Exhibit 99.1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Unilab Corporation:
We have audited the accompanying consolidated balance sheets of Unilab
Corporation as of December 31, 2002 and 2001 and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Unilab Corporation as of December
31, 2002 and 2001 and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2002 in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 12 to the consolidated financial statements, effective
January 1, 2002, Unilab Corporation changed its method of accounting for
goodwill and other intangible assets upon adoption of the provisions of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets."
/s/ Deloitte & Touche LLP
- -------------------------
Los Angeles, California
February 18, 2003
(February 28, 2003 as to Note 14)
UNILAB CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
For the years ended December 31,
2002 2001 2000
--------- ---------- ----------
Revenue $ 428,940 $ 390,205 $ 337,508
- ----------------------------------------------------------------------------------------
Direct Laboratory and Field Expenses:
Salaries, wages and benefits 124,529 115,697 101,034
Supplies 61,279 55,772 48,647
Other operating expenses 94,699 88,022 80,334
- ----------------------------------------------------------------------------------------
280,507 259,491 230,015
Selling, general and administrative expenses 54,015 49,959 44,005
Legal and other non-recurring charges - 6,938 -
Stock-based compensation charges - 23,786 -
Merger-related charges 6,252 - -
Amortization and depreciation 7,515 15,332 12,867
- ----------------------------------------------------------------------------------------
Total Operating Expenses 348,289 355,506 286,887
- ----------------------------------------------------------------------------------------
Operating Income 80,651 34,699 50,621
Interest expense, net 18,144 27,452 37,699
- ----------------------------------------------------------------------------------------
Income before Taxes and Extraordinary Item 62,507 7,247 12,922
Tax Benefit (Provision) (26,253) (3,822) 28,646
- ----------------------------------------------------------------------------------------
Income before Extraordinary Item 36,254 3,425 41,568
Extraordinary Item - loss on early extinguishments
of debt, net of tax benefit of $4,363 - 6,345 -
- ----------------------------------------------------------------------------------------
Net Income (Loss) $ 36,254 $ (2,920) $ 41,568
- ----------------------------------------------------------------------------------------
Basic Net Income (Loss) Per Share:
Income before extraordinary item $ 1.08 $ 0.11 $ 1.63
Extraordinary item - (0.21) -
- ----------------------------------------------------------------------------------------
Net income (loss) $ 1.08 $ (0.10) $ 1.63
- ----------------------------------------------------------------------------------------
Diluted Net Income (Loss) Per Share:
Income before extraordinary item $ 1.03 $ 0.11 $ 1.63
Extraordinary item - (0.20) -
- ----------------------------------------------------------------------------------------
Net income (loss) $ 1.03 $ (0.09) $ 1.63
- ----------------------------------------------------------------------------------------
Weighted Average Shares Outstanding:
Basic 33,508 29,962 25,452
Diluted 35,167 30,995 25,530
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of
these consolidated financial statements.
1
UNILAB CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share amounts)
December 31,
2002 2001
---------- -------
Assets
- --------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 64,593 $ 24,200
Accounts receivable, net of allowance for doubtful accounts
of $33,510 and $32,517 in 2002 and 2001, respectively 57,606 62,702
Inventory of supplies 5,269 4,423
Deferred tax assets 18,540 17,702
Prepaid expenses and other current assets 5,290 2,888
- --------------------------------------------------------------------------------------------------------------
Total current assets 151,298 111,915
- --------------------------------------------------------------------------------------------------------------
Property and equipment, net 11,675 13,465
Deferred tax assets 37,450 43,692
Goodwill, net of accumulated amortization of $26,412 in 2002 and 2001 93,508 90,600
Other intangible assets, net - 581
Other assets 5,216 6,275
- --------------------------------------------------------------------------------------------------------------
$ 299,147 $ 266,528
- --------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
- --------------------------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt $ 8,684 $ 6,839
Accounts payable and accrued liabilities 22,524 22,111
Accrued payroll and benefits 15,402 12,865
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 46,610 41,815
- --------------------------------------------------------------------------------------------------------------
Long-term debt, net of current portion 187,240 195,799
Other liabilities 4,472 5,374
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; Authorized 15,000 shares; none issued - -
Common stock, $.01 par value; Authorized 60,000 shares;
Issued and Outstanding - 33,524 and 33,435 at December 31, 2002
and 2001, respectively 335 334
Additional paid-in capital 293,447 292,417
Accumulated deficit (232,957) (269,211)
- --------------------------------------------------------------------------------------------------------------
Total shareholders' equity 60,825 23,540
- --------------------------------------------------------------------------------------------------------------
$ 299,147 $ 266,528
- --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part
of these consolidated financial statements.
2
UNILAB CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 2002, 2001 and 2000
(amounts in thousands, except per share amounts)
Total
Additional Shareholders'
Common Stock Paid-In Accumulated Equity
Shares Amount Capital Deficit (Deficit)
- -------------------------------------------------------------------------------------------------------------------
Balances, January 1, 2000 25,405 $ 254 $ 149,316 $ (307,859) $ (158,289)
Purchase of shares by CEO 99 1 584 - 585
Tax effect of the merger/
recapitalization transaction - - 3,700 - 3,700
Net income - - - 41,568 41,568
- -------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2000 25,504 $ 255 $ 153,600 $ (266,291) $ (112,436)
Issuance of shares in connection with
initial public offering 7,705 77 112,657 - 112,734
Issuance of shares at $0.63-$5.93 upon
exercise of options 226 2 1,217 - 1,219
Tax benefit from exercise of options - - 1,157 - 1,157
Stock-based compensation charges - - 23,786 - 23,786
Net loss - - - (2,920) (2,920)
- -------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2001 33,435 $ 334 $ 292,417 $ (269,211) $ 23,540
Issuance of shares at $1.77-$4.82 upon
exercise of options 89 1 193 - 194
Tax benefit from exercise of options - - 837 - 837
Net income - - - 36,254 36,254
- -------------------------------------------------------------------------------------------------------------------
Balances, December 31, 2002 33,524 $ 335 $ 293,447 $ (232,957) $ 60,825
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part
of these consolidated financial statements.
