Legal fees and expenses....................................
Rating agency fees.........................................
Miscellaneous..............................................
-----------
Total................................................... $
===========
_____________
* To be completed by amendment.
Item 15. Indemnification of Directors and Officers
Reference is made to Section 102(b)(7) of the Delaware General
Corporation Law (the "DGCL"), which enables a corporation in its original
certificate of incorporation or an amendment thereto to eliminate or limit the
personal liability of a director for violations of the director's fiduciary
duty, except (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL (providing for liability of directors for
the unlawful payment of dividends or unlawful stock purchases or redemptions)
or (iv) for any transaction from which a director derived an improper personal
benefit.
Section 145 of the DGCL empowers the Company to indemnify,
subject to the standards set forth therein, any person in connection with any
action, suit or proceeding brought before or threatened by reason of the fact
that the person was a director, officer, employee or agent of such company, or
is or was serving as such with respect to another entity at the request of
such company. The DGCL also provides that the Company may purchase insurance
on behalf of any such director, officer, employee or agent.
The Company's Certificate of Incorporation provides in effect
for the indemnification by the Company of each director and officer of the
Company to the fullest extent permitted by applicable law.
Item 16. Exhibits
See index to exhibits at E-1.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the registration statement is on Form S-3, Form S-8 or Form F-3,
and the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished to
the Commission by the registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described in Item 15
above or otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Burlington, state of North Carolina, on April 11 ,
1997.
LABORATORY CORPORATION OF AMERICA
HOLDINGS
By: /s/ Thomas P. Mac Mahon
---------------------------------------------
Thomas P. Mac Mahon
Chairman of the Board, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
this amendment has been signed by the following persons in the capacities and
on the dates indicated.
Signature Title Date
- -------------------------------------- -------------------------------------------- ----------------
Chairman of the Board, President, Chief April 11, 1997
/s/ Thomas P. Mac Mahon Executive Officer and Director
- ---------------------------
Thomas P. Mac Mahon
* Executive Vice President, Chief Financial April 11, 1997
- --------------------------- Officer and Treasurer (Principal
Wesley R. Elingburg Accounting and Financial Officer)
* April 11, 1997
- --------------------------- Director
Jean-Luc Belingard
* April 11, 1997
- --------------------------- Director
Wendy E. Lane
* April 11, 1997
- --------------------------- Director
Robert E. Mittelstaedt, Jr.
* April 11, 1997
- --------------------------- Director
James B. Powell, M.D.
* April 11, 1997
- --------------------------- Director
David B. Skinner, M.D.
* April 11, 1997
- --------------------------- Director
Andrew G. Wallace, M.D.
*By: /s/ Thomas P. Mac Mahon
---------------------------
Attorney-in-fact
INDEX TO EXHIBITS
Sequentially
Exhibit No. Description Numbered Page
- ----------------- ---------------------------------------------------------------------------- ---------------
1.1 Form of Dealer Manager Agreement*
4.1 Form of Certificate of Designation of the Series A Exchangeable Preferred
Stock
4.2 Form of Certificate of Designation of the Series B PIK Preferred Stock
4.3 Form of Indenture*
4.4 Form of Note (included in Exhibit 4.3 hereto)
4.5 Form of Rights Certificate
5.1 Opinion of Davis Polk & Wardwell*
8.1 Opinion of Davis Polk & Wardwell (re: tax matters)*
12.1 Statement regarding Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
23.1 Consent of KPMG Peat Marwick LLP
23.3 Consent of Davis Polk & Wardwell (contained in the Opinion of Counsel
filed as Exhibits 5.1 and 8.1 hereto)*
24.1 Power of Attorney**
25.1 Statement of Eligibility under the Trust Indenture Act of 1939, as amended
of , as Trustee under the Indenture*
99.1 Form of Subscription Agency Agreement
99.2 Form of Information Agency Agreement
99.3 Form of Instructions for Rights Certificates
_____________
* To be filed by amendment.
** Previously filed.
EXHIBIT 4.1
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF
LABORATORY CORPORATION OF AMERICA HOLDINGS
[ ]% SERIES A CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
(Par Value $0.10 Per Share)
Pursuant to Section 151(g) of the
General Corporation Law of the
State of Delaware
[ ], 1997
TABLE OF CONTENTS
Page
----
Section 1. Designation..............................................1
Section 2. Ranking..................................................1
Section 3. Dividends................................................2
Section 4. Mandatory Redemption.....................................4
Section 5. Optional Redemption......................................5
Section 6. Exchangeability..........................................5
Section 7. Procedure for Redemption or Exchange.....................6
Section 8. Convertibility...........................................8
Section 9. Liquidation Rights......................................18
Section 10. Voting Rights...........................................19
Section 11. Registration, Transfer and Exchanges....................21
Section 12. Definitions.............................................22
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF
[ ]% SERIES A CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
OF
LABORATORY CORPORATION OF AMERICA HOLDINGS
The undersigned, Wesley R. Elingburg and Bradford T.
Smith, being respectively an Executive Vice President and the Secretary of
Laboratory Corporation of America Holdings, a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), certify that, pursuant to the authority expressly granted
to and vested in the Board of Directors of the Corporation (the "Board of
Directors") by the Certificate of Incorporation of the Corporation (the
"Certificate of Incorporation"), which authorizes the issuance, by the
Corporation, of up to 10,000,000 shares of preferred stock, par value $0.10
per share (the "Preferred Stock"), the Board of Directors in accordance
with the provisions of Section 151 of the General Corporation Law of the
State of Delaware on [ ], 1997 duly adopted the following resolutions:
RESOLVED, that pursuant to Article Fourth of the Certificate
of Incorporation of the Corporation and in accordance with the provisions
of Sections 141 and 151 of the General Corporation Law of the State of
Delaware, the Board of Directors hereby creates and provides for the
issuance of a series of Preferred Stock, par value $0.10 per share and with
a liquidation preference of $50.00 per share, of the Corporation and hereby
fixes the number, voting powers, designation, preferences, and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof, and other matters relating to, said
series as follows:
Section 1. Designation. [ ] shares of the Preferred Stock of
the Corporation are hereby constituted as a series of Preferred Stock, par
value $0.10 per share, with a liquidation preference of $50.00 per share,
designated as "[ ]% Series A Convertible Exchangeable Preferred Stock" (the
"Series A Exchangeable Preferred Stock").
Section 2. Ranking. The Series A Exchangeable Preferred
Stock will have priority as to dividends over the common stock, par value
$0.01 per share, of the Corporation ("Common Stock") and any other series
or class of the Corporation's stock issued after the date hereof that by
its terms ranks junior as to dividends to the Series A Exchangeable
Preferred Stock, when and if issued ("Junior Dividend Stock") and priority
as to distributions of assets upon liquidation, dissolution or winding up
of the Corporation, whether voluntary or involuntary, over the Common Stock
and any series or class of the Corporation's stock issued after the date
hereof that by its terms ranks junior as to liquidation, dissolution and
winding up to the Series A Exchangeable Preferred Stock, when and if issued
("Junior Liquidation Stock") (the Common Stock and any other capital stock
of the Corporation that is both Junior Dividend Stock and Junior
Liquidation Stock, "Junior Stock"). The Series A Exchangeable Preferred
Stock will be junior as to dividends to any series or class of the
Corporation's stock issued after the date hereof that by its terms ranks
senior as to dividends to the Series A Exchangeable Preferred Stock, when
and if issued ("Senior Dividend Stock") and junior as to distributions of
assets upon liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary, to any series or class of the
Corporation's stock issued after the date hereof that by its terms ranks
senior as to liquidation, dissolution and winding up to the Series A
Exchangeable Preferred Stock, when and if issued ("Senior Liquidation
Stock" and collectively with the Senior Dividend Stock, "Senior Stock").
The Series A Exchangeable Preferred Stock will have parity as to dividends
with the [ ]% Series B Convertible Pay-in-Kind Preferred Stock, par value
$0.10 per share (the "Series B PIK Preferred Stock") and any series or
class of the Corporation's stock issued after the date hereof that by its
terms ranks on a parity as to dividends with the Series A Exchangeable
Preferred Stock, when and if issued ("Parity Dividend Stock") and parity as
to distributions of assets upon liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, with the Series B PIK
Preferred Stock and any series or class of the Corporation's stock issued
after the date hereof that by its terms ranks on a parity as to
liquidation, dissolution and winding up with the Series A Exchangeable
Preferred Stock, when and if issued ("Parity Liquidation Stock") (the
Series B PIK Preferred Stock, the Parity Dividend Stock and the Parity
Liquidation Stock, collectively, "Parity Stock"). The Series A
Exchangeable Preferred Stock shall be subject to the creation of Junior
Stock. The Series A Exchangeable Preferred Stock shall be subject to the
creation of Parity Stock and Senior Stock only if the provisions of Section
10(d)(ii) have been complied with. The respective definitions of Senior
Dividend Stock, Senior Liquidation Stock, Junior Dividend Stock, Junior
Liquidation Stock, Parity Dividend Stock and Parity Liquidation Stock shall
also include any warrants, rights, calls or options, exercisable for or
convertible into any of the Senior Dividend Stock, Senior Liquidation
Stock, Junior Dividend Stock, Junior Liquidation Stock, Parity Dividend
Stock and Parity Liquidation Stock, as the case may be.
Section 3. Dividends. (a) Each holder of a share of
Series A Exchangeable Preferred Stock shall be entitled to receive, when,
as and if declared by the Board of Directors out of funds of the
Corporation legally available therefor, dividends at an annual rate of [ ]%
of the Liquidation Preference (as defined herein) of the Series A
Exchangeable Preferred Stock, or $[ ] per share of Series A Exchangeable
Preferred Stock payable in cash. Such dividend shall be cumulative and
shall accrue (whether or not earned or declared, whether or not there are
funds legally available for the payment thereof and whether or not
restricted by the terms of any of the Corporation's indebtedness
outstanding at any time) from the date such shares are issued by the
Corporation and shall be payable quarterly in arrears on [ ], [ ], [ ] and
[ ] of each year (each a "Dividend Payment Date") commencing, [ ], 1997.
No interest will be payable in respect of any dividend payment on the
Series A Exchangeable Preferred Stock which may be in arrears.
(b) The dividend payment period for any dividend payable on a Dividend
Payment Date shall be the period beginning on the immediately preceding
Dividend Payment Date (or on the issue date in the case of the first
dividend payment period) and ending on the day preceding such later
Dividend Payment Date. If any date on which a payment of a dividend or any
other amount is due in respect of Series A Exchangeable Preferred Stock is
not a Business Day, such payment shall be made on the next day that is a
Business Day.
(c) The amount of dividends payable per share of Series A Exchangeable
Preferred Stock for each dividend payment period will be computed by
dividing the annual dividend amount by four; provided, however, that the
amount of dividends payable for the first dividend payment period and for
any dividend payment period shorter than a full quarterly dividend period
will be computed on the basis of a 360-day year of twelve 30-day months.
(d) Dividends payable on any Dividend Payment Date shall be payable to
the holders of record of the Series A Exchangeable Preferred Stock as they
appear on the stock transfer books of the Corporation at the close of
business on such record dates as are fixed by the Board of Directors
(provided that no record date shall be later than (a) the sixth Business
Day prior to the date fixed for any redemption of the Series A Exchangeable
Preferred Stock or, (b) in the case of the dividend payment date occurring
on [ ], the tenth Business Day prior to such date). Dividends paid on the
shares of Series A Exchangeable Preferred Stock in an amount less than
accumulated and unpaid cash dividends payable therein shall be allocated
pro rata on a share-by-share basis among all such shares at the time
outstanding.
(e) If at any time the Corporation shall have failed to pay all
dividends which have accrued on any outstanding shares of Senior Dividend
Stock at the times such dividends are payable, unless otherwise provided in
the terms of the Senior Dividend Stock, no dividend shall be declared by
the Board of Directors or paid or set apart for payment by the Corporation
on shares of the Series A Exchangeable Preferred Stock unless prior to or
concurrently with such declaration, payment or setting apart for payment,
all accrued and unpaid dividends on all outstanding shares of such Senior
Dividend Stock shall have been or be declared, paid or set apart for
payment.
(f) No dividends (other than dividends payable solely in Junior Stock)
shall be paid or declared and set apart for payment on any Junior Dividend
Stock, and no payment shall be made on account of the purchase, redemption,
retirement, or other acquisition of Junior Dividend Stock and Junior
Liquidation Stock (other than such acquisitions pursuant to employee or
director incentive or benefit plans or arrangements, or in exchange solely
for Junior Stock), unless all accrued and unpaid dividends on the Series A
Exchangeable Preferred Stock for all dividend payment periods ending on or
before the date of payment of such dividends on Junior Dividend Stock, or
such payment for such Junior Dividend Stock and Junior Liquidation Stock,
shall have been paid or declared and set apart for payment.
(g) Except as set forth in the second following sentence, no
dividends shall be paid or declared and set apart for payment on the Series
A Exchangeable Preferred Stock unless all accrued and unpaid dividends for
all dividend payment periods through such Dividend Payment Date on any
Parity Dividend Stock, including the Series B PIK Preferred Stock, have
been paid or declared and set apart for payment or are contemporaneously
paid or declared and set apart for payment. Except as set forth in the
following sentence, no dividends shall be paid or declared and set apart
for payment on any Parity Dividend Stock, including the Series B PIK
Preferred Stock, unless all accrued and unpaid dividends for all dividend
payment periods through such Dividend Payment Date on the Series A
Exchangeable Preferred Stock have been paid or declared and set apart for
payment or are contemporaneously paid or declared and set apart for
payment. Whenever all accrued and unpaid dividends have not been paid upon
the Series A Exchangeable Preferred Stock or any other Parity Dividend
Stock, including the Series B PIK Preferred Stock, for all dividend payment
periods through such Dividend Payment Date, all dividends paid or declared
and set apart for payment on the Series A Exchangeable Preferred Stock or
any other Parity Dividend Stock, including the Series B PIK Preferred
Stock, shall be paid or declared pro rata so that the amount of dividends
declared and paid per share on the Series A Exchangeable Preferred Stock
and such Parity Dividend Stock will bear to each other the same ratio that
the accrued and unpaid dividends to the date of payment, on the Series A
Exchangeable Preferred Stock and such Parity Dividend Stock, including the
Series B PIK Preferred Stock, bear each other.
(h) No payment shall be made on account of the purchase, redemption,
retirement or other acquisition of Parity Stock, including the Series B PIK
Preferred Stock, (other than such acquisitions pursuant to employee or
director or incentive or benefit plans or arrangements, or in exchange solely
for Junior Stock) unless all accrued and unpaid dividends on the Series A
Exchangeable Preferred Stock for all dividend payment periods ending on or
before such payment for such Parity Stock, including the Series B PIK
Preferred Stock, shall have been paid or declared and set apart for payment.
Section 4. Mandatory Redemption. All outstanding shares of
the Series A Exchangeable Preferred Stock shall be mandatorily redeemed by
the Corporation out of funds legally available therefor on _________, 2012,
at a redemption price of $50.00 per share plus an amount equal to all
accrued and unpaid dividends, whether or not declared.
Section 5. Optional Redemption. The shares of Series A
Exchangeable Preferred Stock may be redeemed by the Corporation, at its
option, in whole or in part out of funds legally available therefor at any
time on or after [ ], 2000 and if redeemed during the 12-month period
beginning [ ] of the years indicated below, the cash redemption price
per share shall be as set forth below plus, in each case, accrued and unpaid
dividends thereon to the date of redemption (the "Optional Redemption Price"):
Optional
Year Redemption Price
---- ----------------
2000................................... [ ]%
2001................................... [ ]
2002................................... [ ]
2003................................... [ ]
2004................................... [ ]
2005................................... [ ]
2006 and thereafter.................... 100
(b) If fewer than all the outstanding shares of Series A
Exchangeable Preferred Stock are to be redeemed pursuant to this Section 5,
the Corporation will select those shares to be redeemed pro rata or by lot
or in such other manner as the Board of Directors may determine to be fair
and reasonable; provided, however, that if at any time dividends on the
Series A Exchangeable Preferred Stock are in arrears, the Corporation may
not redeem less than all of the then outstanding shares of Series A
Exchangeable Preferred Stock.
(c) No fractional shares of Series A Exchangeable Preferred Stock
will be issued upon a redemption of less than all of the Series A
Exchangeable Preferred Stock pursuant to this Section 5, but in lieu
thereof, an appropriate amount will be paid in cash based on the Closing
Price for the Series A Exchangeable Preferred Stock on the date of such
redemption.
Section 6. Exchangeability. The Series A Exchangeable
Preferred Stock shall be exchangeable, in whole but not in part, at the option
of the Corporation, for the Corporation's % Convertible Subordinated Notes
due 2012 (the "Notes") on any [ ], [ ], [ ], or [
], on or after [ ], 2000 (a "Notes Exchange Date") provided
(i) the conditions to such exchange contained in the Indenture relating to the
Notes have been satisfied or waived and (ii) such exchange is permitted
pursuant to applicable law. Each share of Series A Exchangeable Preferred
Stock will be exchangeable for Notes at the rate of $50 principal amount of
Notes for each share of Series A Exchangeable Preferred Stock. No shares of
Series A Exchangeable Preferred Stock may be exchanged for Notes unless the
Corporation has paid or set aside for the benefit of the holders of the Series
A Exchangeable Preferred Stock all accrued and unpaid dividends on the Series
A Exchangeable Preferred Stock to the Notes Exchange Date.
Section 7. Procedure for Redemption or Exchange. (a) In the
event of redemption of the Series A Exchangeable Preferred Stock pursuant to
Section 4, or an offer by the Corporation to redeem any shares of Series A
Exchangeable Preferred Stock pursuant to Section 5 or exchange shares of
Series A Exchangeable Preferred Stock for Notes pursuant to Section 6,
notice of such redemption, offer to redeem or exchange shall be given by
hand or by nationally recognized "overnight courier" for delivery at the
earliest time offered by such overnight courier (which may not necessarily
be the next day) to each holder of record of the shares to be redeemed or
exchanged at such holder's address as the same appears on the stock
transfer books of the Corporation at least 30 but not more than 60 days
before the date fixed for redemption or the Notes Exchange Date, as the
case may be, provided, however, that no failure to give such notice nor any
defect therein shall affect the validity of the redemption or exchange of
any share of Series A Exchangeable Preferred Stock to be redeemed or
exchanged except as to the holder to whom the Corporation has failed to
give said notice or except as to the holder whose notice was defective.
Each such notice shall state: (i) the redemption date or Notes Exchange
Date; (ii) the number of shares of Series A Exchangeable Preferred Stock
to be redeemed or exchanged and, if less than all the shares held by such
holder are to be redeemed or exchanged, the number of shares to be redeemed
or exchanged from such holder; (iii) the Optional Redemption Price, if
applicable, or rate of exchange; (iv) the place or places where
certificates for such shares are to be surrendered for payment of the
redemption price or exchange for the Notes; (v) the specific provision
hereof pursuant to which such redemption or exchange is to be made;
and (vi) that dividends on the shares to be redeemed or exchanged will
cease to accrue on such redemption date or Notes Exchange Date. Each such
notice shall be effective upon delivery if given by hand or upon deposit
with a nationally recognized overnight courier if given by such a courier.
Upon giving any notice of a redemption pursuant to Section 5(a) or notice
of exchange pursuant to Section 6, the Corporation shall become obligated
to redeem or exchange the shares of Series A Exchangeable Preferred Stock
specified in such notice on the redemption date or Notes Exchange Date, as
the case may be, specified in such notice.
(b) Notice having been given as aforesaid, from and after the
redemption date or the Notes Exchange Date (unless, in the case of
redemptions, default shall be made by the Corporation in providing money
for the payment of the redemption price of the shares called for redemption
or, in the case of an exchange, the Corporation defaults in issuing Notes
or fails to pay or set aside for payment accrued and unpaid dividends on
the Series A Exchangeable Preferred Stock to the Notes Exchange Date),
dividends on the shares of Series A Exchangeable Preferred Stock called for
redemption or exchange shall cease to accrue, and such shares shall no
longer be deemed to be outstanding and shall have the status of authorized
but unissued shares of Series A Exchangeable Preferred Stock, unclassified
as to series, and shall not be reissued as shares of Series A Exchangeable
Preferred Stock, and all rights of the holders thereof as stockholders of
the Corporation (except the right to receive from the Corporation the
redemption price without interest or the Notes and accrued and unpaid
dividends on the Series A Exchangeable Preferred Stock to the Notes
Exchange Date) shall cease. Upon surrender in accordance with said notice
of the certificates for any shares so redeemed or exchanged (properly
endorsed or assigned for transfer, if the Board of Directors of the
Corporation shall so require and the notice shall so state), such share
shall be redeemed or exchanged by the Corporation at the redemption price
or rate of exchange aforesaid; provided, however, in the case of a
redemption pursuant to Section 5(a) if fewer than all the shares
represented by any such certificate are to be redeemed, upon surrender of
such certificate a new certificate shall be issued representing the
unredeemed shares without cost to the holder thereof.
(c) The Corporation will pay any and all issuance and delivery taxes
that may be payable in respect of the issuance or delivery of Notes in
exchange for shares of Series A Exchangeable Preferred Stock. The
Corporation shall not, however, be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of
Notes in a name other than that in which the shares of Series A
Exchangeable Preferred Stock so exchanged were registered, and no such
issuance or delivery shall be made unless and until the person requesting
such issuance has paid to the Corporation the amount of any such tax or has
established to the satisfaction of the Corporation that such tax has been
paid.
(d) If a notice of redemption shall have been given, and if, prior
to the redemption date, the Corporation shall have irrevocably deposited
the aggregate redemption price of the shares of Series A Exchangeable
Preferred Stock to be redeemed in trust for the pro rata benefit of the
holders of the shares of Series A Exchangeable Preferred Stock to be
redeemed, so as to be and to continue to be available therefor, with a bank
or trust company that is organized under the laws of the United States of
America or any state thereof, has capital and surplus of not less than
$250,000,000 and has, or, if it has no publicly traded debt securities
rated by a nationally recognized rating agency, is the subsidiary of a bank
holding company that has, publicly traded debt securities rated at least
"A" or the equivalent thereof by Standard & Poor's Corporation or "A-2" or
the equivalent by Moody's Investor Service Inc., then upon making such
deposit, all rights of holders of the shares so called for redemption shall
cease, except (i) conversion rights, (ii) as otherwise set forth herein and
(iii) the right of holders of such shares to receive the redemption price
against delivery of such shares, but without interest, and such shares
shall cease to be outstanding. Any funds so deposited that are unclaimed
by holders of shares at the end of three years from such redemption date
shall be repaid to the Corporation upon its request, after which repayment
the holders of shares of Series A Exchangeable Preferred Stock so called
for redemption shall thereafter be entitled to look only to the Corporation
for payment of the redemption price.
Section 8. Convertibility. (a) Holders of shares of Series A
Exchangeable Preferred Stock will have the right at any time on or after [
], 1997, at the holder's option, to convert any or all shares into fully
paid and nonassessable shares of Common Stock at the conversion rate (subject
to adjustment as described below) of [ ] shares of Common Stock for each
share of Series A Exchangeable Preferred Stock. If the Series A Exchangeable
Preferred Stock is called for redemption, the conversion right will terminate
at 5:00 p.m. New York City time on the Business Day prior to the date fixed
for such redemption and if not exercised prior to such time, such conversion
right will be lost, unless the Corporation defaults in making the payment due
upon redemption; provided, however, with respect to any redemption occurring
on [ ] or one business day thereafter, the conversion right will
terminate at 5:00 p.m. New York City time on the date fixed for redemption.
Following conversion, the holder will no longer have any right to payment of
dividends on the shares of Series A Exchangeable Preferred Stock surrendered
for conversion.
(b) Any holder of shares of Series A Exchangeable Preferred Stock
desiring to convert such shares into Common Stock shall surrender the
certificate or certificates evidencing such shares of Series A Exchangeable
Preferred Stock at the office of the transfer agent for the Series A
Exchangeable Preferred Stock, which certificate or certificates, if the
Corporation shall so require, shall be duly endorsed to the Corporation or
in blank, or accompanied by proper instruments of transfer to the
Corporation or in blank, accompanied by irrevocable written notice to the
Corporation that the holder elects so to convert such shares of Series A
Exchangeable Preferred Stock and specifying the name or names (with address
or addresses) in which a certificate or certificates evidencing shares of
Common Stock are to be issued.
