UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
---------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ---------------- to ---------------
Commission file number 1-11353
--------------------------------------------
LABORATORY CORPORATION OF AMERICA HOLDINGS
- ------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3757370
- ------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
358 South Main Street, Burlington, North Carolina 27215
- ---------------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
336-229-1127
- -----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
- ------------------------------ -------------------------------------
Common Stock, $0.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
---------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes X No
---- ----
As of June 30, 2003, the aggregate market value of the voting and
non-voting common equity held by non-affiliates of the registrant was
approximately $4.4 billion, based on the closing price on such date
of the registrant's common stock on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
149,270,059 shares as of February 28, 2004.
PART I
Item 1. DESCRIPTION OF BUSINESS
Laboratory Corporation of America Holdings and its
subsidiaries(the "Company"), headquartered in Burlington, North
Carolina, is the second largest independent clinical laboratory
company in the United States based on 2003 net revenues. Through
a national network of laboratories, the Company offers more than
4,400 different clinical laboratory tests which are used by the
medical profession in routine testing, patient diagnosis, and in
the monitoring and treatment of disease. In addition, the Company
has developed specialty and niche businesses based on certain
types of specialized testing capabilities and client requirements,
such as oncology testing, HIV genotyping and phenotyping,
diagnostic genetics and clinical research trials. The Company has
significantly expanded its routine and specialty testing
businesses through the acquisitions of Dynacare Inc. ("Dynacare")
and DIANON Systems, Inc. ("DIANON"). Since its founding in 1971,
the Company has grown into a national network of 31 primary
laboratories and over 1,200 service sites, consisting of branches,
patient service centers and STAT laboratories, which are
laboratories that have the ability to perform certain routine
tests quickly and report the results to the physician immediately.
On July 25, 2002, the Company completed its acquisition of
Dynacare, a provider of clinical laboratory testing services in 21
states in the United States and two provinces in Canada. The
acquisition of Dynacare has enabled the Company to expand its
national testing network and the Company expects to realize
significant operational synergies from the acquisition. Dynacare
had 2001 revenues of approximately $238.0 million and had
approximately 6,300 employees at the closing date of the
acquisition. On January 17, 2003, the Company completed the
acquisition of DIANON, a leading national provider of anatomic
pathology and genetic testing services with a primary focus on
advanced oncology testing. DIANON had 2001 revenues of
approximately $125.7 million and had approximately 1,100 employees
at the closing date of the acquisition. DIANON significantly
enhances the Company's oncology testing capabilities and positions
it to more effectively market and distribute the advanced testing
technologies that the Company has developed internally or has
licensed from its technology partners, such as Myriad Genetics,
Inc., EXACT Sciences Corporation, Celera Diagnostics and
Correlogic Systems, Inc.
With approximately 23,000 employees, the Company processes
tests on more than 340,000 patient specimens daily and provides
clinical laboratory testing services to clients in all 50 states,
the District of Columbia, Puerto Rico, and two provinces in
Canada. Its clients include physicians, hospitals, HMOs and other
managed care organizations, governmental agencies, large
employers, and other independent clinical laboratories that do not
have the breadth of its testing capabilities. Several hundred of
the Company's 4,400 tests are frequently used in general patient
care by physicians to establish or support a diagnosis, to monitor
treatment or to search for an otherwise undiagnosed condition.
The most frequently-requested of these routine tests include blood
chemistry analyses, urinalyses, blood cell counts, Pap tests, HIV
tests, microbiology cultures and procedures, and alcohol and other
substance-abuse tests. The Company performs this core group of
routine tests in each of its major laboratories using
sophisticated and computerized instruments, with most results
reported within 24 hours.
The Company's Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, and all amendments to
those reports are made available free of charge through the Media
and Investor Relations section of the Company's internet website
at www.labcorp.com as soon as practicable after such material is
electronically filed with, or furnished to, the Securities and
Exchange Commission.
The Company is committed to providing the highest quality
laboratory services to its clients in full compliance with all
federal, state and local laws and regulations. The Company's Code
of Business Conduct and Ethics outlines ethics and compliance
policies adopted by the Company to meet this commitment. These
policies apply to all employees of the Company and its
subsidiaries as well as the Company's Board of Directors. The
Code of Business Conduct and Ethics, as well as the Charters for
the committees of Audit, Compensation, Ethics and Quality
Assurance, and Nominating and Corporate Governance, and the
Company's Corporate Governance Guidelines, are posted on the
Company's website www.labcorp.com. The Company has established a
Compliance Action hotline (1-800-801-1005), which provides a
confidential and anonymous method to report a possible violation
of a LabCorp compliance policy or procedure, or a federal or state
law or regulation; a HIPAA Privacy hotline(1-877-234-4722), which
provides a confidential and anonymous method to report a possible
violation of a HIPAA privacy, security or billing policy or
procedure; and an Accounting hotline (1-866-469-6893), which
provides a confidential and anonymous method to report a possible
violation of internal accounting controls or auditing matters.
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
cytologic samples, 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 tests, HIV 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 2003
approximately 49% of the clinical testing revenues in the United
States were derived by hospital-based laboratories, approximately 12%
were derived by physicians in their offices and laboratories, and
approximately 39% were derived by independent clinical laboratories.
The Centers for Medicare and Medicaid Services ("CMS") of the
Department of Health and Human Services ("HHS") has estimated that in
2003 there were approximately 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 over the past ten years, primarily as a result of
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 organizations 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. In addition, managed care organizations
have used capitated payment contracts in an attempt to fix the
cost of laboratory testing services for their enrollees. Under a
capitated payment contract, the clinical laboratory and the
managed care organization agree to a per member, per month payment
to cover all laboratory tests during the month, regardless of the
number or cost of the tests actually performed. The Company makes
significant efforts to ensure that esoteric tests (which are more
sophisticated tests used to obtain information not provided by
routine tests and generally involve a higher level of complexity
and more substantial human involvement than routine tests) are
excluded from capitated arrangements and therefore paid for
separately by the managed care organization. Capitated payment
contracts shift the risks of additional testing beyond that
covered by the capitated payment to the clinical laboratory. For
the year ended December 31, 2003, such capitated contracts
accounted for approximately $128.4 million of the Company's net
sales. The increase in managed care and insurance companies'
attempts to control utilization of medical services overall has
also resulted in declines in the utilization of laboratory testing
services.
In addition, Medicare (which principally services patients 65
and older), Medicaid (which principally serves low-income
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, added
costs and decreased 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. 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.
Despite the market changes discussed above, the Company
believes that the volume of clinical laboratory testing will be
positively influenced by several factors, including the expanded
base of genomics knowledge, which has led to an enhanced
appreciation of the value of gene-based diagnostic assays for
current patient care as well as for the development of new
therapeutics. Additionally, these novel gene-based tests have led
to an increased awareness by physicians that clinical laboratory
testing is a cost-effective means of prevention and early
detection of disease and monitoring of treatment. In an effort to
better offer new technology as medical needs and standards of care
develop, the Company has entered into a number of licensing and
technology distribution agreements with such leading-edge
diagnostic testing technology providers as: Atherotech
(cardiovascular disease risk assessment), EXACT Sciences
(colorectal cancer detection), BioPredictive (determination of
liver fibrosis), Myriad Genetics (predisposition for breast,
ovarian, colon and uterine cancer), Celera (development of new
gene-based assays in a variety of disease areas) and Correlogic
Systems (ovarian cancer detection).
Additional factors which may lead to future volume growth
include an increase in the number and types of tests which are
readily available (due to advances in technology and increased
cost efficiencies) for testing of cancer and infectious diseases
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.
Laboratory Testing Operations and Services
The Company has 31 primary testing facilities, and over 1,200
service sites consisting of branches, patient service centers and
STAT laboratories. A "branch" is a central facility which collects
specimens in a region for shipment to one of the Company's
laboratories for testing. A branch also is used as a base for sales
staff. Generally, a "patient service center" is a facility
maintained by the Company to serve the physicians in a medical
professional building or other strategic location. 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 over 340,000
patient specimens per day in 2003. 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
ensure that the results are attributed to the correct patient. The
test request forms are sent to a data entry operator who ensures that
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 through computer interface or manually, depending upon the
tests and the type of equipment involved. Most of the Company's
computerized testing equipment is connected to the Company's
information systems. Most routine testing is completed by early the
next morning and test results are in most cases electronically
delivered to clients via smart printers, personal computer-based
products or computer interfaces. 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.
Company Strategy
The Company believes that it has differentiated itself from its
competition and positioned itself for continued strong growth by
building a leadership position in genomic and other advanced testing
technologies. This leadership position enables the Company to
provide a broad menu of testing services for the infectious disease
and cancer markets, which it believes represent two of the most
significant areas of future growth in the genomic clinical laboratory
industry. The Company's primary strategic objective is to expand its
leadership position in genomic and other advanced testing
technologies and leverage its national core testing infrastructure to
deliver outstanding and innovative clinical testing services to
patients and physicians nationwide.
Develop and Be First to Market with New Tests
Advances in medicine have begun to fundamentally change
diagnostic testing, and new tests are allowing clinical laboratories
to provide unprecedented amounts of health-related information to
physicians and patients. Significant new tests introduced over the
past several years include a gene-based test for human papilloma
virus, Myriad Genetics' predictive test for breast cancer and tests
for HIV phenotyping and cystic fibrosis. As science continues to
advance, the Company expects new testing technologies to emerge;
therefore, it intends to continue to invest in advanced testing
capabilities so that it can remain on the cutting edge of clinical
laboratory testing. The Company has added, and expects to continue
to add, new testing technologies and capabilities through a
combination of internal development initiatives, technology licensing
and partnership transactions and selected acquisitions. Through its
national sales force, the Company rapidly introduces new testing
technologies to physician customers.
Capitalize on Unique Opportunities with New Testing Technologies
The Company has announced a number of significant licensing and
technology distribution agreements which provide it with access to
exciting new testing technologies that it expects will have an
increasing impact on diagnostic testing. For example, in June 2002,
the Company announced the creation of an exclusive, long-term
strategic agreement with EXACT Sciences to commercialize PreGen-Plus,
EXACT Sciences' proprietary, non-invasive technology to aid in the
early detection of colorectal cancer. The Company commercially
launched this gene-based test, which represents a significant new
tool for the early detection of colorectal cancer, in August of 2003.
The Company is collaborating with Celera Diagnostics to determine the
clinical utility of laboratory tests based on novel diagnostic
markers for Alzheimer's disease, breast cancer and prostate cancer
and will have exclusive access to any related markers found to have
clinical utility. In addition, the Company recently signed a co-
exclusive licensing agreement with Correlogic Systems to
commercialize its ovarian cancer protein pattern blood test, which
offers the prospect of accurate and early detection of ovarian
cancer. With its exclusive sales and distribution agreement with
Myriad Genetics, physicians now have the convenience of sending
patients to one of the Company's patient service centers for Myriad
Genetics' predisposition testing for breast, ovarian, colon and
uterine cancers. The Company's relationship with Myriad Genetics
makes it one of the few clinical laboratories in the United States to
provide the entire oncology care continuum from predisposition to
surveillance testing, including screening, evaluation, diagnosis and
monitoring options.
In July 2003, the Company announced a marketing and distribution
relationship with Atherotech, a leading cardiodiagnostic company and
specialty reference laboratory, to offer its proprietary Vertical
Auto Profile (VAP"TM") Cholesterol Test. This multi-year agreement
includes a provision for the transfer of patented testing technology
to the Company, after which, if certain conditions are met, the
Company would become the first clinical laboratory licensed to perform
the VAP cardiovascular disease risk assessment assay within its own
national laboratory system.
In August of 2003, the Company formed a new, majority-owned
subsidiary for the purpose of developing new ideas, inventions,
products, processes and services for diagnostic testing and
monitoring in the medical, pharmaceutical, and/or therapeutic
markets. The initial areas of interest include West Nile Virus,
Alpha-1 Anti Trypsin Deficiency, Oxidative Markers of DNA stress and
Cancer Markers.
During the fourth quarter of 2003, the Company and
BioPredictive, a French diagnostics firm, announced an exclusive
agreement that combines the Company's expertise in infectious disease
testing with BioPredictive's noninvasive, predictive testing
technology to quantitatively estimate liver fibrosis and
necroinflammatory activity in hepatitis C (HCV) patients. HCV
FIBROSURE"TM" is expected to be broadly available
in the U.S., only through the Company, beginning in the first
quarter of 2004.
The Company's investment in new testing technologies has been
significant. While the Company continues to believe its strategy of
entering into licensing and technology distribution agreements with
the developers of leading-edge technologies will provide future
growth in revenues, there are certain risks associated with these
investments. These risks include, but are not limited to, the risk
that the licensed technology will not gain broad acceptance in the
marketplace; or that insurance companies, managed care organizations,
or Medicare and Medicaid will not approve reimbursement for these
tests at a level commensurate with the costs of running the tests.
Any or all of these circumstances could result in impairment in the
value of certain capitalized licensing costs.
Enhance the Company's Oncology Testing Business by Leveraging
DIANON's Unique Capabilities
DIANON is a national provider of oncology testing services and
significantly enhances the Company's oncology testing capabilities.
DIANON is recognized by physicians, managed care companies and other
customers as a leading provider of a wide range of anatomic pathology
testing services, with particular strength in uropathology,
dermatopathology, GI pathology and hematopathology. DIANON's
strengths in anatomic pathology complement the Company's strengths in
other areas of cancer testing, particularly cytology. The Company
expects that DIANON's specialized sales force, scientific expertise,
efficient operating model and proprietary CarePath clinical and
pathology reporting system will allow it to enhance its cancer
testing business. The Company intends to apply DIANON's best
practices to its existing anatomic pathology operations, which it
expects will enable it to realize significant operational
efficiencies
Leverage National Infrastructure
The Company's national presence provides a number of significant
benefits and it intends to maintain and continue to build this
presence. The Company's national network of 31 primary laboratories
and over 1,200 service sites, including branches, patient service
centers and STAT laboratories, enables it to provide high-quality
services to physicians, hospitals, managed care organizations and
other customers across the United States. Agreements with Premier,
as well as the Company's managed care contracts with United
Healthcare, Aetna, Anthem, Cigna, Wellpoint, Horizon and MAMSI,
demonstrate the importance of being able to deliver services on a
nationwide basis. Furthermore, the Company's scale provides it with
significant cost structure advantages, particularly related to supply
and other operating costs.
Expand Hospital Relationships
Another of the Company's growth strategies is to develop an
increasing number of hospital relationships. These relationships can
take several different forms, including laboratory technical support
(management) contracts, reference agreements, and testing
arrangements.
Testing Services
Routine Testing
The Company currently offers approximately 4,400 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
tests include blood chemistry analyses, urinalyses, blood cell
counts, Pap tests, HIV tests, microbiology cultures and procedures
and alcohol and other substance-abuse tests. These routine
procedures are most often used by 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 major 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. One of the primary growth
strategies of the Company is the continued expansion of its specialty
and niche businesses, which involve certain types of unique testing
capabilities and/or client requirements. In general, the specialty
and niche businesses are designed to serve two market segments:
(i) markets which are not typically served by the clinical testing
laboratory; and (ii) markets which are served by the clinical
testing laboratory and offer the possibility of adding related
services (such as clinical trials or occupational drug testing)
from the same supplier. The Company's research and development
group continually seeks new and improved technologies for early
diagnosis. For example, the Company's Center for Molecular
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 other
viral and bacterial diseases. In August 2000, the Company acquired
Los Angeles-based National Genetics Institute, Inc. (NGI), a
leader in the development of PCR assays for Hepatitis C (HCV). In
June 2001, the Company acquired Minneapolis-based Viro-Med
Laboratories, Inc., which offers molecular microbial testing using
real time PCR platforms. Management believes these technologies
may represent a significant savings to the healthcare system
increasing the detection of early stage (treatable) diseases. The
following are specialty and niche businesses in which the Company
offers testing and related services:
Infectious Disease. The Company provides complete viral load
testing as well as HIV genotyping and phenotyping. In 2000, the
Company added HIV GenoSure? to its portfolio of HIV resistance
testing services. The Company's use of this leading-edge
technology puts it in the forefront of HIV drug resistance
testing-one of the most important issues surrounding the treatment
of HIV. Additionally, the Company provides comprehensive testing
for HCV including both PCR testing and genotyping at CMBP, NGI and
Viro-Med.
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.
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, molecular
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. Management believes it is now the largest provider of
identity testing services in the United States.
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. The
Company's scientists have novel assays for detecting melanoma and
breast cancer in clinical development. In August of 2003, the
Company began offering PreGen-Plus, a non-invasive technology to
aid in the early detection of colorectal cancer in a broader
population. PreGen-Plus utilizes EXACT Sciences' proprietary
genomics-based technology. In January 2003, the Company acquired
DIANON, a national provider of oncology testing services. DIANON
is recognized by physicians, managed care companies and other
customers as a leading provider of a wide range of anatomic
pathology testing services, with particular strength in
uropathology, dermatopathology, GI pathology and hematopathology.
Occupational Testing Services. The Company provides testing for
the detection of drug abuse for private and government customers,
and also provides blood testing services for the detection of drug
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.
The Company also provides other analytical testing and a variety
of management support services.
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. CMBP, NGI and Viro-Med
also specialize in new test development and related education and
training.
Clients
The Company provides testing services to a broad range of
health care providers. During the year ended December 31, 2003,
no client or group of clients under the same contract accounted
for more than four 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 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
or Medicaid. Billings are typically on a fee-for-service basis.
If the billings are to the physician, they are based on customer
fee schedule and subject to negotiation. Otherwise, the patient
or third party payor is billed at the laboratory's patient fee
schedule, subject to third party payor limitations and negotiation
by physicians on behalf of their patients. Revenues received from
Medicare and Medicaid billings are based on government-set fee
schedules.
Hospitals
The Company provides 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. Fees for management services are
billed monthly at contractually agreed-upon rates.
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. The majority of the Company's managed care testing is
negotiated on a fee-for-service basis. Testing is sometimes
reimbursed on a capitated basis for managed care organizations.
Under a capitated payment contract, the Company agrees to perform
certain laboratory tests during a given month for which the managed
care organization agrees to pay a flat monthly fee for each covered
member. The tests covered under agreements of this type are
negotiated for each contract, but usually include 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 monitor service
and performance 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 fee-for-service basis.
Payors
Most testing services are billed to a party other than the
physician or other authorized person who ordered the test. In
addition, tests performed by a single physician may be billed to
different payors depending on the medical insurance benefits of a
particular patient. Payors other than the direct patient include,
among others, insurance companies, managed care organizations,
Medicare and Medicaid. For the year ended December 31, 2003,
accessions (based on the total volume of accessions) and average
revenue per accession by payor are as follows:
Revenue
Accession Volume as per
a % of Total Accession
------------------- ---------
Private Patients 2.8% $118.48
Medicare, Medicaid and
Other 20.6% $ 34.25
Commercial Clients 36.0% $ 27.07
Managed Care 40.6% $ 32.74
Affiliations and Alliances
The Company continues to develop its relationships with
hospitals through traditional and non-traditional business models.
The Company has increased its focus on the traditional business model
with a hospital, whereby the Company enters into a reference service
agreement. The establishment of a vertical sales organizational
structure dedicated to hospital sales is a reinforcement of the
Company focus. In the non-traditional business model, the Company has
seen strong growth due to laboratory technical support (management)
contracts and shared services agreements. In 2003, the Company added
a number of new traditional and non-traditional relationships with
hospitals.
Reference agreements, the Company's traditional business model,
provide a means for hospitals to outsource patient laboratory testing
services that are not time critical (e.g., test results reported
within twenty-four hours of drawing the specimen as opposed to those
requiring two to four hour turnaround). These agreements allow the
hospitals to maintain their own STAT/emergency lab on-site, while
eliminating certain costs of maintaining a full-service lab on their
premises.
One example of a non-traditional business model is where the
Company provides technical support services or laboratory management
for a fee in a variety of health care settings. In these
relationships, the Company may supply the laboratory manager and/or
provide other laboratory personnel, as well as testing equipment and
supplies, in the management of a laboratory that is owned by a
hospital, managed care organization or other health care provider.
Under the typical laboratory technical support agreement, the
laboratory manager is employed by or under contract with the Company.
In such laboratory management arrangements, the Company generally
bills the hospital a monthly contractually-determined management fee
in addition to different fixed on-site and off-site fees per test.
Highly esoteric tests are generally billed under a separate fee
schedule. A pathologist is designated by the laboratory owner to
serve as medical director for the laboratory, and all billing,
licensure and permits also remain the obligation of the owner of the
laboratory.
An important advantage the Company offers to its clients is the
flexibility of the Company's information systems for creating single
or bi-directional interfaces to support such cooperative testing
arrangements. Such bi-directional interfaces allow each party's
system to efficiently and effectively communicate with the other
party's system.
The Company's laboratory management and technical support
agreements typically have initial terms between three and five years.
However, most contracts contain a clause that permits termination for
cause prior to the contract expiration date of the initial term.
There are additional termination clauses that generally fall into one
of the following categories: (1) termination without cause by either
party during the additional term, after written notice 60 to 120 days
prior to termination; (2) termination by the hospital if there are
uncorrected deficiencies in the Company's performance after 30 days'
written notice; (3) termination if there is a loss of accreditation
or licensure held by the Company which accreditation or licensure is
not reinstated within 60 days of the loss; or (4) termination should
the Company fail to meet anticipated profitability. While the
Company believes that it will maintain and renew its existing
contracts, there can be no assurance of such maintenance or renewal.
The Company has developed several different pricing formulas
under its non-traditional business contracts. The Company generally
bills the hospital a monthly contractually-determined management fee
in addition to different fixed on-site and off-site fees per test.
Highly esoteric tests are generally billed under a separate fee
schedule. In certain cases, profitability may depend on the
Company's ability to accurately predict test volumes, patient
encounters or the number of admissions.
Investments in Equity Affiliates
In conjunction with the acquisition of Dynacare in 2002, the
Company holds investments in three equity affiliates, located in
Milwaukee, Wisconsin; Ontario, Canada; and Alberta, Canada. These
businesses represent joint venture agreements between Dynacare and
other independent diagnostic laboratory investors. Under these
agreements, all partners share in the profits and losses of the
businesses in proportion to their respective ownership percentages.
All partners are actively involved in the major business decisions
made by each joint venture.
Each of the Canadian joint ventures own licenses to conduct
diagnostic testing services in their respective provinces.
Substantially all of their revenues are received as reimbursement
from the provincial governments' health care programs. While the
Canadian licenses guarantee the joint ventures the ability to conduct
diagnostic testing in their respective provinces, they do not
guarantee that the provincial governments will continue to reimburse
diagnostic laboratory testing at current levels. If the provincial
governments decide to limit or reduce their reimbursement of
laboratory diagnostic services, it could have a negative impact on
the profits and cash flows the Company derives from these investments
as well as possibly impair the value assigned by the Company to the
Canadian licenses.
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, 2003, the Company
employed 235 generalists and 170 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 regional service managers and account
managers ("AMs") to interact with clients on an ongoing basis. AMs
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, 2003, the Company employed 371 AMs. AMs are compensated
through 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
to one in which the purchasing decisions for laboratory services are
increasingly being made by managed care organizations, insurance
plans, employers and even by patients themselves. In view of these
changes, the Company has adapted its sales and marketing structure to
more appropriately address the opportunities presented by this shift.
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. During 2003, one of the Company's
goals was to continue 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 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 the Company's 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 Company's Corporate Information
Systems Division manages its information resources and programs on a
consolidated basis in order to achieve greater efficiency and
economies of scale. The Company employs a Chief Information Officer,
whose responsibility is to integrate, manage and develop the
Company's information systems.
Billing
Billing for laboratory services is a complex 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. 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 generally performs the requested tests and returns 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 intricate 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.
During 2003, the Company's days sales outstanding (DSO) were
reduced 1 day from December 31, 2002 levels to 53 days as a result of
Company-wide efforts to increase cash collections from all payors, as
well as on-going improvements to its claim submission processes. The
Company is continuing to take the steps necessary to improve DSO and
cash collections by:
1) conversion of decentralized billing locations to a centralized
billing system. During 2003, billing activity in numerous
Dynacare sites was converted to the centralized billing system.
In 2004, the Company will concentrate its conversion activities on
the remaining Dynacare locations as well as its Salt Lake City,
Reno, San Diego and Viro-Med facilities;
2) continuing initiative to reduce the number of requisitions
received that are missing certain billing information. This
initiative involves counting the number of clinical requisitions
received from an ordering client, as well as determining what
specific information was not provided. The Company then
identifies root causes of why the information was missing and
takes steps to ensure that information is provided in the future.
These steps include re-educating clients as to what information is
needed in order for the Company to bill and collect for the test.
As of December 31, 2003, the percentage of requisitions received
which were missing billing information was 4.3% as compared to
4.6% at the end of 2002.
3) implementation of numerous initiatives related to self-pay
accounts receivable. These include: i) collecting payment at the
time of service; ii) increased training for billing personnel
related to improving collections during phone calls and iii)
review of bill design and frequency.
Although there can be no assurance of success, the Company has
developed a number of initiatives to address the complexity of the
billing process and to improve collection rates. These initiatives
include: i) installation of personal computer based products in
client offices and Company locations to help with the accuracy and
completeness of billing information captured on the front-end; ii)
establishment of a project group to focus on improvements in order
entry; iii) development and implementation of enhanced eligibility
checking to compare information to payor records before billing;and
iv) activities related to self-pay accounts receivable, such as
collecting payment at the time of service. Additionally, the Company
believes that it can benefit from the conversion of its multiple
billing systems into a centralized system.
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 required by
CMS 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 at the same time as 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 this
program 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 CAP's proficiency testing
program for all categories in which the laboratory is accredited by
CAP. CAP is an independent non-governmental organization of board-
certified pathologists which offers an accreditation program to which
laboratories can voluntarily subscribe. CAP has been accredited by
CMS to inspect clinical laboratories to determine adherence to the
Clinical Laboratory Improvement Act of 1967, and the Clinical
Laboratory Improvement Amendments of 1988 standards. A laboratory's
receipt of accreditation by 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 CAP.
The Company's forensic crime laboratory, located at Research
Triangle Park, NC, is accredited by the American Society of Crime
Laboratory Directors, Laboratory Accreditation Board ("ASCLD/LAB") in
the category of DNA testing. Under the Crime Laboratory
Accreditation Program managed by the ASCLD/LAB, a crime laboratory
undergoes a comprehensive and in-depth inspection to demonstrate that
its management, operations, employees, procedures and instruments,
physical plant, and security and personnel safety procedures meet
stringent quality standards. The Company is one of 260 ASCLD
accredited crime laboratories worldwide and is one of only nine
private crime laboratories holding the accreditation. Accreditation
is granted for a period of five years provided that a laboratory
continues to meet the standards during that period.
Competition
The clinical laboratory business is intensely competitive. The
Company believes that in 2003 the entire United States clinical
laboratory testing industry had estimated revenues between $34
billion and $36 billion; approximately 49% of such revenues were
attributable to hospital-affiliated laboratories, approximately 39%
were attributable to independent clinical laboratories and
approximately 12% were attributable to physicians in their offices
and laboratories. There are presently two national independent
clinical laboratories: the Company and Quest Diagnostics Incorporated
("Quest"), which had approximately $4.7 billion in revenues from
clinical laboratory testing in 2003.
In addition to the other national clinical laboratory, the
Company competes 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.
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 laboratory 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 their ownership of laboratories as well as increased
regulation of laboratories are expected to contribute to the
continuing consolidation of the industry.
Employees
As of January 31, 2004, the Company had approximately 23,000
full-time equivalent employees. Subsidiaries of the Company have
four collective bargaining agreements which cover approximately 600
employees. One of the contracts has expired and the parties are
continuing to abide by certain key terms. The Company believes that
its overall relations with its employees are good.
Regulation and Reimbursement
General
The clinical laboratory industry is subject to significant
governmental regulation at the federal, state and sometimes local
levels. As described below, these regulations concern licensure and
operation of clinical laboratories, payment for laboratory services,
health care fraud and abuse, security and confidentiality of health
information and environmental and occupational safety.
Regulation of Clinical Laboratories
The Clinical Laboratory Improvement Amendments of 1988 ("CLIA")
extend federal oversight to virtually all clinical laboratories by
requiring that they be certified by the federal government or by a
federally-approved accreditation agency. Pursuant to CLIA, clinical
laboratories must meet quality assurance, quality control and
personnel standards. Laboratories also must undergo proficiency
testing and are subject to inspections.
Standards for testing under CLIA are based on the complexity of
the tests performed by the laboratory, with all tests classified as
either high complexity, moderate complexity, or waived. Laboratories
performing high complexity testing are required to meet more
stringent requirements than moderate complexity laboratories. Labs
performing only waived tests, which are tests determined by the Food
and Drug Administration to have a low potential for error and
requiring little or no oversight, may apply for a certificate of
waiver indicating that they need not comply with most of the
requirements of CLIA. All major and many smaller Company facilities
hold CLIA certificates to perform high complexity testing. The
Company's remaining smaller testing sites hold CLIA certificates to
perform moderate complexity testing or have a certificate of waiver.
The sanction for failure to comply with CLIA requirements may be
suspension, revocation or limitation of a laboratory's CLIA
certificate, which is necessary to conduct business, as well as
significant fines and/or criminal penalties. The loss or suspension
of a license, imposition of a fine or other penalties, or future
changes in the CLIA law or regulations (or interpretation of the law
or 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 regulations different from or more stringent
than those under federal law, and a number of states have implemented
their own laboratory regulatory schemes. State laws may require that
laboratory personnel meet certain qualifications, specify certain
quality controls, or require maintenance of certain records. For
example, some 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 those under federal law.
The Company believes that it is in compliance with federal and
state laboratory requirements, and the Company's laboratories have
continuing programs to ensure that their operations meet all
applicable regulatory requirements, but no assurances can be given
that the Company's laboratories will pass all future licensure or
certification inspections.
Payment of Clinical Laboratory Services
In 2003 and 2002, the Company derived approximately 19% and 16%,
respectively of its net sales from tests performed for beneficiaries
of the Medicare and Medicaid programs. In addition, the Company's
other business depends significantly on continued participation in
these programs, and other government healthcare programs, because
clients often want a single laboratory to perform all of their
testing services. Both governmental and private sector payors have
made efforts to contain or reduce health care costs, including
payment for clinical laboratory services, in recent years.
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 limitation for clinical laboratory services furnished to
Medicaid recipients.
Since 1984, Congress has periodically reduced the ceilings on
Medicare payment 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. After subsequent further reductions, the national limitation
is now 74% of the national median. However, under a provision of the
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act
of 2000 ("BIPA"), the cap is set at 100% of the median for tests
performed after January 1, 2001 that the Secretary determines are new
tests for which no limitation amount has previously been
established.
In August 1997, Congress passed and the President signed the
Balanced Budget Act of 1997 ("BBA"), which included a provision that
froze the Consumer Price Index update of the clinical lab fee
schedule for five years. This provision expired in 2003, and there
was a 1.19% increase in the fee schedule based on the Consumer Price
Index. However, in late 2003 the Congress passed and the President
signed the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 ("MMA"), which again imposed a freeze in the Consumer
Price Index update of the clinical lab fee schedule for 2004 through
2008.
For services reimbursed under the Medicare physician fee
schedule, the conversion factor and relative value units that are
used to calculate the payment amounts under this fee schedule are
subject to adjustment on an annual basis. Because of factors
included in the formula used to calculate the conversion factor, it
decreased significantly in 2003, resulting in decreases in payment
for most physician services. However, Congress intervened and the
conversion factor was subsequently increased from March 1, 2003
through December 31, 2003. The conversion factor was again expected
to decrease significantly in 2004 and 2005, but the MMA included a
provision to provide for increases in each of these years of not less
than 1.5%.
The MMA also included a provision requiring CMS to conduct a
demonstration program on using competitive acquisition for clinical
lab tests that are furnished without a face-to-face encounter between
the individual and the hospital personnel or physician performing the
test. The Secretary of the Department of Health and Human Services
is required to make an initial report to Congress on this
demonstration program no later than December 31, 2005. Details of
CMS' plans regarding this demonstration program have not yet been
released but if, in the future, widespread use of competitive
acquisition is implemented for clinical lab services, this could have
a significant effect on the clinical laboratory industry and the
Company.
Because a significant portion of the Company's costs are
relatively fixed, Medicare, Medicaid and other government program
payment reductions have a direct adverse affect on the Company's net
earnings and cash flows, but the Company cannot predict whether
changes that will result in such reductions will be implemented.
Another provision of the BBA also required the Department of
Health and Human Services to adopt uniform coverage, administration
and payment policies for lab tests using a negotiated rulemaking
process. Consensus was reached by the negotiated rulemaking
committee which, among other things, established policies limiting
Medicare coverage for certain tests to patients with specified
medical conditions or diagnoses. These uniform policies replace
local Medicare coverage policies. The final rules were published on
November 23, 2001 and generally became effective on November 25,
2002. Although the use of uniform policies has improved the
Company's ability to obtain necessary billing information in some
cases, Medicare, Medicaid and private payor diagnosis code
requirements continue to negatively impact the Company's ability to
be paid for some of thes tests it performs. Due to the range of
payors and policies, the extent of this impact is difficult to
quantify.
Future changes in federal, state and local laws and regulations
(or in the interpretation of current regulations) affecting
government payment for clinical laboratory testing could have a
material adverse effect on the Company. However, based on currently
available information, the Company is unable to predict what type of
legislation, if any, will be enacted into law.
Security and Confidentiality of Health Information
The Health Insurance Portability and Accountability Act of 1996
("HIPAA") was designed to address issues related to the portability
of health insurance. A section on administrative simplification was
added to the law in an effort to improve the efficiency and
effectiveness of the health care system by facilitating the
electronic exchange of information in certain financial and
administrative transactions, while protecting the privacy and
security of the information exchanged. Five regulations promulgated
under the administrative simplification provisions of HIPAA have been
finalized: the Transactions and Code Sets Rule, the Privacy Rule, the
Security Rule, the National Standard Employer Identifier Rule, which
requires the use of a unique employer identifier in connection with
certain electronic transactions, and the National Provider Identifier
Rule, which requires the use of a unique health care provider
identifier in connection with certain electronic transactions. These
regulations apply to health plans, health care providers that conduct
standard transactions electronically and health care clearinghouses
("covered entities").
The Transactions and Code Sets Rule standardizes the format and
data content to be used in the most common electronic health care
transactions, including, among others, health care claims,
eligibility, and health care claim status. Its purpose is to
encourage the use of electronic exchanges while reducing the
administrative burden associated with using different formats. The
compliance date for this rule was October 16, 2002; however, under
the Administrative Simplification Compliance Act, covered entities
(except small health plans) were permitted to file an extension plan
with the Department of Health and Human Services before October 16,
2002 to extend the compliance date to October 16, 2003. The
extension plan described how the entity will come into compliance
with the Transactions and Code Sets Rule requirements by the
compliance date. The Company and its subsidiaries filed such
extension plans. The Department of Health and Human Services
announced contingency plans permitting entities unable to meet the
compliance date to continue to accept legacy claims after October 16,
2003. The Company continues to work with payors who were not
prepared to meet the compliance date. At present, there is no
deadline for payors to stop accepting legacy claims. If such a
deadline were to be set and all payors were not prepared to accept
standard claims, it is possible that the Company's cash flow could be
disrupted as a result of those payors failing to accept claims or
failing to remit payment in standard format. The Company is
optimistic that these potential issues will be resolved.
The Privacy Rule regulates the use and disclosure of protected
health information ("PHI") by covered entities. It also sets forth
certain rights that an individual has with respect to his or her PHI
maintained by a covered entity, such as the right to access or amend
certain records containing PHI or to request restrictions on the use
or disclosure of PHI. Additionally, it requires covered entities to
implement certain administrative requirements, such as designating a
privacy officer, drafting and implementing privacy policies and
procedures, and training workforce members. Health care providers
governed by the Privacy Rule were required to come into compliance by
April 14, 2003.
The Company's HIPAA project plans have two phases: (i)
assessment of current systems, applications, processes and procedure
testing and validation for HIPAA compliance and (ii) remediation of
affected systems, applications, processes and procedure testing and
validation for HIPAA compliance.
The Company believes that it is in compliance in all material
respects with the Transactions and Code Sets Rule. The Company also
believes that it is in compliance with all material provisions of the
Privacy Rule.In this regard, the Company has set up a hotline for the
reporting of possible violations. The total cost associated with the
requirements of HIPAA is not expected to be material to the Company's
operations or cash flows. There are, however, many unresolved issues
in both of these areas and future interpretations of HIPAA could
impose significant costs on the Company.
The Company is in the assessment phase of the Security Rule.
The Company expects to meet the April 21, 2005 compliance date for
the Security Rule. In addition to the federal HIPAA regulations
described above, there are a number of state laws regarding the
confidentiality of medical information, some of which apply to
clinical laboratories. These laws vary widely, and new laws in this
area are pending, but they most commonly restrict the use and
disclosure of medical information. Penalties for violation of these
laws include sanctions against a laboratory's state licensure, as
well as civil and/or criminal penalties. Violations of the HIPAA
provisions after the applicable compliance dates could result in
civil and/or criminal penalties, including significant fines and up
to 10 years in prison.
Fraud and Abuse Regulations
Existing federal laws governing Medicare and Medicaid, as well
as similar state laws, impose a variety of broadly described fraud
and abuse prohibitions on healthcare providers, including clinical
laboratories. These laws are interpreted liberally and enforced
aggressively by multiple government agencies, including the U.S.
Department of Justice, the U.S. Department of Health and Human
Services Office of the Inspector General ("OIG"), and the states.
The federal government's enforcement efforts have been increasing, in
part as a result of the enactment of HIPAA, which, among other
things, provided for the establishment of a program to coordinate
federal, state and local law enforcement programs, and to conduct
investigations, audits and inspections relating to payment for
healthcare, and for the establishment of a federal anti-fraud and
abuse account for enforcement efforts, funded through collection of
penalties and fines for violations of the healthcare anti-fraud and
abuse laws. Moreover, over the last several years, the clinical
laboratory industry has been the focus of major governmental
enforcement initiatives.
The Medicare and Medicaid anti-kickback laws prohibit
intentionally providing anything of value to induce 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 if all conditions of the safe harbor are met.
Failure to fall within a safe harbor does not constitute a violation
of the anti-kickback laws; rather, the arrangement would remain
subject to scrutiny by HHS. Most states have their own Medicaid
anti-kickback laws, and several states also have anti-kickback laws
that apply to attempts to gain referral of patients covered by
private insurance as well as federal programs.
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 federal 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 reduced laboratory utilizations;
providing free pick-up 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.
The OIG has provided additional guidance regarding arrangements
that may violate the anti-kickback laws. In a 1999 Advisory Opinion,
the OIG concluded that a proposed arrangement whereby a laboratory
would offer physicians significant discounts on laboratory tests
billed to the physician might violate the anti-kickback act. The OIG
reasoned that if the discounts were greater than could otherwise be
justified, the proposed arrangement could be viewed as the laboratory
providing discounts to the physician in exchange for referral by the
physician of non-discounted Medicare program business. Similarly, in
1999 correspondence, the OIG stated that if any direct or indirect
link exists between a price discount that a laboratory offers to a
skilled nursing facility ("SNF") for Prospective Payment System
("PPS")-covered services and referrals of Medicare Part B business,
the anti-kickback statute would be implicated. Moreover, the OIG
stated that it is continuing to monitor the situation regarding
potentially unlawful contracts between SNFs and service providers,
including laboratories.
The OIG also has issued two separate fraud alerts or bulletins
regarding joint venture arrangements that may be viewed as suspect
under the anti-kickback law. The first, which focused on investor
referrals to such ventures, was issued in 1989, and the more recent
one, concerning contractual joint ventures, was issued in April 2003.
The OIG has noted that these joint ventures can take a variety of
forms, including contractual arrangements between parties to
cooperate in providing services, or an investment by physicians or
others who are in a position to refer patients to the joint venture.
Some of the elements of such joint ventures that the OIG identified
as "suspect" include arrangements under which the capital invested by
the physicians is disproportionately small in comparison to the
promised return and risk incurred; specific selection of investors
who are in a position to refer; the "owner" of the venture neither
operates the business nor commits substantial resources to the
venture, but instead contracts out substantially all of the
operations to a manager who essentially operates the business and
bills insurers and patients in the name of the owner; and
arrangements in which the manager takes its benefit in the form of
payments under a contract with the owner, and the owner receives its
share in the form of residual profit of the venture. The OIG
specifically noted that protection of such arrangements under the
safe harbors regulations may not be available.
As noted above, violation of various Medicare statutory
provisions can result in exclusion of providers from participation in
the Medicare program. One basis for such exclusion is an individual
or entity's submission of bills or requests for payment for items or
services that are "substantially in excess of that individual or
entity's usual charges." In September 2003, the OIG issued a notice
of proposed rulemaking to amend the federal regulations regarding
exclusion from the Medicare program on this basis, and in this notice
OIG proposes to define, for the first time, the terms "substantially
in excess" and "usual charges", and clarifies the meaning of "good
cause" as an exception to the exclusion authority. This notice,
which solicited comments, is only a proposal, but if the exclusion
regulations were to be amended as proposed, it could have an adverse
effect on the Company. However, at this time it is impossible to
predict whether and when this proposed change in regulations might be
finalized, and how any such final regulations might differ from the
notice of proposed rulemaking.
Under another federal provision, known as the "Stark" law or
"self-referral" prohibition, physicians who have an investment or
compensation relationship with a clinical laboratory may not, unless
a statutory exception applies, refer Medicare or Medicaid patients
for testing to the laboratory, regardless of the intent of the
parties. Similarly, laboratories may not bill Medicare or Medicaid
or any other party for services furnished pursuant to a prohibited
referral. There are federal Stark law exceptions for fair market
value compensation to a physician for reasonable and necessary
services, and for discounts to physicians purchasing laboratory
services. There is also an exception for physician investment in a
laboratory company so long as the company's stock is traded on a
public exchange, the company has stockholder equity exceeding $75.0
million, and the physician's shares may be purchased on terms
generally available to the public. State self-referral laws exist as
well, which apply to all patient referrals, not just Medicare and
Medicaid.
There are a variety of other types of federal and state
anti-fraud and abuse laws, including laws prohibiting submission of
false or otherwise improper claims to federal healthcare programs,
and laws limiting the extent of any differences between the Company's
charges to Medicare and Medicaid and its charges to other parties.
