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, 1994
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OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________
Commission file number 1-11353
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NATIONAL HEALTH LABORATORIES HOLDINGS INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3757370
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4225 Executive Square, Suite 805, La Jolla, California 92037
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(Address of principal executive offices) (Zip Code)
619-657-9382
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
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Common Stock, $0.01 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. X
State the aggregate market value of the voting stock held by
non-affiliates of the registrant, by reference to the price at which
the stock was sold as of a specified date within 60 days prior to the
date of filing: $904,251,320 at February 21, 1995.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: 84,766,109
shares at February 21, 1995, of which 20,176,729 shares are held by an
indirect wholly owned subsidiary of Mafco Holdings Inc.
PART I
Item 1. DESCRIPTION OF BUSINESS
National Health Laboratories Holdings Inc. ("NHL Holdings"
and together with its subsidiaries, the "Company") was
incorporated in Delaware in 1994 in connection with a corporate
reorganization approved by the stockholders of National Health
Laboratories Incorporated ("NHLI") on June 7, 1994. As a result
of the reorganization, NHL Holdings now owns, through NHL
Intermediate Holdings Corp. I, a Delaware corporation and a
wholly owned subsidiary of NHL Holdings ("Intermediate Holdings
I"), and NHL Intermediate Holdings Corp. II, a Delaware
corporation and a wholly owned subsidiary of Intermediate
Holdings I ("Intermediate Holdings II"), all of the outstanding
common stock of the NHLI. The Company's principal executive
offices are located at 4225 Executive Square, Suite 805, La
Jolla, California 92037, and its telephone number is (619)
657-9382.
Until the initial public offering of approximately 5% of the
Company's common stock in July 1988, the Company was an indirect
wholly owned subsidiary of Revlon Holdings Inc. ("Revlon"), then
known as Revlon, Inc., which, in turn, is an indirect wholly
owned subsidiary of Mafco Holdings Inc. ("Mafco"), a corporation
that is 100% owned by Ronald O. Perelman. Following the
completion of successive secondary public offerings of the
Company's common stock, a self tender offer by the Company and
the purchase by the Company of outstanding shares of its common
stock, Mafco's indirect ownership has been reduced to
approximately 24%.
On June 23, 1994, the Company acquired Allied Clinical
Laboratories, Inc. ("Allied"), then the sixth largest
independent clinical laboratory testing company in the United
States (in terms of net revenues), as a wholly owned subsidiary
for approximately $191.5 million in cash plus the assumption of
$24.0 million of Allied indebtedness and the recognition of
approximately $5.0 million of Allied net liabilities (the "Allied
Acquisition").
The Company is one of the leading clinical laboratory
companies in the United States. Through a national network of
laboratories, the Company offers a broad range of testing
services used by the medical profession in the diagnosis,
monitoring and treatment of disease and other clinical states.
Office-based physicians constitute approximately 90% of the
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Company's clients. The remainder is comprised primarily of
clinics, nursing homes, hospitals and other clinical
laboratories.
Since its founding in 1971, the Company has grown into a
network of 23 major laboratories, including a national reference
laboratory which performs esoteric testing and tests for the
presence of drugs of abuse, and approximately 950 service sites
consisting of sales ports, patient service centers and STAT
laboratories, serving customers in 45 states.
Recent Developments
The Company has entered into an Agreement and Plan of Merger
dated as of December 13, 1994 (the "Merger Agreement") with HLR
Holdings Inc. ("HLR"), Roche Biomedical Laboratories, Inc.
("RBL"), and (for the purposes set forth therein) Hoffmann-La
Roche Inc. ("Roche") providing for, among other things, the
merger of RBL with and into the Company with the Company as the
surviving corporation (the "Merger"), and pursuant to which,
subject to certain exceptions, each outstanding share of common
stock, par value $0.01 per share, of the Company, will be
converted into (i) 0.72 of a share of common stock of the Company
and (ii) the right to receive $5.60 in cash, without interest.
In addition, all shares of common stock, no par value, of
RBL issued and outstanding immediately prior to the effective
time of the Merger (other than treasury shares, which will be
canceled) will be converted into, and become, that number of
newly issued shares of Company common stock as would, in the
aggregate and after giving effect to the Merger and the Company
common stock owned by HLR, RBL and their subsidiaries immediately
after the effective time of the Merger, equal 49.9% of the total
number of shares of Company common stock outstanding immediately
after the effective
time of the Merger (after giving effect to the issuance of
Company common stock in respect of the Company employee stock
options in connection with the Merger).
In connection with the Merger, the Company currently intends
to declare a dividend, payable to holders of record of shares of
Company common stock as of the third business day prior to the
date of the special meeting of the stockholders to consider and
vote on the approval and adoption of the Merger, which dividend
will consist of 0.16308 of a warrant per outstanding share of
Company common stock, each such warrant (a "Warrant")
representing the right to purchase one newly issued share of
Company common stock for $22.00 (subject to adjustments) on the
fifth anniversary of the issuance of the Warrant. In addition,
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the Merger Agreement provides for the issuance to and purchase by
Roche, for a purchase price of $51,048,900, of 8,325,000 Warrants
to purchase shares of Company common stock (the "Roche
Warrants"), which Warrants will have the terms described in the
preceding sentence.
The aggregate cash consideration of approximately
$474,700,000 to be paid to stockholders of the Company in the
Merger will be financed from three sources: a cash contribution
by the Company of approximately $288,000,000 out of proceeds of
borrowings by the Company in an equal amount, a cash contribution
to be made by HLR in the amount of approximately $135,651,100 and
the proceeds from the issuance of the Roche Warrants.
The Company has obtained a commitment for a credit facility,
which will include a term loan facility of not more than
$800,000,000 and a revolving credit facility of not more than
$400,000,000, to refinance the Company's existing indebtedness
and to finance the Company's portion of the total cash
consideration to be paid to stockholders of the Company in the
Merger. The specific terms and conditions of the credit facility
are currently under negotiation.
Restructuring costs of approximately $84,000,000 are
expected to be recorded by the Company at the close of the
Merger. These costs will reflect the write-off of deferred
financing costs related to the repayment of the Company's
existing revolving credit facility and term loan facility entered
into in connection with the Allied Acquisition financing and the
creation of reserves for severance and benefit costs, costs for
office facilities expected to be closed, vacant space costs,
systems conversion costs and other restructuring expenses of the
Company associated with the Merger.
The Clinical Laboratory Industry
Clinical laboratory tests are used by physicians, hospitals
and other health care providers to diagnose, monitor and treat
diseases and other clinical states through the examination of
substances in blood or tissue samples and other specimens.
Clinical laboratory tests are primarily performed by hospitals
in-house, by physicians in their offices or in physician-owned
laboratories and by independent laboratory companies like the
Company. The Company views the clinical laboratory industry as
highly fragmented and intensively competitive with many local and
regional competitors, including numerous physician-owned and
hospital-owned laboratories as well as several large independent
laboratory companies.
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In recent years, certain independent laboratories have
engaged in acquisitions of other laboratories and taken advantage
of opportunities for cost efficiencies afforded by larger scale,
automated testing operations. The Company believes that
acquisition activity will continue in the clinical laboratory
business due to legislative initiatives and increasing demand for
quality service and efficiency at lower prices. See "--
Competition".
Laboratory Testing Operations and Services
The Company has 23 major laboratories, and approximately 950
service sites consisting of sales ports, patient service centers
and STAT laboratories. A "sales port" is a central office which
collects specimens in a region for shipment to one of the
Company's laboratories for testing. Test results can be printed
at a sales port and conveniently delivered to the client. A
sales port also is used as a base for sales staff. A "patient
service center" generally is a facility maintained by the Company
to serve the physicians in a medical professional building. 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 processes approximately 152,000 patient
specimens on an average day. 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 patient helps to
assure that the results are attributed to the correct patient.
The test request forms are sent to a data entry terminal where a
file is established for each patient and the necessary testing
and billing information is entered. Once this information is
entered into the computer system, the tests are performed and the
results are entered primarily through computer interface or
manually, depending upon the tests and the type of equipment
involved. Most of the Company's computer testing equipment is
directly linked with the Company's computer system. Most routine
testing is completed by early the next morning, and test results
are printed and prepared for distribution by service
representatives that day. Some clients have local printer
capability and have reports printed out directly in their
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offices. Clients who request that they be called with a result
are so notified in the morning. It is Company policy to notify
the client immediately if at any time in the course of the
testing process a life-threatening result is found.
The following discussion describes the different types of
tests performed by the Company:
Routine Clinical Testing. The vast majority of the number
of tests performed by the Company are considered by the Company
to be routine. The Company performs all such routine tests in
its own laboratories. A routine test generally is a higher
volume, simpler test capable of being performed and reported
within 24 hours. The Company performs many routine clinical
tests with sophisticated and computerized laboratory testing
equipment. These tests provide information used by physicians in
determining the existence or absence of disease or abnormalities.
The Company performs this core group of routine tests in each of
its 23 major regional laboratories for a total of approximately
104 million routine tests annually.
Esoteric Clinical Testing. Esoteric tests are specialized
laboratory tests performed in cases where information is needed
to confirm a diagnosis or when the physician requires additional
information to develop a plan of therapy for a complicated
medical case. Esoteric tests are generally more complex tests,
requiring more sophisticated technology and more expensive
equipment and materials, as well as a higher degree of technical
skill to perform. The number of esoteric tests continually
increases as new medical discoveries are made. The Company
operates a state-of-the-art national reference laboratory
("National Reference Laboratory") in Nashville, Tennessee. This
laboratory provides a central location for esoteric testing for
all of the Company's major laboratories. The Company performs
approximately 90% of all types of tests considered by the Company
to be esoteric at this facility, representing approximately
2,300,000 tests annually. With the operation of this facility,
the Company reduces both the types and numbers of esoteric tests
that are referred to outside laboratories to be performed.
Cytology. Cytology, which involves both routine and
esoteric anatomical testing, is the examination of cells under a
microscope to detect abnormalities in composition, form or
structure which are associated with disease. Cytology is divided
into two testing services, Gynecologic and Non-Gynecologic. The
Gynecologic (Papanicolaou ("Pap") Smear) is the most common
cytologic test, accounting for approximately 99% of all of the
Company's testing in this area. The additional cytology tests,
Non-Gynecologic, are performed on specimens from other body sites
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(i.e., Sputums, Breast, Urine and Fine Needle Aspirations
("FNA's")). The Company performs approximately 4.0 million
Gynecologic and Non-Gynecologic tests annually.
Anatomical Testing. Routine and esoteric anatomical tests
require the examination of a small piece of tissue which either
is cut from the body surgically or taken in a biopsy. These
tissue specimens are examined by a pathologist both visually and
microscopically to detect abnormalities in composition, form or
structure which are associated with disease. The Company
performs approximately 810,000 anatomical tests annually.
Contract Management Services
The Company provides management services in a variety of
health care settings. The Company generally provides the
laboratory manager and other laboratory personnel, as well as,
equipment and testing supplies to manage a laboratory that is
owned by a hospital, physician or other health care provider. In
addition, the Company maintains a data processing system to
organize and report test results and to provide billing and other
pertinent information related to the tests performed in the
managed laboratory. Under the typical laboratory management
agreement, the laboratory manager, who is employed by the
Company, reports to the hospital or clinic administration. Thus,
the provider maintains control of the laboratory. A pathologist
designated by the provider serves as medical director for the
laboratory.
An important advantage the Company offers to its clients is
the flexibility of the Company's information systems used in
management contract services. In addition to the ability to be
customized for a particular user's needs, the Company's
information systems also interface with several hospital and
clinic systems, giving the user more efficient and effective
information flow.
The Company's existing management service contracts expire
between 1995 and 1998. However, each contract contains a clause
that permits termination prior to the contract expiration date.
The termination terms vary but they generally fall into one of
the following categories: (i) termination without cause by
either the Company or the contracted provider after written
notice (generally 60 to 90 days prior to termination); (ii)
termination by the contracted provider only if there are
uncorrected deficiencies in the Company's performance under the
contract after notice by the contracted provider; or (iii)
termination by the contracted provider if there is a loss of
accreditation held by any Company laboratory that services the
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contracted provider, which accreditation is not reinstated within
30 days of the loss, or upon 30 days' notice if there is a
decline in the quality of services provided under such contract
which remains uncorrected after a 15 day period. While the
Company believes that it will maintain and renew its existing
contracts, there can be no assurance of such maintenance or
renewal.
As part of its marketing efforts, and as a way to focus on a
contract management client's particular needs, the Company has
developed several different pricing formulas for its management
services agreements. In certain cases, profitability may depend
on the Company's ability to accurately predict test volumes,
patient encounters or the number of admissions in the case of an
inpatient facility.
Quality Assurance
The Company considers the quality of its tests to be of
critical importance to its growth and retention of accounts. It
has established a comprehensive quality assurance program for all
of its laboratories designed to help assure accurate and timely
test results. All regional laboratories are certified by the
Health Care Financing Administration ("HCFA") of the Department
of Health and Human Services ("HHS") for participation in the
Medicare program and licensed under the Clinical Laboratory
Improvement Act of 1967, as amended by the Clinical Laboratory
Improvement Amendments of 1988 (as amended, "CLIA") and must
participate in basic quality assurance programs. In addition to
the compulsory external inspections and proficiency programs
demanded by CLIA, the Company has adopted a substantial number of
additional quality assurance programs. See "-- Governmental and
Industry Regulation".
Each regional laboratory is equipped with sophisticated
testing equipment which is monitored daily in accordance with the
Company's preventive maintenance program. In addition, each
regional laboratory is supervised by a medical director who is a
physician, assisted by a technical director who meets certain
regulatory requirements, and is staffed with medical
professionals. The primary role of such professionals is to
ensure the accuracy of the Company's tests.
The Company employs inspectors with doctorate and masters
degrees in the biological sciences who visit and inspect each of
the laboratories on an unannounced basis. Inspections are based
on CLIA guidelines and Company policies and, for the most part,
occur on a semi-annual basis. The Company attempts to have such
inspections conducted in the same manner as the biennial
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inspections conducted by Federal and state government officials.
Any major deficiencies which appear are corrected immediately,
and other deficiencies are corrected promptly, and typically
within one month.
As part of its commitment to quality, the Company
established a state-of-the-art Technology Center at its
headquarters in La Jolla, California. The center houses the
Company's Quality Assurance Group and enhances its ability to
monitor the testing results of the individual laboratories. A
computerized data-capture network has been established allowing
virtual on-line examination of test results and monitoring of the
laboratories.
The Company also participates in a number of proficiency
testing programs which, generally, entail submitting pretested
samples to a laboratory to verify the laboratory test results
against the known proficiency test value. These proficiency
programs are conducted both by the Company on its own and in
conjunction with groups such as the College of American
Pathologists ("CAP") and state and Federal government regulatory
agencies.
The CAP is an independent non-governmental organization
(which has recently been accredited by HCFA to inspect clinical
laboratories to determine CLIA standards) of board certified
pathologists which offers an accreditation program to which
laboratories can voluntarily subscribe. The CAP accreditation
program involves both on-site inspections of the laboratory and
participation in the CAP's proficiency testing program for all
categories in which the laboratory is accredited by the CAP. A
laboratory's receipt of accreditation by the CAP satisfies the
Medicare requirement for participation in proficiency testing
programs administered by an external source. See "--Governmental
and Industry Regulation".
Sales, Marketing and Client Service
The Company places a great deal of emphasis on sales,
marketing and client service since they are and have been key
ingredients in the Company's growth.
In 1994, the Company's net new growth (new accounts minus
lost accounts) returned to previous historical levels and was 20%
higher than the rate experienced in 1993. The traditional
physician office sales force continued to have excellent success
in a market which has always been the Company's strongest.
Managed care revenues grew considerably from a fee-for-service as
well as a capitated rate perspective.
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The Company believes that the shift toward managed care
experienced in 1994 will continue for the foreseeable future. To
address this, the Company expanded its dedicated managed care
sales force from 20 to 25 while maintaining its traditional sales
force at approximately 300. At the end of the year, managed care
revenues were approximately 8% to 9% of total revenues covering
over forty million lives. During 1994, the Company signed over
200 new contracts with various managed care organizations
including U.S. Health Care, Health Plus, Humana, MetLife and
Prudential.
The Company believes that given the increasing complexity of
the clinical laboratory marketplace, training of its sales force
is of paramount importance. With this goal in mind, during 1994
the Company enhanced its comprehensive sales training program.
This project involved a complete revision of the sales training
material. Two comprehensive manuals, covering basic sales skills
and specialized laboratory sales, were produced and distributed
to the Company's sales representatives. A national sales
management training seminar was held for associate and sales
managers. This seminar provided training classes on management
skills, responsibilities, and in-depth technical sales sessions.
In addition, a new 90 day evaluation follow-up program was
created to determine if a satisfactory level of training was
achieved.
The volume of hospital reference and testing for drugs of
abuse also increased in 1994. Monthly accession volume at
National Reference Laboratory was up over 100% for testing of
drugs of abuse and 30% for reference laboratory testing. New
accounts sold in 1994 for these two market segments are expected
to have annualized revenues of approximately $6 million.
The Company has always stressed the importance of customer
service and its contribution to growth. Through its Client
Service Coordinators, the Company continuously monitors and
assesses service levels, maintains client relationships and
attempts to identify and respond to client needs. During 1994,
the Company continued to expand the client service force; at
year-end, there were approximately 230 Client Service
Coordinators.
Potential New Markets
Health care reform, the shift toward managed care and
increased competition by hospitals all had an impact on the
clinical laboratory testing industry in 1994. The Company
expects these trends to continue and plans to respond by shifting
additional sales staff to support the managed care market
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segment.
The Company believes that specialty sales of testing and
related services for use in renal dialysis, nursing homes,
clinical trials, detection of drugs of abuse and hospital
reference testing will also continue to offer opportunities for
additional revenue growth in 1995.
The Company views hospitals in general as a major
competitive force in the marketplace today. To that end, a
hospital business venture group has been formed whose primary
goal is to identify potential hospital joint venture
arrangements. These arrangements are likely to include
management agreements, hospital laboratory operations ventures
and hospital laboratory purchases. The Company views this market
as having exceptional future potential for 1995 and beyond.
The Allied Acquisition has provided the Company with
increased geographic coverage in Utah, Nevada, Idaho, Alabama and
Northern California. This increased coverage provides for
increased physician office penetration and managed care
opportunities in these states.
Information Systems
The Company believes that the health care provider's need
for data will continue to place high demands on its information
systems staff. During 1994, staffing levels were increased to
help meet this demand. Information systems resources were also
expanded during 1994 to accommodate the Allied Acquisition.
Support for and enhancements to the managed care data system
including Health Plan Employer Data and Information Set ("HEDIS")
reporting capability also required heavy involvement from the
Company's information systems staff. Additionally, the Company
continued to test and refine its next generation comprehensive
billing system. Live installation of this new system is
currently scheduled for mid-year 1995.
Customers
To date, the Company has focused its marketing efforts
primarily on office-based physicians, whose orders account for
approximately 90% of its net sales. The remaining 10% of net
sales is derived from hospital reference testing, nursing homes,
clinics, referrals from other clinical laboratories and other
clients. The largest client of the Company accounts for less
than 1% of net sales. The Company believes that the loss of any
one client would not have a material adverse effect on its
financial condition. Payment for the Company's services is made
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by the patients directly, physicians who in turn bill their
patients, or third party payors, including public and private
parties such as Medicare, Medicaid and Blue Shield.
Employees
At December 31, 1994, the Company employed approximately
14,000 people. These include approximately 10,500 full-time
employees and approximately 3,500 part-time employees, which
represents the equivalent of approximately 11,800 persons full-
time. Of the approximately 11,800 full-time equivalent
employees, approximately 325 are sales personnel, approximately
10,200 are laboratory and distribution personnel and
approximately 1,275 are administrative and data processing
personnel. The Company has no collective bargaining agreements
with any unions and believes that its overall relations with its
employees are excellent.
Governmental and Industry Regulation
The clinical laboratory industry is subject to significant
governmental regulation at the Federal, state and local levels.
The Company's major laboratories are certified under the
Federal Medicare program (which principally serves patients 65
and older), state Medicaid programs (which principally serve
indigent patients) and CLIA. Where applicable, licensure is
maintained under the laws of state or local governments that have
clinical laboratory regulation programs. In addition, in
facilities where radioimmunoassay testing is performed, the
facilities are licensed by the Federal Nuclear Regulatory
Commission and, where applicable, by state nuclear regulatory
agencies. All of the Company's 23 major laboratories are
accredited by the CAP. In addition, the Company's STAT
laboratories are also certified or licensed, as necessary, under
Federal, state or local programs.
CLIA extends federal oversight to virtually all clinical
laboratories by requiring that laboratories be certified by the
government. Many clinical laboratories must also meet
governmental quality and personnel standards, undergo proficiency
testing and be subject to biennial inspection. Rather than
focusing on location, size or type of laboratory, this extended
oversight is based on the complexity of the tests performed by
the laboratory.
In 1992, HHS published regulations implementing CLIA. The
quality standards and enforcement procedure regulations became
effective in 1992, although certain personnel, quality control
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and proficiency testing requirements are currently being phased
in by HHS. The quality standards regulations divide all tests
into three categories (waivered, moderate complexity and high
complexity) and establish varying requirements depending upon the
complexity of the testing performed. A laboratory that performs
high complexity tests must meet more stringent requirements than
a laboratory that performs only moderate complexity tests, while
those that perform only one or more of eight routine "waivered"
tests may apply for a waiver from most requirements of CLIA. All
major and many smaller facilities of the Company are certified by
CLIA to perform high complexity testing. The remaining smaller
testing sites of the Company are certified by CLIA to perform
moderate complexity testing or have obtained a waiver from most
requirements of CLIA. Generally, the HHS regulations require, for
laboratories that perform high complexity or moderate complexity
tests, the implementation of systems that ensure the accurate
performance and reporting of test results, establishment of
quality control systems, proficiency testing by approved agencies
and biennial inspections.