No payments or adjustments in respect of dividends on shares
of Series A Exchangeable Preferred Stock surrendered for conversion or on
account of any dividend on the Common Stock issued upon conversion shall be
made upon the conversion of any shares of Series A Exchangeable Preferred
Stock; provided, however, that:
(i) if a dividend record date fixed for the Series A
Exchangeable Preferred Stock as established herein results in a
holder who undertakes conversion being eligible to receive on any
Dividend Payment Date both a dividend on the Series A Exchangeable
Preferred Stock and a dividend on the Common Stock issued upon
conversion thereof, then such holder shall be entitled to receive
only the higher of such dividend amounts; and
(ii) if the Corporation shall, by dividend or otherwise,
declare or make a distribution on its Common Stock referred to in
Section 8(c)(iv) or 8(c)(v) (including, without limitation,
dividends or distributions referred to in the last sentence of
Section 8(c)(iv)), the holder of each share of Series A Exchangeable
Preferred Stock, upon the conversion thereof subsequent to the close
of business on the date fixed for the determination of shareholders
entitled to receive such dividend or distribution and prior to the
effectiveness of the conversion price adjustment in respect of such
dividend or distribution, shall also be entitled to receive for each
share of Common Stock into which such share of Series A Exchangeable
Preferred Stock is converted, the portion of the shares of Common
Stock, rights, warrants, evidences of indebtedness, shares of capital
stock, cash and assets so distributed applicable to one share of
Common Stock; provided, however, that at the election of the
Corporation (whose election shall be evidenced by a resolution of the
Board of Directors) with respect to all holders so converting, the
Corporation may, in lieu of distributing to such holder any portion
of such distribution not consisting of cash or securities of the
Corporation, pay such holder an amount in cash equal to the fair
market value thereof (as determined in good faith by the Board of
Directors, whose determination shall be conclusive and described in a
resolution of the Board of Directors).
The Corporation shall, as soon as practicable after such
deposit of certificates evidencing shares of Series A Exchangeable Preferred
Stock accompanied by the written notice and compliance with any other
conditions herein contained, deliver at the office of such transfer agent to
the person for whose account such shares of Series A Exchangeable Preferred
Stock were so surrendered, or to the nominee or nominees of such person,
certificates evidencing the number of full shares of Common Stock to which
such person shall be entitled as aforesaid, together with a cash adjustment
in respect of any fraction of a share of Common Stock as hereinafter
provided. Such conversion shall be deemed to have been made as of the date
of such surrender of the shares of Series A Exchangeable Preferred Stock to
be converted, and the person or persons entitled to receive the Common
Stock deliverable upon conversion of such Series A Exchangeable Preferred
Stock shall be treated for all purposes as the record holder or holders of
such Common Stock on such date.
(c) The conversion price at which a share of Series A Exchangeable
Preferred Stock is convertible into Common Stock shall be subject to
adjustment from time to time as follows:
(i) In case the Corporation shall pay or make a dividend or
other distribution on its Common Stock exclusively in Common Stock or
shall pay or make a dividend or other distribution on any other class or
series of capital stock of the Corporation which dividend or
distribution includes Common Stock, the conversion price in effect at
the opening of business on the day following the date fixed for the
determination of shareholders entitled to receive such dividend or other
distribution shall be reduced by multiplying such conversion price by:
A/(A + B), where:
A = the number of shares of Common Stock outstanding at the
close of business on the date fixed for such determination; and
B = the total number of shares of Common Stock constituting such
dividend or other distribution,
such reduction to become effective immediately after the opening of
business on the day following the date fixed for such
determination. For purposes of this subparagraph (i), the number
of shares of Common Stock at any time outstanding shall not
include shares held in the treasury of the Corporation. The
Corporation shall not pay any dividend or make any distribution on
shares of Common Stock held in the treasury of the Corporation.
(ii) In case the Corporation shall pay or make a dividend or
other distribution on its Common Stock consisting exclusively of, or
shall otherwise issue to all holders of its Common Stock, rights or
warrants entitling the holders thereof to subscribe for or purchase
shares of Common Stock at a price per share less than the Current Market
Price Per Share of the Common Stock on the date fixed for the
determination of shareholders entitled to receive such rights or
warrants, the conversion price in effect at the opening of business on
the day following the date fixed for such determination shall be reduced
by multiplying such conversion price by: (A + B)/(A + C), where:
A = the number of shares of Common Stock outstanding at the close of
business on the date fixed for such determination,
B = the number of shares of Common Stock which the aggregate of the
offering price of the total number of shares of Common Stock so
offered for subscription or purchase would purchase at such Current
Market Price Per Share, and
C = the number of additional shares of Common Stock so offered for
subscription or purchase,
such reduction to become effective immediately after the opening of
business on the day following the date fixed for such determination.
In case any rights or warrants referred to in this subparagraph
(ii) in respect of which an adjustment shall have been made shall
expire unexercised [within 45 days after the shares] shall have
been distributed or issued by the Corporation the conversion price
shall be readjusted at the time of such expiration to the
conversion price that would have been in effect if no adjustment
had been made on account of the distribution or issuance of such
expired rights or warrants; provided that no such readjustment upon
expiration of such rights or warrants shall affect the number of
shares of Common Stock issued upon conversion of shares of Series A
Exchangeable Preferred Stock prior to such readjustment.
(iii) In case outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the
conversion price in effect at the opening of business on the day
following the day upon which such subdivision becomes effective shall be
proportionately reduced, and conversely, in case outstanding shares of
Common Stock shall be combined into a smaller number of shares of Common
Stock, the conversion price in effect at the opening of business on the
day following the day upon which such combination becomes effective
shall be proportionately increased, such reduction or increase, as the
case may be, to become effective immediately after the opening of
business on the day following the day upon which such subdivision or
combination becomes effective.
(iv) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Common Stock evidences of its
indebtedness, shares of any class or series of capital stock, cash or
assets (including securities, but excluding any rights or warrants
referred to in subparagraph (ii) of this Section 8(c), any dividend or
distribution paid exclusively in cash and any dividend or distribution
referred to in subparagraph (i) of this Section 8(c)), the conversion
price shall be reduced so that the same shall equal the price determined
by multiplying the conversion price in effect immediately prior to the
effectiveness of the conversion price reduction contemplated by this
subparagraph (iv) by: (A - B)/A, where:
A = the Current Market Price Per Share of the Common Stock immediately
prior to the close of business on the date fixed for the
determination of stockholders entitled to receive such
distribution (the "Reference Date"), and
B = the fair market value (as determined in good faith by the Board of
Directors, whose determination shall be conclusive and described
in a resolution of the Board of Directors), on the Reference Date,
of the portion of the evidence of indebtedness, shares of capital
stock, cash and assets so distributed applicable to one share of
Common Stock,
such reduction to become effective immediately prior to the
opening of business on the day following the Reference Date,
provided, however, that for purposes of this subparagraph (iv),
any dividend or distribution that includes shares of Common Stock
or rights or warrants to subscribe for or purchase shares of
Common Stock shall be deemed instead to be a dividend or
distribution of the evidences of indebtedness, cash, assets or
shares of capital stock other than such shares of Common Stock or
rights or warrants (making any further conversion price reduction
required by this subparagraph (iv)) immediately followed by a
dividend or distribution of such shares of Common Stock or such
rights or warrants (making any further conversion price reduction
required by subparagraph (i) or (ii) of this Section 8(c), except
the Reference Date of such dividend or distribution as defined in
this subparagraph (iv) shall be substituted as "the date fixed for
the determination of shareholders entitled to receive such
dividend or other distribution", "the date fixed for the
determination of shareholders entitled to receive such rights or
warrants" and "the date fixed for such determination" within the
meaning of subparagraph (i) and (ii) of this Section 8(c) and any
shares of Common Stock included in such dividend or distribution
shall not be deemed "outstanding at the close of business on the
date fixed for such determination within the meaning of
subparagraph (i) of this Section 8(c)). If the Board of Directors
determines the fair market value of any distribution for purposes
of this subparagraph (iv) by reference to the actual or when
issued trading market for any securities comprising such
distribution, it must in doing so consider the prices in such
market over the same period used in computing the Current Market
Price Per Share of Common Stock.
(v) In case the Corporation shall pay or make a dividend or
other distribution on its Common Stock exclusively in cash (excluding
cash that is part of the distribution referred to in (iv) above and, in
the case of any quarterly cash dividend on the Common Stock, the portion
thereof that does not exceed the per share amount of the next preceding
quarterly cash dividend on the Common Stock (as adjusted to
appropriately reflect any of the events referred to in subparagraph (i),
(ii), (iii) and (iv) of this Section 8(c)), or all of such quarterly
cash dividend if the amount thereof per share of Common Stock multiplied
by four does not exceed [ %] of the Current Market Price Per Share of
the Common Stock on the Trading Day next preceding the date of
declaration of such dividend), the conversion price shall be reduced so
that the same shall equal the conversion price in effect immediately
prior to the effectiveness of the conversion price reduction
contemplated by this subparagraph (v) by: (A - B)/A, where:
A = the Current Market Price Per Share of the Common Stock
immediately prior to the close of business on the date fixed for the
determination of stockholders entitled to receive such distribution, and
B = the amount of cash so distributed and not excluded as
provided above applicable to one share of Common Stock,
such reduction to become effective immediately prior to the
opening of business on the day following the date fixed for the
payment of such distribution.
(vi) No adjustment in the conversion price shall be required
unless such adjustment would require an increase or decrease of at least 1%
in the conversion price; provided, however, that any adjustments which by
reason of this subparagraph (vi) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment.
(vii) Whenever the conversion price is adjusted as herein
provided: the Corporation shall compute the adjusted conversion price and
shall prepare a certificate signed by the Chief Financial Officer of the
Corporation setting forth the adjusted conversion price and showing in
reasonable detail the facts upon which such adjustment is based, and such
certificate shall forthwith be filed with the transfer agent for the Series
A Exchangeable Preferred Stock; and a notice stating that the conversion
price has been adjusted and setting forth the adjusted conversion price
shall forthwith be required, and as soon as practicable after it is
required, such notice shall be mailed by the Corporation to all record
holders of shares of Series A Exchangeable Preferred Stock at their last
addresses as they shall appear upon the stock transfer books of the
Corporation.
(viii) The Corporation from time to time may reduce the
conversion price by any amount for any period of time if the period is
at least twenty days, the reduction is irrevocable during the period and
the Board of Directors of the Corporation shall have made a
determination that such reduction would be in the best interest of the
Corporation, which determination shall be conclusive. Whenever the
conversion price is reduced pursuant to the preceding sentence, the
Corporation shall mail to holders of record of the Series A Exchangeable
Preferred Stock a notice of the reduction at least fifteen days prior to
the date the reduced conversion price takes effect, and such notice
shall state the reduced conversion price and the period it will be in
effect.
(d) No fractional shares of Common Stock shall be issued upon
conversion of Series A Exchangeable Preferred Stock. If more than one
certificate evidencing shares of Series A Exchangeable Preferred Stock
shall be surrendered for conversion at one time by the same holder, the
number of full shares issuable upon conversion thereof shall be computed on
the basis of the aggregate number of shares of Series A Exchangeable
Preferred Stock so surrendered. Instead of any fractional share of Common
Stock that would otherwise be issuable to a holder upon conversion of any
shares of Series A Exchangeable Preferred Stock, the Corporation shall pay
a cash adjustment in respect of such fractional share in an amount equal to
the same fraction of the market price per share of Common Stock (as
determined by the Board of Directors or in any manner prescribed by the
Board of Directors, which, if available, shall be the Closing Price (as
defined herein) for the shares of Common Stock) on the day of conversion.
(e) In the event that the Corporation shall be a party to any
transaction (including without limitation any recapitalization or
reclassification of the Common Stock (other than a change in par value, or
from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination of the Common Stock), any
consolidation of the Corporation with, or merger of the corporation into,
any other person, any merger of another person into the Corporation (other
than a merger which does not result in a reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock of the
Corporation), any sale or transfer of all or substantially all of the
assets of the Corporation or any share exchange) pursuant to which the
Common Stock is converted into the right to receive other securities, cash
or other property, then lawful provisions shall be made as part of the
terms of such transaction whereby the holder of each share of Series A
Exchangeable Preferred Stock then outstanding shall have the right
thereafter to convert such share only into in the case of any such
transaction other than a Common Stock Fundamental Change and subject to
funds being legally available for such purpose under applicable law at the
time of such conversion, the kind and amount of securities, cash and other
property receivable upon such transaction by a holder of the number of
shares of Common Stock into which such share of Series A Exchangeable
Preferred Stock might have been converted immediately prior to such
transaction, after giving effect, in the case of any Non-Stock Fundamental
Change, to any adjustment in the conversion price required by the
provisions of Section 8(h), and in the case of a Common Stock Fundamental
Change, common stock of the kind received by holders of Common Stock as a
result of such Common Stock Fundamental Change in an amount determined
pursuant to the provisions of Section 8(h). The Corporation or the person
formed by such consolidation or resulting from such merger or which
acquires such assets or which acquires the Corporation's shares, as the
case may be, shall make provisions in its certificate or articles of
incorporation or other constituent document to establish such right. Such
certificate or articles of incorporation or other constituent document
shall provide for adjustments which, for events subsequent to the effective
date of such certificate or articles of incorporation or other constituent
document, shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 8. The above provisions shall
similarly apply to successive transactions of the foregoing type.
(f) After [ ], the Corporation shall at all times reserve and keep
available, free from preemptive rights out of its authorized and unissued
stock, solely for the purpose of effecting the conversion of the Series A
Exchangeable Preferred Stock, such number of shares of its Common Stock as
shall from time to time be sufficient to effect that conversion of all
shares of Series A Exchangeable Preferred Stock from time to time
outstanding in accordance with their terms.
If any shares of Common Stock required to be reserved for
purposes of conversion of the Series A Exchangeable Preferred Stock hereunder
require registration with or approval of any governmental authority under any
Federal or State law before such shares may be issued upon conversion, the
Corporation will in good faith and as expeditiously as possible endeavor to
cause such shares to be duly registered or approved as the case may be. If
the Common Stock is listed on the New York Stock Exchange or any other
national securities exchange or traded through the Nasdaq National Market, the
Corporation will, if permitted by the rules of such exchange or market, list
and keep listed on such exchange or make and keep eligible for trading on such
market (as the case may be), upon official notice of issuance, all shares of
Common Stock issuable upon conversion of the Series A Exchangeable Preferred
Stock; provided, however, that such shares of Common Stock may be delisted
from such exchange or may cease to be eligible for trading through such market
(as the case may be) if, prior to or concurrent with such delisting or
cessation of eligibility for trading, the Corporation causes such shares of
Common Stock to be listed on or eligible for trading through any other
national securities exchange or on the Nasdaq National Market.
(g) In case:
(i) the Corporation shall (1) declare any dividend (or any
other distribution) on its Common Stock, other than (A) a dividend
payable in shares of Common Stock or (B) a dividend payable in cash out
of its retained earnings other than any special or nonrecurring or other
extraordinary dividend or (2) declare or authorize a redemption or
repurchase of in excess of 10% of the then-outstanding shares of Common
Stock; or
(ii) the Corporation shall authorize the granting to all
holders of Common Stock of rights or warrants to subscribe for or
purchase any shares of stock of any class or series or of any other
rights or warrants; or
(iii) of any reclassification of Common Stock (other than a
subdivision or combination of the outstanding Common Stock, or a change in
par value, or from par value to no par value, or from no par value to par
value), or of any consolidation or merger to which the Corporation is a
party and for which approval of any shareholders of the Corporation shall
be required, or of the sale or transfer of all or substantially all of the
assets of the Corporation or of any share exchange whereby the Common Stock
is converted into other securities, cash or other property; or
(iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Corporation;
then the Corporation shall cause to be filed with the transfer agent for
the Series A Exchangeable Preferred Stock, and shall cause to be mailed
to the holders of record of the Series A Exchangeable Preferred Stock,
at their last addresses as they shall appear upon the stock transfer
books of the Corporation, at least ten days prior to the applicable
record or effective date hereinafter specified, a notice stating (x) the
date on which a record (if any) is to be taken for the purpose of such
dividend, distribution, redemption, repurchase, rights or warrants or,
if a record is not to be taken, the date as of which the holders of
Common Stock of record to be entitled to such dividend, distribution,
redemption, rights or warrants are to be determined or (y) the date on
which such reclassification, consolidation, merger, sale, transfer,
share exchange, dissolution, liquidation or winding up is expected to
become effective and the date as of which it is expected that holders of
Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities, cash or other property deliverable upon
such reclassification, consolidation, merger, sale, transfer, share
exchange, dissolution, liquidation or winding up (but no failure to mail
such notice or any defect therein or in the mailing thereof shall affect
the validity of the corporate action required to be specified in such
notice).
(h) Notwithstanding any other provision in this Section 8 to the
contrary, if any Fundamental Change occurs, then the conversion price in
effect will be adjusted immediately after such Fundamental Change as
described below. In addition, in the event of a Common Stock Fundamental
Change, each share of Series A Exchangeable Preferred Stock shall be
convertible solely into common stock of the kind received by holders of
Common Stock as the result of such Common Stock Fundamental Change.
For purposes of calculating any adjustment to be made pursuant
to this Section 8(h) in the event of a Fundamental Change, immediately after
such Fundamental Change:
(i) In the case of a Non-Stock Fundamental Change, the
conversion price of the Series A Exchangeable Preferred Stock shall
thereupon become the lower of the conversion price in effect immediately
prior to such Non-Stock Fundamental Change, but after giving effect to any
other prior adjustments effected pursuant to this Section 8, and the result
of A x $50/B, where:
A = the greater of the Applicable Price or the then applicable
Reference Market Price, and
B = (x) the then-current Optional Redemption Price per share of
Series A Exchangeable Preferred Stock or (y) for any Non-Stock
Fundamental Change that occurs before the Series A Exchangeable
Preferred Stock becomes redeemable by the Corporation pursuant to
Section 5, the applicable price per share set forth for the date of such
Non-Stock Fundamental Change in the following table:
After date of original issuance of Series A Exchangeable Preferred Stock
and on or before [ ], 1998 .......................................... $
After [ ], 1998 and on or before [ ], 1999.............................. $
After [ ], 1998 and on or before [ ], 2000 ............................. $
plus, in any case referred to in this clause (y), an amount equal
to all per share dividends on the Series A Exchangeable Preferred
Stock accrued and unpaid thereon, whether or not declared, to but
excluding the date of such Non-Stock Fundamental Change; and
(ii) In the case of a Common Stock Fundamental Change, the
conversion price of the Series A Exchangeable Preferred Stock in effect
immediately prior to such Common Stock Fundamental Change, but after giving
effect to any other prior adjustments effected pursuant to this Section 8,
shall thereupon be adjusted by multiplying such conversion price by a
fraction of which the numerator shall be the Purchaser Stock Price and the
denominator shall be the Applicable Price; provided, however, that in the
event of a Common Stock Fundamental Change in which 100% by value of the
consideration received by a holder of Common Stock is common stock of the
successor, acquiror or other third party (and cash, if any, is paid with
respect to any fractional interests in such common stock resulting from
such Common Stock Fundamental Change) and all of the Common Stock shall
have been exchanged for, converted into or acquired for common stock (and
cash with respect to fractional interests) of the successor, acquiror or
other third party, the conversion price of the Series A Exchangeable
Preferred Stock in effect immediately prior to such Common Stock
Fundamental Change shall thereupon be adjusted by dividing such conversion
price by the number of shares of common stock of the successor, acquiror,
or other third party received by a holder of one share of Common Stock as a
result of such Common Stock Fundamental Change.
(i) Notwithstanding the foregoing provisions, the issuance of
any shares of Common Stock pursuant to any plan providing for the
reinvestment of dividends or interest payable on securities of the
Corporation and the investment of additional optional amounts in shares of
Common Stock under any such plan, and the issuance of any shares of Common
Stock or options or rights to purchase such shares pursuant to any employee
benefit plan or program of the Corporation or pursuant to any option,
warrant, right or exercisable, exchangeable or convertible security
outstanding as of the date the Series A Exchangeable Preferred Stock was
first designated shall not be deemed to constitute an issuance of Common
Stock or exercisable, exchangeable or convertible securities by the
Corporation to which any of the adjustment provisions described above
applies. There shall also be no adjustment of the conversion price in case
of the issuance of any stock (or securities convertible into or
exchangeable for stock) of the Corporation except as specifically described
in this Section 8. If any action would require adjustment of the
conversion price pursuant to more than one of the provisions described
above, only one adjustment shall be made and such adjustment shall be the
amount of adjustment which has the highest absolute value to holders of
Series A Exchangeable Preferred Stock.
Section 9. Liquidation Rights. (a) In the case of the
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, holders of outstanding shares of Series A Exchangeable
Preferred Stock shall be entitled to receive a liquidation preference from
the net assets of the Corporation available for distribution to
stockholders in an amount in cash which for each such share shall equal $50
per share (the "Liquidation Preference"), plus an amount equal to any
accrued and unpaid dividends to the payment date, before any payment or
distribution is made to the holders of Common Stock or any other Junior
Liquidation Stock, but the holders of the shares of the Series A
Exchangeable Preferred Stock will not be entitled to receive the
liquidation preference of such shares until the liquidation preference of
any Senior Liquidation Stock has been paid in full.
(b) The holders of Series A Exchangeable Preferred Stock and Parity
Liquidation Stock, including the Series B PIK Preferred Stock, shall share
ratably in any liquidation, distribution or winding up of the Corporation
(after payment of the liquidation preference of the Senior Liquidation Stock)
in which the net assets or the proceeds thereof are not sufficient to pay in
full the aggregate of the amounts payable thereon, in the same ratio that the
respective amounts which would be payable on such distribution if the amounts
to which the holders of all the outstanding shares of Series A Exchangeable
Preferred Stock and Parity Liquidation Stock, including the Series B PIK
Preferred Stock, are entitled were paid in full, bear to each other. After
payment in full of the liquidation preference of the shares of the Series A
Exchangeable Preferred Stock, the holders of such shares will not be entitled
to any further participation in any distribution of assets by the Corporation.
(c) Neither a consolidation nor merger of the Corporation with another
corporation nor a sale or transfer of all or substantially all of the
Corporation's property or assets will be considered a liquidation, dissolution
or winding up of the Corporation.
Section 10. Voting Rights. (a) The holders of shares of
Series A Exchangeable Preferred Stock shall not be entitled to vote on any
matter on which the holders of any voting securities of the Corporation
shall be entitled to vote except as otherwise provided by this Section 10
or as required by law from time to time. In exercising any such vote, each
outstanding share of Series A Exchangeable Preferred Stock will be entitled
to one vote, excluding shares held by any entity controlled by the
Corporation, which shares shall have no voting rights.
(b) In the event that the Corporation shall have failed to pay
dividends on Series A Exchangeable Preferred Stock or on any outstanding
shares of Parity Dividend Stock, including the Series B PIK Preferred
Stock, in an aggregate amount equal to at least six quarterly dividends on
such shares (whether or not consecutive) (such failure, a "Dividend Non-
Payment"), the number of directors constituting the Board of Directors of
the Corporation, without further action, shall be increased by two and the
holders of the outstanding shares of Series A Exchangeable Preferred Stock
shall have the right, voting separately as a class with the holders of
Parity Dividend Stock on which like voting rights have been conferred and
are exercisable, including the Series B PIK Preferred Stock, to elect such
two additional members of the Board of Directors, at any annual meeting of
stockholders of the Corporation or by written consent pursuant to Section
228 of the General Corporation Law of the State of Delaware, in each case,
who shall continue to serve so long as such dividends on the Series A
Exchangeable Preferred Stock and Parity Dividend Stock, including the
Series B PIK Preferred Stock, have not been paid. If and when all such
accrued and unpaid dividends on the Series A Exchangeable Preferred Stock
and Parity Dividend Stock, including the Series B PIK Preferred Stock, have
been paid or declared and set apart for payment, the holders of shares of
the Series A Exchangeable Preferred Stock and Parity Dividend Stock,
including the Series B PIK Preferred Stock, shall be divested of the
special voting rights provided by this Section 10, subject to revesting in
the event of every subsequent Dividend Non-Payment. Upon termination of
such special voting rights, the term of office of each director elected
pursuant to this Section 10 by the holders of shares of Series A
Exchangeable Preferred Stock and Parity Dividend Stock, including the
Series B PIK Preferred Stock, (a "Preferred Stock Director") shall
terminate immediately and the number of directors constituting the entire
Board of Directors shall, without further action, be reduced by two,
subject always to the increase of the number of directors pursuant to this
Section 10 in the case of the future right of the holders of Series A
Exchangeable Preferred Stock to elect Preferred Stock Directors. Any
Preferred Stock Director may be removed by, and shall not be removed
otherwise than by, the vote of the holders of record of a majority of the
outstanding shares of the Series A Exchangeable Preferred Stock and the
Parity Dividend Stock, including the Series B PIK Preferred Stock, entitled
to vote thereon present at a meeting called for such purpose at which a
quorum is present or by written consent pursuant to Section 228 of the
General Corporation Law of the State of Delaware. So long as a Dividend
Non-Payment shall continue, any vacancy in the office of a Preferred Stock
Director may be filled by vote of the holders of record of a majority of
the outstanding shares of the Series A Exchangeable Preferred Stock and the
Parity Dividend Stock, including the Series B PIK Preferred Stock, entitled
to vote thereon present at a meeting called for such purpose at which a
quorum is present or by written consent pursuant to Section 228 of the
General Corporation Law of the State of Delaware. As long as a Dividend
Non-Payment shall continue, holders of shares of the Series A Exchangeable
Preferred Stock shall not, as such stockholders, be entitled to vote on the
election or removal of directors other than Preferred Stock Directors, but
shall not be divested of any other voting rights provided to such
stockholders by law or this Certificate of Designation with respect to any
other matter to be acted upon by the stockholders of the Corporation.