The Company seeks to conduct its business in compliance with the
federal and state anti-fraud and abuse laws. However, the Company is
unable to predict how these laws will be applied in the future, and
no assurances can be given that its arrangements will not be subject
to scrutiny under them. Sanctions for violations of these laws may
include exclusion from participation in Medicare, Medicaid and other
federal healthcare programs, significant criminal and civil fines and
penalties, and loss of licensure. Any exclusion from participation
in a federal healthcare program, or any loss of licensure, arising
from any action by any federal or state regulatory or enforcement
authority, would have a material adverse effect on the Company's
business. In addition, any significant criminal or civil penalty
resulting from such proceedings could have a material adverse effect
on the Company's business.
Environmental, Health and 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
generally utilizes outside vendors for disposal of such specimens.
In addition, the federal Occupational Safety and Health
Administration ("OSHA") 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.
On November 6, 2000, Congress passed the Needlestick Safety and
Prevention Act which required, among other things, that companies
include in their safety programs the evaluation and use of
engineering controls such as safety needles if found to be effective
at reducing the risk of needlestick injuries in the workplace.
During 2001, the Company voluntarily implemented the use of safety
needles at all of its service locations at a cost of approximately
$6.0 million.
Although the Company is not aware of any current material non-
compliance 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 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; Raritan, New
Jersey; Houston, Texas; San Diego, California; Seattle, Washington
and Southaven, Mississippi 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.
Compliance Program
Because of evolving interpretations of regulations and the
national debate over health care fraud and abuse, 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 Company's
compliance program is to develop, implement, and update compliance
safeguards as necessary. Emphasis is placed on developing compliance
policies and guidelines, personnel training programs and various
monitoring and audit procedures to attempt to achieve implementation
of all applicable rules and regulations.
In 2001, DIANON settled a U.S. Department of Justice
investigation into several of DIANON's billing practices. As part of
the settlement, DIANON entered into a voluntary corporate integrity
program. As part of DIANON's acquisition of UroCor Inc., DIANON
assumed responsibility and liability for compliance with the UroCor
corporate integrity agreement.
The Company seeks to conduct its business in compliance 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 will not be interpreted or applied by a
prosecutorial, regulatory or judicial authority in a manner that
would adversely effect the Company. Potential sanctions for violation
of these statutes and regulations include significant fines and the
loss of various licenses, certificates, and authorizations, which
could have a material adverse effect on the Company's business.
Item 2. PROPERTIES
The following table summarizes certain information as to the
Company's principal operating and administrative facilities as of
December 31, 2003.
Approximate Area Nature of
Location (in square feet) Occupancy
- ----------------------- -------------------- ---------------------
Operating Facilities:
Birmingham, Alabama 100,000 Lease expires 2005
Montgomery, Alabama 50,000 Owned
Phoenix, Arizona 55,000 Lease expires 2009
San Leandro, California 22,000 Lease expires 2008
Los Angeles, California 40,000 Lease expires 2004
San Diego, California 48,000 Lease expires 2007
Denver, Colorado 20,000 Lease expires 2005
Stratford, Connecticut 57,000 Lease expires 2006
Tampa, Florida 95,000 Lease expires 2015;
one 5 year
renewal option
Tampa, Florida 18,000 Lease expires 2005;
one 5 year
renewal option
Hollywood, Florida 21,000 Lease expires 2004
Chicago, Illinois 45,000 Lease expires 2008;
Approximate Area Nature of
Location (in square feet) Occupancy
- ----------------------- -------------------- ---------------------
Operating Facilities (cont.):
Louisville, Kentucky 60,000 Lease expires 2007;
two 5 year
renewal options
Baton Rouge, Louisiana 28,000 Lease expires 2004
Detroit, Michigan 32,000 Lease expires 2004;
one 10 year
renewal option
Eden Prairie, Minnesota 48,000 Lease expires 2014
Meridian, Mississippi 29,000 Lease expires 2005
Kansas City, Missouri 78,000 Owned
Reno, Nevada 16,000 Owned
Portsmouth, New Hampshire 47,000 Lease expires 2006;
one 5 year
renewal option
Raritan, New Jersey 187,000 Owned
Uniondale, New York 108,000 Lease expires 2007;
two 5 year
renewal options
Burlington, North Carolina 275,000 Owned
Charlotte, North Carolina 25,000 Lease expires 2008
Research Triangle Park,
North Carolina 71,000 Lease expires 2008;
three 5 year
renewal options
111,000 Lease expires 2011;
three 5 year
renewal options
Dublin, Ohio 81,000 Owned
Oklahoma City, Oklahoma 108,000 Lease expires 2010
Knoxville, Tennessee 51,000 Lease expires 2004:
Annual renewal option
Dallas, Texas 60,000 Lease expires 2004;
two 5 year
renewal option
Houston, Texas 70,000 Lease expires 2012;
two 5 year
renewal options
Houston, Texas 10,000 Lease expires 2004;
automatic one year
renewals
Midland, Texas 10,000 Lease expires 2005;
one 5 year renewal
option
San Antonio, Texas 44,000 Lease expires 2004;
two 5 year
renewal option
Salt Lake City, Utah 20,000 Lease expires 2005;
two 3 year
renewal options
Herndon, Virginia 80,000 Lease expires 2004
Richmond, Virginia 34,000 Lease expires 2006
Kent, Washington 42,000 Lease expires 2005;
one 5 year
renewal option
Seattle, Washington 33,000 Lease expires 2004
Approximate Area Nature of
Location (in square feet) Occupancy
- ----------------------- -------------------- ---------------------
Operating Facilities (cont.):
Fairmont, West Virginia 25,000 Lease expires 2005;
three 5 year
renewal options
Mechelen, Belgium 20,000 Lease expires 2007
Administrative facilities:
Raritan, New Jersey 53,000 Owned
Burlington, North Carolina 293,000 Owned
Burlington, North Carolina 273,000 Leases expire
2004-2010;
various options to
purchase or renew
All of the Company's 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.
Item 3. LEGAL PROCEEDINGS
The Company is involved in litigation purporting to be a nation-
wide class action involving the alleged overbilling of patients who
are covered by private insurance. The Company has reached a
settlement with the class that will not materially differ from
accruals previously established or have a material adverse effect on
the Company. The Company has now substantially implemented its
obligations under the settlement. On January 9, 2001, the Company
was served with a complaint in North Carolina which purported to be a
class action and made claims similar to those referred to above.
That claim has now been dismissed with prejudice.
On June 24, 2003, the Company and certain of its executive
officers were sued in the United States District Court for the Middle
District of North Carolina in the first of a series of putative
shareholder class actions alleging securities fraud. Since that
date, at least five other complaints containing substantially
identical allegations have been filed against the Company and certain
of the Company's executive officers. Each of the complaints alleges
that the defendants violated the federal securities laws by making
material misstatements and/or omissions that caused the price of the
Company's stock to be artificially inflated between February 13 and
October 3, 2002. The plaintiffs seek certification of a class of
substantially all persons who purchased shares of the Company's stock
during that time period and unspecified monetary damages. These six
cases have been consolidated and will proceed as a single case. The
defendants deny any liability and intend to defend the case
vigorously. At this time, it is premature to make any assessment of
the potential outcome of the cases or whether they could have a
material adverse effect on the Company's financial condition.
The Company is the appellant in a patent case originally filed
in the United States District Court for the District of Colorado.
The Company has disputed liability and contested the case vigorously.
After a jury trial, the district court entered judgment against the
Company for patent infringement. The Company appealed the case to
the United States Court of Appeals for the Federal Circuit. The
Company has received a letter from its counsel dated February 6,
2004, stating "it remains our opinion that the amended judgment and
order will be reversed on appeal."
The Company is a party to two lawsuits involving Chiron Inc.
relating to Hepatitis C and HIV testing. Chiron asserts that the
Company has infringed on Chiron's patents in each of these areas.
The Company denies liability and intends to contest the suits
vigorously. It is premature at this juncture to assess the likely
outcome of these matters, or to determine whether they will have a
material effect on the Company.
The Company is also involved in various claims and legal actions
arising in the ordinary course of business. These matters include,
but are not limited to, intellectual property disputes, professional
liability, employee related matters, and inquiries from governmental
agencies and Medicare or Medicaid payors and managed care payors
requesting comment on allegations of billing irregularities that are
brought to their attention through billing audits or third parties.
In the opinion of management, based upon the advice of counsel and
consideration of all facts available at this time, the ultimate
disposition of these matters is not expected to have a material
adverse effect on the financial position, results of operations or
liquidity of the Company. The Company is also named from time to
time in suits brought under the qui tam provisions of the False
Claims Act. These suits typically allege that the Company has made
false statements and/or certifications in connection with claims for
payment from federal health care programs. They may remain under
seal (hence, unknown to the Company) for some time while the
government decides whether to intervene on behalf of the qui tam
plaintiff. Such claims are an inevitable part of doing business in
the health care field today and, in the opinion of management, based
upon the advice of counsel and consideration of all facts available
at this time, the ultimate disposition of those qui tam matters
presently known to the Company is not expected to have a material
adverse effect on the financial position, results of operations or
liquidity of the Company.
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.
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, professional and vehicle liability, certain medical
costs 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, 2003 and 2002, the Company had
provided letters of credit aggregating approximately $57.1
million and $45.6 million respectively, primarily in connection
with certain insurance programs.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock trades on the New York Stock Exchange ("NYSE")
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
------ ------
2002
First Quarter 49.120 38.150
Second Quarter 52.375 43.300
Third Quarter 45.210 26.000
Fourth Quarter 34.050 18.510
High Low
------ ------
2003
First Quarter 30.040 22.210
Second Quarter 32.630 25.940
Third Quarter 32.660 28.200
Fourth Quarter 37.720 28.210
High Low
------ ------
2004
First Quarter (through February 27, 2004) 44.200 36.900
On May 10, 2002, the Company effected a 2-for-1 stock split.
The reported sales prices reflect such stock split.
On February 27, 2004 there were 696 holders of record of the
Common Stock.
The Company has not historically paid dividends on its common
stock, but could consider future dividend payments as deemed
appropriate, based upon results of operations and future cash
requirements. In addition, the Company's senior credit facilities
place certain limits on the payment of dividends.
Item 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the captions
"Statement of Operations Data" and "Balance Sheet Data" as of and for
the five-year period ended December 31, 2003 are derived from
consolidated financial statements of the Company, which have been
audited by PricewaterhouseCoopers LLP, independent accountants. This
data should be read in conjunction with the accompanying notes, the
Company's consolidated financial statements and the related notes
thereto, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," all included elsewhere herein.
Year Ended December 31,
--------------------------------------------------
2003(a) 2002(b)(c) 2001(d) 2000 1999
--------------------------------------------------
(Dollars in millions, except per share amounts)
Statement of Operations
Data:
Net sales $2,939.4 $2,507.7 $2,199.8 $ 1,919.3 $1,698.7
Gross profit 1,224.6 1,061.8 925.6 766.6 629.1
Operating income 533.7 435.0 367.6 245.6(e) 149.7
Net earnings 321.0 254.6 179.5 112.1 65.4
Basic earnings
per common share $ 2.23 $ 1.78 $ 1.29 $ 0.82 $ 0.30
Diluted earnings
per common share $ 2.22 $ 1.77 $ 1.27 $ 0.80 $ 0.29
Basic weighted
average common
shares outstanding
(in thousands) 143,969 142,791 138,838 94,161 50,665
Diluted weighted
average common
shares outstanding
(in thousands) 144,756 144,198 141,077 96,299 51,509
Balance Sheet Data:
Cash and cash
equivalents $ 123.0 $ 56.4 $ 149.2 $ 48.8 $ 40.3
Intangible assets, net 1,857.3 1,217.5 968.5 865.7 803.9
Total assets 3,414.9 2,580.4 1,929.6 1,666.9 1,590.2
Long-term obligations
and redeemable
preferred stock (f) 883.9 521.5 509.2 355.8 1,041.5
Total shareholders'
equity 1,895.9 1,611.7 1,085.4 877.4 175.5
(a) On January 17, 2003, the Company completed the acquisition of
all of the outstanding shares of DIANON Systems, Inc. for $47.50 per
share in cash, or approximately $595.6 million including transaction
fees and expenses. See "Note 2 to the Consolidated Financial
Statements" for further discussion of this acquisition. During the
third and fourth quarters of 2003, the Company recorded pre-tax
charges totaling $6.4 million, in connection with the integrations
of its recent acquisitions. The Company also recorded certain
adjustments to previously recorded restructuring charges due to
changes in estimates, resulting in a net credit of approximately $4.9
million, which was recorded in the fourth quarter of 2003. Net
restructuring and other special charges was $1.5 million for 2003.
(b) On July 25, 2002, the Company completed the acquisition of all
of the outstanding stock of Dynacare Inc. in a combination cash and
stock transaction with a combined value of approximately $496.4
million, including transaction costs. See "Note 3 to the
Consolidated Financial Statements" for further discussion of this
acquisition. During the third quarter of 2002, the Company recorded
restructuring and other special charges totaling $17.5 million.
These charges included a special bad debt provision of approximately
$15.0 million related to the acquired Dynacare accounts receivable
balance and restructuring expense of approximately $2.5 million
relating to Dynacare integration costs of actions that impact the
Company's existing employees and operations.
(c) Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible
Assets". This Standard requires that goodwill and other intangibles
that are acquired in business combinations and that have indefinite
useful lives are not to be amortized. See "Note 10 to the
Consolidated Financial Statements" for further discussion of the
effect of SFAS No. 142.
(d) During the third quarter of 2001, the Company recorded a loss of
$5.5 million relating to the write-off of unamortized bank fees
associated with the Company's term debt, which was repaid in
September of 2001. The Company also recorded a charge of $8.9
million as a result of a payment made to a bank to terminate an
interest rate swap agreement tied to the Company's term loan.
(e) In the fourth quarter of 2000, the Company recorded a $4.5
million restructuring charge relating to the closing of its Memphis
drug testing facility.
(f) Long-term obligations primarily include capital lease
obligations of $4.4 million, $5.5 million, $6.1 million, $7.2 million
and $4.4 million at December 31, 2003, 2002, 2001, 2000 and 1999,
respectively. Long-term obligations exclude amounts due to
affiliates. On June 6, 2000, the Company called for redemption all
of its outstanding redeemable preferred stock, resulting in the
conversion of substantially all of the preferred stock into common
stock. During 2001, the Company sold $744.0 million aggregate
principal amount at maturity of its zero coupon convertible
subordinated notes due 2021 in a private placement. The Company
received approximately $488.6 million in net proceeds from the
offering. The Company used a portion of the proceeds to repay
$412.5 million of its term loan outstanding under its credit
agreement.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
During 2003, the Company continued to strengthen its financial
performance through the implementation of the Company's strategic
plan as well as expanding its national platform in routine testing.
This plan continues to provide growth opportunities for the Company
by building a leadership position in genomic and other advanced
testing technologies primarily through internal development efforts,
acquisitions and technology licensing activities.
The Company's Center for Molecular Biology and Pathology, located
in Research Triangle Park, NC is a leader in the development and
application of molecular diagnostics and polymerase chain reaction,
or PCR, technologies in the areas of diagnostic genetics, oncology
and infectious disease. The Company believes that these technologies
may represent a significant savings to the healthcare system by
increasing the detection of early stage (treatable) diseases. The
Company's National Genetics Institute in Los Angeles, CA, develops
novel, highly-sensitive PCR methods used to test for hepatitis C and
other infectious agents and is the only laboratory in the U.S. that
is FDA-approved to screen plasma for infectious diseases. Viro-Med
Laboratories, Inc., based in Minneapolis, MN, offers molecular
microbial testing using real-time PCR platforms and provides
significant additional capacity to support the continued expansion of
the Company's advanced testing business. These Centers of Excellence
enable the Company to provide a broad menu of testing services for
the infectious disease and cancer markets, which the Company believes
represent two of the most significant areas of future growth in the
clinical laboratory industry.
The Company completed the acquisition of DIANON on January 17,
2003. This acquisition significantly enhances the Company's oncology
testing capabilities and enables the Company to nationally offer one
of the broadest menu of specialized anatomic pathology and gene-based
cancer testing in the U.S. At the end of 2003, the Company was ahead
of schedule with the integration and had achieved the synergy savings
of approximately $26.2 million. The Company expects to achieve
additional synergy savings of approximately $5.5 million by the end
of 2004, and a total net savings of approximately $32.4 million by
2005. The Company began applying DIANON's standardized anatomic
pathology processes in early 2004. This "DIANIZATION" of the Company
will take approximately three years.
The Dynacare integration is substantially completed and is
performing as expected, including the achievement of the planned
total synergy savings of $45.0 million. Dynacare continues to
strengthen the Company's national network of routine testing.
In March 2003, the Company purchased certain assets in Northern
California from Quest Diagnostics Incorporated (Quest) for $4.5
million in cash. The assets purchased included the assignment of
four contracts with independent physician associations (IPAs), as
well as the leases for 46 patient service centers, five of which also
serve as rapid response laboratories, located throughout Northern
California. Acquiring these assets provides the Company an
immediate, competitive presence in Northern California for the first
time. Quest has indicated that approximately $27.0 million in annual
revenues is generated by capitated fees under the IPA contracts and
associated fee-for-service testing for physicians whose patients use
these patient service centers, as well as from specimens received
directly from the IPA physicians. The Company began the customer
conversion process in June and July of 2003, which has been ongoing
through the end of the year. The Company expects that incremental
revenues will be approximately $9-$10 million in 2004.
The Company has announced a number of significant licensing and
partnership agreements which provide it with access to new testing
technologies that it expects will have an increasing impact on
diagnostic testing.
In July 2003, the Company announced a marketing and distribution
relationship with Atherotech, a leading cardiodiagnostic company and
specialty reference laboratory, to offer its proprietary Vertical
Auto Profile (VAP"TM") Cholesterol Test. This
multi-year agreement includes a provision for the transfer of
patented testing technology to the Company, after which, if certain
conditions are met, the Company would become the first clinical
laboratory licensed to perform the cardiovascular disease risk
assessment assay within its own national laboratory system.
In August of 2003, the Company announced that it had
commercially launched PreGen-Plus, EXACT Sciences' proprietary, non-
invasive technology to aid in the early detection of colorectal
cancer. Since then, the daily number of specimens received has
increased at a moderate pace and the Company has expanded its
production capacity to handle higher daily volumes.
On October 21, 2003, the Company announced an exclusive
agreement with BioPredictive, a French Diagnostics firm, that
combines the Company's expertise in infectious disease testing with
BioPredictive's noninvasive, predictive testing technology to
quantitatively determine the amount of liver fibrosis, and the rate
of its progression, in hepatitis C (HCV) patients. HCV FIBROSURE"TM"
is expected to be broadly available in the U.S., only through the
Company, around the beginning of the second quarter of 2004.
As a result of the exclusive sales and distribution agreement
with Myriad Genetics, physicians now have the convenience of sending
patients to one of the Company's patient service centers for Myriad
Genetics' predisposition testing for breast, ovarian, colon and
uterine cancers. The Company's relationship with Myriad Genetics
makes it one of the few clinical laboratories in the U.S. to provide
the entire oncology care continuum from predisposition to
surveillance testing, including screening, evaluation, diagnosis and
monitoring options.
In October 2002, the Company announced a collaboration with
Celera to establish the clinical utility of laboratory tests based on
novel diagnostic markers. The Company is continuing interactions
with Celera to support the development of new gene-based assays in a
variety of disease areas.
Through an agreement with Correlogic Systems, the Company plans
to commercialize their protein pattern blood test for the detection
of ovarian cancer, which offers the prospect of accurate and early
detection of ovarian cancer. This is a common disease, which if
detected early enough, is readily treated and often curable. The
Company will initially plan to offer the test to those women at
greater than average risk for ovarian cancer sometime during 2004.
In addition to the acquisitions and relationships discussed above,
the Company believes future performance will be positively affected
by several factors: 1) The expansion of higher-value genomic tests
such as Cystic Fibrosis, HCV and HIV genotyping, along with the
continued growth of HIV viral loads and HPV testing; 2) Continued
conversion of traditional pap smears to the newer, high value
monolayer technology; 3) Continued progress with existing licensing
and business relationships (such as Myriad Genetics, EXACT Sciences,
Correlogic and most recently, BioPredictive); 4) The Company's
ongoing business acquisition strategy; and 5) Growing demand for
genomic testing creating a positive shift in test mix toward higher
value testing.
On December 17, 2003, the Company's Board of Directors
authorized a stock repurchase program under which the Company may
purchase up to an aggregate of $250.0 million of its common stock
from time-to-time. It is the Company's intention to fund future
purchases of its common stock with cash flow from operations.
Seasonality
Volume of testing generally declines during the year-end holiday
periods and other major holidays. 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, 2003 compared with Year ended December 31,
2002.
Net sales for 2003 were $2,939.4 million, an increase of
17.2% from $2,507.7 million reported in the comparable 2002
period. Testing volume growth, measured by accessions, increased
approximately 11.7% and was affected by the acquisitions of
Dynacare and DIANON as well as growth in the Company's esoteric
test volumes (including HPV and cystic fibrosis). Price per
accession increased approximately 5.5%, compared to 2002. The
growth in price was affected by this same shift in test mix and
from shifts in histology testing which is primarily DIANON-
related. These improvements were partially offset by the impact
of severe winter weather during the first quarter of 2003 and
physician strikes to protest rising malpractice insurance rates
during the second quarter.
Cost of sales, which includes primarily laboratory and
distribution costs, was $1,714.8 million for 2003 compared to
$1,445.9 million in 2002, an increase of 18.6%. The increase in
cost of sales is primarily the result of increases in volume and
supplies due to recent acquisitions, growth in the base business
and growth in esoteric and genomic testing (with significant
increases in cystic fibrosis and HPV testing). Cost of sales as a
percentage of net sales was 58.3% for 2003 and 57.7% in 2002,
reflecting the additional infrastructure costs (facilities and
personnel) of Dynacare and DIANON acquisitions.
Selling, general and administrative expenses increased to $651.8
million in 2003 from $585.5 million in 2002 representing an increase
of $66.3 million or 11.3%. This increase resulted primarily from
personnel and other costs as a result of the recent acquisitions.
As a percentage of net sales, selling, general and administrative
expenses were 22.2% and 23.3% for the year ended 2003 and 2002,
respectively, reflecting the realization of synergies from the
Dynacare and DIANON acquisitions, as well as the Company's
reduction of its bad debt expense rate by approximately 130 basis
points during 2003 as compared to 2002.
The amortization of intangibles and other assets was $37.6
million and $23.8 million for 2003 and 2002, respectively. The
increase in amortization expense is a result of the acquisitions of
Dynacare and DIANON.
The Company recorded pre-tax restructuring charges of $3.3
million and $17.5 million during the third quarters of 2003 and 2002,
respectively, in connection with the integrations of DIANON and
Dynacare, Inc. During the fourth quarter of 2003, the Company
recorded a charge of $3.1 million, relating to the continuing
integration of its recent acquisitions. The Company also recorded
certain adjustments in the fourth quarter of 2003 to previously
recorded restructuring charges due to changes in estimates, resulting
in a credit of approximately $4.8 million.
Interest expense was $40.9 million in 2003 compared to $19.2
million in 2002. This increase was a direct result of the Company's
financing of the DIANON acquisition.
Income from equity investments was $43.7 million for the year
ended December 31, 2003 compared to $13.4 million for the year end
December 31, 2002. This income represents the Company's ownership
share in equity affiliates acquired as part of the Dynacare
acquisition on July 25, 2002. A significant portion of this
income is derived from investments in Ontario and Alberta, Canada,
and is earned in Canadian dollars. The strengthening of the
Canadian dollar versus the U.S. dollar during the year ended
December 31, 2003 has had a positive impact on this income as well
as the cash generated from the Canadian investments.
The provision for income taxes as a percentage of earnings
before taxes was 40.6% in 2003 compared to 41.1% in 2002. The
decrease in the effective tax rate for 2003 is due to a $2.1
million state tax recovery during the third quarter of 2003.
Year ended December 31, 2002 compared with Year ended December 31,
2001.
Net sales for 2002 were $2,507.7 million, an increase of 14.0%
from $2,199.8 million reported in the comparable 2001 period.
Testing volume, measured by accessions, increased 10.7% (primarily
as a result of the Dynacare acquisition and esoteric volume
growth) and price per accession increased 3.3% (due in part to the
shift in test mix to higher-value esoteric tests) compared to
2001.
Cost of sales, which includes primarily laboratory and
distribution costs, was $1,445.9 million for 2002 compared to
$1,274.2 million in 2001, an increase of 13.5%. In the third
quarter of 2002, the Company announced a slowdown in volume growth
in the Carolinas. In order to reverse these declines in volume,
the Company initiated a reinvestment program that included adding
individuals and facilities to improve client service. Although
this reinvestment moderately increased the fourth quarter expenses
as expected, there was an improvement in the ratio of new to lost
accounts in the affected region. Also, the Company incurred
certain costs associated with the acquisition and integration of
Dynacare such as additional overtime and temporary help and the
payment of retention bonuses. Additional costs were incurred due
to growth in esoteric and genomic testing and higher volume of Pap
tests performed using more expensive monolayer technology. Cost
of sales as a percentage of net sales was 57.7% for 2002 and 57.9%
in 2001.
Selling, general and administrative expenses increased to $585.5
million in 2002 from $516.5 million in 2001 representing an increase
of $69.0 million or 13.4%. This increase resulted primarily from
personnel and other costs as a result of the Dynacare acquisition.
Selling, general and administrative expenses were 23.3% and 23.5% as
a percentage of net sales in 2002 and 2001, respectively.
The amortization of intangibles and other assets was $23.8
million and $41.5 million for 2002 and 2001, respectively. The
decrease in the amortization expense is due to the adoption in 2002
of the non-amortization provisions of SFAS No. 142 for goodwill
offset partially by increases in identifiable intangibles
amortization resulting from the acquisition of Dynacare.
During the third quarter of 2002, the Company recorded
restructuring and other special charges totaling $17.5 million.
The $17.5 million was comprised of a special bad debt provision of
approximately $15.0 million related to the acquired Dynacare
accounts receivable balance and an additional $2.5 million
relating to integration costs of actions that impact the Company's
existing employees and operations.
Interest expense was $19.2 million in 2002 compared to $27.0
million in 2001. The reduction in interest expense reflects the
Company's lower cost of borrowings from its zero coupon-subordinated
notes as well as overall market rate declines in interest rates in
2002 compared to 2001.
As a result of the Dynacare acquisition, the Company has
investments in equity affiliates in Milwaukee, Wisconsin, Ontario,
Canada and Alberta, Canada. These investments are accounted for
under the equity method of accounting and resulted in other income of
$13.4 million for 2002.
Provision for income taxes was $177.7 million in 2002 compared
to $149.6 million in 2001. The effective tax rate was 41.1% in 2002
and 45.0% in 2001. The decrease in the effective tax rate is
primarily due to the elimination of amortization related to goodwill
upon adoption of SFAS No. 142 and, to a smaller extent, the Company's
reduction of $1.7 million of valuation allowance relating to its net
deferred tax assets.
Liquidity and Capital Resources
Net cash provided by operating activities was $564.3 million,
$444.9 million and $316.0 million, in 2003, 2002 and 2001,
respectively. The increase in cash flow from operations in both 2003
and 2002 primarily resulted from improved earnings, the expansion of
the business through acquisitions, and the improvement of the
Company's accounts receivable days' sales outstanding ("DSO") to 53
days at the end of 2003 from 54 days at the end of 2002. This
improvement was due to Company-wide efforts to increase cash
collections from all payors, as well as on-going improvements to
claim submission processes. In addition, the Company continued to
take steps necessary to improve DSO and cash collections by:
1) conversion of decentralized billing locations, including former
Dynacare locations, to a centralized billing system. During
2003, billing activity in numerous Dynacare sites was converted
to the centralized billing system. In 2004, the Company will
concentrate its conversion activities on the remaining Dynacare
locations as well as its Salt Lake City, Reno, San Diego and
Viro-Med facilities.
2) continuing initiative to reduce the number of requisitions
received that are missing certain billing information. This
initiative involves counting the number of clinical requisitions
received from an ordering client, as well as determining what
specific information was not provided. The Company then
identifies root causes of why the information was missing and
takes steps to ensure that information is provided in the
future. These steps include re-educating clients as to what
information is needed in order for the Company to bill and
collect for the test. As of December 31, 2003, the percentage
of requisitions received which were missing billing information
was 4.3% as compared to 4.6% at the end of 2002.
3) implementation of numerous initiatives related to self-pay
accounts receivable. These include: i) collecting payment at the
time of service; ii) increased training for billing personnel
related to improving collections during phone calls and iii)
review of bill design and frequency.
Capital expenditures were $83.6 million, $74.3 million and $88.1
million for 2003, 2002 and 2001, respectively. The Company expects
capital expenditures of approximately $90.0 to $100.0 million in
2004. These expenditures are intended to continue standardizing lab
and billing information systems and further automate laboratory
processes. The Company will continue to make important investments
in information technology connectivity with its customers. Such
expenditures are expected to be funded by cash flow from operations
as well as borrowings under the Company's revolving credit
facilities.
On January 31, 2003,in connection with the acquisition of
DIANON, the Company completed a private placement of $350.0 million
in senior notes, which was used to repay the $350.0 million bridge
loan that was entered into to fund part of the DIANON purchase. The
notes, in an aggregate principal amount of $350.0 million, will bear
an interest rate of 5.5% and resulted in net proceeds of $345.1
million.
In conjunction with the acquisition of DIANON, the Company's
planned financing of the acquisition, and announced share repurchase
plan, Standard and Poor's lowered its overall rating on the Company
to BBB from BBB+ and Moody's issued a Baa3 rating to the Company's
newly issued Senior Notes.
On January 13, 2004, the Company entered into a new $150.0
million 364-day revolving credit facility with Credit Suisse First
Boston, acting as Administrative Agent, and a group of financial
institutions to replace the existing $150.0 million 364-day
revolving credit facility, which had terminated. The $200.0
million three-year revolving credit facility was amended on
January 14, 2003 and expires on February 18, 2005.
On January 17, 2003, in conjunction with the acquisition of
DIANON, the Company borrowed $350.0 million under the DIANON
Bridge Loan Agreement with Credit Suisse First Boston, acting as
Administrative Agent. On January 31, 2003, the Company sold
$350.0 million aggregate principal amount of its 5 1/2% Senior Notes
due February 1, 2013. Proceeds from the issuance of these Notes
($345.1 million), together with cash on hand was used to repay the
$350.0 million principal amount of the Company's bridge loan
facility, and as a result, the loan was terminated. During the
first quarter of 2003, the Company entered into an interest rate
swap agreement with a major financial institution, solely to
manage its interest rate exposure on $175.0 million of its 5 1/2%
Senior Notes. This swap agreement was terminated during June 2003
and resulted in net proceeds to the Company of $5.3 million.
Pension Funding
During 2001, 2002 and 2003, the Company made contributions to
its defined pension plan in the amounts of $18.0 million, $8.6
million and $10.2 million, respectively. The Company expects to
contribute $34.6 million to its defined pension plan during 2004.
See "Note 22 to the Consolidated Financial Statements" for a
further discussion of the Company's pension and postretirement
plans.
New Accounting Pronouncements
On December 23, 2003, the Financial Accounting Standards
Board released revised Statement of Financial Accounting Standards
No. 132 "Employers Disclosures about Pensions and Other
Postretirement Benefits". This Standard is an amendment of SFAS
No. 87,88, and 106 and a revision of SFAS No. 132. The provisions
of this Statement do not change the measurement and recognition
provisions of these previously issued Statements, but requires
that additional disclosures are made. Some of the required
disclosures include: 1) Plan assets by category, 2) Investment
policies and strategies, 3) Target allocation percentages or
target ranges for plan asset categories, 4) Projections of future
benefit payments, 5) Estimates of future contributions to fund
pension and other postretirement benefit plans, and 6) Interim
disclosures of certain items. The requirements of the standard
are effective for public companies for fiscal years ending after
December 15, 2003. The Company adopted this statement for its
2003 Annual Report and Form 10-K and it does not effect the
Company's financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN
No. 46), "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." FIN No. 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties.
FIN No. 46 and FIN No. 46R is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1, 2003, the
provisions of FIN No. 46 must be applied for the first interim or
annual period beginning after December 15, 2003. The Company does not
believe it has any unconsolidated variable interest entities, but has
not fully completed its evaluation.
In December 2002, Statement of Financial Accounting Standards
("SFAS") No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123",
was issued. This Statement amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair-
value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require disclosure in interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. The Company has not adopted a fair-value based method of
accounting for stock-based employee compensation and SFAS No. 148 has
not had a material impact on its consolidated financial statements.
In July 2002, SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" was issued. This Statement
addresses the recognition, measurement, and reporting of costs
associated with exit or disposal activities, and supercedes
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a
Restructuring)" ("EITF 94-3"). The principal difference between
SFAS No. 146 and EITF 94-3 relates to the requirements for
recognition of a liability for a cost associated with an exit or
disposal activity. SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity, including
those related to employee termination benefits and obligations
under operating leases and other contracts, be recognized when
the liability is incurred, and not necessarily the date of an
entity's commitment to an exit plan, as under EITF 94-3. SFAS
No. 146 also establishes that the initial measurement of a
liability recognized under SFAS No. 146 be based on fair value.
The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early
application encouraged. The Company adopted this statement
January 1, 2003 and it has not effected its financial position or
results of operations.
In May 2002, SFAS No. 145, "Rescission of FAS Nos. 4, 44,
and 64, Amendment of FAS 13, and Technical Corrections as of
April 2002" was issued. This Statement rescinds SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, SFAS No. 64, Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements. This Statement also
rescinds SFAS No. 44, Accounting for Intangible Assets of Motor
Carriers. This Statement amends SFAS No. 13, Accounting for
Leases, to eliminate any inconsistency between the required
accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements
to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The
Company adopted this statement January 1, 2003 and it has
resulted in the reclassification of the 2001 extraordinary loss.
Contractual Cash Obligations
Payments Due by Period
------------------------------------
Less More than
1 Yr 1-3 Yrs 3-5 Yrs > 5 Yrs
------ ------- ------- ---------
Capital lease obligations $ 3.5 $ 5.7 $ 1.2 $ --
Operating leases obligations 55.4 72.1 34.1 25.3
Restructuring obligations 5.0 6.7 6.2 6.8
Contingent future licensing
payments 24.1(b) 13.5 18.7 --
Royalty payments 0.3 1.8 2.0 --
5 1/2% Senior Notes -- -- -- 350.0
Zero coupon-subordinated notes 530.5(a) -- -- --
----- ----- ----- -----
Total contractual cash
obligations $618.8 $ 99.8 $ 62.2 $382.1
===== ===== ===== =====
(a) Holders of the zero coupon-subordinated notes may require the
Company to purchase all or a portion of their notes on September
11, 2004, 2006 and 2011 at prices ranging from $712.97 to
$819.54 per note. The Company may choose to pay the purchase
price in cash or common stock or a combination of cash and
common stock. If the holders elect to require the Company to
purchase their notes, it is the Company's current intention to
retire the notes by a cash payment. However, future market
conditions are subject to change. Should the holders put the
notes to the Company on any of the dates above, the Company
believes that it will be able to obtain alternate financing to
satisfy this contingent obligation.
(b) Contingent future licensing payments will be made in the event
that certain events take place, such as the launch of a specific
test, the transfer of certain technology, and when specified
revenue milestones are met.
Off-Balance Sheet Arrangements
The Company does not have transactions or relationships with
"special purpose" entities, and the Company does not have any off
balance sheet financing other than normal operating leases.
Other Commercial Commitments
At December 31, 2003, the Company provided letters of credit
aggregating approximately $57.1 million, primarily in connection
with certain insurance programs. These letters of credit are
secured by the Company's senior credit facilities and are renewed
annually, around mid-year.
Based on current and projected levels of operations, coupled
with availability under its new senior credit facilities, the Company
believes it has sufficient liquidity to meet both its short-term
and long-term cash needs. For a discussion of the Company's zero
coupon-subordinated notes, see "Note 13 to Consolidated Financial
Statements." For a discussion of the Company's new senior credit
facilities, see "Note 14 to Consolidated Financial Statements."
Critical Accounting Policies
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. Significant
estimates include the allowances for doubtful accounts, amortization
lives for intangible assets, accruals for self-insurance reserves
and reserves for professional liability claims.
The process for estimating the ultimate collection of
receivables involves significant assumptions and judgments.
Billings for services under third-party payor programs, including
Medicare and Medicaid, are recorded as revenues net of allowances
for differences between amounts billed and the estimated receipts
under such programs. Adjustments to the estimated receipts, based
on final settlement with the third-party payors, are recorded upon
settlement as an adjustment to net revenues.
In addition, the Company has implemented a process to
estimate and review the collectibility of its receivables based on
the period they have been outstanding. Historical collection and
payor reimbursement experience is an integral part of the
estimation process related to reserves for doubtful accounts. The
Company also assesses the current state of its billing functions
in order to identify any known collection or reimbursement issues
in order to assess the impact, if any, on the reserve estimates,
which involves judgment. The Company believes that the
collectibility of its receivables is directly linked to the
quality of its billing processes, most notably, those related to
obtaining the correct information in order to bill effectively for
the services provided. Revisions in reserve for doubtful accounts
estimates are recorded as an adjustment to bad debt expense within
selling, general and administrative expenses. The Company
believes that its collection and reserves processes, along with
the close monitoring of its billing processes, helps reduce the
risk associated with material revisions to reserve estimates
resulting from adverse changes in collection and reimbursement
experience and billing operations.
The Company's pension expense is developed from actuarial
valuations. Inherent in these valuations are key assumptions,
including discount rates and expected return on plan assets, which
are usually updated on an annual basis at the beginning of each
year. The Company is required to consider current market
conditions, including changes in interest rates, in making these
assumptions. Changes in pension costs may occur in the future due
to changes in these assumptions. The key assumptions used in
accounting for the defined benefit plans were a 6.25% discount
rate and an 8.5% expected return on plan assets. Compared with
the prior year, net pension cost increased $5.3 million and is
projected to decrease approximately $4.0 million in 2004,
primarily as a result of the performance of plan assets in 2003,
which should reduce 2004 plan expense by approximately $3.7
million; plan amendments, which should result in reduced 2004 plan
expense by approximately $1.0 million; and offset by increased
expense of approximately $0.6 million as a result of the reduction
of the discount rate. In establishing its expected return on
plan assets assumption, the Company reviews asset allocation
considering plan maturity and develops return assumptions based on
different asset classes adjusting for plan operating expenses.
Actual asset over/under performance compared to expected returns
will respectively decrease/increase unrecognized loss. The change
in the unrecognized loss will change amortization cost in upcoming
periods. A one percentage point change in the expected return
assumption in the current year would have resulted in a change in
pension expense of approximately $1.4 million.
Effective December 31, 2003, the Company adopted the revised
Statement of Financial Accounting Standards No. 132 "Employers
Disclosures about Pensions and Other Postretirement Benefits".
This Standard is an amendment of SFAS No. 87,88, and 106 and a
revision of SFAS No. 132. The provisions of this Statement do not
change the measurement and recognition provisions of these
previously issued Statements, but requires that additional
disclosures are made. Some of the required disclosures include:
1) plan assets by category, 2) investment policies and strategies,
3) target allocation percentages or target ranges for plan asset
categories, 4) projections of future benefit payments, 5)
estimates of future contributions to fund pension and other
postretirement benefit plans, and 6) interim disclosures of
certain items.
Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets". This Standard requires that goodwill and
other intangibles that are acquired in business combinations and
that have indefinite useful lives are not to be amortized and are
to be reviewed for impairment annually based on an assessment of
fair value. Other intangibles (patents and technology, customer
lists and non-compete agreements), are amortized on a straight-
line basis over the expected periods to be benefited, such as
legal life for patents and technology, 10 to 25 years for customer
lists and contractual lives for non-compete agreements. The
impact of adopting SFAS No. 142 is summarized in Note 10 to the
Consolidated Financial Statements.
Accruals for self-insurance reserves (including workers'
compensation, auto and employee medical) are determined based on
historical payment trends and claims history, along with current
and estimated future economic conditions.
The Company is self-insured for professional liability
claims arising in the normal course of business, generally
related to the testing and reporting of laboratory test results.
The Company records an accrual for such claims payable and claims
incurred but not reported based on an actuarial assessment of the
accrual, which is performed at least annually.
While management believes these estimates are reasonable and
consistent, they are by their very nature, estimates of amounts
that will depend on future events. Accordingly, actual results
could differ from these estimates. The Company's Audit Committee
periodically reviews the Company's significant accounting
policies. See "Note 1 to the Consolidated Financial Statements"
for further discussion of significant accounting policies.
FORWARD-LOOKING STATEMENTS
The Company has made in this report, and from time to time may
otherwise make in its public filings, press releases and discussions
with Company management, forward-looking statements concerning the
Company's operations, performance and financial condition, as well as
its strategic objectives. Some of these forward-looking statements
can be identified by the use of forward-looking words such as
"believes", "expects", "may", "will", "should", "seeks",
"approximately", "intends", "plans", "estimates", or "anticipates" or
the negative of those words or other comparable terminology. Such
forward-looking statements are subject to various risks and
uncertainties and the Company claims the protection afforded by the
safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995. Actual results could
differ materially from those currently anticipated due to a number of
factors in addition to those discussed elsewhere herein and in the
Company's other public filings, press releases and discussions with
Company management, including:
1. changes in federal, state, local and third party payor regulations
or policies (or in the interpretation of current regulations)
affecting governmental and third-party reimbursement for clinical
laboratory testing;
2. adverse results from investigations of clinical laboratories by
the government, which may include significant monetary damages
and/or exclusion from the Medicare and Medicaid programs;
3. loss or suspension of a license or imposition of a fine or
penalties under, or future changes in, the law or regulations of
the Clinical Laboratory Improvement Act of 1967, and the Clinical
Laboratory Improvement Amendments of 1988, or those of Medicare,
Medicaid or other federal, state or local agencies;
4. failure to comply with the Federal Occupational Safety and Health
Administration requirements and the Needlestick Safety and
Prevention Act which may result in penalties and loss of
licensure;
5. failure to comply with HIPAA, which could result in significant
fines;
6. failure of third party payors to complete testing with the
Company, or accept or remit transactions in HIPAA-required
standard transaction and code set format, could result in an
interruption in the Company's cash flow;
7. increased competition, including price competition;
8. changes in payor mix, including an increase in capitated managed-
cost health care;
9. failure to obtain and retain new customers and alliance partners,
or a reduction in tests ordered or specimens submitted by existing
customers;
10.failure to integrate newly acquired businesses and the cost related
to such integration;
11.adverse results in litigation matters;
12.inability to attract and retain experienced and qualified
personnel;
13.failure to maintain the Company's days sales outstanding levels;
14.decrease in credit ratings by Standard & Poor's and/or Moody's;
15.failure to develop or acquire licenses for new or improved
technologies, or if customers use new technologies to perform
their own tests;
16.inability to commercialize newly licensed tests or technologies or
to obtain appropriate reimbursements for such tests, which could
result in impairment in the value of certain capitalized licensing
costs;
17.inability to obtain and maintain adequate patent and other
proprietary rights protection of the Company's products and
services and successfully enforce the Company's proprietary
rights;
18.the scope, validity and enforceability of patents and other
proprietary rights held by third parties which might impact on the
Company's ability to develop, perform, or market the Company's
tests or operate its business;
19.failure in the Company's information technology systems resulting
in an increase in testing turnaround time or billing processes;
20.liabilities that result from the inability to comply with new
Corporate governance requirements; and
21.compliance by the Company with the Sarbanes-Oxley Act of 2002,
including Section 404 of that Act which requires management to
report on, and our independent auditors to attest to and report
on, our internal controls, will require management to devote
substantial time and attention, which could prove to be disruptive
to product development and licensing, marketing and other business
activities and will require additional legal, accounting and other
expenses to implement the requirements of these new rules.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company addresses its exposure to market risks,
principally the market risk associated with changes in interest
rates, through a controlled program of risk management that has
included in the past, the use of derivative financial instruments
such as interest rate swap agreements. The Company had an
interest rate swap agreement with a major financial institution,
solely to manage its interest rate exposure on $175.0 million of
its 5 1/2% senior notes. This swap agreement was terminated during
June 2003 and the Company received net proceeds of $5.3 million.