The sanction for failure to comply with these regulations
may be suspension, revocation or limitation of a laboratory's
CLIA certificate necessary to conduct business, significant fines
and criminal penalties. The loss of a license, imposition of a
fine or future changes in such Federal, state and local laws and
regulations (or in the interpretation of current laws and
regulations) could have a material adverse effect on the Company.
The Company is also subject to state regulation. CLIA
provides that a state may adopt more stringent regulations than
Federal law. For example, state law may require that laboratory
personnel meet certain qualifications, specify certain quality
controls, maintain certain records and undergo proficiency
testing. For example, certain of the Company's laboratories are
subject to the State of New York's clinical laboratory
regulations, which contain provisions that are more stringent
than Federal law.
The Company is subject to licensing and regulation under
Federal, state and local laws relating to the handling and
disposal of medical specimens, infectious and hazardous waste and
radioactive materials as well as to the safety and health of
laboratory employees. All of the Company's laboratories are
operated in accordance with applicable Federal and state laws and
regulations relating to biohazardous disposal of all laboratory
specimens, and the Company utilizes outside vendors for disposal
of such specimens. Although the Company believes that it is
currently in compliance in all material respects with such
Federal, state and local laws, failure to comply could subject
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the Company to denial of the right to conduct business, fines,
criminal penalties and/or other enforcement actions.
In addition to its comprehensive regulation of safety in the
workplace, 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. In addition, in
January 1990, OSHA established safety requirements for the use of
chemicals as reagents and for other purposes.
Drug testing for public sector employees is regulated by the
Substance Abuse and Mental Health Services Administration
("SAMSHA") (formerly the National Institute on Drug Abuse), which
has established detailed performance and quality standards that
laboratories must meet in order to be approved to perform drug
testing on employees of the Federal government, Federal
government contractors and certain other entities. To the extent
that the Company performs such testing, it must be certified as
meeting SAMSHA standards. The Company's Herndon, Virginia;
Nashville, Tennessee; Redmond, Washington; Reno, Nevada; and
Winston Salem, North Carolina laboratories are SAMSHA certified.
The use of controlled substances in testing for drugs of
abuse is regulated by the Federal Drug Enforcement
Administration.
Regulations of the Department of Transportation, the Public
Health Service and the Postal Service apply to the transportation
of clinical laboratory specimens.
In 1994, 1993 and 1992, approximately 35%, 41% and 42%,
respectively, of the Company's revenues were derived from tests
performed for beneficiaries of Medicare and Medicaid programs.
Furthermore, the conduct of the Company's other business depends
substantially on continued participation in these programs
because clients often want a single laboratory to perform all of
their testing services. 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 must
accept the scheduled amount as payment in full for tests that are
subject to reimbursement under the fee schedule methodology and
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performed on behalf of Medicare beneficiaries and must bill the
program directly. In addition, state Medicaid programs are
prohibited from paying more than the Medicare fee schedule amount
for clinical laboratory services furnished to Medicaid
recipients. Since the 1984 establishment of Medicare fee
schedules, Congress has periodically reduced the ceilings on
Medicare reimbursement to clinical laboratories from previously
authorized levels. In 1993, pursuant to provisions in the
Omnibus Budget and Reconciliation Act of 1993 ("OBRA '93"),
Congress reduced, effective January 1, 1994, the Medicare
national limitations from 88% of the 1984 national median to 76%
of the 1984 national median, which reductions are being
implemented on a phased-in basis from 1994 through 1996 (to 84%
in 1994, 80% in 1995 and 76% in 1996). OBRA '93 also eliminated
the provision for annual fee schedule increases based upon the
consumer price index for 1994 and 1995. Because a significant
portion of the Company's costs are relatively fixed, these
Medicare reimbursement reductions have a direct adverse effect on
the Company's net earnings and cash flows. Additional future
changes in Federal, state or local regulations (or in the
interpretation of current regulations) affecting governmental
reimbursement for clinical laboratory testing or the methods for
choosing laboratories eligible to perform tests could have a
material adverse effect on the Company.
On January 1, 1993, numerous changes in the Physicians'
Current Procedural Terminology ("CPT") were published. The CPT
is a coding system that is published by the American Medical
Association. It lists descriptive terms and identifying codes
for reporting medical and medically related services. The
Medicare and Medicaid programs require suppliers, including
laboratories, to use the CPT codes when they bill the programs
for services performed. HCFA implemented these CPT changes for
Medicare and Medicaid on August 1, 1993. The CPT changes have
altered the way the Company bills Medicare and Medicaid for some
of its services, thereby reducing the reimbursement the Company
receives from those programs for some of its services. For
example, certain codes for calculations, such as LDL cholesterol,
were deleted and are no longer a payable service under Medicare
and Medicaid.
In November 1994, HCFA proposed changes in the policies used
to administer Medicare payments to clinical laboratories for the
most frequently performed automated blood chemistry profiles.
Among other things, the proposed changes would establish a
consistent standard nationwide for the content of the automated
chemistry profiles. Another change incorporated in the HCFA
proposal would require laboratories performing certain automated
blood chemistry profiles to obtain and provide documentation of
the medical necessity of tests included in the profiles for each
15
Medicare beneficiary. If such a requirement were to be
established, all laboratories would incur significant additional
costs associated with compliance. In addition, if implemented,
such changes would increase the losses associated with
unreimbursed testing caused by the inability to obtain sufficient
information from physicians to allow the laboratory to file valid
claims with Medicare. The HCFA proposals may be modified or
replaced with other proposals and no prediction can be made
regarding what proposals, if any, will ultimately be adopted.
In November 1990, the Company became aware of a grand jury
inquiry relating to its pricing practices being conducted by the
United States Attorney for the San Diego area (the Southern
District of California) with the assistance of the Office of
Inspector General (the "OIG") of HHS. On December 18, 1992, the
Company announced that it had entered into agreements that
concluded the investigation (the "Government Settlement"). The
settlement revolved around the government's contention that the
Company improperly included its tests for HDL cholesterol and
serum ferritin (a measure of iron in the blood) in its basic
Health Survey Profile, without clearly offering an alternative
profile that did not include these medical tests. The government
also contended that, in certain instances, physicians were told
that these additional tests would be included in the Health
Survey Profile at no extra charge. As a result, the government
contended, the Company's marketing activities denied physicians
the ability to exercise their judgment as to the medical
necessity of these tests.
Pursuant to the Government Settlement, the Company pleaded
guilty to the charge of presenting two false claims to the
Civilian Health and Medical Program of the Uniformed Services
("CHAMPUS") and paid a $1 million fine. In connection with
pending and threatened civil claims, the Company also agreed to
pay $100 million to the Federal government, of which $89 million
has been paid and $11 million will be paid in quarterly
installments through September 30, 1995. Concurrently, the
Company settled related Medicaid claims with states that account
for over 99.5% of its Medicaid business and has paid $10.4
million to the settling states.
As a result of these settlements, the Company took a one-
time pre-tax charge of $136.0 million in the fourth quarter of
1992, which reduced net earnings for the quarter and year ended
December 31, 1992 by $80.3 million. Earnings per share for the
fourth quarter and year were each reduced by $0.85. The charge
covered all estimated costs related to the investigation and the
settlement agreements. The Company will continue to receive
reimbursements from all government third party reimbursement
programs, including Medicare, Medicaid and CHAMPUS, under the
settlement agreements. (The Company made changes to requisition
16
forms, pricing and compendia of tests following the settlement.
See "--Managements' Discussion and Analysis of Financial
Condition and Results of Operations").
In September 1993, the Company was served with a subpoena
issued by the OIG, which required the Company to provide
documents to the OIG concerning its regulatory compliance
procedures. The Company has provided documents to the OIG in
response to the subpoena and continues to be in contact with the
OIG through its outside attorneys.
In August 1993, Allied received a subpoena from the OIG
requesting a broad range of documents and certain information
relating to its pricing and billing practices. According to
published reports, other independent clinical laboratories also
received subpoenas as part of what appears to be a nationwide
audit and investigation.
The OIG subpoena received by Allied called for the
production of documents regarding 14 blood chemistry tests which
were being or had been performed by certain independent clinical
laboratories in conjunction with automated chemistry profiles and
which were being or had been filed separately to Medicare or
Medicaid. An automated chemistry profile is a grouping of up to
23 tests that can be performed together on a single specimen and
that Medicare and Medicaid pay for under the Medicare fee
schedule.
Based on published reports, the Company believes that the
OIG's investigation is primarily focused on two alleged
practices. The first alleged practice consists of offering the
automated chemistry profile as part of a "standard" blood
chemistry profile that also includes one or more of the 14 tests
referenced in the OIG subpoena in a manner which is misleading to
the ordering physician or which fails to provide the physician
with the choice of ordering only the automated chemistry profile.
Representatives of the OIG have publicly stated that this
practice may lead to the ordering of "unnecessary" tests. The
second alleged practice involves the failure to disclose to
physicians that the prices charged by those laboratories to
Medicare and Medicaid for many of these tests referenced in the
OIG subpoena were greater than the prices the laboratories
charged to the physicians for those same tests when the tests
were performed in conjunction with an automated chemistry
profile. Representatives of the OIG have publicly stated that
undisclosed pricing differences may cause physicians to believe
incorrectly that they are ordering tests at little or no cost to
the Medicare and Medicaid programs, possibly causing tests to be
ordered which are not medically necessary. Allied's laboratories
17
have included some of the 14 tests in its "standard" blood
chemistry profile and also in "custom" profiles created for
individual physicians at their request. Tests performed for
Medicare and Medicaid patients are, in accordance with applicable
laws, billed directly to the Medicare and Medicaid programs.
In April 1994, Allied received a subpoena from the OIG
requesting documents and certain information regarding the
Medicare billing practices of its Cincinnati, Ohio clinical
laboratory with respect to certain cancer screening tests. In
connection with Allied's assembling of documents responding to
this subpoena, representatives of the Company and Allied became
aware that the nature of the possible problems associated with
the billing practices of that laboratory may have been both
different and greater than previously perceived by Allied and the
Company. As a result, Allied and the Company agreed to reduce
the acquisition price for the Allied Acquisition from $23.00 per
share to $21.50 per share, or an aggregate of $12.6 million. The
Company and Allied are continuing to investigate these possible
problems and have communicated with the OIG and the United States
Department of Justice regarding its subpoena and a related qui
tam action commenced in a Cincinnati, Ohio Federal court, and
they are cooperating fully with the governmental investigation of
Allied's Cincinnati laboratory. The Company has established
reserves which it believes are adequate to cover any liability
associated with these matters.
Potential sanctions in connection with the OIG investigation
for violations of the laws related to the Medicare and Medicaid
programs may include significant fines, recovery of the amounts
paid to the clinical laboratory for the tests involved and, in
the case of a criminal conviction, mandatory exclusion from the
Medicare and Medicaid programs for a period of at least five
years. If the OIG asserts a claim against Allied and is
successful in pursuing such a claim, the Company's business and
financial condition could be adversely affected. Although
neither the Government Settlement nor, based on published
reports, any settlement agreements with OIG entered into by other
major clinical laboratory companies, provided for exclusion from
participation in the Medicare and Medicaid programs, there can be
no assurance that Allied will be able to negotiate settlement
agreements with similar terms if the government asserts (or
threatens to assert) a claim. In addition, a criminal conviction
or the successful prosecution of a civil fraud or false claims
action could result in the exclusion of the defendant from the
Medicare and Medicaid programs. Any such exclusion would likely
have a material adverse effect on the Company's non-Medicare and
non-Medicaid testing business. No claim has been asserted by the
18
OIG against Allied, however, no prediction can be made as to the
outcome of the investigation or the impact of such outcome on the
Company's financial condition or results of operations.
The Medicare and Medicaid anti-kickback laws prohibit
intentionally paying anything of value to influence the referral
of Medicare and Medicaid business. HHS has published safe harbor
regulations which specify certain business activities that do not
violate the Medicare/Medicaid anti-kickback laws. Failure to
fall within a safe harbor does not constitute a violation of the
anti-kickback laws; rather, the arrangement would remain subject
to scrutiny by HHS.
In March 1992, HCFA published proposed regulations to
implement the Medicare statute's prohibition (with certain
exceptions) on referrals by physicians who have an investment
interest in or a compensation arrangement with laboratories. The
prohibition on referrals also applies where an immediate family
member of a physician has an investment interest or compensation
arrangement with a laboratory. The proposed regulations would
define remuneration that gives rise to a compensation arrangement
as including discounts granted by a laboratory to a physician who
sends testing business to the laboratory and who pays the
laboratory for such services. If that definition of remuneration
were to have become effective, it could have had an impact on the
way the Company prices its services to physicians. However, in
August 1993, the referenced Medicare statute was amended by OBRA
'93. One of these amendments makes it clear that day-to-day
transactions between laboratories and their customers, including,
but not limited to, discounts granted by laboratories to their
customers, are not affected by the compensation arrangement
provisions of the Medicare statute. Thus, the Company expects
the definition of remuneration in HCFA's proposed regulations
will be changed to reflect this amendment to the Medicare
statute. Currently, these proposed regulations have not been
finalized.
In October 1994, the OIG issued a Special Fraud Alert, which
set forth a number of practices allegedly engaged in by clinical
laboratories and health care providers that the OIG believes
violate the anti-kickback laws. These practices include
providing employees to collect patient samples at physician
offices if the employees perform additional services for
physicians that are typically the responsibility of the
physicians' staff; selling laboratory services to renal dialysis
centers at prices that are below fair market value in return for
referrals of Medicare tests which are billed to Medicare at
higher rates; providing free testing to a physician's HMO
patients in situations where the referring physician benefits
19
from such lower utilization; 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 which 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 Fraud Alert that when one purpose of the arrangements is to
induce referral of program-reimbursed laboratory testing, both
the clinical laboratory and the health care provider or physician
may be liable under the anti-kickback laws and may be subject to
criminal prosecution and exclusion from participation in the
Medicare and Medicaid programs.
According to the 1995 work plan of the OIG, its recently
established Office of Civil Fraud and Administrative Adjudication
("OCFAA") will be responsible for protecting the government-
funded health care programs and deterring fraudulent conduct by
health care providers through the negotiations and imposition of
civil monetary penalties, assessments and program exclusions.
The OCFAA works very closely with the Department of Justice, the
Office of General Counsel and the OIG investigative and audit
offices in combatting fraud and abuse. In addition, the OIG has
stated in its 1995 work plan that it will determine the extent to
which laboratories supply physicians' offices with phlebotomists
(blood-drawing technicians), offer management services or medical
waste pick-up to physicians, provide training to physicians or
engage in other financial arrangements as well as the extent to
which such arrangements might be unlawful.
The health care industry is undergoing significant change as
third party payers, such as Medicare and Medicaid and insurers,
increase their efforts to control the cost, utilization and
delivery of health care services. In an effort to address this
problem of increasing health care costs, legislation has been
proposed or enacted at both the Federal and state levels to
regulate health care delivery in general and clinical
laboratories in particular. Some of the proposals include
managed competition, global budgeting and price controls.
Although the Clinton Administration's health care reform proposal
was not enacted by the 103rd Congress, such proposal or other
proposals may be considered in the future. In particular, the
Company believes that reductions in reimbursement for Medicare
services will continue to be implemented from time to time.
Reductions in the reimbursement rates of other third party payers
may occur as well. The Company cannot predict the effect health
care reform, if enacted, would have on its business, and there
can be no assurance that such reforms, if enacted, would not have
a material adverse effect on the Company's business and
20
operations.
In addition to general health care reform, the Federal
government has been examining the rapid growth of Federal
expenditures for clinical laboratory services. Several Federal
agencies are responsible for investigating allegations of
fraudulent and abusive conduct by health care providers,
including the Federal Bureau of Investigation and the OIG. In
its published work plan for 1992-1993, the OIG indicated its
intention to target certain laboratory practices for
investigation and prosecution. Pursuant to one such project
described in such work plan, entitled "Laboratory Unbundle,"
laboratories that offer packages of tests to physicians and
"unbundle" them into several "tests to get higher reimbursement
when billing Medicare and Medicaid" will be identified and
"suitable cases will be presented for prosecution." Under
another project described in such work plan, laboratories "that
link price discounts to the volume of physician referrals,
"unbundle" tests in order to bill Medicare at a higher total
rate, and conduct unnecessary tests . . . will be identified to
coordinate investigations throughout the country."
Compliance Program
Because of evolving interpretations of regulations and the
national debate over health care, compliance with all Medicare,
Medicaid and other government-established rules and regulations
has become a significant factor throughout the clinical
laboratory industry. The Company began the implementation of a
new compliance program in late 1992 and early 1993. The
objective of the program is to develop aggressive and reliable
compliance safeguards. Emphasis is placed on developing training
programs for personnel to attempt to assure the strict
implementation of all rules and regulations. Further, in-depth
reviews of procedures, personnel and facilities are conducted to
assure regulatory compliance throughout the Company. Such
sharpened focus on regulatory standards and procedures will
continue to be priority for the Company in the future.
The Company believes that it is in compliance in all
material respects with all statutes, regulations and other
requirements applicable to its clinical laboratory operations.
The clinical laboratory testing industry is, however, subject to
extensive regulation, and many of these statutes and regulations
have not been interpreted by the courts. There can be no
assurance therefore that applicable statutes and regulations
might not be interpreted or applied by a prosecutorial,
regulatory or judicial authority in a manner that would adversely
affect the Company. Potential sanctions for violation of these
21
statutes and regulations include significant fines and the loss
of various licenses, certificates and authorizations.
Competition
The clinical laboratory testing business is highly
fragmented and intensively competitive. The Company believes
that there are many clinical laboratory companies which provide a
broad range of laboratory testing services in the same markets
serviced by the Company. Among the Company's national
competitors are MetPath Inc. (a subsidiary of Corning, Inc.
("Corning")), RBL (see "Recent Developments") and SmithKline
Beecham Clinical Laboratories, Inc. According to HCFA, there are
over 151,000 federally regulated clinical laboratories, of which
approximately 5,700 are independent laboratories and the
remainder were hospital-based laboratories and physician-owned
laboratories.
In recent years, certain independent laboratories have
engaged in acquisitions of other laboratories and taken advantage
of opportunities for cost efficiencies afforded by larger scale,
automated testing operations. In June 1994, the Company acquired
Allied. Also in 1994, Corning, Inc. acquired Nichols Institute
in exchange for Corning common stock. In 1993, Corning acquired
the stock of Damon Corporation. In December 1994, the Company
entered into the Merger Agreement providing for, among other
things, the merger of RBL with and into the Company. The Company
believes that acquisition activity will continue in the clinical
laboratory business. Several factors are contributing to this
activity, including legislative initiatives such as restrictions
on physician referrals and ownership of laboratories, increasing
demand for higher quality services and more stringent service
requirements, the growth of managed health care entities which
require low-cost testing services and, generally, the demands by
health care providers and payers for faster reporting of test
results and lower prices.
The Company competes primarily on the basis of the quality
of its testing, reporting and information services, its
reputation in the medical community, the pricing of its services
and its ability to employ qualified laboratory personnel. The
Company believes that its ability to compete also depends on its
ability to make investments in equipment and management
information systems and offer testing services on a broad
regional geographic basis.
22
Item 2. PROPERTIES
The principal properties of the Company are its leased
corporate headquarters located in La Jolla, California, Allied's
corporate offices located in Nashville, Tennessee and the
following major laboratory facilities:
Approximate
Area Nature of
Location (in square feet) Occupancy
------------------- --------------- ------------------------
Birmingham, Alabama 20,854 Lease expires 1997; one
4 year renewal option
Phoenix, Arizona 43,024 Lease expires 2001; one
5 year renewal option
San Diego, California 40,167 Lease expires 2000
Denver, Colorado 19,982 Lease expires 2001; two
5 year renewal options
Hollywood, Florida 46,500 Lease expires 1997; three
5 year renewal options
St. Petersburg, Florida 26,667 Lease expires 1995; two
5 year renewal options
Tampa, Florida 26,600 Lease expires 2002; one
5 year renewal option
Chicago, Illinois 40,065 Lease expires 2003; two
5 year renewal options
Louisville, Kentucky 60,000 Lease expires 2002; three
5 year renewal options
Detroit, Michigan 32,000 Lease expires 2004; two
5 year renewal options
Reno, Nevada
(888 Willow Street) 12,000 Owned
(704 Mill Street) 12,000 Lease expires 1998; one
2 year renewal option;
and
(704 Mill Street) 1,645 Lease expires 2003; one
2 year renewal option
Cranford, New Jersey 80,900 Lease expires 2009
Uniondale, New York 108,000 Lease expires 2007; two
5 year renewal options
Cincinnati, Ohio 30,000 Lease expires 2002; one
10 year renewal option
Winston-Salem,
North Carolina 73,500 Lease expires 2004; one
5 year renewal option
Chattanooga, Tennessee
(863 McCallie Avenue) 18,300 Owned
(1501 Riverside Drive) 30,000 Lease expires 2012
23
Approximate
Area Nature of
Location (in square feet) Occupancy
------------------- --------------- -----------------------
Nashville, Tennessee
NRL I 52,165 Lease expires 2000; two
5 year renewal options
NRL II 25,640 Lease expires 2000; two
5 year renewal options
Dallas, Texas 53,694 Lease expires 2004; one
5 year renewal option
Houston, Texas 32,368 Lease expires 1997
San Antonio, Texas 44,000 Lease expires 2004; two
5 year renewal options
Salt Lake City, Utah 20,000 Lease expires 2002; two
5 year renewal options
Herndon, Virginia 64,172 Lease expires 2004; one
5 year renewal option
Seattle, Washington 34,900 Lease expires 2000; two
5 year renewal options
Construction of a new laboratory to consolidate the
Company's Tampa and St. Petersburg, Florida facilities began in
the fourth quarter of 1994 and is expected to be completed in the
third quarter of 1995.