(c) At any meeting held for the purpose of electing directors at
which the holders of outstanding shares of Series A Exchangeable Preferred
Stock shall have the right to elect directors as provided in this Section
10, the presence, in person or by proxy, of the holders of at least a
majority of the then outstanding shares of Series A Exchangeable Preferred
Stock and the Parity Dividend Stock, including the Series B PIK Preferred
Stock, on which like voting rights have been conferred and are exercisable
shall be required and be sufficient to constitute a quorum of such class
for the election of directors by such class. At any such meeting or
adjournment thereof (i) the absence of a quorum of the holders of the
Series A Exchangeable Preferred Stock and the Parity Dividend Stock,
including the Series B PIK Preferred Stock, present in person or by proxy
shall not prevent the election of directors other than those to be elected
by the holders of the Series A Exchangeable Preferred Stock and the Parity
Dividend Stock, including the Series B PIK Preferred Stock, and the absence
of a quorum or quorums of the holders of any class or classes of any stock
or other securities of the Corporation other than the Series A Exchangeable
Preferred Stock and the Parity Dividend Stock, including the Series B PIK
Preferred Stock shall not prevent the election of directors to be elected
by the holders of the Series A Exchangeable Preferred Stock and the Parity
Dividend Stock, including the Series B PIK Preferred Stock and (ii) in the
absence of a quorum of the holders of any class of stock entitled to vote
for the election of directors, a majority of the holders present in person
or by proxy of such class shall have the power to adjourn the meeting for
the election of directors which the holders of such class are entitled to
elect, from time to time, without notice (except as required by law) other
than announcement at the meeting, until a quorum shall be present.
(d) So long as any shares of Series A Exchangeable Preferred Stock
remain outstanding, the Corporation will not, without the affirmative vote
or consent of the holders of at least 66 2/3% of all shares of Series A
Exchangeable Preferred Stock and Series B PIK Preferred Stock and other
Parity Stock, voting separately as one class:
(i) amend, alter or repeal (by merger or otherwise) any
provision of the Certificate of Incorporation or any terms or provisions of
this Certificate of Designation or the by-laws of the Corporation so as to
affect adversely the relative rights, preferences, qualifications,
limitations, or restrictions of the Series A Exchangeable Preferred Stock;
or
(ii) authorize or issue, or increase the authorized or issued
amount of any Senior Dividend Stock, Senior Liquidation Stock or any
security convertible into such Senior Dividend Stock or such Senior
Liquidation Stock; or
(iii) effect any reclassification of the Series A Exchangeable
Preferred Stock.
or, without the consent of the holders of a majority of Series
A Exchangeable Preferred Stock and Series B PIK Preferred Stock and other
Parity Stock, voting separately as one class, authorize or issue, or increase
the authorized or issued amount of any additional class of Parity Stock or any
Security Convertible into such Parity Stock.
Section 11. Registration, Transfer and Exchanges. The
Corporation will keep with American Stock Transfer & Trust Company, the
registrar and transfer agent, a register in which the Corporation will provide
for the registration and transfer of shares of Series A Exchangeable Preferred
Stock. Any holder of shares of Series A Exchangeable Preferred Stock may, at
its option, in person or by duly authorized attorney, surrender the
certificate representing the same for exchange at American Stock Transfer &
Trust Company (duly endorsed or accompanied, if so required by the
Corporation, by a written instrument of transfer duly executed by such holder
or his or her duly authorized attorney), and, within a reasonable time
thereafter and without expense (other than transfer taxes, if any), receive in
exchange therefor one or more duly executed certificate or certificates dated
as of the date to which dividends have been paid on the shares of Series A
Exchangeable Preferred Stock so surrendered, or if no dividend has yet been so
paid, then dated the date hereof, and registered in such name or names, all as
may be designated by such holder, for the same aggregate number of shares of
Series A Exchangeable Preferred Stock as represented by the certificate or
certificates so surrendered. The Corporation covenants and agrees to take and
cause to be taken all action reasonably necessary to effect such
registrations, transfers and exchanges. Each share of Series A Exchangeable
Preferred Stock issued in exchange for any share shall carry the same rights
to unpaid dividends, redemption payments and exchange for Notes which were
carried by the share so exchanged, so that neither gain nor loss of any such
right shall result from any such transfer or exchange.
The Corporation and any agent of the Corporation may treat the
person in whose name any share of Series A Exchangeable Preferred Stock is
registered as the owner of such share for the purpose of receiving payment of
dividends, and amounts payable on redemption and liquidation in respect of
such share and Notes receivable upon an exchange and for all other purposes.
Section 12. Definitions. Unless the context or use indicates
another or different meaning or intent, as used herein, the following terms
shall have the following meanings, terms defined in the singular to have a
correlative meaning when used in the plural and vice versa:
"Applicable Price" means (i) in the event of a Non-Stock
Fundamental Change in which the holders of the Common Stock receive only cash,
the amount of cash received by the holder of one share of Common Stock and
(ii) in the event of any other Non-Stock Fundamental Change or any Common
Stock Fundamental Change, the average of the Closing Prices for the Common
Stock during the ten consecutive Trading Days prior to and including the
record date for the determination of the holders of Common Stock entitled to
receive cash, securities, property or other assets in connection with such
Non-Stock Fundamental Change or Common Stock Fundamental Change, or, if there
is no such record date, the date upon which the holders of the Common Stock
shall have the right to receive such cash, securities, property or other
assets, in each case, as adjusted in good faith by the Board of Directors or
the Corporation to appropriately reflect any of the events referred to in
clauses (i) through (v) of Section 8(c).
"Business Day" shall mean any day other than a Saturday, Sunday
or any day on which banking institutions are authorized to close in New York,
New York.
"Closing Price" of any security means on any day the last
reported sale price regular way on such day or in case no sale takes place on
such day, the average of the reported closing bid and asked prices regular way
in each case on the New York Stock Exchange, Inc. or, if the security is not
quoted on such system, on the principal national securities exchange or
quotation system on which such security is listed or admitted to trading or
quoted, or, if not listed or admitted to trading on any national securities
exchange or quotation system, the average of the closing bid and asked prices
in the over-the-counter market on such day as reported by the National
Quotation Bureau Incorporated, or a similarly generally accepted reporting
service, or, if not so available in such manner, as furnished by any New York
Stock Exchange Member firm selected from time to time by the Board of
Directors for that purpose.
"Common Stock Fundamental Change" means any Fundamental Change
in which more than 50% of the value (as determined in good faith by the Board
of Directors of the Corporation) of the consideration received by holders of
Common Stock consists of common stock that for each of the ten consecutive
Trading Days referred to with respect to such Fundamental Change in the
definition of "Applicable Price" has been admitted for listing or admitted for
listing subject to notice of issuance on a national securities exchange or
quoted on the Nasdaq National Market, provided, however, that a Fundamental
Change shall not be a Common Stock Fundamental Change unless either (i) the
Corporation continues to exist after the occurrence of such Fundamental Change
and the outstanding shares of Series A Exchangeable Preferred Stock continue
to exist as outstanding Series A Exchangeable Preferred Stock, or (ii) not
later than the occurrence of such Fundamental Change, the outstanding shares
of Series A Exchangeable Preferred Stock are converted into or exchanged for
shares of preferred stock of a corporation succeeding to the business of the
Corporation, which preferred stock has powers, preferences and relative,
participating, optional or other rights, and qualifications, limitations and
restrictions, substantially similar to those of the Series A Exchangeable
Preferred Stock.
"Current Market Price Per Share" shall mean, as to the Common
Stock on any date in question, the average of the daily Closing Prices for the
five consecutive Trading Days prior to and including the date in question;
provided, however, that:
(i) if the Ex Date for any event (other than the issuance or
distribution requiring such computation) that required an adjustment to
the conversion price pursuant to subparagraphs (i), (ii), (iii), (iv) or
(v) of Section 8(c) ("Other Event") occurs after the fifth Trading Day
prior to the day in question and prior to the Ex Date for the issuance
or distribution requiring such computation (the "Current Event"), the
Closing Price for each Trading Day prior to the Ex Date for such Other
Event shall be adjusted by multiplying such Closing Price by the same
fraction by which the conversion price is so required to be adjusted as
a result of such Other Event,
(ii) if the Ex Date for any Other Event occurs after the Ex Date
for the Current Event and on or prior to the date in question, the
Closing Price for each Trading Day on and after the Ex Date for such
Other Event shall be adjusted by multiplying such Closing Price by the
reciprocal of the fraction by which the conversion price is so required
to be adjusted as a result of such Other Event,
(iii) if the Ex Date for any Other Event occurs on the Ex Date
for the Current Event, one of those events, as determined by the
Corporation, shall be deemed for purposed of clauses (i) and (ii) of
this proviso to have an Ex Date occurring prior to the Ex Date for the
other of those events, and
(iv) if the Ex Date for the Current Event is on or prior to the
date in question, then after taking into account any adjustment required
pursuant to clause (ii) of this proviso, the Closing Price for each Trading
Day on or after such Ex Date shall be adjusted by adding thereto the amount
of any cash and the fair market value on the date in question (as
determined in good faith by the Board of Directors in a manner consistent
with any determination of such value for purposes of paragraph (iv) or (v)
of Section 8(c), whose determination shall be conclusive and described in a
resolution of the Board of Directors) of the portion of the rights,
warrants, evidences of indebtedness, shares of capital stock or assets
being distributed applicable to one share of Common Stock.
"Ex Date" shall mean (i) when used with respect to any issuance
or distribution, means the first date on which the Common Stock trades regular
way on the relevant exchange or in the relevant market from which the Closing
Price was obtained without the right to receive such issuance or distribution
and (ii) when used with respect to any subdivision or combination of shares of
Common Stock, means the first date on which the Common Stock trades regular
way on such exchange or in such market after the time at which such
subdivision or combination becomes effective.
"Fundamental Change" means the occurrence of any transaction or
event in connection with a plan pursuant to which all or substantially all of
the Common Stock shall be exchanged for, converted into, acquired for or
constitute solely the right to receive cash, securities, property or other
assets (whether by means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification, recapitalization or
otherwise) provided, in the case of a plan involving more than one such
transaction or event, for purposes of adjustment of the conversion price, such
Fundamental Change shall be deemed to have occurred when substantially all of
the Common Stock of the Corporation shall be exchanged for, converted into, or
acquired for or constitute solely the right to receive cash, securities,
property or other assets, but the adjustment shall be based upon the highest
weighted average per share consideration which a holder of Common Stock could
have received in such transactions or events as a result of which more than
50% of the Common Stock of the Corporation shall have been exchanged for,
converted into, or acquired for or constitute solely the right to receive cash,
securities, property or other assets.
"Non-Stock Fundamental Change" means any Fundamental Change
other than a Common Stock Fundamental Change.
"Purchaser Stock Price" means, with respect to any Common Stock
Fundamental Change, the average of the Closing Prices for the common stock
received in such Common Stock Fundamental Change for the ten consecutive
Trading Days prior to and including the record date for the determination of
the holders of Common Stock entitled to receive such common stock, or if there
is no such record date, the date upon which the holders of the Common Stock
shall have the right to receive such common stock, in each case, as adjusted
in good faith by the Board of Directors to appropriately reflect any of the
events referred to in clauses (i) through (v) Section 8(c); provided, however,
that if no such Closing Prices exist, the Purchaser Stock Price shall be set
at a price determined in good faith by the Board of Directors of the
Corporation.
"Reference Market Price" shall mean $[ ] (which is an
amount equal to 66 2/3% of the reported last sale price for the Common Stock
on the New York Stock Exchange on [ ], 1997) and in the event of any
adjustment to the conversion price other than as a result of a Fundamental
Change, the Reference Market Price shall also be adjusted so that the ratio of
the Reference Market Price to the conversion price after giving effect to any
such adjustment shall always be the same ratio of $ to the initial
conversion price specified in the first sentence of Section 8.
"Trading Day" shall mean a day on which securities traded on
the national securities exchange or quotation system or in the
over-the-counter market used to determine the Closing Price.
IN WITNESS WHEREOF, LABORATORY CORPORATION OF AMERICA HOLDINGS
has caused this Certificate to be signed by one of its [ ] and to be
attested to by its Secretary, as of the ____ day of [ ] 1997.
LABORATORY CORPORATION
OF AMERICA HOLDINGS
By_________________________________
Name:
Title:
Attest_________________________________
Name: Bradford T. Smith
Title: Secretary
EXHIBIT 4.2
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF
LABORATORY CORPORATION OF AMERICA HOLDINGS
[ ]% SERIES B CONVERTIBLE PAY-IN-KIND PREFERRED STOCK
(Par Value $0.10 Per Share)
Pursuant to Section 151(g) of the
General Corporation Law of the
State of Delaware
[ ], 1997
TABLE OF CONTENTS
Page
----
Section 1. Designation..............................................1
Section 2. Ranking..................................................1
Section 3. Dividends................................................2
Section 4. Mandatory Redemption.....................................4
Section 5. Optional Redemption......................................5
Section 6. Procedure for Redemption.................................5
Section 7. Convertibility...........................................7
Section 8. Liquidation Rights......................................17
Section 9. Voting Rights...........................................18
Section 10. Registration, Transfer and Exchanges....................21
Section 11. Definitions.............................................21
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF
[ ]% SERIES B CONVERTIBLE PAY-IN-KIND PREFERRED STOCK
OF
LABORATORY CORPORATION OF AMERICA HOLDINGS
The undersigned, Wesley R. Elingburg and Bradford T.
Smith, being respectively an Executive Vice President and the Secretary of
Laboratory Corporation of America Holdings, a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), certify that, pursuant to the authority expressly granted
to and vested in the Board of Directors of the Corporation (the "Board of
Directors") by the Certificate of Incorporation of the Corporation (the
"Certificate of Incorporation"), which authorizes the issuance, by the
Corporation, of up to 10,000,000 shares of preferred stock, par value $0.10
per share (the "Preferred Stock"), the Board of Directors in accordance
with the provisions of Section 151 of the General Corporation Law of the
State of Delaware on [ ], 1997 duly adopted the following resolutions:
RESOLVED, that pursuant to Article Fourth of the Certificate
of Incorporation of the Corporation and in accordance with the provisions
of Sections 141 and 151 of the General Corporation Law of the State of
Delaware, the Board of Directors hereby creates and provides for the
issuance of a series of Preferred Stock, par value $0.10 per share and with
a liquidation preference of $50.00 per share, of the Corporation and hereby
fixes the number, voting powers, designation, preferences, and relative,
participating, optional or other special rights and such qualifications,
limitations or restrictions thereof, and other matters relating to, said
series as follows:
Section 1. Designation. [ ] shares of the Preferred Stock of
the Corporation are hereby constituted as a series of Preferred Stock, par
value $0.10 per share, with a liquidation preference of $50.00 per share,
designated as "[ ]% Series B Convertible Pay-in-Kind Preferred Stock" (the
"Series B PIK Preferred Stock").
Section 2. Ranking. The Series B PIK Preferred Stock will
have priority as to dividends over the common stock, par value $0.01 per
share, of the Corporation ("Common Stock") and any other series or class of
the Corporation's stock issued after the date hereof that by its terms
ranks junior as to dividends to the Series B PIK Preferred Stock, when and
if issued ("Junior Dividend Stock") and priority as to distributions of
assets upon liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary, over the Common Stock and any series or
class of the Corporation's stock issued after the date hereof that by its
terms ranks junior as to liquidation, dissolution and winding up to the
Series B PIK Preferred Stock, when and if issued ("Junior Liquidation
Stock") (the Common Stock and any other capital stock of the Corporation
that is both Junior Dividend Stock and Junior Liquidation Stock, "Junior
Stock"). The Series B PIK Preferred Stock will be junior as to dividends
to any series or class of the Corporation's stock issued after the date
hereof that by its terms ranks senior as to dividends to the Series B PIK
Preferred Stock, when and if issued ("Senior Dividend Stock") and junior as
to distributions of assets upon liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, to any series or class
of the Corporation's stock issued after the date hereof that by its terms
ranks senior as to liquidation, dissolution and winding up to the Series B
PIK Preferred Stock, when and if issued ("Senior Liquidation Stock" and
collectively with the Senior Dividend Stock, "Senior Stock"). The Series B
PIK Preferred Stock will have parity as to dividends with the [ ]% Series A
Convertible Exchangeable Preferred Stock, par value $0.10 per share (the
"Series A Exchangeable Preferred Stock") and any series or class of the
Corporation's stock issued after the date hereof that by its terms ranks on
a parity as to dividends with the Series B PIK Preferred Stock, when and if
issued ("Parity Dividend Stock") and parity as to distributions of assets
upon liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, with the Series A Exchangeable Preferred Stock
and any series or class of the Corporation's stock issued after the date
hereof that by its terms ranks on a parity as to liquidation, dissolution
and winding up with the Series B PIK Preferred Stock, when and if issued
("Parity Liquidation Stock") (the Series A Exchangeable Preferred Stock,
the Parity Dividend Stock and the Parity Liquidation Stock, collectively,
"Parity Stock"). The Series B PIK Preferred Stock shall be subject to the
creation of Junior Stock. The Series B PIK Preferred Stock shall be
subject to the creation of Parity Stock and Senior Stock only if the
provisions of Section 9(d)(ii) have been complied with. The respective
definitions of Senior Dividend Stock, Senior Liquidation Stock, Junior
Dividend Stock, Junior Liquidation Stock, Parity Dividend Stock and Parity
Liquidation Stock shall also include any warrants, rights, calls or
options, exercisable for or convertible into any of the Senior Dividend
Stock, Senior Liquidation Stock, Junior Dividend Stock, Junior Liquidation
Stock, Parity Dividend Stock and Parity Liquidation Stock, as the case may
be.
Section 3. Dividends. (a) Each holder of a share of Series B
PIK Preferred Stock shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds of the Corporation legally available
therefor, dividends at an annual rate of [ ]% of the Liquidation Preference
(as defined herein) of the Series B PIK Preferred Stock, or $[ ] per share
of Series B PIK Preferred Stock payable in shares of Series B PIK Preferred
Stock until ___, 2003 and cash thereafter. Such dividend shall be
cumulative and shall accrue (whether or not earned or declared, whether or
not there are funds legally available for the payment thereof and whether
or not restricted by the terms of any of the Corporation's indebtedness
outstanding at any time) from the date such shares are issued by the
Corporation and shall be payable quarterly in arrears on [ ], [ ], [ ] and
[ ] of each year (each a "Dividend Payment Date") commencing, [ ], 1997.
No interest will be payable in respect of any dividend payment on the
Series B PIK Preferred Stock which may be in arrears.
(b) The dividend payment period for any dividend payable on a Dividend
Payment Date shall be the period beginning on the immediately preceding
Dividend Payment Date (or on the issue date in the case of the first
dividend payment period) and ending on the day preceding such later
Dividend Payment Date. If any date on which a payment of a dividend or any
other amount is due in respect of Series B PIK Preferred Stock is not a
Business Day, such payment shall be made on the next day that is a Business
Day.
(c) The amount of dividends payable per share of Series B PIK Preferred
Stock for each dividend payment period will be computed by dividing the
annual dividend amount by four; provided, however, that the amount of
dividends payable for the first dividend payment period and for any
dividend payment period shorter than a full quarterly dividend period will
be computed on the basis of a 360-day year of twelve 30-day months. No
fractional shares of Series B PIK Preferred Stock will be issued, so that
the number of shares to be paid as a dividend shall be rounded to the
nearest whole number of shares. All dividends paid in additional shares of
Series B PIK Preferred Stock shall be deemed issued on the applicable
Dividend Payment Date and will thereupon be duly authorized, validly
issued, fully paid and nonassessable and free and clear of all liens and
charges.
(d) Dividends payable on any Dividend Payment Date shall be payable to
the holders of record of the Series B PIK Preferred Stock as they appear on
the stock transfer books of the Corporation at the close of business on
such record dates as are fixed by the Board of Directors (provided that no
record date shall be later than (a) the sixth Business Day prior to the
date fixed for any redemption of the Series B PIK Preferred Stock or, (b)
in the case of the dividend payment date occurring on [ ], the tenth
Business Day prior to such date). Dividends paid on the shares of Series B
PIK Preferred Stock in an amount less than accumulated and unpaid dividends
payable therein shall be allocated pro rata on a share-by-share basis among
all such shares at the time outstanding.
(e) If at any time the Corporation shall have failed to pay all
dividends which have accrued on any outstanding shares of Senior Dividend
Stock at the times such dividends are payable, unless otherwise provided in
the terms of the Senior Dividend Stock, no dividend shall be declared by
the Board of Directors or paid or set apart for payment by the Corporation
on shares of the Series B PIK Preferred Stock unless prior to or
concurrently with such declaration, payment or setting apart for payment,
all accrued and unpaid dividends on all outstanding shares of such Senior
Dividend Stock shall have been or be declared, paid or set apart for
payment.
(f) No dividends (other than dividends payable solely in Junior Stock)
shall be paid or declared and set apart for payment on any Junior Dividend
Stock, and no payment shall be made on account of the purchase, redemption,
retirement, or other acquisition of Junior Dividend Stock and Junior
Liquidation Stock (other than such acquisitions pursuant to employee or
director incentive or benefit plans or arrangements, or in exchange solely
for Junior Stock), unless all accrued and unpaid dividends on the Series B
PIK Preferred Stock for all dividend payment periods ending on or before
the date of payment of such dividends on Junior Dividend Stock, or such
payment for such Junior Divident Stock and Junior Liquidation Stock, shall
have been paid or declared and set apart for payment.
(g) Except as set forth in the second following sentence, no dividends
shall be paid or declared and set apart for payment on the Series B PIK
Preferred Stock unless all accrued and unpaid dividends for all dividend
payment periods through such Dividend Payment Date on any Parity Dividend
Stock, including the Series A Exchangeable Preferred Stock, have been paid
or declared and set apart for payment or are contemporaneously paid or
declared and set apart for payment. Except as set forth in the following
sentence, no dividends shall be paid or declared and set apart for payment
on any Parity Dividend Stock, including the Series A Exchangeable Preferred
Stock, unless all accrued and unpaid dividends for all dividend payment
periods through such Dividend Payment Date on the Series B PIK Preferred
Stock have been paid or declared and set apart for payment or are
contemporaneously paid or declared and set apart for payment. Whenever all
accrued and unpaid dividends have not been paid upon the Series B PIK
Preferred Stock or any other Parity Dividend Stock, including the Series A
Exchangeable Preferred Stock, for all dividend payment periods through such
Dividend Payment Date, all dividends paid or declared and set apart for
payment on the Series B PIK Preferred Stock or any other Parity Dividend
Stock, including the Series A Exchangeable Preferred Stock, shall be paid
or declared pro rata so that the amount of dividends declared and paid per
share on the Series B PIK Preferred Stock and such Parity Dividend Stock,
including the Series A Exchangeable Preferred Stock, will bear to each
other the same ratio that the accrued and unpaid dividends to the date of
payment, on the Series B PIK Preferred Stock and such Parity Dividend
Stock, including the Series A Exchangeable Preferred Stock, bear each
other.
(h) No payment shall be made on account of the purchase, redemption,
retirement or other acquisition of Parity Stock, including the Series A
Exchangeable Preferred Stock, (other than such acquisitions pursuant to
employee or director or incentive or benefit plans or arrangements, or in
exchange solely for Junior Stock) unless all accrued and unpaid dividends
on the Series B PIK Preferred Stock for all dividend payment periods ending
on or before such payment for such Parity Stock, including the Series A
Exchangeable Preferred Stock, shall have been paid or declared and set
apart for payment.