Although, as set forth below, the Company's zero coupon-
subordinated notes contain features that are considered to be
embedded derivative instruments, the Company does not hold or
issue derivative financial instruments for trading purposes. The
Company does not believe that its exposure to market risk is
material to the Company's financial position or results of
operations.
The Company's zero coupon-subordinated notes contain the following
three features that are considered to be embedded derivative
instruments under FAS No. 133:
1) The Company will pay contingent cash interest on the zero coupon-
subordinated notes after September 11, 2006, if the average market
price of the notes equals 120% or more of the sum of the issue
price, accrued original issue discount and contingent additional
principal, if any, for a specified measurement period.
2) Contingent additional principal will accrue on the zero coupon-
subordinated notes during the two year period from September 11,
2004 to September 11, 2006, if the Company's stock price is at or
below specified thresholds.
3) Holders may surrender zero coupon-subordinated notes for
conversion during any period in which the rating assigned to the
zero coupon-subordinated notes by Standard & Poor's Ratings
Services is BB- or lower.
Based upon independent appraisals, these embedded derivatives
had no fair market value at December 31, 2003.
Borrowings under the Company's revolving credit facility are
subject to variable interest rates, unless fixed through interest
rate swap or other agreements.
Two of the Company's equity affiliates operate in Canada and
remit the Company's share of partnership income in Canadian Dollars.
Accordingly, the cash flow received from these affiliates is subject
to a certain amount of foreign currency exchange risk.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index on Page F-1 of the
Financial Report included herein.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable.
Item 9.A. CONTROLS AND PROCEDURES
As of the end of the period covered by this Form 10-K, the
Company carried out, under the supervision and with the participation
of the Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, an evaluation of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on the foregoing, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely
alerting them to material information which is required to be included
in the periodic reports that the Company must file with the Securities
and Exchange Commission.
There were no significant changes in the Company's internal
controls or in other factors that could adversely affect the internal
controls subsequent to the date the Company completed its evaluation.
PART III
The information required by Part III, Items 10, 11, 13 and 15,
of Form 10-K is incorporated by reference to the registrant's
definitive proxy statement for its 2003 annual meeting of
stockholders, which is to be filed pursuant to Regulation 14A not
later than April 30, 2004.
Item 10. CODE OF ETHICS, EXPERTS ON AUDIT COMMITTEE
In October 2002, the Board of Directors adopted an updated set
of Corporate Governance Guidelines (the "Guidelines). The Guidelines
address a number of topics, including director independence, Board
and Committee self-assessment, retirement, evaluation of the Chief
Executive Officer, composition of the Board and succession planning.
The Nominating and Corporate Governance Committee reviews the
Guidelines on a regular basis and any proposed additions or
amendments to the Guidelines are submitted to the Board for its
consideration.
In December 2003, the Board adopted the Company's updated Code
of Business Conduct and Ethics (the "Code"). The Code is a code of
business conduct and ethics applicable to all directors, officers and
employees of the Company, including its Chief Executive Officer and
its Chief Financial Officer, Controller and other senior financial
officers. The Code sets forth Company policies and expectations on a
number of topics, including but not limited to, conflicts of
interest, confidentiality, compliance with laws (including insider
trading laws), preservation and use of Company assets, and business
ethics. The Code also sets forth procedures for communicating and
handling any potential conflict of interest (or the appearance of any
conflict of interest) involving directors or executive officers, and
for the confidential communication and handling of issues regarding
accounting, internal controls and auditing matters. The Company
regularly reviews the Code and proposed additions or amendments to
the Code are considered and subject to approval by the Board.
In order to provide stockholders with greater knowledge
regarding the Board's processes, the Guidelines and the Code adopted
by the Board of Directors are posted on the Company's website at
www.labcorp.com. In addition, any amendments to the Code will be
posted on the Company's website.
The Company has carefully reviewed its Guidelines and Code and
believes that they comply with the provisions of the Sarbanes-Oxley
Act of 2002, the rules of the Commission, and the NYSE's new
corporate governance listing standards regarding corporate governance
policies and processes.
The Audit Committee of the Board of Directors further concluded that
Wendy E. Lane and James B. Powell have eash been identified as an
"audit committee financial expert" as defined by Commission rules and
each has the "accounting or related financial management expertise"
required by the Listing Standards.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
See "Note 19 to the Consolidated Financial Statements" for a
discussion of the Company's Stock Compensation Plans. Except for the
above referenced footnote, the information called for by this Item is
incorporated by reference in the information under the caption
"Security Ownership of Certain Beneficial Owners and Management"
appearing in the Proxy Statement.
Item 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Aggregate fees for professional services rendered for the Company
by PricewaterhouseCoopers as of or for the years ended December
31, 2003 and 2002, were:
2003 2002
-------- --------
Audit $664,469 $606,540
Audit Related 39,946 79,689
Tax 2,100 12,000
All Other -- 18,085
-------- --------
Total $706,515 $716,314
======== ========
The Audit fees for the years ended December 31, 2003 and 2002,
respectively, were for professional services rendered (including
reimbursement for out-of-pocket expenses) for the audits of the
consolidated financial statements of the Company ($585,000 and
$540,000) and the issuance of comfort letters, consents, income
tax provision procedures, and assistance with review of documents
filed with the SEC ($72,084 and $66,540).
The Audit Related fees for the years ended December 31, 2002 were
primarily for assurance and related services related to due
diligence related to mergers and acquisitions and accounting
consultations in connection with acquisitions. For the year
ended December 31, 2003, such fees were primarily for accounting
consultations and for Section 404 pre-attestation advisory work.
Tax fees for the years ended December 31, 2003 and 2002,
respectively, were for services related to tax compliance, tax
planning and tax advice.
All Other fees for the year ended December 31, 2002 were for
assistance with the development of investment policies.
No fees were paid for Financial Information Systems Design and
Implementation for the years ended December 31, 2003 and 2002.
The Audit Committee has considered the other services rendered and
believes that they are compatible with PricewaterhouseCoopers
remaining independent.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) List of documents filed as part of this Report:
(1) Consolidated Financial Statements and Independent
Auditors' Reports included herein:
See Index on page F-1
(2) Financial Statement Schedules:
See Index on page F-1
All other schedules are omitted as they are inapplicable or the
required information is furnished in the Consolidated Financial
Statements or notes thereto.
(3) Index to and List of Exhibits
Exhibits:
Exhibits 10.2 through 10.4 and 10.9 through 10.18 are
management contracts or compensatory plans or arrangements.
3.1 - Amended and Restated Certificate of Incorporation of the Company dated
May 24, 2001 (incorporated herein by reference to the Company's
Registration Statement on Form S-3, filed with the Commission on
October 19, 2001, File No. 333-71896).
3.2 - Amended and Restated By-Laws of the Company dated April 28, 1995
(incorporated herein by reference to the Company's report on Form 8-K,
filed with the Commission on May 12, 1995).
4.1 - Specimen of the Company's Common Stock Certificate (incorporated
herein by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2001).
4.2 - Indenture dated September 11, 2001 between the Company
and Bank of New York, as trustee (incorporated herein
by reference to the Company's Registration Statement on
Form S-3, filed with the Commission on October 19,
2001, File No. 333-71896).
4.3 - Registration Rights Agreement dated September 11, 2001
between the Company and Merrill Lynch, Pierce, Fenner &
Smith Incorporated (incorporated herein by reference to
the Company's Registration Statement on Form S-3, filed
with the Commission on October 19, 2001, File No. 333-
71896).
4.4 - Rights Agreement dated December 13, 2001 between the
Company and American Stock Transfer & Trust Company, as
rights Agent (incorporated herein by reference to the
Company's Registration Statement on Form 8-A, filed
with the Commission on December 21, 2001, File No. 001-
11353).
4.5 - Indenture dated as of January 31, 2003 between the
Company and Wachovia Bank, National Association, as
trustee (incorporated herein by reference to the
January 31, 2003 Form 8-K, filed with the Commission on
February 3, 2003).
4.6 - Registration Rights Agreement, dated as of January 28,
2003 between the Company and the Initial Purchasers
(incorporated herein by reference to the January 31,
2003 Form 8-K, filed with the Commission on February 3,
2003).
10.1 - National Health Laboratories Incorporated Pension
Equalization Plan (incorporated herein by reference to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992).
10.2 - National Health Laboratories 1988 Stock Option Plan, as
amended (incorporated herein by reference to the
Company's Registration Statement on Form S-1, filed
with the Commission on July 9, 1990, File No. 33-
35782).
10.3 - National Health Laboratories 1994 Stock Option Plan
(incorporated herein by reference to the Company's
Registration Statement on Form S-8, filed with the
Commission on August 12, 1994, File No. 33-55065).
10.4 - Laboratory Corporation of America Holdings Master
Senior Executive Severance Plan (incorporated herein by
reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2002).
10.5 - Exchange Agent Agreement dated as of April 28, 1995
between the Company and American Stock Transfer & Trust
Company (incorporated herein by reference to the May
12, 1995 Form 8-K).
10.6 - Three-Year Credit Agreement dated February 20, 2002
among the Company, the lenders named therein and Credit
Suisse First Boston, as administrative agent
(incorporated herein by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 2001).
10.7 - First Amendment to the Three-Year Credit Agreement,
dated January 14, 2003 (incorporated herein by
reference to the January 17, 2003 Form 8-K, filed with
the Commission on February 3, 2003).
10.8*- 364-Day Credit Agreement dated January 13, 2004 among
the Company, the lenders named therein and Credit
Suisse First Boston, as administrative agent.
10.9 - Laboratory Corporation of America Holdings 1995 Stock
Plan for Non-Employee Directors dated September 26,
1995 (incorporated herein by reference to the Company's
Registration Statement on Form S-8, filed with the
Commission on September 26, 1995, File No. 33-62913).
10.10- Amendment to the 1995 Stock Plan for Non-Employee
Directors (incorporated herein by reference to the
Company's 1997 Annual Proxy Statement, filed with the
Commission on June 6, 1997).
10.11- Amendment to the 1995 Stock Plan for Non-Employee
Directors (incorporated herein by reference to Annex I
of the Company's 2001 Annual Proxy Statement, filed
with the Commission on April 25, 2001).
10.12- Laboratory Corporation of America Holdings 1997
Employee Stock Purchase Plan (incorporated herein by
reference to Annex I of the Company's Registration
Statement on Form S-8 filed with the Commission on
December 13, 1996, File No. 333-17793).
10.13- Amendments to the Laboratory Corporation of America
Holdings 1997 Employee Stock Purchase Plan
(incorporated herein by reference to the Company's
Registration Statement on Form S-8, filed with the
Commission on January 10, 2000, File No. 333-94331).
10.14- Laboratory Corporation of America Holdings Amended and
Restated 1999 Stock Incentive Plan (incorporated herein
by reference to Annex I of the Company's 1999 Annual
Proxy Statement filed with the Commission of May 3,
1999).
10.15- Laboratory Corporation of America Holdings 2000 Stock
Incentive Plan (incorporated herein by reference to the
Company's Registration Statement on Form S-8, filed
with the Commission on June 5, 2000, File No. 333-
38608).
10.16- Amendments to the 2000 Stock Incentive Plan
(incorporated herein by reference to the Company's
Registration Statement on Form S-8, filed with the
Commission on June 19, 2002, File No. 333-90764).
10.17- Dynacare Inc., Amended and Restated Employee Stock
Option Plan (incorporated herein by reference to the
Company's Registration Statement on Form S-8, filed
with the Commission on August 7, 2002, File No. 333-
97745).
10.18- DIANON Systems, Inc. 1996 Stock Incentive Plan, DIANON
Systems, Inc. 1999 Stock Incentive Plan, DIANON
Systems, Inc. 2000 Stock Incentive Plan, DIANON
Systems, Inc. 2001 Stock Incentive Plan, and UroCor,
Inc. Second Amended and Restated 1992 Stock Option Plan
(incorporated herein by reference to the Company's
Registration Statement on Form S-8, filed with the
Commission on January 21, 2003, File No. 333-102602.
21* - List of Subsidiaries of the Company
23.1*- Consent of PricewaterhouseCoopers LLP
24.1*- Power of Attorney of Jean-Luc Belingard
24.2*- Power of Attorney of Wendy E. Lane
24.3*- Power of Attorney of Robert E. Mittelstaedt, Jr.
24.4*- Power of Attorney of James B. Powell, M.D.
24.5*- Power of Attorney of Andrew G. Wallace, M.D.
24.6*- Power of Attorney of M. Keith Weikel
99.1*- Written Statement of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
* Filed herewith.
(b) Reports on Form 8-K
(1) A current report on Form 8-K dated December 17, 2003 was filed
on December 17, 2003 by the registrant, in connection with the
press release dated December 17, 2003 announcing that the
Company's Board of Directors authorized a stock repurchase
program.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
LABORATORY CORPORATION OF AMERICA HOLDINGS
------------------------------------------
Registrant
By: /s/ THOMAS P. MAC MAHON
----------------------------
Thomas P. Mac Mahon
Chairman of the Board, President
and Chief Executive Officer
Dated: March 10, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant on March 10, 2004 in the capacities indicated.
Signature Title
--------- -----
/s/ THOMAS P. MAC MAHON Chairman of the Board,
- --------------------------------- President and Chief
Thomas P. Mac Mahon Executive Officer
(Principal Executive Officer)
/s/ WESLEY R. ELINGBURG Executive Vice President,
- --------------------------------- Chief Financial Officer
Wesley R. Elingburg and Treasurer
(Principal Financial Officer
and Principal Accounting
Officer)
/s/ JEAN-LUC BELINGARD* Director
- ---------------------------------
Jean-Luc Belingard
/s/ WENDY E. LANE* Director
- ---------------------------------
Wendy E. Lane
/s/ ROBERT E. MITTELSTAEDT, JR.* Director
- ---------------------------------
Robert E. Mittelstaedt, Jr.
/s/ JAMES B. POWELL, M.D.* Director
- ---------------------------------
James B. Powell, M.D.
/s/ ANDREW G. WALLACE, M.D.* Director
- ---------------------------------
Andrew G. Wallace, M.D.
/s/ M. Keith Weikel* Director
- ---------------------------------
M. Keith Weikel
* Bradford T. Smith, by his signing his name hereto, does hereby sign this
report on behalf of the directors of the Registrant after whose typed names
asterisks appear, pursuant to powers of attorney duly executed by such
directors and filed with the Securities and Exchange Commission.
By:/s/ BRADFORD T. SMITH
---------------------
Bradford T. Smith
Attorney-in-fact
Certification [Exhibit 31.1]
- ----------------------------
I, Thomas P. Mac Mahon, certify that:
1. I have reviewed this annual report on Form 10-K of
Laboratory Corporation of America Holdings;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements
were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e) for the registrant and have:
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation;
and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's
auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal control over financial
reporting.
Date: March 10, 2004
-----------------
/s/ THOMAS P. MAC MAHON
-----------------------
Thomas P. Mac Mahon
Chief Executive Officer
Certification [Exhibit 31.2]
- ----------------------------
I, Wesley R. Elingburg, certify that:
1. I have reviewed this annual report on Form 10-K of
Laboratory Corporation of America Holdings;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements
were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e) for the registrant and have:
a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation;
and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's
auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal control over financial
reporting.
Date: March 10, 2004
-----------------
/s/ WESLEY R. ELINGBURG
-----------------------
Wesley R. Elingburg
Chief Financial Officer
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE
Page
----
Report of Independent Auditors F-2
Consolidated Financial Statements:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Shareholders'
Equity F-5
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9
Financial Statement Schedule:
II - Valuation and Qualifying Accounts and Reserves F-42
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
of Laboratory Corporation of America Holdings
In our opinion, the consolidated financial statements
listed in the accompanying index present fairly, in all material
respects, the financial position of Laboratory Corporation of
America Holdings and its subsidiaries (the Company) at December
31, 2003 and 2002, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule
listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of
America, which 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, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Note 1 to the financial statements, the
Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" which changed the method of accounting for goodwill and
other intangible assets effective January 1, 2002.
PricewaterhouseCoopers LLP
Greensboro, North Carolina
February 12, 2004
PART I - FINANCIAL INFORMATION
Item 1. Financial Information
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions, Except Per Share Data)
December 31, December 31,
2003 2002
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 123.0 $ 56.4
Accounts receivable, net 432.5 393.0
Supplies inventories 47.0 44.8
Prepaid expenses and other 36.3 33.8
Deferred income taxes 19.1 57.1
Total current assets 657.9 585.1
Property, plant and equipment, net 361.3 351.2
Goodwill 1,285.9 910.1
Intangible assets, net 571.4 307.4
Investments in equity affiliates 505.3 400.6
Other assets, net 33.1 26.0
---------- ---------
$ 3,414.9 $ 2,580.4
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 73.0 $ 79.9
Accrued expenses and other 161.1 146.1
Zero coupon-subordinated notes 523.2 --
Current portion of long-term debt 0.3 0.4
Total current liabilities 757.6 226.4
Zero coupon-subordinated notes -- 512.9
5 1/2% senior notes 353.8 --
Long-term debt, less current portion 2.5 3.1
Capital lease obligations 4.4 5.5
Deferred income taxes 273.4 79.3
Other liabilities 127.3 141.5
Commitments and contingent liabilities -- --
Shareholders' equity:
Preferred Stock, $0.10 par value; 30,000,000
shares authorized; shares issued: none
Common stock, $0.10 par value; 265,000,000
shares authorized; 148,855,110 and
147,839,103 shares issued and outstanding
at December 31, 2003 and December 31,
2002, respectively 14.9 14.8
Additional paid-in capital 1,440.9 1,406.5
Retained earnings 587.1 266.1
Treasury stock, at cost; 5,521,620 and
97,426 shares at December 31, 2003
and December 31, 2002, respectively (159.3) (4.4)
Unearned restricted stock compensation (22.4) (41.4)
Accumulated other comprehensive
earnings (loss) 34.7 (29.9)
---------- ---------
Total shareholders' equity 1,895.9 1,611.7
---------- ---------
$ 3,414.9 $ 2,580.4
========== =========
The accompanying notes are an integral part of these 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,
-----------------------------------
2003 2002 2001
-----------------------------------
Net sales $ 2,939.4 $ 2,507.7 $ 2,199.8
Cost of sales 1,714.8 1,445.9 1,274.2
--------- --------- ---------
Gross profit 1,224.6 1,061.8 925.6
Selling, general and
administrative expenses 651.8 585.5 516.5
Amortization of intangibles
and other assets 37.6 23.8 41.5
Restructuring and other
special charges 1.5 17.5 --
--------- --------- ---------
Operating income 533.7 435.0 367.6
Other income (expenses):
Interest expense (40.9) (19.2) (27.0)
Income from equity investments, net 43.7 13.4 --
Investment income 5.1 3.7 2.4
Other, net (1.2) (0.6) (1.8)
Termination of interest rate
swap agreement -- -- (8.9)
Loss on early debt termination -- -- (5.5)
--------- --------- ----------
Earnings before income taxes 540.4 432.3 326.8
Provision for income taxes 219.4 177.7 147.3
--------- --------- ----------
Net earnings $ 321.0 $ 254.6 $ 179.5
========= ========= ==========
Basic earnings per
common share $ 2.23 $ 1.78 $ 1.29
========== ========== ==========
Diluted earnings per
common share $ 2.22 $ 1.77 $ 1.27
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Millions)
Common Stock Additional Retained
--------------- Paid-in Earnings
Shares Amount Capital (Deficit)
--------------- ---------- ----------
BALANCE AT DECEMBER 31, 2000 139.5 $ 14.0 $1,041.2 $ (168.0)
Comprehensive earnings:
Net earnings -- -- -- 179.5
Other comprehensive loss:
Cumulative effect of
change in accounting
principle (net-of-tax
of $0.4) -- -- -- --
Unrealized derivative loss
on cash flow hedge -- -- -- --
Termination of interest
rate swap agreement -- -- -- --
Foreign currency
translation adjustments -- -- -- --
Minimum pension liability
adjustment -- -- -- --
Comprehensive earnings
Issuance of common stock 1.6 0.2 14.8 --
Issuance of restricted
stock awards -- -- 11.3 --
Amortization of unearned
restricted stock
compensation -- -- -- --
Income tax benefit from stock
options exercised -- -- 14.4 --
----- ----- ------- ------
BALANCE AT DECEMBER 31, 2001 141.1 14.2 1,081.7 11.5
Comprehensive earnings:
Net earnings -- -- -- 254.6
Other comprehensive loss:
Foreign currency
translation adjustments -- -- -- --
Minimum pension liability
adjustment -- -- -- --
Tax effect of other
comprehensive loss
adjustments -- -- -- --
Comprehensive earnings
Issuance of common stock 1.7 0.1 18.2 --
Issuance of restricted
stock awards -- -- 40.9 --
Surrender of restricted
stock awards -- -- -- --
Issuance of common stock and
assumption of stock options
in connection with
acquisition,(net of
forfeitures) 5.0 0.5 249.7 --
Amortization of unearned
restricted stock
compensation -- -- -- --
Income tax benefit from stock
options exercised -- -- 16.0 --
----- ----- ------- ------
BALANCE AT DECEMBER 31, 2002 147.8 14.8 1,406.5 266.1
Comprehensive earnings:
Net earnings -- -- -- 321.0
Other comprehensive loss:
Foreign currency
translation adjustments -- -- -- --
Minimum pension liability
adjustment -- -- -- --
Tax effect of other
comprehensive loss
adjustments -- -- -- --
Comprehensive earnings
Issuance of common stock 1.1 0.1 21.3 --
Issuance of restricted
stock awards -- -- 0.2 --
Cancellation of restricted
stock awards -- -- (1.1) --
Amortization of unearned
restricted stock
compensation -- -- -- --
Income tax benefit from
stock options exercised -- -- 5.5 --
Assumption of vested stock
options in connection
with acquisition -- -- 8.5 --
Purchase of common stock -- -- -- --
----- ------ -------- --------
BALANCE AT DECEMBER 31, 2003 148.9 $ 14.9 $1,440.9 $ 587.1
===== ====== ======== ========
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in Millions)
Unearned Accumulated
Restricted Other Total
Treasury Stock Comprehensive Shareholders'
Stock Compensation Earnings(Loss) Equity
-------- ------------ -------------- ----------
BALANCE AT DECEMBER 31, 2000 $ -- $ (9.4) $ (0.4) $ 877.4
Comprehensive earnings(loss):
Net earnings -- -- -- 179.5
Other comprehensive loss:
Cumulative effect of change
in accounting principle
(net-of-tax of $0.4) -- -- 0.6 0.6
Unrealized derivative loss
on cash flow hedge -- -- (9.5) (9.5)
Termination of interest
rate swap agreement -- -- 8.9 8.9
Foreign currency translation
adjustments -- -- (0.6) (0.6)
Minimum pension liability
adjustment -- -- (7.8) (7.8)
-----
Comprehensive earnings(loss) 171.1
Issuance of common stock -- -- -- 15.0
Issuance of restricted
stock awards -- (11.3) -- --
Amortization of unearned
restricted stock compensation -- 7.5 -- 7.5
Income tax benefit from stock
options exercised -- -- -- 14.4
------ ------ ------ -------
BALANCE AT DECEMBER 31, 2001 -- (13.2) (8.8) 1,085.4
Comprehensive earnings(loss):
Net earnings -- -- -- 254.6
Other comprehensive loss:
Foreign currency
translation adjustments -- -- 2.3 2.3
Minimum pension liability
adjustment -- -- (43.2) (43.2)
Tax effect of other
comprehensive loss
adjustments -- -- 19.8 19.8
-------
Comprehensive earnings 233.5
Issuance of common stock -- -- -- 18.3
Issuance of restricted
stock awards -- (40.9) -- --
Surrender of restricted
stock awards (4.4) -- -- (4.4)
Issuance of common stock and
assumption of stock options in
connection with acquisition,
(net of forfeitures) -- (1.6) -- 248.6
Amortization of unearned
restricted stock compensation -- 14.3 -- 14.3
Income tax benefit from stock
options exercised -- -- -- 16.0
------ ------ ------ -------
BALANCE AT DECEMBER 31, 2002 (4.4) (41.4) (29.9) 1,611.7
Comprehensive earnings:
Net earnings -- -- -- 321.0
Other comprehensive loss:
Foreign currency translation
adjustments -- -- 87.8 87.8
Minimum pension liability
adjustment -- -- 19.6 19.6
Tax effect of other
comprehensive loss
adjustments -- -- (42.8) (42.8)
-------
Comprehensive earnings 385.6
Issuance of common stock -- -- -- 22.5
Issuance of restricted
stock awards -- (0.2) -- --
Cancellation of restricted
stock awards -- 1.1 -- --
Amortization of unearned
restricted stock compensation -- 18.1 -- 18.1
Income tax benefit from stock
options exercised -- -- -- 5.5
Assumption of vested stock
options in connection
with acquisition -- -- -- 8.5
Purchase of common stock (154.9) -- -- (154.9)
-------- -------- -------- --------
BALANCE AT DECEMBER 31, 2003 $ (159.3) $ (22.4) $ 34.7 $1,895.9
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
Years Ended December 31,
------------------------------
2003 2002 2001
------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 321.0 $ 254.6 $ 179.5
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 135.6 101.8 104.0
Stock compensation 18.1 14.3 7.5
Loss on sale of assets 0.2 0.6 1.8
Accreted interest on zero coupon-
subordinated notes 10.3 10.1 3.0
Loss on early
debt termination -- -- 5.5
Termination of interest rate
swap agreement -- -- 8.9
Cumulative earnings in excess of
distribution from equity affiliates (5.7) -- --
Deferred income taxes 86.3 28.9 1.6
Change in assets and liabilities (net of
effects of acquisitions):
Decrease (increase) in accounts
receivable, net (6.0) 11.1 16.2
Increase in inventories (0.1) (1.5) (3.6)
Decrease (increase) in prepaid
expenses and other (8.5) (12.5) 5.8
(Decrease) increase in
accounts payable (15.6) (7.8) (3.4)
Increase (decrease) in accrued
expenses and other 28.7 45.3 (10.8)
------- ------- -------
Net cash provided by operating activities 564.3 444.9 316.0
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (83.6) (74.3) (88.1)
Proceeds from sale of assets 1.0 1.8 4.4
Deferred payments on acquisitions (17.7) (21.0) (18.6)
Proceeds from sale of marketable securities 50.4 -- --
Distributions from equity affiliates in
excess of cumulative earnings 1.9 1.5 --
Acquisition of licensing technology (15.0) (15.0) --
Acquisition of businesses, net of cash
acquired (647.5) (261.9) (127.7)
------- ------- -------
Net cash used for investing activities $ (710.5) $ (368.9) $ (230.0)
------- ------- -------
(continued)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
Years Ended December 31,
-----------------------------------
2003 2002 2001
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bridge loan $ 350.0 $ -- $ --
Payments on bridge loan (350.0) -- --
Proceeds from credit facilities 275.0 330.0 75.0
Payments on credit facilities (275.0) (330.0) (75.0)
Proceeds from senior note offering 350.0 -- --
Proceeds from zero coupon-subordinated
notes -- -- 499.8
Payments on other long-term debt (0.7) (204.6) (478.5)
Payment of debt issuance costs (7.3) (3.2) (11.2)
Termination of interest rate swap
agreement 5.3 19.6 (8.9)
Payments on long-term lease obligations (1.1) (1.1) (1.1)
Purchase of common stock (154.9) -- --
Net proceeds from issuance of stock to
employees 21.0 18.2 14.9
------- ------- -------
Net cash provided by (used for)
financing activities 212.3 (171.1) 15.0
------- ------- -------
Effect of exchange rate changes on cash
and cash equivalents 0.5 2.3 (0.6)
------- ------- -------
Net (decrease) increase in cash and
cash equivalents 66.6 (92.8) 100.4
Cash and cash equivalents at
beginning of period 56.4 149.2 48.8
------- ------- -------
Cash and cash equivalents at
end of period $ 123.0 $ 56.4 $ 149.2
======= ======= =======
Supplemental schedule of cash
flow information:
Cash paid during the period for:
Interest $ 12.1 $ 1.5 $ 23.2
Income taxes, net of refunds 107.9 135.0 127.7
Disclosure of non-cash financing
and investing activities:
Issuance of restricted stock awards 0.2 40.9 11.3
Assumption of vested stock options in
connection with acquisition 8.5 5.0 --
Surrender of restricted stock awards -- 4.4 --
Issuance of common stock in acquisitions -- 245.6 --
The accompanying notes are an integral part of these 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 Financial Statement Presentation:
Laboratory Corporation of America Holdings with its subsidiaries
(the "Company") is the second largest independent clinical laboratory
company in the United States based on 2003 net revenues. Through a
national network of laboratories, the Company offers a broad range of
testing services used by the medical profession in routine testing,
patient diagnosis, and in the monitoring and treatment of disease. In
addition, the Company has developed specialty and niche businesses
based on certain types of specialized testing capabilities and client
requirements, such as oncology testing, HIV genotyping and
phenotyping, diagnostic genetics and clinical research trials.
Since its founding in 1971, the Company has grown into a network
of 31 primary testing facilities and over 1,200 service sites
consisting of branches, patient service centers and STAT
laboratories. With approximately 23,000 employees, the Company
processes tests on more than 340,000 patient specimens daily and
provides clinical laboratory testing services in all 50 states, the
District of Columbia, Puerto Rico and two provinces in Canada. The
Company operates in one business segment.
The consolidated financial statements include the accounts of
Laboratory Corporation of America Holdings and its subsidiaries after
elimination of all material intercompany accounts and transactions.
On January 17, 2003, the Company completed the acquisition of Dianon,
a leading provider of anatomic pathology and oncology testing
services. On July 25, 2002, the Company completed the acquisition of
Dynacare, a provider of clinical laboratory testing services.
Disclosure of certain business combination transactions is included
in Notes 2, 3 and 4 - Business Acquisitions.
The financial statements of the Company's foreign subsidiaries
are measured using the local currency as the functional currency.
Assets and liabilities are translated at exchange rates as of the
balance sheet date. Revenues and expenses are translated at average
monthly exchange rates prevailing during the year. Resulting
translation adjustments are included in "Accumulated other
comprehensive earnings(loss)".
Cash Equivalents:
Cash equivalents (primarily investments in money market funds,
time deposits, commercial paper and Eurodollars which have original
maturities of three months or less at the date of purchase) are
carried at cost which approximates market. As a result of the
Company's cash management system, checks issued but not presented to
the banks for payment may create negative book cash balances. Such
negative balances are included in trade accounts payable and totaled
$17.7 and $23.1 at December 31, 2003 and 2002, respectively.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Inventories:
Inventories, consisting primarily of purchased laboratory
supplies, are stated at the lower of cost (first-in, first-out) or
market.
Derivative Financial Instruments:
Interest rate swap agreements, which have been used by the
Company from time to time in the management of interest rate
exposure, are accounted for at fair value. Amounts to be paid or
received under such agreements are recognized as interest income or
expense in the periods in which they accrue.
The Company's zero coupon-subordinated notes contain the
following three features that are considered to be embedded
derivative instruments under Statement of Financial Accounting
Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities":
1) The Company will pay contingent cash interest on the zero
coupon subordinated notes after September 11, 2006, if the
average market price of the notes equals 120% or more of the
sum of the issue price, accrued original issue discount and
contingent additional principal, if any, for a specified
measurement period.
2) Contingent additional principal will accrue on the zero
coupon-subordinated notes during the two year period from
September 11, 2004 to September 11, 2006, if the Company's
stock price is at or below specified thresholds.
3) Holders may surrender zero coupon-subordinated notes for
conversion during any period in which the rating assigned to
the zero coupon-subordinated notes by Standard & Poor's
Ratings Services is BB- or lower.
Based upon independent appraisals, these embedded
derivatives had no fair market value at December 31, 2003 and
2002.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
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
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 term of
the related leases. Expenditures for repairs and maintenance are
charged to operations as incurred. Retirements, sales and other
disposals of assets are recorded by removing the cost and accumulated
depreciation from the related accounts with any resulting gain or
loss reflected in operations.
Capitalized Software Costs:
The Company capitalizes purchased software which is ready for
service and capitalizes software development costs incurred on
significant projects starting from the time that the preliminary
project stage is completed and management commits to funding a
project until the project is substantially complete and the software
is ready for its intended use. Capitalized costs include direct
material and service costs and payroll and payroll-related costs.
Research and development costs and other computer software
maintenance costs related to software development are expensed as
incurred. Capitalized software costs are amortized using the
straight-line method over the estimated useful life of the underlying
system, generally five years.
Debt Issuance Costs:
The costs related to the issuance of debt are capitalized and
amortized to interest expense using the effective interest method
over the terms of the related debt.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Professional Liability:
The Company is self-insured for professional liability claims
arising in the normal course of business, generally related to the
testing and reporting of laboratory test results. The Company
records a reserve for such asserted and estimated unasserted claims
based on actuarial assessments of future settlement and legal defense
costs.
Fair Value of Financial Instruments:
The carrying amounts of cash and cash equivalents, accounts
receivable, income taxes receivable and accounts payable are
considered to be representative of their respective fair values
due to their short-term nature. The fair market value of the zero
coupon-subordinated notes, based on market pricing, was approximately
$465.6 and $495.2 as of December 31, 2003 and 2002, respectively.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash
equivalents and accounts receivable.
The Company maintains cash and cash equivalents with various
major financial institutions. The total cash balances on deposit
that exceeded the balances insured by the F.D.I.C., were
approximately $121.4 at December 31, 2003. Cash equivalents at
December 31, 2003, totaled $93.9, which includes amounts invested in
treasury bills and short-term bonds.
Substantially all of the Company's accounts receivable are with
companies and individuals in the health care industry. However,
concentrations of credit risk are limited due to the number of the
Company's clients as well as their dispersion across many different
geographic regions.
Accounts receivable balances (gross) from Medicare and
Medicaid were $100.4 and $96.1 at December 31, 2003 and 2002,
respectively.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
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
contractual discounts and 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 as an
adjustment to revenue. In 2003, 2002 and 2001, approximately
19%, 16%, and 16%, respectively of the Company's revenues were
derived from tests performed for the beneficiaries of the
Medicare and Medicaid programs. Under capitated agreements with
managed care customers, the Company recognizes revenue based on
a predetermined monthly contractual rate for each member of the
managed care plan regardless of the number or cost of services
provided by the Company.
Income Taxes:
The Company accounts for income taxes utilizing the asset
and liability method. Under this method 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 and for tax loss carryforwards. 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.
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. Future tax benefits, such as net operating
loss carryforwards, are recognized to the extent that
realization of such benefits is more likely than not.
Stock Splits:
On June 11, 2001, the Company effected a two-for-one stock split
through the issuance of a stock dividend of one new share of common
stock for each share of common stock held by shareholders of record
on June 4, 2001. On May 10, 2002, the Company effected a two-for-one
stock split through the issuance of a stock dividend of one new share
of common stock for each share of common stock held by shareholders
of record on May 3, 2002. All references to common stock, common
shares outstanding, average number of common shares outstanding,
stock options, restricted shares and per share amounts in the
Consolidated Financial Statements and Notes to Consolidated Financial
Statements have been restated to reflect common stock splits and the
reverse split on a retroactive basis.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Stock Compensation Plans:
The Company accounts for its employee stock option plans using
the intrinsic method under APB Opinion No. 25 and related
Interpretations. Accordingly, compensation for stock options is
measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee must
pay to acquire the stock. The Company's employee stock purchase plan
is also accounted for under APB Opinion No. 25 and is treated as non-
compensatory.
The Company applies the provisions of APB Opinion No. 25 in
accounting for its employee stock option and stock purchase
plans and, accordingly, no compensation cost has been recognized
for these plans in the financial statements. Had the Company
determined compensation cost based on the fair value method as
defined in SFAS No. 123, the impact on the Company's net
earnings on a pro forma basis is indicated below:
Years ended
December 31,
2003 2002 2001
-------------------------------
Net earnings, as reported $ 321.0 $ 254.6 $ 179.5
Add: Stock-based compensation
under APB 25 -- -- --
Deduct: Total stock-based compensation
expense determined under fair value
method for all awards, net of related
tax effects (25.2) (20.7) (12.2)
------- ------- -------
Pro forma net income $ 295.8 $ 233.9 $ 167.3
======= ======= =======
Basic earnings per
common share As reported $ 2.23 $ 1.78 $ 1.29
Pro forma 2.05 1.64 1.20
Diluted earnings per
common share As reported $ 2.22 $ 1.77 $ 1.27
Pro forma 2.04 1.62 1.18
The pro forma weighted average fair values at date of grant
for options issued during 2003, 2002 and 2001 were $13.43,
$23.50 and $19.72 respectively, and were estimated using the
Black-Scholes option pricing model. Weighted average
assumptions for the expected life in years, volatility and
dividend yield were 7 years, .5, and 0% for each of the three
years ended December 31, 2003. Interest rate assumptions were
3.2%, 3.0% and 4.3% for the years ended December 31, 2003, 2002 and
2001, respectively. Compensation cost for restricted stock awards
is recorded by allocating their aggregate grant date fair value
over their vesting period.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Earnings per Share:
Basic earnings per share is computed by dividing net
earnings, less preferred stock dividends and accretion, by the
weighted average number of common shares outstanding. Diluted
earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding plus
potentially dilutive shares, as if they had been issued at the
beginning of the period presented. Potentially dilutive common
shares result primarily from the Company's restricted stock
awards and outstanding stock options.
The following represents a reconciliation of the weighted
average shares used in the calculation of basic and diluted
earnings per share:
Years ended December 31,
2003 2002 2001
-----------------------------------------
Basic 143,969,177 142,791,247 138,837,750
Assumed conversion/exercise
of:
Stock options 449,439 584,259 1,116,399
Restricted stock awards 337,440 822,210 1,123,294
----------- ----------- -----------
Diluted 144,756,056 144,197,716 141,077,443
=========== =========== ===========
The following table summarizes the potential common shares
not included in the computation of diluted earnings per share
because their impact would have been antidilutive:
December 31,
2003 2002 2001
--------------------------------
Stock Options 3,902,019 2,012,960 29,738
The Company's zero-coupon subordinated notes are
contingently convertible into 9,977,634 shares of common stock
and are not currently included in the diluted earnings per share
calculation because these notes were not convertible according
to their terms during 2003, 2002 and 2001.
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. Significant estimates include the allowances for
doubtful accounts and deferred tax assets, amortization lives
for intangible assets and accruals for self-insurance reserves.
The allowance for doubtful accounts is determined based on
historical collection trends, the aging of accounts, current
economic conditions and regulatory changes. Actual results
could differ from those estimates.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Long-Lived Assets:
Goodwill is evaluated for impairment by applying a fair value
based test on an annual basis and more frequently if events or
changes in circumstances indicate that the asset might be impaired.
Long-lived assets, other than goodwill, are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amounts may not be recoverable. Recoverability of
assets to be held and used is determined by the Company at the entity
level by a comparison of the carrying amount of the assets to future
undiscounted net cash flows before interest expense and income taxes
expected to be generated by the assets. Impairment, if any, is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets (based on market prices in an
active market or on discounted cash flows). Assets to be disposed of
are reported at the lower of the carrying amount or fair value.
The Company completed an annual impairment analysis of its
indefinite lived assets, including goodwill, and has found no
instances of impairment as of December 31, 2003.
Intangible Assets:
Prior to July 1, 2001, the cost of acquired businesses in excess
of the fair value of net assets acquired was recorded as goodwill and
amortized on the straight-line basis ranging from 20 to 40 years.
Effective January 1, 2002, the Company adopted SFAS No. 142 "Goodwill
and Other Intangible Assets". This standard requires that goodwill
and other intangibles that are acquired in business combinations and
that have indefinite useful lives are not to be amortized and are to
be reviewed for impairment annually based on an assessment of fair
value. Other intangibles (patents and technology, customer lists and
non-compete agreements), are amortized on a straight-line basis over
the expected periods to be benefited, such as legal life for patents
and technology, 10 to 25 years for customer lists and contractual
lives for non-compete agreements. With the adoption of SFAS No. 142,
the Company reassessed the useful lives of these intangible assets
and determined that no changes are currently necessary.
Research and Development
In August 2003, the Company formed a new, majority-owned
subsidiary with a former owner of the Company's subsidiary, National
Genetics Institute, Inc. In conjunction with the formation of this
subsidiary, the principals entered into a two-year joint venture
agreement whereby the Company will fund a total of $3.0 for research
and development efforts to be conducted on behalf of the newly formed
subsidiary. It is the Company's policy to expense all research and
development costs when incurred. As of December 31, 2003, the Company
had incurred approximately $0.3 in costs associated with this
venture.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Reclassifications
Certain amounts in the prior year's financial statements
have been reclassified to conform with the current year
presentation.
2. BUSINESS ACQUISITION - DIANON SYSTEMS, INC.
On January 17, 2003, the Company completed the acquisition
of all of the outstanding shares of DIANON Systems, Inc.
(DIANON) for $47.50 per share in cash, or approximately $596.0
including transaction fees and expenses, and converted
approximately 390,000 vested DIANON employee stock options into
approximately 690,000 vested Company options valued at $8.5. The
transaction total of approximately $604.5 was funded by a
combination of cash on hand, borrowings under the Company's
senior credit facilities and a bridge loan facility.