3
UNILAB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
For the years ended December 31,
2002 2001 2000
--------- --------- ---------
Cash Flows From Operating Activities:
Net income (loss) $ 36,254 $ (2,920) $ 41,568
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Amortization and depreciation 7,515 15,332 12,867
Provision for doubtful accounts 29,650 28,342 24,524
Stock-based compensation charges - 23,786 -
Non-cash legal expenses - 2,800 -
Loss on early extinguishments of debt - 6,345 -
Loss on disposals of property and equipment 120 32 -
Net changes in assets and liabilities affecting operations, net of acquisitions:
Increase in Accounts receivable (24,554) (27,884) (34,003)
(Increase) decrease in Inventory of supplies (846) 4 (212)
(Increase) decrease in Prepaid expenses and other current assets (1,565) (1,460) 282
(Increase) decrease in Deferred tax assets 5,404 (11,955) (29,181)
Decrease in Other assets 357 335 570
Increase (decrease) in Accounts payable and accrued liabilities (278) 3,562 (4,164)
Increase in Accrued payroll and benefits 2,326 2,872 2,410
Other 827 1,040 1,277
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 55,210 40,231 15,938
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Borrowings under revolving credit facility - - 7,000
Payments of third party debt and revolving credit facility (6,839) (109,371) (11,586)
Premium paid in connection with the retirement of the senior
subordinated notes - (6,917) -
Net proceeds from issuance of common stock - 112,734 585
Proceeds from exercise of options 194 1,219 -
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (6,645) (2,335) (4,001)
- ------------------------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Capital expenditures (5,264) (8,029) (4,843)
Payments for acquisitions (2,908) (8,260) (17,058)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (8,172) (16,289) (21,901)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 40,393 21,607 (9,964)
Cash and Cash Equivalents - Beginning of Year 24,200 2,593 12,557
- ------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents - End of Year $ 64,593 $ 24,200 $ 2,593
- ------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part
of these consolidated financial statements.
4
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Unilab and Significant Accounting Policies
a. Description of Unilab
Unilab Corporation ("Unilab" or "the Company") provides clinical laboratory
testing services to physicians, managed-care organizations, hospitals and
other health care providers primarily in the State of California.
b. Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Unilab
Corporation and its subsidiary, Unilab Acquisition Corporation (100%
owned). All intercompany transactions have been eliminated in
consolidation.
c. Inventory of Supplies
Inventories, which consist principally of purchased clinical laboratory
supplies, are valued at the lower of cost (first-in, first-out) or market.
d. Revenue Recognition
Revenue is recognized at the time the service is provided. The Company's
revenue is based on amounts billed or billable for services rendered, net
of contractual adjustments and other arrangements made with third-party
payors to provide services at less than established billing rates.
In addition, certain laboratory services are provided pursuant to managed
care contracts which provide for the payment of capitated fees (a fixed
monthly fee per individual enrolled with a managed care plan for some or
all laboratory tests performed during the month) rather than individual
fees for tests actually performed. Revenue under capitated arrangements is
recognized in the month when enrolled individuals are entitled to receive
services under the terms of the related contracts. Estimated revenue from
capitated arrangements contributed 10-15% of total revenues.
e. Use of Estimates
The preparation of the financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
these estimates. The most significant estimates with regards to these
financial statements relate to accounts receivable.
The Company's net accounts receivable balance is determined after
deductions for contractual adjustments, which are estimated based on
established billing rates made with third party payors, and an allowance
for doubtful accounts, which primarily is based on the aging of the
accounts and historical collection experience.
5
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
f. Fair Value of Financial Instruments and Concentration of Credit Risk
The carrying amounts reported in the balance sheets for cash, accounts
receivable, accounts payable and accrued liabilities approximate fair value
because of the immediate or short-term maturity of these financial
instruments. The fair value of the Company's $98.4 million in senior notes
approximates $117.9 million based on quotes from brokers. The carrying
amounts of the floating rate bank term loans are considered to be
representative of their respective fair values as their interest rates are
based on current market rates. The Company believes that the Company's
capital lease obligations approximate fair value based on current yields
for debt instruments of similar quality and terms.
Concentration of credit risk with respect to accounts receivable are
limited due to the diversity of the Company's client base. However, the
Company provides services to certain patients covered by various
third-party payors, including the Federal and California Medicare/Medicaid
programs. Revenue, net of contractual allowances, from direct billings
under Federal and California Medicare/ Medicaid programs during each of the
years ended December 31, 2002, 2001 and 2000 approximated 20-25%, 25-30%
and 25-30% of revenue, respectively.
g. Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the related assets.
Buildings are depreciated over 28 years, laboratory and computer equipment
are generally depreciated over 7 and 3 years, respectively, and furniture
and fixtures are depreciated over 7 years. Leasehold improvements are
amortized using the straight-line method over the remaining term of the
related lease. Betterments, which extend the life or add value to equipment
are capitalized and depreciated over their remaining useful life. Repairs
and maintenance are expensed as incurred.
h. Goodwill
Goodwill represents the excess of cost over the fair value of net tangible
and identifiable intangible assets acquired and was amortized using the
straight-line method over 40 years for acquisitions completed prior to
January 1, 1995, over 20 years for acquisitions through November 1998 and
10 years for acquisitions through June 30, 2001. For the acquisitions that
occurred after June 30, 2001, Statement of Financial Accounting Standards
("SFAS") No. 141 requires that goodwill remain on the balance sheet and not
be amortized. On an annual basis, and when there is reason to suspect that
their values have been diminished or impaired, these assets must be tested
for impairment, and write-downs may be necessary.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets." In accordance with the
guidelines of this accounting principle, goodwill and indefinite-lived
intangible assets are no longer amortized but will be assessed for
impairment on at least an annual basis. The Company adopted SFAS No. 142 on
January 1, 2002 and ceased amortization of goodwill. The Company performed
an impairment analysis of goodwill in 2002 and concluded that the fair
value exceeded the carrying amount of goodwill. The Company has various
operating segments and has aggregated them into one reportable segment.
6
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
i. Other Intangible Assets
Customer lists and covenants not to compete are recorded at cost and are
amortized utilizing the straight-line method over the estimated lives of
the assets, generally 10 years for customer lists and 3-5 years for
covenants not to compete. The cost of other intangible assets is evaluated
periodically and adjusted, if necessary, if later events and circumstances
indicate that a permanent decline in value below the current unamortized
historical cost has occurred.
j. Income Taxes
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the basis for
financial reporting purposes and the basis for tax purposes.
k. Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
l. Reportable Segments
The Company has various operating segments which have been aggregated into
one reportable segment in accordance with SFAS No. 131, "Disclosures about
Segment of an Enterprise and Related Information".
m. Net Income (Loss) Per Share
Basic net income (loss) per common share has been computed by dividing the
net income (loss) by the weighted average number of common shares
outstanding for each period presented. Diluted net income (loss) per share
includes the effect of additional common shares that would have been
outstanding if dilutive potential common shares had been issued. In 2002,
the weighted average number of dilutive stock options were 1.7 million,
which reduced net income per share by $0.05. In 2001, the weighted average
number of dilutive stock options were 1.0 million, which reduced the net
loss per share by $0.01. In 2000, the weighted average number of dilutive
stock options were 0.1 million, which had no effect on the net income per
share calculation.