Section 4. Mandatory Redemption. All outstanding shares of
the Series B PIK Preferred Stock shall be mandatorily redeemed by the
Corporation out of funds legally available therefor on _________, 2012, at
a redemption price of $50.00 per share plus $50.00 per share for all
accrued and unpaid dividends, whether or not declared.
Section 5. Optional Redemption. (a) The shares of Series B PIK
Preferred Stock may be redeemed by the Corporation, at its option, in whole
or in part out of funds legally available therefor at any time on or after
[ ], 2000 and if redeemed during the 12-month period beginning [ ] of the
years indicated below, the cash redemption price per share shall be as set
forth below plus, in each case, $50.00 per share for all accrued and unpaid
dividends thereon to the date of redemption plus any cash payable in
respect of fractional shares in the form of accrued and unpaid dividends as
set forth herein or an amount equal to all accrued and unpaid dividends, as
the case may be (the "Optional Redemption Price"):
Optional
Year Redemption Price
---- ----------------
2000................................... [ ]%
2001................................... [ ]
2002................................... [ ]
2003................................... [ ]
2004................................... [ ]
2005................................... [ ]
2006 and thereafter.................... 100
(b) If fewer than all the outstanding shares of Series B PIK
Preferred Stock are to be redeemed pursuant to this Section 5, the
Corporation will select those shares to be redeemed pro rata or by lot or
in such other manner as the Board of Directors may determine to be fair and
reasonable; provided, however, that if at any time dividends on the Series
B PIK Preferred Stock are in arrears, the Corporation may not redeem less
than all of the then outstanding shares of Series B PIK Preferred Stock.
(c) No fractional shares of Series B PIK Preferred Stock will be
issued upon a redemption of less than all of the Series B PIK Preferred
Stock pursuant to this Section 5, but in lieu thereof, an appropriate
amount will be paid in cash based on the Closing Price for the Series B PIK
Preferred Stock on the date of such redemption.
Section 6. Procedure for Redemption. (a) In the event of
redemption of the Series B PIK Preferred Stock pursuant to Section 4, or an
offer by the Corporation to redeem any shares of Series B PIK Preferred Stock
pursuant to Section 5, notice of such redemption or offer to redeem shall be
given by hand or by nationally recognized "overnight courier" for delivery at
the earliest time offered by such overnight courier (which may not necessarily
be the next day) to each holder of record of the shares to be redeemed at such
holder's address as the same appears on the stock transfer books of the
Corporation at least 30 but not more than 60 days before the date fixed for
redemption, provided, however, that no failure to give such notice nor any
defect therein shall affect the validity of the redemption of any share of
Series B PIK Preferred Stock to be redeemed except as to the holder to whom
the Corporation has failed to give said notice or except as to the holder
whose notice was defective. Each such notice shall state: the redemption
date; the number of shares of Series B PIK Preferred Stock to be redeemed
and, if less than all the shares held by such holder are to be redeemed, the
number of shares to be redeemed from such holder; the Optional Redemption
Price, if applicable; the place or places where certificates for such shares
are to be surrendered for payment of the redemption price; the specific
provision hereof pursuant to which such redemption is to be made; and that
dividends on the shares to be redeemed will cease to accrue on such redemption
date. Each such notice shall be effective upon delivery if given by hand or
upon deposit with a nationally recognized overnight courier if given by such a
courier. Upon giving any notice of a redemption pursuant to Section 5(a), the
Corporation shall become obligated to redeem the shares of Series B PIK
Preferred Stock specified in such notice on the redemption date specified in
such notice.
(b) Notice having been given as aforesaid, from and after the
redemption date (unless default shall be made by the Corporation in
providing money for the payment of the redemption price of the shares
called for redemption), dividends on the shares of Series B PIK Preferred
Stock called for redemption shall cease to accrue, and such shares shall no
longer be deemed to be outstanding and shall have the status of authorized
but unissued shares of Series B PIK Preferred Stock, unclassified as to
series, and shall not be reissued as shares of Series B PIK Preferred
Stock, and all rights of the holders thereof as stockholders of the
Corporation (except the right to receive from the Corporation the
redemption price without interest) shall cease. Upon surrender in
accordance with said notice of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the Board of Directors of
the Corporation shall so require and the notice shall so state), such share
shall be redeemed by the Corporation at the redemption price aforesaid;
provided, however, in the case of a redemption pursuant to Section 5(a) if
fewer than all the shares represented by any such certificate are to be
redeemed, upon surrender of such certificate a new certificate shall be
issued representing the unredeemed shares without cost to the holder
thereof.
(c) If a notice of redemption shall have been given, and if, prior
to the redemption date, the Corporation shall have irrevocably deposited
the aggregate redemption price of the shares of Series B PIK Preferred
Stock to be redeemed in trust for the pro rata benefit of the holders of
the shares of Series B PIK Preferred Stock to be redeemed, so as to be and
to continue to be available therefor, with a bank or trust company that is
organized under the laws of the United States of America or any state
thereof, has capital and surplus of not less than $250,000,000 and has, or,
if it has no publicly traded debt securities rated by a nationally
recognized rating agency, is the subsidiary of a bank holding company that
has, publicly traded debt securities rated at least "A" or the equivalent
thereof by Standard & Poor's Corporation or "A-2" or the equivalent by
Moody's Investor Service Inc., then upon making such deposit, all rights of
holders of the shares so called for redemption shall cease, except (i)
conversion rights, (ii) as otherwise ser forth herein and (iii) the right
of holders of such shares to receive the redemption price against delivery
of such shares, but without interest, and such shares shall cease to be
outstanding. Any funds so deposited that are unclaimed by holders of
shares at the end of three years from such redemption date shall be repaid
to the Corporation upon its request, after which repayment the holders of
shares of Series B PIK Preferred Stock so called for redemption shall
thereafter be entitled to look only to the Corporation for payment of the
redemption price.
Section 7. Convertibility. (a) Holders of shares of Series B
PIK Preferred Stock will have the right at any time on or after [ ], 2000,
at the holder's option, to convert any or all shares into fully paid and
nonassessable shares of Common Stock at the conversion rate (subject to
adjustment as described below) of [ ] shares of Common Stock for each share
of Series B PIK Preferred Stock. If the Series B PIK Preferred Stock is
called for redemption, the conversion right will terminate at 5:00 p.m.
New York City time on the Business Day prior to the date fixed for such
redemption and if not exercised prior to such time, such conversion right
will be lost, unless the Corporation defaults in making the payment due
upon redemption; provided, however, with respect to any redemption
occurring on [ ] or one business day thereafter, the conversion right will
terminate at 5:00 p.m. New York City time on the date fixed for
redemption. Following conversion, the holder will no longer have any right
to payment of dividends on the shares of Series B PIK Preferred Stock
surrendered for conversion.
(b) Any holder of shares of Series B PIK Preferred Stock desiring to
convert such shares into Common Stock shall surrender the certificate or
certificates evidencing such shares of Series B PIK Preferred Stock at the
office of the transfer agent for the Series B PIK Preferred Stock, which
certificate or certificates, if the Corporation shall so require, shall be
duly endorsed to the Corporation or in blank, or accompanied by proper
instruments of transfer to the Corporation or in blank, accompanied by
irrevocable written notice to the Corporation that the holder elects so to
convert such shares of Series B PIK Preferred Stock and specifying the name
or names (with address or addresses) in which a certificate or certificates
evidencing shares of Common Stock are to be issued.
No payments or adjustments in respect of dividends on shares of
Series B PIK Preferred Stock surrendered for conversion or on account of any
dividend on the Common Stock issued upon conversion shall be made upon the
conversion of any shares of Series B PIK Preferred Stock; provided, however,
that:
(i) if a dividend record date fixed for the Series B PIK
Preferred Stock as established herein results in a holder who undertakes
conversion being eligible to receive on any Dividend Payment Date both a
dividend on the Series B PIK Preferred Stock and a dividend on the
Common Stock issued upon conversion thereof, then such holder shall be
entitled to receive only the higher of such dividend amounts; and
(ii) if the Corporation shall, by dividend or otherwise, declare or
make a distribution on its Common Stock referred to in Section 7(c)(iv)
or 7(c)(v) (including, without limitation, dividends or distributions
referred to in the last sentence of Section 7(c)(iv)), the holder of
each share of Series B PIK Preferred Stock, upon the conversion thereof
subsequent to the close of business on the date fixed for the
determination of shareholders entitled to receive such dividend or
distribution and prior to the effectiveness of the conversion price
adjustment in respect of such dividend or distribution, shall also be
entitled to receive for each share of Common Stock into which such share
of Series B PIK Preferred Stock is converted, the portion of the shares
of Common Stock, rights, warrants, evidences of indebtedness, shares of
capital stock, cash and assets so distributed applicable to one share of
Common Stock; provided, however, that at the election of the Corporation
(whose election shall be evidenced by a resolution of the Board of
Directors) with respect to all holders so converting, the Corporation
may, in lieu of distributing to such holder any portion of such
distribution not consisting of cash or securities of the Corporation,
pay such holder an amount in cash equal to the fair market value thereof
(as determined in good faith by the Board of Directors, whose
determination shall be conclusive and described in a resolution of the
Board of Directors).
The Corporation shall, as soon as practicable after such
deposit of certificates evidencing shares of Series B PIK Preferred Stock
accompanied by the written notice and compliance with any other conditions
herein contained, deliver at the office of such transfer agent to the person
for whose account such shares of Series B PIK Preferred Stock were so
surrendered, or to the nominee or nominees of such person, certificates
evidencing the number of full shares of Common Stock to which such person
shall be entitled as aforesaid, together with a cash adjustment in respect of
any fraction of a share of Common Stock as hereinafter provided. Such
conversion shall be deemed to have been made as of the date of such surrender
of the shares of Series B PIK Preferred Stock to be converted, and the person
or persons entitled to receive the Common Stock deliverable upon conversion of
such Series B PIK Preferred Stock shall be treated for all purposes as the
record holder or holders of such Common Stock on such date.
(c) The conversion price at which a share of Series B PIK Preferred
Stock is convertible into Common Stock shall be subject to adjustment from
time to time as follows:
(i) In case the Corporation shall pay or make a dividend or other
distribution on its Common Stock exclusively in Common Stock or shall
pay or make a dividend or other distribution on any other class or
series of capital stock of the Corporation which dividend or
distribution includes Common Stock, the conversion price in effect at
the opening of business on the day following the date fixed for the
determination of shareholders entitled to receive such dividend or other
distribution shall be reduced by multiplying such conversion price by:
A/(A + B), where:
A = the number of shares of Common Stock outstanding at the
close of business on the date fixed for such determination; and
B = the total number of shares of Common Stock constituting such
dividend or other distribution,
such reduction to become effective immediately after the opening of
business on the day following the date fixed for such
determination. For purposes of this subparagraph (i), the number
of shares of Common Stock at any time outstanding shall not
include shares held in the treasury of the Corporation. The
Corporation shall not pay any dividend or make any distribution on
shares of Common Stock held in the treasury of the Corporation.
(ii) In case the Corporation shall pay or make a dividend or other
distribution on its Common Stock consisting exclusively of, or shall
otherwise issue to all holders of its Common Stock, rights or warrants
entitling the holders thereof to subscribe for or purchase shares of
Common Stock at a price per share less than the Current Market Price Per
Share of the Common Stock on the date fixed for the determination of
shareholders entitled to receive such rights or warrants, the conversion
price in effect at the opening of business on the day following the date
fixed for such determination shall be reduced by multiplying such
conversion price by: (A + B)/(A + C), where:
A = the number of shares of Common Stock outstanding at the
close of business on the date fixed for such determination,
B = the number of shares of Common Stock which the aggregate of the
offering price of the total number of shares of Common Stock so
offered for subscription or purchase would purchase at such Current
Market Price Per Share, and
C = the number of additional shares of Common Stock so offered for
subscription or purchase,
such reduction to become effective immediately after the opening of
business on the day following the date fixed for such
determination.
In case any rights or warrants referred to in this subparagraph
(ii) in respect of which an adjustment shall have been made shall
expire unexercised [within 45 days after the shares] shall have
been distributed or issued by the Corporation the conversion price
shall be readjusted at the time of such expiration to the
conversion price that would have been in effect if no adjustment
had been made on account of the distribution or issuance of such
expired rights or warrants; provided that no such readjustment upon
expiration of such rights or warrants shall affect the number of
shares of Common Stock issued upon conversion of shares of Series
B PIK Preferred Stock prior to such readjustment.
(iii) In case outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the
conversion price in effect at the opening of business on the day
following the day upon which such subdivision becomes effective shall be
proportionately reduced, and conversely, in case outstanding shares of
Common Stock shall be combined into a smaller number of shares of Common
Stock, the conversion price in effect at the opening of business on the
day following the day upon which such combination becomes effective
shall be proportionately increased, such reduction or increase, as the
case may be, to become effective immediately after the opening of
business on the day following the day upon which such subdivision or
combination becomes effective.
(iv) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Common Stock evidences of its
indebtedness, shares of any class or series of capital stock, cash or
assets (including securities, but excluding any rights or warrants
referred to in subparagraph (ii) of this Section 7(c), any dividend or
distribution paid exclusively in cash and any dividend or distribution
referred to in subparagraph (i) of this Section 7(c)), the conversion
price shall be reduced so that the same shall equal the price determined
by multiplying the conversion price in effect immediately prior to the
effectiveness of the conversion price reduction contemplated by this
subparagraph (iv) by: (A - B)/A, where:
A = the Current Market Price Per Share of the Common Stock
immediately prior to the close of business on the date fixed for the
determination of stockholders entitled to receive such distribution (the
"Reference Date"), and
B = the fair market value (as determined in good faith by the
Board of Directors, whose determination shall be conclusive and
described in a resolution of the Board of Directors), on the Reference
Date, of the portion of the evidence of indebtedness, shares of capital
stock, cash and assets so distributed applicable to one share of Common
Stock,
such reduction to become effective immediately prior to the
opening of business on the day following the Reference Date,
provided, however, that for purposes of this subparagraph (iv),
any dividend or distribution that includes shares of Common Stock
or rights or warrants to subscribe for or purchase shares of
Common Stock shall be deemed instead to be a dividend or
distribution of the evidences of indebtedness, cash, assets or
shares of capital stock other than such shares of Common Stock or
rights or warrants (making any further conversion price reduction
required by this subparagraph (iv)) immediately followed by a
dividend or distribution of such shares of Common Stock or such
rights or warrants (making any further conversion price reduction
required by subparagraph (i) or (ii) of this Section 7(c), except
the Reference Date of such dividend or distribution as defined in
this subparagraph (iv) shall be substituted as "the date fixed for
the determination of shareholders entitled to receive such
dividend or other distribution", "the date fixed for the
determination of shareholders entitled to receive such rights or
warrants" and "the date fixed for such determination" within the
meaning of subparagraph (i) and (ii) of this Section 7(c) and any
shares of Common Stock included in such dividend or distribution
shall not be deemed "outstanding at the close of business on the
date fixed for such determination within the meaning of
subparagraph (i) of this Section 7(c)). If the Board of Directors
determines the fair market value of any distribution for purposes
of this subparagraph (iv) by reference to the actual or when
issued trading market for any securities comprising such
distribution, it must in doing so consider the prices in such
market over the same period used in computing the Current Market
Price Per Share of Common Stock.
(v) In case the Corporation shall pay or make a dividend or
other distribution on its Common Stock exclusively in cash (excluding
cash that is part of the distribution referred to in (iv) above and, in
the case of any quarterly cash dividend on the Common Stock, the portion
thereof that does not exceed the per share amount of the next preceding
quarterly cash dividend on the Common Stock (as adjusted to
appropriately reflect any of the events referred to in subparagraph (i),
(ii), (iii) and (iv) of this Section 7(c)), or all of such quarterly
cash dividend if the amount thereof per share amount of Common Stock
multiplied by four does not exceed [ %] of the Current Market Price Per
Share of the Common Stock on the Trading Day next preceding the date of
declaration of such dividend), the conversion price shall be reduced so
that the same shall equal the conversion price in effect immediately
prior to the effectiveness of the conversion price reduction
contemplated by this subparagraph (v) by: (A - B)/A, where:
A = the Current Market Price Per Share of the Common Stock
immediately prior to the close of business on the date fixed for the
determination of stockholders entitled to receive such distribution, and
B = the amount of cash so distributed and not excluded as
provided above applicable to one share of Common Stock,
such reduction to become effective immediately prior to the
opening of business on the day following the date fixed for the
payment of such distribution.
(vi) No adjustment in the conversion price shall be required
unless such adjustment would require an increase or decrease of at least
1% in the conversion price; provided, however, that any adjustments
which by reason of this subparagraph (vi) are not required to be made
shall be carried forward and taken into account in any subsequent
adjustment.
(vii) Whenever the conversion price is adjusted as herein
provided: the Corporation shall compute the adjusted conversion price and
shall prepare a certificate signed by the Chief Financial Officer of the
Corporation setting forth the adjusted conversion price and showing in
reasonable detail the facts upon which such adjustment is based, and such
certificate shall forthwith be filed with the transfer agent for the Series
B PIK Preferred Stock; and a notice stating that the conversion price has
been adjusted and setting forth the adjusted conversion price shall
forthwith be required, and as soon as practicable after it is required,
such notice shall be mailed by the Corporation to all record holders of
shares of Series B PIK Preferred Stock at their last addresses as they
shall appear upon the stock transfer books of the Corporation.
(viii) The Corporation from time to time may reduce the
conversion price by any amount for any period of time if the period is
at least twenty days, the reduction is irrevocable during the period and
the Board of Directors of the Corporation shall have made a
determination that such reduction would be in the best interest of the
Corporation, which determination shall be conclusive. Whenever the
conversion price is reduced pursuant to the preceding sentence, the
Corporation shall mail to holders of record of the Series B PIK
Preferred Stock a notice of the reduction at least fifteen days prior to
the date the reduced conversion price takes effect, and such notice
shall state the reduced conversion price and the period it will be in
effect.
(d) No fractional shares of Common Stock shall be issued upon
conversion of Series B PIK Preferred Stock. If more than one certificate
evidencing shares of Series B PIK Preferred Stock shall be surrendered for
conversion at one time by the same holder, the number of full shares
issuable upon conversion thereof shall be computed on the basis of the
aggregate number of shares of Series B PIK Preferred Stock so surrendered.
Instead of any fractional share of Common Stock that would otherwise be
issuable to a holder upon conversion of any shares of Series B PIK
Preferred Stock, the Corporation shall pay a cash adjustment in respect of
such fractional share in an amount equal to the same fraction of the market
price per share of Common Stock (as determined by the Board of Directors or
in any manner prescribed by the Board of Directors, which, if available,
shall be the Closing Price (as defined herein) for the shares of Common
Stock, on the day of conversion.
(e) In the event that the Corporation shall be a party to any
transaction (including without limitation any recapitalization or
reclassification of the Common Stock (other than a change in par value, or
from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination of the Common Stock), any
consolidation of the Corporation with, or merger of the corporation into,
any other person, any merger of another person into the Corporation (other
than a merger which does not result in a reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock of the
Corporation), any sale or transfer of all or substantially all of the
assets of the Corporation or any share exchange) pursuant to which the
Common Stock is converted into the right to receive other securities, cash
or other property, then lawful provisions shall be made as part of the
terms of such transaction whereby the holder of each share of Series B PIK
Preferred Stock then outstanding shall have the right thereafter to convert
such share only into in the case of any such transaction other than a
Common Stock Fundamental Change and subject to funds being legally
available for such purpose under applicable law at the time of such
conversion, the kind and amount of securities, cash and other property
receivable upon such transaction by a holder of the number of shares of
Common Stock into which such share of Series B PIK Preferred Stock might
have been converted immediately prior to such transaction, after giving
effect, in the case of any Non-Stock Fundamental Change, to any adjustment
in the conversion price required by the provisions of Section 7(h), and in
the case of a Common Stock Fundamental Change, common stock of the kind
received by holders of Common Stock as a result of such Common Stock
Fundamental Change in an amount determined pursuant to the provisions of
Section 7(h). The Corporation or the person formed by such consolidation
or resulting from such merger or which acquires such assets or which
acquires the Corporation's shares, as the case may be, shall make
provisions in its certificate or articles of incorporation or other
constituent document to establish such right. Such certificate or articles
of incorporation or other constituent document shall provide for
adjustments which, for events subsequent to the effective date of such
certificate or articles of incorporation or other constituent document,
shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 7. The above provisions shall similarly apply
to successive transactions of the foregoing type.
(f) After [ ], the Corporation shall at all times reserve and keep
available, free from preemptive rights out of its authorized and unissued
stock, solely for the purpose of effecting the conversion of the Series B
PIK Preferred Stock, such number of shares of its Common Stock as shall
from time to time be sufficient to effect that conversion of all shares of
Series B PIK Preferred Stock from time to time outstanding in accordance
with their terms.
If any shares of Common Stock required to be reserved for
purposes of conversion of the Series B PIK Preferred Stock hereunder require
registration with or approval of any governmental authority under any Federal
or State law before such shares may be issued upon conversion, the Corporation
will in good faith and as expeditiously as possible endeavor to cause such
shares to be duly registered or approved as the case may be. If the Common
Stock is listed on the New York Stock Exchange or any other national
securities exchange or traded through the Nasdaq National Market, the
Corporation will, if permitted by the rules of such exchange or market, list
and keep listed on such exchange or make and keep eligible for trading on such
market (as the case may be), upon official notice of issuance, all shares of
Common Stock issuable upon conversion of the Series B PIK Preferred Stock;
provided, however, that such shares of Common Stock may be delisted from such
exchange or may cease to be eligible for trading through such market (as the
case may be) if, prior to or concurrent with such delisting or cessation of
eligibility for trading, the Corporation causes such shares of Common Stock to
be listed on or eligible for trading through any other national securities
exchange or on the Nasdaq National Market.
(g) In case:
(i) the Corporation shall (1) declare any dividend (or any other
distribution) on its Common Stock, other than (A) a dividend payable in
shares of Common Stock or (B) a dividend payable in cash out of its
retained earnings other than any special or nonrecurring or other
extraordinary dividend or (2) declare or authorize a redemption or
repurchase of in excess of 10% of the then-outstanding shares of Common
Stock; or
(ii) the Corporation shall authorize the granting to all holders
of Common Stock of rights or warrants to subscribe for or purchase any
shares of stock of any class or series or of any other rights or
warrants; or
(iii) of any reclassification of Common Stock (other than a
subdivision or combination of the outstanding Common Stock, or a change
in par value, or from par value to no par value, or from no par value to
par value), or of any consolidation or merger to which the Corporation
is a party and for which approval of any shareholders of the Corporation
shall be required, or of the sale or transfer of all or substantially
all of the assets of the Corporation or of any share exchange whereby
the Common Stock is converted into other securities, cash or other
property; or
(iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Corporation;
then the Corporation shall cause to be filed with the transfer
agent for the Series B PIK Preferred Stock, and shall cause to be
mailed to the holders of record of the Series B PIK Preferred
Stock, at their last addresses as they shall appear upon the stock
transfer books of the Corporation, at least ten days prior to the
applicable record or effective date hereinafter specified, a
notice stating (x) the date on which a record (if any) is to be
taken for the purpose of such dividend, distribution, redemption,
repurchase, rights or warrants or, if a record is not to be taken,
the date as of which the holders of Common Stock of record to be
entitled to such dividend, distribution, redemption, rights or
warrants are to be determined or (y) the date on which such
reclassification, consolidation, merger, sale, transfer, share
exchange, dissolution, liquidation or winding up is expected to
become effective and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities, cash or other
property deliverable upon such reclassification, consolidation,
merger, sale, transfer, share exchange, dissolution, liquidation
or winding up (but no failure to mail such notice or any defect
therein or in the mailing thereof shall affect the validity of the
corporate action required to be specified in such notice).
(h) Notwithstanding any other provision in this Section 7 to
the contrary, if any Fundamental Change occurs, then the conversion
price in effect will be adjusted immediately after such Fundamental
Change as described below. In addition, in the event of a Common Stock
Fundamental Change, each share of Series B PIK Preferred Stock shall be
convertible solely into common stock of the kind received by holders of
Common Stock as the result of such Common Stock Fundamental Change.