DIANON is a leading provider of anatomic pathology and
oncology testing services in the U.S. and had 2001 revenues of
approximately $125.7. DIANON had approximately 1,100 employees
at the closing date of the acquisition and processed more than
8,000 samples per day in one main testing facility and four
regional labs.
The acquisition of DIANON was accounted for under the
purchase method of accounting. As such, the cost to acquire
DIANON has been allocated to the assets and liabilities acquired
based on estimated fair values as of the closing date. The
consolidated financial statements include the results of
operations of DIANON subsequent to the closing of the
acquisition.
The following table summarizes the Company's purchase price
allocation related to the acquisition of DIANON based on the
fair value of the assets acquired and liabilities assumed on the
acquisition date.
Fair Values
as of
January 17, 2003
----------------
Current assets $ 87.7
Property, plant and equipment 28.3
Goodwill 355.5
Identifiable intangible assets 271.5
Other assets 3.0
--------
Total assets acquired 746.0
--------
Current liabilities $ 33.1
Other liabilities 108.4
--------
Total liabilities assumed 141.5
--------
Net assets acquired $ 604.5
========
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
As a result of this acquisition, the Company recorded an
addition to non-deductible goodwill of approximately $355.5, an
addition to customer lists of approximately $227.8 (expected
period of benefit of 30 years, non-deductible for tax) and an
addition to trade names of approximately $43.7 (expected period
of benefit of 15 years, non-deductible for tax).
The Company believes that the combined company is now in a
position nationally to offer to both primary care physicians and
specialists such as oncologists, urologists and
gastroenterologists, the broadest range of leading-edge
anatomic, genomic and clinical testing technology for the large
and rapidly growing cancer diagnostic market.
3. BUSINESS ACQUISITION - DYNACARE INC.
On July 25, 2002, the Company completed the acquisition of
all of the outstanding stock of Dynacare Inc. in a combination
cash and stock transaction with a combined value of
approximately $496.4 including transaction costs. The Company
also converted approximately 553,958 unvested Dynacare stock
options into 297,013 unvested Company options to acquire shares
of the Company at terms comparable to those under the
predecessor Dynacare plan. This conversion of outstanding
unvested options increased the non-cash consideration of the
transaction by approximately $5.0 and resulted in the recording
of initial deferred compensation of approximately $2.5. In
conjunction with this acquisition, the Company repaid Dynacare's
existing $204.4 of senior subordinated unsecured notes,
including a call premium of approximately $7.0. The transaction
was financed by issuing approximately 4.9 million shares of the
Company's common stock, valued at approximately $245.6, assuming
unvested Dynacare options valued at $5.0, and using $245.8 in
available cash and the proceeds of a $150.0 bridge loan and
borrowings of $50.0 under the Company's $300.0 senior credit
facilities.
The Company terminated a number of interest rate swap
agreements related to Dynacare's existing senior subordinated
unsecured notes. The $19.6 the Company received upon
termination of these swap agreements was included in the
estimated fair value of the net assets acquired as of July 25,
2002.
Dynacare had 2001 revenues of approximately $238.0 and had
approximately 6,300 employees at the closing date of the
acquisition. Dynacare operated in 21 states and two provinces
in Canada with 24 primary laboratories, 2 esoteric laboratories,
115 rapid response labs and 302 patient service centers.
The acquisition of Dynacare was accounted for under the
purchase method of accounting. As such, the cost to acquire
Dynacare has been allocated to the assets and liabilities
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
acquired based on fair values as of the closing date. The
consolidated financial statements include the results of
operations of Dynacare subsequent to the closing of the
acquisition.
The following table summarizes the Company's purchase price
allocation related to the acquisition of Dynacare based on the fair
value of the assets acquired and liabilities assumed on the
acquisition date.
Fair Values
as of
July 25, 2002
-------------
Current assets $ 100.2
Property, plant and equipment 48.0
Goodwill 173.3
Identifiable intangible assets 52.5
Investment in equity affiliates 402.1
Other assets 23.2
Deferred compensation 2.5
-------
Total assets acquired 801.8
-------
Current liabilities 268.1
Long-term debt 12.9
Other liabilities 24.4
-------
Total liabilities assumed 305.4
-------
Net assets acquired $ 496.4
=======
As a result of this acquisition, the Company recorded an
addition to non-deductible goodwill of approximately $173.3 and an
addition to customer lists of approximately $52.5 (expected period of
benefit of 15 years). The investments in equity affiliates include
$341.7 of Canadian licenses (with an indefinite life and deductible
for tax).
The Company believes that the acquisition of Dynacare enhances
its ability to provide health coverage in the United States and
Canada by expanding its customer base and service capabilities. The
Company believes that the price paid for the outstanding shares of
Dynacare was competitive with market conditions existing at the time.
The following unaudited pro forma combined financial
information for the years ended December 31, 2003 and 2002
assumes that the DIANON and Dynacare, Inc. acquisitions which
were closed by the Company on January 17, 2003 and July 25,
2002, respectively, were acquired on January 1, 2002:
Years Ended December 31
2003 2002
--------------------
Net sales $2,947.4 $2,867.7
Net earnings 321.1 255.3
Diluted earnings
per common share $ 2.22 1.73
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
4. BUSINESS ACQUISITIONS - OTHER
On June 4, 2001, the Company completed the acquisition of
Minneapolis-based Viro-Med Laboratories Inc. for approximately $31.7
in cash and contingent future payments of $12.0 ($3.7 and $7.9 earned
and paid in 2002 and 2001, respectively) based upon attainment of
specific earnings targets. Viro-Med's revenues for the year ended
December 31, 2000 were approximately $25.2.
On April 30, 2001, the Company completed the acquisition of all
of the outstanding stock of Path Lab Holdings, Inc. (Path Lab), which
is based in Portsmouth, New Hampshire for approximately $83.0 in cash
and contingent future payments of $25.0 ($11.1 and $5.5 earned and
paid in 2002 and 2001, respectively) based upon attainment of
specific earnings targets. Path Lab's revenues for the year ended
December 31, 2000 were approximately $51.6.
5. INVESTMENTS IN EQUITY AFFILIATES
At December 31, 2003 (as a result of the Dynacare
acquisition) the Company had investments in the following equity
affiliates:
Net Percentage
Location Investment Interest Owned
Milwaukee, Wisconsin $ 3.5 50.00%
Ontario, Canada $ 452.6 72.99%
Alberta, Canada $ 49.2 43.37%
Each of the joint venture agreements that govern the
conduct of business of these equity affiliates mandates
unanimous agreement between partners on all major business
decisions as well as providing other preemptive rights to each
partner. These investments are accounted for under the equity
method of accounting. The Company has no material obligations
or guarantees to, or in support of, these unconsolidated joint
ventures and their operations.
Condensed financial information for the Ontario, Canada
equity affiliate as of December 31, 2003 and for the period of
January 1, 2003 through December 31, 2003 is as follows:
Current assets $ 20.8
Other assets 99.2
-------
Total assets 120.0
=======
Total liabilities 14.5
Shareholders' equity 105.5
-------
Total liabilities and
shareholders' equity $ 120.0
=======
Net sales $ 133.9
Gross profit $ 74.0
Net earnings $ 48.5
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
6. INTEGRATION OF DYNACARE AND DIANON
During the third quarter of 2002, the Company finalized its plan
related to the integration of Dynacare's U.S. operations into the
Company's service delivery network. The plan focuses on reducing
redundant facilities, while maintaining a focus on providing
excellent customer service. A reduction in staffing will occur as
the Company executes the integration plan and consolidates duplicate
or overlapping functions and facilities. Employee groups being
affected as a result of this plan include those involved in the
collection and testing of specimens, as well as administrative and
other support functions.
In connection with the Dynacare integration plan, the Company
recorded $14.6 of costs associated with the execution of the plan.
The majority of these integration costs related to employee severance
and contractual obligations associated with leased facilities and
equipment. Of the total costs indicated above, $12.1 related to
actions that impact the employees and operations of Dynacare, and was
accounted for as a cost of the Dynacare acquisition and included in
goodwill. Of the $12.1, $6.0 related to employee severance benefits
for approximately 722 employees, with the remainder primarily related
to contractual obligations associated with leased facilities and
equipment. In addition, the Company recorded restructuring expense
of $2.5, relating to integration costs of actions that impact the
Company's existing employees and operations. Of this amount $1.0
related to employee severance benefits for approximately 78
employees, with the remainder primarily related to contractual
obligations associated with leased facilities and equipment.
The Company also recorded a special bad debt provision of
approximately $15.0 related to the acquired Dynacare accounts
receivable balance. This provision, based on Company experience, was
made in anticipation of changes in staffing and collection procedures
that will occur as the Company converts Dynacare customers to
LabCorp's billing system and related customer service organization.
In connection with the DIANON integration plan, the Company
recorded $20.8 of costs associated with the execution of the
plan. The majority of these integration costs related to
contractual obligations associated with leased facilities and
equipment ($12.7) and employee severance ($8.1). These costs
were accounted for as costs of the DIANON acquisition.
During the third and fourth quarters of 2003, the Company
recorded a pre-tax restructuring charge totaling $6.4 in connection
with the continuing integration of its recent acquisitions.
Substantially all of this charge relates to the fair value of
employee severance benefits for approximately 730 employees. The
Company also recorded certain adjustments in the fourth quarter of
2003 to previously recorded restructuring charges due to changes in
estimates, resulting in a net credit of approximately $4.9.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
7. RESTRUCTURING AND NON-RECURRING CHARGES
The following represents the Company's restructuring
activities for each of the years in the three years ended
December 31, 2003:
Lease and
Severance Other Facility
Costs Costs Total
Balance at January 1, 2001 1.9 20.1 22.0
Reclassifications
non-cash items (0.7) 0.2 (0.5)
Cash payments (1.0) (4.5) (5.5)
------ ------ ------
Balance at December 31, 2001 0.2 15.8 16.0
Dynacare integration 7.0 7.6 14.6
Reclassifications
non-cash items -- (1.2) (1.2)
Cash payments (1.4) (1.9) (3.3)
------ ------ ------
Balance at December 31, 2002 5.8 20.3 26.1
Dianon integration 8.1 12.7 20.8
Restructuring charges 4.6 1.8 6.4
Restructuring adjustments (0.8) (4.1) (4.9)
Cash payments (13.7) (3.9) (17.6)
------ ------ ------
Balance at December 31, 2003 4.0 26.8 30.8
====== ====== ======
Current $ 15.0
Non-current 15.8
------
$ 30.8
======
8. ACCOUNTS RECEIVABLE, NET
December 31, December 31,
2003 2002
------------ ------------
Gross accounts receivable $ 565.5 $ 536.2
Less allowance for doubtful accounts (133.1) (143.2)
--------- ---------
$ 432.5 $ 393.0
========= =========
The provision for doubtful accounts was $214.2, $214.9 and
$202.5 in 2003, 2002 and 2001 respectively.
9. PROPERTY, PLANT AND EQUIPMENT, NET
December 31, December 31,
2003 2002
------------ ------------
Land $ 15.3 $ 15.3
Buildings and building improvements 90.4 89.5
Machinery and equipment 473.5 409.7
Leasehold improvements 81.1 76.2
Furniture and fixtures 17.5 16.9
Construction in progress 28.4 30.0
Buildings under capital leases 5.4 5.4
Equipment under capital leases 2.2 3.8
-------- --------
713.8 646.8
Less accumulated depreciation
and amortization of capital lease assets (352.5) (295.6)
-------- --------
$ 361.3 $ 351.2
======== ========
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Depreciation expense and amortization of capital lease
assets was $91.6, $73.0 and $59.6 for 2003, 2002 and 2001,
respectively.
10. GOODWILL AND INTANGIBLE ASSETS
Goodwill at December 31, 2003 and 2002 consisted of the
following:
2003 2002
--------- ---------
Goodwill $1,477.9 $1,102.1
Less: accumulated amortization (192.0) (192.0)
------- -------
Goodwill, net $1,285.9 $ 910.1
======= =======
The changes in the gross carrying amount of goodwill for
the years ended December 31, 2003 and 2002 are as follows:
2003 2002
--------- --------
Balance as of January 1 $1,102.1 $ 911.3
Goodwill acquired during the year 388.7 190.8
Adjustments to goodwill (12.9) --
------- -------
Balance as of December 31 $1,477.9 $1,102.1
======= =======
The components of identifiable intangible assets are as follows:
December 31, 2003 December 31, 2002
----------------------- -----------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
----------------------- -----------------------
Customer lists $ 582.5 $ 118.1 $ 338.4 $ 90.8
Patents, licenses
And technology 67.2 11.1 55.2 6.0
Non-compete
agreements 23.0 18.1 21.3 16.1
Trade name 49.6 3.6 5.9 0.5
------- ------- ------- -------
$ 722.3 $ 150.9 $ 420.8 $ 113.4
======= ======= ======= =======
Amortization of intangible assets was $37.6, $23.8 and
$41.5 in 2003, 2002 and 2001, respectively. Amortization
expense for the net carrying amount of intangible assets is
estimated to be $41.0 in fiscal 2004, $40.3 in fiscal 2005,
$38.9 in fiscal 2006, $37.4 in fiscal 2007, and $35.4 in fiscal
2008.
The Company paid approximately $15.0 in 2003 and $15.0 in 2002
for certain exclusive and non-exclusive licensing rights to
diagnostic testing technology. These amounts are being
amortized over the life of the licensing agreement.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
The following table presents net earnings and basic and diluted
earnings per common share, adjusted to reflect results as if the non-
amortization provisions of SFAS No. 142 had been in effect for the
periods presented.
December 31,
----------------------------------
2003 2002 2001
----------------------------------
Net earnings attributable to
common shareholders $ 321.0 $ 254.6 $ 179.5
Add back: goodwill amortization,
net of tax -- $ -- 25.0
------ ------ ------
Adjusted net earnings attributable to
common shareholders $ 321.0 $ 254.6 $ 204.5
====== ====== ======
Basic earnings per share:
Reported basic earnings per share $ 2.23 $ 1.78 $ 1.29
Add back: goodwill amortization,
net of tax -- -- 0.18
------ ------ ------
Adjusted basic earnings per share $ 2.23 $ 1.78 $ 1.47
====== ====== ======
Diluted earnings per share:
Reported diluted earnings per share $ 2.22 $ 1.77 $ 1.27
Add back: goodwill amortization,
net of tax -- -- 0.18
------ ------ ------
Adjusted diluted earnings per share $ 2.22 $ 1.77 $ 1.45
====== ====== ======
11. ACCRUED EXPENSES AND OTHER
December 31, December 31,
2003 2002
------------ ------------
Employee compensation and benefits $ 60.6 $ 60.8
Acquisition related accruals 7.1 15.5
Restructuring reserves 15.0 10.0
Accrued taxes payable(receivable) (2.6) (19.6)
Other tax accruals 28.8 26.0
Self-insurance reserves 34.1 28.5
Interest payable 8.4 0.8
Swap payable -- 10.9
Royalty payable 5.0 6.0
Other 4.7 7.2
------- -------
$ 161.1 $ 146.1
======= =======
12. OTHER LIABILITIES
December 31, December 31,
2003 2002
------------ ------------
Acquisition related accruals $ 1.3 $ 2.0
Restructuring reserves 15.8 16.1
Minimum pension liability 37.0 56.6
Post-retirement benefit obligation 45.0 42.9
Self-insurance reserves 17.9 20.9
Other 10.3 3.0
------- -------
$ 127.3 $ 141.5
======= =======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
13. ZERO COUPON-SUBORDINATED NOTES
In September 2001, the Company sold $650.0 aggregate
principal amount at maturity of its zero coupon convertible
subordinated notes (the "notes") due 2021 in a private
placement. The Company received approximately $426.8 (net of
underwriter's fees of approximately $9.8) in net proceeds from
the offering. In October 2001, the underwriters exercised their
rights to purchase an additional $94.0 aggregate principal
amount pursuant to an overallotment option from which the
Company received approximately $61.8 in net proceeds (net of
underwriters fees of approximately $1.4). The notes, which are
subordinate to the Company's bank debt, were sold at an issue
price of $671.65 per $1,000 principal amount at maturity
(representing a yield to maturity of 2.0% per year). Each one
thousand dollar principal amount at maturity of the notes is
convertible into 13.4108 shares of the Company's common stock,
subject to adjustment in certain circumstances, if one of the
following conditions occurs:
1) If the sales price of the Company's common stock for at least
20 trading days in a period of 30 consecutive trading days
ending on the last trading day of the preceding quarter
reaches specified thresholds (beginning at 120% and declining
0.1282% per quarter until it reaches approximately 110% for
the quarter beginning July 1, 2021 of the accreted conversion
price per share of common stock on the last day of the
preceding quarter). The accreted conversion price per share
will equal the issue price of a note plus the accrued original
issue discount and any accrued contingent additional
principal, divided by the number of shares of common stock
issuable upon conversion of a note on that day. The
conversion trigger price for the fourth quarter of 2003 was
approximately $62.14.
2) If the credit rating assigned to the notes by Standard &
Poor's Ratings Services is at or below BB-.
3) If the notes are called for redemption.
4) If specified corporate transactions have occurred (such as if
the Company is party to a consolidation, merger or binding
share exchange or a transfer of all or substantially all of
its assets).
Holders of the notes may require the Company to purchase all or
a portion of their notes on September 11, 2004, 2006 and 2011 at
prices ranging from $712.97 to $819.54, plus any accrued contingent
additional principal and any accrued contingent interest thereon.
The Company may choose to pay the purchase price in cash, common
stock or a combination of cash and common stock. If the holders
elect to require the Company to purchase their notes it is the
Company's current intention to retire the notes by a cash payment.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
The Company may redeem for cash all or a portion of the
notes at any time on or after September 11, 2006 at specified
redemption prices per one thousand dollar principal amount at
maturity of the notes ranging from $741.92 at September 11, 2006 to
$1,000.00 at September 11, 2021 (assuming no contingent additional
principal accrues on the notes).
The Company used a portion of the proceeds to repay $412.5
of its term loan outstanding under its credit agreement and to
pay $8.9 to terminate the interest rate swap agreement tied to
the Company's term loan. The Company recorded a loss of $5.5
relating to the write-off of unamortized bank fees associated
with the Company's term debt.
The Company has registered the notes and the shares of
common stock issuable upon conversion of the notes with the
Securities and Exchange Commission.
14. LONG-TERM DEBT
In February 2002, the Company entered into two senior
credit facilities with Credit Suisse First Boston, acting as
Administrative Agent, and a group of financial institutions
totaling $300.0. The senior credit facilities consisted of a
364-day revolving credit facility in the principal amount of
$100.0 and a three-year revolving credit facility in the
principal amount of $200.0. Based upon the Company's rating as
of December 31, 2003, the effective rate under the $200.0 and
$100.0 facilities was LIBOR plus 82.5 basis points and LIBOR
plus 87.5 basis points, respectively. There were no balances
outstanding on the Company's senior credit facilities at
December 31, 2003 and 2002.
On January 13, 2004, the Company entered into a new $150.0
364-day revolving credit facility with Credit Suisse First
Boston, acting as Administrative Agent, and a group of financial
institutions to replace the existing $150.0 364-day revolving
credit facility, which had terminated. The $200.0 three-year
revolving credit facility was amended on January 14, 2003 and
expires on February 18, 2005. These credit facilities bear
interest at varying rates based upon the Company's credit rating
with Standard & Poor's Ratings Services.
The senior credit facilities are available for general
corporate purposes, including working capital, capital
expenditures, funding of share repurchases and other payments,
and acquisitions. The agreements contain certain debt covenants
which require that the Company maintain leverage and interest
coverage ratios of 2.5 to 1.0 and 5.0 to 1.0, respectively. The
Company is in compliance with all covenants.
On July 24, 2002, in conjunction with the acquisition of
Dynacare, the Company borrowed $150.0 under the Dynacare Bridge
Loan Agreement, which had an original maturity date of July 23,
2003. On November 29, 2002, the Company repaid all outstanding
balances under the Dynacare Bridge Loan, and as a result, the
loan was terminated.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
On January 17, 2003, in conjunction with the acquisition of
DIANON, the Company borrowed $350.0 under the DIANON Bridge Loan
Agreement with Credit Suisse First Boston, acting as
Administrative Agent. On January 31, 2003, the Company sold
$350.0 aggregate principal amount of its 5 1/2% Senior Notes due
February 1, 2013. Proceeds from the issuance of these Notes
($345.1), together with cash on hand was used to repay the
$350.0 principal amount of the Company's bridge loan facility,
and as a result, the loan was terminated.
15. STOCK REPURCHASE PROGRAM
On October 22, 2002, the Company's Board of Directors
authorized a stock repurchase program under which the Company
may purchase up to an aggregate of $150.0 of its common stock
from time-to-time. During the third quarter of 2003, the Company
completed this program purchasing approximately 5.2 million shares of
its common stock totaling approximately $150.0 with cash flow from
operations.
On December 17, 2003, the Company's Board of Directors
authorized a stock repurchase program under which the Company
may purchase up to an aggregate of $250.0 of its common stock
from time-to-time, beginning in the first quarter of 2004. It is
the Company's intention to fund future purchases of its common
stock with cash flow from operations.
16. STOCKHOLDER RIGHTS PLAN
The Company adopted a stockholder rights plan effective as
of December 13, 2001 that provides that each common stockholder
of record on December 21, 2001 received a dividend of one right
for each share of common stock held. Each right entitles the
holder to purchase from the Company one-hundredth of a share of
a new series of participating preferred stock at an initial
purchase price of four hundred dollars. These rights will
become exercisable and will detach from the Company's common
stock if any person becomes the beneficial owner of 15% or more
of the Company's common stock. In that event, each right will
entitle the holder, other than the acquiring person, to
purchase, for the initial purchase price, shares of the
Company's common stock having a value of twice the initial
purchase price. The rights will expire on December 13, 2011,
unless earlier exchanged or redeemed.
17. INTEREST RATE SWAP AGREEMENTS
In the second quarter of 2003 the Company terminated its
interest rate swap agreement with a major financial institution and
received net proceeds of $5.3 of which $1.4 was credited to interest
expense and a gain of $3.9 was deferred and is being amortized to
interest expense through 2013.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
In the third quarter of 2001, in conjunction with the early
retirement of its long-term debt, the Company terminated its interest
rate swap agreement with a bank by making a settlement payment of
$8.9 with a portion of the proceeds from the sale of zero coupon-
subordinated notes. In accordance with the provisions of SFAS
No. 133, as amended, this interest rate swap agreement had been
designated as a cash flow hedge and carried on the balance sheet
at fair value with a corresponding offset in accumulated other
comprehensive loss.
18. INCOME TAXES
The sources of income before taxes, classified between
domestic and foreign entities are as follows:
Pre-tax income:
2003 2002 2001
-------- -------- --------
Domestic $ 545.3 $ 440.6 $ 336.6
Foreign (4.9) (8.3) (4.3)
------ ------ ------
Total pre-tax income $ 540.4 $ 432.3 $ 332.3
====== ====== ======
The provisions for income taxes in the accompanying
consolidated statements of operations consist of the following:
Years Ended December 31,
----------------------------
2003 2002 2001
----------------------------
Current:
Federal $ 104.2 $ 118.0 $122.8
State 29.2 28.4 25.2
Foreign (0.3) 2.4 --
------ ------ ------
$ 133.1 $ 148.8 $ 148.0
------ ------ ------
Deferred:
Federal $ 70.0 $ 26.0 $ (2.3)
State 13.8 4.7 3.9
Foreign 2.5 (1.8) --
------ ------ ------
86.3 28.9 1.6
------ ------ ------
$ 219.4 $ 177.7 $ 149.6
====== ====== ======
The tax benefit associated with option exercises from stock
plans reduced taxes currently payable by approximately $5.5, $16.0
and $14.4 in 2003, 2002 and 2001, respectively. Such benefits are
recorded as additional paid-in-capital.
The effective tax rates on earnings before income taxes is
reconciled to statutory federal income tax rates as follows:
Years Ended December 31,
------------------------------
2003 2002 2001
------------------------------
Statutory federal rate 35.0% 35.0% 35.0%
State and local income taxes,
net of federal income tax effect 4.5 4.5 4.9
Non-deductible amortization of
intangible assets -- -- 2.3
Change in valuation allowance -- (0.4) --
Other 1.1 2.0 2.8
----- ----- -----
Effective rate 40.6% 41.1% 45.0%
===== ===== =====
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are as follows:
December 31, December 31,
2003 2002
------------ ------------
Deferred tax assets:
Accounts receivable $ 12.5 $ 36.2
Self-insurance reserves 17.3 18.8
Postretirement benefit obligation 17.8 17.0
Acquisition and restructuring reserves 22.7 17.5
Tax loss carryforwards 18.2 6.8
Employee benefits 13.1 26.0
Other (1.1) 8.0
-------- --------
100.5 130.3
Less valuation allowance (2.7) (2.8)
-------- --------
Net deferred tax assets 97.8 127.5
-------- --------
Deferred tax liabilities:
Deferred earnings (12.1) (9.6)
Intangible assets (221.0) (88.5)
Property, plant and equipment (46.3) (34.8)
Zero coupon-subordinated notes (33.6) (18.1)
Currency translation adjustment (35.5) --
Other (3.6) 1.3
-------- --------
Total gross deferred tax liabilities (352.1) (149.7)
-------- --------
Net deferred tax liabilities $ (254.3) $ (22.2)
======== ========
Based upon the realization of certain capital loss
carryforwards, the Company reduced its valuation allowance applied
against its deferred tax assets by approximately $1.7 during the
second quarter of 2002. The current valuation allowance brings the
Company's net deferred tax assets to a level where management
believes it is more likely than not the tax benefits will be
realized.
The Company's effective tax rate was reduced due to a $2.1 state
tax recovery in the third quarter of 2003.
The Company has been notified its 2001 and 2002 income tax
returns will be examined by the the Internal Revenue Service. In
addition, the Internal Revenue Service has concluded its examination
of the Company's 2000, 1999 and 1998 income tax returns and has
issued a report of its findings. While the Company will appeal
certain issues of the examination, management believes adequate
provisions have been recorded relating to the concluded examination.
The Company has state tax loss carryforwards of approximately
$19.6 which expire 2004 through 2018. In addition, as a result of
the Dynacare, Inc. acquisition, the Company has federal tax loss
carryovers of approximately $15.6 expiring periodically through 2021.
The Company provided for taxes on undistributed earnings of
foreign subsidiaries.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
19. STOCK COMPENSATION PLANS
In May 2000, the shareholders approved the 2000 Stock Incentive
Plan, authorizing 6.8 million shares for issuance under the plan plus
the remaining shares available from the Amended and Restated 1999
Stock Incentive Plan and the 1994 Stock Option Plan (the "Prior
Plans"). The effect was to increase to 11.68 million, the number of
shares available under the 2000 Stock Incentive Plan and Prior Plans.
In May 2002, the shareholders approved an amendment to the 2000
Stock Incentive Plan authorizing an additional 8.0 million shares.
The effect was to increase to an aggregate of 19.68 million shares
for issuance under the 2000 Stock Incentive Plan.
On January 17, 2003, the Company converted approximately
378,422 vested Dianon stock options into 669,614 vested Company
options to acquire shares of the Company at terms comparable to
those under the predecessor Dianon plan. The Company is not
expecting to make further grants from this plan.
During 2003, there were 2,433,540 options granted to officers
and key employees of the Company (which include 669,614 options
assumed upon the acquisition of Dianon). The exercise price for
these options ranged from $1.84 to $35.93 per share. Also, during
2003, two grants of restricted stock, for an aggregate of 19,559
shares were awarded to members of the Company's Board of Directors
under the 2000 Stock Incentive Plan at market values on the dates of
grant of $30.36 and $31.35. Restrictions limit the sale or transfer
of these shares during a six-year vesting period when the
restrictions lapse. Upon issuance of stock in 2003 under the 2000
Incentive Plan, unearned compensation of $0.2 was recorded as
additional paid-in capital and an equivalent amount was charged to
shareholders' equity as unearned restricted stock compensation.
The plan provides for accelerated vesting of outstanding
restricted shares in percentages of 33.3%, 66.7% or 100%, if certain
predefined two-year profitability targets are achieved as of December
31, 2003 or certain three-year profitability targets are achieved as
of December 31, 2004. The unearned restricted stock compensation is
being amortized to expense over the applicable vesting periods. For
2003, 2002 and 2001, total restricted stock compensation expense was
$18.1, $14.3 and $7.5, respectively. Total restricted shares granted
in 2002 and 2001 were 966,408 and 348,488, respectively. At December
31, 2003, there were 6,843,687 additional shares available for grant
under the Company's stock option plans.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
The Company has an employee stock purchase plan, begun in
1997 and amended in 1999, with 3,000,000 shares of common stock
authorized for issuance. The plan permits substantially all
employees to purchase a limited number of shares of Company
stock at 85% of market value. The Company issues shares to
participating employees semi-annually in January and July of
each year. A summary of shares issued is as follows:
2001 2002 2003 2004
------- ------- ------- -------
January 102,627 73,514 149,020 133,431
July 61,752 75,446 140,524
Pro forma compensation expense is calculated for the fair
value of the employee's purchase right using the Black-Scholes
model. Assumptions include a weighted average life of
approximately one-half year, dividend yield of 0%, risk free
interest rates for each six month period as follows: 2003 -
1.3% and 0.9%; 2002 - 1.8% and 1.8% and 2001 - 5.8% and 3.5% and
volatility rates for each of the following six month periods:
2003 - .3 and .2; 2002 - .2 and .8 and 2001 - .4 and .3.
The per share weighted average grant date fair value of the
benefits under the employee stock purchase plan for the first
and second six-month periods is as follows:
2003 2002 2001
------ ------ ------
First six months $ 6.98 $11.87 $11.51
Second six months $ 8.67 $18.21 $ 8.79
The following table summarizes grants of non-qualified
options made by the Company to officers and key employees under
all 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, options vest
ratably over a period of two to three years on the anniversaries
of the grant date, subject to their earlier expiration or
termination.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
Changes in options outstanding under the plans for the periods
indicated were as follows:
Weighted-Average
Number Exercise Price
of Options per Option
----------- -----------------
Outstanding at January 1, 2001 3,130,752 $14.426
(671,835 exercisable)
Options granted 2,094,976 $33.069
Forfeited (197,922) $21.828
Exercised (1,121,872) $ 9.967
---------
Outstanding at December 31, 2001 3,905,934 $25.331
(729,504 exercisable)
Options granted at market value 2,186,818 $42.524
Granted above market value 77,750 $28.910
Granted below market value 199,240 $18.626
Forfeited (316,568) $29.902
Exercised (697,394) $18.976
---------
Outstanding at December 31, 2002 5,355,780 $32.711
(1,326,120 exercisable)
Options granted at market value 1,763,926 $24.967
Granted above market value 632,410 $30.343
Granted below market value 37,204 $13.120
Forfeited (436,685) $20.444
Exercised (747,202) $20.444
---------
Outstanding at December 31, 2003 6,605,433 $31.805
=========
Exercisable at December 31, 2003 2,811,938 $30.878
=========
Options issued above or below market value during 2003 and 2002
were issued in conjunction with the acquisitions of DIANON and
Dynacare.
The weighted-average remaining life of options outstanding at
December 31, 2003 is approximately 7.8 years.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
The following table summarizes information concerning currently
outstanding and exercisable options.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
$ 1.84 - 24.24 556,165 5.56 $13.643 494,285 $13.033
$24.46 - 32.50 2,304,648 8.48 $25.747 552,951 $28.046
$33.06 - 37.90 1,702,454 7.12 $33.127 1,078,994 $33.124
$39.34 - 48.02 2,042,166 8.10 $42.485 685,708 $42.492
--------- ---------
6,605,433 2,811,938
========= =========
20. RELATED PARTY TRANSACTIONS
On February 21, 2002, the Company filed a registration
statement on Form S-3, relating to the sale by Roche of
7,000,000 shares of the Company's common stock, with a 700,000
share over-allotment option. At that time, Roche owned
10,705,074 shares of common stock (approximately 15.13% of the
common stock then outstanding). On March 12, 2002, Roche sold
7,000,000 shares of common stock and on March 18, 2002, an
additional 700,000 shares of common stock were sold to cover
over-allotments of shares leaving Roche with 3,005,074 shares of
the Company's outstanding common stock, or approximately 4.22%
at March 31, 2002.
Roche entered into a number of call option contracts with
respect to the remaining 3,005,074 shares of the Company's
common stock it owned at March 31, 2002, which were not covered
by the registration statement. The Company has been informed
that each of these call option contracts was exercised in full
by July 2002, and as a result, Roche no longer owns any shares
of the Company's common stock.
The Company purchased certain items, primarily laboratory
testing supplies from various affiliates of Roche Holdings, Inc.
("Roche"). Total purchases from these affiliates, which are recorded
in cost of sales, were $55.2 and $62.3 in 2002 and 2001,
respectively. In addition, the Company made royalty payments to
Roche for diagnostic technology in the amounts of $4.7 in 2002 and
$4.4 in 2001. Amounts due to Roche and its affiliates at December
31, 2002 were $3.3. Revenue received from Roche for laboratory
services was $1.4 in 2002 and $2.6 in 2001. Amounts due from Roche
and its affiliates at December 31, 2002 were $0.6.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
21. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in litigation purporting to be a
nation-wide class action involving the alleged overbilling of
patients who are covered by private insurance. The Company has
reached a settlement with the class that will not materially
differ from accruals previously established or have a material
adverse effect on the Company. The Company has now
substantially implemented its obligations under the settlement.
On January 9, 2001, the Company was served with a complaint in
North Carolina which purported to be a class action and made
claims similar to those referred to above. That claim has now
been dismissed with prejudice.
On June 24, 2003, the Company and certain of its executive
officers were sued in the United States District Court for the
Middle District of North Carolina in the first of a series of
putative shareholder class actions alleging securities fraud.
Since that date, at least five other complaints containing
substantially identical allegations have been filed against the
Company and certain of the Company's executive officers. Each
of the complaints alleges that the defendants violated the
federal securities laws by making material misstatements and/or
omissions that caused the price of the Company's stock to be
artificially inflated between February 13 and October 3, 2002.
The plaintiffs seek certification of a class of substantially
all persons who purchased shares of the Company's stock during
that time period and unspecified monetary damages. These six
cases have been consolidated and will proceed as a single case.
The defendants deny any liability and intend to defend the case
vigorously. At this time, it is premature to make any
assessment of the potential outcome of the cases or whether they
could have a material adverse effect on the Company's financial
condition.
The Company is the appellant in a patent case originally
filed in the United States District Court for the District of
Colorado. The Company has disputed liability and contested the
case vigorously. After a jury trial, the district court entered
judgment against the Company for patent infringement. The
Company appealed the case to the United States Court of Appeals
for the Federal Circuit. The Company has received a letter from
its counsel dated February 6, 2004, stating "it remains our
opinion that the amended judgment and order will be reversed on
appeal."
The Company is a party to two lawsuits involving Chiron Inc.
relating to Hepatitis C and HIV testing. Chiron asserts that the
Company has infringed on Chiron's patents in each of these areas.
The Company denies liability and intends to contest the suits
vigorously. It is premature at this juncture to assess the likely
outcome of these matters, or to determine whether they will have a
material effect on the Company.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
The Company is also involved in various claims and legal actions
arising in the ordinary course of business. These matters include,
but are not limited to, intellectual property disputes, professional
liability, employee related matters, and inquiries from governmental
agencies and Medicare or Medicaid payors and managed care payors
requesting comment on allegations of billing irregularities that are
brought to their attention through billing audits or third parties.
In the opinion of management, based upon the advice of counsel and
consideration of all facts available at this time, the ultimate
disposition of these matters is not expected to have a material
adverse effect on the financial position, results of operations or
liquidity of the Company. The Company is also named from time to
time in suits brought under the qui tam provisions of the False
Claims Act. These suits typically allege that the Company has made
false statements and/or certifications in connection with claims for
payment from federal health care programs. They may remain under
seal (hence, unknown to the Company) for some time while the
government decides whether to intervene on behalf of the qui tam
plaintiff. Such claims are an inevitable part of doing business in
the health care field today and, in the opinion of management, based
upon the advice of counsel and consideration of all facts available
at this time, the ultimate disposition of those qui tam matters
presently known to the Company is not expected to have a material
adverse effect on the financial position, results of operations or
liquidity of the Company.
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.
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, professional and vehicle liability,
certain medical costs 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,
2003 and 2002, the Company had provided letters of credit
aggregating approximately $57.1 and $45.6 respectively,
primarily in connection with certain insurance programs.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
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,
2004 are as follows:
Operating Capital
--------- ---------
2004 $ 55.4 $ 3.5
2005 42.4 2.8
2006 29.7 2.9
2007 20.3 1.2
2008 13.8 --
Thereafter 25.3 --
----- -----
Total minimum lease payments 186.9 10.4
Less:
Amounts included in
restructuring accruals -- 2.6
Amount representing interest -- 2.1
----- -----
Total minimum operating
lease payments and
present value of minimum
capital lease payments $186.9 $ 5.7
===== =====
Current $ 1.3
Non-current 4.4
-----
$ 5.7
=====
Rental expense, which includes rent for real estate, equipment
and automobiles under operating leases, amounted to $104.2, $86.1 and
$74.8 for the years ended December 31, 2003, 2002 and 2001,
respectively.
22. 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, have been employed by the Company for at
least six consecutive months and have 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 $10.9, $8.5 and
$8.3 in 2003, 2002 and 2001, 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. The Company's
policy is to fund the Company Plan with at least the minimum amount
required by applicable regulations.
The Company has a second defined benefit plan which covers its
senior management group that provides for the payment of the
difference, if any, between the amount of any maximum limitation on
annual benefit payments under the Employee Retirement Income Security
Act of 1974 and the annual benefit that would be payable under the
Company Plan but for such limitation. This plan is an unfunded plan.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
The components of net periodic pension cost for both of the
defined benefit plans are summarized as follows:
Company Plans
---------------------------
Years ended
December 31,
2003 2002 2001
---------------------------
Components of net periodic benefit cost
Service cost $ 12.3 $ 11.9 $ 11.2
Interest cost 12.9 12.4 11.4
Expected return on plan assets (12.7) (13.7) (13.5)
Net amortization and deferral 3.7 0.3 (1.5)
----- ----- -----
Net periodic pension cost $ 16.2 $ 10.9 $ 7.6
===== ===== =====
Company Plans
-----------------
December 31,
2003 2002
-----------------
Change in benefit obligation
Benefit obligation at beginning of year $199.5 $173.7
Service cost 12.3 11.9
Interest cost 12.9 12.4
Actuarial loss (8.3) 13.2
Amendments 0.3 --
Benefits paid (13.3) (11.7)
----- -----
Benefit obligation at end of year 203.4 199.5
----- -----
Change in plan assets
Fair value of plan assets at beginning of year 139.5 151.1
Actual return on plan assets 33.4 (18.2)
Employer contributions 18.3 18.3
Benefits paid (13.3) (11.7)
----- -----
Fair value of plan assets at end of year 177.9 139.5
----- -----
Unfunded status, end of year 25.5 60.0
Unrecognized net actuarial loss (42.2) (76.3)
Unrecognized prior service cost 1.7 3.3
Additional minimum liability 37.0 56.6
----- -----
Accrued pension liability $ 22.0 $ 43.6
===== =====
At December 31, 2003, the additional minimum liability of
the Company's Cash Balance Retirement Plan exceeded the
unrecognized prior service cost by $37.0. This amount has been
recorded as an increase to accumulated other comprehensive loss.
Assumptions used in the accounting for the defined benefit
plans were as follows:
Company Plans
----------------------
2003 2002 2001
----------------------
Weighted-average discount rate 6.25% 6.75% 7.25%
Weighted-average rate of increase
in future compensation levels 3.0% 4.0% 4.0%
Weighted-average expected long-
term rate of return 8.5% 9.0% 9.0%
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
The Company's defined benefit plans asset allocation at
December 31, 2003, and 2002, target allocation for 2004, and
expected long-term rate of return by asset category are as
follows:
Percentage of Weighted-Average
Target Plan Assets Expected
Asset Allocation at December 31, Long-Term Rate
Category 2004 2003 2002 of Return-2003
- -------- ---------- ------ ------ ----------------
Equity Securities 70.0% 70.6% 67.5% 5.7%
Debt Securities 30.0% 26.3% 28.4% 0.8%
Other -- 3.1% 4.2% 0.0%
The Company assumed obligations under a subsidiary's
postretirement medical plan. Coverage under this plan is
restricted to a limited number of existing employees of the
subsidiary. 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:
Year ended Year ended Year ended
December 31, December 31, December 31,
2003 2002 2001
------------ ------------ ------------
Service cost $ 0.8 $ 0.9 $ 1.0
Interest cost 3.2 3.3 3.4
Net amortization and deferral (1.9) (1.1) (1.1)
Actuarial loss 0.8 0.4 0.7
------ ------- -------
Postretirement benefit costs $ 2.9 $ 3.5 $ 4.0
====== ======= =======
A summary of the components of the accumulated postretirement
benefit obligation follows:
December 31,
2003 2002
--------------
Retirees $ 19.5 $ 17.2
Fully eligible active plan participants 19.9 15.5
Other active plan participants 21.1 24.8
----- -----
$ 60.5 $ 57.5
===== =====
Reconciliation of the funded status of the December 31,
postretirement benefit plan and accrued liability 2003 2002
--------------
Accumulated postretirement benefit obligation,
beginning of year $ 57.5 $ 45.6
Changes in benefit obligation due to:
Service cost 0.8 0.9
Interest cost 3.2 3.3
Plan participants contributions 0.3 0.3
Amendments (5.8) --
Actuarial (gain) loss 6.0 8.5
Benefits paid (1.5) (1.1)
----- -----
Accumulated postretirement benefit obligation,
end of year 60.5 57.5
Actuarial (gain) loss 6.0 8.5
Unrecognized net actuarial loss (23.6) (18.5)
Unrecognized prior service cost 7.8 3.9
----- -----
Accrued postretirement benefit obligation $ 44.7 $ 42.9
===== =====
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
The weighted-average discount rates used in the calculation of
the accumulated postretirement benefit obligation was 6.4% and 6.9%
as of December 31, 2003 and 2002, respectively. The health care cost
trend rate-medical was assumed to be 9.0% and 7.0% as of December 31,
2003 and 2002, respectively, and the trend rate-prescription was
assumed to be 12.0% and 10.6% as of December 31, 2003 and 2002,
respectively, declining gradually to 5.0% in the year 2011. The
health care cost trend rate has a significant effect on the amounts
reported. Increasing the assumed health care cost trend rates by a
percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 2003 by $10.0.
