UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2002
----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-11353
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LABORATORY CORPORATION OF AMERICA HOLDINGS
- -----------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3757370
- -------------------------------- ----------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
358 SOUTH MAIN STREET, BURLINGTON, NORTH CAROLINA 27215
- ---------------------------------------------------- ---------
(Address of principal executive offices) (Zip code)
(336) 229-1127
- ----------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ----
The number of shares outstanding of the issuer's common stock is
147,811,836 shares as of October 31, 2002.
INDEX
PART I. Financial Information
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets (unaudited)
September 30, 2002 and December 31, 2001
Condensed Consolidated Statements of Operations (unaudited)
Nine and three months ended September 30, 2002 and 2001
Condensed Consolidated Statements of Changes in
Shareholders' Equity (unaudited)
Nine months ended September 30, 2002 and 2001
Condensed Consolidated Statements of Cash Flows
(unaudited) Nine months ended September 30, 2002 and 2001
Notes to Unaudited Condensed Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures about
Market Risk
Item 4 Controls and Procedures
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Changes in Securities and Use of Proceeds
Item 6 Exhibits and Reports on Form 8-K
PART I - FINANCIAL INFORMATION
Item 1. Financial Information
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(Unaudited)
September 30, December 31,
2002 2001
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 98.4 $ 149.2
Accounts receivable, net 418.7 365.5
Supplies inventories 44.0 38.7
Prepaid expenses and other 23.1 16.7
Deferred income taxes 53.5 54.4
-------- --------
Total current assets 637.7 624.5
Property, plant and equipment, net 355.3 309.3
Goodwill 935.9 719.3
Identifiable intangible assets, net 305.1 249.2
Investments in equity affiliates 390.6 --
Other assets, net 29.0 27.3
-------- --------
$ 2,653.6 $ 1,929.6
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 90.0 $ 60.2
Accrued expenses and other 194.9 141.0
Current portion of long-term debt 120.5 --
-------- -------
Total current liabilities 405.4 201.2
Zero coupon-subordinated notes 510.3 502.8
Long-term debt, less current portion 3.2 --
Capital lease obligations 6.3 6.1
Other liabilities 153.2 134.1
Commitments and contingent liabilities -- --
Shareholders' equity:
Preferred stock, $0.10 par value; 30,000,000
shares authorized; shares issued: none -- --
Common stock, $0.10 par value; 265,000,000
shares authorized; 147,808,264 and
141,107,436 shares issued and outstanding
at September 30, 2002 and December 31,
2001, respectively 14.8 14.1
Additional paid-in capital 1,406.2 1,081.8
Retained earnings 213.1 11.5
Treasury stock, at cost; 97,426 shares
at September 30, 2002 (4.4) --
Deferred stock compensation (46.1) (13.2)
Accumulated other comprehensive loss (8.4) (8.8)
-------- --------
Total shareholders' equity 1,575.2 1,085.4
-------- --------
$ 2,653.6 $ 1,929.6
======== ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------- -----------------------
2002 2001 2002 2001
----------------------- -----------------------
Net sales $ 1,857.6 $ 1,636.0 $ 655.2 $ 560.9
Cost of sales 1,049.7 935.5 381.9 322.9
------- ------- -------- -------
Gross profit 807.9 700.5 273.3 238.0
Selling, general and
administrative expenses 427.3 380.4 153.4 128.0
Restructuring and other
special charges 17.5 -- 17.5 --
Amortization of intangibles
and other assets 16.4 29.9 6.2 9.7
------- ------- ------- -------
Operating income 346.7 290.2 96.2 100.3
Other income (expenses):
Income from equity
investments 6.2 -- 6.2 --
Loss on sale of assets (0.4) (1.9) -- (0.7)
Net investment income 2.9 1.5 0.9 --
Termination of interest rate
swap agreement -- (8.9) -- (8.9)
Interest expense (13.7) (22.8) (5.3) (6.5)
------- ------- ------- -------
Earnings before income taxes
and extraordinary loss 341.7 258.1 98.0 84.2
Provision for income taxes 140.1 116.2 40.7 37.9
------- ------- ------- -------
Earnings before
extraordinary loss $ 201.6 $ 141.9 $ 57.3 $ 46.3
Extraordinary loss, net of
tax benefit -- 3.2 -- 3.2
------- ------- ------- -------
Net earnings after
extraordinary loss $ 201.6 $ 138.7 $ 57.3 $ 43.1
======= ======= ======= =======
Basic earnings per
common share before
extraordinary loss $ 1.42 $ 1.02 $ 0.40 $ 0.33
Extraordinary loss, net of
tax benefit $ -- $ 0.02 $ -- $ 0.02
-------- -------- -------- --------
Basic earnings per
common share after
extraordinary loss $ 1.42 $ 1.00 $ 0.40 $ 0.31
======== ======== ======== ========
Diluted earnings per
common share before
extraordinary loss $ 1.40 $ 1.00 $ 0.39 $ 0.33
Extraordinary loss, net of
tax benefit $ -- $ 0.02 $ -- $ 0.02
-------- -------- -------- --------
Diluted earnings per
common share after
extraordinary loss $ 1.40 $ 0.98 $ 0.39 $ 0.31
======== ======== ========= ========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN MILLIONS)
(Unaudited)
Additional Retained
Common Paid-in Earnings Treasury
Stock Capital (Deficit) Stock
------- ---------- ------------- ---------
PERIOD ENDED SEPTEMBER 30, 2001
Balance at beginning of year $ 14.0 $1,041.2 $ (168.0) $ --
Comprehensive income:
Net earnings after
extraordinary loss -- -- 138.7 --
Other comprehensive income:
Cumulative effect of change
in accounting principle
(net-of-tax of $0.4) -- -- -- --
Unrealized derivative loss
on cash flow hedge -- -- -- --
Termination of interest
rate swap agreement -- -- -- --
Foreign currency translation
adjustments -- -- -- --
----- ------- ------- ------
Comprehensive income -- -- 138.7 --
Issuance of common stock -- 9.1 -- --
Issuance of restricted stock
awards -- 11.3 -- --
Amortization of unearned
restricted stock compensation -- -- -- --
Income tax benefit from stock
options exercised -- 6.2 -- --