For purposes of calculating any adjustment to be made pursuant
to this Section 7(h) in the event of a Fundamental Change, immediately after
such Fundamental Change:
(i) In the case of a Non-Stock Fundamental Change, the
conversion price of the Series B PIK Preferred Stock shall thereupon
become the lower of the conversion price in effect immediately prior to
such Non-Stock Fundamental Change, but after giving effect to any other
prior adjustments effected pursuant to this Section 7, and the result of
A x $50/B, where:
A = the greater of the Applicable Price or the then applicable
Reference Market Price, and
B = (x) the then-current Optional Redemption Price per share of
Series B PIK Preferred Stock or (y) for any Non-Stock Fundamental Change
that occurs before the Series B PIK Preferred Stock becomes redeemable
by the Corporation pursuant to Section 5, the applicable price per share
set forth for the date of such Non-Stock Fundamental Change in the
following table:
After date of original issuance of Series B PIK Preferred Stock and on or
before [ ], 1998 ............................................... $
After [ ], 1998 and on or before [ ], 1999............ $
After [ ], 1998 and on or before [ ], 2000 ........... $
plus, in any case referred to in this clause (y), a similar amount for
all per share dividends on the Series B PIK Preferred Stock accrued and
unpaid thereon, whether or not declared, to but excluding the date of
such Non-Stock Fundamental Change plus any cash payable in respect of
fractional shares with respect to such accrued and unpaid dividends, as
set forth herein; and
(ii) In the case of a Common Stock Fundamental Change, the
conversion price of the Series B PIK Preferred Stock in effect
immediately prior to such Common Stock Fundamental Change, but after
giving effect to any other prior adjustments effected pursuant to this
Section 7, shall thereupon be adjusted by multiplying such conversion
price by a fraction of which the numerator shall be the Purchaser Stock
Price and the denominator shall be the Applicable Price; provided,
however, that in the event of a Common Stock Fundamental Change in
which 100% of the value of the consideration received by a holder of
Common Stock is common stock of the successor, acquiror or other third
party (and cash, if any, is paid with respect to any fractional
interests in such common stock resulting from such Common Stock
Fundamental Change) and all of the Common Stock shall have been
exchanged for, converted into or acquired for common stock (and cash
with respect to fractional interests) of the successor, acquiror or
other third party, the conversion price of the Series B PIK Preferred
Stock in effect immediately prior to such Common Stock Fundamental
Change shall thereupon be adjusted by dividing such conversion price by
the number of shares of common stock of the successor, acquiror, or
other third party received by a holder of one share of Common Stock as
a result of such Common Stock Fundamental Change.
(i) Notwithstanding the foregoing provisions, the issuance of
any shares of Common Stock pursuant to any plan providing for the
reinvestment of dividends or interest payable on securities of the
Corporation and the investment of additional optional amounts in shares of
Common Stock under any such plan, and the issuance of any shares of Common
Stock or options or rights to purchase such shares pursuant to any employee
benefit plan or program of the Corporation or pursuant to any option,
warrant, right or exercisable, exchangeable or convertible security
outstanding as of the date the Series B PIK Preferred Stock was first
designated shall not be deemed to constitute an issuance of Common Stock or
exercisable, exchangeable or convertible securities by the Corporation to
which any of the adjustment provisions described above applies. There
shall also be no adjustment of the conversion price in case of the issuance
of any stock (or securities convertible into or exchangeable for stock) of
the Corporation except as specifically described in this Section 7. If any
action would require adjustment of the conversion price pursuant to more
than one of the provisions described above, only one adjustment shall be
made and such adjustment shall be the amount of adjustment which has the
highest absolute value to holders of Series B PIK Preferred Stock.
Section 8. Liquidation Rights. (a) In the case of the
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, holders of outstanding shares of Series B PIK Preferred Stock
shall be entitled to receive a liquidation preference from the net assets
of the Corporation available for distribution to stockholders in an amount
in cash which for each such share shall equal $50 per share (the
"Liquidation Preference"), plus a similar amount for any accrued and unpaid
dividends to the payment date plus any cash payable in respect of
fractional shares with respect to such accrued and unpaid dividends, as set
forth herein, before any payment or distribution is made to the holders of
Common Stock or any other Junior Liquidation Stock, but the holders of the
shares of the Series B PIK Preferred Stock will not be entitled to receive
the liquidation preference of such shares until the liquidation preference
of any Senior Liquidation Stock has been paid in full.
(b) The holders of Series B PIK Preferred Stock and Parity Liquidation
Stock, including the Series A Exchangeable Preferred Stock, shall share
ratably in any liquidation, distribution or winding up of the Corporation
(after payment of the liquidation preference of the Senior Liquidation Stock)
in which the net assets or the proceeds thereof are not sufficient to pay in
full the aggregate of the amounts payable thereon, in the same ratio that the
respective amounts which would be payable on such distribution if the amounts
to which the holders of all the outstanding shares of Series B PIK Preferred
Stock and Parity Liquidation Stock, including the Series A Exchangeable
Preferred Stock, are entitled were paid in full, bear to each other. After
payment in full of the liquidation preference of the shares of the Series B
PIK Preferred Stock, the holders of such shares will not be entitled to any
further participation in any distribution of assets by the Corporation.
(c) Neither a consolidation nor merger of the Corporation with another
corporation nor a sale or transfer of all or substantially all of the
Corporation's property or assets will be considered a liquidation, dissolution
or winding up of the Corporation.
Section 9. Voting Rights. (a) The holders of shares of
Series B PIK Preferred Stock shall not be entitled to vote on any matter on
which the holders of any voting securities of the Corporation shall be
entitled to vote except as otherwise provided by this Section 9 or as
required by law from time to time. In exercising any such vote, each
outstanding share of Series B PIK Preferred Stock will be entitled to one
vote, excluding shares held by any entity controlled by the Corporation,
which shares shall have no voting rights.
(b) In the event that the Corporation shall have failed to pay
dividends on Series B PIK Preferred Stock or on any outstanding shares of
Parity Dividend Stock, including the Series A Exchangeable Preferred Stock,
in an aggregate amount equal to at least six quarterly dividends on such
shares (whether or not consecutive) (such failure, a "Dividend Non-
Payment"), the number of directors constituting the Board of Directors of
the Corporation, without further action, shall be increased by two and the
holders of the outstanding shares of Series B PIK Preferred Stock shall
have the right, voting separately as a class with the holders of Parity
Dividend Stock on which like voting rights have been conferred and are
exercisable, including the Series A Exchangeable Preferred Stock, to elect
such two additional members of the Board of Directors, at any annual
meeting of stockholders of the Corporation or by written consent pursuant
to Section 228 of the General Corporation Law of the State of Delaware, in
each case, who shall continue to serve so long as such dividends on the
Series B PIK Preferred Stock and Parity Dividend Stock, including the
Series A Exchangeable Preferred Stock, have not been paid. If and when all
such accrued and unpaid dividends on the Series B PIK Preferred Stock and
Parity Dividend Stock, including the Series A Exchangeable Preferred Stock,
have been paid or declared and set apart for payment, the holders of shares
of the Series B PIK Preferred Stock and Parity Dividend Stock, including
the Series A Exchangeable Preferred Stock, shall be divested of the special
voting rights provided by this Section 9, subject to revesting in the event
of every subsequent Dividend Non-Payment. Upon termination of such special
voting rights, the term of office of each director elected pursuant to this
Section 9 by the holders of shares of Series B PIK Preferred Stock and
Parity Dividend Stock, including the Series A Exchangeable Preferred Stock,
(a "Preferred Stock Director") shall terminate immediately and the number
of directors constituting the entire Board of Directors shall, without
further action, be reduced by two, subject always to the increase of the
number of directors pursuant to this Section 9 in the case of the future
right of the holders of Series B PIK Preferred Stock to elect Preferred
Stock Directors. Any Preferred Stock Director may be removed by, and shall
not be removed otherwise than by, the vote of the holders of record of a
majority of the outstanding shares of the Series B PIK Preferred Stock and
the Parity Dividend Stock, including the Series A Exchangeable Preferred
Stock, entitled to vote thereon present at a meeting called for such
purpose at which a quorum is present or by written consent pursuant to
Section 228 of the General Corporation Law of the State of Delaware. So
long as a Dividend Non-Payment shall continue, any vacancy in the office of
a Preferred Stock Director may be filled by vote of the holders of record
of a majority of the outstanding shares of the Series B PIK Preferred Stock
and the Parity Dividend Stock, including the Series A Exchangeable
Preferred Stock, entitled to vote thereon present at a meeting called for
such purpose at which a quorum is present or by written consent pursuant to
Section 228 of the General Corporation Law of the State of Delaware. As
long as a Dividend Non-Payment shall continue, holders of shares of the
Series B PIK Preferred Stock shall not, as such stockholders, be entitled
to vote on the election or removal of directors other than Preferred Stock
Directors, but shall not be divested of any other voting rights provided to
such stockholders by law or this Certificate of Designation with respect to
any other matter to be acted upon by the stockholders of the Corporation.
(c) At any meeting held for the purpose of electing directors at
which the holders of outstanding shares of Series B PIK Preferred Stock
shall have the right to elect directors as provided in this Section 9, the
presence, in person or by proxy, of the holders of at least a majority of
the then outstanding shares of Series B PIK Preferred Stock and the Parity
Dividend Stock, including the Series A Exchangeable Preferred Stock, on
which like voting rights have been conferred and are exercisable shall be
required and be sufficient to constitute a quorum of such class for the
election of directors by such class. At any such meeting or adjournment
thereof (i) the absence of a quorum of the holders of the Series B PIK
Preferred Stock and the Parity Dividend Stock, including the Series A
Exchangeable Preferred Stock, present in person or by proxy shall not
prevent the election of directors other than those to be elected by the
holders of the Series B PIK Preferred Stock and the Parity Dividend Stock,
including the Series A Exchangeable Preferred Stock, and the absence of a
quorum or quorums of the holders of any class or classes of any stock or
other securities of the Corporation other than the Series B PIK Preferred
Stock and the Parity Dividend Stock, including the Series A Exchangeable
Preferred Stock, shall not prevent the election of directors to be elected
by the holders of the Series B PIK Preferred Stock and the Parity Dividend
Stock, including the Series A Exchangeable Preferred Stock, and (ii) in the
absence of a quorum of the holders of any class of stock entitled to vote
for the election of directors, a majority of the holders present in person
or by proxy of such class shall have the power to adjourn the meeting for
the election of directors which the holders of such class are entitled to
elect, from time to time, without notice (except as required by law) other
than announcement at the meeting, until a quorum shall be present.
(d) So long as any shares of Series B PIK Preferred Stock remain
outstanding, the Corporation will not, without the affirmative vote or consent
of the holders of at least 66 (2)/(3)% of all shares of Series B PIK Preferred
Stock and Series A Exchangeable Preferred Stock and other Parity Stock, voting
separately as a one class:
(i) amend, alter or repeal (by merger or otherwise) any
provision of the Certificate of Incorporation or any terms or
provisions of this Certificate of Designation or the by-laws of the
Corporation so as to affect adversely the relative rights,
preferences, qualifications, limitations, or restrictions of the
Series B PIK Preferred Stock; or
(ii) authorize or issue, or increase the authorized or issued
amount of any Senior Dividend Stock, Senior Liquidation Stock or any
security convertible into such Senior Dividend Stock or such Senior
Liquidation Stock; or
(iii) effect any reclassification of the Series B PIK Preferred
Stock.
or, without the consent of the holders of a majority of Series
A Exchangeable Preferred Stock and Series B PIK Preferred Stock and other
Parity Stock, voting separately as one class authorize or issue, or increase
the authorized or issued amount of any additional class of Parity Stock or any
Security Convertible into such Parity Stock.
Section 10. Registration, Transfer and Exchanges. The
Corporation will keep with American Stock Transfer & Trust Company, the
registrar and transfer agent, a register in which the Corporation will provide
for the registration and transfer of shares of Series B PIK Preferred Stock.]
Any holder of shares of Series B PIK Preferred Stock may, at its option, in
person or by duly authorized attorney, surrender the certificate representing
the same for exchange at with American Stock Transfer & Trust Company, the
registrar and transfer agent, (duly endorsed or accompanied, if so required by
the Corporation, by a written instrument of transfer duly executed by such
holder or his or her duly authorized attorney), and, within a reasonable time
thereafter and without expense (other than transfer taxes, if any), receive in
exchange therefor one or more duly executed certificate or certificates dated
as of the date to which dividends have been paid on the shares of Series B PIK
Preferred Stock so surrendered, or if no dividend has yet been so paid, then
dated the date hereof, and registered in such name or names, all as may be
designated by such holder, for the same aggregate number of shares of Series B
PIK Preferred Stock as represented by the certificate or certificates so
surrendered. The Corporation covenants and agrees to take and cause to be
taken all action reasonably necessary to effect such registrations, transfers
and exchanges. Each share of Series B PIK Preferred Stock issued in exchange
for any share shall carry the same rights to unpaid dividends and redemption
payments which were carried by the share so exchanged, so that neither gain
nor loss of any such right shall result from any such transfer or exchange.
The Corporation and any agent of the Corporation may treat the
person in whose name any share of Series B PIK Preferred Stock is registered
as the owner of such share for the purpose of receiving payment of dividends,
and amounts payable on redemption and liquidation in respect of such share and
for all other purposes.
Section 11. Definitions. Unless the context or use indicates
another or different meaning or intent, as used herein, the following terms
shall have the following meanings, terms defined in the singular to have a
correlative meaning when used in the plural and vice versa:
"Applicable Price" means (i) in the event of a Non-Stock
Fundamental Change in which the holders of the Common Stock receive only cash,
the amount of cash received by the holder of one share of Common Stock and
(ii) in the event of any other Non-Stock Fundamental Change or any Common
Stock Fundamental Change, the average of the Closing Prices for the Common
Stock during the ten consecutive Trading Days prior to and including the
record date for the determination of the holders of Common Stock entitled to
receive cash, securities, property or other assets in connection with such
Non-Stock Fundamental Change or Common Stock Fundamental Change, or, if there
is no such record date, the date upon which the holders of the Common Stock
shall have the right to receive such cash, securities, property or other
assets, in each case, as adjusted in good faith by the Board of Directors or
the Corporation to appropriately reflect any of the events referred to in
clauses (i) through (v) of Section 7(c).
"Business Day" shall mean any day other than a Saturday, Sunday
or any day on which banking institutions are authorized to close in New York,
New York.
"Closing Price" of any security means on any day the last
reported sale price regular way on such day or in case no sale takes place on
such day, the average of the reported closing bid and asked prices regular way
in each case on the New York Stock Exchange, Inc. or, if the security is not
quoted on such system, on the principal national securities exchange or
quotation system on which such security is listed or admitted to trading or
quoted, or, if not listed or admitted to trading on any national securities
exchange or quotation system, the average of the closing bid and asked prices
in the over-the-counter market on such day as reported by the National
Quotation Bureau Incorporated, or a similarly generally accepted reporting
service, or, if not so available in such manner, as furnished by any New York
Stock Exchange Member firm selected from time to time by the Board of
Directors for that purpose.
"Common Stock Fundamental Change" means any Fundamental Change
in which more than 50% of the value (as determined in good faith by the Board
of Directors of the Corporation) of the consideration received by holders of
Common Stock consists of common stock that for each of the ten consecutive
Trading Days referred to with respect to such Fundamental Change in the
definition of "Applicable Price" has been admitted for listing or admitted for
listing subject to notice of issuance on a national securities exchange or
quoted on the Nasdaq National Market, provided, however, that a Fundamental
Change shall not be a Common Stock Fundamental Change unless either (i) the
Corporation continues to exist after the occurrence of such Fundamental Change
and the outstanding shares of Series B PIK Preferred Stock continue to exist
as outstanding Series B PIK Preferred Stock, or (ii) not later than the
occurrence of such Fundamental Change, the outstanding shares of Series B PIK
Preferred Stock are converted into or exchanged for shares of preferred stock
of a corporation succeeding to the business of the Corporation, which
preferred stock has powers, preferences and relative, participating, optional
or other rights, and qualifications, limitations and restrictions,
substantially similar to those of the Series B PIK Preferred Stock.
"Current Market Price Per Share" shall mean, as to the Common
Stock on any date in question, the average of the daily Closing Prices for the
five consecutive Trading Days prior to and including the date in question;
provided, however, that:
(i) if the Ex Date for any event (other than the issuance or
distribution requiring such computation) that required an adjustment to
the conversion price pursuant to subparagraphs (i), (ii), (iii), (iv) or
(v) of Section 7(c) ("Other Event") occurs after the fifth Trading Day
prior to the day in question and prior to the Ex Date for the issuance
or distribution requiring such computation (the "Current Event"), the
Closing Price for each Trading Day prior to the Ex Date for such Other
Event shall be adjusted by multiplying such Closing Price by the same
fraction by which the conversion price is so required to be adjusted as
a result of such Other Event,
(ii) if the Ex Date for any Other Event occurs after the Ex Date
for the Current Event and on or prior to the date in question, the
Closing Price for each Trading Day on and after the Ex Date for such
Other Event shall be adjusted by multiplying such Closing Price by the
reciprocal of the fraction by which the conversion price is so required
to be adjusted as a result of such Other Event,
(iii) if the Ex Date for any Other Event occurs on the Ex Date
for the Current Event, one of those events, as determined by the
Corporation, shall be deemed for purposed of clauses (i) and (ii) of
this proviso to have an Ex Date occurring prior to the Ex Date for the
other of those events, and
(iv) if the Ex Date for the Current Event is on or prior to the
date in question, then after taking into account any adjustment required
pursuant to clause (ii) of this proviso, the Closing Price for each
Trading Day on or after such Ex Date shall be adjusted by adding thereto
the amount of any cash and the fair market value on the date in question
(as determined in good faith by the Board of Directors in a manner
consistent with any determination of such value for purposes of
paragraph (iv) or (v) of Section 7(c), whose determination shall be
conclusive and described in a resolution of the Board of Directors) of
the portion of the rights, warrants, evidences of indebtedness, shares
of capital stock or assets being distributed applicable to one share of
Common Stock.
"Ex Date" shall mean (i) when used with respect to any issuance
or distribution, means the first date on which the Common Stock trades regular
way on the relevant exchange or in the relevant market from which the Closing
Price was obtained without the right to receive such issuance or distribution
and (ii) when used with respect to any subdivision or combination of shares of
Common Stock, means the first date on which the Common Stock trades regular
way on such exchange or in such market after the time at which such
subdivision or combination becomes effective.
"Fundamental Change" means the occurrence of any transaction or
event in connection with a plan pursuant to which all or substantially all of
the Common Stock shall be exchanged for, converted into, acquired for or
constitute solely the right to receive cash, securities, property or other
assets (whether by means of an exchange offer, liquidation, tender offer,
consolidation, merger, combination, reclassification, recapitalization or
otherwise) provided, in the case of a plan involving more than one such
transaction or event, for purposes of adjustment of the conversion price, such
Fundamental Change shall be deemed to have occurred when substantially all of
the Common Stock of the Corporation shall be exchanged for, converted into, or
acquired for or constitute solely the right to receive cash, securities,
property or other assets, but the adjustment shall be based upon the highest
weighted average per share consideration which a holder of Common Stock
could have received in such transactions or events as a result of which
more than 50% of the Common Stock of the Corporation shall have been
exchanged for, converted into, or acquired for or constitute solely the
right to receive cash, securities, property or other assets.
"Non-Stock Fundamental Change" means any Fundamental Change
other than a Common Stock Fundamental Change.
"Purchaser Stock Price" means, with respect to any Common Stock
Fundamental Change, the average of the Closing Prices for the common stock
received in such Common Stock Fundamental Change for the ten consecutive
Trading Days prior to and including the record date for the determination of
the holders of Common Stock entitled to receive such common stock, or if there
is no such record date, the date upon which the holders of the Common Stock
shall have the right to receive such common stock, in each case, as adjusted
in good faith by the Board of Directors to appropriately reflect any of the
events referred to in clauses (i) through (v) Section 7(c); provided, however,
that if no such Closing Prices exist, the Purchaser Stock Price shall be set
at a price determined in good faith by the Board of Directors of the
Corporation.
"Reference Market Price" shall mean $[ ] (which is an
amount equal to 66 2/3% of the reported last sale price for the Common Stock
on the New York Stock Exchange on [ ], 1997) and in the event of any
adjustment to the conversion price other than as a result of a Fundamental
Change, the Reference Market Price shall also be adjusted so that the ratio of
the Reference Market Price to the conversion price after giving effect to any
such adjustment shall always be the same ratio of $ to the initial
conversion price specified in the first sentence of Section 7.
"Trading Day" shall mean a day on which securities traded on
the national securities exchange or quotation system or in the
over-the-counter market used to determine the Closing Price.
IN WITNESS WHEREOF, LABORATORY CORPORATION OF AMERICA HOLDINGS
has caused this Certificate to be signed by one of its [ ] and to be
attested to by its Secretary, as of the ____ day of [ ] 1997.
LABORATORY CORPORATION
OF AMERICA HOLDINGS
By_____________________________
Name:
Title:
Attest_____________________________
Name: Bradford T. Smith
Title: Secretary
EXHIBIT 4.5
RIGHTS LABORATORY CORPORATION OF NUMBER OF RIGHTS:
CERTIFICATE NO. AMERICA HOLDINGS CUSIP NO. 50540R 12 8
THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH
IN THE LABORATORY CORPORATION OF AMERICA HOLDINGS PROSPECTUS DATED , 1997
(THE "PROSPECTUS") AND ARE INCORPORATED HEREIN BY REFERENCE. COPIES OF
THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM LABORATORY CORPORATION OF
AMERICA HOLDINGS AND AMERICAN STOCK TRANSFER & TRUST COMPANY (THE
"SUBSCRIPTION AND INFORMATION AGENT").
THIS CERTIFICATE OR A NOTICE OF GUARANTEED DELIVERY MUST BE
RECEIVED BY THE SUBSCRIPTION AND INFORMATION AGENT WITH PAYMENT IN FULL BY
5:00 P.M., NEW YORK TIME, ON ___________________ 1997 (SUCH DATE, SUBJECT TO
EXTENSION AS PROVIDED IN THE PROSPECTUS, IS REFERRED TO IN THIS CERTIFICATE AS
THE "EXPIRATION DATE").
AN EXERCISE OF RIGHTS EVIDENCED HEREBY IS IRREVOCABLE.
The Rights represented by this Rights Certificate may be
exercised by duly completing Form 1 and may be transferred, exercised or sold
through a bank or broker by duly completing Form 2. Rights Holders (as
defined in the Prospectus) are advised to review the Prospectus and
instructions (copies of which are available from the Subscription and
Information Agent) before exercising or selling their Rights.
IMPORTANT: Complete the appropriate FORM and if applicable,
delivery instructions, and SIGN on reverse side.
SUBSCRIPTION PRICE $50 PER SHARE RIGHTS TO PURCHASE % SERIES A
CONVERTIBLE
REGISTERED OWNER: EXCHANGEABLE PREFERRED STOCK OR
% SERIES B CONVERTIBLE PAY-IN-KIND
PREFERRED STOCK OF
LABORATORY CORPORATION OF AMERICA HOLDINGS
The registered owner or assigns whose name is inscribed hereon
is entitled to subscribe for shares of either % Series A Convertible
Exchangeable Preferred Stock or % Series B Convertible Pay-in-Kind Preferred
Stock (together, referred to in this certificate as the "Preferred Stock")
upon the terms and subject to the conditions set forth in the Prospectus and
instructions relating thereto.
Date:
By_________________________ By_______________________________
Chief Executive Officer Secretary
THIS RIGHTS CERTIFICATE IS TRANSFERABLE AND MAY BE COMBINED OR
DIVIDED AT THE OFFICE OF THE SUBSCRIPTION AND INFORMATION AGENT.
RIGHTS HOLDERS SHOULD BE AWARE THAT IF THEY CHOOSE TO EXERCISE
OR TRANSFER LESS THAN ALL OF THE RIGHTS EVIDENCED HEREBY, THEY MAY NOT RECEIVE
A NEW RIGHTS CERTIFICATE IN SUFFICIENT TIME TO EXERCISE THE REMAINING RIGHTS
EVIDENCED THEREBY.
Delivery: American Stock Transfer & Trust Company Countersigned: American Stock Transfer & Trust Company
40 Wall Street (New York, NY) Subscription and Information Agent
New York, NY 10005 Authorized Signature
FORM 1 - EXERCISE AND SUBSCRIPTION: The undersigned hereby
irrevocably exercises one or more Rights evidenced by this Rights Certificate
to subscribe for an equal amount of either % Series A Convertible
Exchangeable Preferred Stock or % Series B Convertible Pay-in-Kind
Preferred Stock as indicated below, on the terms and subject to the
conditions specified in the Prospectus, receipt of which is hereby
acknowledged.