Options to purchase an aggregate 110,000 shares of common stock for the
year ended December 31, 2002 and an aggregate of 10,000 shares of common
stock for the year ended December 31, 2001 were not included in the
computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common stock for
each respective period.
Additionally, options to purchase an aggregate of 683,230, 683,230 and
1,959,634 shares of common stock for the years ended December 31, 2002,
2001 and 2000, respectively, were not included in the computation of
diluted earnings per share because the options' contingent provisions were
not satisfied at the end of each reporting period nor would such provisions
be satisfied if the end of each reporting period were the end of the
options' contingency period.
7
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
n. Merger-Related Charges
Direct transaction costs associated with the Merger Agreement are expensed
as incurred (see Note 14).
o. Stock-Based Compensation
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123"), the Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25") and its related
interpretations. Pursuant to APB No. 25, compensation expense is recognized
for financial reporting purposes using the intrinsic value method when it
becomes probable that the options will be exercisable. The amount of
compensation expense to be recognized is determined by the excess of the
fair value of common stock over the exercise price of the related option at
the measurement date.
The following table illustrates the effect on net income and earnings per
share if the company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation:
Years Ended December 31,
2002 2001 2000
------- ------- -------
(amounts in thousands, except
per share amounts)
Net income (loss), as reported $36,254 $(2,920) $41,568
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of related tax effects (3,502) (2,388) (1,310)
------- ------- -------
Pro forma net income (loss) $32,752 $(5,308) $40,258
======= ======= =======
Net income (loss) per share:
Basic, as reported $ 1.08 $ (0.10) $ 1.63
Basic, pro forma $ 0.98 $ (0.18) $ 1.58
Diluted, as reported $ 1.03 $ (0.09) $ 1.63
Diluted, pro forma $ 0.93 $ (0.17) $ 1.58
For the year ended December 31, 2001, the Company's net income before
extraordinary item of $3.4 million would have been reduced to the pro forma
amount of $1.0 million, while basic and diluted income per share of $0.11
would have been reduced to $0.03 per share.
8
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
p. Reclassifications
Certain 2001 amounts have been reclassified to conform to the 2002
financial statement presentation.
2. Property and Equipment, Net
Property and equipment, net consists of the following:
December 31,
2002 2001
------- --------
(amounts in thousands)
Buildings $ 3,100 $ 3,100
Leasehold improvements 13,047 11,154
Laboratory and other equipment 40,626 41,587
Furniture and fixtures 6,557 5,279
------- -------
63,330 61,120
Less-accumulated depreciation and amortization 51,655 47,655
------- -------
$11,675 $13,465
======= =======
Depreciation expense was approximately $6.9 million in 2002, $7.1 million
in 2001 and $5.5 million in 2000.
3. Acquisitions
On July 21, 2001, Unilab and Medical Arts Clinical Laboratories ("MACL")
signed an asset purchase agreement whereby the Company acquired certain
assets of MACL. The purchase price consisted of a cash payment of $6.8
million and the assumption of net liabilities of $0.4 million. The
acquisition was accounted for under the purchase method of accounting and
the statements of operations include the results of MACL since July 21,
2001.
The purchase price was primarily allocated to the net assets acquired based
on their fair value at the date of acquisition. Such allocation consisted
of accounts receivable of $0.3 million, goodwill of $7.2 million and other
liabilities of $0.7 million.
The impact of the MACL acquisition in 2001 was not material to the
Company's results of operations and consequently, pro forma information is
not presented.
4. Legal Proceedings
On November 4, 1999, a purported class action lawsuit was filed in the
United States District Court for the Southern District of New York against
the Company and its board of directors by two of the Company's former
stockholders, seeking compensatory damages, prejudgment interest, expenses
on behalf of the class of shareholders and a preliminary injunction against
a recapitalization of the Company in November 1999. The complaint alleges,
among other things, that the proxy statement relating to the Company's
recapitalization contained material misrepresentations and omissions in
violation of the federal proxy rules and that approval of the terms of the
recapitalization amounted to a breach of the fiduciary duties owed to the
Company's stockholders by its directors. Plaintiffs and defendants
negotiated a settlement in principle of the action, subject to completion
of confirmatory discovery and definitive
9
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
documentation relating to the settlement and court approval. However, on
November 15, 2000, plaintiffs announced that they would not agree to
consummate the settlement. On September 26, 2001, plaintiffs filed a second
amended complaint against the Company and its former board of directors.
The second amended complaint adds as a defendant BT Alex. Brown, the
investment banker that delivered a fairness opinion in connection with the
Company's recapitalization. The complaint asserts additional claims and
allegations, including that the defendants brought the Company private in
order to obtain large profits for themselves and others, to the detriment
of the public shareholders prior to the recapitalization. The complaint
also seeks exemplary damages. On April 16, 2002, the court granted
defendants' motion to dismiss the second amended complaint, but granted
plaintiffs leave to amend. On May 16, 2002, plaintiffs filed their third
amended complaint; defendants have renewed their motion to dismiss. The
Company believes the plaintiffs' claims are without merit, but because this
matter is in the early stages of litigation it is not possible to predict
the likelihood of a favorable or unfavorable outcome.
In May of 1999, the Company learned of a federal investigation under the
False Claims Act relating to its billing practices for certain test
procedures including offering apolipoprotein in conjunction with coronary
risk panel assessments. In cooperation with the government, the Company has
completed the process of gathering and submitting documentation to the
Department of Justice regarding the tests with respect to which they
requested information. The Company cannot at this time assess what the
result of the investigation might be. Remedies available to the government
include civil and criminal penalties and exclusion from participation in
federal healthcare programs such as Medicare and Medicaid. The resolution
of such investigation could be material to the Company's operating results
for any particular period, depending upon the level of income for such
period. On May 31, 2001, the Department of Justice orally offered to settle
the claims subject to the federal investigation for a payment by the
Company of approximately $2.8 million. The Company cannot assure that this
matter will be resolved pursuant to this offer. Although the Company
disputes the claims that are the subject of the investigation and hopes to
negotiate a settlement with the Department of Justice for less than the
government's initial settlement offer, the Company has recorded a legal
charge, included in legal and other non-recurring charges in the statement
of operations for the year ended December 31, 2001 of $2.95 million, which
reflects the verbal settlement offer plus certain legal expenses.