----- ------- ------- ------
BALANCE AT SEPTEMBER 30, 2001 $ 14.0 $1,067.8 $ (29.3) $ --
===== ======= ======= ======
PERIOD ENDED SEPTEMBER 30, 2002
Balance at beginning of year $ 14.1 $1,081.8 $ 11.5 $ --
Comprehensive income:
Net earnings -- -- 201.6 --
Other comprehensive income:
Foreign currency translation
adjustments -- -- -- --
----- ------- ------- ------
Comprehensive income -- -- 201.6 --
Issuance of common stock 0.1 17.8 -- --
Issuance of restricted stock
awards 0.1 40.9 -- --
Surrender of restricted stock
awards -- -- -- (4.4)
Common stock issued in
connection with acquisition 0.5 245.1 -- --
Stock options assumed in
connection with acquisition,
(net of forfeitures) -- 4.7 -- --
Amortization of unearned
restricted stock compensation -- -- -- --
Income tax benefit from stock
options exercised -- 15.9 -- --
----- ------- ------- ------
BALANCE AT SEPTEMBER 30, 2002 $ 14.8 $1,406.2 $ 213.1 $ (4.4)
===== ======= ======= ======
(continued)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONTINUED)
(DOLLARS IN MILLIONS)
(Unaudited)
Unearned Accumulated
Restricted Other Total
Stock Comprehensive Shareholders'
Compensation Loss Equity
------------ -------------- ------------
PERIOD ENDED SEPTEMBER 30, 2001
Balance at beginning of year $ (9.4) $ (0.4) $ 877.4
Comprehensive income:
Net earnings after
extraordinary loss -- -- 138.7
Other comprehensive income:
Cumulative effect of change
in accounting principle
(net-of-tax of $0.4) -- 0.6 0.6
Unrealized derivative loss
on cash flow hedge -- (9.5) (9.5)
Termination of interest
rate swap agreement -- 8.9 8.9
Foreign currency translation
adjustments -- (0.6) (0.6)
------- ------- -------
Comprehensive income -- (0.6) 138.1
Issuance of common stock -- -- 9.1
Issuance of restricted stock
awards (11.3) -- --
Amortization of unearned
restricted stock compensation 5.7 -- 5.7
Income tax benefit from stock
options exercised -- -- 6.2
------- ------- -------
BALANCE AT SEPTEMBER 30, 2001 $ (15.0) $ (1.0) $1,036.5
======= ======= =======
PERIOD ENDED SEPTEMBER 30, 2002
Balance at beginning of year $ (13.2) $ (8.8) $1,085.4
Comprehensive income:
Net earnings -- -- 201.6
Other comprehensive income:
Foreign currency translation
adjustments -- 0.4 0.4
------- ------- -------
Comprehensive income -- 0.4 202.0
Issuance of common stock -- -- 17.9
Issuance of restricted stock
awards (41.0) -- --
Surrender of restricted stock
awards -- -- (4.4)
Common stock issued in
connection with acquisition -- -- 245.6
Stock options assumed in
connection with acquisition,
(net of forfeitures) (1.6) -- 3.1
Amortization of unearned
restricted stock compensation 9.7 -- 9.7
Income tax benefit from stock
options exercised -- -- 15.9
------- ------- -------
BALANCE AT SEPTEMBER 30, 2002 $ (46.1) $ (8.4) $1,575.2
======= ======= =======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(Unaudited)
Nine Months Ended
September 30,
--------------------------
2002 2001
--------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings after extraordinary loss $ 201.6 $ 138.7
Adjustments to reconcile net earnings
after extraordinary loss to net
cash provided by operating activities:
Depreciation and amortization 72.4 75.5
Deferred compensation 9.7 5.7
Net losses on sale of assets 0.4 1.9
Restructuring and other special charges 17.5 --
Accreted interest on zero coupon-
subordinated notes 7.6 0.5
Extraordinary loss, net of
tax benefit -- 3.2
Termination of interest rate
swap agreement -- 8.9
Net earnings on equity method investments (6.2) --
Deferred income taxes (9.1) (6.9)
Change in assets and liabilities:
Increase in accounts receivable, net (21.1) (7.3)
Increase in inventories (0.6) (2.6)
Decrease (increase) in prepaid
expenses and other (2.0) 6.0
Increase (decrease) in accounts payable 2.2 (0.3)
Increase in accrued expenses and other 52.7 29.0
Other, net 1.3 0.1
------ ------
Net cash provided by operating activities 326.4 252.4
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (54.9) (59.0)
Proceeds from sale of assets 1.4 2.3
Deferred payments on acquisitions (14.7) (5.2)
Licensing technology (15.0) --
Acquisition of businesses, net of
cash acquired (243.8) (131.4)
------ ------
Net cash used for investing activities (327.0) (193.3)
------ ------
(continued)
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN MILLIONS)
(Unaudited)
Nine Months Ended
September 30,
------------------------
2002 2001
------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit
facilities $ 180.0 $ 75.0
Payments on revolving credit
facilities (180.0) (75.0)
Proceeds from bridge loan facility 150.0 --
Payments on bridge loan facility (30.0) --
Proceeds from zero coupon-subordinated
notes -- 436.6
Payments on long-term debt (204.4) (478.5)
Termination of interest rate swap agreement 19.6 (8.9)
Debt issuance costs (2.8) (9.8)
Payments on long-term lease obligations (0.8) (0.8)
Net proceeds from issuance of stock to
employees 17.8 9.1
Other -- 0.5
------ ------
Net cash used for financing activities (50.6) (51.8)
------ ------
Effect of exchange rate changes on cash
and cash equivalents 0.4 (0.6)
------ ------
Net increase (decrease) in cash and
cash equivalents (50.8) 6.7
Cash and cash equivalents at
beginning of period 149.2 48.8
------ ------
Cash and cash equivalents at
end of period $ 98.4 $ 55.5
====== ======
Supplemental schedule of cash
flow information:
Cash paid during the period for:
Interest $ 1.2 $ 22.8
Income taxes, net of refunds 92.3 62.7
Disclosure of non-cash financing
and investing activities:
Issuance of restricted stock awards 41.0 11.3
Surrender of restricted stock awards 4.4 --
Issuance of common stock in acquisitions 245.6 --
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
The condensed consolidated financial statements include the
accounts of Laboratory Corporation of America Holdings and its
wholly owned subsidiaries (the "Company") after elimination of all
material intercompany accounts and transactions. The Company
operates in one business segment.