All of the major laboratory facilities have been built or
improved for the single purpose of providing clinical laboratory
testing services. The Company believes that these facilities are
suitable and adequate and have sufficient production capacity for
its currently foreseeable level of operations. The Company
believes that if it were to lose the lease on any of the
facilities it presently leases, it could find alternate space at
competitive market rates and readily relocate its operations to
such new locations without material disruption to its operations.
24
Item 3. LEGAL PROCEEDINGS
The Company is involved in certain claims and legal actions
arising in the ordinary course of business. In the opinion of
management, based upon the advice of counsel, the ultimate
disposition of these matters will not have a material adverse
effect on the financial position or results of operations of the
Company.
In 1994, the Company approved a settlement of previously
disclosed shareholder class and derivative litigation. As
previously disclosed, the litigation consisted of two consolidated
class action suits filed in December 1992 and November 1993 and
a consolidated shareholder derivative action brought in Federal
and state courts in San Diego, California. The settlement involved
no admission of wrongdoing. In connection with the settlement,
the Company took a pre-tax special charge of $15.0 million and a
$6.0 million charge for expenses related to the settled litigation.
Insurance payments and payments from other defendants aggregate
$55.0 million plus expenses.
During 1994, the Company learned of the existence of a
federal qui tam action regarding Allied's Medicare billing
practices at its Cincinnati, Ohio facility. As previously
disclosed, Allied also received a subpoena from the OIG in 1994
regarding these practices. The Company has been cooperating
fully with the governmental investigation of Allied's Cincinnati
facility. The Company has established reserves which it believes
are adequate to cover any liability associated with these
matters.
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.
25
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
On April 24, 1991, the common stock commenced trading on the
New York Stock Exchange ("NYSE") under the symbol "NH". Prior to
such time, the common stock was quoted on the National Market
System of the National Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ") under the symbol "NHLI".
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, and the cash dividends
declared per share of common stock.
Dividends
Declared
High Low Per Share
--------------------------------------------------------------
1993
First Quarter $18 1/4 $12 7/8 $0.08
Second Quarter 19 1/2 16 1/8 0.08
Third Quarter 18 1/2 14 1/2 0.08
Fourth Quarter 16 3/8 12 0.08
1994
First Quarter 15 1/4 12 7/8 0.08
Second Quarter 13 3/4 10 5/8 --
Third Quarter 13 3/8 10 7/8 --
Fourth Quarter 15 3/4 11 3/8 --
1995
First Quarter (through
February 21, 1995) 14 1/2 12 5/8 --
On February 9, 1995, there were approximately 574 holders of
record of the common stock.
The Company, in connection with the Allied Acquisition, has
discontinued its dividend payments for the foreseeable future in
order to increase its flexibility with respect to both its
acquisition strategy and stock repurchase plan. In addition,
Intermediate Holdings II's revolving credit facility (the
"Revolving Credit Facility") and term loan facility (the "Term
Facility" and, together with the Revolving Credit Facility, the
"Bank Facility") entered into in June 1994 contains, among other
provisions, a covenant prohibiting the declaration or payment of
cash dividends to stockholders if, after giving effect to such
action, a default (as defined by the terms of the Bank Facility)
shall occur and be continuing.
26
Item 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the
captions "Statement of Earnings Data" and "Balance Sheet Data" as
of and for each of the years in the five-year period ended
December 31, 1994 are derived from consolidated financial
statements of the Company, which financial statements have been
audited by KPMG Peat Marwick LLP, independent certified public
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,
---------------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- -----
(Dollars in millions, except per share amounts)
Statement of Earnings Data:
Net sales . . . . . . . . . $ 872.5 $ 760.5 $ 721.4 $ 603.9 $ 501.9
Gross profit . . . . . . . . 275.5 316.0 326.3 271.4 222.6
Operating income (a) . . . . 109.9 185.5 64.1 165.8 133.1
Net earnings (a) (b) . . . . 30.1 112.7 40.6 103.9 82.6
Earnings per common
share (a) (b) (c) . . . . . $ 0.36 $ 1.26 $ 0.43 $ 1.05 $ 0.83
Dividends per common
share subsequent to
initial public
offering (d) . . . . . . . $ 0.08 $ 0.32 $ 0.31 $ 0.27 $ 1.58
Weighted average
common shares
outstanding (in
thousands) (c) . . . . . . 84,754 89,439 94,468 99,096 99,048
December 31,
---------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
Balance Sheet Data:
Cash and cash equivalents . $ 26.8 $ 12.3 $ 33.4 $ 51.3 $ 45.8
Intangible assets, net (e) . 551.9 281.5 188.3 193.1 192.7
Total assets (e) . . . . . . 1,012.7 585.5 477.4 411.3 374.2
Long-term obligations
(a)(c)(f)(g). . . . . . . 583.0 314.6 114.2 2.9 0.9
Due to affiliates (d) . . . -- 0.1 0.9 -- 66.4
Total stockholders'
equity (c) (d) . . . . . . 166.0 140.8 212.5 330.8 256.7
27
<FN>
(a) In the fourth quarter of 1992, the Company took a one-time charge
against operating income of $136.0 million related to the Government
Settlement. At December 31, 1993, the long-term portion representing
payments for settlement and related expenses due in 1995 was $11.5
million.
(b) In 1994, the Company approved a settlement of previously disclosed
shareholder class and derivative litigation. In connection with the
settlement, the Company took a pre-tax special charge of $15.0 million
and a $6.0 million charge for expenses related to the settled
litigation. Insurance payments and payments from other defendants
amounted to $55.0 million plus expenses. As previously disclosed, the
litigation consisted of two consolidated class action suits filed in
December 1992 and November 1993 and a consolidated shareholder
derivative action brought in Federal and state courts in San Diego,
California. The settlement involved no admission of wrongdoing.
(c) On January 16, 1992, the Company purchased 4,808,000 shares of its
outstanding common stock from its stockholders pursuant to a tender
offer (the "Tender Offer"). The Company borrowed $100.0 million under a
revolving credit facility in existence at that time and used $25.8
million of cash on hand to finance the Tender Offer. During 1993 and
1992, the Company made open market purchases of 9,485,800 and 310,000 of
its outstanding shares of common stock, respectively, for an aggregate
amount of $154.2 million and $6.1 million, respectively. Such purchases
were financed with cash on hand and borrowings under revolving credit
facilities in existence at such time. At December 31, 1993 and 1992,
$278.0 million and $75.0 million, respectively, was outstanding on the
revolving credit facilities in existence on those dates. In connection
with the corporate reorganization on June 7, 1994, all of the 14,603,800
treasury shares held by NHLI were cancelled. As a result, the $286.1
million value assigned to such treasury shares was eliminated with
corresponding decreases in the par value, additional paid-in capital,
and retained earnings of $0.2 million, $72.3 million and $213.6 million,
respectively.
(d) In July 1990, the Company paid a special dividend of $150.6 million
($1.52 per share). Due to affiliates at December 31, 1990 principally
represents borrowings from Revlon in the original principal amount of
$77.0 million incurred in connection with the special dividend paid in
1990, net of an $11.0 million principal payment made in 1990. All
remaining amounts due to affiliates were paid at a discount in December
1991.
(e) On June 23, 1994, the Company acquired Allied as a wholly owned
28
subsidiary for approximately $191.5 million in cash plus the assumption
of $24.0 million of Allied indebtedness and the recognition of
approximately $5.0 million of Allied net liabilities. The purchase was
financed with borrowings under the Bank Facility. The excess of cost
over the fair value of net tangible assets acquired was $220.5 million
and is included under the caption "Intangible assets, net." During 1994,
the Company also acquired 11 small clinical laboratory companies for an
aggregate amount of $46.4 million in cash plus the recognition of $32.9
million of liabilities. The cash portion of these acquisitions was
financed with cash on hand and borrowings under the revolving credit
facilities in existence at the time of the acquisitions and the Bank
Facility. The excess of cost over the fair value of net tangible assets
acquired was $72.1 million and is included under the caption "Intangible
assets, net." During 1993, the Company acquired thirty-four clinical
laboratory companies for an aggregate amount of $78.2 million in cash
plus the recognition of $28.7 million of liabilities, comprised primarily
of future contractual and contingent payments. The cash portion of such
purchases was financed with cash on hand and borrowings under revolving
credit facilities in existence at the time of the acquisitions. The
excess of cost over the fair value of net tangible assets acquired was
$100.1 million and is included under the caption "Intangible assets,
net".
(f) In the fourth quarter of 1992, the Company relocated its Long Island-
based laboratory to a newly constructed facility. The transaction is
treated as a capital lease for financial reporting purposes; as such,
the associated long-term lease obligation totalled $9.8 million, $9.7
million and $9.6 million at December 31, 1994, 1993 and 1992,
respectively.
(g) Long-term debt includes the expected value of long-term future
contractual and contingent amounts to be paid to the principals of
acquired clinical laboratory companies. Such payments are primarily
based on a percentage of future revenues derived from the acquired
customer lists or specified amounts to be paid over a period of time.
At December 1994, 1993, 1992, 1991 and 1990, such amounts were $19.2
million, $15.4 million, $1.6 million, $2.9 million and $0.9 million,
respectively.
</FN>
29
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company derives approximately 35% of its net sales from
tests performed for beneficiaries of Medicare and Medicaid
programs. Several changes have been made which adversely affect
the reimbursement the Company receives from such programs. On
January 1, 1993, numerous changes in the CPT were published which
became effective on August 1, 1993. These changes adversely
affect the reimbursement the Company receives on some of its
services that are billed to the Medicare and Medicaid programs.
For example, certain codes for calculations, such as LDL
cholesterol, were deleted and are no longer a payable service
under Medicare and Medicaid. Had such changes been implemented
as of January 1, 1993, the Company estimates that 1993 net sales
would have been reduced by approximately $7 million.
During 1993, provisions were included in OBRA '93 which
reduced Medicare reimbursement schedules by lowering payments
under the fee schedule methodology from 88% to 84% of the 1984
national median, effective January 1, 1994 and from 84% to 80% of
the national median, effective January 1, 1995. The Company
estimates that the change effective January 1, 1995 would have
decreased 1994 net sales by approximately $11 million had it been
implemented as of January 1, 1994. A further reduction in
payments to 76% of the 1984 national median will become effective
on January 1, 1996. OBRA '93 also eliminated, for 1994 and 1995,
the provision for annual fee schedule increases based upon the
consumer price index.
In the latter part of 1993, the Company held discussions
with HCFA concerning the reimbursement policy for serum ferritin
and HDL cholesterol tests. HCFA expressed concerns that the
incidence of orders of these tests by physicians remained too
high despite changes in the Company's requisition forms, pricing
and compendia of tests instituted after the Government
Settlement. As a result of a HCFA directive to Medicare
carriers, the Company began to receive denials of claims
submitted in September 1993 for serum ferritin and HDL
cholesterol tests ordered by physicians and performed in
conjunction with automated chemistry panels. Such denials and
related suspended billings reduced the Company's 1993 net sales
by approximately $18.6 million.
The Company has undertaken actions with regard to HCFA's
concerns. The Company has removed the serum ferritin and HDL
cholesterol tests from all standard chemistry profiles offered on
its test requisition forms. These tests may be ordered
separately or as part of a custom designed profile where specific
authorization is provided by the requesting physician. The
30
Company estimates that the effect of these changes reduced net
sales in 1994 by approximately $60 million.
The health care industry is undergoing significant change as
third party payers, such as Medicare and Medicaid and insurers,
increase their efforts to control the cost, utilization and
delivery of health care services. In an effort to address this
problem of increasing health care costs, legislation has been
proposed or enacted at both the Federal and state levels to
regulate health care delivery in general and clinical
laboratories in particular. Some of the proposals include
managed competition, global budgeting and price controls.
Although the Clinton Administration's health care reform proposal
was not enacted by the 103rd Congress, such proposal or other
proposals may be considered in the future. In particular, the
Company believes that reductions in reimbursement for Medicare
services will continue to be implemented from time to time.
Reductions in the reimbursement rates of other third party payers
may occur as well. The Company cannot predict the effect health
care reform, if enacted, would have on its business, and there
can be no assurance that such reforms, if enacted, would not have
a material adverse effect on the Company's business and
operations.
Year Ended December 31, 1994 compared with Year Ended December
-----------------------------------------------------------------
31, 1993
--------
Net sales increased by $112.0 million to $872.5 million in
1994, an increase of 14.7% over 1993. The inclusion of Allied
since June 23, 1994 increased net sales by approximately $96.8
million or 12.7%. Revenues generated by new accounts and
numerous acquisitions of small clinical laboratory companies
increased net sales by approximately 9.6% and 11.4%,
respectively. In addition, a price increase, effective April 1,
1994, increased net sales for 1994 by approximately 1.8%. A
reduction in Medicare's fee schedules from 88% to 84% of the 1984
national median effective on January 1, 1994, plus changes in
reimbursement policies of various third party payors, reduced net
sales by approximately 3.1%. Other factors, in order of
decreasing magnitude, comprised the remaining reduction in net
sales as follows: declines in the level of HDL cholesterol and
serum ferritin testing, lower utilization of laboratory testing,
price erosion in the industry as whole and severe weather in the
first quarter of 1994. The Company believes that the decline in
utilization was due to fewer patient visits to physicians'
offices since the number of tests ordered per patient remained
relatively constant. Revenues derived from tests performed for
beneficiaries of Medicare and Medicaid programs were
approximately 35% and 41% of net sales in 1994 and 1993,
respectively.
31
Cost of sales, which primarily includes laboratory and
distribution costs, increased to $597.0 million in 1994 from
$444.5 million in 1993. Of the $152.5 million increase,
approximately $66.6 million was due to the inclusion of the cost
of sales of Allied since June 23, 1994, approximately $62.3
million was a result of higher testing volume, and approximately
$7.0 million was due to an increase in phlebotomy staffing to
improve client service and meet competitive demand. Rental of
premises increased approximately $2.7 million due to the
expansion and/or relocation of existing facilities to accommodate
increased volume and the full year impact of expanding the number
of patient service centers by 50% during 1993. The remaining
increase resulted primarily from higher compensation and
insurance expenses. As a percentage of net sales, cost of sales
increased to 68.4% in 1994 from 58.4% in 1993. The increase in
the cost of sales percentage primarily resulted from a reduction
in net sales due to a reduction in Medicare fee schedules,
pricing pressures and utilization declines, each of which provide
little corresponding reduction in costs.
Selling, general and administrative expenses increased to
$149.3 million in 1994 from $121.4 million in 1993, an increase
of $27.9 million. Approximately $21.7 million of the increase
was due to the inclusion of the selling, general and
administrative expenses of Allied since June 23, 1994.
Approximately $3.9 million of the increase was a result of a non-
recurring charge in the fourth quarter of 1994 for lease costs
and the write-off of leasehold improvements related to the
relocation of certain of the Company's regional laboratories.
The remaining increase was primarily due to expansion of data
processing and billing departments due to increased volume and to
improve client service. As a percentage of net sales, selling,
general and administrative expenses increased to 17.1% in 1994
compared with 16.0% in 1993. The increase in the selling,
general and administrative percentage primarily resulted from a
reduction in net sales, as discussed above, that provided little
corresponding reduction in costs.
Management expects net sales to continue to grow through
strategic acquisitions and the addition of new accounts, although
there can be no assurance that the Company will experience such
growth. Reductions in Medicare fee schedules, pursuant to OBRA
'93, to 80% of the 1984 national median, effective January 1,
1995, followed by an additional reduction to 76% of such median
on January 1, 1996, are expected to negatively impact net sales,
cost of sales as a percentage of net sales and selling, general
and administrative expenses as a percentage of net sales in the
future. Management does not expect future increases in cost of
sales as a percentage of net sales and selling, general and
32
administrative expenses as a percentage of net sales of the
magnitude experienced in the year ended December 31, 1994.
Management cannot predict if price erosion or utilization
declines will continue or their ultimate effect on net sales or
results of operations. It is the objective of management to
partially offset the increase in cost of sales as a percentage of
net sales and selling, general, and administrative expenses as a
percentage of net sales through comprehensive cost reduction
programs at each of the Company's regional laboratories, although
there can be no assurance of the success of such programs.
The increase in amortization of intangibles and other assets
to $16.3 million in 1994 from $9.1 million in 1993 primarily
resulted from the acquisition of Allied and several small
clinical laboratory companies during 1994 and 1993.
In the third quarter of 1994, the Company approved a
settlement of previously disclosed shareholder class and
derivative litigation. As previously disclosed, the litigation
consisted of two consolidated class action suits and a consolidated
shareholder derivative action brought in Federal and state courts
in San Diego, California. The settlement involved no admission
of wrongdoing. In connection with the settlement, the Company
took a pre-tax special charge of $15.0 million and a $6.0 million
charge for expenses related to the settled litigation. Insurance
payments and payments from other defendants aggregate $55.0 million
plus expenses.
Other gains and expenses in 1993 include expense
reimbursement and termination fees of $21.6 million received in
connection with the Company's attempt to purchase Damon
Corporation, less related expenses and the write-off of certain
bank financing costs aggregating $6.3 million, resulting in a
one-time pre-tax gain of $15.3 million.
Net interest expense was $33.5 million in 1994 compared to
$9.7 million in 1993. The increase resulted primarily from
increased borrowings used to finance the Allied Acquisition in
June 1994, the acquisition of numerous small laboratory companies
during both 1994 and 1993 and repurchases of the Company's common
stock in 1993. Higher average interest rates also contributed to
the increase in net interest expense.
The provision for income taxes as a percentage of earnings
before income taxes increased to 45.7% in 1994 from 41.0% in
1993, primarily due to a higher effective tax rate for both
Federal and state income taxes.
33
Year Ended December 31, 1993 compared with Year Ended December
-----------------------------------------------------------------
31, 1992
--------
Net sales increased by $39.1 million to $760.5 million in
1993, an increase of 5.4% over 1992. Revenues generated by new
accounts increased net sales by approximately 12.0%. The
acquisition of thirty-four small clinical laboratory companies
increased the growth in net sales by approximately 3.5%. In
addition, net sales for 1993 increased approximately 2.7% because
of the Company's annual price increases (effective in January of
1993). Changes in Medicare's reimbursement policy for LDL tests,
coupled with changes in various state Medicaid fee schedules and
reimbursement methodologies partially offset the increase in net
sales by approximately 1.0%. Medicare's denial of claims for HDL
cholesterol and serum ferritin tests, which began in September
1993 and continued through December 20, 1993 when the Company
introduced new test forms and procedures, and related suspended
billings also offset the increase in net sales by approximately
2.6%. Additionally, a decline in the utilization of laboratory
services, and, to a lesser extent, severe weather in the first
three months of the year further offset the increase in net sales
by approximately 7.3%. Improved accuracy in estimating the
difference between amounts billed and amounts received for
services provided under third party payor programs, primarily due
to the wider use of specific fee schedules for individual third
party carriers, resulted in an increase in the growth in net
sales of 1.6%. The aggregate impact of various other factors,
including discounts granted to meet competitive pressure and
movement between payor mix categories, reduced the growth in net
sales by approximately 3.5%. Revenues derived from tests
performed for beneficiaries of Medicare and Medicaid programs
were approximately 41% and 42% of net sales in 1993 and 1992,
respectively.
The Company actively pursued acquisitions of small clinical
laboratory companies during 1993. The laboratory industry is
consolidating rapidly as smaller, less efficient organizations
are experiencing decreasing profitability in the current health
care environment. The purchase of thirty-four small
laboratories, primarily in the second half of 1993, increased net
sales for the year by approximately $25 million. Had all such
acquisitions occurred as of the beginning of 1993, the aggregate
contribution to net sales is estimated to have been approximately
$81 million.
Cost of sales primarily includes laboratory and distribution
costs, a substantial portion of which varies directly with sales.
Cost of sales increased to $444.5 million in 1993 from $395.1
million in 1992. As a percentage of net sales, cost of sales
increased to 58.4% in 1993 from 54.8% in 1992. Labor costs
34
increased approximately 2.7% of net sales, primarily as a result
of an increase in phlebotomy staffing to improve client service
and meet competitive demands. Rental of premises also grew
approximately 0.3% of net sales due to expanding the number of
patient service centers by 50% during 1993. Higher capital
spending led to increased depreciation expenses of approximately
0.3% of net sales. Also, several expense categories increased
slightly, aggregating approximately 0.3% of net sales. The
Company continued to focus on cost savings as part of an ongoing
program to improve its cost structure. Internal operating
reviews were completed in 15 of the Company's 16 laboratories
which were in operation during 1993.
Selling, general and administrative expenses increased to
$121.4 million in 1993 from $117.9 million in 1992, an increase
of $3.5 million. As a percentage of net sales, selling, general
and administrative expenses decreased slightly to 16.0% in 1993
compared with 16.3% in 1992. This was primarily due to a
reduction in the provision for doubtful accounts, reflecting
improvements in the collection of delinquent accounts, and also a
result of reduced spending for the relocation of Company
employees and for legal services. These changes more than offset
an increase in labor costs related to staffing added during 1993
to improve billing customer service and expand the Company's
information systems group.
The increase in amortization of intangibles and other assets
to $9.1 million in 1993 from $8.3 million in 1992 primarily
resulted from the acquisition of several small clinical
laboratory companies during 1993.
Other gains and expenses include expense reimbursement and
termination fees of $21.6 million received in connection with the
Company's attempt to purchase Damon Corporation, less related
expenses and the write-off of certain bank financing costs
aggregating $6.3 million, resulting in a one-time pre-tax gain of
$15.3 million.