(a) Number of shares subscribed for pursuant to the Basic Subscription
Privilege (as defined in the Prospectus). (One Right needed to
subscribe for each full share.)
__________X $50 per share = $____________
(Number of shares -- whole number only)
SERIES OF PREFERRED STOCK (CHECK ONLY ONE):(*)
[ ] % Series A Convertible Exchangeable Preferred Stock
[ ] % Series B Convertible Pay-in-Kind Preferred Stock
(b) Number of shares subscribed for pursuant to the Oversubscription
Privilege (as defined in the Prospectus).(**) Shares issued
pursuant to the Oversubscription Privilege will be of the same
series of Preferred Stock issued pursuant to the Basic Subscription
Privilege.
__________X $50 per share = $____________
(Number of shares -- whole number only)
(c) Total Subscription Price. (Total number of shares subscribed for
pursuant to both the Basic Subscription Privilege and the
Oversubscription Privilege, times the Subscription Price of
$50.)(***)
$______________
METHOD OF PAYMENT (CHECK ONE)
[ ] CHECK, BANK DRAFT OR MONEY ORDER PAYABLE TO AMERICAN STOCK
TRANSFER & TRUST COMPANY
[ ] WIRE TRANSFER DIRECTLY TO AMERICAN STOCK TRANSFER & TRUST COMPANY,
ACCOUNT NO. _________________________________, ABA NO. ________
(*) A failure to indicate a series of Preferred Stock will result in the
issuance of % Series A Convertible Exchangeable Preferred Stock.
(**) Shares of Preferred Stock available to Rights Holders pursuant to the
Oversubscription Privilege may be limited as set forth in the Prospectus. If
the shares of Preferred Stock subscribed for pursuant to the Oversubscription
Privilege exceeds the number of shares actually tendered to the subscriber,
the portion of the Subscription Price tendered corresponding to those excess
shares shall be returned to the subscriber, without interest, as soon as
practicable after the Expiration Date.
(***)If the amount enclosed or transmitted is not sufficient to pay the
Subscription Price for all shares that are stated to be subscribed for, or if
the number of shares being subscribed for is not specified, the number of
shares subscribed for will be assumed to be the maximum number that could be
subscribed for upon payment of such amount. If the Oversubscription Privilege
is not exercised and the amount enclosed or transmitted exceeds the
Subscription Price for all shares represented by this Rights Certificate, the
person subscribing pursuant thereto shall be deemed to have exercised the
Oversubscription Privilege to purchase, to the extent available, that number
of whole shares of Preferred Stock equal to the quotient obtained by dividing
the subscription excess by $50. Any amount remaining after such division
shall be returned to the subscriber without interest.
(d) If the number of Rights being exercised pursuant to the Basic
Subscription Privilege is less than all of the Rights represented by
this Rights Certificate (check only one):
[ ] DELIVER TO ME A NEW RIGHTS CERTIFICATE EVIDENCING THE REMAINING
RIGHTS TO WHICH I AM ENTITLED.
[ ] DELIVER A NEW RIGHTS CERTIFICATE EVIDENCING THE REMAINING RIGHTS IN
ACCORDANCE WITH MY FORM 2 INSTRUCTIONS (please include any required
signature guarantees).
[ ] CHECK HERE IF RIGHTS ARE BEING EXERCISED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY DELIVERED TO THE SUBSCRIPTION AND INFORMATION
AGENT PRIOR TO THE DATE HEREOF AND COMPLETE THE FOLLOWING:
Name(s) of Registered Owner(s):____________________________________
Window Ticket number (if any):_____________________________________
Date of execution of Notice of Guaranteed Delivery:________________
Name of institution which guaranteed delivery:_____________________
[ ] FORM 2-CHECK HERE TO TRANSFER YOUR RIGHTS CERTIFICATE OR SOME OR ALL
OF YOUR RIGHTS EVIDENCED HEREBY OR TO EXERCISE OR SELL RIGHTS
THROUGH YOUR BANK OR BROKER: For value received,
___________________ Rights represented by this Rights Certificate
are hereby assigned to (please print name, address and Social
Security Number or Taxpayer ID No. of transferees in full):
Name:______________________________________________________________
Address:___________________________________________________________
___________________________________________________________________
___________________________________________________________________
Social Security Number
or Taxpayer ID No.:________________________________________________
[ ] FORM 3-DELIVERY INSTRUCTIONS: Name and/or address for mailing any
Preferred Stock, new Rights Certificate or cash payment if other
than shown on the front hereof:
Name:______________________________________________________________
Address:___________________________________________________________
___________________________________________________________________
___________________________________________________________________
Social Security Number
or Taxpayer ID No.:________________________________________________
IMPORTANT
RIGHTS HOLDER SIGN HERE
___________________________________________________________________
___________________________________________________________________
(Signature(s) of Registered Holder(s))
___________________________________________________________________
(Capacity)
Dated: ______________________________________________________, 1997
(Must be signed by the registered holder(s) exactly as name(s) appear(s) on
this Rights Certificate. If signature is by trustee(s), executor(s),
administrator(s), guardian(s), attorney(s)-in-fact, agent(s), officer(s), or a
corporation or another acting in a fiduciary or representative capacity,
please provide the following information. See instructions.)
Name(s): _________________________________________________________
_________________________________________________________
(Please Print)
Capacity: _________________________________________________________
Address: _________________________________________________________
(Including Zip Code)
Area Code and Telephone Number:
_________________________________________________________
(Home)
_________________________________________________________
(Business)
Social Security Number or Taxpayer ID No.:
_________________________________________________________
GUARANTEE OF SIGNATURE(S)
Note: See paragraph 5(c) of Instructions
Authorized Signature ______________________________________________
Name: _____________________________________________________________
Title: ____________________________________________________________
Name of Firm: _____________________________________________________
Address: __________________________________________________________
Area Code and Telephone Number:____________________________________
Dated: ______________________________________________________, 1997
EXHIBIT 12.1
LABORATORY CORPORATION OF AMERICA HOLDINGS
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS (LOSS)
TO COMBINED FIXED CHARGES AND PREFERRED DIVIDENDS
(dollars in millions)
Proforma
Year ended
December
Year ended December 31, 31,
-----------------------------------------------------------------------
1992 1993 1994 1995 1996 1996
------ ------- ------- ------ ------- ---------
Earnings (loss): .........................
Earnings (loss before provision for
income taxes and extraordinary item..... $ 62.1 $ 191.1 $ 55.4 $ 3.1 $(188.3) $(175.4)
Add: Fixed Charges
Interest expense (gross) ............... 4.2 10.9 34.5 65.5 71.7 58.8
Interest factor in rents ............... 9.0 10.0 11.5 20.1 23.5 23.5
------ ------- ------- ------ ------- -------
Earnings (loss) as adjusted ............ $ 75.3 $ 212.0 $ 101.4 $ 88.7 $ (93.1) $ (93.1)
====== ======= ======= ====== ======= =======
Preferred dividend requirements ........ $ -- $ -- $ -- $ -- $ -- $ 43.2
Ratio of earnings (loss) before
provision for income taxes to
net earnings (loss).................... -- -- -- -- -- 120%
------ ------- ------- ------ ------- -------
Preferred dividend factor on a pre-tax
basis ................................. -- -- -- -- -- 52.0
Fixed Charges
Interest expense (gross) .............. 4.2 10.9 34.5 65.5 71.7 58.8
Interest factor in rents .............. 9.0 10.0 11.5 20.1 23.5 23.5
------ ------- ------- ------ ------- -------
Combined fixed charges and
preferred dividends ................. 13.2 20.9 46.0 85.6 95.2 134.4
====== ======= ======= ====== ======= =======
Ratio of earning to combined fixed ....... 5.71 10.16 2.20 1.04 NM NM
charges and preferred dividends
Amount by which earnings are
insufficient to cover combined fixed
charges and preferred dividends .......... $(188.3) $(227.4)
======= =======
EXHIBIT 23.1
Independent Auditors' Consent
The Board of Directors
Laboratory Corporation of America Holdings:
We consent to the use of our reports included herein and incorporated herein
by reference and to the reference to our firm under the heading "Experts" in
the Prospectus.
Raleigh, North Carolina
April 10, 1997
/s/ KPMG Peat Marwick LLP
EXHIBIT 99.1
SUBSCRIPTION AGENCY AGREEMENT
This Subscription Agency agreement (the "Agreement") is made and
entered into this day of , 1997, by and between Laboratory
Corporation of America Holdings, a corporation organized under the laws of
Delaware (the "Company"), and American Stock Transfer & Trust Company, a New
York corporation with offices at 40 Wall Street, New York, New York 10005 (the
"Subscription Agent").
WITNESSETH:
WHEREAS, the Company is filing a Registration Statement with the
Securities and Exchange Commission on Form S-3 (the "Registration Statement")
with respect to the proposed offering (the "Rights Offering") of up to an
aggregate of 10,000,000 shares of % Series A Convertible
Exchangeable Preferred Stock, par value $0.10 per share, of the Company (the
"Series A Exchangeable Preferred Stock") and % Series B Convertible
Pay-in-Kind Preferred Stock, par value $0.10 per share, of the Company (the
"Series B PIK Preferred Stock" and together with the Series A Exchangeable
Preferred Stock, the "Preferred Stock"), pursuant to transferable subscription
rights (the "Rights") to be issued to holders of record (the "Recordholders")
of the Company's outstanding common stock, par value $0.01 per share (the
"Common Stock"); and
WHEREAS, the Subscription Agent presently serves as Transfer
Agent (the "Transfer Agent") and Registrar (the "Registrar") of the Common
Stock and will serve as Transfer Agent and Registrar for the Rights and the
Preferred Stock; and
WHEREAS, it is expected by the Company that of a Right
will be issued for each share of Common Stock held of record as of the date
set forth in the Registration Statement as the record date (the "Record
Date"), that one Right will entitle the holder (the "Rights Holder") to
purchase one (1) share of either Series A Exchangeable Preferred Stock or
Series B PIK Preferred Stock (the "Basic Subscription Privilege") at $50 per
share (the "Subscription Price"), that Rights Holders who exercise their Basic
Subscription Privilege in full will be eligible to subscribe at the
Subscription Price for shares (the "Excess Shares") of Preferred Stock of the
same series subscribed for pursuant to the Basic Subscription Privilege which
are not otherwise purchased pursuant to the Basic Subscription Privilege (the
"Oversubscription Privilege") and that the Rights will be evidenced by
transferable certificates (the "Rights Certificates") in a form satisfactory
to the Subscription Agent and the Company; and
WHEREAS, the Company desires to employ the Subscription Agent to
issue and deliver the Rights Certificates and to act as Subscription Agent in
connection with the Rights Offering, and the Subscription Agent is willing to
act in such capacity;
NOW, THEREFORE, the parties hereto agree, in consideration of
the mutual covenants and promises herein contained, as follows:
1. Appointment of Subscription Agent. The Rights
Offering will be conducted in the manner and upon the terms set forth in the
final Prospectus constituting a part of the Registration Statement (the
"Prospectus"), which is incorporated herein by reference and made a part
hereof as if set forth in full herein. The Subscription Agent is hereby
appointed as subscription agent to effect the Rights Offering in accordance
with the Prospectus, and the Subscription Agent hereby accepts such
appointment. Each reference to the Subscription Agent in this Agreement is to
the Subscription Agent in its capacity as subscription agent unless the
context indicates otherwise.
2. Delivery of Documents By Company.
(a) The Company will cause to be timely delivered to the
Subscription Agent sufficient copies of the following
documents for delivery to Recordholders;
(i) the Prospectus;
(ii) blank transferable Rights Certificate;
(iii) instructions for use and exercise of the Rights
Certificates;
(iv) transmittal letter;
(v) transmittal letter for Recordholders outside of
the United States and Canada or who have an APO or
FPO address;
(vi) separate transmittal letter for Recordholders who
are nominees;
(vii) separate transmittal letter to be sent to
beneficial holders; and
(viii) notice of guaranteed delivery for Rights
Certificates.
(b) The Company will also deliver to the Subscription
Agent resolutions adopted by the Board of Directors of the
Company in connection with the Rights Offering, certified by
the Secretary of the Company.
3. Determination of Recordholders and Rights. The Company
will issue of a Right to each Recordholder for each share of Common Stock
held by the Recordholder on the Record Date. No fractional Rights or cash
in lieu thereof will be issued or paid. Instead, the number of Rights
issued to a Recordholder will be rounded to the nearest whole number, with
such adjustments as may be necessary to ensure that no more than 10,000,000
shares of Preferred Stock are issued.
On or about the Record Date, the Subscription Agent shall
create and maintain from the stock ledger and register it maintains in its
capacities as Transfer Agent and Registrar of the Common Stock a record of the
names, addresses and, where available, taxpayer identification numbers of the
Recordholders and the number of Rights each such Recordholder is entitled to
receive in the Rights Offering (the "Rights Record"). The Rights Record shall
also include the number of the Rights Certificate, the number of Rights
evidenced on the face of the Rights Certificate and the date of the Rights
Certificate issued to each Recordholder. The Recordholders shall be
established as of the close of business on the Record Date.
4. Mailing of Documents by Subscription Agent.
As soon as practicable after delivery of the documents described in
subparagraph 2(a) hereof and receipt of written instructions from the Company,
the Subscription Agent shall mail or cause to be mailed, via first class mail,
to each Recordholder within the United States and Canada who does not have an
APO or FPO address, a transmittal letter, a Rights Certificate dated as of the
date of issuance thereof by the Subscription Agent evidencing the Rights to
which such Recordholder is entitled, a Prospectus, the instructions for use
and exercise of the Rights Certificates, the Notice of Guaranteed Delivery (as
herein defined) for the Rights Certificates and an envelope addressed to the
Subscription Agent. The Subscription Agent shall mail or cause to be mailed
via airmail or courier to Recordholders whose addresses are outside the United
States and Canada or who have an APO or FPO address a transmittal letter from
the Company addressed to such Recordholders and a Prospectus. The
Subscription Agent shall make reasonable effects to identify which of the
Recordholders are likely to be nominee holders and to include a separate
transmittal letter for Recordholders who are nominees with such
Recordholders' mailing. The Subscription and Information Agent shall make
copies of a separate transmittal letter addressed to beneficial holders
available upon request. Prior to mailing, the Subscription Agent, as
Transfer Agent and Registrar for the Rights, will cause to be issued Rights
Certificates in the names of the Recordholders and for the number of Rights
to which they are each entitled, as determined in accordance with paragraph
3 above. The Subscription Agent shall either manually sign or affix a duly
authorized facsimile signature on all Rights Certificates. Promptly after
the Rights Certificates are mailed, the Subscription Agent shall execute
and deliver to the Company a certificate in the form of Exhibit A hereto.
Subsequent to their original issuance, no Rights Certificates shall be
issued except Rights Certificates issued upon any transfer, combination,
split up or exchange of Rights, issued in replacement of mutilated,
destroyed, lost or stolen Rights Certificates or otherwise issued pursuant
to paragraph 6 hereof.
5. Subscription Procedure; Payment for Preferred
Stock and Delivery of Preferred Stock.
(a) For a valid exercise of Rights to occur, the
Subscription Agent must receive, by first class mail,
express mail, overnight courier or hand delivery, prior to
5:00 P.M., New York time, on the Expiration Date (as defined
in the Prospectus), the properly completed and executed
Rights Certificate(s) evidencing those Rights, with any
signatures guaranteed as required, or by first class mail,
express mail, overnight courier, hand delivery, telegram or
facsimile prior to 5:00 P.M., New York time, on the
Expiration Date, a properly completed and executed Notice of
Guaranteed Delivery (as set forth in paragraph 7), in each
case, together with payment in full of the Subscription
Price for each share subscribed for pursuant to the Basic
Subscription Privilege and the Oversubscription Privilege.
Payment may be made only (i) by check or bank draft drawn
upon a U.S. bank, or postal, telegraphic or express money
order, payable to the Subscription Agent; or (ii) by wire
transfer of funds to the escrow account maintained by the
Subscription Agent for the purpose of accepting
subscriptions (the "Subscription Account"). The
Subscription Price will be deemed to have been received by
the Subscription Agent only upon (i) clearance of any
uncertified check; (ii) receipt by the Subscription Agent
of any certified check or bank draft drawn upon a U.S. bank
or any postal, telegraphic or express money order; or (iii)
receipt of collected funds in the Subscription Account. In
the case of Rights that are held of record through the
Depository Trust Company ("DTC"), exercises of the
Subscription Privilege may be effected by instructing DTC to
transfer Rights from the DTC account of such holder to the
DTC account of the Subscription Agent, together with
certification as to the aggregate number of Rights exercised
and the number of shares of Preferred Stock thereby
subscribed for pursuant to the Basic Subscription Privilege
and the Oversubscription Privilege by each beneficial owner
of Rights on whose behalf such nominee Recordholder is
acting, and payment of the Subscription Price for each share
of Preferred Stock subscribed for pursuant to the
Subscription Privilege.
(b) Three days following the Expiration Date, the
Subscription Agent shall pay to the Company, by wire
transfer, certified or bank check or other method acceptable
to the Company, the amount of all funds received by the
Subscription Agent in payment of the Subscription Price for
the Preferred Stock subscribed for pursuant to the Basic
Subscription Privilege and the Oversubscription Privilege.
(c) Three (3) calendar days after the Expiration Date
the Company shall issue written instructions to mail the
Preferred Stock subscribed for pursuant to the Rights, and
the Subscription Agent shall as soon as practicable mail
certificates representing the Series A Exchangeable
Preferred Stock or Series B PIK Preferred Stock (together,
the "Preferred Certificates") properly subscribed for by the
Rights Holder, registered in the name of the Rights Holder
exercising such Rights. The Preferred Certificates shall be
mailed via first class mail to the subscribers' addresses as
shown on the reverse side of the Rights Certificates or, if
none, then as listed on the Subscription Agent's register,
except that the Subscription Agent shall comply with any
ancillary written delivery instructions provided by any
Rights Holder. The Subscription Agent shall maintain a
blanket surety bond protecting the Company and the
Subscription Agent from loss or liability arising out of
non-receipt or non-delivery of such Preferred Certificates.
(d) Fractional shares shall not be issued or subscribed
for. One Right may be exercised to purchase one share of
Preferred Stock at the Subscription Price. A Rights
Certificate may not be divided in such a manner as would
permit the Rights Holders to subscribe for a greater number
of shares of Preferred Stock than the number for which they
would be entitled to subscribe under the original Rights
Certificate.
(e) To the extent that any Rights Certificates remain
unexercised outstanding, or not transferred to the
Subscription Agent's account at DTC at 5:01 P.M., New York
time, on the Expiration Date (other than those subject to
paragraph 7 hereof), subject to the extension set forth in
paragraph 5(f), such outstanding Rights Certificates shall
be null and void. The Company will not be obligated to
honor any purported exercise of Rights received by the
Subscription Agent or transfer of Rights to the Subscription
Agent's account at DTC after the Expiration Date, regardless
of when the documents relating to that exercise were sent,
except pursuant to the Guaranteed Delivery Procedures (as
herein defined).
(f) The Company may extend the Expiration Date for up to
an additional 30 days, in its sole discretion, by giving
oral or written notice to the Subscription Agent on or
before the Expiration Date, followed by a press release no
later than 9:00 a.m. New York time on the next business day
after the previously scheduled Expiration Date. The Rights
Offering will not be extended to a time later than 5:00
p.m., New York time, on , 1997.
(g) A Rights Holder who subscribes for fewer than all of
the shares represented by its Right Certificate(s) may,
under certain circumstances, receive from the Subscription
Agent a new Rights Certificate representing the remaining
Rights. The Subscription Agent will issue a new Rights
Certificate to a submitting Rights Holder upon the partial
exercise of Rights only if the Subscription Agent receives a
properly endorsed Rights Certificate no later than the
fourth business day prior to the Expiration Date. After
such time and date no new Rights Certificates will be
issued. Accordingly, after such time and date a Rights
Holder exercising less than all of its Rights will lose the
power to exercise its remaining Rights. The Subscription
Agent will send a new Rights Certificate by first class mail
to the submitting Rights Holder if the Subscription Agent
receives the properly completed Rights Certificate by 5:00
p.m. New York time, on _________, 1997. Unless the
submitting Rights Holder makes other arrangements with the
Subscription Agent, a new Rights Certificate issued by the
Subscription Agent after 5:00 p.m. New York time on
__________, 1997 will be held for pick-up by the submitting
Rights Holder at the principal office of the Subscription
Agent. All deliveries of newly issued Rights Certificates
will be at the risk of the Rights Holder.
6. Defective Exercise of Rights; Transfer, Etc. of Rights
Certificates; and Lost Rights Certificates.
(a) All questions concerning the timeliness, validity,
form and eligibility of any exercise of Rights will be
determined by the Company, whose determination will be final
and binding. The Company, in its sole discretion, may waive
any defect or irregularity, or permit a defect or
irregularity to be corrected within such time as it may
determine. Rights Certificates will not be deemed to have
been received or accepted until all irregularities have been
waived or cured within such time as the Company determines,
in its sole discretion. Neither the Subscription Agent nor
the Company will be under any duty to give notification of
any defect or irregularity in connection with the submission
of Rights Certificates or incur any liability for failure to
give such notification. If an exercise is not defective
except that the Rights Holder has failed to select the
series of Preferred Stock exercised, the Subscription Agent
shall issue Series A Exchangeable Preferred Stock. If an
exercise is not defective except that there is a partial
payment of the Subscription Price, the Subscription Agent
shall issue the number of shares of Preferred Stock for
which payment has been made. To the extent that the
aggregate payment delivered by a Rights Holder exceeds the
product of the Subscription Price multiplied by the number
of Rights evidenced by the Rights Certificates delivered by
a Rights Holder (such excess being the "Subscription
Excess"), the Rights Holder will be deemed to have exercised
the Oversubscription Privilege to purchase, to the extent
available, that number of whole shares equal to the quotient
obtained by dividing the Subscription Excess by the
Subscription Price. Any amount remaining after application
of the foregoing procedures will be returned by the
Subscription Agent to the Rights Holder promptly by mail
without interest or deduction. Any Rights Certificate with
respect to which defects in exercise are not corrected prior
to 5:00 P.M., New York time, on the Expiration Date, or
which are received after such time, shall be null and void.
(b) Subject to the provisions of subparagraph 5(d)
hereof, any Rights Certificate may be transferred, split up,
combined or exchanged for another Rights Certificate or
Rights Certificates. Any Rights Holder desiring to
transfer, split up, combine or exchange any Rights
Certificate(s) shall make such request, by properly
completing the assignment panel on the Rights Certificate(s)
and surrendering the Rights Certificate(s) to be
transferred, split up, combined or exchanged at least four
(4) business days prior to the Expiration Date at the
principal office of the Subscription Agent. Thereupon the
Subscription Agent shall date and deliver to the person
entitled thereto a Rights Certificate or Rights
Certificates, as the case may be, as so requested. Nothing
contained in this paragraph 6, paragraph 5 or elsewhere
herein shall permit a Rights Holder to split up or divide a
Right or to partially exercise a Right.
(c) Upon the receipt by the Subscription Agent and the
Company of evidence reasonably satisfactory to them of the
loss, theft, destruction or mutilation of a Rights
Certificate, and upon receipt of indemnity or security
reasonably satisfactory to them and reimbursement of all
expenses incidental thereto, and upon surrender and
cancellation of the Rights Certificate if mutilated, the
Company will make and deliver a new Rights Certificate of
like tenor to the Subscription Agent for delivery to the
registered owner in lieu of the Rights Certificate so lost,
stolen, destroyed or mutilated. The Subscription Agent may,
at the direction of the Company and with the consent of the
Rights Holder of the lost, stolen or destroyed Rights
Certificate, permit the exercise of the Rights evidenced by
such certificate without a replacement of such certificate;
provided that such lost, stolen or destroyed Rights
Certificate is not presented for exercise prior to the
Expiration Date.
(d) Except for the fees charged by the Subscription
Agent (which will be paid by the Company) and taxes
described in paragraph 16, all commissions, fees and other
expenses (including brokerage commissions and transfer
taxes) incurred in connection with the purchase, sale or
exercise of Rights will be for the account of the transferor
of the Rights, and none of such commissions, fees or
expenses will be paid by the Company or the Subscription
Agent.