The Company has settled claims brought by a former employee regarding
employment benefits and recorded a legal charge of $0.6 million in December
2001.
The Company is a party to various legal proceedings arising in the ordinary
course of the Company's business. Although the ultimate disposition of
these proceedings is not determinable, management does not believe that
adverse determinations in any or all of such proceedings will have a
material adverse effect upon the Company's financial condition, liquidity
or results of operations.
10
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. Income Taxes
The components of the provision for income taxes are as follows:
Years Ended December 31,
2002 2001 2000
------- -------- ------
(amounts in thousands)
Current:
Federal $16,581 $ 12,663 $ 418
State 4,268 3,114 117
------- -------- --------
20,849 15,777 535
Deferred:
Federal 5,761 (9,670) 4,087
State (357) (2,285) 1,132
------- -------- --------
5,404 (11,955) 5,219
Change in valuation allowance -- -- (34,400)
------- -------- --------
Total $26,253 $ 3,822 $(28,646)
======= ======== ========
The Company recorded a $4.4 million income tax benefit included in the
extraordinary loss of $6.3 million related to the extinguishments of debt
and a $1.2 million income tax benefit recorded to additional paid in
capital attributable to employee stock option exercises during the year
ended December 31, 2001.
The Company reduced its valuation allowance recorded against its deferred
tax assets by $38.1 million and recognized a tax benefit of $34.4 million
in the statement of operations and $3.7 million as an increase to
additional paid in capital. This resulted in a net income tax benefit of
$28.6 million recorded in the statement of operations for the year ended
December 31, 2000.
A reconciliation between the actual income tax expense (benefit) and income
taxes computed by applying the statutory Federal income tax rate to income
from operations before income taxes is as follows:
Years Ended December 31,
2002 2001 2000
------- ------ --------
(amounts in thousands)
Computed income taxes at U.S. statutory rate $21,877 $2,536 $ 4,523
State income taxes, net of federal benefit 2,542 539 812
Non-deductible merger costs 2,188 - -
Amortization and write-off of goodwill and intangible
assets disallowed for income tax purposes - 387 387
Non-deductible expenses 65 321 -
Change in valuation allowance - - (34,400)
Other (419) 39 32
------- ------ --------
$26,253 $3,822 $(28,646)
======= ====== ========
11
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Significant components of the Company's deferred tax assets and liabilities
are as follows:
December 31,
2002 2001
------- -------
(amounts in thousands)
Deferred tax assets:
Bad debt reserve $10,549 $11,379
Intangible assets 7,493 11,621
Stock-based compensation 9,466 9,466
Property and equipment 3,425 3,015
Accrued liabilities 4,641 4,276
State taxes 2,496 819
Net operating loss carryfowards 17,920 20,818
------- -------
$55,990 $61,394
======= =======
In accordance with the provisions of SFAS No. 109, the Company continually
reviews the adequacy of the valuation allowance and recognizes the benefits
from its deferred tax assets only when an analysis of both positive and
negative factors indicate that it is more likely than not that the benefits
will be realized. Based on the Company's current operating performance,
management believes it is more likely than not it will have sufficient
future taxable income to realize the future tax benefits.
The Company has an income tax receivable of $2.8 million included in
prepaid expenses and other current assets.
The Company has net operating loss carryforwards for tax purposes in the
U.S. which are available to offset future taxable income through 2019. At
December 31, 2002, available net operating loss carryforwards for U.S. tax
purposes were approximately $48.8 million. Net operating loss carryforwards
for California state tax purposes were approximately $13.0 million.
Utilization of the net operating losses may be subject to an annual
limitation due to ownership change limitations provided by the Internal
Revenue Code of 1986 and similar state provisions.
6. Long-Term Debt
Long-term debt consists of the following:
December 31,
2002 2001
-------- --------
(amounts in thousands)
Senior Notes, interest at 12.75 percent payable semi-annually $ 98,430 $ 98,305
Six year bank term loan, interest at LIBOR plus applicable margin 23,815 29,343
Seven year bank term loan, interest at LIBOR plus applicable margin 72,414 73,163
Obligation under capital lease collateralized by land and building
with interest due through 2004 1,265 1,827
-------- --------
195,924 202,638
Less - current portion 8,684 6,839
-------- --------
$187,240 $195,799
======== ========
12
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Company completed an offering of $155.0 million of senior notes (the
"Senior Notes") in September 1999 and entered into a credit agreement (the
"Credit Agreement") with a syndicate of banks and other financial
institutions for a $185.0 million credit facility (the "Credit Facility").
The Senior Notes were issued at a discount at 97.27% per note. The
aggregate discount on the Senior Notes approximated $4.2 million and is
charged to operations as additional interest expense over the life of the
Senior Notes using the effective interest method. The remaining unamortized
discount at December 31, 2002 and 2001 was $2.3 million and $2.4 million
respectively. Interest on the Senior Notes is 12.75% and is payable on
April 1st and October 1st of each year. The Senior Notes are due October
2009 and the Company is not obligated to make any mandatory redemption or
sinking fund payment with respect to the Senior Notes prior to maturity.
The Senior Notes are not redeemable prior to October 1, 2004, after which
the Senior Notes will be redeemable at any time at the option of the
Company, in whole or in part, at various redemption prices as set forth in
the indenture covering such Senior Notes (the "Indenture"), plus accrued
and unpaid interest, if any, to the date of redemption (see Note 14).
The Senior Notes are general unsecured obligations of the Company and rank
pari passu in right of payment with all unsubordinated indebtedness of the
Company. In addition, the Indenture limits the ability of the Company to
pay dividends or distributions on capital stock or repurchase capital stock
and incur additional indebtedness, under certain circumstances.
The $185.0 million Credit Facility consists of $160.0 million in term loans
($50.0 million Term A and $110.0 million Term B) and $25.0 million in
revolving loans. Any borrowings under the revolving line of credit are due
October 2005 and no amounts were outstanding at December 31, 2002 and 2001.
The Term A loan is due in quarterly principal payments of $1.3 million
starting in December 2001 and increasing to $1.7 million in December 2002,
$2.1 million in December 2003 and $2.6 million in December 2004 through
September 2005. The Term B loan is due in quarterly principal payments of
$0.2 million through September 2005 and increasing to $17.6 million in
December 2005 through September 2006. In addition, the Credit Agreement
requires mandatory repayment for various items, including a percentage of
annual excess cash flow, as defined in the Credit Agreement. Interest on
amounts borrowed under the Credit Facility is subject to adjustment
determined based on certain levels of financial performance. For LIBOR
borrowings, the applicable margin added to LIBOR can range from 2.00% to
3.375% for Term A and revolving loans, and 3.50% to 3.875% for Term B
loans. The weighted average interest rates on term loans were 5.0%, 7.9%,
and 10.3% for the years ended December 31, 2002, 2001 and 2000,
respectively. The amounts outstanding under the Credit Facility are subject
to certain restrictive covenants. The covenants include, but are not
limited to, requirements that the Company maintains specified financial
ratios and stays within defined limitations on capital expenditures and
additional indebtedness. The Company also cannot declare or pay any
dividends. All obligations under the Credit Facility are secured by
substantially all of the Company's assets (see Note 8 for principal repaid
with proceeds from an Initial Public Offering "IPO").