Investment income decreased to $1.2 million in 1993 from
$2.2 million in 1992 and interest expense increased to $10.9
million in 1993 from $4.2 million in 1992. During 1993, cash in
excess of operating requirements and increased borrowings were
used to finance acquisitions of numerous small clinical
laboratory companies and to finance purchases by the Company of
its common stock.
The provision for income taxes as a percentage of earnings
before income taxes increased to 41.0% in 1993 from 34.6% in
1992, primarily due to the increase in the U.S. corporate tax
35
rates and as a result of a higher effective rate for state income
taxes.
Liquidity and Capital Resources
The Company has entered into the Merger Agreement with HLR,
RBL, and (for the purposes set forth in the Merger Agreement)
Roche providing for, among other things, the merger of RBL with
and into the Company with the Company as the surviving
corporation, and pursuant to which, subject to certain
exceptions, each outstanding share of common stock, par value
$0.01 per share, of the Company, will be converted into (i) 0.72
of a share of common stock of the Company and (ii) the right to
receive $5.60 in cash, without interest.
In addition, all shares of common stock, no par value, of
RBL issued and outstanding immediately prior to the effective
time of the Merger (other than treasury shares, which will be
canceled) will be converted into, and become, that number of
newly issued shares of Company common stock as would, in the
aggregate and after giving effect to the Merger and the Company
common stock owned by HLR, RBL and their subsidiaries immediately
after the effective time of the Merger, equal 49.9% of the total
number of shares of Company common stock outstanding immediately
after the effective time of the Merger (after giving effect to the
issuance of Company common stock in respect of the Company employee
stock options in connection with the Merger).
In connection with the Merger, the Company currently intends
to declare a dividend, payable to holders of record of shares of
Company common stock as of the third business day prior to the
date of the special meeting of the stockholders to consider and
vote on the approval and adoption of the Merger, which dividend
will consist of 0.16308 of a warrant per outstanding share of
Company common stock, each such warrant representing the right to
purchase one newly issued share of Company common stock for
$22.00 (subject to adjustments) on the fifth anniversary of the
issuance of the Warrant. In addition, the Merger Agreement
provides for the issuance to and purchase by Roche, for a
purchase price of $51.0 million, of 8,325,000 Roche Warrants to
purchase shares of Company common stock, which warrants will have
the terms described in the preceding sentence.
The aggregate cash consideration of approximately $474.7
million to be paid to stockholders of the Company in the Merger
will be financed from three sources: a cash contribution by the
Company of approximately $288.0 million out of proceeds of
borrowings by the Company in an equal amount, a cash contribution
36
to be made by HLR in the amount of approximately $135.7 million
and the proceeds from the issuance of the Roche Warrants.
The Company has obtained a commitment for a credit facility,
which will include a term loan facility of not more than $800.0
million and a revolving credit facility of not more than $400.0
million, to refinance the Company's existing indebtedness and to
finance the Company's portion of the total cash consideration to
be paid to stockholders of the Company in the Merger. The
specific terms and conditions of the credit facility are
currently under negotiation.
Restructuring costs of approximately $84.0 million are
expected to be recorded by the Company at the close of the
Merger. These costs will reflect the write-off of deferred
financing costs related to the repayment of the Company's
existing revolving credit facility and term loan facility entered
into in connection with the Allied Acquisition financing and the
creation of reserves for severance and benefit costs, costs for
office facilities expected to be closed, vacant space costs,
systems conversion costs and other restructuring expenses of the
Company associated with the Merger.
The Company has generated cash flow in excess of its
operating requirements in each of the three past fiscal years.
Cash from operations was $14.7 million, $57.2 million and $102.4
million for the years ended December 31, 1994, 1993 and 1992,
respectively. Cash used for capital expenditures was $48.9
million, $33.6 million and $34.9 million for the years ended
December 31, 1994, 1993, and 1992, respectively. The Company
expects capital expenditures to be approximately $45.0 to $55.0
million in 1995 to accommodate expected growth, further automate
laboratory processes, improve efficiency and further integrate
the Company and Allied.
On May 3, 1994, the Company entered into a definitive
agreement to acquire Allied. Pursuant to the agreement, on May
9, 1994, a subsidiary of the Company commenced a cash tender
offer for all shares of Allied common stock for $23 per share.
The agreement provided that any shares not tendered and purchased
in the offer were to be exchanged for $23 per share in cash in a
second-step merger. On June 7, 1994, the Company entered into an
agreement whereby the price payable in such cash tender offer and
such second-step merger was reduced to $21.50 per share, or an
aggregate of approximately $12.6 million. A subsidiary of the
Company acquired Allied as a wholly owned subsidiary on June 23,
1994, for approximately $191.5 million in cash plus the
assumption of $24.0 million in Allied indebtedness and the
recognition of approximately $5.0 million of Allied net
liabilities.
37
During 1994, the Company acquired 11 small clinical
laboratory companies in various locations of the United States
for an aggregate amount of $46.4 million in cash plus the
recognition of $32.9 million of liabilities. These laboratories,
on an annual basis, are expected to generate approximately
$49 million in net sales. During 1993, the Company acquired
thirty-four clinical laboratory companies for an aggregate amount
of $78.2 million in cash plus the recognition of $0.7 million of
liabilities.
On June 21, 1994, Intermediate Holdings II, a subsidiary of
the Company, entered into the Credit Agreement dated as of such
date (the "Credit Agreement") with the banks named therein (the
"Banks"), Citicorp USA, Inc., as administrative agent (the "Bank
Agent"), and certain co-agents named therein, which made
available to Intermediate Holdings II the Term Facility of $400.0
million and the Revolving Credit Facility of $350.0 million. The
Bank Facility provided funds for the Allied Acquisition, for the
refinancing of certain existing debt of Allied and NHLI, to pay
related fees and expenses and for general corporate purposes of
Intermediate Holdings II and its subsidiaries, in each case
subject to the terms and conditions set forth therein.
The Credit Agreement provides that the Banks and the Bank
Agent will receive from Intermediate Holdings II customary
facility and administrative agent fees, respectively.
Intermediate Holdings II will pay a commitment fee on the average
daily unused portion of the Bank Facility of 0.5% per annum,
subject to a reduction to 0.375% per annum if certain financial
tests are met. Availability of funds under the Bank Facility is
conditioned on certain customary conditions, and the Credit
Agreement contains customary representations, warranties and
events of default. The Credit Agreement also requires the
Company to maintain certain financial ratios and tests, including
minimum debt service coverage ratios and net worth tests.
The Revolving Credit Facility matures in June 1999, with
semi-annual reductions of availability of $50.0 million,
commencing in December 1997. The Term Facility matures in
December 2000, with repayments in each quarter prior to maturity
based on a specified amortization schedule. The Bank Facility
bears interest, at the option of Intermediate Holdings II, at (i)
Citibank, N.A.'s Base Rate (as defined in the Credit Agreement),
plus a margin of up to 0.75% per annum, based upon variations in
certain financial tests or (ii) the Eurodollar rate for one, two,
three or six month interest periods (as selected by Intermediate
Holdings II), plus a margin varying between 1.25% and 2.00% per
annum based upon the Company's financial performance. At
December 31, 1994 the effective rate was 8.157%.
38
Aggregate maturities on long-term debt are $39.0 million,
$48.7 million, $58.5 million, $68.2 million and $77.9 million for
the years 1995 through 1999, respectively.
The Bank Facility is guaranteed by Intermediate Holdings I
and certain subsidiaries of Intermediate Holdings II and is
secured by pledges of stock and other assets of Intermediate
Holdings II and its subsidiaries.
On June 21, 1994, $400.0 million available under the Term
Facility was borrowed by Intermediate Holdings II and loaned to
NHLI and was used by NHLI to repay in full its existing revolving
credit facilities and for working capital and general corporate
purposes. On June 23, 1994, Intermediate Holdings II borrowed
$185.0 million of the amount available under the Revolving Credit
Facility to consummate the Allied Acquisition.
In connection with the Allied Acquisition, the Company
announced that it terminated its 10 million share repurchase
program, under which 7,795,800 common shares had been
repurchased, and established a new $50.0 million stock repurchase
program through which the Company will acquire additional shares
of the Company's common stock from time to time in the open
market. As of December 31, 1994, there were no repurchases under
the new stock repurchase program.
During 1993, the Company purchased 9,485,800 of its
outstanding common stock for an aggregate amount of $154.2
million. The purchase was financed by borrowings under the
revolving credit facilities in existence at such time and cash on
hand. In connection with the corporate reorganization on June 7,
1994, all of the 14,603,800 treasury shares held by NHLI were
cancelled. As a result, the $286.1 million value assigned to
such treasury shares was eliminated with corresponding decreases
in the par value, additional paid-in capital and retained
earnings of $0.2 million, $72.3 million and $213.6 million,
respectively. The Company announced, also in connection with the
Allied Acquisition, that it is discontinuing its dividend
payments for the foreseeable future in order to increase its
flexibility with respect to both its acquisition strategy and
stock repurchase plan.
Pursuant to the settlement of previously disclosed
shareholder class and derivative litigation, a total of $6.0
million was paid for such settlement and other expenses during
1994. The remaining amount due as part of the settlement was
paid on February 15, 1995.
Pursuant to the Government Settlement, a total of $23.8
39
million was paid for the Government Settlement and other expenses
during 1994, including aggregate cash payments of $16.0 million
made to the Federal government. The remaining amount due the
Federal government, $11.0 million, will be paid in quarterly
installments through September 1995, which installments are
expected to be paid with cash generated from operations. During
1993, the Company paid $55.8 million for settlement and related
expenses, including $38.0 million to the Federal government.
During 1991, the Company guaranteed a $9.0 million, 5 year
loan to a third party for construction of a new laboratory to
replace one of the Company's existing facilities. Following its
completion in November 1992, the building was leased to the
Company by this third party. Under the terms of this guarantee,
as modified, the Company is required to maintain 105% of the
outstanding loan balance, including any overdue interest, as
collateral in a custody account established and maintained at the
lending institution. As of December 31, 1994 and 1993, the
Company had placed $9.5 million of investments in the custody
account.
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.
40
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth as of February 15, 1995 the
executive officers and directors of the Company:
Name Position
------------------ ---------------------------
Ronald O. Perelman Chairman of the Board and
Director
James R. Maher President, Chief Executive
Officer and Director
David C. Flaugh Senior Executive Vice
President, Chief Operating
Officer and Acting Chief
Financial Officer and
Treasurer
Timothy J. Brodnik Executive Vice President
Larry L. Leonard Executive Vice President
John F. Markus Executive Vice President and
Corporate Compliance Officer
James G. Richmond Executive Vice President and
General Counsel
W. David Slaunwhite, Ph.D. Executive Vice President
Bernard E. Statland, M.D., Ph.D. Executive Vice President and
Chief Executive Officer of
National Reference
Laboratory
Robert E. Whalen Executive Vice President
Saul J. Farber, M.D. Director
Howard Gittis Director
Ann Dibble Jordan Director
David J. Mahoney Director
Paul A. Marks, M.D. Director
Linda Gosden Robinson Director
Samuel O. Thier, M.D. Director
Ronald O. Perelman (52) has been Chairman of the Board and
Director of the Company since 1988. Mr. Perelman has been
Chairman of the Board and Chief Executive Officer of MacAndrews &
Forbes Holdings Inc. ("M&F Holdings") and Mafco Holdings Inc.
("Mafco" and together with M&F Holdings, "MacAndrews & Forbes")
for more than the past five years. Mr. Perelman also is Chairman
of the Board of Andrews Group Incorporated ("Andrews Group"),
Consolidated Cigar Corporation ("Consolidated Cigar"), New World
Communications Group Incorporated ("New World Communications"),
41
Mafco Worldwide Corporation ("Mafco Worldwide"), Marvel
Entertainment Group, Inc. ("Marvel") and Revlon Consumer Products
Corporation ("Revlon Products"). Mr. Perelman is a Director of
the following corporations which file reports pursuant to the
Securities Exchange Act of 1934: Andrews Group, The Coleman
Company, Inc. ("Coleman"), Coleman Holdings Inc., Coleman
Worldwide Corporation, Consolidated Cigar, First Nationwide
Holdings Inc. ("FNH"), Mafco Worldwide, Marvel, Marvel Holdings
Inc. ("Marvel Holdings"), Marvel (Parent) Holdings Inc. ("Marvel
Parent"), Marvel III Holdings Inc. ("Marvel III"), New World
Communications, New World Television Incorporated ("NWTV"), NWCG
Holdings Corporation ("NWCG Holdings"), Revlon Products and
Revlon Worldwide Corporation. Mr. Perelman is also a Director of
First Nationwide Bank, a Federal Savings Bank.
James R. Maher (45) has been President, Chief Executive
Officer and a Director of the Company since December 1992. Mr.
Maher was Vice Chairman of The First Boston Corporation from 1990
to 1992 and Managing Director of The First Boston Corporation
from 1982 to 1992. Mr. Maher also is a Director of First Brands
Corporation.
David C. Flaugh (47) has been Chief Operating Officer and
Senior Executive Vice President of the Company since 1993. He
has been Acting Chief Financial Officer and Treasurer of the
Company since July 1994. Mr. Flaugh was Vice President-Managing
Director, Chief Financial Officer and Treasurer of the Company
from 1991 to 1993. From 1988 to 1991, Mr. Flaugh was Vice
President-Finance. From 1984 to 1988, Mr. Flaugh was Vice
President and Controller.
Timothy J. Brodnik (47) joined the Company in 1971. He was
appointed Executive Vice President of the Company in 1993 and was
Senior Vice President from 1991 to 1993 and Vice President-
Division Manager commencing 1979. Mr. Brodnik oversees the
Company's sales operations and major regional laboratories in
Florida and North Carolina.
Larry L. Leonard (53), who holds a Ph.D. degree in
microbiology, joined the Company in 1978. He was appointed
Executive Vice President of the Company in 1993 and was Senior
Vice President from 1991 to 1993 and Vice President-Division
Manager commencing 1979. Dr. Leonard oversees major regional
laboratories in Arizona, Texas and Colorado.
John F. Markus (43) joined the Company in 1990. He was
appointed Executive Vice President and Director of Compliance in
1993 and was Vice President-Managing Director from 1990 to 1993.
Previously, Mr. Markus was an attorney in the law firm of Akin,
42
Gump, Strauss, Hauer and Feld in Washington D.C. for more than
five years and was a partner in such firm since 1989.
James G. Richmond (50) joined the Company in 1992 as
Executive Vice President and General Counsel. Previously, Mr.
Richmond was Managing Partner of the law firm of Coffield,
Ungaretti & Harris in Chicago from 1991 to 1992. Prior thereto,
he was Special Counsel to the Deputy Attorney General of the
United States from 1990 to 1991 and from 1985 to 1991 was United
States Attorney for the Northern District of Indiana.
W. David Slaunwhite, Ph.D. (49) joined the Company in 1981.
He was appointed Executive Vice President in 1993, was Vice
President-Managing Director from 1991 to 1993 and Vice
President-Division Manager from 1989 to 1991. Prior to that he
held positions of increasing importance with the Company.
Bernard E. Statland, M.D., Ph.D. (53) joined the Company in
1990. He was appointed Executive Vice President in 1993 and was
Vice President-Managing Director from 1990 to 1993. In addition,
Dr. Statland is Chief Executive Officer of the National Reference
Laboratory. Dr. Statland was named a Scientific Advisor on the
Company's Board of Consultants in 1989. Prior to joining the
Company, he was Director of Pathology and Laboratory Medicine at
Methodist Hospital of Indiana for four years and previously held
a similar position at Boston University Hospital.
Robert E. Whalen (52) joined the Company in 1976. He was
named Executive Vice President of the Company in 1993 and was
Senior Vice President from 1991 to 1993 and Vice
President-Administration commencing 1985. From 1979 to 1985, he
was Vice President-Division Manager of the Company. Mr. Whalen
oversees human resources, information systems, client service and
major regional laboratories in California, Washington, Nevada and
Utah.
Saul J. Farber, M.D. (77) has been a Director of the Company
since 1988. He has been Chairman of the Department of Medicine
of the New York University School of Medicine since 1966,
Frederick H. King Professor of Medicine since 1978 and Dean of
the School of Medicine since 1987.
Howard Gittis (60) has been a Director of the Company since
1988. He has been Vice Chairman and a Director of MacAndrews &
Forbes and various affiliates since 1985. Mr. Gittis also is a
Director of Andrews Group, Consolidated Cigar, Mafco Worldwide,
Revlon Products, Revlon Worldwide, New World Communications,
NWTV, First Nationwide Holdings and NWCG Holdings, Jones Apparel
Group, Inc. and Loral Corporation. Mr. Gittis is also a Director
of First Nationwide Bank, a Federal Savings Bank.
43
Ann Dibble Jordan (60) has been a Director of the Company
since 1990. She is a consultant and was previously Field Work
Assistant Professor, School of Social Service Administration,
University of Chicago from 1970 to 1987. Ms. Jordan also is a
Director of Johnson & Johnson Corporation, Capital Cities--ABC,
Inc., The Traveler's Companies, Salant Corp., The Hechinger
Company and Automatic Data Processing, Inc.
David J. Mahoney (71) has been a Director of the Company
since 1988. He has been President of David Mahoney Ventures
since 1983 and was Chairman of Norton Simon, Inc. for more than
five years prior to 1983. Mr. Mahoney also is a Director of The
Dreyfus Corporation and Bionaire Inc.
Paul A. Marks, M.D. (68) has been a Director of the Company
since 1991. He has been President and Chief Executive Officer of
Memorial Sloan-Kettering Cancer Center since 1980. He has been a
Professor of Medicine at Cornell University Medical College since
1982 and a Professor at Cornell University Graduate School of
Medical Sciences since 1983. He is a member of the National
Academy of Sciences and American Academy of Arts and Sciences.
Dr. Marks also is a Director of Pfizer, Inc., several Dreyfus
Mutual Funds, Life Technologies, Inc. and Tularik, Inc.
Linda Gosden Robinson (42) has been a Director of the
Company since 1990. She has been President and Chief Executive
Officer of Robinson Lake Sawyer Miller since 1986 and was Senior
Vice President, Corporate Affairs, of Warner Cable
Communications, Inc. from 1983 to 1986. Ms. Robinson also is a
Director of Bozell, Jacobs, Kenyon & Eckhardt, Inc. She is a
Trustee of New York University Medical Center.
Samuel O. Thier, M.D. (57) has been a Director of the
Company since 1992. Dr. Thier became President and Chief
Executive Officer of Massachusetts General Hospital in 1994. He
was President of Brandeis University from 1991 to 1994 and was
President of the Institute of Medicine of the National Academy of
Sciences from 1985 to 1991. From 1966 to 1985 Dr. Thier served
on the faculties of the medical schools at Harvard University,
University of Pennsylvania and Yale University. At Yale
University, Dr. Thier was Chairman of the Department of Internal
Medicine from 1975 through 1985. Dr. Thier is a Director of
Merck & Co., Inc. and Shawmut National Corp.
44
Board of Directors and its Committees
The Board of Directors has an Executive Committee, an Audit
Committee, an Employee Benefits Committee, an Ethics and Quality
Assurance Committee and a Nominating Committee.
The Executive Committee consists of Messrs. Perelman, Gittis
and Maher. The Executive Committee may exercise all the powers
and authority of the Board, except as otherwise provided under
the corporation law of Delaware. The Audit Committee, consisting
of Dr. Farber, Ms. Jordan and Dr. Marks, makes recommendations to
the Board regarding the engagement of the Company's independent
auditors, reviews the plan, scope and results of the audit,
reviews with the auditors and management the Company's policies
and procedures with respect to internal accounting and financial
controls and reviews changes in accounting policy and the scope
of the non-audit services which may be performed by the Company's
independent auditors. The Ethics and Quality Assurance Committee
consists of Mr. Gittis, Dr. Farber and Ms. Jordan. The Ethics
and Quality Assurance Committee is responsible for ensuring that
the Company adopts and implements procedures that require the
Company's employees to act in accordance with high ethical
standards and deliver high quality services. The Ethics and
Quality Assurance Committee was formed in February 1994. The
Employee Benefits Committee, consisting of Dr. Farber, Messrs.
Gittis and Mahoney, Ms. Robinson and Dr. Thier, makes
recommendations to the Board regarding compensation, benefits and
incentive arrangements for officers and other key managerial
employees of the Company. The Employee Benefits Committee may
consider and recommend awards of options to purchase shares of
common stock pursuant to the Company's 1988 Stock Option Plan and
the 1994 Stock Option Plan. The Nominating Committee, consisting
of Mr. Perelman, Ms. Jordan, Ms. Robinson and Dr. Thier, makes
recommendations to the Board regarding the qualifications for
directors and procedures for identifying possible nominees. The
Nominating Committee also reviews the performance of current
directors and evaluates the appropriate size and composition of
the Board.
During 1994, the Board of Directors held eleven meetings and
the Executive Committee acted fourteen times by unanimous written
consent of all members thereof, each in accordance with the
Company's by-laws and the corporation law of Delaware. The
Employee Benefits Committee held two meetings, the Audit
Committee held three meetings and the Ethics and Quality
Assurance Committee held one meeting in 1994. The Nominating
Committee did not meet in 1994. During 1994, no director
attended fewer than 75% of the meetings of the board and the
committees of which he or she is a member other than Mr. Mahoney
45
and Dr. Thier.