The impact of a percentage point change on the aggregate of the
service cost and interest cost components of the net periodic
postretirement benefit cost results in an increase of $0.7 or
decrease of $0.6.
On December 8, 2003, President Bush signed into law the
Medicare Prescription Drug, Improvement and Modernization Act of
2003 ("the Act"). The Act expanded Medicare to include, for the
first time, coverage for prescription drugs. The Company
expects that this legislation will eventually reduce the
Company's cost for its subsidiary's postretirement medical plan.
At present, no analysis of the potential reduction in the
Company's costs or obligations has been performed. Under the
Company's accounting policy, the financial effect of this
legislation is expected to be reflected during 2004.
23. QUARTERLY DATA (UNAUDITED)
The following is a summary of unaudited quarterly data:
Year ended December 31, 2003
---------------------------------------------------
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- --------
Net sales $ 712.2 $ 743.7 $ 752.0 $ 731.5 $2,939.4
Gross profit 296.4 316.5 310.9 300.8 1,224.6
Net earnings 73.9 86.4 83.1 77.6 321.0
Basic earnings per
common share 0.51 0.60 0.58 0.55 2.23
Diluted earnings per
common share 0.51 0.60 0.58 0.54 2.22
Year ended December 31, 2002
--------------------------------------------------
1st 2nd 3rd 4th Full
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- --------
Net sales $ 590.0 $ 612.4 $ 655.2 $ 650.1 $2,507.7
Gross profit 258.3 276.3 273.3 253.9 1,061.8
Net earnings 65.8 78.5 57.3 53.0 254.6
Basic earnings per
common share 0.47 0.56 0.40 0.36 1.78
Diluted earnings per
common share 0.46 0.55 0.39 0.36 1.77
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
24. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN
No. 46), "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." FIN No. 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of
the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties.
FIN No. 46 and FIN No. 46R is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable
interest entities created or acquired prior to February 1, 2003, the
provisions of FIN No. 46 must be applied for the first interim or
annual period beginning after December 15, 2003. The Company does
not believe it has any unconsolidated variable interest entities, but
has not fully completed its evaluation.
In December 2002, Statement of Financial Accounting Standards
("SFAS") No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123",
was issued. This Statement amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair-
value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require disclosure in interim
financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported
results. The Company does not intend to adopt a fair-value based
method of accounting for stock-based employee compensation and does
not believe that SFAS No. 148 will have a material impact on its
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others."
Interpretation No. 45 changes current practice in accounting for and
disclosure of guarantees and will require certain guarantees to be
recorded as liabilities at fair value on the balance sheet. Previous
practice required that liabilities related to guarantees be recorded
only when a loss is probable and reasonably estimable, as those terms
are defined in SFAS No. 5, "Accounting for Contingencies."
Interpretation No. 45 also requires a guarantor to make significant
new disclosures, even when the likelihood of making any payments
under the guarantee is remote. The disclosure requirements of
Interpretation No. 45 were effective December 31, 2002. The initial
recognition and measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31,
2002. The Company does not have any guarantees that require
disclosure or further recognition under Interpretation No. 45.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)
In July 2002, SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" was issued. This Statement
addresses the recognition, measurement, and reporting of costs
associated with exit or disposal activities, and supercedes Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)"
("EITF 94-3"). The principal difference between SFAS No. 146
and EITF 94-3 relates to the requirements for recognition of a
liability for a cost associated with an exit or disposal
activity. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity, including those
related to employee termination benefits and obligations under
operating leases and other contracts, be recognized when the
liability is incurred, and not necessarily the date of an
entity's commitment to an exit plan, as under EITF 94-3. SFAS
No. 146 also establishes that the initial measurement of a
liability recognized under SFAS No. 146 be based on fair value.
The provisions of SFAS No. 146 are effective for exit or
disposal activities that are initiated after December 31, 2002,
with early application encouraged. The Company adopted this
statement January 1, 2003 and it had no effect on our financial
position or results of operations.
In May 2002, SFAS No. 145, "Rescission of SFAS Nos. 4, 44,
and 64, Amendment of SFAS 13, and Technical Corrections as of
April 2002" was issued. This Statement rescinds SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, SFAS No. 64, Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements. This Statement
also rescinds SFAS No. 44, Accounting for Intangible Assets of
Motor Carriers. This Statement amends SFAS No. 13, Accounting
for Leases, to eliminate any inconsistency between the required
accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed
conditions. The provisions of this Statement related to the
rescission of SFAS No. 4 shall be applied in fiscal years
beginning after May 15, 2002. The Company adopted this statement
January 1, 2003 and it resulted in the reclassification of the
2001 extraordinary loss to other income(expense).
Schedule II
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 31, 2003, 2002 and 2001
(Dollars in millions)
- ----------------------------------------------------------------------------
Balance Charged Other
at to (Deduct- Balance
beginning Costs and ions) at end
of year Expenses Additions of year
- ----------------------------------------------------------------------------
Year ended December 31, 2003:
Applied against asset
accounts:
Allowance for
doubtful accounts $ 143.2 $ 214.2 $ (224.3) $ 133.1
======= ======= ======= =======
Valuation allowance-
deferred tax assets $ 2.8 $ -- $ (0.1) $ 2.7
======= ======= ======= =======
Year ended December 31, 2002:
Applied against asset
accounts:
Allowance for
doubtful accounts $ 119.5 $ 214.9 $ (191.2) $ 143.2
======= ======= ======= =======
Valuation allowance-
deferred tax assets $ 4.5 $ (1.7) $ -- $ 2.8
======= ======= ======= =======
Year ended December 31, 2001:
Applied against asset
accounts:
Allowance for
doubtful accounts $ 123.0 $ 202.5 $ (206.0) $ 119.5
======= ======= ======= =======
Valuation allowance-
deferred tax assets $ 4.5 $ -- $ -- $ 4.5
======= ======= ======= =======
EXECUTION COPY
$150,000,000
364-DAY CREDIT AGREEMENT
dated as of January 13, 2004,
among
LABORATORY CORPORATION OF AMERICA HOLDINGS,
THE LENDERS NAMED HEREIN
and
CREDIT SUISSE FIRST BOSTON,
as Administrative Agent
--------------------------------
CREDIT SUISSE FIRST BOSTON,
as Sole Bookrunner and
Sole Lead Arranger
BANK OF AMERICA, N.A.,
UBS WARBURG LLC AND
WACHOVIA SECURITIES,
as Co-Syndication Agents
SUNTRUST BANK,
as Documentation Agent
[CS&M Ref No. 5865-177]
TABLE OF CONTENTS
Page
----
ARTICLE I
Definitions
SECTION 1.01. Defined Terms. 5
SECTION 1.02. Terms Generally. 18
SECTION 1.03. Classification of Loans and Borrowings. 18
ARTICLE II
The Credits
SECTION 2.01. Commitments. 19
SECTION 2.02. Loans. 19
SECTION 2.03. Competitive Bid Procedure. 20
SECTION 2.04. Borrowing Procedure. 22
SECTION 2.05. Evidence of Debt; Repayment of Loans. 23
SECTION 2.06. Fees. 24
SECTION 2.07. Interest on Loans. 24
SECTION 2.08. Default Interest. 25
SECTION 2.09. Alternate Rate of Interest. 25
SECTION 2.10. Termination and Reduction of
Commitments. 26
SECTION 2.11. Conversion and Continuation of
Borrowings. 26
SECTION 2.12. Optional Prepayment. 27
SECTION 2.13. Reserve Requirements; Change in
Circumstances. 28
SECTION 2.14. Change in Legality. 29
SECTION 2.15. Break Funding. 30
SECTION 2.16. Pro Rata Treatment. 30
SECTION 2.17. Sharing of Setoffs. 31
SECTION 2.18. Payments. 31
SECTION 2.19. Taxes. 32
SECTION 2.20. Assignment of Commitments Under
Certain Circumstances; Duty to
Mitigate. 34
ARTICLE III
Representations and Warranties
SECTION 3.01. Organization; Powers. 35
SECTION 3.02. Authorization. 35
SECTION 3.03. Enforceability. 35
SECTION 3.04. Governmental Approvals. 36
SECTION 3.05. Financial Statements. 36
Page
----
SECTION 3.06. No Material Adverse Change. 36
SECTION 3.07. Subsidiaries. 36
SECTION 3.08. Litigation; Compliance with Laws. 36
SECTION 3.09. Federal Reserve Regulations. 36
SECTION 3.10. Investment Company Act; Public
Utility Holding Company Act. 37
SECTION 3.11. Use of Proceeds. 37
SECTION 3.12. Tax Returns. 37
SECTION 3.13. No Material Misstatements. 37
SECTION 3.14. Employee Benefit Plans. 37
SECTION 3.15. Environmental Matters. 37
SECTION 3.16. Senior Indebtedness. 38
ARTICLE IV
Conditions of Lending
SECTION 4.01. All Borrowings . 38
SECTION 4.02. Closing Date 38
ARTICLE V
Affirmative Covenants
SECTION 5.01. Existence; Businesses and Properties. 40
SECTION 5.02. Insurance. 40
SECTION 5.03. Obligations and Taxes. 40
SECTION 5.04. Financial Statements, Reports, etc. 40
SECTION 5.05. Litigation and Other Notices. 41
SECTION 5.06. Maintaining Records; Access to
Properties and Inspections. 42
SECTION 5.07. Use of Proceeds. 42
SECTION 5.08. Reportable Transactions. 42
ARTICLE VI
Negative Covenants
SECTION 6.01. Subsidiary Indebtedness. 43
SECTION 6.02. Liens. 44
SECTION 6.03. Sale and Lease-Back Transactions. 45
SECTION 6.04. Mergers, Consolidations and Sales
of Assets. 45
SECTION 6.05. Restricted Payments. 46
SECTION 6.06. Business of Borrower and Subsidiaries. 46
SECTION 6.07. Interest Coverage Ratio. 46
SECTION 6.08. Maximum Leverage Ratio. 46
SECTION 6.09. Hedging Agreements 46
ARTICLE VII
Events of Default
ARTICLE VIII
The Administrative Agent
ARTICLE IX
Miscellaneous
SECTION 9.01. Notices. 51
SECTION 9.02. Survival of Agreement. 51
SECTION 9.03. Binding Effect. 51
SECTION 9.04. Successors and Assigns. 51
SECTION 9.05. Expenses; Indemnity. 55
SECTION 9.06. Right of Setoff. 56
SECTION 9.07. Applicable Law. 56
SECTION 9.08. Waivers; Amendment. 56
SECTION 9.09. Interest Rate Limitation. 57
SECTION 9.10. Entire Agreement. 57
SECTION 9.11. WAIVER OF JURY TRIAL. 58
SECTION 9.12. Severability. 58
SECTION 9.13. Counterparts. 58
SECTION 9.14. Headings. 58
SECTION 9.15. Jurisdiction; Consent to Service
of Process. 58
SECTION 9.16. Confidentiality. 59
SECTION 9.17. Termination of Existing Credit
Agreement 60
SCHEDULES
Schedule 2.01 Lenders and Commitments
Schedule 3.07 Subsidiaries
EXHIBITS
Exhibit A Form of Administrative Questionnaire
Exhibit B Form of Assignment and Acceptance
Exhibit C Form of Borrowing Request
Exhibit D-1 Form of Competitive Bid Request
Exhibit D-2 Form of Notice of Competitive Bid Request
Exhibit D-3 Form of Competitive Bid
Exhibit D-4 Form of Competitive Bid Accept/Reject Letter
Exhibit E-1 Form of Opinion of Chief Legal Counsel of the
Borrower
Exhibit E-2 Form of Opinion of Hogan & Hartson L.L.P.
364-DAY CREDIT AGREEMENT dated as of January 13, 2004,
among LABORATORY CORPORATION OF AMERICA HOLDINGS, a
Delaware corporation (the "Borrower"), the Lenders (as
defined in Article I), and CREDIT SUISSE FIRST BOSTON, as
administrative agent (in such capacity, the "Administrative
Agent") for the Lenders.
The Borrower has requested the Lenders to extend
credit in the form of Revolving Loans (such term and each
other capitalized term used but not defined herein having
the meaning given it in Article I) at any time and from
time to time prior to the Maturity Date, in an aggregate
principal amount at any time outstanding not in excess of
$150,000,000. The Borrower has also requested the Lenders
to provide a procedure pursuant to which the Borrower may
invite the Lenders to bid on an uncommitted basis on short-
term borrowings by the Borrower. The proceeds of the Loans
are to be used solely for general corporate purposes of the
Borrower and its Subsidiaries, including (a) working
capital, (b) capital expenditures, (c) the funding of share
repurchases and other Restricted Payments permitted
hereunder, (d) acquisitions and (e) the repayment of all
amounts outstanding or due under the Existing Credit
Agreement.
The Lenders are willing to extend such credit to the
Borrower on the terms and subject to the conditions set
forth herein. Accordingly, the parties hereto agree as
follows:
ARTICLE I
Definitions
SECTION 1.01. Defined Terms. As used in this
Agreement, the following terms shall have the meanings
specified below:
"ABR", when used in reference to any Loan or
Borrowing, refers to whether such Loan, or the Loans
comprising such Borrowing, are bearing interest at a rate
determined by reference to the Alternate Base Rate.
"Acquisition" shall mean the acquisition by the
Borrower or any wholly owned Subsidiary of the Borrower of
all or substantially all of the assets of a person or line
of business of such person, or all or substantially all of
the Equity Interests of a person, in each case where the
aggregate consideration (in whatever form) payable by the
Borrower or any Subsidiary exceeds $10,000,000.
"Administrative Agent Fees" shall have the meaning
assigned to such term in Section 2.06(b).
"Administrative Questionnaire" shall mean an
Administrative Questionnaire in the form of Exhibit A, or
such other form as may be supplied from time to time by the
Administrative Agent.
"Affiliate" shall mean, when used with respect to a
specified person, another person that directly, or
indirectly through one or more intermediaries, Controls or
is Controlled by or is under common Control with the person
specified.
"Aggregate Revolving Credit Exposure" shall mean the
aggregate amount of the Lenders' Revolving Credit
Exposures.
"Alternate Base Rate" shall mean, for any day, a rate
per annum equal to the greater of (a) the Prime Rate in
effect on such day and (b) the Federal Funds Effective Rate
in effect on such day plus 1/2 of 1%. Any change in the
Alternate Base Rate due to a change in the Prime Rate or
the Federal Funds Effective Rate shall be effective on the
effective date of such change in the Prime Rate or the
Federal Funds Effective Rate, respectively.
"Applicable Percentage" shall mean, for any day, with
respect to any Eurodollar Loan (other than any Eurodollar
Competitive Loan) or ABR Loan, or with respect to the
Facility Fees, as the case may be, the applicable
percentage set forth below under the caption "Eurodollar
Spread", "ABR Spread" or "Facility Fee Percentage", as the
case may be, based upon the rating by S&P applicable on
such date to the Index Debt:
S&P Rating Eurodollar ABR Spread Facility Fee
Spread Percentage
---------- ---------- ---------- ------------
Category 1
- ----------
Equal to or
greater than A- 0.545% 0.00% 0.080%
Category 2
- ----------
BBB+ 0.650% 0.00% 0.100%
Category 3
- ----------
BBB 0.875% 0.00% 0.125%
Category 4
- ----------
BBB- 1.200% 0.200% 0.175%
Category 5
- ----------
Less than BBB- 1.525% 0.525% 0.225%
For purposes of the foregoing, (i) if S&P shall not
have in effect a rating for the Index Debt (other than by
reason of the circumstances referred to in the last
sentence of this definition), then S&P shall be deemed to
have established a rating in Category 5; and (ii) if the
rating established or deemed to have been established by
S&P for the Index Debt shall be changed (other than as a
result of a change in the rating system of S&P), such
change shall be effective as of the date on which it is
first announced by S&P. Each change in the Applicable
Percentage shall apply during the period commencing on the
effective date of such change and ending on the date
immediately preceding the effective date of the next such
change. If the rating system of S&P shall change, or if
S&P shall cease to be in the business of rating corporate
debt obligations, the Borrower and the Lenders shall
negotiate in good faith to amend this definition to reflect
such changed rating system or the non-availability of a
rating from S&P and, pending the effectiveness of any such
amendment, the Applicable Percentage shall be determined by
reference to the rating most recently in effect prior to
such change or cessation.
"Assignment and Acceptance" shall mean an assignment
and acceptance entered into by a Lender and an assignee
(with the consent of any party whose consent is required by
Section 9.04), and accepted by the Administrative Agent, in
the form of Exhibit B or such other form as shall be
approved by the Administrative Agent.
"Board" shall mean the Board of Governors of the
Federal Reserve System of the United States of America.
"Borrowing" shall mean (a) Loans of the same Type
made, converted or continued on the same date and, in the
case of Eurodollar Loans, as to which a single Interest
Period is in effect or (b) a Borrowing described in the
definition of the term "Competitive Borrowing".
"Borrowing Request" shall mean a request by the
Borrower in accordance with the terms of Section 2.04.
"Business Day" shall mean any day other than a
Saturday, Sunday or day on which banks in New York City are
authorized or required by law to close; provided, however,
that when used in connection with a Eurodollar Loan, the
term "Business Day" shall also exclude any day on which
banks are not open for dealings in dollar deposits in the
London interbank market.
"Capital Lease Obligations" of any person shall mean
the obligations of such person to pay rent or other amounts
under any lease of (or other arrangement conveying the
right to use) real or personal property, or a combination
thereof, which obligations are required to be classified
and accounted for as capital leases on a balance sheet of
such person under GAAP, and the amount of such obligations
shall be the capitalized amount thereof determined in
accordance with GAAP.
A "Change in Control" shall be deemed to have occurred
if (a)any person or group (within the meaning of Rule 13d-5
of the Securities Exchange Act of 1934 as in effect on the
date hereof) shall own directly or indirectly, beneficially
or of record, shares representing more than 40% of the
aggregate ordinary voting power represented by the issued
and outstanding capital stock of the Borrower or (b)a
majority of the seats (other than vacant seats) on the
board of directors of the Borrower shall at any time be
occupied by persons who were neither (i)nominated by the
board of directors of the Borrower, nor (ii)appointed by
directors so nominated.
"Change in Law" shall mean (a) the adoption of any
law, rule or regulation after the date of this Agreement,
(b) any change in any law, rule or regulation or in the
interpretation or application thereof by any Governmental
Authority after the date of this Agreement or (c)
compliance by any Lender (or, for purposes of Section 2.13,
by any lending office of such Lender or by such Lender's
holding company, if any) with any request, guideline or
directive (whether or not having the force of law) of any
Governmental Authority made or issued after the date of
this Agreement.
"Closing Date" shall mean January 13, 2004.
"Code" shall mean the Internal Revenue Code of 1986,
as amended from time to time.
"Commitment" shall mean, with respect to each Lender,
the commitment of such Lender to make Loans hereunder as
set forth on Schedule 2.01, or in the Assignment and
Acceptance pursuant to which such Lender assumed its
Commitment, as applicable, as the same may be (a) reduced
from time to time pursuant to Section 2.10 and (b) reduced
or increased from time to time pursuant to assignments by
or to such Lender pursuant to Section 9.04.
"Competitive Bid" shall mean an offer by a Lender to
make a Competitive Loan pursuant to Section 2.03(b) in the
form of Exhibit D-3.
"Competitive Bid Accept/Reject Letter" shall mean a
notification made by the Borrower pursuant to
Section 2.03(d) in the form of Exhibit D-4.
"Competitive Bid Rate" shall mean, as to any
Competitive Bid, (i) in the case of a Eurodollar Loan, the
Margin, and (ii) in the case of a Fixed Rate Loan, the
fixed rate of interest offered by the Lender making such
Competitive Bid.
"Competitive Bid Request" shall mean a request made by
the Borrower pursuant to Section 2.03(a).
"Competitive Borrowing" shall mean a Borrowing
consisting of a Competitive Loan or concurrent Competitive
Loans from the Lender or Lenders whose Competitive Bids for
such Borrowing have been accepted by the Borrower under the
bidding procedure described in Section 2.03.
"Competitive Loan" shall mean a Loan from a Lender to
the Borrower pursuant to the bidding procedure described in
Section 2.03. Each Competitive Loan shall be a Eurodollar
Competitive Loan or a Fixed Rate Loan.
"Confidential Information Memorandum" shall mean the
Confidential Information Memorandum of the Borrower dated
November 2003.
"Consolidated EBITDA" shall mean, for any period,
Consolidated Net Income for such period plus (a) without
duplication and to the extent deducted in determining such
Consolidated Net Income, the sum of (i) consolidated
interest expense net of interest income for such period,
(ii) consolidated income tax expense for such period, (iii)
all amounts attributable to depreciation and amortization
for such period and (iv) any extraordinary charges and all
non-cash write-offs and write-downs of amortizable and
depreciable items for such period, and minus (b) without
duplication, to the extent included in determining such
Consolidated Net Income, any extraordinary gains and all
non-cash items of income for such period, all determined on
a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" shall mean, for any
period, the interest expense (including (a) imputed
interest expense in respect of Capital Lease Obligations
and (b) the amortization of original issue discount in
connection with the Subordinated Notes and other
Indebtedness issued with original issue discount) of the
Borrower and the Subsidiaries for such period, net of
interest income, in each case determined on a consolidated
basis in accordance with GAAP. For purposes of the
foregoing, interest expense shall be determined after
giving effect to any net payments made or received by the
Borrower or any Subsidiary with respect to interest rate
Hedging Agreements.
"Consolidated Net Income" shall mean, for any period,
the net income or loss of the Borrower and the Subsidiaries
for such period determined on a consolidated basis in
accordance with GAAP.
"Control" shall mean the possession, directly or
indirectly, of the power to direct or cause the direction
of the management or policies of a person, whether through
the ownership of voting securities, by contract or
otherwise, and the terms "Controlling" and "Controlled"
shall have meanings correlative thereto.
"Default" shall mean any event or condition which upon
notice, lapse of time or both would constitute an Event of
Default.
"dollars" or "$" shall mean lawful money of the United
States of America.
"Environmental Laws" shall mean all laws, rules,
regulations, codes, ordinances, orders, decrees, judgments
or injunctions issued, promulgated or entered into by any
Governmental Authority, relating to the environment, the
preservation or reclamation of natural resources, the
management or release of Hazardous Materials or to the
effect of the environment on human health and safety.
"Environmental Liability" shall mean liabilities,
obligations, claims, actions, suits, judgments or orders
under or relating to any Environmental Law for any damages,
injunctive relief, losses, fines, penalties, fees,
expenses (including fees and expenses of attorneys and
consultants) or costs, whether contingent or otherwise,
including those arising from or relating to (a) any action
to address the on- or off-site presence, release of, or
exposure to, Hazardous Materials, (b) permitting and
licensing, governmental administrative oversight and
financial assurance requirements, (c) any personal injury
(including death), any property damage (real or personal)
or natural resource damage and (d) the violation of any
Environmental Law.
"Equity Interests" shall mean shares of capital stock,
partnership interests, membership interests in a limited
liability company, beneficial interests in a trust or other
equity interests in any person, or any obligations
convertible into or exchangeable for, or giving any person
a right, option or warrant to acquire such equity interests
or such convertible or exchangeable obligations;
provided that the Subordinated Notes are deemed not to
constitute Equity Interests of the Borrower.
"ERISA" shall mean the Employee Retirement Income
Security Act of 1974, as amended from time to time.
"ERISA Affiliate" shall mean any trade or business
(whether or not incorporated) that, together with the
Borrower, is treated as a single employer under
Section 414(b) or (c) of the Code, or solely for purposes
of Section 302 of ERISA and Section 412 of the Code, is
treated as a single employer under Section 414 of the Code.
"ERISA Event" shall mean (a) any "reportable event",
as defined in Section 4043 of ERISA or the regulations
issued thereunder, with respect to a Plan (other than an
event for which the 30-day notice period is waived); (b)
the existence with respect to any Plan of an "accumulated
funding deficiency" (as defined in Section 412 of the Code
or Section 302 of ERISA), whether or not waived; (c) the
filing pursuant to Section 412(d) of the Code or Section
303(d) of ERISA of an application for a waiver of the
minimum funding standard with respect to any Plan; (d) the
incurrence by the Borrower or any of its ERISA Affiliates
of any liability under Title IV of ERISA with respect to
the termination of any Plan or the withdrawal or partial
withdrawal of the Borrower or any of its ERISA Affiliates
from any Plan or Multiemployer Plan; (e) the receipt by the
Borrower or any of its ERISA Affiliates from the PBGC or a
plan administrator of any notice relating to the intention
to terminate any Plan or Plans or to appoint a trustee to
administer any Plan; (f) the adoption of any amendment to a
Plan that would require the provision of security pursuant
to Section 401(a)(29) of the Code or Section 307 of ERISA;
(g) the receipt by the Borrower or any of its ERISA
Affiliates of any notice, or the receipt by any
Multiemployer Plan from the Borrower or any of its ERISA
Affiliates of any notice, concerning the imposition of
Withdrawal Liability or a determination that a
Multiemployer Plan is, or is expected to be, insolvent or
in reorganization, within the meaning of Title IV of ERISA;
or (h) the occurrence of a "prohibited transaction" with
respect to which the Borrower or any of the Subsidiaries is
a "disqualified person" (within the meaning of Section 4975
of the Code) or with respect to which the Borrower or any
such Subsidiary could otherwise be liable.
"Eurodollar", when used in reference to any Loan or
Borrowing, refers to whether such Loan, or the Loans
comprising such Borrowing, are bearing interest at a rate
determined by reference to the LIBO Rate.
"Event of Default" shall have the meaning assigned to
such term in Article VII.
"Excluded Taxes" shall mean, with respect to the
Administrative Agent, any Lender or any other recipient of
any payment to be made by or on account of any obligation
of the Borrower hereunder, (a) income, franchise or similar
taxes imposed on (or measured by) its net income by the
United States of America, the jurisdiction under the laws
of which such recipient is organized or in which its
principal office is located (or, in the case of any Lender,
in which its applicable lending office is located), or, in
the case of a jurisdiction that imposes taxes on the basis
of management or control or other concept or principle of
residence, the jurisdiction in which such recipient is so
resident, (b) Taxes imposed by reason of any present or
former connection between such person and the jurisdiction
imposing such Taxes, other than solely as a result of the
execution and delivery of this Agreement, the making of any
Loans hereunder or the performance of any action provided
for hereunder, (c) any branch profits taxes imposed by the
United States of America or any similar tax imposed by any
other jurisdiction in which the Borrower is located and
(d) in the case of a Foreign Lender (other than as an
assignee pursuant to a request by the Borrower under
Section 2.20(a)), any withholding tax that (i) is imposed
on amounts payable to such Foreign Lender at the time such
Foreign Lender becomes a party to this Agreement (or
designates a new lending office), except to the extent that
such Foreign Lender (or its assignor, if any) was entitled,
at the time of designation of a new lending office (or
assignment), to receive additional amounts from the
Borrower with respect to such withholding tax pursuant to
Section 2.19(a) or (ii) is attributable to such Foreign
Lender's failure to comply with Section 2.19(e).
"Existing Credit Agreement" shall mean the 364-Day
Credit Agreement dated as of January 14, 2003, among the
Borrower, the lenders from time to time party thereto, and
Credit Suisse First Boston, as administrative agent.
"Facility Fee" shall have the meaning assigned to such
term in Section 2.06(a).
"Federal Funds Effective Rate" shall mean, for any
day, the weighted average (rounded upwards, if necessary,
to the next 1/100 of 1%) of the rates on overnight Federal
funds transactions with members of the Federal Reserve
System arranged by Federal funds brokers, as published on
the next succeeding Business Day by the Federal Reserve
Bank of New York, or, if such rate is not so published for
any day that is a Business Day, the average (rounded
upwards, if necessary, to the next 1/100 of 1%) of the
quotations for the day for such transactions received by
the Administrative Agent from three Federal funds brokers
of recognized standing selected by it.
"Fees" shall mean the Facility Fees and the
Administrative Agent Fees.
"Financial Officer" of any person shall mean the chief
financial officer, principal accounting officer, Treasurer
or Controller of such person.
"Fixed Rate Borrowing" shall mean a Borrowing
comprised of Fixed Rate Loans.
"Fixed Rate Loan" shall mean any Competitive Loan
bearing interest at a fixed percentage rate per annum
(expressed in the form of a decimal to no more than four
decimal places) specified by the Lender making such Loan in
its Competitive Bid.
"Foreign Lender" shall mean any Lender that is
organized under the laws of a jurisdiction other than that
in which the Borrower is located. For purposes of this
definition, the United States of America, each State
thereof and the District of Columbia shall be deemed to
constitute a single jurisdiction.
"GAAP" shall mean generally accepted accounting
principles applied on a consistent basis.
"Governmental Authority" shall mean any Federal,
state, local or foreign court or governmental agency,
authority, instrumentality or regulatory body.
"Granting Lender" shall have the meaning assigned to
such term in Section 9.04(i).
"Guarantee" of or by any person (the "guarantor")
shall mean any obligation, contingent or otherwise, of such
person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other person (the
"primary obligor") in any manner, whether directly or
indirectly, and including any obligation of the guarantor,
direct or indirect, (a) to purchase or pay (or advance or
supply funds for the purchase or payment of) such
Indebtedness or to purchase (or to advance or supply funds
for the purchase of) any security for the payment of such
Indebtedness, (b) to purchase or lease property, securities
or services for the purpose of assuring the owner of such
Indebtedness of the payment of such Indebtedness or other
obligation, (c) to maintain working capital, equity capital
or any other financial statement condition or liquidity of
the primary obligor so as to enable the primary obligor to
pay such Indebtedness or (d) as an account party in respect
of any letter of credit or letter of guaranty issued to
support such Indebtedness; provided, however, that the term
"Guarantee" shall not include endorsements for collection
or deposit in the ordinary course of business.
"Hazardous Materials" shall mean (a) petroleum
products and byproducts, asbestos, urea formaldehyde foam
insulation, polychlorinated biphenyls, radon gas,
chlorofluorocarbons and all other ozone-depleting
substances and (b) any chemical, material, substance,
waste, pollutant or contaminant that is prohibited, limited
or regulated by or pursuant to any Environmental Law.
"Hedging Agreement" shall mean any interest rate
protection agreement, foreign currency exchange agreement,
commodity price protection agreement or other interest or
currency exchange rate or commodity price hedging
arrangement.
"Indebtedness" of any person shall mean, without
duplication, (a) all obligations of such person for
borrowed money, (b) all obligations of such person
evidenced by bonds, debentures, notes or similar
instruments, (c) all obligations of such person under
conditional sale or other title retention agreements
relating to property or assets purchased by such person,
(d) all obligations of such person issued or assumed as the
deferred purchase price of property or services (excluding
trade accounts payable and accrued obligations incurred in
the ordinary course of business), (e) all Indebtedness of
others secured by (or for which the holder of such
Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien on property owned or
acquired by such person, whether or not the obligations
secured thereby have been assumed, (f) all Guarantees by
such person of Indebtedness of others, (g) all Capital
Lease Obligations of such person, (h) all obligations,
contingent or otherwise, of such person as an account party
in respect of letters of credit and letters of guaranty,
(i) all obligations, contingent or otherwise, of such
person in respect of bankers' acceptances and (j) all
obligations of such person to make contingent cash payments
in respect of any acquisition, to the extent such
obligations are or are required to be shown as liabilities
on the balance sheet of such person in accordance with
GAAP. The Indebtedness of any person shall include the
Indebtedness of any other entity (including any partnership
in which such person is a general partner) to the extent
such person is liable therefor as a result of such person's
ownership interest in or other relationship with such
entity, except to the extent the terms of such Indebtedness
provide that such person is not liable therefor.
"Indemnified Taxes" shall mean Taxes other than
Excluded Taxes.
"Index Debt" shall mean the senior, unsecured, non-
credit enhanced, long-term indebtedness for borrowed money
of the Borrower.
"Interest Coverage Ratio" shall mean, for any period,
the ratio of (a) Consolidated EBITDA for such period to (b)
Consolidated Interest Expense for such period.
"Interest Payment Date" shall mean (a) with respect to
any ABR Loan, the last Business Day of each March, June,
September and December and (b) with respect to any
Eurodollar Loan or Fixed Rate Borrowing, the last day of
the Interest Period applicable to the Borrowing of which
such Loan is a part or such Fixed Rate Borrowing, as the
case may be, and, in the case of a Eurodollar Borrowing
with an Interest Period of more than three months' duration
or a Fixed Rate Borrowing with an Interest Period of more
than 90 days' duration, each day that would have been an
Interest Payment Date had successive Interest Periods of
three months' or 90 days' duration, respectively, been
applicable to such Borrowing.
"Interest Period" shall mean, (a) with respect to any
Eurodollar Borrowing, the period commencing on the date of
such Borrowing and ending on the numerically corresponding
day (or, if there is no numerically corresponding day, on
the last day) in the calendar month that is 1, 2, 3 or
6 months thereafter, as the Borrower may elect, and
(b) with respect to any Fixed Rate Borrowing, the period
commencing on the date of such Borrowing and ending on the
date specified in the Competitive Bids in which the offers
to make the Fixed Rate Loans comprising such Borrowing were
extended, which shall not be earlier than 30 days after the
date of such Borrowing or later than 360 days after the
date of such Borrowing; provided, however, that if any
Interest Period would end on a day other than a Business
Day, such Interest Period shall be extended to the next
succeeding Business Day unless, in the case of a Eurodollar
Borrowing only, such next succeeding Business Day would
fall in the next calendar month, in which case such
Interest Period shall end on the next preceding Business
Day. Interest shall accrue from and including the first
day of an Interest Period to but excluding the last day of
such Interest Period. For purposes hereof, the date of a
Borrowing initially shall be the date on which such
Borrowing is made and thereafter shall be the effective
date of the most recent conversion or continuation of such
Borrowing.
"Lenders" shall mean (a) the persons listed on
Schedule 2.01 (other than any such person that has ceased
to be a party hereto pursuant to an Assignment and
Acceptance) and (b) any person that has become a party
hereto pursuant to an Assignment and Acceptance.
"Leverage Ratio" shall mean, for any period, the ratio
of Total Debt on the last day of such period to
Consolidated EBITDA for such period. Solely for purposes
of this definition, if at the time of any determination of
the Leverage Ratio an Acquisition shall have been completed
during the relevant period, the Consolidated EBITDA for
such period shall be reformulated on a pro forma basis to
give effect to such Acquisition as if it had occurred on
the first day of such period. For purposes of the
foregoing, all pro forma adjustments shall be (a) only
those required or permitted by Regulation S-X of the
Securities Act of 1933 or otherwise based on reasonably
detailed written assumptions reasonably acceptable to the
Administrative Agent and (b) certified by a Financial
Officer of the Borrower as having been prepared in good
faith based upon reasonable assumptions.
"LIBO Rate" shall mean, with respect to any Eurodollar
Borrowing for any Interest Period, the rate per annum
determined by the Administrative Agent at approximately
11:00 a.m., London time, on the date that is two Business
Days prior to the commencement of such Interest Period by
reference to the British Bankers' Association Interest
Settlement Rates for deposits in dollars (as set forth by
the Bloomberg Information Service or any successor thereto
or any other service selected by the Administrative Agent
which has been nominated by the British Bankers'
Association as an authorized information vendor for the
purpose of displaying such rates) for a period equal to
such Interest Period; provided that, to the extent that an
interest rate is not ascertainable pursuant to the
foregoing provisions of this definition, the "LIBO Rate"
shall be the interest rate per annum determined by the
Administrative Agent to be the average of the rates per
annum at which dollar deposits of $10,000,000 are offered
for such relevant Interest Period to major banks in the
London interbank market in London, England by the
Administrative Agent at approximately 11:00 a.m. (London
time) on the date that is two Business Days prior to the
beginning of such Interest Period.
"Lien" shall mean, with respect to any asset, (a) any
mortgage, deed of trust, lien, pledge, encumbrance, charge
or security interest in or on such asset or (b) the
interest of a vendor or a lessor under any conditional sale
agreement, capital lease or title retention agreement (or
any financing lease having substantially the same economic
effect as any of the foregoing) relating to such asset.
"Loans" shall mean the Revolving Loans and the
Competitive Loans.
"Margin" shall mean, as to any Eurodollar Competitive
Loan, the margin (expressed as a percentage rate per annum
in the form of a decimal to no more than four decimal
places) to be added to or subtracted from the LIBO Rate in
order to determine the interest rate applicable to such
Loan, as specified in the Competitive Bid relating to such
Loan.
"Margin Stock" shall have the meaning assigned to such
term in Regulation U.
"Material Adverse Effect" shall mean a materially
adverse effect on the financial condition, results of
operations or business of the Borrower and the
Subsidiaries, taken as a whole.
"Material Indebtedness" shall mean Indebtedness (other
than the Loans), or obligations in respect of one or more
Hedging Agreements, of any one or more of the Borrower and
the Subsidiaries in an aggregate principal amount exceeding
$50,000,000. For purposes of determining Material
Indebtedness, the "principal amount" of the obligations of
the Borrower or any Subsidiary in respect of any Hedging
Agreement at any time shall be the maximum aggregate amount
(giving effect to any netting agreements) that the Borrower
or such Subsidiary would be required to pay if such Hedging
Agreement were terminated at such time.
"Material Subsidiary" shall mean at any time any
Subsidiary, except Subsidiaries which, if aggregated and
considered as a single Subsidiary, would not meet the
definition of a "significant subsidiary" contained as of
the date hereof in Regulation S-X of the Securities and
Exchange Commission.
"Maturity Date" shall mean January 12, 2005.
"Moody's" shall mean Moody's Investors Service, Inc.
"Multiemployer Plan" shall mean a multiemployer plan
as defined in Section 4001(a)(3) of ERISA.
"Other Taxes" shall mean any and all present or future
stamp or documentary taxes or any other excise or property
taxes, charges or similar levies arising from any payment
made under this Agreement or from the execution, delivery
or enforcement of, or otherwise with respect to, this
Agreement.
"PBGC" shall mean the Pension Benefit Guaranty
Corporation referred to and defined in ERISA.
"person" shall mean any natural person, corporation,
business trust, joint venture, association, company,
limited liability company, partnership, Governmental
Authority or other entity.
"Plan" shall mean any employee pension benefit plan
(other than a Multiemployer Plan) subject to the provisions
of Title IV of ERISA or Section 412 of the Code or
Section 307 of ERISA, and in respect of which the Borrower
or any ERISA Affiliate is (or, if such plan were
terminated, would under Section 4069 of ERISA be deemed to
be) an "employer" as defined in Section 3(5) of ERISA.
"Prime Rate" shall mean the rate of interest per annum
publicly announced from time to time by the Administrative
Agent as its prime rate in effect at its principal office
in New York City; each change in the Prime Rate shall be
effective on the date such change is publicly announced as
being effective.
"Register" shall have the meaning assigned to such
term in Section 9.04(d).
"Regulation T" shall mean Regulation T of the Board as
from time to time in effect and all official rulings and
interpretations thereunder or thereof.
"Regulation U" shall mean Regulation U of the Board as
from time to time in effect and all official rulings and
interpretations thereunder or thereof.
"Regulation X" shall mean Regulation X of the Board as
from time to time in effect and all official rulings and
interpretations thereunder or thereof.
"Related Parties" shall mean, with respect to any
specified person, such person's Affiliates and the
respective directors, officers, employees, agents and
advisors of such person and such person's Affiliates.
"Required Lenders" shall mean, at any time, Lenders
having Commitments (or, if the Commitments have terminated,
Loans) representing at least a majority of the Total
Commitment (or if the Commitments have terminated, the
aggregate amount of Loans outstanding) at such time or, for
purposes of acceleration pursuant to clause (ii) of the
last paragraph of Article VII, Lenders having Loans and
unused Commitments representing at least a majority of the
sum of all Loans outstanding and unused Commitments.
"Restricted Payment" shall mean (a) any dividend or
other distribution (whether in cash, securities or other
property) with respect to any Equity Interests in the
Borrower or any Subsidiary, or (b) any payment (whether in
cash, securities or other property), including any sinking
fund or similar deposit, other than a payment to the extent
consisting of Equity Interests of equal or junior ranking,
on account of the purchase, redemption, retirement,
acquisition, cancelation or termination of any Equity
Interests in the Borrower or any Subsidiary. It is
understood that the withholding of shares, and the payment
of cash to the Internal Revenue Service in an amount not to
exceed the value of the withheld shares, by the Company in
connection with any of its stock incentive plans shall not
constitute Restricted Payments.
"Revolving Credit Borrowing" shall mean a Borrowing
comprised of Revolving Loans.
"Revolving Credit Exposure" shall mean, with respect
to any Lender at any time, the aggregate principal amount
at such time of all outstanding Revolving Loans of such
Lender.
"Revolving Loans" shall mean the revolving loans made
by the Lenders to the Borrower pursuant to Section 2.01.
Each Revolving Loan shall be a Eurodollar Revolving Loan or
an ABR Revolving Loan.
"S&P" shall mean Standard & Poor's Ratings Service.
"SPC" shall have the meaning assigned to such term in
Section 9.04(i).
"Subordinated Notes" shall mean the Borrower's Zero
Coupon Liquid Yield Option (Subordinated Convertible) Notes
due 2021, in an aggregate principal amount at maturity of
$744,000,000.
"Subordinated Note Documents" shall mean the indenture
under which the Subordinated Notes were issued and all
other instruments, agreements and other documents
evidencing or governing the Subordinated Notes or providing
for any Guarantee or other right in respect thereof.
"subsidiary" shall mean, with respect to any person
(herein referred to as the "parent"), any corporation,
partnership, association or other business entity (a) of
which securities or other ownership interests representing
more than 50% of the equity or more than 50% of the
ordinary voting power or more than 50% of the general
partnership interests are, at the time any determination is
being made, owned, controlled or held, or (b) that is, at
the time any determination is made, otherwise Controlled,
by the parent or one or more subsidiaries of the parent or
by the parent and one or more subsidiaries of the parent.
"Subsidiary" shall mean any subsidiary of the
Borrower.
"Synthetic Purchase Agreement" shall mean any swap,
derivative or other agreement or combination of agreements
pursuant to which the Borrower or any Subsidiary is or may
become obligated to make (a) any payment in connection with
a purchase by any third party from a person other than the
Borrower or any Subsidiary of any Equity Interest or (b)
any payment (other than on account of a permitted purchase
by it of any Equity Interest) the amount of which is
determined by reference to the price or value at any time
of any Equity Interest; provided that no phantom stock or
similar plan providing for payments only to current or
former directors, officers or employees of the Borrower or
the Subsidiaries (or to their heirs or estates) shall be
deemed to be a Synthetic Purchase Agreement.