13
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
At December 31, 2002, future scheduled principal payments of long-term debt
are as follows (in thousands):
Years Ending December 31,
-------------------------
2003 $ 8,684
2004 10,238
2005 25,805
2006 52,767
2007 0
Thereafter 100,750
--------
198,244
Bond discount 2,320
--------
$195,924
========
7. Early Extinguishment of Debt
With certain of the proceeds from the IPO, on June 11, 2001, the Company
repaid $15.0 million of the Term A and $34.2 million of the Term B bank
loans and wrote-off $1.0 million in related deferred financing costs. The
$1.0 million in deferred financing costs, net of $0.4 million in taxes was
recorded as an extraordinary loss from the early extinguishment of debt of
$0.6 million in the second quarter of 2001.
On July 9, 2001, $54.3 million in principal of the $155.0 million in 12.75%
senior subordinated notes due October 2009 was repaid with proceeds from
the IPO, which represents 35% of the outstanding notes. In order to retire
such debt, the Company paid a premium of $6.9 million and additionally
wrote-off $1.4 million in note discount and $1.4 million in deferred
financing costs. The retirement premium and write-off of the note discount
and deferred financing costs, which totaled $9.7 million, is shown as an
extraordinary item, net of tax, in the amount of $5.8 million in the
statement of operations.
8. Shareholders' Equity
Initial Public Offering, Increase in Authorized Shares and Reverse Stock
Split
On June 6, 2001, the Company completed an IPO of common stock, $0.01 par
value. The shares of common stock sold in the IPO were registered under the
Securities Act of 1933, as amended, on a Registration Statement Form S-1
(the "Registration Statement") (Reg. No. 333-60154) that was declared
effective by the SEC on June 5, 2001. The offering commenced on June 6,
2001 where 6,700,000 shares of common stock registered under the
Registration Statement were sold at a price of $16.00 per share. The
Underwriters exercised an overallotment option of 1,005,000 shares on June
8, 2001. All 1,005,000 shares were sold at a price of $16.00 per share. The
aggregate price of the offering amount registered, including the
overallotment, was $123.3 million. In connection with the IPO, the Company
incurred underwriting discounts and commissions and other related offering
expenses in the amount of approximately $10.6 million. The Company received
net proceeds from the IPO of approximately $112.7 million. The net proceeds
were primarily used to repay debt and pay $2.5 million in consideration for
the termination of annual fees for financial advisory services from Kelso &
Company, the Company's majority shareholder. The $2.5 million paid to Kelso
& Company has been recorded as a non-recurring charge in the second quarter
of 2001.
14
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
On May 15, 2001, the Company's Board of Directors and Stockholders
approved: (1) the Company's filing of a Restated Certificate of
Incorporation that was amended to increase the number of shares of capital
stock which the Company is authorized to issue to 75 million shares
consisting of (a) 60 million shares of common stock, par value $0.01 per
share and (b) 15 million shares of preferred stock, no par value, and (2) a
1 for 0.986312 reverse stock split for the common stock. All common stock
and per share data have been retroactively adjusted to reflect the 1 for
0.986312 reverse stock split.
Secondary Offering
During October 2001, the Company filed a registration statement relating to
the sale of 7.5 million shares by Kelso, and 1.7 million shares by certain
other selling stockholders. Certain other selling stockholders exercised
0.2 million employee stock options, which are included in the 1.7 million
noted above, and sold the shares in this offering. Following such sales,
Kelso's ownership percentage decreased to 41.4% from 64.3%. Unilab did not
receive any proceeds from the sale of shares by the selling stockholders.
In connection with this sale, Kelso and the other selling stockholders paid
the underwriting discount costs and Unilab paid the other offering expenses
of $0.9 million.
Preferred Stock
The Company is authorized to issue 15,000,000 shares of preferred stock,
none of which are currently outstanding. The Company's board of directors
may, without stockholder approval, issue more than one series of preferred
stock, fix the number of shares, dividend rights, conversion rights,
redemption rights, liquidation, preferences, privileges and restrictions
applicable to the preferred stock it decides to issue.
Restricted Stock
The Company issued 50,000 shares of restricted stock to an employee as part
of an acquisition in January 2002. The shares are perfomance based and
restrictions expire as performance objectives are met.
9. Employee Benefits
Profit Sharing Plan
The Company provides a savings plan under Section 401(k) of the Internal
Revenue Code covering most employees. Company contributions to the plan
totaled approximately $3.0 million, $2.6 million and $0.4 million for the
years ended December 31, 2002, 2001 and 2000, respectively. As of January
1, 2001 the Company contribution was increased to 100% of the first 4% from
25% of the first 4% contributed by the employee.
Executive Retirement Plan
The Company maintains the Unilab Corporation Executive Retirement Plan (the
"SERP"), an unfunded defined contribution plan, for the benefit of
designated key employees. Participants receive an annual contribution to
their account as well as earning interest on their account balance at prime
plus two percent. The benefit formula to determine amounts earned by
participants is primarily based on the employee's final five-year average
15
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
compensation and years of service. Pension expense for the SERP was
approximately $0.5 million for the years ended December 31, 2002, 2001 and
2000. At December 31, 2002 and 2001, the accumulated obligation included in
other liabilities in the balance sheet was approximately $4.1 million and
$3.6 million, respectively. The weighted average discount rate and rate of
increase in future compensation levels used in determining the present
value of benefit obligations were 5.48% and 3.8% in 2002, 5.49% and 3.8% in
2001, and 6.35% and 3.8% in 2000.
Stock Option Plans
2000 Executive Stock Option Plan. In 2000, the Company adopted, and on June
29, 2000 the Company's stockholders approved, the Executive Stock Option
Plan (the "2000 Plan") for certain key employees. The 2000 Plan was
designed to attract and retain key employees of Unilab. The 2000 Plan
authorizes the issuance of voting common stock to officers and key
employees under terms and conditions set by the Company's Board of
Directors. The 2000 Plan initially provided for two types of options (Class
A and Class B options) that vest as specified by the stock option
agreements as follows: (1) in three equal installments on each of the first
three anniversaries starting on November 23, 1999 or on grant date if after
November 23, 1999 (Class A options); and (2) based on the occurrence of an
exit event (as defined) and achievement of certain share price exit values
(Class B options). All options will expire 10 years from November 23, 1999
or from the grant date if after November 23, 1999.