The financial statements of the Company's foreign subsidiary
are measured using the local currency as the functional currency.
Assets and liabilities are translated at exchange rates as of the
balance sheet date. Revenues and expenses are translated at average
monthly exchange rates prevailing during the period. Resulting
translation adjustments are included in "Accumulated Other
Comprehensive Loss."
The accompanying condensed consolidated financial statements of
the Company are unaudited. In the opinion of management, all
adjustments (which include only normal recurring accruals) necessary
for a fair presentation of such financial statements have been
included. Interim results are not necessarily indicative of results
for a full year.
The financial statements and notes are presented in accordance
with the rules and regulations of the Securities and Exchange
Commission and do not contain certain information included in the
Company's annual report. Therefore, the interim statements should
be read in conjunction with the consolidated financial statements
and notes thereto contained in the Company's annual report.
2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by
the weighted average number of common shares outstanding. Dilutive
earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding plus
potentially dilutive shares, as if they had been issued at the
beginning of the period presented. Potentially dilutive common
shares result primarily from the Company's restricted stock awards
and outstanding stock options.
The following represents a reconciliation of the weighted
average shares used in the calculation of basic and diluted earnings
per share:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ --------------------------
2002 2001 2002 2001
------------------------ --------------------------
Basic 144,527,602 138,887,528 141,746,566 138,651,130
Assumed conversion/
exercise of:
Stock options 440,606 1,238,624 781,974 1,150,150
Restricted stock awards 757,907 1,136,922 1,165,568 1,119,498
----------- ----------- ----------- -----------
Diluted 145,726,115 141,263,074 143,694,108 140,920,778
=========== =========== =========== ===========
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
At September 30, 2002 and 2001, options to acquire
1,428,379 and 13,626 shares of common stock, respectively, were
excluded in the computations of diluted earnings per share,
because the effect of including the options would have been
antidilutive. The Company's zero coupon-subordinated notes are
contingently convertible into 9,977,634 shares of common stock
and are not currently included in the diluted earnings per share
calculation because these notes were not convertible according
to their terms during 2002.
3. BRIDGE LOAN AGREEMENT
In conjunction with the acquisition of Dynacare, the Company
borrowed $150.0 under a Bridge Loan Agreement that matures on
July 23, 2003. As of September 30, 2002, the Company had an outstanding
balance of $120.0 on the bridge loan, with an interest rate of Libor
plus 75 basis points.
4. STOCK COMPENSATION PLANS
During January 2002, the Company granted 516,800 options and
347,200 shares of restricted stock at a price of $39.34 under its
2000 Stock Incentive Plan. During February 2002, the Company
granted 1,649,400 options and 619,208 shares of restricted stock at
a price of $43.53 under its 2000 Stock Incentive Plan. The
restricted stock issued in January 2002 has an initial four year
vesting period and the restricted stock issued in February 2002 has
an initial six year vesting period.
The tax benefits associated with the exercise of non-qualified
stock options reduced taxes currently payable by $15.9 and $6.2 for
the nine months ended September 30, 2002 and 2001, respectively.
Such benefits are credited to additional paid-in-capital.
5. STOCK REPURCHASE PROGRAM
On October 22, 2002, the Company's Board of Directors
authorized a stock repurchase program under which the Company may
purchase up to an aggregate of $150.0 of its common stock from time-
to-time. It is the Company's intention that the common stock
acquired through the program will be funded with cash flow from
operations.
6. BUSINESS ACQUISITIONS
On July 25, 2002, the Company completed the acquisition of
all of the outstanding stock of Dynacare Inc. in a combination
cash and stock transaction with a combined value of
approximately $495.3 including transaction costs. The Company
also converted approximately 553,958 unvested Dynacare stock
options into 297,049 unvested Company options to acquire shares
of the Company at terms comparable to those under the
predecessor Dynacare plan. This conversion of outstanding
unvested options increased the non-cash consideration of the
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
transaction by approximately $5.0 and resulted in the recording
of initial deferred compensation of approximately $2.5. In
conjunction with this acquisition, the Company repaid Dynacare's
existing $204.4 of senior subordinated unsecured notes,
including a call premium of approximately $7.0. The transaction
was financed by issuing approximately 4.9 million shares of the
Company's common stock, valued at approximately $245.6, and
using $260.0 in available cash, a $150.0 bridge loan and
borrowings of $50.0 under the Company's $300.0 revolver.
The Company terminated a number of interest rate swap
agreements related to Dynacare's existing senior subordinated
unsecured notes. The $19.6 the Company received upon
termination of these swap agreements was included in the
estimated fair value of the net assets acquired as of July 25,
2002.
Dynacare had 2001 revenues of approximately $238.0 and had
approximately 6,300 employees at the closing date of the
acquisition. Dynacare operates in 21 states and Canada with 24
primary laboratories, 2 esoteric laboratories, 115 rapid
response labs and 302 patient service centers.
The acquisition of Dynacare was accounted for under the
purchase method of accounting. As such, the cost to acquire
Dynacare has been allocated on a preliminary basis to the assets and
liabilities acquired based on estimated fair values as of the
closing date. The consolidated financial statements include the
results of operations of Dynacare subsequent to the closing of the
acquisition.
The following table summarizes the Company's purchase price
allocation related to the acquisition of Dynacare based on the
estimated fair value of the assets acquired and liabilities assumed
on the acquisition date. The purchase price allocation will be
finalized after completion of the valuation of certain assets and
liabilities, including costs to integrate Dynacare's operations.
This process is expected to be substantially completed by the end of
the fourth quarter of 2002.