Item 11. EXECUTIVE COMPENSATION
The compensation paid by the Company to its Chief Executive
Officer and each of the Company's four most highly compensated
executive officers for services during the year ended December
31, 1994 was as follows:
Summary Compensation Table
|Long-Term|
|Compensa-|
| tion |
Annual Compensation | Awards |
| | All
| | Other
| | Compen-
Salary Bonus | Options | sation
Name and Principal Position Year ($)(a) ($)(b) | SARs (#)| ($)(c)
- -------------------------- ---- --------- --------- -------- -------
James R. Maher, President 1994 $1,000,001 $ 450,000| 350,000|$20,066
and Chief Executive 1993 1,000,000 500,000| - | 29,136
Officer 1992 34,616 1,662,500| 300,000| -
| |
David C. Flaugh, Senior 1994 499,991 375,000| 200,000| 14,154
Executive Vice President 1993 507,683 400,000| 125,000| 13,865
Chief Operating Officer 1992 267,117 265,000| - | 9,287
and Acting Chief Financial | |
Officer and Treasurer | |
| |
Timothy J. Brodnik, 1994 325,000 246,250| 150,000| 8,853
Executive Vice President 1993 325,000 262,500| 50,000| 11,334
1992 238,046 243,800| - | 10,007
| |
W. David Slaunwhite, Ph.D., 1994 325,000 266,250| 75,000| 8,850
Executive Vice President 1993 324,615 282,500| 50,000| 11,397
1992 267,117 265,000| - | 94,644
| |
Bernard E. Statland, M.D., 1994 457,500 236,250| 25,000| 14,759
Ph.D., Executive Vice 1993 457,500 252,500| 50,000| 17,219
President 1992 386,243 365,000| - | 15,482
<FN>
(a) Includes salary paid or accrued for each indicated year.
(b) Includes bonus accrued or paid for each indicated year and other
payments made pursuant to employment agreements. The 1992 amount for
Mr. Maher represents the value, on the date of grant, of 100,000 shares
of the Company's common stock granted in 1992.
(c) Reflects the following: (i) relocation expenses in 1993 for Mr. Maher of
46
$14,001 and in 1992 for Dr. Slaunwhite of $84,365; (ii) life insurance
premiums of $15,566 in 1994 and $8,060 in 1993 for Mr. Maher, $9,654 in
1994, $6,790 in 1993 and $3,414 in 1992 for Mr. Flaugh, $4,353 in 1994,
$4,259 in 1993 and $3,141 in 1992 for Mr. Brodnik, $4,350 in 1994,
$4,322 in 1993 and $3,413 in 1992 for Dr. Slaunwhite and $10,259 in
1994, $10,144 in 1993 and $8,616 in 1992 for Dr. Statland; (iii) 401(a)
and (k) contributions in 1994 of $4,500 and in 1993 of $7,075 for each
of such individuals named in the table and in 1992 of $5,873 for
Mr. Flaugh and $6,866 for each of Mr. Brodnik, Dr. Slaunwhite and
Dr. Statland.
</FN>
Stock Option Transactions in 1994
During 1994, the following grants were made under the 1988 Stock Option
Plan and the 1994 Stock Option Plan for the executive officers named in the
Summary Compensation Table:
Option/SAR Grants in 1994
Grant
Date
Individual Grants Value
Percen-
tage of
Total
Options/
Number of SARs
Securities Granted Exercise Grant
Underlying to Em- or Base Date
Options/SARs ployees Price Expiration Present
Name Granted(a) in 1994 ($/Sh) Date Value $(b)
- --------------- ----------- ------ ------- --------- -----------
James R. Maher 350,000 17% $11.75- 2/10/04- $2,663,000
$13.875 7/12/04
David C. Flaugh 200,000 10 $11.75- 2/10/04- 1,535,000
$13.875 7/12/04
Timothy J. Brodnik 150,000 7 $11.75- 2/10/04- 1,151,000
$13.875 7/12/04
W. David Slaunwhite,
Ph.D. 75,000 4 $13.875 2/10/04 611,000
Bernard E. Statland,
M.D., Ph.D. 25,000 1 $13.875 2/10/04 204,000
47
<FN>
(a) No tandem SARs were granted in 1994.
(b) Valuation based upon the Black-Scholes option pricing model assuming a
volatility of .351 (based on the weekly closing stock prices from
January 1, 1993 to January 7, 1994; a risk free interest rate of 6.0%
(the asking yield on the 10-year U.S. Treasury Strip maturing February
2004); and a dividend yield of 0.0%. The valuation assumptions have
made no adjustments for non-transferability.
For each grant of non-qualified options made in 1994, the
exercise price was equivalent to the fair market price per share
on the date of grant. One third of the option's shares of common
stock vested on the date of grant and one third vests on each of
the first and second anniversaries of such date, subject to their
earlier expiration or termination.
</FN>
48
The following chart shows, for 1994, the number of stock
options exercised and the 1994 year-end value of the options held
by the executive officers named in the Summary Compensation
Table:
Aggregated Option/SAR Exercises in 1994
and Year-End 1994 Option/SAR Values
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs
Options/SARs at Year-
at Year-End End ($)(a)
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- -------------- ------------ ----------- ------------- -------------
James R. Maher 0 $0 416,667 $100,000
233,333 200,000
David C. Flaugh 0 0 166,500 50,000
175,000 100,000
Timothy J. Brodnik 0 0 94,833 37,500
116,667 75,000
W. David Slaunwhite, 0 0 74,833 0
Ph.D. 66,667 0
Bernard E. Statland, 0 0 58,167 0
M.D., Ph.D. 33,333 0
<FN>
(a) Calculated using actual December 31, 1994 closing price per common share
on the NYSE Composite Tape of $13.25
</FN>
49
Retirement Benefits and Savings Plan
The following table sets forth the estimated annual
retirement benefits payable at age 65 to persons retiring with
the indicated average direct compensation and years of credited
service, on a straight life annuity basis after Social Security
offset, under the Company's Employees' Retirement Plan, as
supplemented by the Company's Pension Equalization Plan.
Pension Plan Table
Five year
average
Compensation(1) 10 Years(2) 15 Years(2) 20 Years(2) 25 Years(2) 30 Years(2)
- --------------- ----------- ----------- ----------- ----------- -----------
$ 50,000 $ 6,898 $10,346 $ 13,795 $ 17,244 $ 20,693
100,000 16,242 24,364 32,485 40,606 48,727
150,000 25,602 38,404 51,204 64,006 76,807
200,000 34,962 52,444 69,924 87,406 104,887
250,000 44,322 66,484 88,644 110,806 132,967
300,000 53,682 80,524 107,364 134,206 161,047
(1) Highest consecutive five year average base compensation during final ten
years. Compensation considered for this five year average is reflected
in the Summary Compensation Table under the heading "salary." Under the
Equalization Plan, a maximum of $300,000 final average compensation is
considered for benefit calculation. No bonuses are considered.
(2) Under the plans, the normal form of benefit for an unmarried participant
is a life annuity with a guaranteed minimum payment of ten years.
Payments in other optional forms, including the 50% joint and survivor
normal form for married participants, are actuarially equivalent to the
normal form for an unmarried participant. The above table is determined
with regard to a life only form of payment; thus, payment using a ten
year guarantee would produce a lower annual benefit.
The Retirement Plan, which is intended to qualify under
Section 401 of the Internal Revenue Code of 1986, as amended (the
"Code"), is a defined benefit pension plan designed to provide an
employee having 30 years of credited service with an annuity
equal to 52% of final average compensation less 50% of estimated
individual Social Security benefits. Credited service is defined
generally as all periods of employment with National Health
Laboratories Incorporated, a participating subsidiary or with
Revlon prior to 1992, after attainment of age 21 and completion
of one year of service. Final average compensation is defined as
average annual base salary during the five consecutive calendar
years in which base salary was highest out of the last ten years
prior to normal retirement age or earlier termination. The
50
Employment Retirement Income Security Act of 1974, as amended,
places certain maximum limitations upon the annual benefit
payable under all qualified plans of an employer to any one
individual. Such limitation for defined benefit pension plans
was $118,800 for 1994 (except to the extent a larger benefit had
accrued as of December 31, 1982) and $120,000 for 1995, and will
be subject to cost of living adjustments for future years. In
addition, the Tax Reform Act of 1986 limits the amount of
compensation that can be considered in determining the level of
benefits under qualified plans. The applicable limit is adjusted
annually; for 1994 the limit was $150,000. For 1995 the limit
will remain at $150,000. The Company believes that, with respect
to certain employees, annual retirement benefits computed in
accordance with the Retirement Plan's benefit formula may be
greater than such qualified plan limitation. The Company's non-
qualified, unfunded, Equalization Plan is designed to provide for
the payment of the difference, if any, between the amount of such
maximum limitation and the annual benefit that would be payable
under the Retirement Plan but for such limitation.
As of December 31,1994, credited years of service under the
retirement plans for the following individuals are for Mr. Maher-
1 year, Mr. Flaugh-22 years, Dr. Slaunwhite 12 years, Dr.
Statland 3 years and Mr. Brodnik 21 years.
Compensation of Directors
Directors who are not currently receiving compensation as
officers or employees of the Company or any of its affiliates are
paid an annual $25,000 retainer fee, payable in monthly
installments, and a fee of $1,000 for each meeting of the Board
of Directors or any committee thereof they attend.
Compensation Plans and Arrangements
The Company has an employment agreement with Mr. Maher which
provides for his employment as Chief Executive Officer of the
Company through December 31, 1995 at an annual salary of
$1,000,000 and an annual bonus of $500,000 and an additional
discretionary bonus as may be awarded at the discretion of the
Board of Directors. If the employment agreement is terminated by
Mr. Maher for certain specified reasons, including, but not
limited to, (i) the assignment of duties materially inconsistent
with Mr. Maher's status as Chief Executive Officer of the Company
or resulting in an adverse alteration in the nature of his
responsibilities, (ii) a reduction by the Company in the annual
salary or annual bonus or a failure by the Company to pay any
such amount when due, (iii) the relocation of the Company's
principal executive offices to a location more than 50 miles from
51
La Jolla, California or the Company's failure to permit Mr. Maher
to maintain his principal places of employment at both the
Company's principal executive offices in La Jolla, California and
in New York, New York or (iv) the occurrence of a change in
control of the Company which, for such purpose, is deemed to
occur if Mr. Perelman ceases beneficially to own 5% or more of
the combined voting power of the Company's outstanding
securities, then the Company will be required to pay Mr. Maher,
within five days following the date of such termination, in a
lump sum in cash, the sum of (i) any amounts due to Mr. Maher as
annual salary and annual bonus, but unpaid, and (ii) $3,000,000.
In connection with the Merger, the Company will pay Mr. Maher a
special bonus of $1,000,000, subject to certain conditions, in
recognition for his efforts on behalf of the Company with respect
to the Merger. The special bonus is in addition to any other
payments Mr. Maher may become entitled to under his employment
agreement with the Company in connection with the Merger.
The Company has an amended employment agreement with Mr.
Flaugh which provides for his employment as Senior Executive Vice
President and Chief Operating Officer of the Company through
December 31, 1996 at an annual salary of $500,000 with an annual
bonus of 50% of the annual salary then in effect and an
additional discretionary bonus as may be awarded at the
discretion of the Board of Directors. Pursuant to his employment
agreement, Mr. Flaugh received a $150,000 lump sum payment in
December 1994. The employment agreement also provides that the
duties assigned to Mr. Flaugh will be performed primarily at the
offices of the Company in San Diego County, California. If the
employment agreement is terminated by Mr. Flaugh for certain
specified reasons including (i) the assignment of duties
materially inconsistent with Mr. Flaugh's status as Senior
Executive Vice President, (ii) a reduction by the Company in the
annual salary or annual bonus or a failure by the Company to pay
any such amount when due or (iii) a material breach of any of the
terms of the employment agreement by the Company, then the
Company will be required to pay, in monthly installments, (i) the
annual salary Mr. Flaugh would have otherwise received during the
remainder of the employment period and (ii) for a period of one
year following the date of the expiration of the employment term,
in consideration of the performance of specified noncompetition
obligations, an amount equal to one-half the annual salary at the
rate in effect on the date of expiration of the employment term.
The Company has an amended employment agreement with
Mr. Brodnik which provides for him to be employed as an Executive
Vice President through December 31, 1996 at an annual salary of
$325,000 with an annual bonus equal to 50% of the annual salary
then in effect and an additional discretionary bonus as may be
52
awarded at the discretion of the Board of Directors. Pursuant to
his employment agreement, Mr. Brodnik received a $100,000 lump
sum payment in December 1994. The employment agreement also
provides that the duties assigned to Mr. Brodnik will be
performed primarily at the offices of the Company in Fairfax
County, Virginia. If the employment agreement is terminated by
Mr. Brodnik for certain specified reasons, including, (i) the
assignment of duties materially inconsistent with the status of
the office of Executive Vice President of the Company or
resulting in an adverse alteration in the nature of the
responsibilities associated therewith, (ii) a reduction by the
Company in the annual salary or annual bonus or a failure by the
Company to pay any such amount when due or (iii) a material
breach of any of the terms of the employment agreement by the
Company, then the Company will be required to pay, in monthly
installments, (i) the annual salary and annual bonus Mr. Brodnik
would have otherwise received during the remainder of his
employment period and (ii) for a period of one year following the
date of expiration of his employment term, in consideration of
the performance of specified noncompetition obligations, an
amount equal to one-half the annual salary at the rate in effect
on the date of expiration of his employment term.
The Company has an amended employment agreement with Dr.
Slaunwhite which provides for him to be employed as an Executive
Vice President through December 31, 1996 at an annual salary of
$325,000 with an annual bonus equal to 50% of the annual salary
then in effect and an additional discretionary bonus as may be
awarded at the discretion of the Board of Directors. Pursuant to
his employment agreement, Dr. Slaunwhite received a lump sum
payment of $120,000 in December 1994. If the employment
agreement is terminated by Dr. Slaunwhite for certain specified
reasons, including, (i) the assignment of duties materially
inconsistent with the status of the office of Executive Vice
President of the Company or resulting in an adverse alteration in
the nature of the responsibilities associated therewith, (ii) a
reduction by the Company in the annual salary or annual bonus or
a failure by the Company to pay any such amount when due or (iii)
a material breach of any of the terms of the employment agreement
by the Company, then the Company will be required to pay, in
monthly installments, (i) the annual salary and annual bonus Dr.
Slaunwhite would have otherwise received during the remainder of
his employment period and (ii) for a period of one year following
the date of expiration of his employment term, in consideration
of the performance of specified noncompetition obligations, an
amount equal to one-half the annual salary at the rate in effect
on the date of expiration of his employment term.
The Company has an amended employment agreement with Dr.
53
Statland which provides for his employment as Executive Vice
President of the Company and Chief Executive Officer of National
Reference Laboratory through December 31, 1995 at an annual
salary of $325,000 with an annual bonus of equal to 50% of the
annual salary then in effect and an additional discretionary
bonus as may be awarded at the discretion of the Board of
Directors. Pursuant to his employment agreement, Dr. Statland
received a $90,000 lump sum payment in December 1994. If the
employment agreement is terminated by Dr. Statland following a
material breach of any of the terms of the employment agreement
by the Company, then the Company will be required to pay, in
monthly installments, (i) the annual salary Dr. Statland would
have otherwise received during the remainder of the employment
period and (ii) for a period of one year following the date of
the expiration of the employment term, in consideration of the
performance of specified noncompetition obligations, an amount
equal to one-half the annual salary at the rate in effect on the
date of expiration of the employment term.
Employee Benefits Committee Interlocks and Insider Participation
The members of the Employee Benefits Committee are Saul J.
Farber, M.D., Howard Gittis, David J. Mahoney, Linda Gosden
Robinson and Samuel O. Thier, M.D. No member of the Employee
Benefits Committee is an officer or employee of the Company.
Certain Director Relationships. Robinson Lake Sawyer
Miller, the corporate communications firm of which Ms. Robinson
is President and Chief Executive Officer performs corporate
communications services for MacAndrews & Forbes and its
affiliates, including the Company. The amount of compensation
paid to Robinson, Lake for services to the Company in 1994 was
$233,670. On September 17, 1993, the Company purchased 66% of
the common stock of a newly-formed corporation, Health Partners,
Inc. ("Health Partners"). Robinson purchased 2% of the common
stock of Health Partners. In 1994, the Company sold its interest
in Health Partners for an amount equal to the original cost. Ms.
Robinson is the wife of the principal of J.D. Robinson Inc. which
performs consulting services for MacAndrews & Forbes and receives
$250,000 per annum from MacAndrews & Forbes for such services to
MacAndrews & Forbes. The principal of J.D. Robinson Inc. also
serves as a Director of a subsidiary of MacAndrews & Forbes.
Ms. Jordan is the wife of a director of a subsidiary of
MacAndrews & Forbes who is a partner in a law firm that has on a
regular basis in the past provided services and that continues to
provide services to MacAndrews & Forbes and its affiliates,
including the Company. No services were performed by such firm
in 1994 for the Company.
54
Dr. Farber was on the Company's Scientific Advisory board
through June 30, 1994 and was paid $7,500 for such services.
Employee Benefits Committee Report on Executive Compensation
The Employee Benefits Committee of the Board of Directors
(the "Committee") is comprised of Saul J. Farber, M.D., Howard
Gittis, David J. Mahoney, Linda Gosden Robinson and Samuel O.
Thier, M.D. The Committee's duties include determination of the
Company's compensation and benefit policies and practices for
executive officers and key managerial employees. The Committee
also considers and awards options to purchase shares of the
Company's common stock pursuant to the Company's 1994 Stock
Option Plan. In accordance with rules established by the
Commission, the Company is required to provide certain data and
information in regard to the compensation provided to the
Company's Chief Executive Officer and the four other most highly
compensated executive officers. The Committee has prepared the
following report for inclusion in this Annual Report.
Compensation Policies. The Company's current compensation
arrangements for senior executives are significantly affected by
the Company's long history as a private company until the 1988
initial public offering, after which an Employee Benefits
Committee was established. The overall compensation program for
officers historically emphasized a strong base salary position in
relation to competitive practice and a competitive annual bonus
opportunity dependent upon the operating income performance of
the corporation. In contrast to the Company's highly competitive
cash compensation policy, the Company did not offer long-term
incentive opportunities as an executive compensation element
until 1989 when the first stock option awards were made. The
Committee understands that the combination of strongly
competitive cash compensation and modest use of long-term
incentives is typical of private companies with professional
management leadership; and this historical approach continued to
influence the Company's programs as a public company from 1989
into 1992. Late in 1992, with the appointment of James R. Maher
as President and Chief Executive Officer, the Company's
compensation philosophy changed to make a greater portion of
executive compensation dependent on the Company's long-term stock
performance.
Beginning in late 1992 and in 1993 and 1994, the Company's
compensation philosophy reflected a greater emphasis on grants of
stock options. In 1994, the Committee granted options in varying
amounts to 159 senior and mid-level managers. The option awards
55
at all levels of management were part of the Committee's desire
to make a growing and more significant portion of senior
executive compensation directly dependent on the Company's long-
term share price appreciation. The number of options granted in
1994 to each of the four senior executives named in the cash
compensation table was determined considering the Company's
relatively low historical option grants, the Committee's desire
to make a greater proportion of the senior executives'
compensation equity-based, an analysis of the potential value of
the options over the term of the option and a review of option
grants at the peer companies listed in the stock performance
graph.
In 1992, after consultations with Mr. Maher, the Committee
decided to raise the senior executive base salary levels and to
restructure the annual bonus opportunity as the combination of a
cash year-end retention bonus equal to 50% of base salary and a
performance bonus opportunity. The general effect of these
salary and bonus actions was to set the overall cash compensation
opportunity for senior executives at or below 1992 levels, while
strengthening the retentive elements of the compensation package.
When these arrangements were established it was anticipated that
the performance bonus would be based on achieving operating
income growth and the contribution of each senior executive as
evaluated by the Chief Executive Officer and approved by the
Committee.
The Committee believes that each of the four most highly
compensated senior executives of the Company have demonstrated
superior performance in 1994 during a period of general
uncertainty in the medical services marketplace. Notwithstanding
such performance, however, given industry conditions and the
effects of the changes in the industry on the Company's results,
the Committee believed, as it did at the end of 1993, that it
would not be appropriate to award any discretionary bonus nor to
increase any compensation levels for senior executives at this
time. Each of such executives also agreed in 1994 to a reduction
in the year-end retention bonus in an amount equal to five
percent of their base salary.
Compensation of Chief Executive Officer. The compensation
arrangement with the Company's President and Chief Executive
Officer was entered into in December 1992. At that time, the
Committee considered the salary and incentive pay levels at
public companies whose financial characteristics and market
capitalization were similar to those of the Company and whose
workforce skills requirements and customer bases were similar.
The Committee also considered the Company's circumstances and
special leadership challenges in the aftermath of the settlement
56
with the Federal government. In the Committee's judgment, these
circumstances required stable new direction at the chief
executive officer level to help ensure sustained quality of the
Company's services and continued employee commitment to the
Company's objectives.
Based on these considerations and the Company's strategic
direction for executive compensation, it was determined to
provide a cash compensation arrangement for the Chief Executive
consisting of an annual salary of $1 million, a year-end
retention bonus of $500,000 for each year of the contract term
and an annual discretionary performance bonus opportunity. The
Committee also determined that it was important to structure the
Chief Executive Officer's total compensation package to reflect
the policy of creating strong financial incentives for executive
officers to achieve a high level of long-term shareholder return.
Accordingly, the Chief Executive Officer was awarded 100,000
shares of the Company's common stock and granted options to
purchase 300,000 shares at the then fair market value of the
shares, which options vest during the term of the three-year
contract. The Committee views the common stock and stock option
awards as the primary means by which the Chief Executive Officer
would be rewarded for the Company's business success and believes
it is important for the Chief Executive Officer to maintain and
increase his equity interest in the Company. Accordingly in
1994, Mr. Maher was granted options to purchase an additional
350,000 shares. The annual discretionary bonus opportunity was
adopted as a special recognition vehicle appropriate for years in
which the Company achieves superior performance as measured
against industry results for growth in operating income and
revenues. The Committee decided that with respect to 1994, Mr.