"Taxes" shall mean any and all present or future
taxes, levies, imposts, duties, deductions, charges,
liabilities or withholdings imposed by any Governmental
Authority.
"Three-Year Credit Agreement" shall mean the Three-
Year Credit Agreement dated as of February 20, 2002 (as
amended, supplemented or otherwise modified from time to
time), among the Borrower, the lenders from time to time
party thereto, and Credit Suisse First Boston, as
administrative agent.
"Total Debt" shall mean, at any time, the total
Indebtedness of the Borrower and the Subsidiaries at such
time (excluding Indebtedness of the type described in
clause (h) of the definition of such term, except to the
extent of any unreimbursed drawings thereunder).
"Total Commitment" shall mean, at any time, the
aggregate amount of the Commitments, as in effect at such
time.
"Transactions" shall have the meaning assigned to such
term in Section 3.02.
"Type", when used in respect of any Loan or Borrowing,
shall refer to the Rate by reference to which interest on
such Loan or on the Loans comprising such Borrowing is
determined. For purposes hereof, the term "Rate" shall
include the LIBO Rate and the Alternate Base Rate.
"wholly owned Subsidiary" of any person shall mean a
subsidiary of such person of which securities (except for
directors' qualifying shares) or other ownership interests
representing 100% of the Equity Interests are, at the time
any determination is being made, owned, controlled or held
by such person or one or more wholly owned Subsidiaries of
such person or by such person and one or more wholly owned
Subsidiaries of such person.
"Withdrawal Liability" shall mean liability to a
Multiemployer Plan as a result of a complete or partial
withdrawal from such Multiemployer Plan, as such terms are
defined in Part I of Subtitle E of Title IV of ERISA.
SECTION 1.02. Terms Generally. The definitions in
Section 1.01 shall apply equally to both the singular and
plural forms of the terms defined. Whenever the context
may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The words "include",
"includes" and "including" shall be deemed to be followed
by the phrase "without limitation". The word "will" shall
be construed to have the same meaning and effect as the
word "shall"; and the words "asset" and "property" shall be
construed as having the same meaning and effect and to
refer to any and all tangible and intangible assets and
properties, including cash, securities, accounts and
contract rights. All references herein to Articles,
Sections, Exhibits and Schedules shall be deemed references
to Articles and Sections of, and Exhibits and Schedules to,
this Agreement unless the context shall otherwise require.
Except as otherwise expressly provided herein, all terms of
an accounting or financial nature shall be construed in
accordance with GAAP, as in effect from time to time;
provided, however, that if the Borrower notifies the
Administrative Agent that the Borrower wishes to amend any
covenant in Article VI or any related definition to
eliminate the effect of any change in GAAP occurring after
the date of this Agreement on the operation of such
covenant (or if the Administrative Agent notifies the
Borrower that the Required Lenders wish to amend Article VI
or any related definition for such purpose), then the
Borrower's compliance with such covenant shall be
determined on the basis of GAAP in effect immediately
before the relevant change in GAAP became effective, until
either such notice is withdrawn or such covenant is amended
in a manner satisfactory to the Borrower and the Required
Lenders.
SECTION 1.03. Classification of Loans and
Borrowings. For purposes of this Agreement, Loans
may be classified and referred to by Class (e.g., a
"Revolving Loan") or by Type (e.g., a "Eurodollar Loan") or
by Class and Type (e.g., a "Eurodollar Revolving Loan").
Borrowings also may be classified and referred to by Class
(e.g., a "Revolving Borrowing") or by Type (e.g., a
"Eurodollar Borrowing") or by Class and Type (e.g., a
"Eurodollar Revolving Borrowing").
ARTICLE II
The Credits
SECTION 2.01. Commitments. Subject to the terms and
conditions and relying upon the representations and warranties
herein set forth, each Lender agrees, severally and not jointly,
to make Revolving Loans to the Borrower, at any time and from
time to time on or after the date hereof, and until the
earlier of the Maturity Date and the termination of the
Commitment of such Lender in accordance with the terms
hereof, in an aggregate principal amount at any time
outstanding that will not result in such Lender's Revolving
Credit Exposure exceeding such Lender's Commitment minus
the amount by which the outstanding Competitive Borrowings
shall be deemed to have utilized such Commitment in
accordance with Section 2.16. Within the limits set forth
in the preceding sentence and subject to the terms,
conditions and limitations set forth herein, the Borrower
may borrow, pay or prepay and reborrow Revolving Loans.
SECTION 2.02. Loans. (a) Each Loan (other than Competitive
Loans) shall be made as part of a Borrowing consisting of
Loans made by the Lenders ratably in accordance with their
respective Commitments; provided, however, that the failure
of any Lender to make any Loan shall not in itself relieve any
other Lender of its obligation to lend hereunder (it being
understood, however, that no Lender shall be responsible
for the failure of any other Lender to make any Loan
required to be made by such other Lender). Each
Competitive Loan shall be made in accordance with the
procedures set forth in Section 2.03. The Loans comprising
any Borrowing shall be in an aggregate principal amount
that is (i) an integral multiple of $1,000,000 and not less
than $10,000,000 or (ii) equal to the remaining available
balance of the Commitments.
(b) Subject to Sections 2.09 and 2.14, each
Competitive Borrowing shall be comprised entirely of
Eurodollar Competitive Loans or Fixed Rate Loans, and each
other Borrowing shall be comprised entirely of ABR Loans or
Eurodollar Loans as the Borrower may request pursuant to
Section 2.03 or 2.04, as applicable. Each Lender may at
its option make any Eurodollar Loan by causing any domestic
or foreign branch or Affiliate of such Lender to make such
Loan; provided that any exercise of such option shall not
affect the obligation of the Borrower to repay such Loan in
accordance with the terms of this Agreement. Borrowings of
more than one Type may be outstanding at the same time;
provided, however, that the Borrower shall not be entitled
to request any Borrowing that, if made, would result
in more than 15 Eurodollar Borrowings outstanding hereunder
at any time. For purposes of the foregoing, Borrowings
having different Interest Periods, regardless of whether
they commence on the same date, shall be considered
separate Borrowings.
(c) Each Lender shall make each Loan to be made by it
hereunder on the proposed date thereof by wire transfer of
immediately available funds to such account in New York
City as the Administrative Agent may designate not later
than 11:00 a.m., New York City time, and the Administrative
Agent shall promptly credit the amounts so received to an
account in the name of the Borrower and designated by the
Borrower in the applicable Borrowing Request or Competitive
Bid Request or, if a Borrowing shall not occur on such date
because any condition precedent herein specified shall not
have been met, return the amounts so received to the
respective Lenders.
(d) Unless the Administrative Agent shall have
received notice from a Lender prior to the date of any
Borrowing that such Lender will not make available to the
Administrative Agent such Lender's portion of such
Borrowing, the Administrative Agent may assume that such
Lender has made such portion available to the
Administrative Agent on the date of such Borrowing in
accordance with paragraph (c) above and the Administrative
Agent may, in reliance upon such assumption, make available
to the Borrower on such date a corresponding amount. If
the Administrative Agent shall have so made funds available
then, to the extent that such Lender shall not have made
such portion available to the Administrative Agent, such
Lender and the Borrower severally agree to repay to the
Administrative Agent forthwith on demand such corresponding
amount together with interest thereon, for each day from
the date such amount is made available to the Borrower
until the date such amount is repaid to the Administrative
Agent at (i) in the case of the Borrower, the interest rate
applicable at the time to the Loans comprising such
Borrowing and (ii) in the case of such Lender, a rate
determined by the Administrative Agent to represent its
cost of overnight or short-term funds (which determination
shall be conclusive absent manifest error). If such Lender
shall repay to the Administrative Agent such corresponding
amount, such amount shall constitute such Lender's Loan as
part of such Borrowing for purposes of this Agreement.
(e) Notwithstanding any other provision of this
Agreement, the Borrower shall not be entitled to request
any Borrowing if the Interest Period requested with respect
thereto would end after the Maturity Date.
SECTION 2.03. Competitive Bid Procedure. (a) In order
to request Competitive Bids, the Borrower shall notify the
Administrative Agent of such request by telephone (i) in
the case of a Eurodollar Competitive Borrowing , not later
than 11:00 a.m., New York City time, four Business Days
before the proposed date of such Borrowing and (ii) in the
case of a Fixed Rate Borrowing, not later than 11:00 a.m.,
New York City time, one Business Day before the proposed
date of such Borrowing. Provided that no two Competitive
Bid Requests submitted on the same day shall be identical,
the Borrower may submit up to (but not more than) three
Competitive Bid Requests on the same day, but a Competitive
Bid Request shall not be made within five Business Days
after the date of any previous Competitive Bid Request
unless such previous Competitive Bid Request shall have
been rejected by the Administrative Agent, as provided
below. No ABR Loan shall be requested in, or made pursuant
to, a Competitive Bid Request. Each such telephonic
Competitive Bid Request shall be confirmed promptly by hand
delivery or telecopy to the Administrative Agent of a
written Competitive Bid Request substantially in the form
of Exhibit D-1. A Competitive Bid Request that does not
conform substantially to the format of Exhibit D-1 may be
rejected by the Administrative Agent and the Administrative
Agent shall notify the Borrower of such rejection as
promptly as practicable. Each Competitive Bid Request shall
refer to this Agreement and specify (i) whether the
Borrowing being requested is to be a Eurodollar Borrowing
or a Fixed Rate Borrowing; (ii) the date of such Borrowing
(which shall be a Business Day); (iii) the number and the
location of the account to which funds are to be disbursed
(which shall be an account that complies with the
requirements of Section 2.02(c)); (iv) the aggregate
principal amount of such Borrowing, which shall be a
minimum of $10,000,000 and an integral multiple of
$1,000,000, and in any event shall not result in the sum of
the Aggregate Revolving Credit Exposure and the aggregate
outstanding principal amount of Competitive Loans, after
giving effect to such Borrowing, exceeding the Total
Commitment; and (v) the Interest Period with respect
thereto (which may not end after the Maturity Date).
Promptly after its receipt of a Competitive Bid Request
that is not rejected, the Administrative Agent shall invite
the Lenders in the form set forth as Exhibit D-2 to bid to
make Competitive Loans pursuant to the Competitive Bid
Request.
(b) Each Lender may make one or more Competitive Bids
to the Borrower responsive to a Competitive Bid Request.
Each Competitive Bid by a Lender must be received by the
Administrative Agent by telecopy, (i) in the case of a
Eurodollar Competitive Borrowing, not later than 9:30 a.m.,
New York City time, three Business Days before the proposed
date of such Competitive Borrowing, and (ii) in the case of
a Fixed Rate Borrowing, not later than 9:30 a.m., New York
City time, on the proposed date of such Competitive
Borrowing. Competitive Bids that do not conform
substantially to the format of Exhibit D-3 may be rejected
by the Administrative Agent, and the Administrative Agent
shall notify the applicable Lender as promptly as
practicable. Each Competitive Bid shall refer to this
Agreement and specify (x) the principal amount (which shall
be a minimum of $5,000,000 and an integral multiple of
$1,000,000 and which may equal the entire principal amount
of the Competitive Borrowing requested by the Borrower) of
the Competitive Loan or Loans that the Lender is willing to
make, (y) the Competitive Bid Rate or Rates at which the
Lender is prepared to make such Loan or Loans and (z) the
Interest Period applicable to such Loan or Loans and the
last day thereof.
(c) The Administrative Agent shall promptly notify
the Borrower by telecopy of the Competitive Bid Rate and
the principal amount of each Competitive Loan in respect of
which a Competitive Bid shall have been made and the
identity of the Lender that shall have made each bid.
(d) The Borrower may, subject only to the provisions
of this paragraph (d), accept or reject any Competitive
Bid. The Borrower shall notify the Administrative Agent by
telephone, confirmed by telecopy in the form of a
Competitive Bid Accept/Reject Letter, whether and to what
extent it has decided to accept or reject each Competitive
Bid, (x) in the case of a Eurodollar Competitive Borrowing,
not later than 10:30 a.m., New York City time, three
Business Days before the date of the proposed Competitive
Borrowing, and (y) in the case of a Fixed Rate Borrowing,
not later than 10:30 a.m., New York City time, on the
proposed date of the Competitive Borrowing; provided,
however, that (i) the failure of the Borrower to give such
notice shall be deemed to be a rejection of each
Competitive Bid, (ii) the Borrower shall not accept a
Competitive Bid made at a particular Competitive Bid Rate
if the Borrower has decided to reject a Competitive Bid
made at a lower Competitive Bid Rate, (iii) the aggregate
amount of the Competitive Bids accepted by the Borrower
shall not exceed the principal amount specified in the
Competitive Bid Request, (iv) if the Borrower shall accept
a Competitive Bid or Bids made at a particular Competitive
Bid Rate but the amount of such Competitive Bid or Bids
would cause the total amount to be accepted by the Borrower
to exceed the amount specified in the Competitive Bid
Request, then the Borrower shall accept a portion of such
Competitive Bid or Bids in an amount equal to the amount
specified in the Competitive Bid Request less the amount of
all other Competitive Bids so accepted, which acceptance,
in the case of multiple Competitive Bids at such
Competitive Bid Rate, shall be made pro rata in accordance
with the amount of each such Bid, and (v) except pursuant
to clause (iv) above, no Competitive Bid shall be accepted
for a Competitive Loan unless such Competitive Loan is in a
minimum principal amount of $5,000,000 and an integral
multiple of $1,000,000; provided further, however, that if
a Competitive Loan must be in an amount less than
$5,000,000 because of the provisions of clause (iv) above,
such Competitive Loan may be for a minimum of $1,000,000 or
any integral multiple thereof, and in calculating the pro
rata allocation of acceptances of portions of multiple
Competitive Bids at a particular Competitive Bid Rate
pursuant to clause (iv) the amounts shall be rounded to
integral multiples of $1,000,000 in a manner determined by
the Borrower. A notice given by the Borrower pursuant to
this paragraph (d) shall be irrevocable.
(e) The Administrative Agent shall promptly notify
each bidding Lender by telecopy whether or not its
Competitive Bid has been accepted (and, if so, in what
amount and at what Competitive Bid Rate), and each
successful bidder will thereupon become bound, upon the
terms and subject to the conditions hereof, to make the
Competitive Loan in respect of which its Competitive Bid
has been accepted.
(f) If the Administrative Agent shall elect to submit
a Competitive Bid in its capacity as a Lender, it shall
submit such Competitive Bid directly to the Borrower at
least one quarter of an hour earlier than the time by which
the other Lenders are required to submit their Competitive
Bids to the Administrative Agent pursuant to paragraph (b)
above.
(g) Within the limits set forth in this Section 2.03
and subject to the terms, conditions and limitations set
forth herein, the Borrower may borrow, pay and reborrow
Competitive Loans.
SECTION 2.04. Borrowing Procedure. In order to request a
Borrowing (other than a Competitive Borrowing, as to which
this Section 2.04 shall not apply), the Borrower shall
notify the Administrative Agent of such request by
telephone (a) in the case of a Eurodollar Borrowing, not
later than 11:00 a.m., New York City time, three Business
Days before a proposed Borrowing, and (b) in the case of an
ABR Borrowing, not later than 11:00 a.m., New York City
time, on the day of a proposed Borrowing. Each Borrowing
Request shall be irrevocable, shall be confirmed promptly
by hand delivery or telecopy to the Administrative Agent of
a written Borrowing Request substantially in the form of
Exhibit C or such other form as shall be acceptable to the
Administrative Agent and shall specify the following
information: (i) whether the Borrowing then being requested
is to be a Eurodollar Borrowing or an ABR Borrowing;
(ii) the date of such Borrowing (which shall be a Business
Day); (iii) the number and location of the account to which
funds are to be disbursed (which shall be an account that
complies with the requirements of Section 2.02(c));
(iv) the amount of such Borrowing; and (v) if such
Borrowing is to be a Eurodollar Borrowing, the Interest
Period with respect thereto; provided, however, that,
notwithstanding any contrary specification in any Borrowing
Request, each requested Borrowing shall comply with the
requirements set forth in Section 2.02. If no election as
to the Type of Borrowing is specified in any such notice,
then the requested Borrowing shall be an ABR Borrowing. If
no Interest Period with respect to any Eurodollar Borrowing
is specified in any such notice, then the Borrower shall be
deemed to have selected an Interest Period of one month's
duration. The Administrative Agent shall promptly advise
the Lenders of any notice given pursuant to this
Section 2.04 (and the contents thereof), and of each
Lender's portion of the requested Borrowing.
SECTION 2.05. Evidence of Debt; Repayment of Loans.
(a) The Borrower hereby unconditionally promises to pay to
the Administrative Agent for the account of each Lender (i)
the then unpaid principal amount of each Competitive Loan
of such Lender on the last day of the Interest Period
applicable to such Loan and (ii) the then unpaid principal
amount of each Revolving Loan of such Lender on the
Maturity Date.
(b) Each Lender shall maintain in accordance with its
usual practice an account or accounts evidencing the
indebtedness of the Borrower to such Lender resulting from
each Loan made by such Lender from time to time, including
the amounts of principal and interest payable and paid to
such Lender from time to time under this Agreement.
(c) The Administrative Agent shall maintain accounts
in which it will record (i) the amount of each Loan made
hereunder, the Type thereof and the Interest Period
applicable thereto, (ii) the amount of any principal or
interest due and payable or to become due and payable from
the Borrower to each Lender hereunder and (iii) the amount
of any sum received by the Administrative Agent hereunder
from the Borrower and each Lender's share thereof.
(d) The entries made in the accounts maintained
pursuant to paragraphs (b) and (c) above shall be prima
facie evidence of the existence and amounts of the
obligations therein recorded; provided, however, that the
failure of any Lender or the Administrative Agent to
maintain such accounts or any error therein shall not in
any manner affect the obligations of the Borrower to repay
the Loans in accordance with their terms.
(e) Any Lender may request that Loans made by it
hereunder be evidenced by a promissory note. In such
event, the Borrower shall execute and deliver to such
Lender a promissory note payable to such Lender and its
registered assigns and in a form and substance reasonably
acceptable to the Administrative Agent and the Borrower.
Notwithstanding any other provision of this Agreement, in
the event any Lender shall request and receive such a
promissory note, the interests represented by such note
shall at all times (including after any assignment of all
or part of such interests pursuant to Section 9.04) be
represented by one or more promissory notes payable to the
payee named therein or its registered assigns.
SECTION 2.06. Fees. (a) The Borrower agrees to pay to
each Lender, through the Administrative Agent, on the last
Business Day of March, June, September and December in each
year, and on the date on which the Commitment of such Lender
shall expire or be terminated as provided herein, a facility
fee (a "Facility Fee") equal to the Applicable Percentage per
annum in effect from time to time on the daily amount of the
Commitment of such Lender (whether used or unused) during
the preceding quarter (or shorter period commencing with
the date hereof or ending with the Maturity Date or the
date on which the Commitment of such Lender shall expire or
be terminated); provided that, if such Lender continues to
have any Revolving Credit Exposure after its Commitment
terminates, then the Facility Fee shall continue to accrue
(and be payable on demand) on the daily amount of such
Lender's Revolving Credit Exposure from and including the
date on which its Commitment terminates to and including
the date on which such Lender ceases to have any Revolving
Credit Exposure. All Facility Fees shall be computed on
the basis of the actual number of days elapsed (including
the first day but excluding the last day) in a year of 360
days. The Facility Fee due to each Lender shall commence
to accrue on the date of this Agreement and shall cease to
accrue on the later of the date on which the Commitment of
such Lender shall expire or be terminated as provided
herein and such Lender shall have no Revolving Credit
Exposure.
(b) The Borrower agrees to pay to the Administrative
Agent, for its own account, the administration fee referred
to in the Fee Letter dated November 29, 2001, as amended or
supplemented from time to time, between the Borrower and
Credit Suisse First Boston (the "Administrative Agent
Fees").
(c) All Fees shall be paid on the dates due, in
immediately available funds, to the Administrative Agent
for distribution, if and as appropriate, among the Lenders.
Once paid, none of the Fees shall be refundable under any
circumstances.
SECTION 2.07. Interest on Loans. (a) Subject to the
provisions of Section 2.08, the Loans comprising each ABR
Borrowing shall bear interest (computed on the basis of the
actual number of days elapsed (including the first day but
excluding the last day) over a year of 365 or 366 days, as
the case may be, when the Alternate Base Rate is determined
by reference to the Prime Rate and over a year of 360 days
at all other times) at a rate per annum equal to the
Alternate Base Rate plus the Applicable Percentage in
effect from time to time.
(b) Subject to the provisions of Section 2.08, the
Loans comprising each Eurodollar Borrowing shall bear
interest (computed on the basis of the actual number of
days elapsed (including the first day but excluding the
last day) over a year of 360 days) at a rate per annum
equal to (i) in the case of each Revolving Loan, the LIBO
Rate for the Interest Period in effect for such Borrowing
plus the Applicable Percentage in effect from time to time,
and (ii) in the case of each Competitive Loan, the LIBO
Rate for the Interest Period in effect for such Borrowing
plus the Margin offered by the Lender making such Loan and
accepted by the Borrower pursuant to Section 2.03.
(c) Subject to the provisions of Section 2.08, each
Fixed Rate Loan shall bear interest (computed on the basis
of the actual number of days elapsed (including the first
day but excluding the last day) over a year of 360 days) at
a rate per annum equal to the fixed rate of interest
offered by the Lender making such Loan and accepted by the
Borrower pursuant to Section 2.03.
(d) Interest on each Loan shall be payable on the
Interest Payment Dates applicable to such Loan except as
otherwise provided in this Agreement; provided that (i) in
the event of any repayment or prepayment of any Loan (other
than a prepayment of an ABR Loan), accrued interest on the
principal amount repaid or prepaid shall be payable on the
date of such repayment or prepayment and (ii) in the event
of any conversion of any Eurodollar Loan prior to the end
of the current Interest Period therefor, accrued interest
on such Loan shall be payable on the effective date of such
conversion. The applicable Alternate Base Rate or LIBO
Rate for each Interest Period or day within an Interest
Period, as the case may be, shall be determined by the
Administrative Agent, and such determination shall be
conclusive absent manifest error.
SECTION 2.08. Default Interest. If the Borrower shall
default in the payment of the principal of or interest on any
Loan or any other amount becoming due hereunder, by acceleration
or otherwise, the Borrower shall on demand from time to time
pay interest, to the extent permitted by law, on such
defaulted amount to but excluding the date of actual
payment (after as well as before judgment) (a) in the case
of overdue principal, at the rate otherwise applicable to
such Loan pursuant to Section 2.07 plus 2.00% per annum and
(b) in all other cases, at a rate per annum (computed on
the basis of the actual number of days elapsed (including
the first day but excluding the last day) over a year of
365 or 366 days, as the case may be, when determined by
reference to the Prime Rate and over a year of 360 days at
all other times) equal to the rate that would be applicable
to an ABR Revolving Loan plus 2.00%.
SECTION 2.09. Alternate Rate of Interest. In the
event, and on each occasion, that on the day two Business
Days prior to the commencement of any Interest Period for a
Eurodollar Borrowing the Administrative Agent shall have
determined that dollar deposits in the principal amounts of
the Loans comprising such Borrowing are not generally
available in the London interbank market, or that
reasonable means do not exist for ascertaining the LIBO
Rate, or the Administrative Agent shall have been informed
by the Required Lenders (or, in the case of a Eurodollar
Competitive Loan, any Lender required to make such Loan)
that the rates at which such dollar deposits are being
offered will not adequately and fairly reflect the cost to
the Required Lenders (or such Lender) of making or
maintaining their or its Eurodollar Loan during such
Interest Period, the Administrative Agent shall, as soon as
practicable thereafter, give written or telecopy notice
thereof to the Borrower and the Lenders. In the event of
any such notice, until the Administrative Agent shall have
advised the Borrower and the Lenders that the circumstances
giving rise to such notice no longer exist, (i) any request
by the Borrower for a Eurodollar Revolving Credit Borrowing
pursuant to Section 2.04 shall be deemed to be a request
for an ABR Borrowing and (ii) any request by the Borrower
for a Eurodollar Competitive Borrowing pursuant to
Section 2.03 shall be of no force and effect and shall be
denied by the Administrative Agent; provided that if the
circumstances giving rise to such notice do not affect all
the Lenders, then the Borrower may make requests for
Eurodollar Competitive Borrowings to Lenders that are not
affected thereby. Each determination by the Administrative
Agent under this Section 2.09 shall be conclusive absent
manifest error.
SECTION 2.10. Termination and Reduction of
Commitments. (a) The Commitments shall
automatically terminate on the Maturity Date.
(b) Upon at least three Business Days' prior
irrevocable written or telecopy notice (or telephone notice
promptly confirmed by written or telecopy notice) to the
Administrative Agent, the Borrower may at any time in whole
permanently terminate, or from time to time in part
permanently reduce, the Commitments; provided, however,
that (i) each partial reduction of the Commitments shall be
in an integral multiple of $1,000,000 and in a minimum
amount of $10,000,000 and (ii) the Total Commitment shall
not be reduced to an amount that is less than the sum of
the Aggregate Revolving Credit Exposure and the aggregate
outstanding principal amount of the Competitive Loans at
the time.
(c) Each reduction in the Commitments hereunder shall
be made ratably among the Lenders in accordance with their
respective Commitments. The Borrower shall pay to the
Administrative Agent for the account of the applicable
Lenders, on the date of each termination or reduction, the
Facility Fees on the amount of the Commitments so
terminated or reduced accrued to but excluding the date of
such termination or reduction.
SECTION 2.11. Conversion and Continuation of
Borrowings. The Borrower shall have the
right at any time upon prior irrevocable written or
telecopy notice (or telephone notice promptly confirmed by
written or telecopy notice) to the Administrative Agent
(a) not later than 11:00 a.m., New York City time, on the
day of conversion, to convert any Eurodollar Borrowing into
an ABR Borrowing, (b) not later than 11:00 a.m., New York
City time, three Business Days prior to conversion or
continuation, to convert any ABR Borrowing into a
Eurodollar Revolving Credit Borrowing or to continue any
Eurodollar Revolving Credit Borrowing as a Eurodollar
Revolving Credit Borrowing for an additional Interest
Period, and (c) not later than 11:00 a.m., New York City
time, three Business Days prior to conversion, to convert
the Interest Period with respect to any Eurodollar
Revolving Credit Borrowing to another permissible Interest
Period, subject in each case to the following:
(i) each conversion or continuation shall be made
pro rata among the Lenders in accordance with the
respective principal amounts of the Loans comprising
the converted or continued Borrowing;
(ii) if less than all the outstanding principal
amount of any Borrowing shall be converted or
continued, then each resulting Borrowing shall satisfy
the limitations specified in Sections 2.02(a) and
2.02(b) regarding the principal amount and maximum
number of Borrowings of the relevant Type;
(iii) each conversion shall be effected by each
Lender and the Administrative Agent by recording for
the account of such Lender the new Loan of such Lender
resulting from such conversion and reducing the Loan
(or portion thereof) of such Lender being converted by
an equivalent principal amount; accrued interest on
any Eurodollar Loan (or portion thereof) being
converted shall be paid by the Borrower at the time of
conversion;
(iv) if any Eurodollar Borrowing is converted at
a time other than the end of the Interest Period
applicable thereto, the Borrower shall pay, upon
demand, any amounts due to the Lenders pursuant to
Section 2.15;
(v) any portion of a Borrowing maturing or
required to be repaid in less than one month may not
be converted into or continued as a Eurodollar
Borrowing;
(vi) any portion of a Eurodollar Borrowing that
cannot be converted into or continued as a Eurodollar
Borrowing by reason of the immediately preceding
clause shall be automatically converted at the end of
the Interest Period in effect for such Borrowing into
an ABR Borrowing; and
(vii) upon notice to the Borrower from the
Administrative Agent given at the request of the
Required Lenders, after the occurrence and during the
continuance of a Default or Event of Default, no
outstanding Revolving Loan may be converted into, or
continued as, a Eurodollar Loan and, unless repaid,
each Eurodollar Revolving Borrowing shall be converted
into an ABR Borrowing at the end of the Interest
Period applicable thereto.
Each notice pursuant to this Section 2.11 shall refer
to this Agreement and specify (i) the identity and amount
of the Borrowing that the Borrower requests be converted or
continued, (ii) whether such Borrowing is to be converted
to or continued as a Eurodollar Borrowing or an
ABR Borrowing, (iii) if such notice requests a conversion,
the date of such conversion (which shall be a Business Day)
and (iv) if such Borrowing is to be converted to or
continued as a Eurodollar Borrowing, the Interest Period
with respect thereto. If no Interest Period is specified
in any such notice with respect to any conversion to or
continuation as a Eurodollar Borrowing, the Borrower shall
be deemed to have selected an Interest Period of one
month's duration. The Administrative Agent shall advise
the Lenders of any notice given pursuant to this
Section 2.11 and of each Lender's portion of any converted
or continued Borrowing. If the Borrower shall not have
given notice in accordance with this Section 2.11 to
continue any Borrowing into a subsequent Interest Period
(and shall not otherwise have given notice in accordance
with this Section 2.11 to convert such Borrowing), such
Borrowing shall, at the end of the Interest Period
applicable thereto (unless repaid pursuant to the terms
hereof), automatically be continued into an ABR Borrowing.
The Borrower shall not have the right to continue or
convert the Interest Period with respect to any Competitive
Borrowing pursuant to this Section 2.11.
SECTION 2.12. Optional Prepayment.(a) The Borrower shall
have the right at any time and from time to time to prepay any
Borrowing (other than a Competitive Borrowing), in whole or
in part, upon at least three Business Days' prior written
or telecopy notice (or telephone notice promptly confirmed
by written or telecopy notice) in the case of Eurodollar
Loans, or written or telecopy notice (or telephone notice
promptly confirmed by written or telecopy notice) on the
day of prepayment in the case of ABR Loans, to the
Administrative Agent before 11:00 a.m., New York City time;
provided, however, that each partial prepayment shall be in
an amount that is an integral multiple of $1,000,000 and
not less than $10,000,000. The Borrower shall not have the
right to prepay any Competitive Borrowing.
(b) In the event of any termination of all the
Commitments, the Borrower shall repay or prepay all its
outstanding Revolving Credit Borrowings on the date of such
termination. If as a result of any partial reduction of the
Commitments the sum of the Aggregate Revolving Credit
Exposure and the aggregate outstanding principal amount of
the Competitive Loans at the time would exceed the Total
Commitment after giving effect thereto, then the Borrower
shall, on the date of such reduction, repay or prepay
Revolving Credit Borrowings in an amount sufficient to
eliminate such excess.
(c) Each notice of prepayment shall specify the
prepayment date and the principal amount of each Borrowing
(or portion thereof) to be prepaid, shall be irrevocable
and shall commit the Borrower to prepay such Borrowing by
the amount stated therein on the date stated therein. All
prepayments under this Section 2.12 shall be subject to
Section 2.15 but otherwise without premium or penalty. All
prepayments under this Section 2.12 (other than prepayment
of an ABR Loan that does not occur in connection with, or
as a result of, the reduction or termination of the
Commitments) shall be accompanied by accrued and unpaid
interest on the principal amount to be prepaid to but
excluding the date of payment.
SECTION 2.13. Reserve Requirements; Change in
Circumstances. (a) Notwithstanding any other provision of
this Agreement, if any Change in Law shall impose, modify
or deem applicable any reserve, special deposit or similar
requirement against assets of, deposits with or for the
account of or credit extended by any Lender or shall impose
on such Lender or the London interbank market any other
condition affecting this Agreement or Eurodollar Loans or
Fixed Rate Loans made by such Lender, and the result of any
of the foregoing shall be to increase the cost to such
Lender of making or maintaining any Eurodollar Loan or
Fixed Rate Loan or to reduce the amount of any sum received
or receivable by such Lender hereunder (whether of
principal, interest or otherwise) by an amount deemed by
such Lender to be material, then the Borrower will pay to
such Lender upon demand such additional amount or amounts
as will compensate such Lender for such additional costs
incurred or reduction suffered.
(b) If any Lender shall have determined that any
Change in Law regarding capital adequacy has or would have
the effect of reducing the rate of return on such Lender's
capital or on the capital of such Lender's holding company,
if any, as a consequence of this Agreement or the Loans
made to a level below that which such Lender or such
Lender's holding company could have achieved but for such
Change in Law (taking into consideration such Lender's
policies and the policies of such Lender's holding company
with respect to capital adequacy) by an amount deemed by
such Lender to be material, then from time to time the
Borrower shall pay to such Lender such additional amount or
amounts as will compensate such Lender or such Lender's
holding company for any such reduction suffered.
(c) A certificate of a Lender setting forth the
amount or amounts necessary to compensate such Lender or
its holding company, as applicable, as specified in
paragraph (a) or (b) above shall be delivered to the
Borrower and shall be conclusive absent manifest error.
The Borrower shall pay such Lender the amount shown as due
on any such certificate delivered by it within 15 days
after its receipt of the same.
(d) Failure or delay on the part of any Lender to
demand compensation for any increased costs or reduction in
amounts received or receivable or reduction in return on
capital shall not constitute a waiver of such Lender's
right to demand such compensation; provided that the
Borrower shall not be under any obligation to compensate
any Lender under paragraph (a) or (b) above with respect to
increased costs or reductions with respect to any period
prior to the date that is 120 days prior to such request if
such Lender knew or could reasonably have been expected to
know of the circumstances giving rise to such increased
costs or reductions and of the fact that such circumstances
could reasonably be expected to result in a claim for
increased compensation by reason of such increased costs or
reductions; provided further that the foregoing limitation
shall not apply to any increased costs or reductions
arising out of the retroactive application of any Change in
Law within such 120-day period. The protection of this
Section shall be available to each Lender regardless of any
possible contention of the invalidity or inapplicability of
the Change in Law that shall have occurred or been imposed.
Notwithstanding any other provision of this Section, no
Lender shall be entitled to demand compensation hereunder
in respect of any Competitive Loan if it shall have been
aware of the event or circumstance giving rise to such
demand at the time it submitted the Competitive Bid
pursuant to which such Loan was made.
SECTION 2.14. Change in Legality. (a) Notwithstanding
any other provision of this Agreement, if any Change in
Law shall make it unlawful for any Lender to make or maintain
any Eurodollar Loan or to give effect to its obligations as
contemplated hereby with respect to any Eurodollar Loan,
then, by written notice to the Borrower and to the
Administrative Agent:
(i) such Lender may declare that Eurodollar Loans
will not thereafter (for the duration of such
unlawfulness) be made by such Lender hereunder (or be
continued for additional Interest Periods and ABR
Loans will not thereafter (for such duration) be
converted into Eurodollar Loans), whereupon such
Lender shall not submit a Competitive Bid in response
to a request for a Eurodollar Competitive Loan and any
request for a Eurodollar Borrowing (or to convert an
ABR Borrowing to a Eurodollar Borrowing or to continue
a Eurodollar Borrowing for an additional Interest
Period) shall, as to such Lender only, be deemed a
request for an ABR Loan (or a request to continue an
ABR Loan as such for an additional Interest Period or
to convert a Eurodollar Loan into an ABR Loan, as the
case may be), unless such declaration shall be
subsequently withdrawn; and
(ii) such Lender may require that all outstanding
Eurodollar Loans made by it be converted to ABR Loans,
in which event all such Eurodollar Loans shall be
automatically converted to ABR Loans as of the
effective date of such notice as provided in
paragraph (b) below.
In the event any Lender shall exercise its rights under
(i) or (ii) above, all payments and prepayments of
principal that would otherwise have been applied to repay
the Eurodollar Loans that would have been made by such
Lender or the converted Eurodollar Loans of such Lender
shall instead be applied to repay the ABR Loans made by
such Lender in lieu of, or resulting from the conversion
of, such Eurodollar Loans.
(b) For purposes of this Section 2.14, a notice to
the Borrower by any Lender shall be effective as to each
Eurodollar Loan made by such Lender, if lawful, on the last
day of the Interest Period then applicable to such
Eurodollar Loan; in all other cases such notice shall be
effective on the date of receipt by the Borrower.
SECTION 2.15. Break Funding. The Borrower shall
compensate each Lender for any loss or expense that such
Lender may sustain or incur as a consequence of (a) such Lender
receiving or being deemed to receive any amount on account of
the principal of any Fixed Rate Loan or Eurodollar Loan prior
to the end of the Interest Period in effect therefor, (b)
the conversion of any Eurodollar Loan to an ABR Loan, or
the conversion of the Interest Period with respect to any
Eurodollar Loan, in each case other than on the last day of
the Interest Period in effect therefor or (c) the failure
of the Borrower to borrow, convert, continue or prepay any
Fixed Rate Loan or Eurodollar Loan made or to be made by
such Lender (including any Eurodollar Loan to be made
pursuant to a conversion or continuation under
Section 2.11) after notice of such borrowing, conversion,
continuation or prepayment shall have been given by the
Borrower hereunder (any of the events referred to in this
sentence being called a "Breakage Event"). In the case of
any Breakage Event, such loss shall include an amount equal
to the excess, as reasonably determined by such Lender, of
(i) its cost of obtaining funds for the Fixed Rate Loan or
Eurodollar Loan that is the subject of such Breakage Event
for the period from the date of such Breakage Event to the
last day of the Interest Period in effect (or that would
have been in effect) for such Loan over (ii) the amount of
interest likely to be realized by such Lender in
redeploying the funds released or not utilized by reason of
such Breakage Event for such period. A certificate of any
Lender setting forth any amount or amounts which such
Lender is entitled to receive pursuant to this Section 2.15
shall be delivered to the Borrower and shall be conclusive
absent manifest error. The Borrower shall pay such Lender
the amount due within 15 days of the receipt of any such
certificate.
SECTION 2.16. Pro Rata Treatment. Except as provided
below in this Section 2.16 with respect to Competitive
Borrowings and as required under Section 2.14, each Borrowing,
each payment or prepayment of principal of any Borrowing, each
payment of interest on the Loans, each payment of the
Facility Fees, each reduction of the Commitments and each
conversion of any Borrowing to or continuation of any
Borrowing as a Borrowing of any Type shall be allocated pro
rata among the Lenders in accordance with their respective
Commitments (or, if such Commitments shall have expired or
been terminated, in accordance with the respective
principal amounts of their outstanding Loans). Each
payment of principal of and interest on any Competitive
Borrowing shall be allocated pro rata among the Lenders
participating in such Borrowing in accordance with the
respective principal amounts of their outstanding
Competitive Loans comprising such Borrowing. For purposes
of determining the available Commitments of the Lenders at
any time, each outstanding Competitive Borrowing shall be
deemed to have utilized the Commitments of the Lenders
(including those Lenders which shall not have made Loans as
part of such Competitive Borrowing) pro rata in accordance
with such respective Commitments. Each Lender agrees that
in computing such Lender's portion of any Borrowing to be
made hereunder, the Administrative Agent may, in its
discretion, round each Lender's percentage of such
Borrowing to the next higher or lower whole dollar amount.
SECTION 2.17. Sharing of Setoffs. tc \l 2 "SECTION
2.17. Sharing of Setoffs." Each Lender agrees that if it
shall, through the exercise of a right of banker's lien,
setoff or counterclaim against the Borrower, or pursuant to
a secured claim under Section 506 of Title 11 of the United
States Code or other security or interest arising from, or
in lieu of, such secured claim, received by such Lender
under any applicable bankruptcy, insolvency or other
similar law or otherwise, or by any other means, obtain
payment (voluntary or involuntary) in respect of any Loan
or Loans as a result of which the unpaid principal portion
of its Loans shall be proportionately less than the unpaid
principal portion of the Loans of any other Lender, it
shall be deemed simultaneously to have purchased from such
other Lender at face value, and shall promptly pay to such
other Lender the purchase price for, a participation in the
Loans of such other Lender, so that the aggregate unpaid
principal amount of the Loans and participations in Loans
held by each Lender shall be in the same proportion to the
aggregate unpaid principal amount of all Loans then
outstanding as the principal amount of its Loans prior to
such exercise of banker's lien, setoff or counterclaim or
other event was to the principal amount of all Loans
outstanding prior to such exercise of banker's lien, setoff
or counterclaim or other event; provided, however, that if
any such purchase or purchases or adjustments shall be made
pursuant to this Section 2.17 and the payment giving rise
thereto shall thereafter be recovered, such purchase or
purchases or adjustments shall be rescinded to the extent
of such recovery and the purchase price or prices or
adjustment restored without interest. The Borrower
expressly consents to the foregoing arrangements and agrees
that any Lender holding a participation in a Loan deemed to
have been so purchased may exercise any and all rights of
banker's lien, setoff or counterclaim with respect to any
and all moneys owing by the Borrower to such Lender by
reason thereof as fully as if such Lender had made a Loan
directly to the Borrower in the amount of such
participation.
SECTION 2.18. Payments. (a) The Borrower shall make
each payment (including principal of or interest on any
Borrowing or any Fees or other amounts) hereunder not later
than 12:00 (noon), New York City time, on the date when due in
immediately available dollars, without setoff, defense or
counterclaim. Each such payment shall be made to the
Administrative Agent at its offices at Eleven Madison
Avenue, New York, NY 10010 or as otherwise instructed by
the Administrative Agent.
(b) Except as otherwise expressly provided herein,
whenever any payment (including principal of or interest on
any Borrowing or any Fees or other amounts) hereunder shall
become due, or otherwise would occur, on a day that is not
a Business Day, such payment may be made on the next
succeeding Business Day, and such extension of time shall
in such case be included in the computation of interest or
Fees, if applicable.
SECTION 2.19. Taxes. (a) Any and all payments by the
Borrower hereunder shall be made free and clear of and without
deduction for any Indemnified Taxes or Other Taxes; provided
that if the Borrower shall be required to deduct any Indemnified
Taxes or Other Taxes from such payments, then (i) the sum payable
shall be increased as necessary so that after making all
required deductions (including deductions applicable to
additional sums payable under this Section) the
Administrative Agent or such Lender (as the case may be)
receives an amount equal to the sum it would have received
had no such deductions been made, (ii) the Borrower shall
make such deductions and (iii) the Borrower shall pay the
full amount deducted to the relevant Governmental Authority
in accordance with applicable law.
(b) In addition, the Borrower shall pay any Other
Taxes not paid pursuant to Section 2.19(a)(iii) to the
relevant Governmental Authority in accordance with
applicable law. As of the Closing Date, each Foreign
Lender intends to make Loans hereunder out of an office
located in the United States of America or out of an office
so that such Loans would not be subject to Other Taxes.