7. Guaranteed Delivery. If a Rights Holder wishes to
exercise Rights, but time will not permit such Rights Holder to cause the
Rights Certificate(s) evidencing those Rights to reach the Subscription Agent
prior to the Expiration Date, such Rights may nevertheless be exercised if all
of the following conditions (the "Guaranteed Delivery Procedures") are met:
(i) the Rights Holder has caused payment in full of
the Subscription Price for each share being subscribed
for pursuant to the Basic Subscription Privilege and,
if applicable, the Oversubscription Privilege, to be
received (in the manner set forth above) by the
Subscription Agent at or prior to the Expiration Date;
(ii) the Subscription Agent receives, at or prior to
the Expiration Date, a guarantee notice (a "Notice of
Guaranteed Delivery"), guaranteed by a member firm of a
registered national securities exchange or a member of
the National Association of Securities Dealers, Inc.,
or from a commercial bank or trust company having an
office or correspondent in the United States, giving
the name of the exercising Rights Holder, the number of
shares being subscribed for pursuant to the Basic
Subscription Privilege and, if any, pursuant to the
Oversubscription Privilege, and guaranteeing the
delivery to the Subscription Agent of the Rights
Certificate(s) evidencing those Rights within two (2)
business days following the date of the Notice of
Guaranteed Delivery; and
(iii) the properly completed Rights Certificate(s)
evidencing the Rights being exercised, with any
signatures guaranteed as required, is received by the
Subscription Agent or such Rights are transferred into
the DTC account of the Subscription Agent within two
(2) business days following the date of the Notice of
Guaranteed Delivery relating thereto. The Notice of
Guaranteed Delivery may be delivered to the
Subscription Agent in the same manner as Rights
Certificates or may be delivered to the Subscription
Agent by telegram or facsimile. The Subscription Agent
shall make additional copies of the Notice of
Guaranteed Delivery available upon request.
8. Foreign Stockholders. Rights Certificates will not be
mailed to Recordholders whose addresses are outside the United States and
Canada or who have an APO or FPO address, but will be held by the
Subscription Agent for each Recordholder account. To exercise their
Rights, such persons must notify the Subscription Agent at or prior to 5:00
p.m., New York time, on , 1997. Such Recordholder's Rights will expire
at the Expiration Date. The Subscription Agent shall airmail or courier the
documents required by subparagraph 2(a) hereof to Recordholders whose
addresses are outside the United States or Canada or who have APO or AFO
addresses, or take other reasonable action to cause the timely delivery of
such documents to such Recordholders.
9. Proof of Authority to Sign. The Subscription Agent need
not procure supporting legal papers, and is authorized to dispense with
proof of authority to sign (including all proof of appointment or authority
to sign of any fiduciary, custodian for a minor, or other person acting in
a representative capacity), and to dispense with the signatures of co-
fiduciaries, in connection with exercise of Rights in the following cases:
(a) where the Rights Certificate is registered in the
name of an executor, administrator, trustee, custodian for a
minor or other fiduciary, and the Rights form thereof is
executed by such executor, administrator, trustee, custodian
for a minor or other fiduciary, and the Preferred Stock is
to be issued in the name of the Rights Holders, as
appropriate; and
(b) where the Rights Certificate is in the name of a
corporation, and the Rights form thereof is executed by an
officer of such corporation, and the Preferred Stock
subscribed for is to be issued in the name of such
corporation.
In all of the cases set forth in this paragraph 9 and
notwithstanding anything contained in this Agreement to the contrary, the
check tendered in payment of the Subscription Price must be drawn for the
proper amount, to the order of the Subscription Agent and otherwise be in
proper form, and there must be no evidence indicating that the subscriber is
not the duly authorized representative it purports to be. In cases other than
the above, the Subscription Agent should procure the necessary legal
documents. However, in the event that by the Expiration Date all legal
requirements have not been met, the Subscription Agent may accept approval
from the Chief Executive Officer or any Executive Vice President as to
whether such Rights Certificate may be accepted and the Preferred Stock
issued.
10. Cancellation and Destruction of Rights Certificates. All
Rights Certificates surrendered for the purpose of exercise, exchange,
substitution or transfer shall, upon surrender to the Subscription Agent be
canceled by it, and no Rights Certificates shall be issued in lieu thereof
except as expressly permitted by any of the provisions of this Agreement.
The Subscription Agent (a) may deliver all canceled Rights Certificates to
the Company, and if delivered, the Company shall make available to the
Subscription Agent the canceled Rights Certificates for its inspection, or
(b) shall, at the written request of the Company, destroy such Rights
Certificates and in such case shall deliver a certificate of destruction
thereof to the Company.
11. Reservation and Availability of Preferred Stock. The
Company covenants and agrees that it will cause to be reserved and kept
available out of its authorized and unissued Preferred Stock, the number of
Preferred Stock which will be sufficient to permit the exercise in full of
all outstanding Rights.
The Company covenants and agrees that it will take all such
action as may be necessary to insure that all Preferred Stock delivered upon
exercise of Rights shall, at the time of delivery of the Preferred
Certificates for such shares (subject to payment of the Subscription Price),
be duly and validly authorized and issued fully paid and nonassessable.
12. Escrow of Funds. All Funds received in payment of the
Subscription Price shall be held by the Subscription Agent and invested at
the direction of the Company in short-term certificates of deposit, short-
term obligations of the United States or any state or any agency thereof or
money market mutual funds investing in the foregoing instruments. The
Subscription Account in which such funds will be held will not be insured
by the FDIC. Any interest earned on such funds will be retained by the
Company.
Funds received in payment of the Subscription Price for Excess
Shares subscribed for pursuant to the Oversubscription Privilege will be held
by the Subscription Agent in the Subscription Account and segregated from its
other accounts pending issuance of the Excess Shares. If a Rights Holder
exercising the Oversubscription Privilege is allocated less than all of the
Excess Shares for which that Rights Holder subscribed pursuant to the
Oversubscription Privilege, then the excess funds paid by the Rights Holder as
the Subscription Price for shares not allocated to such Rights Holder shall be
returned by mail, without interest, as soon as practicable after the
Expiration Date and after all prorations contemplated by the terms of the
Rights Offering have been effected. The Subscription Agent shall provide an
accounting to the Company from time to time, as the Company may reasonably
request, regarding the Subscription Account.
13. Duties of Subscription Agent. The Subscription Agent
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the Rights
Holders, by their acceptance thereof, shall be bound:
(a) The Subscription Agent may consult with legal
counsel (who may be legal counsel for the Company), and the
opinion of such legal counsel shall be full and complete
authorization and protection to the Subscription Agent as to
any action taken or omitted by it in good faith and in
accordance with such opinion.
(b) Whenever in the performance of its duties under
this Agreement the Subscription Agent shall deem it
necessary or desirable that any fact or matter be proved or
established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless other evidence
in respect thereof be herein specifically prescribed) may be
deemed to be conclusively proved and established by a
certificate signed by the Chief Executive Officer, any
Executive Vice President or Secretary of the Company and
delivered to the Subscription Agent; and such certificate
shall be full authorization to the Subscription Agent for
any action taken or suffered in good faith by it under the
provisions of this Agreement in reliance upon such
certificate.
(c) The Subscription Agent shall be liable hereunder
only for its own or its own legal counsel's negligence or
willful misconduct.
(d) The Subscription Agent shall not be liable for any
of the statements of fact or recitals contained in this
Agreement, in the Rights Certificates or in the Registration
Statement, or be required to verify the same, but all such
statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Subscription Agent and any of its stockholders,
directors, officers, or employees may buy, sell or deal in
any of the Rights or other securities of the Company or
become pecuniarily interested in any transaction in which
the Company may be interested, or contract with or lend
money to or otherwise act as fully and freely as though it
were not Subscription Agent under this Agreement. Nothing
herein contained shall preclude the Subscription Agent from
acting in any other capacity for the Company or for any
other person or entity.
(f) The Subscription Agent shall not be under any
responsibility in respect of the validity of this Agreement
or the execution and delivery hereof (except the due
authorization and execution hereof by such Subscription
Agent) or in respect of the validity or execution of any
Rights Certificate (except the due authorization thereof by
it in its capacity as Registrar and Transfer Agent); nor
shall it be responsible for any breach by the Company of any
covenant or condition contained in this Agreement or in any
Rights Certificate; nor shall it by an act hereunder be
deemed to make any representation or warranty as to the
authorization or reservation of any Preferred Stock to be
issued pursuant to this Agreement or any Rights Certificate
or as to whether any Preferred Certificate will, when
issued, be validly authorized and issued fully paid and
nonassessable.
(g) Notwithstanding anything to the contrary contained
in this Agreement, the Subscription Agent shall not be
required to issue any Rights Certificates after or any
Preferred Certificate upon exercise of Rights after the
thirtieth day following the Expiration Date, and the Company
may not extend the Rights Offering or the Expiration Date
for more than ninety (90) days without the written consent
of the Subscription Agent.
14. Reports. The Subscription Agent shall make available to
the Company, upon the Company's request, the following information: (i)
the number of shares of Preferred Stock validly subscribed for; (ii) the
number of shares of Preferred Stock subject to guaranteed exercises; (iii)
the number of shares of Preferred Stock for which defective subscriptions
have been received; and (iv) the amounts of collected and uncollected funds
in the Subscription Account established under this Agreement. As soon as
practicable after the Expiration Date, or upon the request from the Company
from time to time thereafter, the Subscription Agent shall certify in
writing to the Company the cumulative totals through the Expiration Date of
all the information set forth in clauses (i) through (iv) above. Upon
receipt from the Company of written instructions to mail the Preferred
Certificates representing the shares of Preferred Stock subscribed for
pursuant to the Rights, the Subscription Agent will immediately execute and
deliver to the Company two certificates, one in the form of Exhibit B
hereto and one in the form of Exhibit C hereto. The Subscription Agent
shall also maintain and update a record of Rights Holders (including the
number of beneficial owners) who have fully or partially exercised their
Rights and Rights Holders who have not exercised their Rights. The
Subscription Agent shall provide the Company or its designees with such
information compiled by the Subscription Agent pursuant to this paragraph
14 as the Company shall request from time to time.
15. Future Instructions. With respect to notices or
instructions to be provided by the Company hereunder, the Subscription
Agent may rely and act on any written instruction signed by any one or more
of the following authorized officers or employees of the Company: Chief
Executive Officer or any Executive Vice President.
16. Payment of Taxes. The Company covenants and agrees that
it will pay when due and payable all documentary, stamp and other taxes, if
any, which may be payable in respect of the issuance or delivery of any
Rights Certificate or of the Preferred Stock; provided, however, that the
Company shall not be liable for any tax liability arising out of any
transaction which results in, or is deemed to be, an exchange of Rights or
Preferred Stock or a constructive dividend with respect to the Rights or
Preferred Stock and provided further that the Company shall not be required
to pay any tax or other governmental charge which may be payable in respect
of any transfer involved in the transfer or delivery of any Rights
Certificate or the issuance or delivery of Preferred Certificates in a name
other than that of the Recordholder of such Rights Certificate evidencing
the Rights exercised or transferred, and the Subscription Agent shall not
register any such transfer or issue any such Preferred Certificate until
such tax or governmental charge, if required, shall have been paid.
17. Payment of Expenses. The Company will pay the
Subscription Agent compensation for its services under this Agreement in
accordance with Schedule I hereto, and will reimburse the Subscription Agent
for all reasonable and necessary expenses incurred by it in so acting.
18. Indemnification.
(a) The Company covenants and agrees to indemnify and
hold the Subscription Agent harmless against any costs,
expenses (including reasonable fees for legal counsel),
losses or damages which may be paid, incurred or suffered by
or to which the Subscription Agent may become subject,
arising from or out of, directly or indirectly, any claim or
liability resulting from its actions pursuant to this
Agreement other than costs, expenses, losses and damages
incurred or suffered by the Subscription Agent as a result
of, or arising out of, its negligence or willful misconduct
in connection with performance of its duties hereunder.
(b) If the indemnification provided for in this
paragraph 18 is applicable, but for any reason is held to be
unavailable, the Company shall contribute such amount as is
just and equitable to pay, or to reimburse the Subscription
Agent for, the aggregate of any and all losses, liabilities,
costs, damages and expenses, including reasonable legal
counsel fees, actually incurred by the Subscription Agent as
a result of or in connection with, and any amount paid in
settlement of (if such settlement is made in accordance with
paragraph 18(d) hereof), any action, claim or proceeding
arising out of or relating in any way to any actions or
omissions of the Company.
(c) If any action is brought against the Subscription
Agent in respect of which indemnity may be sought against
the Company pursuant to this paragraph 18, the Subscription
Agent shall promptly notify the Company in writing of the
institution of such action and the Company may, at its
option, assume the defense of such action, including the
employment and fees of legal counsel and payment of
expenses. The Subscription Agent shall have the right to
employ its own legal counsel in any such case, but the fees
and expenses of such legal counsel shall be at the expense
of the Subscription Agent unless the employment of such
legal counsel shall have been authorized in writing by the
Company in connection with the defense of such action, the
Company shall not have employed legal counsel to have charge
of the defense of the action or the Subscription Agent shall
have reasonably concluded that there may be defenses
available to it which are different from or additional to
those available to the Company (in which case the Company
shall not have the right to direct the defense of such
action on behalf of the Subscription Agent), in any of which
events the fees and expenses of not more than one additional
firm of attorneys for the Subscription Agent shall be borne
by the Company.
(d) The Company shall not be liable for any settlement
of any proceeding effected without its written consent, but
if settled with such consent or if there be a final judgment
for the plaintiff, the Company agrees to indemnify the
Subscription Agent from and against any loss or liability by
reason of such settlement or judgment. The Company shall
not, without the prior written consent of the Subscription
Agent, effect any settlement of any pending or threatened
proceeding in respect of which the Subscription Agent is or
could have been a party and indemnity could have been sought
hereunder by the Subscription Agent, unless such settlement
includes an unconditional release of the Subscription Agent
from all liability on claims that are the subject matter of
such proceeding.
(e) The provisions of this paragraph 18 shall survive
any termination of this Agreement.
19. Cumulative Rights. The rights and remedies granted in
this Agreement are cumulative and not exclusive, and are in addition to any
and all other rights and remedies granted and permitted under and pursuant
to law.
20. No Waiver. The failure of any of the signatories hereto
to enforce any provision hereof on any occasion shall not be deemed to be a
waiver of any preceding or succeeding breach of such provision or any other
provision.
21. Entire Agreement. This Agreement constitutes the entire
agreement and understanding of the signatories hereto and no amendment,
modification or waiver of any provision herein shall be effective unless in
writing, executed by the party charged therewith.
22. Governing Law. This Agreement shall be construed,
interpreted and enforced in accordance with and shall be governed by the
laws of the New York without regard to the conflict of laws principles.
23. Binding Effect. This Agreement shall bind and inure to
the benefit of the parties, their successors and assigns.
24. Assignment and Delegation of Duties. This Agreement may
not be assigned by the parties hereto. This Agreement is in the nature of
a personal service contract and the duties imposed hereby are non-delegable.
25. Paragraph Headings. The paragraph headings herein have
been inserted for convenience of reference only, and shall in no way modify
or restrict any of the terms or provisions hereof.
26. Notices. Any notice or other communication required or
permitted under the provisions of this Agreement shall be in writing, and
shall be given by postage prepaid, registered or certified mail, return
receipt requested, by hand delivery with receipt acknowledged, by telecopy
with receipt confirmed or by the express mail service offered by the United
States Post Office, directed to the Company and to the Subscription Agent
at the addresses set forth below, or to any new address of which any party
hereto shall have informed the other by the giving of notice in the manner
provided herein. Such notice or communication shall be effective upon
delivery or, if shipped by mail, three (3) days after it is mailed within
the continental United States.
27. Termination. This Agreement shall terminate at 5:00 p.m.,
New York time, on the thirtieth day following the Expiration Date. Upon
termination of this Agreement, and provided that all shares of Preferred
Stock issued pursuant to exercised Rights prior to such termination are
issued and delivered by the Company, the Company shall be discharged from
all obligations under this Agreement except for its obligations to the
Subscription Agent under paragraphs 16 and 18, Schedule I and with respect
to the obligation of the Company to provide instruction and direction to
the Subscription Agent as may be provided in this Agreement.
The Company: Laboratory Corporation of America
Holdings
358 South Main Street
Burlington, NC 27215
Date: By: _____________________________
Name:
Title:
The Subscription Agent: American Stock Transfer
& Trust Company
40 Wall Street
46th Floor
New York, NY 10005
Date: By: _____________________________
Name:
Title:
EXHIBIT A
CERTIFICATE OF SUBSCRIPTION AGENT FOR RIGHTS TO
SUBSCRIBE FOR % SERIES A CONVERTIBLE EXCHANGEABLE
PREFERRED STOCK OR % SERIES B CONVERTIBLE PAY-IN-KIND
PREFERRED STOCK OF LABORATORY CORPORATION
OF AMERICA HOLDINGS
American Stock Transfer & Trust Company (the "Subscription
Agent") does hereby certify that:
The Subscription Agent has been duly appointed and authorized to act as
Subscription Agent in connection with the issuance of rights (the "Rights") to
purchase either % Series A Convertible Exchangeable Preferred Stock, par
value $0.10 per share (the "Series A Exchangeable Preferred Stock") or %
Series B Convertible Pay-in-Kind Preferred Stock, par value $0.10 per share
(the "Series B PIK Preferred Stock") of Laboratory Corporation of America
Holdings, a Delaware corporation (the "Company").
1. The Subscription Agent has of this date issued, countersigned and
mailed certificates evidencing the right to purchase up to an aggregate of
10,000,000 shares of Series A Exchangeable Preferred Stock and Series B PIK
Preferred Stock, together with an accompanying prospectus and other
materials, in accordance with the obligations of the Subscription Agent set
forth in the Subscription Agency agreement dated __________, 1997 between
the Company and the Subscription Agent.
2. Said certificates were signed by duly authorized officers of the
Company by their facsimile signatures and countersigned on behalf of the
Subscription Agent, as Subscription Agent, by authorized officers of the
Subscription Agent who were at the time of affixing their signatures and
still are duly authorized to countersign such certificates.
Dated:__________, 1997
AMERICAN STOCK TRANSFER &
TRUST COMPANY
By:______________________
Authorized Officer
EXHIBIT B
CERTIFICATE OF SUBSCRIPTION AGENT FOR RIGHTS
TO SUBSCRIBE FOR % SERIES A CONVERTIBLE EXCHANGEABLE
PREFERRED STOCK OR % SERIES B CONVERTIBLE PAY-IN-KIND
PREFERRED STOCK OF LABORATORY CORPORATION
OF AMERICA HOLDINGS
American Stock Transfer & Trust Company (the "Subscription
Agent") does hereby certify that:
1. The Subscription Agent has been duly appointed and
authorized to act as Transfer Agent (the "Transfer Agent") and Registrar
(the "Registrar") for Laboratory Corporation of America Holdings, a Delaware
corporation (the "Company"), with respect to the Company's % Series A
Convertible Exchangeable Preferred Stock, par value $0.10 per share (the
"Series A Exchangeable Preferred Stock").
2. As such Transfer Agent and Registrar, it has as of this
date issued and countersigned certificates for Series A Exchangeable
Preferred Stock of the Company as an original issue pursuant to the written
order of the Company, in accordance with the obligations of the
Subscription Agent set forth in the Subscription Agency agreement (the
"Agreement") dated ________, 1997 between the Company and the Subscription
Agent.
3. Said certificates were signed by duly authorized officers
of the Company by their facsimile signatures and countersigned or
authenticated, as the case may be, on behalf of the Subscription Agent, as
Transfer Agent and Registrar, by authorized officers of the Subscription
Agent who were at the time of affixing their signatures and still are duly
authorized to countersign or authenticate such certificates.
4. In its role as Subscription Agent pursuant to the
Agreement, the Subscription Agent has mailed to the parties entitled
thereto, in accordance with the Agreement, the Series A Exchangeable Preferred
Stock certificates described in paragraph 2 above of this Certificate.
Dated:_________, 1997
AMERICAN STOCK TRANSFER &
TRUST COMPANY
By:_______________________
Authorized Officer
EXHIBIT C
CERTIFICATE OF SUBSCRIPTION AGENT FOR RIGHTS TO
SUBSCRIBE FOR % SERIES A CONVERTIBLE EXCHANGEABLE
PREFERRED STOCK OR % SERIES B CONVERTIBLE PAY-IN-KIND
PREFERRED STOCK OF LABORATORY CORPORATION
OF AMERICA HOLDINGS
American Stock Transfer & Trust Company (the "Subscription
Agent") does hereby certify that:
1. The Subscription Agent has been duly appointed and
authorized to act as Transfer Agent (the "Transfer Agent") and Registrar
(the "Registrar") for Laboratory Corporation of America Holdings, a Delaware
corporation (the "Company"), with respect to the Company's % Series B
Convertible Pay-in-Kind Preferred Stock, par value $0.10 per share (the
"Series B PIK Preferred Stock").
2. As such Transfer Agent and Registrar, it has as of this
date issued and countersigned certificates for Series B PIK Preferred Stock
of the Company as an original issue pursuant to the written order of the
Company, in accordance with the obligations of the Subscription Agent set
forth in the Subscription Agency agreement (the "Agreement") dated
__________, 1997 between the Company and the Subscription Agent.
3. Said certificates were signed by duly authorized officers
of the Company by their facsimile signatures and countersigned or
authenticated, as the case may be, on behalf of the Subscription Agent, as
Transfer Agent and Registrar, by authorized officers of the Subscription
Agent who were at the time of affixing their signatures and still are duly
authorized to countersign or authenticate such certificates.
4. In its role as Subscription Agent pursuant to this
Agreement, the Subscription Agent has mailed to the parties entitled
thereto, in accordance with the Agreement, the Series B PIK Preferred Stock
certificates described in paragraph 2 above of this Certificate.
Dated:__________, 1997
AMERICAN STOCK TRANSFER &
TRUST COMPANY
By:_______________________
Authorized Officer
SCHEDULE I
EXHIBIT 99.2
[LOGO OF AMERICAN STOCK
TRANSFER & TRUST COMPANY]
Laboratory Corporation of America Holdings
358 South Main Street
Burlington, North Carolina 27215
To Whom it May Concern:
This letter of agreement sets forth the terms and conditions by
which American Stock Transfer & Trust Company ("we", "our", "us") shall
provide to Laboratory Corporation of America Holdings ("you", "your") our
information agent services (the "services").
Services
(i) Counseling you concerning the operational elements of
organization and timing of the offering.
(ii) Assisting in the coordination of printing activities.
(iii) Determining the material requirements.
(iv) Facilitating the distribution of materials to the registered
and beneficial owners of Laboratory Corporation of America
Holdings' common stock.
(v) Building a file of eligible participants, including
registered holders and beneficial holders identified through
our research.
(vi) Establishing a toll-free telephone number for incoming calls.
(vii) Managing the calling campaign. calls are included in
our fee.
(viii) Status reporting to management.
(ix) Payment of all broker forwarding invoices, subject to
collection from you of monies for this purpose.
Fee for Services
The fee for managing this program is plus all
out-of-pocket expenses incurred by us, including, without limitation,
telephone and postage costs. Such management fees shall be payable upon the
execution of this agreement. Invoices for out-of-pocket expenses shall be
rendered monthly as incurred and shall be payable upon receipt. Our services
shall commence upon receipt of a signed copy of this letter of agreement and
expire days from the expiration of the offering or , 1997,
whichever is sooner.
Responsibility
You shall indemnify and hold us, our directors, officers,
employees and agents harmless from and against any and all claims,
liabilities, losses, damages and/or expenses, including reasonable attorneys'
fees, which shall be incurred or sustained in connection with the performance
of the services referenced above, except to the extent caused directly by our
negligence or willful misconduct. This indemnification obligation shall
survive the termination of this letter of agreement.
Miscellaneous
This agreement shall be made in, governed by and construed in
accordance with the laws of the state of New York, without regard to conflicts
of law principles.
If any provision of this agreement shall be held illegal,
invalid or unenforceable by any court, this agreement shall be construed and
enforced as if that provision had not been contained herein and shall be
deemed an agreement with you to the full extent permitted by applicable law.
All information shall be sent to your address as above written
or such other address as you may advise us in writing, or orally and
subsequently confirm in writing.
This agreement represents the entire understanding of the
parties with respect to the subject matter hereof, supersedes any and all
prior understandings, oral or written, relating hereto and may not be changed
orally. Any waiver or change of any of the provisions hereof must be in
writing and signed by the parties hereto. The failure of either party hereto
at any time to require performance by the other party of any provision hereof
shall not affect the right to require performance at any time thereafter.
If the foregoing terms and conditions are acceptable to you,
please sign and return to us the counterpart of this letter of agreement.