Estimated
Fair Values
as of
July 25, 2002
-------------
Current assets $ 80.4
Property, plant and equipment 48.0
Goodwill 209.3
Identifiable intangible assets 52.5
Investment in equity affiliates 385.4
Other assets 19.3
Deferred compensation 2.5
------
Total assets acquired 797.4
------
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
Estimated
Fair Values
as of
July 25, 2002
-------------
Current liabilities 259.7
Long-term debt 12.9
Other liabilities 29.5
------
Total liabilities assumed 302.1
------
Net assets acquired $ 495.3
======
As a result of this acquisition, the Company recorded an
addition to non-deductible goodwill of approximately $209.3 and an
addition to customer lists of approximately $52.5 (estimated
remaining useful life of 15 years). The investments in equity
affiliates include $341.7 of Canadian licenses and $28.1 of goodwill
(both with indefinite lives and deductible for tax).
The following unaudited pro forma combined financial
information for the three and nine months ended September 30, 2002
and the three and nine months ended September 30, 2001 assumes that
the Dynacare acquisition was effected on January 1, 2001:
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------- ---------------------
2002 2001 2002 2001
----------------------- ---------------------
Net sales $ 2,027.1 $ 1,823.0 $ 673.9 $ 624.6
Earnings before
extraordinary loss $ 207.0 $ 149.8 $ 55.3 $ 48.3
Net earnings after
extraordinary loss $ 207.0 $ 146.6 $ 55.3 $ 45.1
Diluted earnings per
common share:
Before extraordinary loss $ 1.40 $ 1.03 $ 0.38 $ 0.33
After extraordinary loss $ 1.40 $ 1.00 $ 0.38 $ 0.31
7. DERIVATIVE FINANCIAL INSTRUMENTS
The Company's zero coupon-subordinated notes contain the
following three features that are considered to be embedded
derivative instruments under FAS No. 133:
1) The Company will pay contingent cash interest on the zero
coupon subordinated notes after September 11, 2006, if the
average market price of the notes equals 120% or more of
the sum of the issue price, accrued original issue discount
and contingent additional principal, if any, for a
specified measurement period.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
2) Contingent additional principal will accrue on the zero
coupon-subordinated notes during the two year period from
September 11, 2004 to September 11, 2006, if the Company's
stock price is at or below specified thresholds.
3) Holders may surrender zero coupon-subordinated notes for
conversion during any period in which the rating assigned
to the zero coupon-subordinated notes by Standard & Poor's
Ratings Services is BB- or lower.
Dynacare has cross currency and interest rate swap agreements due
January 15, 2006, whereby Dynacare has swapped $85.5 Canadian dollar
denominated receivables due from certain of its subsidiaries for $58.9.
These same subsidiaries have swapped in aggregate $85.5 Canadian dollar
denominated debt due to Dynacare into $58.9. At September 30, 2002 the
estimated fair value of net unfavorable currency and interest rate swaps was
approximately $0.3.
Based upon independent appraisals, these embedded derivatives
had no fair value at September 30, 2002.
8. INTANGIBLES
The Company has adopted Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations," and SFAS No.
142 "Goodwill and Other Intangible Assets". These pronouncements
provide guidance on how to account for the acquisition of businesses
and intangible assets, including goodwill, which arise from such
activities. SFAS No. 141 affirms that only the purchase method of
accounting may be applied to a business combination and also
provides guidance on the allocation of purchase price to the assets
acquired. Under SFAS 142, goodwill and intangible assets that have
indefinite useful lives are no longer amortized but are reviewed at
least annually for impairment. The Company evaluated its intangible
assets excluding goodwill, and determined that all such assets have
determinable lives. The Company completes an impairment analysis of
its indefinite lived assets annually and has found no instances of
impairment of its recorded goodwill as of September 30, 2002.
During the nine months ended September 30, 2002, the Company has
acquired $216.6 of goodwill, substantially all relating to the
acquisition of Dynacare.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
The components of intangible assets are as follows:
September 30, 2002 December 31, 2001
---------------------- ------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
---------------------- ------------------------
Non-compete
agreements $ 21.3 $ 15.6 $ 21.1 $ 14.2
Customer lists 333.9 85.9 276.8 73.5
Patents and
technology 50.0 4.1 35.0 1.8
Trade name 5.9 0.4 5.9 0.1
------ ------ ------ ------
$ 411.1 $ 106.0 $ 338.8 $ 89.6
====== ====== ====== ======
Aggregate amortization expense for the nine month and three
month periods ended September 30, 2002 was $16.4 and $6.2,
respectively, and $29.9 and $9.7 for the nine month and three month
periods ended September 30, 2001, respectively. Amortization
expense for the net carrying amount of intangible assets recorded as
of September 30, 2002 is estimated to be $5.6 for the remainder of
fiscal 2002, $21.9 in fiscal 2003, $21.8 in fiscal 2004, $21.1 in
fiscal 2005, and $19.7 in fiscal 2006. These estimates include the
effect of the Dynacare acquisition.
The following table adjusts earnings and earnings per share for
the adoption of SFAS No. 142.
Nine Months Three Months
Ended September 30, Ended September 30,
--------------------- ----------------------
2002 2001 2002 2001
--------------------- ----------------------
Reported net earnings
before extraordinary loss $ 201.6 $ 141.9 $ 57.3 $ 46.3
Add back goodwill
amortization, net of tax -- 19.2 -- 6.2
------ ------ ------ ------
Adjusted net earnings
before extraordinary loss $ 201.6 $ 161.1 $ 57.3 $ 52.5
====== ====== ====== ======
Basic earnings per share:
Reported basic earnings
per share before
extraordinary loss $ 1.42 $ 1.02 $ 0.40 $ 0.33
Add back goodwill
amortization, net of tax -- 0.14 -- 0.04
------ ------ ------ ------
Adjusted basic earnings
per share before
extraordinary loss $ 1.42 $ 1.16 $ 0.40 $ 0.37
====== ====== ====== ======
Diluted earnings per share:
Reported diluted earnings
per share before
extraordinary loss $ 1.40 $ 1.00 $ 0.39 $ 0.33
Add back goodwill
amortization, net of tax -- 0.14 -- 0.04
------ ------ ------- -------
Adjusted diluted earnings
per share before
extraordinary loss $ 1.40 $ 1.14 $ 0.39 $ 0.37
====== ====== ======= =======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
9. NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, SFAS No. 143, "Accounting for Asset Retirement
Obligations" was issued. This Statement addresses financial
accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated legal
obligations of such asset retirement costs. SFAS No. 143 shall be
effective for financial statements issued for fiscal years beginning
after June 15, 2002. The Company does not expect that
implementation of this standard will have a significant financial
impact.