(c) The Borrower shall indemnify the Administrative
Agent and each Lender, within 15 days after written demand
therefor, for the full amount of any Indemnified Taxes or
Other Taxes paid by the Administrative Agent or such
Lender, as the case may be, on or with respect to any
payment by or on account of any obligation of the Borrower
hereunder (including Indemnified Taxes or Other Taxes
imposed or asserted on or attributable to amounts payable
under this Section) and any penalties, interest and
reasonable expenses arising therefrom or with respect
thereto, whether or not such Indemnified Taxes or Other
Taxes were correctly or legally imposed or asserted by the
relevant Governmental Authority; provided, however, that
the Borrower shall not be obligated to make a payment
pursuant to this Section 2.19 in respect of penalties,
interest and other liabilities attributable to any
Indemnified Taxes or Other Taxes, if (i) such penalties,
interest and other liabilities are attributable to the
failure of the Administrative Agent or such Lender, as the
case may be, to pay amounts paid to the Administrative
Agent or such Lender by the Borrower (for Indemnified Taxes
or Other Taxes) to the appropriate taxing authority in a
timely manner after receipt of such payment from the
Borrower or (ii) such penalties, interest and other
liabilities are attributable to the gross negligence or
wilful misconduct of the Administrative Agent or such
Lender, as the case may be. After the Administrative Agent
or a Lender learns of the imposition of Indemnified Taxes
or Other Taxes, such person will act in good faith to
promptly notify the Borrower of its obligations hereunder.
A certificate as to the amount of such payment or liability
delivered to the Borrower by a Lender, or by the
Administrative Agent on its behalf or on behalf of a
Lender, shall be conclusive absent manifest error.
(d) As soon as practicable after any payment of
Indemnified Taxes or Other Taxes by the Borrower to a
Governmental Authority, the Borrower shall deliver to the
Administrative Agent the original or a certified copy of a
receipt issued by such Governmental Authority evidencing
such payment, a copy of the return reporting such payment
or other evidence of such payment reasonably satisfactory
to the Administrative Agent.
(e) Any Lender that is entitled to an exemption from
or reduction of withholding tax under the law of the
jurisdiction in which the Borrower is located, or any
treaty to which such jurisdiction is a party, with respect
to payments under this Agreement shall deliver to the
Borrower (with a copy to the Administrative Agent), at the
time or times prescribed by applicable law, such properly
completed and executed documentation prescribed by
applicable law and reasonably requested by the Borrower as
will permit such payments to be made without withholding or
at a reduced rate. Each Foreign Lender, before it signs
and delivers this Agreement if listed on the signature
pages hereof and before it becomes a Lender in the case of
each other Foreign Lender, and from time to time
thereafter, before the date any such form expires or
becomes obsolete or invalid, shall provide the Borrower and
the Administrative Agent with Internal Revenue Service form
W-8BEN or W-8ECI (or other appropriate or successor form
prescribed by the Internal Revenue Service) in duplicate,
certifying that such Foreign Lender is entitled to benefits
under an income tax treaty to which the United States of
America is a party which exempts the Foreign Lender from
U.S. withholding tax on payments of interest for the
account of such Foreign Lender or certifying that the
income receivable pursuant to this Agreement is effectively
connected with the conduct by such Foreign Lender of a
trade or business in the United States of America and
exempt from United States withholding tax.
(f) If the Administrative Agent or a Lender
determines that it has received a refund or credit in
respect of and specifically associated with any Indemnified
Taxes or Other Taxes as to which it has been indemnified by
the Borrower, or with respect to which the Borrower has
paid additional amounts, it shall promptly notify the
Borrower of such refund or credit and shall within 15 days
from the date of receipt of such refund or benefit of such
credit pay over the amount of such refund or benefit of
such credit (including any interest paid or credited by the
relevant taxing authority or Governmental Authority with
respect to such refund or credit) to the Borrower (but only
to the extent of indemnity payments made, or additional
amounts paid, by the Borrower with respect to the
Indemnified Taxes or Other Taxes giving rise to such refund
of credit), net of all out-of-pocket expenses of such
person. If the Administrative Agent or a Lender shall
become aware that it is entitled to receive a refund or
credit in respect of Indemnified Taxes or Other Taxes as to
which it has been indemnified by the Borrower or with
respect to which the Borrower has paid additional amounts,
it shall promptly notify the Borrower of the availability
of such refund or credit and shall, within 15 days after
receipt of a request for such by the Borrower (whether as a
result of notification that it has made of such to the
Borrower or otherwise), make a claim to such taxing
authority or Governmental Authority for such refund or
credit and contest such Indemnified Taxes, Other Taxes or
liabilities if (i) such Lender or the Administrative Agent
determines, in its sole discretion, that it would not be
materially disadvantaged or prejudiced as a result of such
contest (it being understood that the mere existence of
fees, charges, costs or expenses that the Borrower has
offered to and agreed to pay on behalf of a Lender or the
Administrative Agent shall not be deemed to be materially
disadvantageous to such person) and (ii) the Borrower
furnishes, upon request of the Lender or the Administrative
Agent, an opinion of reputable tax counsel (such opinion
and such counsel to be acceptable to such Lender or the
Administrative Agent) to the effect that such Indemnified
Taxes or Other Taxes were wrongfully or illegally imposed.
SECTION 2.20. Assignment of Commitments Under Certain
Circumstances; Duty to Mitigate. (a) In the event (i) any
Lender delivers a certificate requesting compensation pursuant
to Section 2.13, (ii) any Lender delivers a notice described
in Section 2.14 or (iii) the Borrower is required to pay
any additional amount to any Lender or any Governmental
Authority on account of any Lender pursuant to
Section 2.19, the Borrower may, at its sole expense and
effort (including with respect to the processing and
recordation fee referred to in Section 9.04(b)), upon
notice to such Lender and the Administrative Agent, require
such Lender to transfer and assign, without recourse (in
accordance with and subject to the restrictions contained
in Section 9.04), all of its interests, rights and
obligations under this Agreement to an assignee that shall
assume such assigned obligations (which assignee may be
another Lender, if a Lender accepts such assignment);
provided that (x) such assignment shall not conflict with
any law, rule or regulation or order of any court or other
Governmental Authority having jurisdiction, (y) the
Borrower shall have received the prior written consent of
the Administrative Agent, which consent shall not
unreasonably be withheld, and (z) the Borrower or such
assignee shall have paid to the affected Lender in
immediately available funds an amount equal to the sum of
the principal of and interest accrued to the date of such
payment on the outstanding Loans of such Lender,
respectively, plus all Fees and other amounts accrued for
the account of such Lender hereunder (including any amounts
under Section 2.13 and Section 2.15); provided further
that, if prior to any such transfer and assignment the
circumstances or event that resulted in such Lender's claim
for compensation under Section 2.13 or notice under
Section 2.14 or the amounts paid pursuant to Section 2.19,
as the case may be, cease to cause such Lender to suffer
increased costs or reductions in amounts received or
receivable or reduction in return on capital, or cease to
have the consequences specified in Section 2.14, or cease
to result in amounts being payable under Section 2.19, as
the case may be (including as a result of any action taken
by such Lender pursuant to paragraph (b) below), or if
such Lender shall waive its right to claim further
compensation under Section 2.13 in respect of such
circumstances or event or shall withdraw its notice under
Section 2.14 or shall waive its right to further payments
under Section 2.19 in respect of such circumstances or
event, as the case may be, then such Lender shall not
thereafter be required to make any such transfer and
assignment hereunder.
(b) If (i) any Lender shall request compensation
under Section 2.13, (ii) any Lender delivers a notice
described in Section 2.14 or (iii) the Borrower is required
to pay any additional amount or indemnity payment to any
Lender or any Governmental Authority on account of any
Lender, pursuant to Section 2.19, then such Lender shall
use reasonable efforts (which shall not require such Lender
to incur an unreimbursed loss or unreimbursed cost or
expense or otherwise take any action inconsistent with its
internal policies or legal or regulatory restrictions or
suffer any disadvantage or burden deemed by it to be
significant) (x) to file any certificate or document
reasonably requested in writing by the Borrower or (y) to
assign its rights and delegate and transfer its obligations
hereunder to another of its offices, branches or
affiliates, if such filing or assignment would reduce its
claims for compensation under Section 2.13 or enable it to
withdraw its notice pursuant to Section 2.14 or would
reduce amounts payable pursuant to Section 2.19, as the
case may be, in the future. The Borrower hereby agrees to
pay all reasonable costs and expenses incurred by any
Lender in connection with any such filing or assignment,
delegation and transfer.
ARTICLE III
Representations and Warranties
The Borrower represents and warrants to the
Administrative Agent and each of the Lenders that:
SECTION 3.01. Organization; Powers. The Borrower and
each of the Subsidiaries (a) is duly organized, validly
existing and in good standing under the laws of the
jurisdiction of its organization, (b) has all requisite power
and authority to own its property and assets and to carry on
its business as now conducted and (c) is qualified to do
business in, and is in good standing in, every jurisdiction
where such qualification is required, except where the failure
so to qualify could not reasonably be expected to result in a
Material Adverse Effect.
SECTION 3.02. Authorization. The execution, delivery
and performance by the Borrower of this Agreement and the
transactions contemplated hereby (including the Borrowings
hereunder) (collectively, the "Transactions") (a) are within
the Borrower's corporate powers and have been duly authorized
by all requisite corporate and, if required, stockholder
action and (b) will not (i) violate (A) any provision of
law, statute, rule or regulation, or of the certificate or
articles of incorporation or other constitutive documents
or by-laws of the Borrower or any Subsidiary, (B) any order
of any Governmental Authority or (C) any provision of any
indenture, agreement or other instrument to which the
Borrower or any Subsidiary is a party or by which any of
them or any of their property is or may be bound, the
effect of which could reasonably be expected to result in a
Material Adverse Effect, (ii) result in a breach of or
constitute (alone or with notice or lapse of time or both)
a default under, or give rise to any right to accelerate or
to require the prepayment, repurchase or redemption of any
obligation under any such indenture, agreement or other
instrument, the effect of which could reasonably be
expected to result in a Material Adverse Effect, or
(iii) result in the creation or imposition of any Lien upon
or with respect to any property or assets now owned or
hereafter acquired by the Borrower or any Subsidiary.
SECTION 3.03. Enforceability. This Agreement has been
duly executed and delivered by the Borrower and constitutes
a legal, valid and binding obligation of the Borrower
enforceable against the Borrower in accordance with its
terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the
enforceability of creditors' rights generally and to general
principles of equity, regardless of whether considered in a
proceeding in equity or at law.
SECTION 3.04. Governmental Approvals. No action, consent
or approval of, registration or filing with or any other
action by any Governmental Authority is or will be required
in connection with the Transactions, except for such as
have been made or obtained and are in full force and
effect.
SECTION 3.05. Financial Statements. The Borrower has
heretofore furnished to the Lenders its consolidated balance
sheets and related statements of income, stockholders' equity
and cash flows (i) as of and for the fiscal year ended December
31, 2002, audited by and accompanied by the opinion of
PricewaterhouseCoopers LLP, independent public accountants,
and (ii) as of and for the fiscal quarter and the portion
of the fiscal year ended September 30, 2003, certified by
its chief financial officer. Such financial statements
present fairly, in all material respects, the financial
condition and results of operations and cash flows of the
Borrower and its consolidated Subsidiaries as of such dates
and for such periods in accordance with GAAP, subject to
normal year-end audit adjustments and the absence of
footnotes in the case of the statements referred to in
clause (ii) above.
SECTION 3.06. No Material Adverse Change. No Material
Adverse Change." Since December 31, 2002, there has been no
material adverse change in the financial condition, results
of operations or business of the Borrower and the Subsidiaries,
taken as a whole.
SECTION 3.07. Subsidiaries. Schedule 3.07 sets forth
as of the Closing Date a list of all Subsidiaries and the
percentage ownership interest of the Borrower therein.
SECTION 3.08. Litigation; Compliance with Laws. (a)
There are not any actions, suits or proceedings at
law or in equity or by or before any Governmental Authority
now pending or, to the knowledge of the Borrower,
threatened against or affecting the Borrower or any
Subsidiary or any business, property or rights of any such
person (i) that involve this Agreement or the Transactions
or (ii) as to which there is a reasonable possibility of an
adverse determination and that, if adversely determined,
could reasonably be expected, individually or in the
aggregate, to result in a Material Adverse Effect.
(b) None of the Borrower or any of the Subsidiaries
is in violation of any law, rule or regulation, or is in
default with respect to any judgment, writ, injunction,
decree or order of any Governmental Authority, where such
violation or default could reasonably be expected to result
in a Material Adverse Effect.
SECTION 3.09. Federal Reserve Regulations. (a) The
Borrower is not engaged principally, or as one of its
important activities, in the business of extending credit
for the purpose of buying or carrying Margin Stock.
(b) No part of the proceeds of any Loan will be used,
whether directly or indirectly, and whether immediately,
incidentally or ultimately, for any purpose that entails a
violation of, or that is inconsistent with, the provisions
of the Regulations of the Board, including Regulation T, U
or X.
SECTION 3.10. Investment Company Act; Public Utility
Holding Company Act. None of the Borrower or any of the
Subsidiaries is (a) an "investment company" as defined in,
or subject to regulation under, the Investment Company Act
of 1940 or (b) a "holding company" as defined in, or subject
to regulation under, the Public Utility Holding Company Act of
1935.
SECTION 3.11. Use of Proceeds. The Borrower will use
the proceeds of the Loans only for the purposes specified in
the preamble to this Agreement.
SECTION 3.12. Tax Returns. Each of the Borrower and
the Subsidiaries has filed or caused to be filed all Federal,
state, local and foreign tax returns or materials required to
have been filed by it and has paid or caused to be paid all
Taxes due and payable by it and all assessments received by it,
except (a) Taxes that are being contested in good faith by
appropriate proceedings and for which the Borrower or such
Subsidiary, as applicable, shall have set aside on its
books adequate reserves or (b) to the extent that the
failure to do so could not reasonably be expected to result
in a Material Adverse Effect.
SECTION 3.13. No Material Misstatements. None of (a) the
Confidential Information Memorandum or (b) any other
information, report, financial statement, exhibit or
schedule furnished by or on behalf of the Borrower to the
Administrative Agent or any Lender in connection with the
negotiation of this Agreement contains any material
misstatement of fact or omits to state any material fact
necessary to make the statements therein taken as a whole,
in the light of the circumstances under which they were
made, not misleading; provided that to the extent any such
information, report, financial statement, exhibit or
schedule was based upon or constitutes a forecast or
projection, the Borrower represents only that it acted in
good faith and utilized reasonable assumptions and due care
in the preparation of such information, report, financial
statement, exhibit or schedule.
SECTION 3.14. Employee Benefit Plans. No ERISA Event has
occurred or is reasonably expected to occur that, when
taken together with all other such ERISA Events, could
reasonably be expected to result in a Material Adverse
Effect. The accumulated benefit obligations (as defined in
Statement of Financial Accounting Standards No. 87) under
all Plans (based on the assumptions used for purposes of
Statement of Financial Accounting Standards No. 87) did
not, as of the last annual valuation dates applicable
thereto, exceed by more than $60,000,000 the fair market
value of the assets of all such Plans.
SECTION 3.15. Environmental Matters. Except with respect
to any matters that, individually or in the aggregate, could
not reasonably be expected to result in a Material Adverse
Effect, neither the Borrower nor any of the Subsidiaries
(i) has failed to comply with any Environmental Law or to
obtain, maintain or comply with any permit, license or
other approval required under any Environmental Law,
(ii) is subject to any Environmental Liability, (iii) has
received written notice of any claim with respect to any
Environmental Liability or (iv) knows of any basis for any
Environmental Liability of the Borrower or the
Subsidiaries.
SECTION 3.16. Senior Indebtedness. The Loans and other
obligations hereunder constitute "Senior Indebtedness"
under and as defined in the Subordinated Note Documents.
ARTICLE IV
Conditions of Lending
The obligations of the Lenders to make Loans hereunder
are subject to the satisfaction of the following
conditions:
SECTION 4.01. All Borrowings. On the date of each
Borrowing:
(a) The Administrative Agent shall have received a
notice of such Borrowing as required by Section 2.03 or
2.04, as applicable.
(b) The representations and warranties set forth in
Article III hereof shall be true and correct in all
material respects on and as of the date of such Borrowing
with the same effect as though made on and as of such date,
except to the extent such representations and warranties
expressly relate to an earlier date.
(c) At the time of and immediately after such
Borrowing, no Event of Default or Default shall have
occurred and be continuing.
Each Borrowing shall be deemed to constitute a
representation and warranty by the Borrower on the date of
such Borrowing as to the matters specified in paragraphs
(b) and (c) of this Section 4.01.
SECTION 4.02. Closing Date. On the Closing Date:
(a) The Administrative Agent (or its counsel)
shall have received from each party hereto either (i)
a counterpart of this Agreement signed on behalf of
such party or (ii) written evidence satisfactory to
the Administrative Agent (which may include telecopy
transmission of a signed signature page of this
Agreement) that such party has signed a counterpart of
this Agreement.
(b) The Administrative Agent shall have
received, on behalf of itself and the Lenders a
favorable written opinion of each of (i) Bradford T.
Smith, Chief Legal Counsel of the Borrower,
substantially to the effect set forth in Exhibit E-1,
and (ii) Hogan & Hartson L.L.P., special counsel for
the Borrower, substantially to the effect set forth in
Exhibit E-2, (A) dated the Closing Date, (B) addressed
to the Administrative Agent and the Lenders, and (C)
covering such other matters relating to this Agreement
and the Transactions as the Administrative Agent shall
reasonably request, and the Borrower hereby requests
such counsel to deliver such opinions.
(c) The Administrative Agent shall have received
(i) a copy of the certificate of incorporation,
including all amendments thereto, of the Borrower,
certified as of a recent date by the Secretary of
State of the State of Delaware, and a certificate as
to the good standing of the Borrower as of a recent
date, from such Secretary of State; (ii) a certificate
of the Secretary or Assistant Secretary of the
Borrower dated the Closing Date and certifying
(A) that attached thereto is a true and complete copy
of the by-laws of the Borrower as in effect on the
Closing Date and at all times since a date prior to
the date of the resolutions described in clause (B)
below, (B) that attached thereto is a true and
complete copy of resolutions duly adopted by the Board
of Directors of the Borrower authorizing the
execution, delivery and performance of this Agreement
and the borrowings hereunder, and that such
resolutions have not been modified, rescinded or
amended and are in full force and effect, (C) that the
certificate of incorporation of the Borrower has not
been amended since the date of the last amendment
thereto shown on the certificate of good standing
furnished pursuant to clause (i) above, and (D) as to
the incumbency and specimen signature of each officer
executing this Agreement or any other document
delivered in connection herewith on behalf of the
Borrower; (iii) a certificate of another officer as to
the incumbency and specimen signature of the Secretary
or Assistant Secretary executing the certificate
pursuant to clause (ii) above; and (iv) such other
documents relating to the Borrower, this Agreement or
the Transactions as the Lenders or the Administrative
Agent may reasonably request.
(d) The Administrative Agent shall have received
a certificate, dated the Closing Date and signed by a
Financial Officer of the Borrower, confirming
compliance with the conditions precedent set forth in
paragraphs (b) and (c) of Section 4.01.
(e) The Administrative Agent shall have received
all Fees and other amounts due and payable on or prior
to the Closing Date, including, to the extent
invoiced, reimbursement or payment of all
out-of-pocket expenses required to be reimbursed or
paid by the Borrower hereunder.
(f) All principal, interest, fees and other
amounts outstanding or due under the Existing Credit
Agreement shall have been paid in full, and the
commitments thereunder terminated, and the
Administrative Agent shall have received satisfactory
evidence thereof.
(g) The credit facility provided for by this
Agreement shall be rated not lower than BBB by S&P,
and the Administrative Agent shall have received
satisfactory evidence thereof.
(h) The Lenders shall have received all
documentation and other information requested by them
and required by bank regulatory authorities under
applicable "know your customer" and anti-money
laundering rules and regulations, including the USA
Patriot Act.
ARTICLE V
Affirmative Covenants
The Borrower covenants and agrees with each Lender
that until the Commitments have been terminated and the
principal of and interest on each Loan, all Fees and all
other expenses or amounts payable hereunder shall have been
paid in full, unless the Required Lenders shall otherwise
consent in writing, the Borrower will, and will cause each
of the Subsidiaries to:
SECTION 5.01. Existence; Businesses and Properties.
(a) Do or cause to be done all things necessary to
preserve, renew and keep in full force and effect its legal
existence, except as otherwise expressly permitted under
Section 6.04.
(b) Do or cause to be done all things necessary to
obtain, preserve, renew, extend and keep in full force and
effect its rights, licenses, permits, franchises,
authorizations, patents, copyrights, trademarks and trade
names, and comply in all material respects with all
applicable laws, rules, regulations and decrees and orders
of any Governmental Authority, in each case except where
the failure to do so could not reasonably be expected to
result in a Material Adverse Effect.
SECTION 5.02. Insurance. Maintain with responsible
and reputable insurance companies insurance, to such extent
and against such risks as is customary with companies in the
same or similar businesses operating in the same or similar
locations.
SECTION 5.03. Obligations and Taxes. Pay its Indebtedness
and other obligations, including Taxes, before the same shall
become delinquent or in default, except where (a) the
validity or amount thereof shall be contested in good faith
by appropriate proceedings and the Borrower shall have set
aside on its books adequate reserves with respect thereto
in accordance with GAAP or (b) to the extent that the
failure to do so could not reasonably be expected to result
in a Material Adverse Effect.
SECTION 5.04. Financial Statements, Reports, etc.
In the case of the Borrower, furnish to the Administrative
Agent and each Lender:
(a) within 105 days after the end of each fiscal
year, its consolidated balance sheet and related
statements of income, stockholders' equity and cash
flows as of the close of and for such fiscal year,
together with comparative figures for the immediately
preceding fiscal year, all audited by
PricewaterhouseCoopers LLP or other independent public
accountants of recognized national standing and
accompanied by an opinion of such accountants (which
shall not be qualified in any material respect) to the
effect that such consolidated financial statements
present fairly in all material respects the financial
condition and results of operations of the Borrower
and its consolidated Subsidiaries on a consolidated
basis in accordance with GAAP consistently applied;
(b) within 50 days after the end of each of the
first three fiscal quarters of each fiscal year, its
consolidated balance sheet and related statements of
income, stockholders' equity and cash flows as of the
close of and for such fiscal quarter and the then
elapsed portion of the fiscal year, and comparative
figures for the same periods in the immediately
preceding fiscal year, all certified by one of its
Financial Officers as presenting fairly in all
material respects the financial condition and results
of operations of the Borrower and its consolidated
Subsidiaries on a consolidated basis in accordance
with GAAP consistently applied, subject to normal
year-end audit adjustments and the absence of
footnotes;
(c) concurrently with any delivery of financial
statements under paragraph (a) or (b) above, a
certificate of a Financial Officer (A) certifying that
no Event of Default or Default has occurred or, if
such an Event of Default or Default has occurred,
specifying the nature and extent thereof and any
corrective action taken or proposed to be taken with
respect thereto, (B) setting forth computations in
reasonable detail satisfactory to the Administrative
Agent demonstrating compliance with the covenants
contained in Sections 6.07 and 6.08 and (C) stating
whether any change in GAAP or in the application
thereof has occurred since the date of the audited
financial statements referred to in Section 3.05 and,
if any such change has occurred, specifying the effect
of such change on the financial statements
accompanying such certificate;
(d) promptly after the same become publicly
available, copies of all periodic and other reports,
proxy statements and other materials filed by the
Borrower or any Subsidiary with the Securities and
Exchange Commission, or any Governmental Authority
succeeding to any or all of the functions of said
Commission, or with any national securities exchange,
or distributed to its shareholders, as the case may
be;
(e) promptly after the receipt thereof by the
Borrower or any of its Subsidiaries, a copy of any
"management letter" received by any such person from
its certified public accountants and the management's
response thereto;
(f) promptly, from time to time, such other
information regarding the operations, business affairs
and financial condition of the Borrower or any
Subsidiary, or compliance with the terms of this
Agreement, as the Administrative Agent or any Lender
may reasonably request; and
(g) promptly, following a request by any Lender,
all documentation and other information that such
Lender reasonably requests in order to comply with its
ongoing obligations under applicable "know your
customer" and anti-money laundering rules and
regulations, including the USA Patriot Act.
SECTION 5.05. Litigation and Other Notices.In the
case of the Borrower, furnish to the Administrative Agent
and each Lender prompt written notice of the following:
(a) any Event of Default or Default, specifying
the nature and extent thereof and the corrective
action (if any) taken or proposed to be taken with
respect thereto;
(b) the filing or commencement of, or any threat
or notice of intention of any person to file or
commence, any action, suit or proceeding, whether at
law or in equity or by or before any Governmental
Authority, against the Borrower or any Affiliate
thereof that could reasonably be expected to result in
a Material Adverse Effect;
(c) any change in the rating by S&P of the Index
Debt; and
(d) the occurrence of any ERISA Event that, alone
or together with any other ERISA Events that have
occurred, could reasonably be expected to result in a
Material Adverse Effect.
SECTION 5.06. Maintaining Records; Access to
Properties and Inspections. Keep books of record and
account in conformity with GAAP and all requirements of
law in relation to its business and activities. The Borrower
will, and will cause each of its Subsidiaries to, permit
any representatives designated by the Administrative Agent
or any Lender, upon reasonable prior notice, to visit and
inspect the financial records and the properties of the
Borrower or any Subsidiary at reasonable times and as often
as reasonably requested and to make extracts from and
copies of such financial records, and permit any
representatives designated by the Administrative Agent or
any Lender to discuss the affairs, finances and condition
of the Borrower or any Subsidiary with the officers thereof
and independent accountants therefor.
SECTION 5.07. Use of Proceeds. Use the proceeds of the
Loans only for the purposes set forth in the preamble to this
Agreement.
SECTION 5.08. Reportable Transactions. Promptly notify
the Administrative Agent if it or any of its Subsidiaries
determines that the Loans or any of the transactions
contemplated by this Agreement are a "reportable
transaction" under Sections 6011, 6111 or 6112 of the
Internal Revenue Code or the Treasury Regulations
promulgated thereunder.
ARTICLE VI
Negative Covenants
The Borrower covenants and agrees with each Lender
that, until the Commitments have been terminated and the
principal of and interest on each Loan, all Fees and all
other expenses or amounts payable hereunder have been paid
in full, unless the Required Lenders shall otherwise
consent in writing, the Borrower will not, and will not
cause or permit any of the Subsidiaries to:
SECTION 6.01. Subsidiary Indebtedness. With respect to
the Subsidiaries, incur, create, issue, assume or permit to
exist any Indebtedness or preferred stock, except:
(a) Indebtedness or preferred stock existing on
the date hereof and having an aggregate principal
amount (or, in the case of preferred stock, an
aggregate liquidation preference) of less than
$25,000,000 in the aggregate and, in the case of any
such Indebtedness, any extensions, renewals or
replacements thereof to the extent the principal
amount of such Indebtedness is not increased, and such
Indebtedness, if subordinated to the Loans, remains so
subordinated on terms no less favorable to the
Lenders, and the original obligors in respect of such
Indebtedness remain the only obligors thereon;
(b) Indebtedness created or existing (i)
hereunder or (ii) under the Three-Year Credit
Agreement;
(c) intercompany Indebtedness or preferred stock
to the extent owing to or held by the Borrower or
another Subsidiary;
(d) Indebtedness of any Subsidiary incurred to
finance the acquisition, construction or improvement
of any fixed or capital assets, and extensions,
renewals and replacements of any such Indebtedness
that do not increase the outstanding principal amount
thereof; provided that (i) such Indebtedness is
incurred prior to or within 180 days after such
acquisition or the completion of such construction or
improvement and (ii) the aggregate principal amount of
Indebtedness permitted by this Section 6.01(d), when
combined with the aggregate principal amount of all
Capital Lease Obligations incurred pursuant to Section
6.01(e) and all Indebtedness incurred pursuant to
Section 6.01(f), shall not exceed $100,000,000 at any
time outstanding;
(e) Capital Lease Obligations in an aggregate
principal amount, when combined with the aggregate
principal amount of all Indebtedness incurred pursuant
to Section 6.01(d) and Section 6.01(f), not in excess
of $100,000,000 at any time outstanding;
(f) Indebtedness of any person that becomes a
Subsidiary after the date hereof; provided that
(i) such Indebtedness exists at the time such person
becomes a Subsidiary and is not created in
contemplation of or in connection with such person
becoming a Subsidiary, (ii) immediately before and
after such person becomes a Subsidiary, no Event of
Default or Default shall have occurred and be
continuing and (iii) the aggregate principal amount of
Indebtedness permitted by this clause (f), when
combined with the aggregate principal amount of all
Indebtedness incurred pursuant to Section 6.01(d) and
all Capital Lease Obligations incurred pursuant to
Section 6.01(e), shall not exceed $100,000,000 at any
time outstanding;
(g) Indebtedness under performance bonds or with
respect to workers' compensation claims, in each case
incurred in the ordinary course of business; and
(h) additional Indebtedness or preferred stock of
the Subsidiaries to the extent not otherwise permitted
by the foregoing clauses of this Section 6.01 in an
aggregate principal amount (or, in the case of
preferred stock, with an aggregate liquidation
preference), when combined (without duplication) with
the amount of obligations of the Borrower and its
Subsidiaries secured by Liens pursuant to
Section 6.02(j), not to exceed $100,000,000 at any
time outstanding.
SECTION 6.02. Liens. Create, incur, assume or permit
to exist any Lien on any property or assets (including
Equity Interests or other securities of any person,
including any Subsidiary) now owned or hereafter acquired
by it or on any income or revenues or rights in respect
of any thereof, except:
(a) Liens on property or assets of the Borrower and
its Subsidiaries existing on the date hereof and encumbering
property or assets with a fair market value, and
securing obligations having an aggregate principal amount,
in each case less than $25,000,000 in the aggregate; provided
that (x) such Liens shall secure only those obligations
which they secure on the date hereof and extensions,
renewals and replacements thereof permitted hereunder and
(y) such Liens shall not apply to any other property or assets
of the Borrower or any of the Subsidiaries;
(b) any Lien existing on any property or asset
prior to the acquisition thereof by the Borrower or
any Subsidiary or existing on any property or asset of
any person that becomes a Subsidiary after the date
hereof prior to the time such person becomes a
Subsidiary; provided that (i) such Lien is not created
in contemplation of or in connection with such
acquisition or such person becoming a Subsidiary, as
the case may be, (ii) such Lien does not apply to any
other property or assets of the Borrower or any
Subsidiary and (iii) such Lien shall secure only those
obligations which it secures on the date of such
acquisition or the date such person becomes a
Subsidiary, as the case may be and extensions,
renewals and replacements thereof permitted hereunder;
(c) Liens for taxes not yet due or which are
being contested in compliance with Section 5.03;
(d) carriers', warehousemen's, mechanics',
materialmen's, repairmen's or other like Liens arising
in the ordinary course of business and securing
obligations that are not overdue by more than 90 days
or which are being contested in compliance with
Section 5.03;
(e) pledges and deposits made in the ordinary
course of business in compliance with workmen's
compensation, unemployment insurance and other social
security laws or regulations;
(f) deposits to secure the performance of bids,
trade contracts (other than for Indebtedness), leases
(other than Capital Lease Obligations), statutory
obligations, surety and appeal bonds, performance
bonds and other obligations of a like nature, in each
case in the ordinary course of business;
(g) zoning restrictions, easements, rights-of-
way, restrictions on use of real property and other
similar encumbrances incurred in the ordinary course
of business which, in the aggregate, are not
substantial in amount and do not materially detract
from the value of the property subject thereto or
interfere with the ordinary conduct of the business of
the Borrower or any of its Subsidiaries;
(h) purchase money security interests in real
property, improvements thereto or equipment hereafter
acquired (or, in the case of improvements,
constructed) by the Borrower or any Subsidiary;
provided that (i) such security interests secure
Indebtedness permitted by Section 6.01, (ii) such
security interests are incurred, and the Indebtedness
secured thereby is created, within 180 days after such
acquisition (or construction) and (iii) such security
interests do not apply to any other property or assets
of the Borrower or any Subsidiary;
(i) Liens in respect of judgments that do not
constitute an Event of Default; and
(j) Liens not otherwise permitted by the
foregoing clauses of this Section 6.02 securing
obligations otherwise permitted by this Agreement in
an aggregate principal and face amount, when combined
(without duplication) with the amount of Indebtedness
or preferred stock of Subsidiaries incurred pursuant
to Section 6.01(h), not to exceed $100,000,000 at any
time outstanding.
SECTION 6.03. Sale and Lease-Back Transactions. Enter
into any arrangement, directly or indirectly, with any
person whereby it shall sell or transfer any property, real
or personal, used or useful in its business, whether now
owned or hereafter acquired, and thereafter rent or lease
such property or other property which it intends to use for
substantially the same purpose or purposes as the property
being sold or transferred unless (a) the sale of such
property is permitted by Section 6.04 and (b) any Capital
Lease Obligations or Liens arising in connection therewith
are permitted by Sections 6.01 and 6.02, respectively.
SECTION 6.04. Mergers, Consolidations and Sales of
Assets. Merge into or consolidate with any
other person, or permit any other person to merge into or
consolidate with it, or sell, transfer, lease or otherwise
dispose of (in one transaction or in a series of
transactions) all or substantially all the assets (whether
now owned or hereafter acquired) of the Borrower, or
liquidate or dissolve, except that, if at the time thereof
and immediately after giving effect thereto no Event of
Default or Default shall have occurred and be continuing,
(a) any person may merge into the Borrower in a transaction
in which the Borrower is the surviving corporation, (b) any
person, other than the Borrower, may merge into or
consolidate with any Subsidiary in a transaction in which
the surviving entity is a Subsidiary and (c) any Subsidiary
may liquidate or dissolve if the Borrower determines in
good faith that such liquidation or dissolution is in the
best interests of the Borrower and is not materially
disadvantageous to the Lenders.
SECTION 6.05. Restricted Payments. Declare or make,
or agree to declare or make, directly or indirectly, any
Restricted Payment (including pursuant to any Synthetic
Purchase Agreement), or incur any obligation (contingent or
otherwise) to do so; provided, however, that (i) any
Subsidiary may declare and pay dividends or make other
distributions ratably to holders of Equity Interests in it,
(ii) the Borrower may declare and pay dividends or make
other distributions of its Equity Interests and (iii) so
long as no Default or Event of Default shall have occurred
and be continuing or would result therefrom, the Borrower
and the Subsidiaries may declare and make, directly or
indirectly, additional Restricted Payments to the extent
not otherwise permitted by the foregoing clauses of this
Section 6.05 in an aggregate amount not to exceed
$300,000,000.
SECTION 6.06. Business of Borrower and
Subsidiaries. Engage to any material extent in any
business or business activity other than businesses of the
type currently conducted by the Borrower and the
Subsidiaries and business activities reasonably related
thereto.
SECTION 6.07. Interest Coverage Ratio. Permit the
Interest Coverage Ratio for any period of four consecutive
fiscal quarters, in each case taken as one accounting
period, to be less than 5.0 to 1.0.
SECTION 6.08. Maximum Leverage Ratio. Permit the
Leverage Ratio for any period of four consecutive fiscal
quarters, in each case taken as one accounting period, to
be greater than 2.5 to 1.0.
SECTION 6.09. Hedging Agreements. Enter into any Hedging
Agreement other than non-speculative Hedging Agreements
entered into to hedge or mitigate risks to which the
Borrower or a Subsidiary is exposed in the ordinary course
of the conduct of its business or the management of its
liabilities.
ARTICLE VII
Events of Default
In case of the happening of any of the following
events ("Events of Default"):
(a) any representation or warranty made or deemed made
in or in connection with this Agreement or the Borrowings
hereunder, or any representation, warranty, statement or
information contained in any report, certificate, financial
statement or other instrument furnished in connection with
or pursuant to this Agreement shall prove to have been
false or misleading in any material respect when so made,
deemed made or furnished;
(b) default shall be made in the payment of any
principal of any Loan when and as the same shall become due
and payable, whether at the due date thereof or at a date
fixed for prepayment thereof or by acceleration thereof or
otherwise;
(c) default shall be made in the payment of any
interest on any Loan or any Fee or any other amount (other
than an amount referred to in (b) above) due under this
Agreement, when and as the same shall become due and
payable, and such default shall continue unremedied for a
period of five Business Days;
(d) default shall be made in the due observance or
performance by the Borrower or any Subsidiary of any
covenant, condition or agreement contained in
Section 5.01(a) (with respect to the Borrower), 5.05(a) or
5.07 or in Article VI;
(e) default shall be made in the due observance or
performance by the Borrower or any Subsidiary of any
covenant, condition or agreement contained in this
Agreement (other than those specified in (b), (c) or (d)
above) and such default shall continue unremedied for a
period of 30 days after notice thereof from the
Administrative Agent to the Borrower (which notice will be
given at the request of any Lender);
(f) (i) the Borrower or any Material Subsidiary
shall (i) fail to pay any principal or interest, regardless
of amount, due in respect of any Material Indebtedness,
when and as the same shall become due and payable (after
giving effect to any applicable grace period), or (ii) any
other event or condition occurs (after giving effect to any
applicable grace period) that results in any Material
Indebtedness becoming due prior to its scheduled maturity
or that enables or permits the holder or holders of any
Material Indebtedness or any trustee or agent on its or
their behalf to cause any Material Indebtedness to become
due, or to require the prepayment, repurchase, redemption
or defeasance thereof, prior to its scheduled maturity;
provided that this clause (ii) shall not apply to secured
Indebtedness that becomes due as a result of the voluntary
sale or transfer of the property or assets securing such
Indebtedness;
(g) an involuntary proceeding shall be commenced or an
involuntary petition shall be filed in a court of competent
jurisdiction seeking (i) relief in respect of the Borrower
or any Material Subsidiary, or of a substantial part of the
property or assets of the Borrower or a Material
Subsidiary, under Title 11 of the United States Code, as
now constituted or hereafter amended, or any other Federal,
state or foreign bankruptcy, insolvency, receivership or
similar law, (ii) the appointment of a receiver, trustee,
custodian, sequestrator, conservator or similar official
for the Borrower or any Material Subsidiary or for a
substantial part of the property or assets of the Borrower
or a Material Subsidiary or (iii) the winding-up or
liquidation of the Borrower or any Material Subsidiary; and
such proceeding or petition shall continue undismissed for
60 days or an order or decree approving or ordering any of
the foregoing shall be entered;
(h) the Borrower or any Material Subsidiary shall
(i) voluntarily commence any proceeding or file any
petition seeking relief under Title 11 of the United States
Code, as now constituted or hereafter amended, or any other
Federal, state or foreign bankruptcy, insolvency,
receivership or similar law, (ii) consent to the
institution of, or fail to contest in a timely and
appropriate manner, any proceeding or the filing of any
petition described in (g) above, (iii) apply for or consent
to the appointment of a receiver, trustee, custodian,
sequestrator, conservator or similar official for the
Borrower or any Material Subsidiary or for a substantial
part of the property or assets of the Borrower or any
Material Subsidiary, (iv) file an answer admitting the
material allegations of a petition filed against it in any
such proceeding, (v) make a general assignment for the
benefit of creditors, (vi) become unable, admit in writing
its inability or fail generally to pay its debts as they
become due or (vii) take any action for the purpose of
effecting any of the foregoing;
(i) one or more judgments for the payment of money in
an amount in excess of $50,000,000 individually or
$75,000,000 in the aggregate shall be rendered against the
Borrower, any Material Subsidiary or any combination
thereof and the same shall remain undischarged for a period
of 30 consecutive days during which execution shall not be
effectively stayed, or any action shall be legally taken by
a judgment creditor to levy upon assets or properties of
the Borrower or any Material Subsidiary to enforce any such
judgment; provided, however, that any such judgment shall
not be an Event of Default under this paragraph (i) if and
for so long as (i) the entire amount of such judgment is
covered by a valid and binding policy of insurance between
the defendant and the insurer covering payment thereof and
(ii) such insurer, which shall be rated at least "A" by
A.M. Best Company, has been notified of, and has not
disputed the claim made for payment of the amount of such
judgment;.
(j) one or more ERISA Events shall have occurred that
results in liability of the Borrower and its ERISA
Affiliates exceeding $50,000,000 individually or
$75,000,000 in the aggregate; or
(k) there shall have occurred a Change in Control;
then, and in every such event (other than an event with
respect to the Borrower described in paragraph (g) or (h)
above), and at any time thereafter during the continuance
of such event, the Administrative Agent may, and at the
request of the Required Lenders shall, by notice to the
Borrower, take either or both of the following actions, at
the same or different times: (i) terminate forthwith the
Commitments and (ii) declare the Loans then outstanding to
be forthwith due and payable in whole or in part, whereupon
the principal of the Loans so declared to be due and
payable, together with accrued interest thereon and any
unpaid accrued Fees and all other liabilities of the
Borrower accrued hereunder, shall become forthwith due and
payable, without presentment, demand, protest or any other
notice of any kind, all of which are hereby expressly
waived by the Borrower, anything contained hereinto the
contrary notwithstanding; and in any event with respect to
the Borrower described in paragraph (g) or (h) above, the
Commitments shall automatically terminate and the principal
of the Loans then outstanding, together with accrued
interest thereon and any unpaid accrued Fees and all other
liabilities of the Borrower accrued hereunder, shall
automatically become due and payable, without presentment,
demand, protest or any other notice of any kind, all of
which are hereby expressly waived by the Borrower, anything
contained herein to the contrary notwithstanding.
ARTICLE VIII
The Administrative Agent
Each of the Lenders hereby irrevocably appoints the
Administrative Agent its agent and authorizes the
Administrative Agent to take such actions on its behalf and
to exercise such powers as are delegated to the
Administrative Agent by the terms of this Agreement,
together with such actions and powers as are reasonably
incidental thereto.
The bank serving as the Administrative Agent hereunder
shall have the same rights and powers in its capacity as a
Lender as any other Lender and may exercise the same as
though it were not the Administrative Agent, and such bank
and its Affiliates may accept deposits from, lend money to
and generally engage in any kind of business with the
Borrower or any Subsidiary or other Affiliate thereof as if
it were not the Administrative Agent hereunder.