Very truly yours,
AMERICAN STOCK TRANSFER
& TRUST COMPANY
By:____________________________________
Title:
Date:
ACCEPTED
LABORATORY CORPORATION OF
AMERICA HOLDINGS
By:______________________________
EXHIBIT 99.3
FORM OF INSTRUCTIONS AS TO USE
OF RIGHTS CERTIFICATES
INSTRUCTIONS AS TO USE OF
LABORATORY CORPORATION OF AMERICAN HOLDINGS RIGHTS
CERTIFICATES
-------------------------------------
CONSULT THE SUBSCRIPTION AND INFORMATION AGENT OR
YOUR BANK OR BROKER AS TO ANY QUESTIONS
The following instructions relate to a rights offering (the "Rights
Offering") by Laboratory Corporation of American Holdings, a Delaware
corporation (the "Company"), to the holders of record (the "Recordholders")
of its common stock, par value $0.01 per share (the "Common Stock"), at the
close of business on , 1997 (the "Record Date") as described in
the Company's Prospectus dated , 1997 (the "Prospectus").
Recordholders will receive of a transferable subscription right (the
"Rights") for each share of Common Stock held by them on the Record Date. An
aggregate of 10,000,000 Rights to purchase up to an aggregate of 10,000,000
shares (the "Underlying Shares") of Preferred Stock (as herein defined) are
being distributed in connection with the Rights Offering.
The Rights will expire at 5:00 p.m., New York time, on
, 1997 unless extended as described in the Prospectus (the "Expiration
Date"). The Rights will be traded on the New York Stock Exchange up to and
including the Expiration Date.
Each Right is exercisable, upon payment of $50 in cash (the
"Subscription Price"), to purchase one share (the "Basic Subscription
Privilege") of either % Series A Convertible Exchangeable Preferred Stock,
par value $0.10 per share, of the Company (the "Series A Exchangeable
Preferred Stock") or % Series B Convertible Pay-in-Kind Preferred Stock,
par value $0.10 per share, of the Company (the "Series B PIK Preferred Stock"
and, together with the Series A Exchangeable Preferred Stock, the "Preferred
Stock"). In addition, subject to availability and proration as described
below, each Right also carries the right to subscribe at the Subscription
Price for additional shares of Preferred Stock, available after satisfaction
of all subscriptions pursuant to the Basic Subscription Privilege, of the same
series subscribed for pursuant to the Basic Subscription Privilege (the
"Oversubscription Privilege", and together with the Basic Subscription
Privilege, the "Subscription Privilege"); provided that the holder of such
Rights (the "Rights Holder") exercises such Rights Holder's Basic Subscription
Privilege in full. If the Underlying Shares so available (the "Excess
Shares") are not sufficient to satisfy all subscriptions pursuant to the
Oversubscription Privilege, the Excess Shares will be allocated pro rata
(subject to the elimination of fractional shares) among the Rights Holders who
exercise the Oversubscription Privilege in proportion to the number of Rights
exercised by such Rights Holder pursuant to the Basic Subscription Privilege,
relative to the number of Rights exercised pursuant to the Basic Subscription
Privilege by all Rights Holders exercising the Oversubscription Privilege;
provided, however, that if such pro rata allocation results in any Rights
Holder being allocated a greater number of Excess Shares than such Rights
Holder subscribed for pursuant to the exercise of such Rights Holder's
Oversubscription Privilege, then such Rights Holder will be allocated only
such number of Excess Shares as such Rights Holder subscribed for and the
remaining Excess Shares will be allocated among all other Rights Holders
exercising Oversubscription Privileges on the same pro rata basis outlined
above; such proration will be repeated until all Excess Shares have been
allocated to the full extent of the Oversubscription Privileges exercised;
provided further, however, that HLR Holdings Inc. and Roche Holdings, Inc.
will not be allocated any Excess Shares until all other Rights Holders
exercising the Oversubscription Privilege have been allocated the number of
Excess Shares for which they oversubscribed. If a proration of the Excess
Shares results in a Rights Holder receiving fewer Excess Shares than such
Rights Holder subscribed for pursuant to the Oversubscription Privilege, then
the excess funds paid by that Rights Holder as the Subscription Price for
shares not issued will be returned without interest or deduction. See
"DESCRIPTION OF RIGHTS OFFERING" in the Prospectus.
No fractional Rights or cash in lieu thereof will be issued or
paid. The number of Rights distributed by the Company has been rounded to the
nearest whole number, with such adjustments as may be necessary to ensure that
no more than 10,000,000 shares of Preferred Stock are issued.
The number of Rights to which you are entitled is printed on the
face of your Rights Certificate. You should indicate your wishes with regard
to the exercise or sale of your Rights by completing the appropriate form or
forms on your Rights Certificate and returning the Rights Certificate to
American Stock Transfer & Trust Company (the "Subscription and Information
Agent") in the envelope provided.
YOUR RIGHTS CERTIFICATE MUST BE RECEIVED BY THE SUBSCRIPTION AND
INFORMATION AGENT, OR GUARANTEED DELIVERY REQUIREMENTS WITH RESPECT TO YOUR
RIGHTS CERTIFICATE MUST BE COMPLIED WITH, AND PAYMENT OF THE SUBSCRIPTION
PRICE, INCLUDING FINAL CLEARANCE OF ANY CHECKS, MUST BE RECEIVED BY THE
SUBSCRIPTION AND INFORMATION AGENT, ON OR BEFORE 5:00 P.M., NEW YORK TIME, ON
THE EXPIRATION DATE. YOU MAY NOT REVOKE ANY EXERCISE OF A RIGHT.
1. Subscription Privilege.
To exercise Rights, complete Form 1 and send your properly
completed and executed Rights Certificate, together with payment in full of the
Subscription Price for each share of Preferred Stock subscribed for pursuant to
the Subscription Privilege to the Subscription and Information Agent. Payment
of the Subscription Price must be made in U.S. dollars for the full number of
shares being subscribed for (a) by check or bank draft upon a U.S. bank or
postal, telegraphic or express money order payable to American Stock Transfer
& Trust Company, as Subscription and Information Agent, or (b) by wire
transfer of funds to the escrow account maintained by the Subscription and
Information Agent for the purpose of accepting subscriptions at
Bank, Account No. , ABA No. . The
Subscription Price will be deemed to have been received by the Subscription
and Information Agent only upon (i) the clearance of any uncertified check,
(ii) the receipt by the Subscription and Information Agent of any certified
check or bank draft drawn upon a U.S. bank or any postal, telegraphic or
express money order or (iii) the receipt of collected funds in the Subscription
and Information Agent's account designated above. IF PAYING BY UNCERTIFIED
PERSONAL CHECK, PLEASE NOTE THAT THE FUNDS PAID THEREBY MAY TAKE AT LEAST FIVE
BUSINESS DAYS TO CLEAR. ACCORDINGLY, RIGHTS HOLDERS WHO WISH TO PAY THE
SUBSCRIPTION PRICE BY MEANS OF UNCERTIFIED PERSONAL CHECK ARE URGED TO MAKE
PAYMENT SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO ENSURE THAT SUCH
PAYMENT IS RECEIVED AND CLEARS BY SUCH DATE AND ARE URGED TO CONSIDER PAYMENT
BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF
FUNDS.
You may also transfer your Rights Certificate to your bank or
broker in accordance with the procedures specified in paragraph 3(a) below,
make arrangements for the delivery of funds on your behalf and request such
bank or broker to exercise the Rights Certificate on your behalf.
Alternatively, you may cause a written guarantee substantially in the form of
Exhibit A to these instructions (the "Notice of Guaranteed Delivery") from a
member firm of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc., or from a commercial bank or
trust company having an office or correspondent in the United States (each of
the foregoing being an "Eligible Institution") to be received by the
Subscription and Information Agent at or prior to the Expiration Date together
with payment in full of the applicable Subscription Price. Such Notice of
Guaranteed Delivery must state your name, the number of Rights represented by
your Rights Certificate, the number of Rights being exercised pursuant to the
Basic Subscription Privilege, the number of Underlying Shares, if any, being
subscribed for pursuant to the Oversubscription Privilege and guarantee the
delivery to the Subscription and Information Agent of your properly completed
and executed Rights Certificates within two (2) business days following the
date of the Notice of Guaranteed Delivery. If this procedure is followed,
your Rights Certificates must be received by the Subscription and Information
Agent within two (2) business days following the date of the Notice of
Guaranteed Delivery. Additional copies of the Notice of Guaranteed Delivery
may be obtained upon request from the Subscription and Information Agent at
the address, or by calling the telephone number, indicated below.
The address, telephone and facsimile numbers of the Subscription
and Information Agent are as follows:
By First Class Mail; Express By Facsimile To Confirm Receipt of
Mail or Overnight Courier; (for Notice of Facsimile and For General
Telegram; and By Hand: Guaranteed Information
American Stock Transfer Delivery only) (718) 921-8200
& Trust Company (718) 234-5001 (800) 937-5449
40 Wall Street,
New York, New York 10005
If you exercise less than all of the Rights evidenced by your
Rights Certificate by so indicating on Form 1 of your Rights Certificate,
the Subscription and Information Agent either (i) will issue to you a new
Rights Certificate evidencing the unexercised Rights or (ii) if you so
indicate on Form 2 of your Rights Certificate, will transfer the
unexercised Rights in accordance with your instructions. A new Rights
Certificate will be issued to you or transferred according to your
instructions upon the partial exercise of Rights only if the Subscription
and Information Agent receives a properly endorsed Rights Certificate no
later than the fourth business day prior to the Expiration Date. After
such time and date no new Rights Certificates will be issued. Accordingly,
after such time and date if you exercise less than all of your Rights you
will lose the power to exercise your remaining Rights. A new Rights
Certificate will be sent by first class mail to the you if the Subscription
and Information Agent receives your properly completed Rights Certificate
by 5:00 p.m. New York time, on , 1997. Unless you make other
arrangements with the Subscription and Information Agent, a new Rights
Certificate received by the Subscription and Information Agent after 5:00
p.m. New York time, on , 1997 will be held for pick-up at the
Subscription and Information Agent's hand delivery address provided above.
All deliveries of newly issued Subscription Right Certificates will be at
your own risk.
IF YOU CHOOSE TO HAVE A NEW RIGHTS CERTIFICATE SENT TO YOU OR TO A
TRANSFEREE, YOU OR SUCH TRANSFEREE MAY NOT RECEIVE ANY SUCH NEW RIGHTS
CERTIFICATE IN SUFFICIENT TIME TO PERMIT SALE OR EXERCISE OF THE RIGHTS
EVIDENCED THEREBY. IF YOU HAVE NOT INDICATED THE NUMBER OF RIGHTS BEING
EXERCISED, OR IF YOU HAVE NOT FORWARDED FULL PAYMENT OF THE SUBSCRIPTION PRICE
FOR THE NUMBER OF RIGHTS THAT YOU HAVE INDICATED ARE BEING EXERCISED, YOU WILL
BE DEEMED TO HAVE EXERCISED THE BASIC SUBSCRIPTION PRIVILEGE FOR SERIES A
EXCHANGEABLE PREFERRED STOCK WITH RESPECT TO THE MAXIMUM NUMBER OF WHOLE
RIGHTS WHICH MAY BE EXERCISED FOR THE AGGREGATE PAYMENT DELIVERED BY YOU, AND
TO THE EXTENT THAT THE AGGREGATE PAYMENT DELIVERED BY YOU EXCEEDS THE PRODUCT
OF THE SUBSCRIPTION PRICE MULTIPLIED BY THE NUMBER OF RIGHTS EVIDENCED BY THE
RIGHTS CERTIFICATES DELIVERED BY YOU (SUCH EXCESS BEING THE "SUBSCRIPTION
EXCESS"), YOU WILL BE DEEMED TO HAVE EXERCISED YOUR OVERSUBSCRIPTION PRIVILEGE
TO PURCHASE, TO THE EXTENT AVAILABLE, THAT NUMBER OF WHOLE EXCESS SHARES EQUAL
TO THE QUOTIENT OBTAINED BY DIVIDING THE SUBSCRIPTION EXCESS BY THE
SUBSCRIPTION PRICE.
2. DELIVERY OF PREFERRED STOCK CERTIFICATES, ETC.
The following deliveries and payments will be made to the address
shown on the face of your Rights Certificate unless you provide instructions to
the contrary on Form 3.
(a) Basic Subscription Privilege. As soon as practicable after
the Expiration Date and the valid exercise of Rights, the Subscription and
Information Agent will mail to each Rights Holder certificates representing
shares of Preferred Stock purchased pursuant to the Basic Subscription
Privilege.
(b) Oversubscription Privilege. As soon as practicable after the
Expiration Date, the Subscription and Information Agent will mail to each
Rights Holder who validly exercises the Oversubscription Privilege the number
of shares allocated to such Rights Holder pursuant to the Oversubscription
Privilege. See "DESCRIPTION OF RIGHTS OFFERING--SUBSCRIPTION
PRIVILEGES--OVERSUBSCRIPTION PRIVILEGE" in the Prospectus.
(c) Cash payments. As soon as practicable after the Expiration
Date, the Subscription and Information Agent will mail to each Rights Holder
who exercises the Basic Subscription Privilege and Oversubscription Privilege
any excess funds received in payment of the Subscription Price for Excess
Shares that are subscribed for by such Rights Holder but not allocated to such
Rights Holder as a result of proration as described above, without interest or
deduction.
3. TO SELL OR TRANSFER RIGHTS.
(a) Sale of Rights through a Bank or Broker. To sell all Rights
evidenced by a Rights Certificate through your bank or broker, so indicate on
Form 2 and deliver your properly completed and executed Rights Certificate to
your bank or broker. Your Rights Certificate should be completed in ample
time for it to be exercised. If Form 2 is completed without designating a
transferee, the Subscription and Information Agent may thereafter treat the
bearer of the Rights Certificate as the absolute owner of all of the Rights
evidenced by such Rights Certificate for all purposes, and the Subscription and
Information Agent shall not be affected by any notice to the contrary. Because
your bank or broker cannot issue Rights Certificates, if you wish to sell less
than all of the Rights evidenced by a Rights Certificate, either you or your
bank or broker must instruct the Subscription and Information Agent as to the
action to be taken with respect to the Rights not sold, or you or your bank or
broker must first have your Rights Certificate divided into Rights Certificates
of appropriate denominations by following the instructions in paragraph 4
below. The Rights Certificates evidencing the number of Rights you intend to
sell can then be transferred by your bank or broker in accordance with the
instructions in this paragraph 3(a).
(b) Transfer of Rights to a Designated Transferee. To transfer
all of your Rights to a transferee other than a bank or broker, you must
complete Form 2 in its entirety, execute the Rights Certificate and have your
signature guaranteed by an Eligible Institution. A Rights Certificate that
has been properly transferred in its entirety may be exercised by a new Rights
Holder without having a new Rights Certificate issued. Because only the
Subscription and Information Agent can issue Rights Certificates, if you wish
to transfer less than all of the Rights evidenced by your Rights Certificate
to a designated transferee, you must instruct the Subscription and Information
Agent as to the action to be taken with respect to the Rights not sold or
transferred, or you must divide your Rights Certificate into Rights
Certificates of appropriate smaller denominations by following the
instructions in paragraph 4 below. The Rights Certificate evidencing the
number of Rights you intend to transfer can then be transferred by following
the instructions in this paragraph 3(b).
4. TO HAVE A RIGHTS CERTIFICATE DIVIDED INTO SMALLER DENOMINATIONS.
To have a Rights Certificate divided into smaller denominations,
send your Rights Certificate, together with complete separate instructions
(including specification of the denominations into which you wish your Rights
Certificate to be divided) signed by you, to the Subscription and Information
Agent, allowing sufficient time for new Rights Certificates to be issued and
returned so that they can be used prior to the Expiration Date.
Alternatively, you may ask a bank or broker to effect such actions on your
behalf. Your signature must be guaranteed by an Eligible Institution if any
of the new Rights Certificates are to be issued in a name other than that in
which the old Rights Certificate was issued. Rights Certificates may not be
divided into fractional Rights, and any instruction to do so will be rejected.
AS A RESULT OF DELAYS IN THE MAIL, THE TIME OF TRANSMITTAL, THE NECESSARY
PROCESSING TIME AND OTHER FACTORS, YOU OR YOUR TRANSFEREE MAY NOT RECEIVE SUCH
NEW RIGHTS CERTIFICATES IN TIME TO ENABLE THE RIGHTS HOLDER TO COMPLETE A SALE
OR EXERCISE BY THE EXPIRATION DATE. NEITHER THE COMPANY NOR THE SUBSCRIPTION
AND INFORMATION AGENT WILL BE LIABLE TO EITHER A TRANSFEROR OR TRANSFEREE FOR
ANY SUCH DELAYS.
5. EXECUTION.
(a) Execution by Registered Holder. The signature on the Rights
Certificate must correspond with the name of the Rights Holder exactly as it
appears on the face of the Rights Certificate without any alteration or change
whatsoever. Persons who sign the Rights Certificate in a representative or
other fiduciary capacity must indicate their capacity when signing and, unless
waived by the Subscription and Information Agent in its sole and absolute
discretion, must present to the Subscription and Information Agent satisfactory
evidence of their authority to so act.
(b) Execution by Person Other than Registered Holder. If the
Rights Certificate is executed by a person other than the Rights Holder named
on the face of the Rights Certificate, proper evidence of authority of the
person executing the Rights Certificate must accompany the same unless, for
good cause, the Subscription and Information Agent dispenses with proof of
authority.
(c) Signature Guarantees. Your signature must be guaranteed by
an Eligible Institution if you wish to transfer your Rights, as specified in
paragraph 3(b) above, to a transferee other than a bank or broker, or if you
specify special payment or delivery instructions pursuant to Form 3.
6. METHOD OF DELIVERY.
The method of delivery of Rights Certificates and payment of the
Subscription Price to the Subscription and Information Agent will be at the
election and risk of the Rights Holder, but, if sent by mail, it is recommended
that they be sent by registered mail, properly insured, with return receipt
requested, and that a sufficient number of days be allowed to ensure delivery
to the Subscription and Information Agent and the clearance of any checks sent
in payment of the Subscription Price prior to 5:00 p.m., New York time, on the
Expiration Date.
7. SPECIAL PROVISIONS RELATING TO THE DELIVERY OF RIGHTS THROUGH THE
DEPOSITORY TRUST COMPANY.
In the case of Rights that are held of record through the
Depository Trust Company ("DTC"), exercises of the Subscription Privilege may
be effected by instructing DTC to transfer Rights from the DTC account of such
holder to the DTC account of the Subscription and Information Agent, together
with certification as to the aggregate number of Rights exercised and the
number of Underlying Shares thereby subscribed for pursuant to the Basic
Subscription Privilege and the Oversubscription Privilege by each beneficial
owner of Rights on whose behalf such nominee Recordholder is acting, and
payment of the Subscription Price for each share of Preferred Stock subscribed
for pursuant to the Subscription Privilege.
EXHIBIT A
FORM OF NOTICE OF GUARANTEED DELIVERY FOR
RIGHTS CERTIFICATES
NOTICE OF GUARANTEED DELIVERY
FOR
RIGHTS CERTIFICATES
ISSUED BY
LABORATORY CORPORATION OF AMERICA HOLDINGS
This form, or one substantially equivalent hereto, must be used to
exercise Rights (the "Rights") pursuant to the Rights Offering (the "Rights
Offering") described in the Prospectus dated , 1997 (the
"Prospectus") of Laboratory Corporation of America Holdings, a Delaware
corporation (the "Company"), if a holder of Rights (the "Rights Holder")
cannot deliver the Rights Certificate(s) evidencing the Rights (the "Rights
Certificate(s)") to the Subscription and Information Agent listed below (the
"Subscription and Information Agent") at or prior to 5:00 p.m., New York time,
on , 1997, or such later date to which the Rights Offering may have
been extended at the option of the Company pursuant to the terms of the
Prospectus (the "Expiration Date"). Such form must be delivered by hand,
telegram, sent by facsimile, first class mail, express mail or overnight
courier to the Subscription and Information Agent, and must be received by the
Subscription and Information Agent on or prior to the Expiration Date. See
"DESCRIPTION OF RIGHTS OFFERING -- METHOD OF SUBSCRIPTION -- EXERCISE OF
RIGHTS" in the Prospectus. Payment of $50 per share (the "Subscription
Price") for each share of the Company's % Series A Convertible Exchangeable
Preferred Stock, par value $0.10 per share (the "Series A Exchangeable
Preferred Stock") or % Series B Convertible Pay-in-Kind Preferred
Stock, par value $0.10 per share (the "Series B PIK Preferred Stock" and
together with the Series A Exchangeable Preferred Stock, the "Preferred
Stock"), as the case may be, subscribed for upon exercise of Rights must be
received by the Subscription and Information Agent in the manner specified in
the Prospectus at or prior to 5:00 p.m., New York time, on the Expiration Date
even if the Rights Certificate evidencing such Rights is being delivered
pursuant to the procedure for guaranteed delivery thereof.
The Subscription and Information Agent is:
American Stock Transfer & Trust Company
First Class Mail; Express Mail By Facsimile To Confirm Receipt of
or Overnight Courier; Telegram; (718) 234-5001 Facsimile and For General
and by Hand: Information
American Stock Transfer (718) 921-8200
& Trust Company (800) 937-5449
40 Wall Street,
New York, New York 10005
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
LABORATORY CORPORATION OF AMERICA HOLDINGS
Ladies and Gentlemen:
The undersigned hereby represents that he or she is the holder of
Rights Certificate(s) representing Rights and that such Rights
Certificate(s) cannot be delivered to the Subscription and Information Agent at
or before 5:00 p.m., New York time on the Expiration Date. Upon the terms and
subject to the conditions set forth in the Prospectus, receipt of which is
hereby acknowledged, the undersigned hereby elects to exercise (i) the Basic
Subscription Privilege (as defined in the Prospectus) to subscribe for one
share of the series of Preferred Stock indicated below per Right with respect
to each of Rights represented by such Rights Certificate and
(ii) the Oversubscription Privilege (as defined in the Prospectus) relating to
each such Right to subscribe, to the extent that Excess Shares (as defined in
the Prospectus) are available therefor, for an aggregate of up to
Excess Shares of the same series purchased pursuant to his or her Basic
Subscription Privilege. The undersigned understands that payment of the
Subscription Price of $50 per share for each share of Preferred Stock
subscribed for pursuant to the Basic Subscription Privilege and
Oversubscription Privilege must be received by the Subscription and
Information Agent at or before 5:00 p.m., New York time, on the Expiration
Date and represents that such payment, in the aggregate amount of $
, either (check appropriate box):
/ / is being delivered to the Subscription and Information
Agent herewith or
/ / has been delivered separately to the Subscription and
Information Agent
/ / was delivered separately in the manner set forth below
(check appropriate box(es) and complete information
relating thereto):
/ / wire transfer of funds
-- name of transferor institution_____________________
-- date of transfer___________________________________
-- confirmation number (if available)_________________
/ / uncertified check (Payment by uncertified check will
not be deemed to have been received by the
Subscription and Information Agent until such check
has cleared. Rights Holders paying by such means are
urged to make payment sufficiently in advance of the
Expiration Date to ensure that such payment clears by
such date.)
/ / certified check
/ / bank draft (cashier's check)
/ / money order
-- name of maker______________________________________
-- date and number of check,
draft or money order___________________________
(date) (number)
-- bank on which check is drawn
or issuer of money order______________________
Series of Preferred Stock (check only one):(*)
/ / % Series A Convertible Exchangeable Preferred
Stock
/ / % Series B Convertible Pay-in Kind Preferred
Stock
- ------------
(*) A failure to indicate a series of Preferred Stock will result in
issuance of % Series A Convertible Exchangeable Preferred Stock.
Signature(s)________________________ Address__________________________________
____________________________________ _________________________________________
Name(s)_____________________________ Address__________________________________
____________________________________ Tel. No(s)_______________________________
Please Type or Print
Rights Certificate No(s). (if available)_____________________________
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR RIGHTS CERTIFICATE
SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or correspondent in the
United States, guarantees that the undersigned will deliver to the Subscription
and Information Agent the certificates representing the Rights being exercised
hereby, with any required signature guarantees and any other required
documents, all within two business days after the date hereof.
___________________________________ Dated:______________________________, 1997
___________________________________ __________________________________________
___________________________________ __________________________________________
Address (Name of Firm)
__________________________________ __________________________________________
(Area Code and Telephone Number) (Area Code and Telephone Number)
The institution which completes this form must communicate the
guarantee to the Subscription and Information Agent and must deliver the
Rights Certificate(s) to the Subscription and Information Agent within the time
period shown herein. Failure to do so could result in a financial loss to such
institution.