In May 2002, SFAS No. 145, "Rescission of FAS Nos. 4, 44, and
64, Amendment of FAS 13, and Technical Corrections as of April 2002"
was issued. This Statement rescinds SFAS No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and an amendment of that
Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This Statement also rescinds SFAS No.
44, Accounting for Intangible Assets of Motor Carriers. This
Statement amends SFAS No. 13, Accounting for Leases, to eliminate
any inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-
leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed
conditions. The provisions of this Statement related to the
rescission of SFAS No. 4 shall be applied in fiscal years beginning
after May 15, 2002. The Company does not expect that implementation
of this standard will have a significant financial impact.
In July 2002, SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" was issued. This Statement
addresses the recognition, measurement, and reporting of costs
associated with exit or disposal activities, and supercedes Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" ("EITF 94-
3"). The principal difference between SFAS No. 146 and EITF 94-3
relates to the requirements for recognition of a liability for a
cost associated with an exit or disposal activity. SFAS No. 146
requires that a liability for a cost associated with an exit or
disposal activity, including those related to employee termination
benefits and obligations under operating leases and other contracts,
be recognized when the liability is incurred, and not necessarily
the date of an entity's commitment to an exit plan, as under EITF
94-3. SFAS No. 146 also establishes that the initial measurement of
a liability recognized under SFAS No. 146 be based on fair value.
The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early
application encouraged. The Company expects to adopt SFAS No. 146,
effective January 1, 2003.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
10. INTEGRATION OF DYNACARE
During the third quarter of 2002, the Company finalized its
plan related to the integration of Dynacare's U.S. operations into
the Company's service delivery network. The plan focuses on
reducing redundant facilities, while maintaining a focus on
providing excellent customer service. A reduction in staffing will
occur as the Company executes the integration plan and consolidates
duplicate or overlapping functions and facilities. Employee groups
being affected as a result of this plan include those involved in
the collection and testing of specimens, as well as administrative
and other support functions.
In connection with the Dynacare integration plan, the Company
recorded $14.6 of costs associated with the executing of the plan.
The majority of these integration costs related to employee
severance and contractual obligations associated with leased
facilities and equipment. Of the total costs indicated above, $12.1
related to actions that impact the employees and operations of
Dynacare, and was accounted for as a cost of the Dynacare
acquisition and included in goodwill. Of the $12.1, $6.0 related to
employee severance benefits for approximately 722 employees, with
the remainder primarily related to contractual obligations
associated with leased facilities and equipment. In addition, the
Company recorded restructuring expense of $2.5, relating to
integration costs of actions that impact the Company's existing
employees and operations. Of this amount $1.0 related to employee
severance benefits for approximately 78 employees, with the
remainder primarily related to contractual obligations associated
with leased facilities and equipment.
The Company also recorded a special bad debt provision of
approximately $15.0 related to the acquired Dynacare accounts
receivable balance. This provision, based on Company experience,
was made in anticipation of changes in staffing and collection
procedures that will occur as the Company converts Dynacare
customers to LabCorp's billing system. The Company believes that
the special bad debt provision is required to properly state the net
realizable value of the Dynacare receivables at September 30, 2002.
11. RESTRUCTURING CHARGES
The following represents the Company's restructuring activities
for the period indicated:
Lease and
Severance Other Facility
Costs Costs Total
--------- -------------- ---------
Balance at December 31, 2001 $ 0.2 $ 15.8 $ 16.0
Dynacare integration 7.0 7.6 14.6
Reclassifications and
non-cash items -- (0.1) (0.1)
Cash payments (0.5) (1.5) (2.0)
----- ------ ------
Balance at September 30, 2002 $ 6.7 $ 21.8 $ 28.5
===== ====== ======
Current $ 21.5
Non-current $ 7.0
------
$ 28.5
======
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
12. COMMITMENTS AND CONTINGENCIES
The Company is involved in litigation purporting to be a
nation-wide class action involving the alleged overbilling of
patients who are covered by private insurance. The Company has
reached a settlement with the class that will not exceed existing
reserves or have a material adverse affect on the Company. On
January 9, 2001, the Company was served with a complaint in North
Carolina which purports to be a class action and makes claims
similar to the case referred to above. The claim has been stayed
and the plaintiff's council has agreed to dismiss the case, with
prejudice. The Company believes that the likelihood of an adverse
result in the North Carolina case is remote.
The Company is also involved in various claims and legal actions
arising in the ordinary course of business. These matters include,
but are not limited to, professional liability, employee related
matters, and inquiries from governmental agencies and Medicare or
Medicaid carriers requesting comment on allegations of billing
irregularities that are brought to their attention through billing
audits or third parties. In the opinion of management, based upon
the advice of counsel and consideration of all facts available at
this time, the ultimate disposition of these matters will not
have a material adverse effect on the financial position, results of
operations or liquidity of the Company.
The Company believes that it is in compliance in all material
respects with all statutes, regulations and other requirements
applicable to its clinical laboratory operations. The clinical
laboratory testing industry is, however, subject to extensive
regulation, and many of these statutes and regulations have not been
interpreted by the courts. There can be no assurance therefore that
applicable statutes and regulations might not be interpreted or
applied by a prosecutorial, regulatory or judicial authority in a
manner that would adversely affect the Company. Potential sanctions
for violation of these statutes and regulations include significant
fines and the loss of various licenses, certificates and
authorizations.
Under the Company's present insurance programs, coverage is
obtained for catastrophic exposures as well as those risks required
to be insured by law or contract. The Company is responsible for
the uninsured portion of losses related primarily to general,
professional and vehicle liability, certain medical costs and
workers' compensation. The self-insured retentions are on a per
occurrence basis without any aggregate annual limit. Provisions for
losses expected under these programs are recorded based upon the
Company's estimates of the aggregated liability of claims incurred.
At September 30, 2002 and 2001, the Company had provided letters of
credit aggregating approximately $31.8 and $36.6, respectively,
primarily in connection with certain insurance programs.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
- --------------------------
The Company has made in this report, and from time to time may
otherwise make in its public filings, press releases and discussions
with Company management, forward-looking statements concerning the
Company's operations, performance and financial condition, as well
as its strategic objectives. Some of these forward-looking
statements can be identified by the use of forward-looking words
such as "believes", "expects", "may", "will", "should", "seeks",
"approximately", "intends", "plans", "estimates", or "anticipates"
or the negative of those words or other comparable terminology.