The Administrative Agent shall not have any duties or
obligations except those expressly set forth in this
Agreement. Without limiting the generality of the
foregoing, (a) the Administrative Agent shall not be
subject to any fiduciary or other implied duties,
regardless of whether a Default has occurred and is
continuing, (b) the Administrative Agent shall not have any
duty to take any discretionary action or exercise any
discretionary powers, except discretionary rights and
powers expressly contemplated by this Agreement that the
Administrative Agent is required to exercise in writing by
the Required Lenders (or such other number or percentage of
the Lenders as shall be necessary under the circumstances
as provided in Section 9.08), and (c) except as expressly
set forth herein, the Administrative Agent shall not have
any duty to disclose, and shall not be liable for the
failure to disclose, any information relating to the
Borrower or any of the Subsidiaries that is communicated to
or obtained by the bank serving as Administrative Agent or
any of its Affiliates in any capacity. The Administrative
Agent shall not be liable for any action taken or not taken
by it with the consent or at the request of the Required
Lenders (or such other number or percentage of the Lenders
as shall be necessary under the circumstances as provided
in Section 9.08) or in the absence of its own gross
negligence or wilful misconduct. The Administrative Agent
shall not be deemed to have knowledge of any Default unless
and until written notice thereof is given to the
Administrative Agent by the Borrower or a Lender, and the
Administrative Agent shall not be responsible for or have
any duty to ascertain or inquire into (i) any statement,
warranty or representation made in or in connection with
this Agreement, (ii) the contents of any certificate,
report or other document delivered thereunder or in
connection therewith, (iii) the performance or observance
of any of the covenants, agreements or other terms or
conditions set forth herein, (iv) the validity,
enforceability, effectiveness or genuineness of this
Agreement or any other agreement, instrument or document,
or (v) the satisfaction of any condition set forth in
Article IV or elsewhere herein, other than to confirm
receipt of items expressly required to be delivered to the
Administrative Agent.
The Administrative Agent shall be entitled to rely
upon, and shall not incur any liability for relying upon,
any notice, request, certificate, consent, statement,
instrument, document or other writing believed by it to be
genuine and to have been signed or sent by the proper
person. The Administrative Agent may also rely upon any
statement made to it orally or by telephone and believed by
it to have been made by the proper person, and shall not
incur any liability for relying thereon. The
Administrative Agent may consult with legal counsel (who
may be counsel for the Borrower), independent accountants
and other experts selected by it, and shall not be liable
for any action taken or not taken by it in accordance with
the advice of any such counsel, accountants or experts.
The Administrative Agent may perform any and all its
duties and exercise its rights and powers by or through any
one or more sub-agents appointed by it. The Administrative
Agent and any such sub-agent may perform any and all its
duties and exercise its rights and powers by or through
their respective Related Parties. The exculpatory
provisions of the preceding paragraphs shall apply to any
such sub-agent and to the Related Parties of each
Administrative Agent and any such sub-agent, and shall
apply to their respective activities in connection with the
syndication of the credit facilities provided for herein as
well as activities as Administrative Agent.
Subject to the appointment and acceptance of a
successor Administrative Agent as provided below, the
Administrative Agent may resign at any time by notifying
the Lenders and the Borrower. Upon any such resignation,
the Required Lenders shall have the right, with the consent
of the Borrower (such consent not to be unreasonably
withheld or delayed), to appoint a successor. If no
successor shall have been so appointed by the Required
Lenders and shall have accepted such appointment within
30 days after the retiring Administrative Agent gives
notice of its resignation, then the retiring Administrative
Agent may, on behalf of the Lenders, appoint a successor
Administrative Agent which shall be a bank with an office
in New York, New York, or an Affiliate of any such bank,
that is acceptable to the Borrower (which shall not
unreasonably withhold its approval). Upon the acceptance
of its appointment as Administrative Agent hereunder by a
successor, such successor shall succeed to and become
vested with all the rights, powers, privileges and duties
of the retiring Administrative Agent, and the retiring
Administrative Agent shall be discharged from its duties
and obligations hereunder. The fees payable by the Borrower
to a successor Administrative shall be the same as those
payable to its predecessor unless otherwise agreed between
the Borrower and such successor. After the Administrative
Agent's resignation hereunder, the provisions of this
Article and Section 9.05 shall continue in effect for the
benefit of such retiring Administrative Agent, its sub-
agents and their respective Related Parties in respect of
any actions taken or omitted to be taken by any of them
while acting as Administrative Agent.
Each Lender acknowledges that it has, independently
and without reliance upon the Administrative Agent or any
other Lender and based on such documents and information as
it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without
reliance upon the Administrative Agent or any other Lender
and based on such documents and information as it shall
from time to time deem appropriate, continue to make its
own decisions in taking or not taking action under or based
upon this Agreement, any related agreement or any document
furnished hereunder or thereunder.
ARTICLE IX
Miscellaneous
SECTION 9.01. Notices. Notices and other communications
provided for herein shall be in writing and shall be
delivered by hand or overnight courier service, mailed
by certified or registered mail or sent by telecopy, as follows:
(a) if to the Borrower, to it at 231 Maple
Avenue, Burlington, NC 27215, Attention of Wesley R.
Elingburg (Telecopy No. (336) 436-1066);
(b) if to the Administrative Agent, to Credit
Suisse First Boston, Eleven Madison Avenue, New York,
NY 10010, Attention of Ronald Davis, Agency Group
(Telecopy No. (212) 325-8304), with a copy to Credit
Suisse First Boston, at Eleven Madison Avenue, New
York, NY 10010, Attention of Agency Group Manager
(Telecopy No. (212) 325-8304); and
(c) if to a Lender, to it at its address (or
telecopy number) set forth on Schedule 2.01 or in the
Assignment and Acceptance pursuant to which such
Lender shall have become a party hereto.
All notices and other communications given to any party
hereto in accordance with the provisions of this Agreement
shall be deemed to have been given on the date of receipt.
SECTION 9.02. Survival of Agreement. All covenants,
agreements, representations and warranties made by the
Borrower herein and in the certificates or other instruments
prepared or delivered in connection with or pursuant to this
Agreement shall be considered to have been relied upon by
the Lenders and shall survive the making by the Lenders of
the Loans, regardless of any investigation made by the Lenders
or on their behalf, and shall continue in full force and effect
as long as the principal of or any accrued interest on any
Loan or any Fee or any other amount payable under this
Agreement is outstanding and unpaid and so long as the
Commitments have not been terminated. The provisions of
Sections 2.13, 2.15, 2.19 and 9.05 shall remain operative
and in full force and effect regardless of the expiration
of the term of this Agreement, the consummation of the
transactions contemplated hereby, the repayment of any of
the Loans, the expiration of the Commitments, the
invalidity or unenforceability of any term or provision of
this Agreement, or any investigation made by or on behalf
of the Administrative Agent or any Lender.
SECTION 9.03. Binding Effect. This Agreement shall
become effective when it shall have been executed by the
Borrower and the Administrative Agent and when the
Administrative Agent shall have received counterparts hereof
which, when taken together, bear the signatures of each
of the other parties hereto.
SECTION 9.04. Successors and Assigns. (a) Whenever in
this Agreement any of the parties hereto is referred to,
such reference shall be deemed to include the permitted
successors and assigns of such party; and all covenants,
promises and agreements by or on behalf of the Borrower,
the Administrative Agent or the Lenders that are contained
in this Agreement shall bind and inure to the benefit of
their respective successors and assigns.
(b) Each Lender may assign to one or more assignees
all or a portion of its interests, rights and obligations
under this Agreement (including all or a portion of its
Commitment and the Loans at the time owing to it);
provided, however, that (i) except in the case of an
assignment to a Lender or an Affiliate of a Lender, (x) the
Borrower and the Administrative Agent must give their prior
written consent to such assignment (which consent shall not
be unreasonably withheld or delayed); provided, however,
that the consent of the Borrower shall not be required to
any such assignment during the continuance of any Event of
Default described in paragraph (g) or (h) of Article VII,
and (y) the amount of the Commitment of the assigning
Lender subject to each such assignment (determined as of
the date the Assignment and Acceptance with respect to such
assignment is delivered to the Administrative Agent) shall
not be less than $5,000,000 (or, if less, the entire
remaining amount of such Lender's Commitment), (ii) each
such assignment shall be of a constant, and not a varying,
percentage of all the assigning Lender's rights and
obligations under this Agreement, (iii) the parties to each
such assignment shall execute and deliver to the
Administrative Agent an Assignment and Acceptance, together
with a processing and recordation fee of $3,500 and
(iv) the assignee, if it shall not be a Lender, shall
deliver to the Administrative Agent an Administrative
Questionnaire and applicable tax forms. Upon acceptance
and recording pursuant to paragraph (e) of this
Section 9.04, from and after the effective date specified
in each Assignment and Acceptance, (A) the assignee
thereunder shall be a party hereto and, to the extent of
the interest assigned by such Assignment and Acceptance,
have the rights and obligations of a Lender under this
Agreement and (B) the assigning Lender thereunder shall, to
the extent of the interest assigned by such Assignment and
Acceptance, be released from its obligations under this
Agreement (and, in the case of an Assignment and Acceptance
covering all or the remaining portion of an assigning
Lender's rights and obligations under this Agreement, such
Lender shall cease to be a party hereto but shall continue
to be entitled to the benefits of Sections 2.13, 2.15, 2.19
and 9.05, as well as to any Fees accrued for its account
and not yet paid). Notwithstanding the foregoing, any
Lender assigning its rights and obligations under this
Agreement may retain any Competitive Loans made by it
outstanding at such time, and in such case shall retain its
rights hereunder in respect of any such Loans so retained
until such Loans have been repaid in full in accordance
with this Agreement.
(c) By executing and delivering an Assignment and
Acceptance, the assigning Lender thereunder and the
assignee thereunder shall be deemed to confirm to and agree
with each other and the other parties hereto as
follows: (i) such assigning Lender warrants that it is the
legal and beneficial owner of the interest being assigned
thereby free and clear of any adverse claim and that its
Commitment, and the outstanding balances of its Revolving
Loans and Competitive Loans, in each case without giving
effect to assignments thereof which have not become
effective, are as set forth in such Assignment and
Acceptance, (ii) except as set forth in (i) above, such
assigning Lender makes no representation or warranty and
assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with
this Agreement, or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this
Agreement or any other instrument or document furnished
pursuant hereto, or the financial condition of the Borrower
or any Subsidiary or the performance or observance by the
Borrower or any Subsidiary of any of its obligations under
this Agreement or any other instrument or document
furnished pursuant hereto; (iii) such assignee represents
and warrants that it is legally authorized to enter into
such Assignment and Acceptance; (iv) such assignee confirms
that it has received a copy of this Agreement, together
with copies of the most recent financial statements
referred to in Section 3.05 or delivered pursuant to
Section 5.04 and such other documents and information as it
has deemed appropriate to make its own credit analysis and
decision to enter into such Assignment and Acceptance;
(v) such assignee will independently and without reliance
upon the Administrative Agent, such assigning Lender or any
other Lender and based on such documents and information as
it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under
this Agreement; (vi) such assignee appoints and authorizes
the Administrative Agent to take such action as agent on
its behalf and to exercise such powers under this Agreement
as are delegated to the Administrative Agent by the terms
hereof, together with such powers as are reasonably
incidental thereto; and (vii) such assignee agrees that it
will perform in accordance with their terms all the
obligations which by the terms of this Agreement are
required to be performed by it as a Lender.
(d) The Administrative Agent, acting for this purpose
as an agent of the Borrower, shall maintain at one of its
offices in The City of New York a copy of each Assignment
and Acceptance delivered to it and a register for the
recordation of the names and addresses of the Lenders, and
the Commitment of, and principal amount of the Loans owing
to, each Lender pursuant to the terms hereof from time to
time (the "Register"). The entries in the Register shall
be conclusive and the Borrower, the Administrative Agent
and the Lenders may treat each person whose name is
recorded in the Register pursuant to the terms hereof as a
Lender hereunder for all purposes of this Agreement,
notwithstanding notice to the contrary. The Register shall
be available for inspection by the Borrower and any Lender,
at any reasonable time and from time to time upon
reasonable prior notice.
(e) Upon its receipt of a duly completed Assignment
and Acceptance executed by an assigning Lender and an
assignee, an Administrative Questionnaire completed in
respect of the assignee (unless the assignee shall already
be a Lender hereunder), the processing and recordation fee
referred to in paragraph (b) above and, if required, the
written consent of the Borrower and the Administrative
Agent to such assignment, the Administrative Agent shall
(i) accept such Assignment and Acceptance and (ii) record
the information contained therein in the Register. No
assignment shall be effective unless it has been recorded
in the Register as provided in this paragraph (e).
(f) Each Lender may without the consent of the
Borrower or the Administrative Agent sell participations to
one or more banks or other entities in all or a portion of
its rights and obligations under this Agreement (including
all or a portion of its Commitment and the Loans owing to
it); provided, however, that (i) such Lender's obligations
under this Agreement shall remain unchanged, (ii) such
Lender shall remain solely responsible to the other parties
hereto for the performance of such obligations, (iii) the
participating banks or other entities shall be entitled to
the benefit of the cost protection provisions contained in
Sections 2.13, 2.15 and 2.19 to the same extent as if they
were Lenders (but, with respect to any particular
participant, to no greater extent than the Lender that sold
the participation to such participant) and (iv) the
Borrower, the Administrative Agent and the Lenders shall
continue to deal solely and directly with such Lender in
connection with such Lender's rights and obligations under
this Agreement, and such Lender shall retain the sole right
to enforce the obligations of the Borrower relating to the
Loans and to approve any amendment, modification or waiver
of any provision of this Agreement (other than amendments,
modifications or waivers decreasing any fees payable
hereunder or the amount of principal of or the rate at
which interest is payable on the Loans, extending any
scheduled principal payment date or date fixed for the
payment of interest on the Loans or increasing or extending
the Commitments).
(g) Any Lender or participant may, in connection with
any assignment or participation or proposed assignment or
participation pursuant to this Section 9.04, disclose to
the assignee or participant or proposed assignee or
participant any information relating to the Borrower
furnished to such Lender by or on behalf of the Borrower;
provided that, prior to any such disclosure of information
designated by the Borrower as confidential, each such
assignee or participant or proposed assignee or participant
shall execute an agreement whereby such assignee or
participant shall agree (subject to customary exceptions)
to preserve the confidentiality of such confidential
information on terms no less restrictive than those
applicable to the Lenders pursuant to Section 9.16.
(h) Any Lender may at any time assign all or any
portion of its rights under this Agreement to secure
extensions of credit to such Lender or in support of
obligations owed by such Lender; provided that no such
assignment shall release a Lender from any of its
obligations hereunder or substitute any such assignee for
such Lender as a party hereto.
(i) Notwithstanding anything to the contrary
contained herein, any Lender (a "Granting Lender") may
grant to a special purpose funding vehicle (an "SPC"),
identified as such in writing from time to time by the
Granting Lender to the Administrative Agent and the
Borrower, the option to provide to the Borrower all or any
part of any Loan that such Granting Lender would otherwise
be obligated to make to the Borrower pursuant to this
Agreement; provided that (i) nothing herein shall
constitute a commitment by any SPC to make any Loan and
(ii) if an SPC elects not to exercise such option or
otherwise fails to provide all or any part of such Loan,
the Granting Lender shall be obligated to make such Loan
pursuant to the terms hereof. The making of a Loan by an
SPC hereunder shall utilize the Commitment of the Granting
Lender to the same extent, and as if, such Loan were made
by such Granting Lender. Each party hereto hereby agrees
that no SPC shall be liable for any indemnity or similar
payment obligation under this Agreement (all liability for
which shall remain with the Granting Lender). In
furtherance of the foregoing, each party hereto hereby
agrees (which agreement shall survive the termination of
this Agreement) that, prior to the date that is one year
and one day after the payment in full of all outstanding
commercial paper or other senior indebtedness of any SPC,
it will not institute against, or join any other person in
instituting against, such SPC any bankruptcy,
reorganization, arrangement, insolvency or liquidation
proceedings under the laws of the United States or any
State thereof. In addition, notwithstanding anything to
the contrary contained in this Section 9.04, any SPC may
(i) with notice to, but without the prior written consent
of, the Borrower and the Administrative Agent and without
paying any processing fee therefor, assign all or a portion
of its interests in any Loans to the Granting Lender or to
any financial institutions (consented to by the Borrower
and Administrative Agent) providing liquidity and/or credit
support to or for the account of such SPC to support the
funding or maintenance of Loans and (ii) disclose on a
confidential basis any non-public information relating to
its Loans to any rating agency, commercial paper dealer or
provider of any surety, guarantee or credit or liquidity
enhancement to such SPC.
(j) The Borrower shall not assign or delegate any of
its rights or duties hereunder without the prior written
consent of the Administrative Agent and each Lender, and
any attempted assignment without such consent shall be null
and void.
SECTION 9.05. Expenses; Indemnity. (a) The Borrower
agrees to pay all reasonable out-of-pocket expenses incurred
by the Administrative Agent in connection with the syndication
of the credit facilities provided for herein and the
preparation and administration of this Agreement or in
connection with any amendments, modifications or waivers of
the provisions hereof (whether or not the transactions
hereby or thereby contemplated shall be consummated) or
incurred by the Administrative Agent or any Lender in
connection with the enforcement or protection of its rights
in connection with this Agreement or in connection with the
Loans made hereunder, including the reasonable fees,
charges and disbursements of Cravath, Swaine & Moore LLP,
counsel for the Administrative Agent, and, in connection
with any such enforcement or protection, the reasonable
fees, charges and disbursements of any other counsel for
the Administrative Agent or any Lender.
(b) The Borrower agrees to indemnify the
Administrative Agent, each Lender and each Related Party of
any of the foregoing persons (each such person being called
an "Indemnitee") against, and to hold each Indemnitee
harmless from, any and all losses, claims, damages,
liabilities and related expenses, including reasonable
counsel fees, charges and disbursements, incurred by or
asserted against any Indemnitee (other than Taxes, Other
Taxes or amounts that would be Other Taxes if imposed by
the United States of America or any political subdivision
thereof) arising out of, in any way connected with, or as a
result of (i) the execution or delivery of this Agreement
or any agreement or instrument contemplated thereby, the
performance by the parties thereto of their respective
obligations thereunder or the consummation of the
Transactions and the other transactions contemplated
thereby, (ii) the use of the proceeds of the Loans, or
(iii) any claim, litigation, investigation or proceeding
relating to any of the foregoing, whether or not any
Indemnitee is a party thereto; provided that such indemnity
shall not, as to any Indemnitee, be available to the extent
that such losses, claims, damages, liabilities or related
expenses (x) are determined by a court of competent
jurisdiction by final and nonappealable judgment (a "Final
Judgment") to have resulted from the gross negligence or
wilful misconduct of such Indemnitee or (y) arise from any
legal proceedings commenced against any Lender by any other
Lender (other than legal proceedings against the
Administrative Agent in its capacity as such) or in which a
Final Judgment is rendered in the Borrower's favor against
such Indemnitee.
(c) To the extent that the Borrower fails to pay any
amount required to be paid by it to the Administrative
Agent under paragraph (a) or (b) of this Section, each
Lender severally agrees to pay to the Administrative Agent
such Lender's pro rata share (determined as of the time
that the applicable unreimbursed expense or indemnity
payment is sought) of such unpaid amount; provided that the
unreimbursed expense or indemnified loss, claim, damage,
liability or related expense, as the case may be, was
incurred by or asserted against the Administrative Agent in
its capacity as such. For purposes hereof, a Lender's "pro
rata share" shall be determined based upon its share of the
sum of the Aggregate Revolving Credit Exposure and unused
Commitments at the time.
(d) To the extent permitted by applicable law, the
Borrower shall not assert, and hereby waives, any claim
against any Indemnitee, on any theory of liability, for
special, indirect, consequential or punitive damages (as
opposed to direct or actual damages) arising out of, in
connection with, or as a result of, this Agreement or any
agreement or instrument contemplated hereby, the
Transactions, any Loan or the use of the proceeds thereof.
(e) All amounts due under this Section 9.05 shall be
payable not later than 15 days after written demand
therefor.
SECTION 9.06. Right of Setoff. If an Event of Default
shall have occurred and be continuing, each Lender is hereby
authorized at any time and from time to time, except to the
extent prohibited by law, to set off and apply any and all
deposits (general or special, time or demand, provisional
or final) at any time held and other indebtedness at any
time owing by such Lender to or for the credit or the
account of the Borrower against any of and all the
obligations of the Borrower now or hereafter existing under
this Agreement held by such Lender, irrespective of whether
or not such Lender shall have made any demand under this
Agreement and although such obligations may be unmatured.
The rights of each Lender under this Section 9.06 are in
addition to other rights and remedies (including other
rights of setoff) which such Lender may have.
SECTION 9.07. Applicable Law.THIS AGREEMENT
SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
LAWS OF THE STATE OF NEW YORK.
SECTION 9.08. Waivers; Amendment. (a) No failure or
delay of the Administrative Agent or any Lender in exercising
any power or right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any
such right or power, or any abandonment or discontinuance of
steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right
or power. The rights and remedies of the Administrative
Agent and the Lenders hereunder are cumulative and are not
exclusive of any rights or remedies that they would
otherwise have. No waiver of any provision of this
Agreement or consent to any departure by the Borrower
therefrom shall in any event be effective unless the same
shall be permitted by paragraph (b) below, and then such
waiver or consent shall be effective only in the specific
instance and for the purpose for which given. No notice or
demand on the Borrower in any case shall entitle the
Borrower to any other or further notice or demand in
similar or other circumstances.
(b) Neither this Agreement nor any provision hereof
may be waived, amended or modified except pursuant to an
agreement or agreements in writing entered into by the
Borrower and the Required Lenders; provided, however, that
no such agreement shall (i) decrease the principal amount
of, or extend the maturity of or any scheduled principal
payment date or date for the payment of any interest on any
Loan, or waive or excuse any such payment or any part
thereof, or decrease the rate of interest on any Loan,
without the prior written consent of each Lender affected
thereby, (ii) increase or extend the Commitment or decrease
or extend the date for payment of any Fees of any Lender
without the prior written consent of such
Lender, (iii) amend or modify the pro rata requirements of
Section 2.16, the provisions of Section 9.04(j), the
provisions of this Section or the definition of the term
"Required Lenders", without the prior written consent of
each Lender or (iv) modify the protections afforded to an
SPC pursuant to the provisions of Section 9.04(i) without
the written consent of such SPC; provided further that no
such agreement shall amend, modify or otherwise affect the
rights or duties of the Administrative Agent hereunder
without the prior written consent of the Administrative
Agent.
SECTION 9.09. Interest Rate Limitation. Notwithstanding
anything herein to the contrary, if at any time the
interest rate applicable to any Loan, together with all
fees, charges and other amounts which are treated as
interest on such Loan under applicable law (collectively
the "Charges"), shall exceed the maximum lawful rate (the
"Maximum Rate") which may be contracted for, charged,
taken, received or reserved by the Lender holding such Loan
or participation in accordance with applicable law, the
rate of interest payable in respect of such Loan or
participation hereunder, together with all Charges payable
in respect thereof, shall be limited to the Maximum Rate
and, to the extent lawful, the interest and Charges that
would have been payable in respect of such Loan or
participation but were not payable as a result of the
operation of this Section 9.09 shall be cumulated and the
interest and Charges payable to such Lender in respect of
other Loans or participations or periods shall be increased
(but not above the Maximum Rate therefor) until such
cumulated amount, together with interest thereon at the
Federal Funds Effective Rate to the date of repayment,
shall have been received by such Lender.
SECTION 9.10. Entire Agreement. This Agreement, the
Fee Letter dated November 29, 2001, between the Borrower
and Credit Suisse First Boston, and the Fee Letter dated
November 18, 2003, between the Borrower and Credit Suisse
First Boston, constitute the entire contract between the
parties relative to the subject matter hereof. Any other
previous agreement among the parties with respect to the
subject matter hereof is superseded by this Agreement. Nothing
in this Agreement, expressed or implied, is intended to confer
upon any person (other than the parties hereto, their respective
successors and assigns permitted hereunder and, to the
extent expressly contemplated hereby, the Related Parties
of each of the Administrative Agent and the Lenders) any
rights, remedies, obligations or liabilities under or by
reason of this Agreement.
SECTION 9.11. WAIVER OF JURY TRIAL. EACH PARTY HERETO
HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR
IN CONNECTION WITH THIS AGREEMENT. EACH PARTY HERETO
(A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF
ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND
(B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE
BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS
SECTION 9.11.
SECTION 9.12. Severability. In the event any one or
more of the provisions contained in this Agreement should
be held invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining
provisions contained herein and therein shall not in any
way be affected or impaired thereby (it being understood
that the invalidity of a particular provision in a
particular jurisdiction shall not in and of itself affect
the validity of such provision in any other jurisdiction).
The parties shall endeavor in good-faith negotiations to
replace the invalid, illegal or unenforceable provisions
with valid provisions the economic effect of which comes as
close as possible to that of the invalid, illegal or
unenforceable provisions.
SECTION 9.13. Counterparts. This Agreement may be executed
in counterparts (and by different parties hereto on different
counterparts), each of which shall constitute an original
but all of which when taken together shall constitute a
single contract, and shall become effective as provided in
Section 9.03. Delivery of an executed signature page to
this Agreement by facsimile transmission shall be as
effective as delivery of a manually signed counterpart of
this Agreement.
SECTION 9.14. Headings. Article and Section headings and
the Table of Contents used herein are for convenience of
reference only, are not part of this Agreement and are not
to affect the construction of, or to be taken into
consideration in interpreting, this Agreement.
SECTION 9.15. Jurisdiction; Consent to Service of
Process. (a) The Borrower hereby irrevocably
and unconditionally submits, for itself and its property,
to the nonexclusive jurisdiction of any New York State
court or Federal court of the United States of America
sitting in New York City, and any appellate court from any
thereof, in any action or proceeding arising out of or
relating to this Agreement, or for recognition or
enforcement of any judgment, and each of the parties hereto
hereby irrevocably and unconditionally agrees that all
claims in respect of any such action or proceeding may be
heard and determined in such New York State or, to the
extent permitted by law, in such Federal court. Each of
the parties hereto agrees that a final judgment in any such
action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law. Nothing in this
Agreement shall affect any right that the Administrative
Agent or any Lender may otherwise have to bring any action
or proceeding relating to this Agreement against the
Borrower or its properties in the courts of any
jurisdiction.
(b) The Borrower hereby irrevocably and
unconditionally waives, to the fullest extent it may
legally and effectively do so, any objection which it may
now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this
Agreement in any New York State or Federal court. Each of
the parties hereto hereby irrevocably waives, to the
fullest extent permitted by law, the defense of an
inconvenient forum to the maintenance of such action or
proceeding in any such court.
(c) Each party to this Agreement irrevocably consents
to service of process in the manner provided for notices in
Section 9.01. Nothing in this Agreement will affect the
right of any party to this Agreement to serve process in
any other manner permitted by law.
SECTION 9.16. Confidentiality. (a) Each of the
Administrative Agent and the Lenders agrees to maintain the
confidentiality of the Information (as defined below), except
that Information may be disclosed (a) to its and its
Affiliates' officers, directors, employees and agents,
including accountants, legal counsel and other advisors who
need to know such Information in connection with its role
as Administrative Agent or Lender (as the case may be)
hereunder (it being understood that the persons to whom such
disclosure is made will be informed of the confidential
nature of such Information and instructed to keep such
Information confidential), (b) to the extent requested by any
regulatory authority or quasi-regulatory authority (such as
the National Association of Insurance Commissioners)
(provided that, to the extent permitted by applicable law
and practicable under the circumstances, such person will
first inform the Borrower of any such request), (c) to the
extent required by applicable laws or regulations or by any
subpoena or similar legal process (provided that, to the
extent permitted by applicable law, such person will
promptly notify the Borrower of such requirement as far in
advance of its disclosure as is practicable to enable the
Borrower to seek a protective order and, to the extent
practicable, such person will cooperate with the Borrower
in seeking any such order), (d) in connection with the
exercise of any remedies hereunder or any suit, action or
proceeding relating to the enforcement of its rights
hereunder, (e) subject to an agreement containing
provisions substantially the same as those of this
Section 9.16, to (i) any actual or prospective assignee of
or participant in any of its rights or obligations under
this Agreement or (ii) any actual or prospective
counterparty (or its advisors) to any credit default swap
or similar credit derivative transaction relating to the
obligations of the Borrower under this Agreement, (f) with
the consent of the Borrower or (g) to the extent such
Information becomes publicly available other than as a
result of a breach of this Section 9.16. For the purposes
of this Section, "Information" shall mean all information
received from the Borrower and related to the Borrower or
its business, other than any such information that was
available to the Administrative Agent or any Lender on a
nonconfidential basis prior to its disclosure by the
Borrower. Each of the Administrative Agent and the Lenders
agrees that, except as expressly provided in this
Section 9.16, it will use Information only in connection
with its role as Administrative Agent or Lender (as the
case may be) hereunder.
SECTION 9.17. Termination of Existing Credit
Agreement. The Borrower and each of the Lenders
that is also a Lender (as defined in the Existing Credit
Agreement) party to the Existing Credit Agreement agree
that the Commitments (as defined in the Existing Credit
Agreement) shall be terminated in their entirety on the
Closing Date in accordance with the terms thereof, subject
only to this Section 9.17. Each of such Lenders waives (a)
any requirement of notice of such termination pursuant to
Section 2.10(b) of the Existing Credit Agreement and (b)
any claim to any facility fees under the Existing Credit
Agreement for any day on or after the Closing Date. The
Borrower (i) represents and warrants that (x) after giving
effect to the preceding sentences of this Section 9.17, the
commitments under the Existing Credit Agreement will be
terminated effective not later than the Closing Date and
(y) no loans will be, as of the Closing Date, outstanding
under the Existing Credit Agreement and (ii) covenants that
all accrued and unpaid facility fees and other amounts due
and payable under the Existing Credit Agreement shall have
been paid on or prior to the Closing Date.
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be duly executed by their respective
authorized officers as of the day and year first above
written.
LABORATORY CORPORATION OF AMERICA
HOLDINGS,
By /s/ Wesley R. Elingburg
--------------------------
Name: Wesley R. Elingburg
Title: Executive Vice President
and Chief Financial Officer
CREDIT SUISSE FIRST BOSTON, acting
through its Cayman Islands Branch,
individually and as Administrative
Agent,
By /s/ S. William Fox
--------------------------
Name: S. William Fox
Title: Director
by:/s/David J. Dodd
--------------------------
Name: David J. Dodd
Title: Associate
SIGNATURE PAGE TO LABORATORY
CORPORATION OF AMERICA HOLDINGS
364-DAY CREDIT AGREEMENT DATED AS
OF THE DAY AND YEAR FIRST ABOVE
WRITTEN
NAME OF LENDER: Bank of America
by:/s/Philip S. Durand
--------------------------
Name: Philip S. Durand
Title: Managing Director
NAME OF LENDER: KeyBank National Association
by:/s/James A. Taylor
--------------------------
Name: James A. Taylor
Title: Vice President
NAME OF LENDER: Mizuho Corporate Bank LTD.
by:/s/Greg Botshon
--------------------------
Name: Greg Botshon
Title: Vice President
NAME OF LENDER: SunTrust Bank
by:/s/Greg Ratliff
--------------------------
Name: Greg Ratliff
Title: Assistant Vice President
NAME OF LENDER: U.S. Bank, N.A.
by:/s/S.W. Choppin
--------------------------
Name: S.W. Choppin
Title: Senior Vice President
NAME OF LENDER: UBS Loan Finance LLC
by:/s/Patricia O'Kicki
--------------------------
Name: Patricia O'Kicki
Title: Director
by:/s/Joselin Fernandes
--------------------------
Name: Joselin Fernandes
Title: Associate Director
NAME OF LENDER: Wachovia Bank, N.A.
by:/s/Lise Hinton
--------------------------
Name: Lise Hinton
Title: Vice President
NAME OF LENDER: WestLB AG, New York Branch
by:/s/Duncan Robertson
--------------------------
Name: Duncan Robertson
Title: Executive Director
by:/s/Donald F. Wolf
--------------------------
Name: Donald F. Wolf
Title: Executive Director
EXHIBIT 21
SUBSIDIARIES(1)
Owned Directly by Laboratory Corporation of America Holdings:
Name Jurisdiction of Organization
- --------------------------------- -----------------------------
LabCorp Delaware, Inc. Delaware
LabCorp, BVBA Belgium
Lab Delivery Service of
New York City, Inc. New York
Laboratory Corporation of America Delaware
Viro-Med Laboratories, Inc. Minnesota
National Genetics Institute California
LabCorp Limited United Kingdom
Path Lab Holdings, Inc. Delaware
Center for Genetic Services, Inc. Texas
Clipper Holdings, Inc. Delaware
Clinical Laboratories, Inc. Pennsylvania
DIANON Systems, Inc. Delaware
New Molecular Diagnostics Ventures LLC (2) Delaware
Owned Directly by Laboratory Corporation of America:
Name Jurisdiction of Organization
- --------------------------------- -----------------------------
Dynacare Laboratories, Inc. Delaware
Owned Directly by Path Lab Holdings, Inc.:
Name Jurisdiction of Organization
- --------------------------------- -----------------------------
Path Lab, Inc. New Hampshire
Owned Directly by Path Lab, Inc.:
Name Jurisdiction of Organization
- --------------------------------- -----------------------------
Medical Management Services, Inc. Vermont
Owned Directly By Medical Management Services, Inc.:
Name Jurisdiction of Organization
- --------------------------------- -----------------------------
Springfield Medical Laboratory, Inc. Vermont
(1) All Subsidiaries are 100% owned by Laboratory Corporation of America
Holdings or Subsidiaries of Laboratory Corporation of America Holdings,
unless otherwise noted. Excludes legal entities with inactive business
operations.
(2) Laboratory Corporation of America Holdings owns 90% of New Molecular
Diagnostics Ventures LLC
Owned Directly by Clipper Holdings, Inc.:
Name Jurisdiction of Organization
- --------------------------------- -----------------------------
3065619 Nova Scotia Company Nova Scotia
Owned Directly by 3065619 Nova Scotia Company:
Name Jurisdiction of Organization
- --------------------------- -----------------------------
Dynacare Company Nova Scotia
Owned by Dynacare Company:
Name Jurisdiction of Organization
- --------------------------- -----------------------------
ExecMed Health Services Inc. Ontario
896988 Ontario Inc. Ontario
Dynacare Realty Inc. Ontario
Dynacare Laboratories Limited Partnership (3) Ontario
Dynacare G.P. Inc. Ontario
Dynacare Holdco LLC Delaware
Owned By Dynacare Laboratories Limited Partnership:
Name Jurisdiction of Organization
- --------------------------- -----------------------------
Gamma-Dynacare Medical Laboratories (4) Ontario
Owned Directly by Gamma-Dynacare Medical Laboratories:
Name Jurisdiction of Organization
- --------------------------- -----------------------------
GDML LeaseCo, Inc. Ontario
Dynacare Gamma Institutional Laboratory
Services Limited Ontario
Ultra-Med Developments Inc. Ontario
Gamma Dynacare Leasing Corporation Ontario
Dynacare X-Ray Services Limited Ontario
RD Belenger & Associates Ltd. (5) Ontario
Centre Diagnostique Analab, Inc. (6) Quebec
(3) Dynacare Company owns 99.9% of Dynacare Laboratories Limited
Partnership. Dynacare GP Inc. owns the remaining 0.1% interest.
(4) Dynacare Laboratories Limited Partnership owns a 72.99% interest in
Gamma-Dynacare Medical Laboratories.
(5) Gamma-Dynacare Medical Laboratories owns a 70% interest in RD Belenger
& Associates Ltd.
(6) Gamma-Dynacare Medical Laboratories owns a 75% interest in Centre
Diagnostique Analab Inc.
Owned by Dynacare Laboratories Inc.:
Name Jurisdiction of Organization
- ------------------------------------ ----------------------------
Dynacare Northwest Inc. Washington
Clinical Laboratories Cheyenne Wyoming
Dynacare Southwest Laboratories, Inc. Texas
LabSouth Inc. Delaware
Dynacare Oklahoma, Inc. Delaware
Dynacare Mississippi, Inc. Delaware
HHD Genpar, Inc. Texas
Dynacare Louisiana, LLC Louisiana
Ownership Interests by Dynacare U.S. Subsidiaries:
Name Jurisdiction of Organization
- ------------------------------------ ----------------------------
HH/DL, LP (7) Texas
SW/DL LP (8) Delaware
UHS/DL, LP (9) Delaware
(7) Dynacare Southwest Laboratories, Inc. owns a 49.5% interest, Dynacare
Laboratories, Inc. owns a 49.5% interest and HHD Genpar, Inc. owns the
remaining 1% interest in HH/DL, LP.
(8) HH/DL, LP owns a 99% interest and HHD Genpar, Inc. owns the
remaining 1% interest.
(9) Dynacare Laboratory Management, Inc. holds a 94.8% and DL/UHS Inc. holds
a 0.4% interest in UHS/DL, LP. Dynacare Laboratories Inc. holds a 50%
interest in DL/UHS Inc.
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the
Registration Statement on Form S-3 (No. 333-71896) and Forms S-8
(No. 33-43006, No. 33-55065, No. 333-39735, No. 333-94329, No. 333-
94331, No. 333-102602, No. 333-90764, and No. 333-97745) of
Laboratory Corporation of America Holdings of our report dated
February 12, 2004, relating to the financial statements and
financial statement schedule, which appear in this Form 10-K.
PricewaterhouseCoopers LLP
Greensboro, North Carolina
March 10, 2004
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned
hereby constitutes and appoints Bradford T. Smith his true and
lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any
and all capacities, in connection with the Laboratory
Corporation of America Holdings (the "Corporation") Annual
Report on Form 10-K for the year ended December 31, 2003 under
the Securities Exchange Act of 1934, as amended, including,
without limiting the generality of the foregoing, to sign the
Form 10-K in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the
Corporation, and any amendments to the Form 10-K and any
instrument, contract, document or other writing, of or in
connection with the Form 10-K or amendments thereto, and to file
the same, with all exhibits thereto, and other documents in
connection therewith, including this power of attorney, with the
Securities and Exchange Commission and any applicable securities
exchange or securities self-regulatory body, granting unto said
attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-
in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has signed these
presents this 10th day of March, 2004.
By: /s/ JEAN-LUC BELINGARD
---------------------------
Jean-Luc Belingard
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned
hereby constitutes and appoints Bradford T. Smith his true and
lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any
and all capacities, in connection with the Laboratory
Corporation of America Holdings (the "Corporation") Annual
Report on Form 10-K for the year ended December 31, 2003 under
the Securities Exchange Act of 1934, as amended, including,
without limiting the generality of the foregoing, to sign the
Form 10-K in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the
Corporation, and any amendments to the Form 10-K and any
instrument, contract, document or other writing, of or in
connection with the Form 10-K or amendments thereto, and to file
the same, with all exhibits thereto, and other documents in
connection therewith, including this power of attorney, with the
Securities and Exchange Commission and any applicable securities
exchange or securities self-regulatory body, granting unto said
attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-
in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has signed these
presents this 10th day of March, 2004.
By:/s/ Wendy E. Lane
-----------------------
Wendy E. Lane
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned
hereby constitutes and appoints Bradford T. Smith his true and
lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any
and all capacities, in connection with the Laboratory
Corporation of America Holdings (the "Corporation") Annual
Report on Form 10-K for the year ended December 31, 2003 under
the Securities Exchange Act of 1934, as amended, including,
without limiting the generality of the foregoing, to sign the
Form 10-K in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the
Corporation, and any amendments to the Form 10-K and any
instrument, contract, document or other writing, of or in
connection with the Form 10-K or amendments thereto, and to file
the same, with all exhibits thereto, and other documents in
connection therewith, including this power of attorney, with the
Securities and Exchange Commission and any applicable securities
exchange or securities self-regulatory body, granting unto said
attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-
in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has signed these
presents this 10th day of March, 2004.
By:/s/Robert E. Mittelstaedt
-----------------------------
Robert E. Mittelstaedt
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned
hereby constitutes and appoints Bradford T. Smith his true and
lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any
and all capacities, in connection with the Laboratory
Corporation of America Holdings (the "Corporation") Annual
Report on Form 10-K for the year ended December 31, 2003 under
the Securities Exchange Act of 1934, as amended, including,
without limiting the generality of the foregoing, to sign the
Form 10-K in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the
Corporation, and any amendments to the Form 10-K and any
instrument, contract, document or other writing, of or in
connection with the Form 10-K or amendments thereto, and to file
the same, with all exhibits thereto, and other documents in
connection therewith, including this power of attorney, with the
Securities and Exchange Commission and any applicable securities
exchange or securities self-regulatory body, granting unto said
attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-
in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has signed these
presents this 10th day of March, 2004.
By:/s/James B. Powell
-------------------------
James B. Powell
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned
hereby constitutes and appoints Bradford T. Smith his true and
lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any
and all capacities, in connection with the Laboratory
Corporation of America Holdings (the "Corporation") Annual
Report on Form 10-K for the year ended December 31, 2003 under
the Securities Exchange Act of 1934, as amended, including,
without limiting the generality of the foregoing, to sign the
Form 10-K in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the
Corporation, and any amendments to the Form 10-K and any
instrument, contract, document or other writing, of or in
connection with the Form 10-K or amendments thereto, and to file
the same, with all exhibits thereto, and other documents in
connection therewith, including this power of attorney, with the
Securities and Exchange Commission and any applicable securities
exchange or securities self-regulatory body, granting unto said
attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-
in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has signed these
presents this 10th day of March, 2004.
By:/s/Andrew G. Wallace
----------------------------
Andrew G. Wallace
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned
hereby constitutes and appoints Bradford T. Smith his true and
lawful attorney-in-fact and agent, with full power of
substitution, for him and in his name, place and stead, in any
and all capacities, in connection with the Laboratory
Corporation of America Holdings (the "Corporation") Annual
Report on Form 10-K for the year ended December 31, 2003 under
the Securities Exchange Act of 1934, as amended, including,
without limiting the generality of the foregoing, to sign the
Form 10-K in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the
Corporation, and any amendments to the Form 10-K and any
instrument, contract, document or other writing, of or in
connection with the Form 10-K or amendments thereto, and to file
the same, with all exhibits thereto, and other documents in
connection therewith, including this power of attorney, with the
Securities and Exchange Commission and any applicable securities
exchange or securities self-regulatory body, granting unto said
attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-
in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the undersigned has signed these
presents this 10th day of March, 2004.
By:/s/M. Keith Weikel
-------------------------
M. Keith Weikel
EXHIBIT 99.1
Written Statement of
Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350)
The undersigned, the Chief Executive Officer and the Chief Financial
Officer of Laboratory Corporation of America Holdings (the "Company"), each
hereby certifies that, to his knowledge on the date hereof:
(a) the Form 10-K of the Company for the Year Ended December 31, 2003
filed on the date hereof with the Securities and Exchange Commission (the
"Report") fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(b) information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
By:/s/THOMAS P. MAC MAHON
--------------------------------
Thomas P. Mac Mahon
Chief Executive Officer
March 10, 2004
By:/s/WESLEY R. ELINGBURG
---------------------------------
Wesley R. Elingburg
Chief Financial Officer
March 10, 2004