Maher, like the other senior executives, would receive no
discretionary cash bonus in excess of his year-end retention
bonus. Mr. Maher, like the other senior executives, also agreed
in 1994 to a reduction in the year-end retention bonus in an
amount equal to five percent of his base salary.
Limit on Deductibility of Compensation. The Omnibus Budget
Reconciliation Act of 1993 ("OBRA") limits the tax deductibility
of compensation paid to the chief executive officer and each of
the four highest paid employees of public companies to $1 million
for fiscal years beginning on or after January 1, 1994. Certain
types of compensation, however, including qualifying performance-
based compensation and compensation arrangements entered into
prior to February 17, 1993 are excluded from the limitation. The
Company's general policy is to preserve the tax deductibility of
compensation paid to its executive officers. OBRA recognizes
stock option plans as performance-based if such plans meet
certain requirements. The Company's 1994 Option Plan is
57
structured to meet the requirements of OBRA. In future years,
the Compensation Committee will consider taking such steps as it
deems necessary to qualify compensation so as not to be subject
to the limit on deductibility.
THE EMPLOYEE BENEFITS COMMITTEE
Saul J. Farber, M.D.
Howard Gittis
David J. Mahoney
Linda Gosden Robinson
Samuel O. Thier, M.D.
58
Common Stock Performance
The Commission requires a five-year comparison of stock
performance for the Company with stock performance of appropriate
similar companies. The Company's common stock is traded on the
NYSE. Set forth below is a line graph comparing the yearly
percentage change in the cumulative total shareholder return on
the Company's common stock and the cumulative total return on the
S&P Composite-500 Stock Index and a peer group of companies. The
peer group of companies includes sixteen companies selected by
the Company. One of these is a medical service laboratory like
the Company - Unilab Corporation. (Other direct competitors of
the Company are subsidiaries of much larger diversified
corporations which were not believed appropriate to be peer
companies.) The remaining fifteen companies are all publicly
traded medical service and medical supply companies with sales
ranging from approximately $500 million to $2.5 billion -
Continental Medical Systems, Inc., Universal Health Services,
Inc., Charter Medical Corporation, Allergan, Inc., C. R. Bard,
Inc., Pall Corporation, Thermo Electron Corporation, United
States Surgical Corporation, Bausch & Lomb Incorporated,
Millipore Corporation, Amsco International, Inc., Beckman
Instruments, Inc., FHP International Corporation and Fisher
Scientific International, Inc. (Nichols Institute which had been
included in the Company's peer group in the 1994 Proxy Statement
is no longer a public company and is therefore not included in
the peer group. Also, Columbia Hospital Corporation, which had
been included in the Company's peer group in the 1994 Proxy
Statement, merged with Hospital Corporation of America in 1994
and is no longer within the sales range as defined above.)
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN(1)
12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94
-------- -------- -------- -------- -------- --------
National Health
Laboratories
Holdings Inc. 100 99 266 166 135 126
Peer Group 100 115 209 191 155 158
S & P 500 100 97 126 135 149 150
<FN>
(1) Reflects the return on $100 invested on December 31, 1989, including the
reinvestment of dividends
</FN>
59
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS
The following table sets forth as of February 15, 1994, the
total number of shares of common stock beneficially owned, and
the percent so owned, by each director of the Company who is a
beneficial owner of any shares of common stock, by each person
known to the Company to be the beneficial owner of more than 5%
of the outstanding common stock, by the officers named in the
summary compensation table and by all directors and officers as a
group. The number of shares owned are those "beneficially
owned," as determined under the rules of the Commission, and such
information is not necessarily indicative of beneficial ownership
for any other purpose. Under such rules, beneficial ownership
includes any shares as to which a person has sole or shared
voting power or investment power and any shares of common stock
which the person has the right to acquire within 60 days through
the exercise of any option, warrant or right, through conversion
of any security, or pursuant to the automatic termination of
power of attorney or revocation of trust, discretionary account
or similar arrangement.
Amount and Nature
of Beneficial Percent of
Ownership Class
----------------- ----------
Ronald O. Perelman 20,176,729(1) 24%
35 East 62nd Street
New York, NY 10021
GEICO Corporation 6,404,000 7
GEICO Plaza
Washington, D.C. 20076
The Equitable Companies Incorporated 5,812,300(2) 7
787 Seventh Avenue
New York, NY 10019
ESL Partners, L.P. 4,653,400 5
LBP Associates, L.P.
115 East Putnam Avenue
Greenwich, CT 06830
Heine Securities Corporation 4,356,500 5
51 John F. Kennedy Parkway
Short Hills, NJ 07078
Howard Gittis 46,000(3) *
35 East 62nd Street
New York, NY 10021
60
Amount and Nature
of Beneficial Percent of
Ownership Class
----------------- ----------
James R. Maher 606,667(4) *
4225 Executive Square
La Jolla, CA 92037
Paul A. Marks, M.D. 3,000 *
1275 York Avenue
New York, NY 10021
David C. Flaugh 245,070(4) *
Timothy J. Brodnik 136,500(4) *
William D. Slaunwhite, Ph.D. 116,500(4) *
Bernard E. Statland, M.D., Ph.D. 83,167(4) *
Saul J. Farber, M.D. 0 0
Ann Dibble Jordan 0 0
David J. Mahoney 0 0
Linda Gosden Robinson 0 0
Samuel O. Thier, M.D. 0 0
All directors and executive 21,881,466(4) 26%
officers as a group (17 persons)
<FN>
* Less than 1%
(1) All such shares of common stock are owned by Mr. Perelman through
MacAndrews & Forbes. All of such shares owned are pledged to secure
obligations.
(2) As reported in the Schedule 13G filed with the Commission on February
10, 1995, on behalf of The Equitable Companies Incorporated, 5,077,600
of these shares are held by Alliance Capital Management L.P., a
subsidiary of The Equitable Companies, for investment purposes on behalf
of client discretionary investment advisory accounts, 697,500 of these
shares are held by The Equitable Life Assurance Society of the United
States, a subsidiary of The Equitable Companies, solely for investment
purposes, and the remaining 37,200 of these shares are held by
Donaldson, Lufkin & Jenrette Securities Corporation, a subsidiary of the
Equitable Companies, solely for investment purposes.
(3) Includes 3,000 shares owned by Mr. Gittis' spouse as to which he
disclaims beneficial ownership.
(4) Beneficial ownership by officers of the Company includes shares of
common stock which such officers have right to acquire upon the exercise
of options which either are vested or which may vest within 60 days.
The number of shares of common stock included in the table as
61
beneficially owned which are subject to such options is as follows: Mr.
Maher - 466,667; Mr. Flaugh - 241,500; Mr. Brodnik - 136,500; Dr.
Slaunwhite - 116,500; Dr. Statland - 83,167; all directors and executive
officers as a group - 1,512,167.
</FN>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company was included in the consolidated federal income
tax returns, and in certain state income tax returns, of Mafco,
M&F Holdings, Revlon Group Incorporated and Revlon Holdings Inc.,
formerly known as Revlon Inc. As a result of the reduction of
MacAndrews & Forbes' ownership interest in the Company on May 7,
1991, the Company is no longer a member of the Mafco consolidated
tax group. For periods subsequent to May 7, 1991, the Company
files its own separate Federal, state and local income tax
returns. Nevertheless, the Company will remain obligated to pay
to M&F Holdings (or other members of the consolidated group of
which M&F Holdings is a member) any income taxes the Company
would have had to pay (in excess of those which it has already
paid) if it had filed separate income tax returns for taxable
periods beginning on or after January 1, 1985 (but computed
without regard to (i) the effect of timing differences (i.e., the
liability or benefit that otherwise could be deferred will be,
instead, includible in the determination of current taxable
income) and (ii) any gain recognized on the sale of any asset not
in the ordinary course of business). In addition, despite the
reduction of MacAndrews & Forbes' indirect ownership of the
Company, the Company will continue to be subject under existing
federal regulations to several liability for the consolidated
federal income taxes for any consolidated return year in which it
was a member of any consolidated group of which Mafco, M&F
Holdings, Revlon Group or Revlon was the common parent. However,
Mafco, M&F Holdings, Revlon Group and Revlon have agreed to
indemnify the Company for any federal income tax liability (or
any similar state or local income tax liability) of Mafco, M&F
Holdings, Revlon Group, Revlon or any of their subsidiaries
(other than that which is attributable to the Company or any of
its subsidiaries) that the Company could be required to pay.
In connection with the settlement of the litigation
described under Item 3. Legal Proceedings, an affiliate of
MacAndrews & Forbes agreed to contribute to the settlement by
reimbursing the Company $15 million, with $5 million reimbursable
to the Company upon demand and the remainder reimbursable no
later than the earlier of the consummation of the Merger and six
months from the date of payment by the Company. Under such
agreement, the Company also will receive interest at the
Company's cost of funds from the date of payment until the
reimbursement.
The Company and National Health Care Group, Inc. ("NHCG")
62
are parties to a Registration Rights Agreement (the "Registration
Rights Agreement") pursuant to which the Company is obligated,
upon the request of NHCG, to file registration statements
("demand registration statements") from time to time with the
Commission covering the sale of any shares of common stock owned
by NHCG. Such demand registration statements may also cover the
resale from time to time of any shares of common stock that NHCG
may purchase in the open market at a time when it is deemed to be
an affiliate (as such term is defined under Rule 144 under the
Securities Act of 1933, as amended), and certain securities
issued in connection with a combination of shares,
recapitalization, reclassification, merger or consolidation, or
other pro rata distribution. NHCG also has the right to include
such common stock and other securities in any registration
statement filed by the Company for the underwritten public
offering of shares of common stock (whether or not for the
Company's account), subject to certain reductions in the amount
of such common stock and securities if the managing underwriters
of such offering determine that the inclusion thereof would
materially interfere with the offering. The Company has agreed
not to effect any public or private sale, distribution or
purchase of any of its securities which are the same as or
similar to the securities covered by any demand registration
statement during the 15-day period prior to, and during the 45-
day period beginning on, the closing date of each underwritten
offering under such registration statement and NHCG has agreed to
a similar restriction with respect to underwritten offerings by
the Company. NHCG's rights under the Registration Rights
Agreement are transferable.
The Company has agreed (for certain stated purposes),
pursuant to the Sharing and Call Option Agreement dated as of
December 13, 1994, among NHCG, Mafco, the Company, HLR and RBL to
use its best efforts to cause the registration statement filed in
connection with the Merger (the "Registration Statement") to
include a resale prospectus that would permit NHCG (or any pledge
of the Merger Shares (as defined below) under a bona fide pledge
arrangement with NHCG) to sell shares of common stock received by
NHCG in the Merger (the "Merger Shares") without restriction and,
after the filing of the Registration Statement, will use its best
efforts to prepare and file with the Commission such amendments
and post-effective amendments to the Registration Statement as
may be necessary to keep such Registration Statement continuously
effective for a period ending on the third anniversary of the
date of the Sharing and Call Option Agreement and during such
period will use its best efforts to cause the resale prospectus
to be supplemented by any required prospectus supplement. The
Company has agreed to pay all of the Registration Expenses
arising from exercise of the registration rights set forth in the
Sharing and Call Option Agreement.
63
PART IV
Item 14. 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' Report 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
(a) Exhibits:*
Exhibits 10.2 through 10.4 and 10.6 through 10.46 are
management contracts or compensatory plans or
arrangements.
2.1 - Agreement and Plan of Merger among the Company,
NHL Sub Acquisition Corp. and NHLI
(incorporated herein by reference to the
Company's Registration Statement on Form S-4
filed with the Securities and Exchange
Commission (the "Commission") on March 14, 1994,
File No. 33-52655 (the "1994 S-4")).
2.2 - Agreement and Plan of Merger dated as of May 3,
1994 of NHLI and N Acquisition Corp.
(incorporated by reference to Exhibit (c)(1) of
Schedule 14D-1 and Schedule 13D ("Schedule 14D-
1 and Schedule 13D") filed with the Commission
on May 9, 1994).
2.3 - Agreement dated as of June 7, 1994, among N
Acquisition Corp., the Company and NHLI
(incorporated herein by reference to Exhibit
(c)(7) of amendment No. 2 to Schedule 14D-1 and
Schedule 13D of NHLI and N Acquisition Corp
filed with the Commission on June 8, 1994).
64
2.4* - Agreement and Plan of Merger dated as of
December 13, 1994 among the Company, HLR
Holdings Inc., Roche Biomedical Laboratories,
Inc. and (for the purposes stated therein)
Hoffman-La Roche Inc. (schedules omitted - the
Company agrees to furnish a copy of any
schedule to the Commission upon request).
2.5* - Stock Purchase Agreement dated December 30,
1994 between Reference Pathology Holding
Company, Inc. and Allied Clinical Laboratories,
Inc. ("Allied").
3.1 - Certificate of Incorporation of the Company
(incorporated herein by reference to the
Company's 1994 S-4).
3.2 - By-laws of the Company (incorporated herein by
reference to the Company's 1994 S-4).
10.1 - Laboratory Agreement dated February 4, 1983
between the Company and Humana of Texas, Inc.
d/b/a/ Medical City Dallas Hospital
(incorporated herein by reference to the
Company's Registration Statement on Form S-1
filed with the Commission on May 5, 1988, File
No. 33-21708).
10.2 - National Health Laboratories Incorporated
Employees' Savings and Investment Plan
(incorporated herein by reference to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1991 filed with the
Commission on February 13, 1992, File No. 1-
10740** (the "1991 10-K")).
10.3 - National Health Laboratories Incorporated
Employees' Retirement Plan (incorporated herein
by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1992
filed with the Commission on March 26, 1993,
File No. 1-10740 (the "1992 10-K")).
10.4 - National Health Laboratories Incorporated
Pension Equalization Plan (incorporated herein
by reference to the 1992 10-K).
10.5 - Settlement Agreement dated December 18, 1992
between the Company and the United States of
America (incorporated herein by reference to
the 1992 10-K).
10.6 - Employment Agreement dated December 21, 1992
between the Company and James R. Maher
(incorporated herein by reference to the 1992
10-K).
65
10.7 - Employment Agreement dated May 1, 1991 between
the Company and Robert Whalen (incorporated
herein by reference to the 1991 10-K).
10.8 - Amendment to Employment Agreement dated June 6,
1991 between the Company and Robert Whalen
(incorporated herein by reference to the 1991
10-K).
10.9 - Amendment to Employment Agreement dated January
1, 1993 between the Company and Robert Whalen
(incorporated herein by reference to the 1992
10-K).
10.10 - Amendment to Employment Agreement dated January
1, 1994 between the Company and Robert Whalen
(incorporated herein by reference to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1993 filed with the
Commission on March 25, 1994, File No. 1-10790
(the "1993 10-K")).
10.11 - Amendment to Employment Agreement dated March
1, 1994 between the Company and Robert Whalen
(incorporated herein by reference to the 1993
10-K).
10.12 - Employment Agreement dated May 1, 1991 between
the Company and Larry L. Leonard (incorporated
herein by reference to the 1991 10-K).
10.13 - Amendment to Employment Agreement dated June 6,
1991 between the Company and Larry L. Leonard
(incorporated herein by reference to the 1991
10-K).
10.14 - Amendment to Employment Agreement dated January
1, 1993 between the Company and Larry L.
Leonard (incorporated herein by reference to
the 1992 10-K).
10.15 - Amendment to Employment Agreement dated January
1, 1994 between the Company and Larry L.
Leonard (incorporated herein by reference to
the 1993 10-K).
10.16 - Amendment to Employment Agreement dated March
1, 1994 between the Company and Larry L.
Leonard (incorporated herein by reference to
the 1993 10-K).
10.17 - Employment Agreement dated May 1, 1991 between
the Company and Timothy Brodnik (incorporated
herein by reference to the 1991 10-K).
10.18 - Amendment to Employment Agreement dated June 6,
1991 between the Company and Timothy Brodnik
(incorporated herein by reference to the 1991
10-K).
66
10.19 - Amendment to Employment Agreement dated January
1, 1993 between the Company and Timothy Brodnik
(incorporated herein by reference to the 1992
10-K).
10.20 - Amendment to Employment Agreement dated January
1, 1994 between the Company and Timothy Brodnik
(incorporated herein by reference to the 1993
10-K).
10.21 - Amendment to Employment Agreement dated March
1, 1994 between the Company and Timothy Brodnik
(incorporated herein by reference to the 1993
10-K).
10.22 - Employment Agreement dated December 31, 1990
between the Company and Bernard E. Statland
(incorporated herein by reference to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1990 filed with the
Commission on March 14, 1991, File No. 1-
10740** (the "1990 10-K")).
10.23 - Amendment to Employment Agreement dated April
1, 1991 between the Company and Bernard E.
Statland (incorporated herein by reference to
the 1991 10-K).
10.24 - Amendment to Employment Agreement dated June 6,
1991 between the Company and Bernard E.
Statland (incorporated herein by reference to
the 1991 10-K).
10.25 - Amendment to Employment Agreement dated January
1, 1993 between the Company and Bernard E.
Statland (incorporated herein by reference to
the 1992 10-K).
10.26 - Employment Agreement dated January 1, 1991
between the Company and David C. Flaugh
(incorporated herein by reference to the 1990
10-K).
10.27 - Amendment to Employment Agreement dated April
1, 1991 between the Company and David C. Flaugh
(incorporated herein by reference to the 1991
10-K).
10.28 - Amendment to Employment Agreement dated June 6,
1991 between the Company and David C. Flaugh
(incorporated herein by reference to the 1991
10-K).
10.29 - Amendment to Employment Agreement dated January
1, 1993 between the Company and David C. Flaugh
(incorporated herein by reference to the 1992
10-K).
10.30* - Amendment to Employment Agreement dated April
1, 1994 between the Company and David C.
67
Flaugh.
10.31 - Employment Agreement dated January 1, 1991
between the Company and W. David Slaunwhite
(incorporated herein by reference to the 1990 -
10-K).
10.32 - Amendment to Employment Agreement dated April
1, 1991 between the Company and David
Slaunwhite (incorporated herein by reference to
the 1991 10-K).
10.33 - Amendment to Employment Agreement dated June 6,
1991 between the Company and David Slaunwhite
(incorporated herein by reference to the 1991
10-K).
10.34 - Amendment to Employment Agreement dated January
1, 1993 between the Company and W. David
Slaunwhite (incorporated herein by reference to
the 1992 10-K).
10.35 - Amendment to Employment Agreement dated January
1, 1994 between the Company and W. David
Slaunwhite (incorporated herein by reference to
the 1993 10-K).
10.36 - Amendment to Employment Agreement dated March
1, 1994 between the Company and W. David
Slaunwhite (incorporated herein by reference to
the 1993 10-K).
10.37 - Employment Agreement dated January 1, 1991
between the Company and John Markus
(incorporated herein by reference to the 1990
10-K).
10.38 - Amendment to Employment Agreement dated April
1, 1991 between the Company and John Markus
(incorporated herein by reference to the 1991
10-K).
10.39 - Amendment to Employment Agreement dated June 6,
1991 between the Company and John Markus
(incorporated herein by reference to the 1991
10-K).
10.40 - Amendment to Employment Agreement dated January
1, 1993 between the Company and John F. Markus
(incorporated herein by reference to the 1992
10-K).
10.41 - Amendment to Employment Agreement dated January
1, 1994 between the Company and John F. Markus
(incorporated herein by reference to the 1993
10-K).
10.42 - Amendment to Employment Agreement dated March
1, 1994 between the Company and John F. Markus
(incorporated herein by reference to the 1993
10-K).
68
10.43 - Employment Agreement dated October 1, 1992
between the Company and James G. Richmond
(incorporated herein by reference to the 1992
10-K).
10.44* - Employment Agreement dated as of June 23, 1994
between the Company and Haywood D. Cochrane,
Jr.
10.45 - National Health Laboratories 1988 Stock Option
Plan, as amended (incorporated herein by
reference to the 1990 S-1).
10.46 - 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).
10.47 - Tax Allocation Agreement dated as of June 26,
1990 between MacAndrews & Forbes Holdings Inc.,
Revlon Group Incorporated, New Revlon Holdings
Inc. and the subsidiaries of Revlon set forth
on Schedule A thereto (incorporated herein by
reference to the Company's Registration
Statement on Form S-1 (No. 33-35782) filed with
the Commission on July 9, 1990 (the "1990 S-
1")).
10.48 - Revolving Credit Agreement dated as of August
27, 1993 among National Health Laboratories
Incorporated, Citicorp USA, Inc., as agent and
arranger, and the group of lenders specified
therein (incorporated herein by reference to
the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1993 filed with
the Commission on November 15, 1993, File No.
1-10740).
10.49 - Credit Agreement dated as of June 21, 1994,
among NHL Intermediate Holdings Corp. II, the
banks named therein, Citicorp USA, Inc., as
administrative agent, and the co-agents named
therein (incorporated herein by reference to
the Company's Current Report on Form 8-K dated
June 23, 1994 filed with the Commission on July
7, 1994, File No. 1-11353).
10.50 - Loan Agreement dated August 1, 1991 among the
Company, Frequency Property Corp. and Swiss
Bank Corporation, New York Branch (incorporated
herein by reference to the 1991 10-K).
10.51* - Sharing and Call Option Agreement dated as of
December 13, 1994 among HLR Holdings Inc.,
Roche Biomedical Laboratories, Inc., Mafco
Holdings Inc., National Health Care Group, Inc.
69
and(for thepurposes stated therein)the Company.
21.1* - List of Subsidiaries of the Company.
23.1* - Consent of KPMG Peat Marwick LLP.
24.1* - Power of Attorney of Ronald O. Perelman.
24.2* - Power of Attorney of James R. Maher.