On June 5, 2001, the Company amended the 2000 Plan to adjust the vesting
provisions of Class B performance options that have been granted to
employees. Under the 2000 Plan, as amended, these Class B options converted
to Class C options and vest in three discrete tranches contingent upon:
o the price of the Company's common stock exceeding a defined average
closing price threshold over all of the consecutive trading days
within a six month calendar period (certain exclusions may apply if
vesting occurs in connection with the announcement of a transaction
pursuant to which the Company may be acquired), and a minimum
applicable price on the last trading day of such six month calendar
period equal to 85% of pre-defined closing price threshold;
o the holder of the Class C option being a director, officer or
employee of Unilab or any Unilab subsidiary on the vesting date;
and
o the defined average closing price thresholds for the granted and
outstanding options are $17.79 for 760,974 options, $22.54 for
591,870 options and $27.88 for 489,972 options.
On June 29, 2001, the Company amended the 2000 Plan to accelerate the
vesting of the Class A service options held by the Company's non-employee
consultants. The modification to fully vest the Class A non-employee
service options resulted in compensation expense of $1.4 million in the
quarter ended June 30, 2001.
The Company has not amended the vesting provisions of any Class B
performance options held by the Company's non-employee consultants. Class B
options held by consultants will
16
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
continue to vest upon the occurrence of an exit event and Kelso's
realization of a certain minimum return on its investments in the Company.
On October 17, 2001, to assure consistency among new option grants, the
Company amended the 2000 Plan so as to allow options granted under that
plan to be in accordance with the Company's 2001 Stock Option Plan. And on
February 6, 2002, the Company amended both Plans to clarify that the Board
has authority to make certain equitable adjustments thereunder.
2001 Stock Option Plan. On May 15, 2001 the Company adopted, and on May 16,
2001 the shareholders approved the Unilab Corporation 2001 Stock Option
Plan (the "2001 Plan"). The 2001 Plan is intended to promote the interests
of Unilab and its stockholders by providing officers and other employees
with appropriate incentives to encourage them to enter into and continue in
the Company's employ and to acquire a proprietary interest in the equity
success of Unilab; to provide incentives to the Company's non-employee
directors that are directly linked to increases in stock value; and to
reward the performance of individual officers, other employees, consultants
and non-employee directors in fulfilling their personal responsibilities
for long-range achievements.
The Company has reserved 500,000 shares of common stock for issuance under
the 2001 Plan. The number of shares reserved for issuance is generally
subject to equitable adjustment upon the occurrence of any stock dividend
or other distribution, recapitalization, stock split, reorganization,
merger, consolidation, combination, repurchase, or share exchange, or other
similar corporate transaction or event. No option holder shall have any
rights with respect to the shares covered by an award under the 2001 Plan
until the shares have been reduced to such person's possession.
The following presents the status of the Company's stock option plans as of
December 31, 2000, 2001 and 2002:
Weighted
Number Average
of Shares Exercise Price
--------- --------------
Outstanding at December 31, 1999 - $ -
Granted 3,533,726 5.93
Exercised - -
Forfeited (75,870) 5.93
Rolled-over options from prior plan 119,516 2.07
--------- ------
Outstanding at December 31, 2000 3,577,372 $ 5.80
Granted 567,373 16.18
Exercised (225,521) 5.40
Forfeited (44,384) 5.93
--------- ------
Outstanding at December 31, 2001 3,874,840 $ 7.34
Granted - -
Exercised (88,582) 2.18
Forfeited (1,500) 19.30
--------- ------
Outstanding at December 31, 2002 3,784,758 $ 7.44
========= ======
17
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The following is summary information about the Company's stock options
outstanding at December 31, 2002:
Weighted Weighted Weighted
Outstanding at Average Average Exercisable at Average
Exercise December Remaining Exercise December 31, Exercise
Price 31, 2002 Term (years) Price 2002 Price
----- -------- ------------ ----- ---- -----
$ 0.63-4.82 2,793 4.1 $ 2.05 2,793 $ 2.05
5.93 3,368,970 7.6 5.93 2,679,626 5.93
16.00 30,000 8.4 16.00 10,000 16.00
19.30-27.91 382,995 8.8 20.13 140,997 20.05
------------ --------- --- ------ --------- ------
$ 0.63-27.91 3,784,758 7.7 $ 7.44 2,833,416 $ 6.66
Stock-Based Compensation
For the year ended December 31, 2001, the Company recognized stock-based
compensation charges in the statement of operation totaling $23.8 million,
comprised of $1.5 million non-cash charges related to service options
issued to non-employee consultants that were accelerated on June 29, 2001
and $22.3 million non-cash charges related to certain Class C
performance-based stock options that met the contingent vesting provisions
on December 6, 2001. Such charges relate to employees and consultants whose
expenses would have otherwise been included in selling, general and
administrative expenses. These amounts increased additional paid-in
capital.
Expense for the one remaining tranche of 489,972 Class C performance
options held by employees and for the 193,258 Class B options held by
non-employee consultants may be recognized in the future if the contingent
provisions are met. Any ultimate possible charge is difficult to determine
since the expense is based on future stock price (see Note 14).
No options were granted for the year ended December 31, 2002. The weighted
average fair value of options granted for the years ended December 31, 2001
and 2000 were estimated on the date of grant using the Black-Scholes option
pricing model and were $13.26 and $4.07. The fair value of options granted
was determined using the following assumptions for the year ended December
31, 2001: risk-free interest rates of 4.3% to 5.4%, no dividend yield,
expected life of approximately 10 years which equals the remaining lives of
the grants, and an expected volatility of 50%. The fair value of options
granted was determined using the following assumptions for the year ended
December 31, 2000: risk-free interest rates of 5.3% to 6.4%, no dividend
yield, expected life of approximately 10 years which equals the remaining
lives of the grants, and an expected volatility of 50%.
10. Related Party Transactions
Kelso & Company, the majority shareholder, earned annual financial advisory
fees of $600,000, from November 23, 1999 through June 30, 2001 when the
advisory agreement was terminated. The Company recorded financial advisory
fees of $0, $300,000 and $600,000 for the years ended December 31, 2002,
2001 and 2000, respectively, related to this agreement.