Such forward-looking statements are subject to various risks and
uncertainties and the Company claims the protection afforded by the
safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995. Actual results could
differ materially from those currently anticipated due to a number
of factors in addition to those discussed elsewhere herein and in
the Company's other public filings, press releases and discussions
with Company management, including:
1. future changes in federal, state, local and third party payor
regulations or policies (or in the interpretation of current
regulations) affecting governmental and third-party reimbursement
for clinical laboratory testing.
2. adverse results from investigations of clinical laboratories by
the government, which may include significant monetary damages
and/or exclusion from the Medicare and Medicaid programs.
3. loss or suspension of a license or imposition of a fine or
penalties under, or future changes in, the law or regulations
of the Clinical Laboratory Improvement Act of 1967, and the
Clinical Laboratory Improvement Amendments of 1988, or those
of Medicare, Medicaid or other federal, state or local
agencies.
4. failure to comply with the Federal Occupational Safety and
Health Administration requirements and the recently passed
Needlestick Safety and Prevention Act which may result in
penalties and loss of licensure.
5. Failure to comply with HIPAA, which could result in
significant fines and up to ten years in prison.
6. increased competition, including price competition.
7. changes in payor mix, including an increase in capitated
managed-cost health care.
FORWARD-LOOKING STATEMENTS (CONTINUED)
- -----------------------------------
8. our failure to obtain and retain new customers and alliance
partners, or a reduction in tests ordered or specimens
submitted by existing customers.
9. our failure to integrate newly acquired businesses and the
cost related to such integration.
10.adverse results in litigation matters.
11.our ability to attract and retain experienced and qualified
personnel.
12.failure to maintain our days sales outstanding levels.
RESULTS OF OPERATIONS
- ---------------------
Three Months ended September 30, 2002 compared with Three Months
ended September 30, 2001.
Net sales for the three months ended September 30, 2002 were
$655.2, an increase of $94.3, or 16.8%, from $560.9 for the
comparable 2001 period, and reflect the acquisition of Dynacare
Inc. on July 25, 2002. The sales increase is a result of an
increase of approximately 13.2% in volume (or 4.3% on a pro forma
basis, assuming Dynacare had been part of the Company since
January 1, 2001) and 3.6% in price.
Cost of sales, which includes primarily laboratory and
distribution costs, was $381.9 for the three months ended
September 30, 2002 compared to $322.9 in the corresponding 2001
period, an increase of $59.0. The Company previously announced a
slowdown in volume growth in certain key regions of the country.
In order to reverse these declines in volume, the Company has
been making investments to improve client service with the
addition of patient service centers, phlebotomists and sales reps
in the affected regions. Also, the Company has incurred certain
costs associated with the acquisition and integration of Dynacare
such as additional overtime and temporary help and the payment of
retention bonuses. Additional costs continue to be incurred due
to growth in esoteric and genomic testing (with significant
increases in Cystic Fibrosis and Human Papillomavirus testing)
and higher volume of pap smear tests being performed using more
expensive monolayer technology. Cost of sales as a percentage of
net sales was 58.3% for the three months ended September 30, 2002
and 57.6% in the corresponding 2001 period.
Selling, general and administrative expenses increased to
$153.4 for the three months ended September 30, 2002 from $128.0
in the same period in 2001. This increase resulted primarily
from personnel and other costs as a result of the Dynacare
acquisition. As a percentage of net sales, selling, general and
administrative expenses were 23.4% and 22.8% for the three months
ended September 30, 2002 and 2001, respectively.
RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------
The amortization of intangibles and other assets was $6.2
and $9.7 for the three months ended September 30, 2002 and 2001.
The decrease in the amortization expense for the three months
ended September 30, 2002 is due to the adoption in 2002 of the non-
amortization provisions of SFAS No. 142 for goodwill.
During the three months ended September 30, 2002, the
Company recorded restructuring and other special charges totaling
$17.5. The $17.5 was comprised of a special bad debt provision
of approximately $15.0 related to the acquired Dynacare accounts
receivable balance and an additional $2.5 relating to integration
costs of actions that impact the Company's existing employees and
operations (see "Note 10 to the Company's Unaudited Condensed
Consolidated Financial Statements").
Interest expense was $5.3 for the three months ended
September 30, 2002 compared with $6.5 for the same period in
2001. The Company repaid its outstanding term loan during
September 2001 with proceeds from the sale of zero coupon-
subordinated notes. In connection with the acquisition of
Dynacare, the Company borrowed $150.0 under a Bridge Loan
Agreement and an additional $50.0 under its existing Revolving
Credit Facility. As of September 30, 2002 the Company had repaid
$80.0 of these borrowings, leaving an outstanding balance of
$120.0 on the bridge loan. The Company expects to repay this
balance by the end of 2002.
The provision for income taxes as a percentage of earnings
before taxes was 41.5% for the three months ended September 30, 2002
compared to 45.0% for the three months ended September 30, 2001.
The decrease in the effective tax rate for the three months ended
September 30, 2002 is primarily due to the application of the non-
amortization provisions of SFAS no. 142 for goodwill.
Nine Months ended September 30, 2002 compared with Nine Months
ended September 30, 2001.
Net sales for the nine months ended September 30, 2002 were
$1,857.6, an increase of $221.6, or 13.5%, from $1,636.0 for the
comparable 2001 period, and reflect the acquisition of Dynacare
on July 25, 2002 . The sales increase is a result of an increase
in volume of approximately 9.5% (or 6.5% on a pro forma basis,
assuming that Dynacare had been part of the Company since January
1, 2001) and an increase in price of approximately 4.0%.
Cost of sales, which includes primarily laboratory and
distribution costs, was $1,049.7 for the nine months ended
September 30, 2002 compared to $935.5 in the corresponding 2001
period, an increase of $114.2. The increase in cost of sales is
primarily the result of increases in volume and supplies due to
recent acquisitions and growth in esoteric and genomic testing
(with significant increases in Cystic Fibrosis and Human
Papillomavirus testing). Costs associated with the acquisition
and integration of Dynacare and the recent investments made by
the Company to improve client service in certain key regions of
the country, have also contributed to the increase in cost of
sales for the nine months ended September 30, 2002. Cost of
sales as a percentage of net sales was 56.5% for the nine months
RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------
ended September 30, 2002 and 57.2% in the corresponding 2001
period.