24.3* - Power of Attorney of Saul J. Farber, M.D.
24.4* - Power of Attorney of Howard Gittis.
24.5* - Power of Attorney of Ann Dibble Jordan.
24.6* - Power of Attorney of David J. Mahoney.
24.7* - Power of Attorney of Paul A. Marks, M.D.
24.8* - Power of Attorney of Linda Gosden Robinson.
24.9* - Power of Attorney of Samuel O. Thier, M.D.
24.10* - Power of Attorney of David C. Flaugh.
27 - Financial Data Schedule (electronically
filed version only)
28.1 - Form of Collateral Agency Agreement (Bank
Obligations) (incorporated herein by reference
to Amendment No. 1 to the 1990 S-1 filed with
the Commission on July 27, 1990, File No.
33-35785).
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K with the
Commission on December 19, 1994 reporting the entering into
of the Agreement and Plan of Merger dated as of December
13, 1994 among the Company, HLR, RBL and (for the purposes
stated therein) Roche.
_________________
* Filed herewith.
** Previously filed under File No. 0-17031 which has been
corrected to File No. 1-10740.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NATIONAL HEALTH LABORATORIES HOLDINGS INC.
Registrant
By:/s/ JAMES R. MAHER
------------------------------------
James R. Maher
President and Chief Executive Officer
By:/s/ DAVID C. FLAUGH
------------------------------------
David C. Flaugh
Senior Executive Vice President,
Chief Operating Officer and Acting
Chief
Financial Officer
(Principal Accounting Officer)
Dated: March 3, 1995
71
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed by the
following persons on March 3, 1995 in the capacities indicated.
Signature Title
----------------------- --------
/s/ RONALD O. PERELMAN* Director
-----------------------
(Ronald O. Perelman)
/s/ JAMES R. MAHER* Director
-----------------------
(James R. Maher)
/s/ SAUL J. FARBER, M.D.* Director
-----------------------
(Saul J. Farber, M.D.)
/s/ HOWARD GITTIS* Director
-----------------------
(Howard Gittis)
/s/ ANN DIBBLE JORDAN* Director
-----------------------
(Ann Dibble Jordan)
/s/ DAVID J. MAHONEY* Director
-----------------------
(David J. Mahoney)
/s/ PAUL A. MARKS, M.D.* Director
-----------------------
(Paul A. Marks, M.D.)
/s/ LINDA GOSDEN ROBINSON* Director
-----------------------
(Linda Gosden Robinson)
/s/ SAMUEL O. THIER, M.D.* Director
-----------------------
(Samuel O. Thier, M.D.)
72
______________________
* David C. Flaugh, 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/ DAVID C. FLAUGH
-------------------
David C. Flaugh
Attorney-in-fact
73
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
AND SCHEDULE
---------------------------------------------------------------
Page
----
Independent Auditors' Report . . . . . . . . . . . . . . F-2
Financial Statements:
Consolidated Balance Sheets as of
December 31, 1994 and 1993 . . . . . . . . . . . . . F-3
Consolidated Statements of Earnings for
each of the years in the three-year
period ended December 31, 1994. . . . . . . . . . . F-4
Consolidated Statements of Stockholders'
Equity for each of the years in the
three-year period ended December 31, 1994 . . . . . . F-5
Consolidated Statements of Cash Flows for
each of the years in the three-year
period ended December 31, 1994. . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . F-8
Financial Statement Schedule:
VIII - Valuation and Qualifying Accounts and Reserves . F-28
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
National Health Laboratories Holdings Inc.:
We have audited the consolidated financial statements
of National Health Laboratories Holdings Inc. and subsidiaries as
listed in the accompanying index. In connection with our audits
of the consolidated financial statements, we have also audited
the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of National Health Laboratories Holdings Inc.
and subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1994, in
conformity with generally accepted accounting principles. Also
in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
KPMG Peat Marwick LLP
San Diego, California
February 13, 1995
F-2
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions, except per share data)
December 31,
-------------------------
1994 1993
--------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 26.8 $ 12.3
Accounts receivable, net 205.4 119.0
Inventories 20.1 14.9
Prepaid expenses and other 8.3 6.8
Deferred income taxes 29.4 21.6
Income taxes receivable 3.0 8.7
-------- --------
Total current assets 293.0 183.3
Property, plant and equipment, net 140.1 100.1
Intangible assets, net 551.9 281.5
Other assets, net 27.7 20.6
-------- --------
$1,012.7 $ 585.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 44.3 $ 36.9
Dividends payable -- 6.8
Accrued expenses and other 92.8 55.6
Current portion of long-term debt 39.0 --
Current portion of accrued
settlement expenses 26.7 21.6
-------- -------
Total current liabilities 202.8 120.9
Revolving credit facility 213.0 278.0
Long-term debt, less current portion 341.0 --
Capital lease obligation 9.8 9.7
Accrued settlement expenses, less
current portion -- 11.5
Deferred income taxes 20.6 3.1
Other liabilities 59.5 21.5
Stockholders' equity:
Preferred stock, $0.10 par value;
10,000,000 shares authorized;
none issued -- --
Common stock, $0.01 par value;
220,000,000 shares authorized;
84,761,817 and 99,354,492 shares
issued at December 31, 1994
and 1993, respectively 0.8 1.0
Additional paid-in capital 153.5 226.3
Retained earnings 11.7 202.0
Minimum pension liability adjustment -- (2.4)
Treasury stock, at cost; 14,603,800
shares of common stock at
December 31, 1993 -- (286.1)
-------- --------
Total stockholders' equity 166.0 140.8
-------- --------
$1,012.7 $ 585.5
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
F-3
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in Millions, except per share data)
Years Ended December 31,
1994 1993 1992
------- ------- -------
Net Sales $ 872.5 $ 760.5 $ 721.4
Cost of sales 597.0 444.5 395.1
------- ------- -------
Gross profit 275.5 316.0 326.3
Selling, general and
administrative expenses 149.3 121.4 117.9
Amortization of intangibles
and other assets 16.3 9.1 8.3
Settlement and related expenses -- -- 136.0
------- ------- -------
Operating income 109.9 185.5 64.1
Other income (expenses):
Litigation settlement and
related expenses (21.0) -- --
Other gains and expenses,
net -- 15.3 --
Investment income 1.0 1.2 2.2
Interest expense (34.5) (10.9) (4.2)
------- ------- -------
Earnings before income taxes 55.4 191.1 62.1
Provision for income taxes 25.3 78.4 21.5
------- ------- -------
Net earnings $ 30.1 $ 112.7 $ 40.6
======= ======= =======
Earnings per common share $ 0.36 $ 1.26 $ 0.43
Dividends per common share $ 0.08 $ 0.32 $ 0.31
<FN>
See notes to consolidated financial statements.
</FN>
F-4
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Millions, except per share data)
Common
Stock Minimum
$0.01 Additional Pension
Par Paid-in Retained Liability Treasury
Value Capital Earnings Adjustment Stock
------- ----------- --------- --------- --------
Balance, January 1, 1992 $1.0 $223.7 $106.1 $ -- $ --
Net earnings -- -- 40.6 -- --
Dividends to stockholders -- -- (29.2) -- --
Exercise of stock options -- 0.5 -- -- --
Acquisition of treasury
stock -- -- -- -- (131.9)
Other -- 1.7 -- -- --
------- ----------- --------- --------- -------
Balance, December 31, 1992 1.0 225.9 117.5 -- (131.9)
Net earnings -- -- 112.7 -- --
Dividends to stockholders -- -- (28.2) -- --
Exercise of stock option s -- 0.4 -- -- --
Acquisition of treasury
stock -- -- -- -- (154.2)
Adjustment for minimum
pension liability -- -- -- (2.4) --
Other -- -- -- -- --
------- ----------- --------- --------- --------
Balance, December 31, 1993 1.0 226.3 202.0 (2.4) (286.1)
Net earnings -- -- 30.1 -- --
Dividends to stockholders -- -- (6.8) -- --
Exercise of stock options -- 0.1 -- -- --
Retirement of treasury (0.2) (72.3) (213.6) -- 286.1
stock
Adjustment for minimum
pension liability -- -- -- 2.4 --
Other -- (0.6) -- -- --
------- ----------- --------- --------- --------
Balance, December 31, 1994 $0.8 $ 153.5 $ 11.7 $ -- $ --
======= =========== ========= ========= ========
<FN>
See notes to consolidated financial statements.
</FN>
F-5
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
Years Ended December 31,
1994 1993 1992
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 30.1 $ 112.7 $ 40.6
Adjustments to reconcile net earnings
to net cash provided by (used for)
operating activities:
Depreciation and amortization 44.4 32.2 26.9
Provision for doubtful accounts,
net (1.4) 0.2 4.5
Litigation settlement and
related expenses 21.0 -- --
Other gains and expenses, net -- (15.3) --
Settlement and related expenses -- -- 136.0
Change in assets and liabilities,
net of effects of acquisitions:
Increase in accounts receivable (54.0) (35.8) (22.5)
Increase in inventories (0.9) (0.9) (1.8)
Decrease (increase) in prepaid
expenses and other 5.1 (2.5) (0.4)
Decrease (increase) in deferred
income taxes, net 11.0 19.1 (39.8)
Decrease (increase) in income
taxes receivable 5.5 6.5 (15.2)
Decrease (increase) in accounts
payable, accrued expenses
and other (13.1) 1.5 15.7
Payments for settlement and
related expenses (29.8) (55.8) (47.1)
Other, net (3.2) (4.7) 5.5
------- ------- -------
Net cash provided by operating
activities 14.7 57.2 102.4
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (48.9) (33.6) (34.9)
Proceeds from sale of subsidiary 10.1 -- --
Acquisitions of businesses (254.8) (78.2) (2.3)
Restricted investments -- 0.8 0.9
Other gains and expenses, net -- 15.3 --
------- ------- -------
Net cash used for investing
activities (293.6) (95.7) (36.3)
------- ------- -------
(continued)
F-6
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Dollars in Millions)
Years Ended December 31,
1994 1993 1992
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit
facilities $ 308.0 $ 342.0 $ 100.0
Payments on revolving credit
facilities (373.0) (139.0) (25.0)
Proceeds from long-term debt 400.0 -- --
Payments on long-term debt (20.0) -- --
Deferred payments on acquisitions (7.6) (1.9) (1.6)
Purchase of treasury stock -- (154.2) (131.9)
Dividends paid on common stock (13.6) (29.0) (28.6)
Proceeds from exercise of stock
options 0.1 0.4 0.5
Other (0.5) (0.9) 2.6
------- ------- -------
Net cash provided by (used for)
financing activities 293.4 17.4 (84.0)
------- ------- -------
Net increase (decrease) in cash
and cash equivalents 14.5 (21.1) (17.9)
Cash and cash equivalents at
beginning of year 12.3 33.4 51.3
------- ------- -------
Cash and cash equivalents at
end of year $ 26.8 $ 12.3 $ 33.4
======= ======= =======
Supplemental schedule of cash
flow information:
Cash paid during the period for:
Interest $ 34.2 $ 8.4 $ 3.6
Income taxes 14.8 59.6 82.0
Disclosure of non-cash financing
and investing activities:
Dividends declared and unpaid
on common stock $ -- $ 6.8 $ 7.6
Fixed assets acquired under
capital leases -- -- 9.6
In connection with business
acquisitions, liabilities were
assumed as follows:
Fair value of assets acquired $ 399.4 $ 106.9 $ 3.0
Cash paid (254.8) (78.2) (2.3)
------- ------- -------
Liabilities assumed $ 144.6 $ 28.7 $ 0.7
======= ======= =======
<FN>
See notes to consolidated financial statements.
</FN>
F-7
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The consolidated financial statements include the accounts
of National Health Laboratories Holdings Inc. and its
subsidiaries ("Company") after elimination of all material
intercompany accounts and transactions. On June 7, 1994, the
stockholders of National Health Laboratories Incorporated
("NHLI") approved a proposed corporate reorganization of NHLI, as
a result of which National Health Laboratories Holdings Inc.
("NHL Holdings"), a Delaware corporation, now owns, through NHL
Intermediate Holdings Corp. I, a Delaware corporation and a
wholly owned subsidiary of NHL Holdings ("Intermediate Holdings
I"), and NHL Intermediate Holdings Corp. II, a Delaware
corporation and a wholly owned subsidiary of Intermediate
Holdings I ("Intermediate Holdings II"), all of the outstanding
common stock of the NHLI.
Until May 7, 1991, the Company was a direct majority owned
subsidiary of National Health Care Group, Inc. ("NHCG") which is
a wholly owned subsidiary of Revlon Holdings Inc. ("Revlon"),
then known as Revlon, Inc., and MacAndrews & Forbes Holdings Inc.
("MacAndrews & Forbes"). MacAndrews & Forbes is wholly owned by
Mafco Holdings Inc. ("Mafco").
As a result of an initial public offering in July 1988 and
subsequent secondary public offerings in August 1990, May 1991
and February 1992, the Company's self tender offer in January
1992 and the purchase by the Company of outstanding shares of its
common stock, Mafco's indirect ownership has been reduced to
approximately 24%.
Cash Equivalents:
Cash equivalents (primarily investments in money market
funds, time deposits and commercial paper which have original
maturities of three months or less at the date of purchase) are
carried at cost which approximates market.
Inventories:
Inventories, consisting primarily of laboratory supplies,
are stated at the lower of cost (first-in, first-out) or market.
F-8
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions)
Property, Plant and Equipment:
Property, plant and equipment is 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 40
Machinery and equipment 3-10
Furniture and fixtures 8
Leasehold improvements and assets held under capital leases
are amortized over the shorter of their estimated lives or the
period of the related leases. Expenditures for repairs and
maintenance charged against earnings in 1994, 1993 and 1992 were
$16.5, $10.8 and $10.7, respectively.
Intangibles:
Intangibles, consisting of goodwill, net of amortization
of $417.0 and $231.2 at December 31, 1994 and 1993,
respectively, and other intangibles (i.e., customer lists
and non-compete agreements), net of amortization, of $134.9 and
$50.3 at December 31, 1994 and 1993, respectively, are being
amortized on a straight-line basis over a period of 40 years and
3-25 years, respectively. Total accumulated amortization for
goodwill, rights to names and other intangibles aggregated $60.8
and $46.4 at December 31, 1994 and 1993, respectively. The
Company assesses the recoverability of intangible assets by
determining whether the amortization of the intangibles' balance
over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operations. The
amount of intangible asset impairment, if any, is measured based
on projected undiscounted future operating cash flows.
Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments", requires
that fair values be disclosed for most of the Company's financial
F-9
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions)
instruments. The carrying amount of cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses, the
revolving credit and long-term debt are considered to be
representative of their respective fair values.
Concentration of Credit Risk:
Concentrations of credit risk with respect to accounts
receivable are limited due to the diversity of the Company's
clients as well as their dispersion across many different
geographic regions.
Revenue Recognition:
Sales are recognized on the accrual basis at the time test
results are reported, which approximates when services are
provided. Services are provided to certain patients covered by
various third-party payor programs including the Medicare and
Medicaid programs. Billings for services under third-party payor
programs are included in sales net of allowances for differences
between the amounts billed and estimated program payment amounts.
Adjustments to the estimated payment amounts based on final
settlement with the programs are recorded upon settlement. In
1994, 1993 and 1992, approximately 35%, 41% and 42%, respectively,
of the Company's revenues were derived from tests performed for
beneficiaries of Medicare and Medicaid programs.
Income Taxes:
Effective January 1, 1992, the Company adopted Financial
Accounting Standards Board Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("Statement
109"). Statement 109 requires the use of the asset and liability
method of accounting for income taxes. Under the asset and
liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date.
F-10
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
Earnings per Common Share:
For the years ended December 31, 1994, 1993 and 1992,
earnings per common share is calculated based on the weighted
average number of shares outstanding during each year
(84,754,183, 89,438,764 and 94,468,022 shares, respectively).
Reclassifications:
Certain amounts in the prior years' financial statements
have been reclassified to conform with the 1994 presentation.
2. ACQUISITIONS
On May 3, 1994, the Company entered into a definitive
agreement to acquire Allied Clinical Laboratories, Inc.
("Allied"). Pursuant to the agreement, on May 9, 1994, a
subsidiary of the Company commenced a cash tender offer for all
shares of Allied common stock for $23 per share. The agreement
provided that any shares not tendered and purchased in the offer
were to be exchanged for $23 per share in cash in a second-step
merger. In connection with the Company's acquisition of Allied,
the Company and Allied became aware that the nature of the
possible problems associated with billing practices of Allied's
Cincinnati, Ohio clinical laboratory, concerning which Allied had
received a subpoena on April 5, 1994 from the Office of Inspector
General of the Department of Health and Human Services (the
"OIG") requiring Allied to produce certain documents and
information regarding the Medicare billing practices of such
laboratory with respect to certain cancer screening tests, may
have been both different and greater than previously perceived by
the Company and Allied. As a result, on June 7, 1994, the
Company entered into an agreement whereby the price payable in
such cash tender offer and such second-step merger was reduced
from $23 per share to $21.50 per share, or an aggregate of
approximately $12.6. The Company and Allied are continuing to
investigate these possible problems and have communicated with
the OIG and the United States Department of Justice regarding its
subpoena and a related qui tam action commenced in a Cincinnati,
Ohio Federal court, and they are cooperating fully with the
governmental investigation of Allied's Cincinnati laboratory.
The Company has established reserves which it believes are
adequate to cover any liability associated with these matters.
F-11
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
A subsidiary of the Company acquired Allied as a wholly
owned subsidiary on June 23, 1994, for approximately $191.5 in
cash, $185.0 of which was borrowed under a revolving credit
facility, plus the assumption of $24.0 of Allied indebtedness and
the recognition of approximately $5.0 of Allied net liabilities
(the "Allied Acquisition"). The Allied Acquisition was accounted
for using the purchase method of accounting; as such, Allied's
assets and liabilities were recorded at their fair values on the
date of acquisition. The purchase price exceeded the fair value
of acquired net tangible assets by approximately $220.5, which
consists of goodwill of $167.7 and other intangible assets of
$52.8. These items are being amortized over periods between
3 and 40 years on a straight-line basis. Allied's results of
operations have been included in the Company's results of
operations beginning June 23, 1994.
The following table provides unaudited pro forma operating
results of the Company giving effect to the Allied Acquisition as
if it had been completed at the beginning of the periods
presented. The pro forma information has been prepared for
comparative purposes only and does not purport to be indicative
of future operating results.
Years Ended
December 31, December 31,
1994 1993
----------- -----------
Net sales $ 962.8 $ 923.5
Net earnings 26.1 104.0
Earnings per common share $ 0.31 $ 1.16
During 1994, the Company also acquired 11 small clinical
laboratory companies for an aggregate purchase price of $79.3.
During 1993 and 1992, the Company acquired thirty-four and five
laboratories, respectively, for an aggregate purchase price of
$106.9 and $3.0, respectively. The acquisitions were accounted
for as purchase transactions. The excess of cost over the fair
value of net tangible assets acquired during 1994, 1993 and 1992
was $72.1, $100.1, and $3.0, respectively, which is included
under the caption "Intangible assets, net" in the accompanying
consolidated balance sheets. The consolidated statements of
earnings reflect the results of operations of these purchased
businesses from their dates of acquisition.
F-12
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
3. ACCOUNTS RECEIVABLE, NET
December 31, December 31,
1994 1993
----------- -----------
Gross accounts receivable $ 270.7 $ 170.0
Less contractual allowances and
allowance for doubtful accounts (65.3) (51.0)
------- -------
$ 205.4 $ 119.0
======= =======
4. PROPERTY, PLANT AND EQUIPMENT, NET
December 31, December 31,
1994 1993
----------- -----------
Land $ 1.3 $ 0.4
Buildings and building improvements 1.8 1.9
Machinery and equipment 154.2 117.9
Leasehold improvements 44.2 27.2
Furniture and fixtures 22.0 14.5
Buildings under capital leases 9.6 9.6
------- -------
233.1 171.5
Less accumulated depreciation
and amortization (93.0) (71.4)
------- -------
$ 140.1 $ 100.1
======= =======
5. ACCRUED EXPENSES AND OTHER
December 31, December 31,
1994 1993
----------- -----------
Employee compensation and benefits $ 38.8 $ 27.9
Taxes other than federal taxes
on income 7.3 7.5
Deferred acquisition related
payments 15.9 11.4
Acquisition related reserves 21.8 1.9
Other 9.0 6.9
------- -------
$ 92.8 $ 55.6
======= =======
F-13
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
6. OTHER LIABILITIES
December 31, December 31,
1994 1993
----------- -----------
Deferred acquisition related
payments $ 19.2 $ 15.4
Acquisition related reserves 31.9 --
Other 8.4 6.1
------- -------
$ 59.5 $ 21.5
======= =======
7. LITIGATION SETTLEMENT
In the third quarter of 1994, the Company approved a
settlement of previously disclosed shareholder class and
derivative litigation (the "Litigation Settlement"). The litigation
consisted of two consolidated class action suits and a
consolidated shareholder derivative action brought in federal and
state courts in San Diego, California. The settlement involved
no admission of wrongdoing. In connection with the settlement, the
Company took a pre-tax special charge of $15.0 and a $6.0 charge
for expenses related to the settled litigation. Insurance payments
and payments from other defendants aggregate $55.0 plus expenses.
8. GOVERNMENT SETTLEMENT
In November 1990, the Company became aware of a grand jury
inquiry relating to its pricing practices being conducted by the
United States Attorney for the San Diego area (the Southern
District of California) with the assistance of the Office of
Inspector General of the Department of Health and Human Services.
On December 18, 1992, the Company announced that it had entered
into agreements that concluded the investigation (the "Government
Settlement"). As a result of this settlement, the Company took a
one-time pre-tax charge of $136.0 in the fourth quarter of 1992.