18
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Part of the net proceeds from the IPO were used to pay $2.5 million in
consideration for the termination of annual fees for financial advisory
services from Kelso & Company. The $2.5 million paid to Kelso & Company was
recorded as a non-recurring charge in the second quarter of 2001.
During October 2001, the Company filed a registration statement relating to
the sale of 7.5 million shares by Kelso and 1.7 million shares by certain
other selling stockholders. Certain other selling stockholders exercised
0.2 million employee stock options, which are included in the 1.7 million
noted above, and sold the shares in this offering. Following such sales,
Kelso's ownership percentage decreased to 41.4% from 64.3%. Unilab did not
receive any proceeds from the sale of shares by the selling stockholders.
In connection with this sale, Kelso and the other selling stockholders paid
the underwriting discount costs and Unilab paid the other offering expenses
of $0.9 million which were recorded as a non-recurring charge in 2001.
The Company sold 98,631 shares, valued at approximately $0.6 million, to
the Company's CEO in 2000.
A former CEO of the Company has been retained as a consultant and receives
$220,000 per year under a five-year contract that expires on November 23,
2004.
In May 1998, the Company entered into a promissory note for $150,000 with
no interest due before May 1, 2003, with an executive of the Company. The
entire amount of the loan is outstanding.
11. Commitments and Contingencies
Property and equipment leased under capital leases is as follows:
December 31,
2002 2001
------ ------
(amounts in thousands)
Building $3,100 $3,100
Less-Accumulated amortization 2,721 2,514
------ ------
Net leased property under capital leases $ 379 $ 586
====== ======
19
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
As of December 31, 2002, future minimum rental payments required under
capital and operating leases that have initial or remaining noncancelable
terms in excess of one year are approximately as follows:
Capital Operating
Years ending December 31, Leases Leases
------ ------
(amounts in thousands)
2003 $ 863 $14,974
2004 594 10,216
2005 - 6,315
2006 - 4,173
2007 - 3,086
Thereafter - 2,795
------ -------
Total minimum lease payments 1,457 $41,559
=======
Less: Amount representing interest 192
------
Present value of net minimum lease payments $1,265
======
Rental expense for operating leases was approximately $18.7 million, $17.7
million and $17.7 million in 2002, 2001 and 2000, respectively.
The Company has employment and severance agreements with its principal
officers and certain other key employees. Such agreements expire at various
dates through December 2005 and most automatically renew for successive one
or two year periods, depending on the employee, until one of the parties
gives notice of termination in accordance with the agreement. The
agreements also provide for annual bonuses for certain officers and key
employees, dependent upon the achievement of certain performance
objectives. In addition, the agreements for certain employees provide for
annual deferred compensation equal to 8% of the employees' cash
compensation (inclusive of bonuses) for the year. The aggregate commitment
under these agreements, excluding bonuses and any deferred compensation
related thereto, is approximately $3.2 million at December 31, 2002. The
Company may terminate the employment agreements without cause on specified
advance notice by providing severance pay equal to one to two times,
depending on the employee, of the current annual base salary plus certain
other benefits.
In addition, the employment agreements grant these employees the right to
receive one to three times, depending on the employee, their annual salary
and bonus, plus continuation of certain benefits and acceleration of
certain stock options, if there is a change in control of the Company (as
defined) and a termination of such employees or certain other events within
one to three years thereafter. The maximum contingent liability upon a
change in control, excluding any bonus, deferred compensation, continuation
of benefits or acceleration of stock options, is approximately $5.0 million
at December 31, 2002.
12. Goodwill and Other Intangible Assets
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." In accordance with the guidelines of this accounting principle,
goodwill and indefinite-lived intangible assets are no longer amortized but
will be assessed for impairment on at least an annual basis. The Company
adopted SFAS No. 142 on January 1, 2002 and ceased amortization of
goodwill.
20
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The following table provides the comparable effects of adoption of SFAS No.
142 for the years ended December 31, 2002, 2001 and 2000.
For the Years Ended December 31,
2002 2001 2000
------- ------- -------
Net Income
Reported net income $36,254 $(2,920) $41,568
Add back: Amortization of goodwill, net of taxes - 5,131 4,463
------- ------- -------
Adjusted net income $36,254 $ 2,211 $46,031
------- ------- -------
Income before extraordinary loss, adjusted to exclude
amortization of goodwill, net of taxes $36,254 $ 8,556 $46,031
------- ------- -------
Basic net income per share
Reported net income $ 1.08 $ (0.10) $ 1.63
Amortization of goodwill, net of taxes - 0.17 0.18
------- ------- -------
Adjusted net income $ 1.08 $ 0.07 $ 1.81
------- ------- -------
Income before extraordinary loss, adjusted to exclude
amortization of goodwill, net of taxes $ 1.08 $ 0.29 $ 1.81
------- ------- -------
Diluted net income per share
Reported net income $ 1.03 $ (0.09) $ 1.63
Amortization of goodwill, net of taxes - 0.17 0.17
------- ------- -------
Adjusted net income $ 1.03 $ 0.08 $ 1.80
------- ------- -------
Income before extraordinary loss, adjusted to exclude
amortization of goodwill, net of taxes $ 1.03 $ 0.28 $ 1.80
------- ------- -------
The following table provides information relating to the Company's
amortized intangible assets as of December 31, 2002 and 2001 (amounts in
thousands):
December 31, 2002 December 31, 2001
------------------------------------ ------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
Amortized intangible assets:
Customer lists $7,675 $7,675 $7,675 $7,139
Covenant not to compete 235 235 235 190
------ ------ ------ ------
Total $7,910 $7,910 $7,910 $7,329
------ ------ ------ ------
The total intangible amortization expense for the years ended December 31,
2002, 2001 and 2000 were $0.6 million, $8.2 million and $7.4 million,
respectively.
The Company does not expect to record any annual amortization expense for
the years ending December 31, 2003-2007.
The changes in the carrying value of goodwill for the year ended December
31, 2002 are as follows (in thousands):
Balance as of January 1, 2002 $90,600
Goodwill acquired during the year 2,908
-------
Balance as of December 31, 2002 $93,508
-------
21
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
13. Recent Accounting Pronouncement
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which elaborates on required
disclosures by a guarantor in its financial statements about obligations
under certain guarantees that it has issued and clarifies the need for a
guarantor to recognize, at the inception of certain guarantees, a liability
for the fair value of the obligation undertaken in issuing the guarantee.
The Company does not expect that the provisions of FIN 45 will have a
material impact on the Company's results of operations or financial
position.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which requires that a
liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred and nullifies Emerging Issues
Task Force Issue No. 94-3. The Company plans to adopt Statement No. 146 in
January 2003. The provisions of SFAS No. 146 are effective for exit and
disposal activities that are initiated after December 31, 2002.