Selling, general and administrative expenses increased to
$427.3 for the nine months ended September 30, 2002 from $380.4
in the same period in 2001. This increase resulted primarily
from personnel and other costs as a result of the recent
acquisitions. As a percentage of net sales, selling, general and
administrative expenses were 23.0% and 23.3% for the nine months
ended September 30, 2002 and 2001, respectively.
The amortization of intangibles and other assets was $16.4
and $29.9 for the nine months ended September 30, 2002 and 2001.
The decrease in the amortization expense for the nine months
ended September 30, 2002 is primarily due to the adoption in 2002
of the non-amortization provisions of SFAS No. 142 for goodwill.
Interest expense was $13.7 for the nine months ended
September 30, 2002 compared with $22.8 for the same period in
2001. The Company repaid its outstanding term loan during
September 2001 with proceeds from the sale of zero coupon-
subordinated notes. In connection with the acquisition of
Dynacare, the Company borrowed $150.0 under a Bridge Loan
Agreement and an additional $50.0 under its existing Revolving
Credit Facility. As of September 30, 2002 the Company had repaid
$80.0 of these borrowings, leaving an outstanding balance of
$120.0 on the bridge loan. The Company expects to repay this
balance by the end of 2002.
The provision for income taxes as a percentage of earnings
before taxes was 41.0% for the nine months ended September 30, 2002
compared to 45.0% for the nine months ended September 30, 2001. The
decrease in the effective tax rate for the nine months ended
September 30, 2002 is due primarily to the application of the non-
amortization provisions of SFAS no. 142 for goodwill.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operating activities was $326.4 and $252.4
for the nine months ended September 30, 2002 and September 30, 2001,
respectively. The increase in cash flows from operations primarily
resulted from improved earnings and improved cash collections.
These increases were partially offset by the increase in estimated
federal tax payments for the nine months ended September 30, 2002
(the third quarter 2001 estimated federal tax payment was deferred
by the IRS until October 15, 2001).
The Company's days sales outstanding (DSO) decreased to 56 days
at September 30, 2002 from 62 days at September 30, 2001. Due to
improved cash collections, the Company lowered its provision for
bad debt expense, as a percentage of sales, to 8.6% (excluding
special bad debt provision of $15.0 relating to Dynacare
receivables) for the nine months ended September 30, 2002
compared to 9.4% for the nine months ended September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
- -------------------------------------------
The Company funded the July 25, 2002 acquisition of Dynacare
Inc. with $260.0 in available cash, a $150.0 bridge loan and
borrowings of $50.0 under its $300.0 revolving credit facility. The
available cash and borrowings of $460.0 were used to fund the cash
portion of the acquisition, acquisition related costs, and paying
off Dynacare's existing $204.4 of senior subordinated unsecured
notes. The Company repaid the $50.0 revolver during the third
quarter of 2002 and has made payments totaling $110.0 as of October
31, 2002 against the outstanding bridge loan balance. It is the
Company's intention to repay the balance of the bridge loan by the
end of 2002 with cash from operations (see "Note 3 to the Company's
Unaudited Condensed Consolidated Financial Statements").
The Company expects that it will incur $14.6 of restructuring
costs to integrate Dynacare Inc. The majority of these costs relate
to severance benefits and contractual obligations associated with
leased facilities and equipment.
On October 22, 2002, the Company announced that its Board of
Directors authorized a stock repurchase program under which the
Company may purchase up to an aggregate of $150.0 of its common
stock. It is the Company's intention that the common stock acquired
through the program will be funded with cash flow from operations.
Based on current and projected levels of operations, coupled
with availability under its senior credit facilities, the Company
believes it has sufficient liquidity to meet both its short-term and
long-term cash needs.
UNCONSOLIDATED JOINT VENTURES
- -----------------------------
At September 30, 2002, as a result of the Dynacare acquisition,
the Company had investments in unconsolidated joint ventures in
Milwaukee, Wisconsin, Ontario, Canada and Alberta, Canada. These
investments are accounted for under the equity method of accounting.
The Company has no material obligations or guarantees to, or in
support of, these unconsolidated joint ventures and their
operations.
ITEM 3. Quantitative and Qualitative Disclosure about
Market Risk
The Company addresses its exposure to market risks, principally
the market risk associated with changes in interest rates, through a
controlled program of risk management that has included in the past,
the use of derivative financial instruments such as interest rate
swap agreements. Dynacare has cross currency and interest rate swap
agreements due January 15, 2006, whereby Dynacare has swapped $85.5
Canadian dollar denominated receivables due from certain of its
subsidiaries for $58.9. These same subsidiaries have swapped in
aggregate $85.5 Canadian dollar denominated debt due to Dynacare
into $58.9. The Company does not hold or issue derivative financial
instruments for trading purposes. The Company does not believe that
its exposure to market risk is material to the Company's financial
position or results of operations.
The Company's zero coupon-subordinated notes contain the
following three features that are considered to be embedded
derivative instruments under FAS No. 133:
1) The Company will pay contingent cash interest on the zero
coupon-subordinated notes after September 11, 2006, if the
average market price of the notes equals 120% or more of the
sum of the issue price, accrued original issue discount and
contingent additional principal, if any, for a specified
measurement period.
2) Contingent additional principal will accrue on the zero
coupon-subordinated notes during the two year period from
September 11, 2004 to September 11, 2006, if the Company's
stock price is at or below specified thresholds.
3) Holders may surrender zero coupon-subordinated notes for
conversion during any period in which the rating assigned to
the zero coupon-subordinated notes by Standard & Poor's
Ratings Services is BB- or lower.
Based upon independent appraisals, these embedded derivatives
had no fair value at September 30, 2002.