The charge covered all estimated costs related to the
investigation and the settlement agreements. At December 31,
1994 and 1993, the remaining liability for the Government
Settlement and related expenses totalled $11.7 and $33.1,
respectively, and is reflected in the accompanying consolidated
balance sheets under the captions "Accrued Settlement Expenses".
F-14
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions)
9. LONG-TERM DEBT
On June 21, 1994, Intermediate Holdings II entered into a
credit agreement dated as of such date (the "Credit Agreement"),
with the banks named therein (the "Banks"), Citicorp USA, Inc.,
as administrative agent (the "Bank Agent"), and certain co-agents
named therein, which made available to Intermediate Holdings II a
term loan facility of $400.0 (the "Term Facility") and a
revolving credit facility of $350.0 (the "Revolving Credit
Facility" and, together with the Term Facility, the "Bank
Facility"). The Bank Facility provided funds for the Allied
Acquisition, for the refinancing of certain existing debt of
Allied and NHLI, to pay related fees and expenses and for general
corporate purposes of Intermediate Holdings II and its
subsidiaries, in each case subject to the terms and conditions
set forth therein.
The Credit Agreement provides that the Banks and the Bank
Agent will receive from Intermediate Holdings II customary
facility and administrative agent fees, respectively.
Intermediate Holdings II will pay a commitment fee on the average
daily unused portion of the Bank Facility of 0.5% per annum,
subject to a reduction to 0.375% per annum if certain financial
tests are met. Availability of funds under the Bank Facility is
conditioned on certain customary conditions, and the Credit
Agreement contains customary representations, warranties and
events of default. The Credit Agreement also requires the
Company to maintain certain financial ratios and tests, including
minimum debt service coverage ratios and net worth tests.
The Revolving Credit Facility matures in June 1999, with
semi-annual reductions of availability of $50.0, commencing in
December 1997. The Term Facility matures in December 2000, with
repayments in each quarter prior to maturity based on a specified
amortization schedule. The Bank Facility bears interest, at the
option of Intermediate Holdings II, at (i) Citibank, N.A.'s Base
Rate (as defined in the Credit Agreement), plus a margin of up to
0.75% per annum, based upon the Company's financial performance
or (ii) the Eurodollar rate for one, two, three or six month
interest periods (as selected by Intermediate Holdings II), plus
a margin varying between 1.25% and 2.00% per annum based upon the
Company's financial performance. At December 31, 1994, the
effective interest rate was 8.157%.
F-15
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions)
The Bank Facility is guaranteed by Intermediate Holdings I
and certain subsidiaries of Intermediate Holdings II and is
secured by pledges of stock and other assets of Intermediate
Holdings II and its subsidiaries.
Aggregate maturities on long-term debt are $39.0, $48.7,
$58.5, $68.2 and $77.9 for the years 1995 through 1999,
respectively.
10. STOCKHOLDERS' EQUITY
In connection with the corporate reorganization on June 7,
1994 discussed above, all of the 14,603,800 treasury shares held
by NHLI were cancelled. As a result, the $286.1 cost of such
treasury shares was eliminated with corresponding decreases in
the par value, additional paid-in capital and retained earnings
accounts of $0.2, $72.3 and $213.6, respectively.
In connection with the Allied Acquisition, the Company
announced that it terminated its 10 million share repurchase
program under which 7,795,800 common shares had been repurchased
and established a new $50.0 stock repurchase plan through which
the Company will acquire additional shares of the Company's
common stock from time to time in the open market. As of
December 31, 1994, there were no stock repurchases under the new
stock repurchase program.
11. INCOME TAXES
As discussed in Note 1, the Company adopted Statement 109
effective January 1, 1992. The cumulative effect of the change
in the method of accounting for income taxes was not material and
is therefore not presented separately in the accompanying
consolidated statements of earnings.
F-16
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions)
The provisions for income taxes in the accompanying
consolidated statements of earnings consist of the following:
Years Ended December 31,
1994 1993 1992
----- ----- -----
Current:
Federal $16.2 $48.9 $52.3
State and local 3.0 10.4 9.0
----- ----- -----
19.2 59.3 61.3
----- ----- -----
Deferred:
Federal 4.9 14.9 (32.3)
State and local 1.2 4.2 (7.5)
----- ----- -----
6.1 19.1 (39.8)
----- ----- -----
$25.3 $78.4 $21.5
===== ===== =====
The effective tax rates on earnings before income taxes is
reconciled to statutory federal income tax rates as follows:
Years Ended December 31,
1994 1993 1992
------ ------ ------
Statutory federal rate 35.0% 35.0% 34.0%
State and local income taxes,
net of federal income tax benefit 4.9 4.9 1.5
Other 5.8 1.1 (0.9)
------ ------ ------
Effective rate 45.7% 41.0% 34.6%
====== ====== ======
The significant components of deferred income tax expense
are as follows:
Years Ended December 31,
1994 1993 1992
------ ------ ------
Settlement and related expenses $ 2.5 $ 22.2 $(34.8)
Reserve for doubtful accounts 0.9 0.4 (2.1)
Other 2.7 (3.5) (2.9)
------ ------ ------
$ 6.1 $ 19.1 $(39.8)
====== ====== ======
F-17
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1994 and 1993 are as follows:
December 31,
1994 1993
----- ------
Deferred tax assets:
Settlement and related expenses, principally
due to accrual for financial reporting
purposes $10.7 $13.2
Accounts receivable, principally due to
allowance for doubtful accounts 8.4 5.5
Self insurance reserves, principally due
to accrual for financial reporting purposes 2.4 0.9
Compensated absences, principally due to
accrual for financial reporting purposes 2.8 2.0
Acquisition related reserves, principally
due to accrual for financial reporting
purposes 8.0 --
Other 4.4 6.6
------ ------
Total gross deferred tax assets 36.7 28.2
------ ------
Deferred tax liabilities:
Intangible assets, principally due to
differences in amortization (22.1) (3.7)
Property, plant and equipment, principally
due to differences in depreciation (0.8) (4.3)
Other (5.0) (1.7)
------ ------
Total gross deferred tax liabilities (27.9) (9.7)
------ ------
Net deferred tax asset $ 8.8 $18.5
====== ======
A valuation allowance was deemed unnecessary at December 31,
1994 and 1993. Based on the Company's history of taxable income
and its projection of future earnings, it believes that it is
more likely than not that sufficient taxable income will be
generated in the foreseeable future to realize the deferred tax
asset.
12. STOCK OPTIONS
In 1988, the Company adopted the 1988 Stock Option Plan,
reserving 2,000,000 shares of common stock for issuance pursuant
to options and stock appreciation rights that may be granted
under the plan. The Stock Option Plan was amended in 1990 to
limit the number of options to be issued under the Stock Option
Plan to
F-18
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
550,000 in the aggregate (including all options previously
granted). In 1991, the number of shares authorized for issuance
under the Stock Option Plan was increased to an aggregate of
2,550,000.
In 1994, the Company adopted the 1994 Stock Option Plan,
reserving 3,000,000 shares of common stock for issuance pursuant
to options and stock appreciation rights that may be granted
under the plan.
The following table summarizes grants of non-qualified
options made by the Company to officers and key employees for
both plans. For each grant, the exercise price was equivalent to
the fair market price per share on the date of grant. Also, for
each grant, one-third of the shares of common stock subject to
such options vested on the date of grant and one-third vests on
each of the first and second anniversaries of such date, subject
to their earlier expiration or termination.
Exercise
Date Options Price Date of
of Grant Granted per Share Expiration
------------- --------- --------- ----------------
February 1989 240,000 $ 7.750 February 8, 1999
July 1990 100,000 13.500 July 9, 2000
October 1991 500,000 20.250 October 8, 2001
October 1992 25,000 20.000 October 2, 2002
December 1992 300,000 16.625 December 21, 2002
January 1993 775,000 16.625 January 18, 2003
July 1993 43,500 17.875 July 6, 2003
February 1994 1,097,500 13.875 February 10, 2004
June 1994 147,000 7.690 June 23, 2004
July 1994 797,500 11.750 July 12, 2004
F-19
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions)
Changes during 1992, 1993 and 1994 in options outstanding
under the plans were as follows:
Number Exercise Price
of Options per Option
---------- -----------------
Outstanding at January 1, 1992 636,900 $ 7.750 - $20.250
Granted 325,000 $16.625 - $20.000
Exercised (30,662) $ 7.750 - $20.250
Canceled or expired (67,167) $13.500 - $20.250
----------
Outstanding at December 31, 1992 864,071 $ 7.750 - $20.250
Granted 818,500 $16.625 - $17.875
Exercised (33,400) $ 7.750
Canceled or expired (84,835) $16.625 - $20.250
----------
Outstanding at December 31, 1993 1,564,336 $ 7.750 - $20.250
Granted 2,042,000 $ 7.690 - $13.875
Exercised (11,125) $ 7.690 - $ 7.750
Canceled or expired (70,001) $13.875 - $20.250
----------
Outstanding at December 31, 1994 3,525,210 $ 7.690 - $20.250
==========
Exercisable at December 31, 1994 2,014,025 $ 7.690 - $20.250
==========
13. COMMITMENTS AND CONTINGENCIES
The Company is involved in certain claims and legal actions
arising in the ordinary course of business. In the opinion of
management, based upon the advice of counsel, the ultimate
disposition of these matters will not have a material adverse
effect on the financial position or results of operations of the
Company.
For all insurance coverages prior to May 7, 1991, the
Company paid Revlon a predetermined amount each year, based upon
the Company's historical loss experience and other relevant
factors, in respect of the Company's share of the self-insured
risks and risks insured by outside insurance carriers, in each
case applicable to Revlon and its subsidiaries. Regardless of
the Company's and Revlon's actual loss experience, the Company
will not be required to pay Revlon amounts in excess of the
Company's predetermined share of such liability for losses
incurred before May 7, 1991.
F-20
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions)
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 occurring on or
after May 7, 1991 related primarily to general, product and vehicle
liability and workers' compensation. The self-insured retentions are
on a per occurrence basis without any aggregate annual limit.
Provisions for losses expected under these programs are recorded
based upon the Company's estimates of the aggregated liability
of claims incurred. At December 31, 1994 and 1993, the Company had
provided letters of credit aggregating approximately $4.9 and
$3.7, respectively, in connection with certain insurance
programs.
During 1991, the Company guaranteed a $9.0, 5 year loan to a
third party for construction of a new laboratory to replace one
of the Company's existing facilities. Following its completion
in November of 1992, the building was leased to the Company by
this third party. Such transaction is treated as a capital lease
for financial reporting purposes. The associated lease term
continues for a period of 15 years, expiring in 2007. Under the
terms of this guarantee, as modified, the Company is required to
maintain 105% of the outstanding loan balance including any
overdue interest as collateral in a custody account established
and maintained at the lending institution. As of December 31,
1994 and 1993, the Company had placed $9.5 of investments in the
custody account. Such investments are included under the caption
"Other assets, net" in the accompanying consolidated balance
sheets.
The Company does not anticipate incurring any loss as a
result of this loan guarantee due to protection provided by the
terms of the lease. Accordingly, the Company, if required to
repay the loan upon default of the borrower (and ultimate
lessor), is entitled to a rent abatement equivalent to the amount
of repayment made by the Company on the borrower's behalf, plus
interest thereon at a rate equal to 2% over the prime rate.
The Company has a contract for the purchase of telephone
services through 1999. The total purchase commitment is $30.0
with minimum purchases of $6.0 per year.
F-21
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions)
The Company leases various facilities and equipment under
non-cancelable lease arrangements. Future minimum rental
commitments for leases with noncancelable terms of one year or
more from December 31, 1994 are as follows:
Operating Capital
--------- -------
1995 $ 19.5 $ 1.2
1996 16.4 1.3
1997 14.1 1.4
1998 12.1 1.5
1999 11.0 1.6
Thereafter 40.4 16.9
--------- -------
Total minimum lease payments 113.5 23.9
Less amount representing
interest -- 14.1
--------- -------
Total minimum operating
lease payments and
present value of minimum
capital lease payments $113.5 $ 9.8
========= =======
Rental expense, which includes rent for real estate,
equipment and automobiles under operating leases, amounted to
$34.6, $29.9 and $27.0 for the years ended December 31, 1994,
1993 and 1992, respectively.
14. RETIREMENT PLANS
The Company maintains a defined contribution pension plan
for all eligible employees. Eligible employees are defined as
individuals who are age 21 or older and have been employed by the
Company for at least six consecutive months and completed 1,000
hours of service. Company contributions to the plan are based on
a percentage of employee contributions. The cost of this plan
was $3.6, $3.0, and $2.5 in 1994, 1993, and 1992, respectively.
In addition, substantially all employees of NHLI are covered
by a defined benefit retirement plan (the "Plan"). The benefits
to be paid under the Plan are based on years of credited service
and average final compensation. Employees of Allied become
eligible under the Plan effective January 1, 1995.
Effective December 31, 1994, the Company adopted certain
amendments to the Plan which resulted in a decrease of
approximately $9.5 million in the projected benefit obligation.
F-22
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions)
Under the requirements of Statement of Financial Accounting
Standards No. 87, "Employers Accounting for Pensions", the
Company recorded an additional minimum pension liability
representing the excess accumulated benefit obligation over plan
assets at December 31, 1993. A corresponding amount was
recognized as an intangible asset to the extent of unrecognized
prior service cost, with the balance recorded as a separate
reduction of stockholders' equity. The Company recorded an
additional liability of $3.0, an intangible asset of $0.6, and a
reduction of stockholders' equity of $2.4. Such amounts were
eliminated as a result of the amendments to the Plan effective
December 31, 1994.
The components of net periodic pension cost are summarized
as follows:
Years ended
December 31,
--------------
1994 1993
----- -----
Service cost $ 5.5 $ 3.7
Interest cost 3.5 2.6
Actual return on plan assets 0.1 (1.3)
Net amortization and deferral (1.4) 0.4
------ -----
Net periodic pension cost $ 7.7 $ 5.4
====== =====
F-23
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
The status of the Plan is as follows:
December 31,
1994 1993
----- -----
Actuarial present value of
benefit obligations:
Vested benefits $26.6 $25.0
Non-vested benefits 3.5 4.0
----- -----
Accumulated benefit obligation 30.1 29.0
Effect of projected future salary
increases 1.9 13.9
----- -----
Projected benefit obligation 32.0 42.9
Fair value of plan assets 31.6 24.2
----- -----
Unfunded projected benefit obligation (0.4) (18.7)
Unrecognized prior service cost (9.7) 0.5
Unrecognized net loss 8.4 16.3
Additional minimum liability -- (3.0)
----- -----
Accrued pension cost $(1.7) $(4.9)
===== =====
Assumptions used in the accounting for the Plan were:
1994 1993
------ ------
Weighted average discount rate 8.5% 7.0%
Weighted average rate of increase
in future compensation levels 4.0% 5.5%
Weighted average expected long-term
rate of return 9.0% 9.0%
F-24
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
15. SALE OF SUBSIDIARY
On December 30, 1994, the Company completed the sale of
Reference Pathology Laboratory, Inc. and subsidiary ("RPL"), a
wholly owned subsidiary of Allied, for cash of approximately
$10.1 and a note receivable of $0.5. No gain or loss was
recognized on the sale. The net cash proceeds from the sale were
used to repay a portion of long-term debt. In connection with
the agreement of sale, the Company will refer certain tests to
RPL in an amount not less than $2.3 per year for five years based
on agreed upon fees.
16. DIVIDENDS
On December 15, 1993, the Company declared a quarterly
dividend in the aggregate amount of approximately $6.8 ($0.08 per
share), which was paid on January 25, 1994 to holders of record
of common stock at the close of business on January 4, 1994.
Such dividend was paid entirely with cash on hand.
17. QUARTERLY DATA (UNAUDITED)
The following is a summary of unaudited quarterly data:
Year Ended December 31, 1994
-------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- -------
Net sales $185.0 $203.9 $248.7 $234.9 $872.5
Gross profit 52.7 67.4 81.0 74.4 275.5
Net earnings 8.1 14.1 0.2 7.7 30.1
Earnings per
common share 0.10 0.16 -- 0.10 0.36
Year Ended December 31, 1993
------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
------- -------- -------- -------- -------
Net sales $199.8 $197.0 $194.8 $168.9 $760.5
Gross profit 90.7 89.2 85.2 50.9 316.0
Net earnings 33.6 33.2 38.2 7.7 112.7
Earnings per
common share 0.36 0.37 0.43 0.10 1.26
F-25
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
In the third quarter of 1994, the Company approved a
settlement of previously disclosed shareholder class and
derivative litigation. In connection with the settlement, the
Company took a pre-tax special charge of $15.0 and a $6.0 charge
for expenses related to the settled litigation.
In the fourth quarter of 1994, the Company took a non-
recurring charge of approximately $3.9 for lease costs and the
write-off of leasehold improvements related to the relocation of
certain of the Company's regional laboratories.
Expense reimbursement and termination fees received in
connection with the Company's attempt to purchase Damon
Corporation, less related expenses and the write-off of certain
bank financing costs, resulted in a one-time pre-tax gain of
$15.3 in the third quarter of 1993.
Medicare's denial of claims for ferritin and HDL tests,
which began in September 1993 and continued through December 20,
1993 when the Company introduced new test forms and procedures,
and related suspended billings reduced net sales and gross profit
by $18.6 in the fourth quarter of 1993.
18. MERGER AGREEMENT
The Company has entered into an Agreement and Plan of Merger
dated as of December 13, 1994 (the"Merger Agreement") with HLR
Holdings Inc. ("HLR"), Roche Biomedical Laboratories, Inc.
("RBL"), and (for the purposes set forth therein) Hoffmann-La
Roche Inc. ("Roche") providing for, among other things, the
merger of RBL with and into the Company with the Company as the
surviving corporation (the "Merger"), and pursuant to which,
subject to certain exceptions, each outstanding share of common
stock, par value $0.01 per share, of the Company, will be
converted into (i) 0.72 of a share of common stock of the Company
and (ii) the right to receive $5.60 in cash, without interest.
In addition, all shares of common stock, no par value, of RBL
issued and outstanding immediately prior to the effective time of
the Merger (other than treasury shares, which will be canceled)
will be converted into, and become, that number of newly issued
shares of Company common stock as would, in the aggregate and after
giving effect to the Merger and the Company common stock owned by
HLR, RBL and their subsidiaries immediately after the effective
time of the Merger, equal 49.9% of the total number of shares of
F-26
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in Millions, except per share data)
Company common stock outstanding immediately after the effective
time of the Merger (after giving effect to the issuance of
Company common stock in respect of the Company employee stock
options in connections with the Merger).
In connection with the Merger, the Company currently intends
to declare a dividend, payable to holders of record of shares of
Company common stock as of the third business day prior to the
date of the special meeting of the stockholders to consider and
vote on the Merger, which dividend will consist of 0.16308 of a
warrant per outstanding share of Company common stock, each such
warrant (a "Warrant") representing the right to purchase one newly
issued share of Company common stock for $22.00 (subject to
adjustments) on the fifth anniversary of the issuance of the Warrant.
In addition, the Merger Agreement provides for the issuance to and
purchase by Roche, for a purchase price of approximately
$51,048,900, of 8,325,000 Warrants to purchase shares of Company
common stock (the "Roche Warrants"), which Warrants will have the
terms described in the preceding sentence.
The aggregate cash consideration of approximately $474.7 to
be paid to stockholders of the Company in the Merger will be
financed from three sources: a cash contribution by the Company
of approximately $288.0 out of proceeds of borrowings by the
Company in an equal amount, a cash contribution to be made by HLR
in the amount of approximately $135.7 and the proceeds from the
issuance of the Roche Warrants.
The Company has obtained a commitment for a credit facility,
which will include a term loan facility of not more than $800.0
and a revolving credit facility of not more than $400.0, to
refinance the Company's existing indebtedness and to finance the
Company's portion of the total cash consideration to the paid to
stockholders of the Company in the Merger. The specific terms
and conditions of the credit facility are currently under
negotiation.
Restructuring costs of approximately $84.0 million are
expected to be recorded by the Company at the close of the
Merger. These costs will reflect the write-off of deferred
financing costs related to the repayment of the Company's
existing revolving credit facility and term loan facility entered
into in connection with the Allied Acquisition financing and the
creation of reserves for severance and benefit costs, costs for
office facilities expected to be closed, vacant space costs,
systems conversion costs and other restructuring expenses of the
Company associated with the Merger.
F-27
Schedule VIII
NATIONAL HEALTH LABORATORIES HOLDINGS INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 31, 1994, 1993 and 1992
(Dollars in Millions)
- ------------------------------------------------------------------------------
Balance Charged Other
at to costs (Deduct- Balance
beginning and ions) at end
of year Acquisitions expenses Additions of year
- ------------------------------------------------------------------------------
Year ended December 31, 1994:
Applied against asset
accounts:
Contractual allowances
and allowance for
doubtful accounts $ 51.0 $ 18.5 $110.0 $(95.7) $ 65.3
====== ====== ====== ======= ======
Year ended December 31, 1993
Applied against asset
accounts:
Contractual allowances
and allowance for
doubtful accounts $ 72.9 - $ 55.1 $(77.0) $ 51.0
====== ====== ====== ======= ======
Year ended December 31, 1992:
Applied against asset
accounts:
Contractual allowances
and allowance for
doubtful accounts $ 63.0 - $ 75.2 $(65.3) $ 72.9
====== ====== ======= ======== ======
F-28
APPENDIX A
NARRATIVE DESCRIPTION OF STOCK PERFORMANCE GRAPH
A narrative description of the graphic presentation of the stock
performance graph required by Item 402(1) of Regulation S-K is
included in Part III, Item 11 "EXECUTIVE COMPENSATION" of this
Form 10-K.