14. Subsequent Event - Acquisition of Unilab Corporation by Quest Diagnostics
On April 2, 2002, the Company entered into a definitive agreement or the
Merger Agreement with Quest Diagnostics Incorporated ("Quest Diagnostics")
which provided for Quest Diagnostics to acquire all of the outstanding
shares of the Company's common stock and assume the Company's existing
debt. On February 26, 2003, Quest Diagnostics accepted for payment more
than 99% of the outstanding capital stock of Unilab. On February 28, 2003,
Quest Diagnostics acquired the remaining shares of Unilab through a merger.
In connection with the acquisition, Quest Diagnostics issued approximately
7.4 million shares of Quest Diagnostics common stock (including 0.3 million
shares of Quest Diagnostics common stock reserved for outstanding stock
options of Unilab which were converted upon the completion of the
acquisition into options to acquire shares of Quest Diagnostics common
stock) and paid $297 million in cash, and Quest Diagnostics intends to
repay substantially all of Unilab's outstanding indebtedness. A director of
the Company acted as a financial advisor to Unilab regarding the merger
with Quest Diagnostics and was paid a fee of $2.6 million in 2003.
The Company incurred $6.3 million in direct transaction costs associated
with the Merger Agreement as of December 31, 2002. Such costs have been
included on a separate line item entitled merger-related charges in the
consolidated statement of operations for the year ended December 31, 2002.
As a result of the change in control, as defined in the Indenture, holders
of the Senior Notes will have the right to require the Company to purchase
their notes, in whole or in part, at a price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any, to the
date of purchase.
As a result of the acquisition of Unilab by Quest Diagnostics, the Class A
service options held by employees and the Class C and B performance options
held by most employees and non-employees, respectively, that are not vested
as of the closing date of the transaction, will be vested and result in
additional expense.
22
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
15. Supplemental Disclosures of Cash Flow Information
For the years ended December 31,
2002 2001 2000
---- ---- ----
(amounts in thousands)
Cash paid during the year for:
Interest $17,069 $28,543 $37,514
Income taxes 23,734 9,357 101
In connection with business acquisitions, liabilities were assumed
as follows:
Fair value of assets acquired $ 2,908 $ 7,010 $19,729
Cash paid $ 2,908 $ 8,260 $17,058
Liabilities assumed $ - $ 1,250 $ 2,671
16. Quarterly Financial Data (unaudited)
Summarized unaudited quarterly financial data for 2002 and 2001 (amounts in
thousands, except per share amounts) is as follows:
Year ended December 31, 2002
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Revenue $103,869 $109,171 $110,462 $105,438
Direct laboratory and field expenses:
Salaries, wages and benefits 30,707 30,620 31,218 31,984
Supplies 14,889 15,539 15,869 14,982
Other operating expenses 22,986 23,927 24,334 23,452
Total 68,582 70,086 71,421 70,418
Selling, general and administrative expenses 13,663 13,756 13,612 12,984
Merger-related charges - - 4,511 1,741
Amortization and depreciation 2,024 1,826 1,836 1,829
Operating income 19,600 23,503 19,082 18,466
Net income 8,660 11,036 8,433 8,125
Net income per common share:
Basic $ 0.26 $ 0.33 $ 0.25 $ 0.24
Diluted $ 0.25 $ 0.31 $ 0.24 $ 0.23
Weighted Average Shares Outstanding:
Basic 33,472 33,514 33,524 33,524
Diluted 35,110 35,302 35,124 35,132
23
UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Year ended December 31, 2001
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $95,308 $98,932 $99,018 $96,947
Direct laboratory and field expenses:
Salaries, wages and benefits 28,929 28,519 28,931 29,318
Supplies 13,743 13,805 14,273 13,951
Other operating expenses 22,034 21,854 22,258 21,876
Total 64,706 64,178 65,462 65,145
Selling, general and administrative expenses 12,470 12,562 12,550 12,377
Legal and other non-recurring charges - 5,450 - 1,488
Stock-based compensation charges 126 1,379 - 22,281
Amortization and depreciation 3,469 3,859 3,965 4,039
Operating income (loss) 14,537 11,504 17,041 (8,383)
Income (loss) before extraordinary item 3,171 1,928 6,772 (8,446)
Net income (loss) 3,171 1,346 1,009 (8,446)
Basic net income (loss) per common share:
Income (loss) before extraordinary item $ 0.12 $ 0.07 $ 0.20 $ (0.25)
Net income (loss) $ 0.12 $ 0.05 $ 0.03 $ (0.25)
Diluted net income (loss) per common share:
Income (loss) before extraordinary item $ 0.12 $ 0.07 $ 0.19 $ (0.25)
Net income (loss) $ 0.12 $ 0.05 $ 0.03 $ (0.25)
Weighted Average Shares Outstanding:
Basic 25,504 27,621 33,209 33,390
Diluted 25,582 29,176 34,750 35,075
Third Quarter 2002
The Company incurred $4.5 million in direct transaction costs associated with
the pending merger with Quest Diagnostics.
Fourth Quarter 2002
The Company incurred $1.8 million in direct transaction costs associated with
the pending merger with Quest Diagnostics.
Second Quarter 2001
On June 6, 2001, the Company completed an IPO of common stock, $0.01 par value.
As a result of the IPO the Company repaid debt incurring an extraordinary loss
of $0.6 million and a $2.5 million payment in consideration for the termination
of annual fees for financial advisory services from Kelso & Company, which is
reflected in the statement of operations as a non-recurring charge.
The Company recorded a non-recurring legal charge of $2.95 million related to a
federal investigation under the False Claims Act relating to the Company's
billing.
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UNILAB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The Company accelerated the vesting of service options issued to consultants and
recorded non-cash charges totaling $1.4 million.
Third Quarter 2001
On July 9, 2001, $54.3 million in principal of the $155.0 million in 12.75%
senior subordinated notes due October 2009 was repaid with proceeds from the IPO
resulting in a $5.8 million extraordinary loss.
Effective July 21, 2001, the Company acquired substantially all of the assets of
MACL.
Fourth Quarter 2001
The Company recognized $22.3 million in non-cash charges related to certain
performance-based stock options that met the contingent vesting provisions in
the fourth quarter.
In October 2001, the Company filed a registration statement to sell shares owned
by Kelso and management. The Company incurred $0.9 million in offering costs as
a result of this secondary offering.
The Company settled claims brought by a former employee regarding employment
benefits and recorded a legal charge of $0.6 million.
25