ITEM 4. Controls and Procedures
Within 90 days prior to the date of this report, the
Company carried out, under the supervision and with the
participation of the Company's management, including the
Company's Chief Executive Officer and Chief Financial Officer,
an evaluation of the effectiveness of the design and operation
of the Company's disclosure controls and procedures. Based on
the foregoing, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to
material information which is required to be included in the
periodic reports that the Company must file with the Securities
and Exchange Commission.
ITEM 4. Controls and Procedures (Continued)
There were no significant changes in the Company's internal
controls or in other factors that could significantly affect the
internal controls subsequent to the date the Company completed
its evaluation.
LABORATORY CORPORATION OF AMERICA HOLDINGS AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See "Note 12 to the Company's Unaudited Condensed Consolidated
Financial Statements" for the nine months ended September 30, 2002,
which is incorporated by reference.
Item 2 Changes in Securities and Use of Proceeds
On July 25, 2002, a subsidiary of the Company issued
approximately 4.9 million shares of the Company's stock and paid
approximately $230.6 in exchange for all of the outstanding
securities and vested options for securities of Dynacare Inc., an
Ontario, Canada company. In addition, unvested employee stock
options held by former employees of Dynacare Inc. were converted into
options to acquire the Company's common stock. The issuance was
exempt from registration pursuant to Section 3(a)(10) of the
Securities Act of 1933, as amended. The securities were issued
pursuant to a plan of arrangement which was approved by the Superior
Court of Justice (Ontario), Canada after holding a hearing. The
securities were issued pursuant to a plan of arrangement to the then
securityholders and optionholders of Dynacare. The court's order
approving the plan of arrangement stated that the court was satisfied
that the terms and conditions of the plan of arrangement were fair
and reasonable to the securityholders and optionholders, both
procedurally and substantively. Dynacare securityholders and
optionholders were given notice of the hearing and the right to
appear.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Dynacare Inc. Amended and Restated Employee Stock
Option Plan (incorporated herein by reference to
the Company's Registration Statement on Form S-8,
filed with the Commission on August 7, 2002. File
No. 333-97745).
(b) Reports on Form 8-K:
(1) A current report on Form 8-K dated August 13, 2002
was filed on August 13, 2002, by the registrant,
containing the Certification of Chief Executive
Officer and Chief Financial Officer of the
Company, pursuant to 18 U.S.C Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
Item 6. Exhibits and Reports on Form 8-K (continued)
(2) A current report on Form 8-K dated August 14, 2002
was filed on August 14, 2002, by the registrant,
containing the Statements Under Oath of the
Company's Principal Executive Officer and
Principal Financial Officer regarding fact and
circumstances relating to Exchange Act Filings.
(3) A current report on Form 8-K dated October 2, 2002
was filed on October 2, 2002, by the registrant,
in connection with the press release dated October
2, 2002 announcing an agreement with Celera
Diagnostics to collaborate in establishing the
clinical utility of laboratory tests based on
novel diagnostic markers for Alzheimer's disease,
breast cancer, and prostrate cancer.
(4) A current report on Form 8-K dated October 3, 2002
was filed on October 3, 2002, by the registrant,
in connection with the press release dated October
3, 2002 announcing preliminary third quarter
results.
(5) A current report on Form 8-K dated October 4, 2002
was filed on October 4, 2002, by the registrant,
in connection with the press release dated October
4, 2002 announcing that Thomas P. Mac Mahon,
Chairman and Chief Executive Officer, was
scheduled to speak at the UBS Warburg Global Life
Sciences Conference on October 7, 2002 at 3:30
p.m. Eastern Time.
(6) A current report on Form 8-K dated October 22,
2002 was filed on October 22, 2002, by the
registrant, in connection with the press release
dated October 22, 2002 announcing that the
Company's Board of Directors authorized a stock
repurchase program.
(7) A current report on Form 8-K dated October 25,
2002 was filed on October 25, 2002, by the
registrant, in connection with the press release
dated October 25, 2002 announcing that Thomas P.
Mac Mahon, Chairman and Chief Executive Officer,
was scheduled to speak at the Solomon Smith Barney
Global Health Care Conference on October 28, 2002
at 3:00 p.m. Eastern Time.
(8) A current report on Form 8-K dated October 30,
2002 was filed on October 30, 2002, by the
registrant, in connection with the press release
dated October 30, 2002 announcing summary
information of the Company.
Item 6. Exhibits and Reports on Form 8-K (continued)
(9) A current report on Form 8-K dated October 30,
2002 was filed on October 30, 2002, by the
registrant, in connection with the press release
dated October 30, 2002 announcing results for the
quarter and nine months ended September 30, 2002.
(10) A current report on Form 8-K dated October 30,
2002 was filed on October 30, 2002, by the
registrant, in connection with the press release
dated October 30, 2002 announcing that Bradford T.
Smith, Executive Vice President of Public Affairs,
was scheduled to speak at the CIBC World Markets
Health Care Conference in New York on November 4,
2002 at 1:30 p.m. Eastern Time.
(11) A current report on Form 8-K dated November 11,
2002 was filed on November 12, 2002, by the
registrant, in connection with the press release
dated November 11, 2002 announcing that the
Company entered into a definitive agreement to
acquire all of the outstanding shares of DIANON
Systems, Services for $47.50 per share in cash.
(12) A current report on Form 8-K dated November 11,
2002 was filed on November 12, 2002, by the
registrant, in connection with the press release
dated November 11, 2002 containing information of
the Company relating to the acquisition of DIANON
Systems, Inc.
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
LABORATORY CORPORATION OF AMERICA HOLDINGS
Registrant
By:/s/THOMAS P. MAC MAHON
-------------------------------
Thomas P. Mac Mahon
Chairman, President and
Chief Executive Officer
By:/s/WESLEY R. ELINGBURG
---------------------------------
Wesley R. Elingburg
Executive Vice President,
Chief Financial Officer and
Treasurer
November 14, 2002
Certification
- -------------
I, Thomas P. Mac Mahon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Laboratory Corporation of America Holdings;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
-----------------
/s/ THOMAS P. MAC MAHON
-----------------------
Thomas P. Mac Mahon
Chief Executive Officer
Certification
- ------------
I, Wesley R. Elingburg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Laboratory Corporation of America Holdings;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
-----------------
/s/ WESLEY R. ELINGBURG
-----------------------
Wesley R. Elingburg
Chief Financial Officer